Target Corporation 10-Q Summary
Reporting-period note: The request identifies 2008 Q2, but the supplied filing is Target’s unaudited Form 10-Q for the quarter and six months ended August 1, 2009, compared with periods ended August 2, 2008.
Business context and results
Target operates retail stores and a credit card business. Management described the second quarter as operating in a challenging economy: retail margins and expense control were strong despite weaker sales, while the credit card portfolio remained profitable amid constrained consumer credit.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenues | $15.067bn | $15.472bn | $29.900bn | $30.274bn |
| Net earnings | $594m | $634m | $1.116bn | $1.237bn |
| Diluted EPS | $0.79 | $0.82 | $1.48 | $1.56 |
| Operating cash flow | Not separately presented for the quarter | $2.051bn | $1.754bn |
Key financial metrics and changes
- Retail: Sales fell 2.7% in Q2 and 1.2% year to date. Comparable-store sales declined 6.2% and 5.0%, respectively. Retail EBIT was $1.064bn for Q2, down 3.1%, and $2.026bn for the six months, down 1.5%.
- Margins: Retail gross margin rate improved to 31.9% in Q2 from 31.2%, and to 31.4% year to date from 31.0%. Management attributed the gains to favorable merchandise-category rate performance, including lower transportation costs, partly offset by a sales mix shift toward lower-margin nondiscretionary goods. Q2 retail EBIT margin was 7.3%, unchanged year over year.
- Credit cards: Segment profit was $63m in Q2 versus $74m, and $101m for six months versus $255m. Year-to-date bad debt expense increased to $600m from $437m; annualized net write-offs rose to 14.2% of average gross receivables from 8.2%. Receivables 90 or more days past due were 4.1% of gross receivables, versus 3.1% a year earlier. The allowance was $1.004bn, or 12.1% of period-end gross receivables, compared with $661m, or 7.6%.
- Cash flow and investment: Six-month operating cash flow increased to $2.051bn. Capital expenditures were $1.042bn, down from $1.956bn. Cash and cash equivalents were $957m at August 1, 2009.
- Debt and liquidity: Balance-sheet debt included $12.500bn of unsecured debt and borrowings and $5.514bn of nonrecourse credit-card debt. The filing separately reports total debt of $17.637bn under a definition excluding certain adjustments and capital leases; estimated fair value was $18.502bn. Target had a $1.9bn revolving credit facility with no outstanding balance and reported expected covenant compliance. It paid a $750m debt maturity during the quarter and a further $500m maturity in August.
- Shareholder returns: Six-month dividends paid were $241m. Open-market repurchases remained suspended; 1.2m shares acquired during the six months were delivered through settlement of prepaid forward contracts.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2009 operating cash flow to exceed $4bn and capital expenditures to be slightly above $2bn. It expected to rely on internally generated cash to meet debt maturities and to approach term debt markets only for a unique opportunity.
- Retail sales pace remained the principal uncertainty. Management cautioned that easier prior-year comparisons could improve year-over-year trends without an actual sales recovery. It expected moderate gross-margin-rate compression in Q3, followed by expansion in Q4, and a low-single-digit increase in full-year expense dollars.
- Management expected year-end 2009 gross credit card receivables to be about $1bn below year-end 2008, reflecting tighter underwriting and reduced card usage. Dollar delinquencies were expected to remain stable; quarterly write-offs were expected to be similar to the first half, with a possibility of some improvement in Q3.
- Credit-card troubled debt restructurings increased to 6.5% of period-end gross receivables from 3.6% a year earlier. The filing also notes tighter credit lines for higher-risk customers and reduced card usage.
- Several California product and environmental lawsuits and an EPA investigation were disclosed. Management expected potential monetary sanctions in certain matters but did not expect these proceedings to materially affect financial position, results or cash flows; one matter was expected to be indemnified by a vendor. The company stated recorded litigation reserves were adequate.
- The filing says quarterly results may not indicate full-year performance because of seasonality. Management reported no material changes in risk factors or market-risk exposures, no material subsequent events through August 28, 2009, and effective disclosure controls.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing covers Q2 2009, not Q2 2008.
- Track comparable-store sales, consumer spending and whether the forecast margin trends materialize.
- Monitor credit-card delinquencies, write-offs, allowance adequacy, receivable balances and the effect of portfolio terms changes.
- Reconcile reported debt measures and assess liquidity after the 2009 maturities, capital spending and planned operating cash generation.
- Review subsequent disclosures on the California and EPA proceedings, and compare actual full-year results with management’s outlook.