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| TGT > SEC Filings for TGT > Form 10-Q on 23-Aug-2012 | All Recent SEC Filings |
23-Aug-2012
Quarterly Report
Executive Summary
Consolidated revenues were $16,779 million for the three months ended July 28, 2012, an increase of $539 million or 3.3 percent from the same period in the prior year. Consolidated earnings before interest expense and income taxes for second quarter 2012 decreased by $45 million or 3.5 percent from second quarter 2011 to $1,255 million. Cash flow provided by operations was $2,471 million and $2,336 million for the six months ended July 28, 2012 and July 30, 2011, respectively. Diluted earnings per share in the second quarter increased 3.4 percent to $1.06 from $1.03 in the same period a year ago. Adjusted diluted earnings per share, which we believe is useful in providing period-to-period comparisons of the results of our U.S. operations, increased 4.6 percent to $1.12 in second quarter 2012 from $1.07 in the same period a year ago.
Earnings Per Share Three Months Ended Six Months Ended
July 28 , July 30 , July 28 , July 30 ,
2012 2011 Change 2012 2011 Change
GAAP diluted earnings per share $ 1.06 $ 1.03 3.4 % $ 2.10 $ 2.02 4.2 %
Adjustments(a) 0.06 0.04 0.13 0.04
Adjusted diluted earnings per share $ 1.12 $ 1.07 4.6 % $ 2.23 $ 2.06 8.0 %
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Note: A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 21.
(a) Adjustments represent the diluted EPS impact of our planned 2013 Canadian market entry and the favorable resolution of various income tax matters.
Our financial results for the second quarter of 2012 in our U.S. Retail Segment reflect increased sales of 3.5 percent over the same period last year due to a 3.1 percent comparable-store increase combined with the contribution from new stores. Our second quarter 2012 U.S. Retail Segment EBITDA and EBIT margin rates remained largely consistent with the prior year.
In the U.S. Credit Card Segment, we experienced a decrease in segment profit due to annualizing over a significant reserve reduction in the prior year and lower finance charge revenue resulting from a smaller portfolio, partially offset by lower interest expense.
During the three and six months ended July 28, 2012, loss before interest expense and income taxes in our Canadian Segment totaled $69 million and $125 million, respectively, comprised of start-up costs and depreciation, compared to $36 million and $47 million during the three and six months ended July 30, 2011, respectively.
Analysis of Results of Operations
U.S. Retail Segment
U.S. Retail Segment Results Three Months Ended Six Months Ended
July 28, July 30, Percent July 28, July 30, Percent
(dollars in millions) 2012 2011 Change 2012 2011 Change
Sales $ 16,451 $ 15,895 3.5 % $ 32,989 $ 31,475 4.8 %
Cost of sales 11,297 10,872 3.9 22,838 21,710 5.2
Gross margin 5,154 5,023 2.6 10,151 9,765 3.9
SG&A expenses(a) 3,468 3,382 2.6 6,762 6,554 3.2
EBITDA 1,686 1,641 2.7 3,389 3,211 5.5
Depreciation and amortization 505 494 2.2 1,009 1,002 0.8
EBIT $ 1,181 $ 1,147 2.9 % $ 2,380 $ 2,209 7.7 %
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EBITDA is earnings before interest expense, income taxes, depreciation and amortization.
EBIT is earnings before interest expense and income taxes.
Note: See Note 11 to our consolidated financial statements for a reconciliation of our segment results to earnings before income taxes. (a) Loyalty program charges were $74 million and $66 million for the three months ended July 28, 2012 and July 30, 2011, respectively, and $138 million and $115 million for the six months ended July 28, 2012 and July 30, 2011, respectively. In all periods, these amounts were recorded as reductions to SG&A expenses within the U.S. Retail Segment and increases to operations and marketing expenses within the U.S. Credit Card Segment.
U.S. Retail Segment Rate
Analysis Three Months Ended Six Months Ended
July 28, July 30, July 28, July 30,
2012 2011 2012 2011
Gross margin rate 31.3 % 31.6 % 30.8 % 31.0 %
SG&A expense rate 21.1 21.3 20.5 20.8
EBITDA margin rate 10.2 10.3 10.3 10.2
Depreciation and
amortization expense rate 3.1 3.1 3.1 3.2
EBIT margin rate 7.2 7.2 7.2 7.0
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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. See Item 1 in our Form 10-K for the fiscal year ended January 28, 2012 for a description of our product categories.
Sales by Product Category Three Months Ended Six Months Ended
July 28, July 30, July 28, July 30,
2012 2011 2012 2011
Household essentials 27 % 26 % 27 % 26 %
Hardlines 15 16 16 17
Apparel and accessories 20 21 20 20
Food and pet supplies 20 18 20 19
Home furnishings and décor 18 19 17 18
Total 100 % 100 % 100 % 100 %
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Comparable-store sales is a measure that highlights the performance of our existing stores by measuring the change 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 stores open longer than one year, including:
† sales from stores that have been remodeled or expanded while remaining open (including our current store remodel program)
† 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
July 28, July 30, July 28, July 30,
2012 2011 2012 2011
Comparable-store sales
change 3.1 % 3.9 % 4.2 % 2.9 %
Drivers of change in
comparable-store sales:
Number of transactions 0.7 0.5 1.3 0.4
Average transaction amount 2.4 3.5 2.8 2.6
Units per transaction 1.3 1.8 1.0 3.1
Selling price per unit 1.1 1.7 1.8 (0.5 )
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The collective interaction of a broad array of macroeconomic, competitive and consumer behavioral factors, as well as sales mix, and transfer of sales to new stores makes further analysis of sales metrics infeasible.
Our U.S. Credit Card Segment offers credit to qualified guests through our branded proprietary credit cards: the Target Visa Credit Card and the Target Credit Card (Target Credit Cards). Additionally, we offer a branded proprietary Target Debit Card. Collectively, we refer to these products as REDcards®. Guests receive a 5 percent discount on virtually all purchases at checkout every day when they use a REDcard at any Target store or on Target.com.
We monitor the percentage of store sales that are paid for using REDcards (REDcard Penetration), because our internal analysis has indicated that a meaningful portion of the incremental purchases on our REDcards are also incremental sales for Target, with the remainder representing a shift in tender type.
REDcard Penetration Three Months Ended Six Months Ended
July 28, July 30, July 28, July 30,
2012 2011 2012 2011
Target Credit Cards 7.7 % 6.6 % 7.4 % 6.2 %
Target Debit Card 5.1 2.1 4.8 1.9
Total Store REDcard Penetration 12.8 % 8.7 % 12.2 % 8.1 %
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Gross Margin Rate
For the three and six months ended July 28, 2012, our gross margin rate was 31.3 percent and 30.8 percent, respectively, decreasing from 31.6 percent and 31.0 percent in the comparable periods last year. These decreases are the result of our integrated growth strategies of 5% REDcard Rewards and remodel program, which impacted the rate by nearly 0.4 percent in each period, partially offset by underlying rate improvements within categories.
Selling, General and Administrative Expense Rate
For the three and six months ended July 28, 2012, the SG&A expense rate was 21.1 percent and 20.5 percent, respectively, a decrease from 21.3 percent and 20.8 percent in the comparable periods last year. Approximately half of this improvement in each period is due to store hourly payroll expense improvements, and the remainder was spread across several other areas.
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.
Depreciation and Amortization Expense Rate
For the three and six months ended July 28, 2012, our depreciation and amortization expense rate was 3.1 percent in both periods, compared with 3.1 percent and 3.2 percent in the respective prior year periods.
Store Data
Change in Number of Stores Three Months Ended Six Months Ended
July 28 , July 30 , July 28 , July 30 ,
2012 2011 2012 2011
Beginning store count 1,764 1,755 1,763 1,750
Opened 9 9 12 15
Closed - - (1 ) -
Relocated (1 ) (a) (2 ) (2 ) (a) (3 )
Ending store count 1,772 1,762 1,772 1,762
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(a) One store was closed for relocation and will be opened within the same trade area in the second half of 2012.
For the first two quarters of 2012, we remodeled 220 stores, compared with 263 in the comparable prior year period.
Number of Stores and Retail
Square Feet Number of Stores Retail Square Feet(a)
July 28 , January 28 , July 30 , July 28 , January 28 , July 30 ,
2012 2012 2011 2012 2012 2011
Target general merchandise
stores 428 637 774 50,974 76,999 93,699
Expanded food assortment
stores 1,090 875 736 141,020 114,219 97,058
SuperTarget stores 251 251 252 44,500 44,503 44,681
CityTarget stores 3 - - 314 - -
Total 1,772 1,763 1,762 236,808 235,721 235,438
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(a) In thousands; reflects total square feet, less office, distribution center and vacant space.
U.S. Credit Card Segment
We offer credit to qualified guests through the Target Credit Cards. Our credit card program supports our core retail operations and remains an important contributor to our overall profitability and engagement with our guests. Credit card revenues are comprised of finance charges, late fees and other revenue, and third party merchant fees, which are amounts received from merchants who accept the Target Visa Credit Card.
U.S. Credit Card Segment
Results Three Months Ended Three Months Ended
July 28, 2012 July 30, 2011
Annualized Annualized
(dollars in millions) Amount Rate(d) Amount Rate(d)
Finance charge revenue $ 265 18.0 % $ 278 17.9 %
Late fees and other
revenue 43 2.8 44 2.8
Third party merchant fees 20 1.4 23 1.5
Total revenue 328 22.2 345 22.2
Bad debt expense 43 2.9 15 1.0
Operations and marketing
expenses(a) 139 9.3 137 8.8
Depreciation and
amortization 3 0.2 4 0.3
Total expenses 185 12.5 156 10.0
EBIT 143 9.7 189 12.2
Interest expense on
nonrecourse debt
collateralized by credit
card receivables 3 18
Segment profit $ 140 $ 171
Average receivables funded
by Target(b) $ 4,406 $ 2,398
Segment pretax ROIC(c) 12.7 % 28.5 %
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U.S. Credit Card Segment
Results Six Months Ended Six Months Ended
July 28, 2012 July 30, 2011
Annualized Annualized
(dollars in millions) Amount Rate(d) Amount Rate(d)
Finance charge revenue $ 536 17.9 % $ 570 18.0 %
Late fees and other
revenue 82 2.7 86 2.7
Third party merchant fees 39 1.3 44 1.4
Total revenue 657 21.9 700 22.1
Bad debt expense 95 3.2 27 0.9
Operations and marketing
expenses(a) 271 9.0 262 8.3
Depreciation and
amortization 7 0.2 9 0.3
Total expenses 373 12.4 298 9.4
EBIT 284 9.5 402 12.7
Interest expense on
nonrecourse debt
collateralized by credit
card receivables 5 37
Segment profit $ 279 $ 365
Average receivables funded
by Target(b) $ 4,646 $ 2,451
Segment pretax ROIC(c) 12.0 % 29.7 %
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Note: See Note 11 to our Consolidated Financial Statements for a reconciliation of our segment results to earnings before income taxes.
(a) See footnote (a) to our U.S. Retail Segment Results table on page 15 for an explanation of our loyalty program charges.
(b) Amounts represent the portion of average gross credit card receivables funded by Target. These amounts exclude $1,500 million and $1,343 million for the three and six months ended July 28, 2012, respectively, and $3,817 million and $3,888 million for the three and six months ended July 30, 2011, respectively, 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. This measure has decreased significantly, primarily due to our voluntary retirement of our 2008 series securitization in January 2012, increasing the average receivables funded by Target.
(d) As an annualized percentage of average gross credit card receivables.
Spread Analysis - Total Portfolio Three Months Ended Three Months Ended
July 28, 2012 July 30, 2011
Annualized Annualized
(dollars in millions) Amount Rate Amount Rate
EBIT $ 143 9.7% (c) $ 189 12.2% (c)
LIBOR(a) 0.2% 0.2%
Spread to LIBOR(b) $ 140 9.5% (c) $ 186 12.0% (c)
Six Months Ended Six Months Ended
July 28, 2012 July 30, 2011
Annualized Annualized
(dollars in millions) Amount Rate Amount Rate
EBIT $ 284 9.5% (c) $ 402 12.7% (c)
LIBOR(a) 0.2% 0.2%
Spread to LIBOR(b) $ 277 9.3% (c) $ 395 12.5% (c)
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(a) Balance-weighted one-month LIBOR.
(b) Spread to LIBOR is a metric used to analyze the performance of our total credit card portfolio because the majority of our portfolio earns finance charge revenue at rates tied to the Prime Rate, and the interest rate on all nonrecourse debt collateralized by credit card receivables is tied to LIBOR.
(c) As an annualized percentage of average gross credit card receivables.
Our primary measure of segment profit is the EBIT generated by our total credit card receivables portfolio less the interest expense on nonrecourse debt collateralized by credit card receivables. We also measure the performance of our overall credit card receivables portfolio by calculating the dollar Spread to LIBOR at the portfolio level. This metric approximates 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. The interest rate on all nonrecourse debt collateralized by credit card receivables is tied to LIBOR.
Total revenue decreased primarily due to lower average receivables resulting in reduced finance charge revenue. Segment expense increases were driven by higher bad debt expense primarily attributable to annualizing over a significant reduction in the reserve from the prior year. Interest expense on nonrecourse debt declined from last year due to a decrease in nonrecourse debt collateralized by credit card receivables.
Receivables Rollforward Analysis Three Months Ended Six Months Ended
July 28, July 30, July 28, July 30,
(dollars in millions) 2012 2011 2012 2011
Beginning gross credit card
receivables $ 5,943 $ 6,286 $ 6,357 $ 6,843
Charges at Target 1,398 1,140 2,686 2,143
Charges at third parties 1,206 1,353 2,345 2,603
Payments (2,875) (2,792) (5,935) (5,793)
Other 233 215 452 406
Period-end gross credit card
receivables $ 5,905 $ 6,202 $ 5,905 $ 6,202
Average gross credit card
receivables $ 5,906 $ 6,215 $ 5,989 $ 6,339
Accounts with three or more
payments (60+ days) past due as a
percentage of period-end gross
credit card receivables 2.6% 3.0% 2.6% 3.0%
Accounts with four or more payments
(90+ days) past due as a percentage
of period-end gross credit card
receivables 1.7% 2.1% 1.7% 2.1%
Allowance for Doubtful Accounts Three Months Ended Six Months Ended
July 28, July 30, July 28, July 30,
(dollars in millions) 2012 2011 2012 2011
Allowance at beginning of period $ 395 $ 565 $ 430 $ 690
Bad debt expense 43 15 95 27
Write-offs(a) (105) (142) (232) (326)
Recoveries(a) 32 42 72 89
Allowance at end of period $ 365 $ 480 $ 365 $ 480
As a percentage of period-end gross
credit card receivables 6.2% 7.7% 6.2% 7.7%
Net write-offs as an annualized
percentage of average gross credit
card receivables 4.9% 6.5% 5.3% 7.5%
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(a) Write-offs include the principal amount of losses (excluding accrued and unpaid finance charges), and recoveries include current period collections on previously written-off balances. These amounts combined represent net write-offs.
Period-end and average gross credit card receivables have declined because of an increase in payment rates and a decrease in Target Visa Credit Card charges at third parties, partially offset by an increase in charges at Target. The decrease in charges on our credit cards at third parties is primarily due to the fact that we no longer issue new Target Visa accounts.
We are pursuing the sale of our credit card receivables portfolio and will execute a transaction only if appropriate strategic and financial conditions are met. We expect to classify the credit card receivables portfolio as held for sale when a transaction that allows us to meet our objectives has been agreed upon with a potential buyer.
Canadian Segment
During the three and six months ended July 28, 2012, start-up costs totaled $47 million and $81 million, respectively, compared with $25 million and $36 million in the comparable prior-year periods, and primarily consisted of compensation, benefits and third-party service expenses. Additionally, we recorded $22 million and $44 million in depreciation for the three and six months ended July 28, 2012, respectively, compared with $11 million in each of the comparable prior year periods, related to capital lease assets and leasehold interests.
Other Performance Factors
Net Interest Expense
Net interest expense for the three and six months ended July 28, 2012 was $184 million and $366 million, respectively, including $19 million and $38 million, respectively, of interest on Canadian capitalized leases. For the three and six months ended July 30, 2011, net interest expense was $191 million and $374 million, respectively, including $10 million of interest on Canadian capitalized leases in both periods. Net interest expense decreased due to a lower average portfolio interest rate.
Provision for Income Taxes
Our effective income tax rate for the three and six months ended July 28, 2012 was 34.3 percent and 35.5 percent, respectively, down from 36.5 percent and 36.4 percent for the three and six months ended July 30, 2011, respectively. This change is primarily due to an increase in the benefit related to the favorable resolution of various income tax matters, which reduced tax expense by $23 million and $31 million, respectively, in the three and six months ended July 28, 2012, compared with $4 million and $9 million in the corresponding prior year periods.
Reconciliation of Non-GAAP Financial Measures to GAAP Measures
Our segment measure of profit is used by management to evaluate the return we are achieving on our investment and to make operating decisions. To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share, which excludes the impact of our planned 2013 Canadian market entry and favorable resolution of various income tax matters. We believe this information is useful in providing period-to-period comparisons of the results of our U.S. operations. This measure is not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The most comparable GAAP measure is diluted earnings per share. Non-GAAP adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP. Other companies may calculate non-GAAP adjusted EPS differently than we do, limiting the usefulness of the measure for comparisons with other companies.
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