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| TGT > SEC Filings for TGT > Form 10-Q on 28-Aug-2009 | All Recent SEC Filings |
28-Aug-2009
Quarterly Report
Executive Summary
Our financial results for the second quarter reflect the challenging economy in which we operated. Our Retail Segment's results reflect strong gross margin rate performance and disciplined expense control. These results were achieved in light of our previously reported decline in overall and comparable store sales. Despite continuing to operate in a constrained consumer credit environment, our Credit Card Segment's portfolio continues to exhibit stability and modest profitability.
Cash flow provided by operations was $2,051 million and $1,754 million for the six months ended August 1, 2009 and August 2, 2008, respectively. We opened 23 new stores during the three months ended August 1, 2009, or 21 stores net of 2 relocations. During the three months ended August 2, 2008, we opened 43 new stores representing 35 stores net of 8 relocations.
Analysis of Results of Operations
Retail Segment
Retail Segment Results Three Months Ended Six Months Ended
August 1, August 2, Percent August 1, August 2, Percent
(millions) 2009 2008 Change 2009 2008 Change
Sales $ 14,567 $ 14,971 (2.7 )% $ 28,928 $ 29,273 (1.2 )%
Cost of sales 9,914 10,304 (3.8 ) 19,851 20,202 (1.7 )
Gross margin 4,653 4,667 (0.3 ) 9,077 9,071 0.1
SG&A expenses(a) 3,115 3,126 (0.4 ) 6,109 6,139 (0.5 )
EBITDA 1,538 1,541 (0.2 ) 2,968 2,932 1.2
Depreciation and amortization 474 443 6.9 942 876 7.7
EBIT $ 1,064 $ 1,098 (3.1 )% $ 2,026 $ 2,056 (1.5 )%
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EBITDA is earnings before interest expense, income taxes, depreciation and amortization.
EBIT is earnings before interest expense and income taxes.
(a) New account and loyalty rewards redeemed by our guests reduce reported sales. Our Retail Segment charges the cost of these discounts to our Credit Card Segment, and the reimbursements of $21 million and $41 million for the three and six months ended August 1, 2009, respectively, and $27 million and $51 million for the three and six months ended August 2, 2008, respectively, are recorded as a reduction to SG&A expenses within the Retail Segment.
Retail Segment Rate Analysis Three Months Ended Six Months Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
Gross margin rate 31.9% 31.2% 31.4% 31.0%
SG&A expense rate 21.4% 20.9% 21.1% 21.0%
EBITDA margin rate 10.6% 10.3% 10.3% 10.0%
Depreciation and amortization expense rate 3.3% 3.0% 3.3% 3.0%
EBIT margin rate 7.3% 7.3% 7.0% 7.0%
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Retail Segment rate analysis metrics are computed by dividing the applicable amount by sales.
Sales
Sales include merchandise sales, net of expected returns, from our stores and our online business, as well as gift card breakage. Comparable-store sales is a measure that indicates the performance of our existing stores by measuring the growth in sales for such stores for a period over the comparable, prior-year period of equivalent length. The method of calculating
comparable-store sales varies across the retail industry. As a result, our comparable-store sales calculation is not necessarily comparable to similarly titled measures reported by other companies.
Comparable-store sales are sales from our online business and sales from general merchandise and SuperTarget stores open longer than one year, including:
† sales from stores that have been remodeled or expanded while remaining open
† sales from stores that have been relocated to new buildings of the same format within the same trade area, in which the new store opens at about the same time as the old store closes
Comparable-store sales do not include:
† sales from general merchandise stores that have been converted, or relocated within the same trade area, to a SuperTarget store format
† sales from stores that were intentionally closed to be remodeled, expanded or reconstructed
Comparable-Store Sales Three Months Ended Six Months Ended
August 1, August 2, August 1, August 2,
2009 2008 2009 2008
Comparable-store sales (6.2)% (0.4)% (5.0)% (0.6)%
Drivers of changes in comparable-store sales:
Number of transactions (2.6)% (2.0)% (1.9)% (1.9)%
Average transaction amount (3.7)% 1.6% (3.1)% 1.4%
Units per transaction (2.6)% (1.5)% (2.9)% (1.2)%
Selling price per unit (1.2)% 3.2% (0.2)% 2.6%
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The comparable-store sales increases or decreases above are calculated by comparing sales in fiscal year periods with comparable prior fiscal year periods of equivalent length.
Transaction-level metrics are influenced by a broad array of macroeconomic, competitive and consumer behavioral factors, and comparable-store sales rates are negatively impacted by transfer of sales to new stores.
Gross Margin Rate
Gross margin rate represents gross margin (sales less cost of sales) as a percentage of sales. See Note 3 in our Form 10-K for the fiscal year ended January 31, 2009 for a description of expenses included in cost of sales. Markup is the difference between an item's cost and its retail price (expressed as a percentage of its retail price). Factors that affect markup include vendor offerings and negotiations, vendor income, sourcing strategies, market forces like raw material and freight costs, and competitive influences. Markdowns are the reduction in the original or previous price of retail merchandise. Factors that affect markdowns include inventory management, competitive influences and economic conditions.
For the three months ended August 1, 2009, our consolidated gross margin rate was 31.9 percent, compared with 31.2 percent in the same period last year. Our 2009 gross margin rate was adversely affected by sales mix; sales in nondiscretionary merchandise categories that yield lower gross margin rates outpaced sales in our higher margin apparel and home merchandise categories. The impact of sales mix on gross margin rate was an approximate 0.5 percentage point reduction for the three months ended August 1, 2009. This mix impact was more than offset by favorable markup and markdown rate performance and favorable supply chain expense rates. The impact of rate performance within merchandise categories on gross margin rate was an approximate 1.2 percentage point increase for the three months ended August 1, 2009. Approximately half of this increase is attributable to lower transportation costs, driven by lower crude oil costs and excess transportation industry capacity.
For the six months ended August 1, 2009, our gross margin rate was 31.4 percent compared with 31.0 percent in the same period last year. The impact of sales mix on gross margin rate was an approximate 0.7 percentage point reduction for the six months ended August 1, 2009. The offsetting impact of rate performance within merchandise categories on gross margin rate was an approximate 1.1 percentage point increase for the six months ended August 1, 2009.
Selling, General and Administrative Expense Rate
Our selling, general and administrative (SG&A) expense rate represents SG&A expenses as a percentage of sales. See Note 3 in our Form 10-K for the fiscal year ended January 31, 2009 for a description of expenses included in SG&A expenses. SG&A expenses exclude depreciation and amortization, as well as expenses associated with our credit card operations, which are reflected separately in our Consolidated Statements of Operations.
SG&A expenses declined $11 million and $30 million between the respective three and six month periods as a result of overall productivity gains in our stores. This decrease was achieved even with 71 additional stores open at the end of the second quarter of 2009 than we had at the end of the second quarter of 2008.
For the three and six months ended August 1, 2009, SG&A expense rate was 21.4 percent and 21.1 percent, compared with 20.9 percent and 21.0 for the same periods last year. The increase of the 2009 SG&A expense rates is a result of sales declining at a rate greater than the decline of SG&A expenses.
Depreciation and Amortization Expense Rate
Our depreciation and amortization expense rate represents depreciation and amortization expense as a percentage of sales. For the three and six months ended August 1, 2009, our depreciation and amortization expense rate was 3.3 percent compared with 3.0 percent for the same periods last year. The rate unfavorability was due to growth of these expenses in line with our historical capital investment while sales decreased between the comparative periods.
Store Data
During the three months ended August 1, 2009, we opened 23 new stores, including 21 general merchandise stores (19 net of 2 store relocations) and 2 SuperTarget stores. During the three months ended August 2, 2008, we opened 43 new stores, including 30 general merchandise stores (22 net of 8 store relocations) and 13 SuperTarget stores.
Number of Stores and
Retail Square Feet Number of Stores Retail Square Feet(a)
August 1, Jan. 31, August 2, August 1, Jan. 31, August 2,
2009 2009 2008 2009 2009 2008
Target general merchandise
stores 1,472 1,443 1,417 184,663 180,321 176,171
SuperTarget stores 247 239 231 43,739 42,267 40,828
Total 1,719 1,682 1,648 228,402 222,588 216,999
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(a) In thousands; reflects total square feet, less office, distribution center and vacant space.
Credit Card Segment
Credit card revenues are comprised of finance charges, late fees and other
revenues, and third party merchant fees, or the amounts received from merchants
who accept the Target Visa credit card.
Credit Card Segment Results Three Months Ended Three Months Ended
August 1, 2009 August 2, 2008
Amount Annualized Amount Annualized
(millions) (in millions) Rate(d) (in millions) Rate(d)
Finance charge revenue $ 377 18.1 % $ 340 16.0 %
Late fees and other revenue 91 4.3 121 5.7
Third party merchant fees 32 1.5 40 1.9
Total revenues 500 23.9 501 23.5
Bad debt expense 303 14.5 256 12.0
Operations and marketing
expenses(a) 106 5.0 118 5.5
Depreciation and amortization 4 0.2 5 0.2
Total expenses 413 19.7 379 17.8
EBIT 87 4.2 122 5.8
Interest expense on nonrecourse
debt collateralized by credit
card Receivables 24 48
Segment profit $ 63 $ 74
Average receivables funded by
Target(b) $ 2,853 $ 3,636
Segment pretax ROIC(c) 8.8 % 8.2 %
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(a) New account and loyalty rewards redeemed by our guests reduce reported sales. Our Retail Segment charges the cost of these discounts to our Credit Card Segment, and the reimbursements of $21 million for the three months ended August 1, 2009 and $27 million for the three months ended August 2, 2008, respectively, are recorded as an increase to operations and marketing expenses within the Credit Card Segment.
(b) Amounts represent the portion of average gross credit card receivables funded by Target. These amounts exclude $5,508 million for the three months ended August 1, 2009 and $4,875 million for the three months ended August 2, 2008 of receivables funded by nonrecourse debt collateralized by credit card receivables.
(c) ROIC is return on invested capital, and this rate equals our segment profit divided by average gross credit card receivables funded by Target, expressed as an annualized rate.
(d) As an annualized percentage of average gross credit card receivables.
Credit Card Segment Results Six Months Ended Six Months Ended
August 1, 2009 August 2, 2008
Amount Annualized Amount Annualized
(millions) (in millions) Rate(d) (in millions) Rate(d)
Finance charge revenue $ 732 17.2 % $ 694 16.4 %
Late fees and other revenue 178 4.2 229 5.4
Third party merchant fees 62 1.5 78 1.9
Total revenues 972 22.8 1,001 23.6
Bad debt expense 600 14.1 437 10.3
Operations and marketing
expenses(a) 213 5.0 234 5.5
Depreciation and amortization 7 0.2 8 0.2
Total expenses 820 19.2 679 16.0
EBIT 152 3.6 322 7.6
Interest expense on nonrecourse
debt collateralized by credit
card Receivables 51 67
Segment profit $ 101 $ 255
Average receivables funded by
Target(b) $ 3,027 $ 4,952
Segment pretax ROIC(c) 6.7 % 10.3 %
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(a) New account and loyalty rewards redeemed by our guests reduce reported sales. Our Retail Segment charges the cost of these discounts to our Credit Card Segment, and the reimbursements of $41 million for the six months ended August 1, 2009 and $51 million for the six months ended August 2, 2008, respectively, are recorded as an increase to operations and marketing expenses within the Credit Card Segment.
(b) Amounts represent the portion of average gross credit card receivables funded by Target. These amounts exclude $5,502 million for the six months ended August 1, 2009 and $3,528 million for the six months ended August 2, 2008 of receivables funded by nonrecourse debt collateralized by credit card receivables.
(c) ROIC is return on invested capital, and this rate equals our segment profit divided by average gross credit card receivables funded by Target, expressed as an annualized rate.
(d) As an annualized percentage of average gross credit card receivables.
Spread Analysis - Total Three Months Ended Three Months Ended
Portfolio August 1, 2009 August 2, 2008
Yield Yield
Amount Annualized Amount Annualized
(in millions) Rate (in millions) Rate
EBIT $ 87 4.2% (b) $ 122 5.8% (b)
LIBOR(a) 0.3% 2.5%
Spread to LIBOR(c) $ 81 3.9% (b) $ 70 3.3% (b)
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(a) Balance-weighted one-month LIBOR
(b) As a percentage of average gross credit card receivables.
(c) Spread to LIBOR is a metric used to analyze the performance of our total credit card portfolio because the vast majority of our portfolio earned finance charge revenue at rates tied to the Prime Rate, and the interest rate on all nonrecourse debt securitized by credit card receivables is tied to LIBOR.
Spread Analysis - Total Six Months Ended Six Months Ended
Portfolio August 1, 2009 August 2, 2008
Yield Yield
Amount Annualized Amount Annualized
(in millions) Rate (in millions) Rate
EBIT $ 152 3.6% (b) $ 322 7.6% (b)
LIBOR(a) 0.4% 2.7%
Spread to LIBOR(c) $ 135 3.2% (b) $ 208 4.9% (b)
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(a) Balance-weighted one-month LIBOR
(b) As a percentage of average gross credit card receivables.
(c) Spread to LIBOR is a metric used to analyze the performance of our total credit card portfolio because the vast majority of our portfolio earned finance charge revenue at rates tied to the Prime Rate, and the interest rate on all nonrecourse debt securitized by credit card receivables is tied to LIBOR.
Our primary measure of Segment profit in our Credit Card Segment is the EBIT generated by our total credit card receivables portfolio less the interest expense on nonrecourse debt collateralized by credit card receivables. We analyze this measure of profit in light of the amount of capital we have invested in our credit card receivables. In addition, we measure the performance of our overall credit card receivables portfolio by calculating the dollar spread to LIBOR at the portfolio level. This metric approximates the overall financial performance of the entire credit card portfolio we manage by measuring the difference between EBIT earned on the portfolio and a hypothetical benchmark rate financing cost applied to the entire portfolio. For the 2009 first quarter, the vast majority of our portfolio accrued finance charge revenue at rates tied to the Prime Rate, and the interest rate on all nonrecourse debt securitized by credit card receivables is tied to LIBOR. We implemented a terms change to our portfolio, effective in April 2009, that establishes a minimum annual percentage rate (APR) applied to cardholder account balances. Under this terms change, finance charges will accrue at a fixed APR if the benchmark Prime Rate is less than 6%; if the Prime Rate is greater than 6%, finance charges will accrue at the benchmark Prime Rate, plus a spread.
Credit Card Segment profit for the three months ended August 1, 2009 declined to $63 million from $74 million for the three months ended August 2, 2008. Revenues for the 2009 three months were negatively impacted by a lower Prime Rate index and lower levels of late fees assessed, almost entirely offset by terms changes implemented in 2008 and 2009. Segment expenses increased during the three months by $35 million, driven by an increase in bad debt expense of $47 million over the comparable period as more accounts were written off, offset by lower rewards expense and strong expense management. Interest expense was favorably impacted by the lower LIBOR rates during 2009 compared with 2008. This portfolio performance, combined with the lower average receivables funded by Target, resulted in an increase in segment pretax ROIC from 8.2% in 2008 to 8.8% in 2009.
During the six months ended August 1, 2009, Credit Card Segment profit declined to $101 million from $255 million in the same period last year as a result of a decline in the spread to LIBOR earned on the overall portfolio and a 38.9 percent reduction in Target's investment in average gross credit card receivables. Segment revenues decreased due to a decline in late fee revenue and third party merchant fees, moderately offset by higher finance charge revenue resulting from the terms changes implemented between the comparative periods. Segment expenses for the six months ended August 1, 2009 were $820 million, an increase of $140 million, or 20.7 percent, from the same period last year, reflecting higher bad debt expense, slightly offset by lower operating and marketing expenses.
Receivables Rollforward Analysis Three Months Ended Six Months Ended
August 1, August 2, August 1, August 2,
(millions) 2009 2008 2009 2008
Beginning gross credit card
receivables $ 8,457 $ 8,420 $ 9,094 $ 8,624
Charges at Target 843 1,021 1,646 1,968
Charges at third parties 1,768 2,258 3,432 4,406
Payments (2,940 ) (3,358 ) (6,201 ) (6,988 )
Other 165 300 322 631
Period-end gross credit card
receivables $ 8,293 $ 8,641 $ 8,293 $ 8,641
Average gross credit card
receivables $ 8,361 $ 8,511 $ 8,529 $ 8,479
Accounts with three or more
payments (60+ days) past due as
a percentage of period-end gross
credit card receivables 5.8 % 4.5 % 5.8 % 4.5 %
Accounts with four or more
payments (90+ days) past due as
a percentage of period-end gross
credit card receivables 4.1 % 3.1 % 4.1 % 3.1 %
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Allowance for Doubtful Accounts Three Months Ended Six Months Ended
August 1, August 2, August 1, August 2,
(millions) 2009 2008 2009 2008
Allowance at beginning of period $ 1,005 $ 590 $ 1,010 $ 570
Bad debt provision 303 256 600 437
Net write-offs(a) (304 ) (185 ) (606 ) (346 )
Allowance at end of period $ 1,004 $ 661 $ 1,004 $ 661
As a percentage of period-end
gross
credit card receivables 12.1 % 7.6 % 12.1 % 7.6 %
Net write-offs as a percentage
of average gross credit card
receivables (annualized) 14.5 % 8.7 % 14.2 % 8.2 %
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(a) Net write-offs include the principal amount of losses (excluding accrued and unpaid finance charges) less current period principal recoveries.
Our period-end gross credit card receivables at August 1, 2009 were $8,293 million compared with $8,641 million at August 2, 2008, a decrease of 4.0 percent. Average gross credit card receivables for the three and six months ended August 1, 2009 decreased 1.8 percent and increased 0.6 percent, respectively, compared with the same 2008 periods. This change was driven by risk management and underwriting initiatives that have significantly reduced available credit lines for higher-risk cardholders, a reduction in charge activity resulting from reductions in card usage by our guests, offset in part by the impact of an industry-wide decline in payment rates.
Other Performance Factors
Net Interest Expense
Net interest expense was $194 million and $397 million for the three and six months ended August 1, 2009, respectively, decreasing $22 million (10.3 percent) and $21 million (5.1 percent), respectively, from the same periods last year. The annualized average portfolio interest rate was 4.7 percent for the six months ended August 1, 2009 compared with 5.5 percent for the six months ended August 2, 2008.
Provision for Income Taxes
Our effective income tax rate for the second quarter of 2009 was 37.9 percent compared with 36.8 percent for the second quarter of 2008. The year-to-date effective tax rate increased to 37.3 percent in 2009 from 36.9 percent in 2008. The increase in the effective rates between periods is primarily due to transactional items and favorable resolution of specific tax uncertainties that lowered the 2008 effective rates but did not recur in 2009. The 2009 effective income tax rates are also higher due to a comparatively smaller proportion of earnings subject to rate differences between taxing jurisdictions than in 2008. The effects of these rate increases were partially offset by comparatively higher capital market returns on investments used to economically hedge the market risk in deferred compensation plans. Gains and losses on these investments are not taxable. The capital market returns from these investments in 2009 were higher compared to 2008.
Analysis of Financial Condition
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