Company Announces Closing of Receivables Transaction with JPMorgan Chase
MINNEAPOLIS--(BUSINESS WIRE)--May 20, 2008--Target Corporation
(NYSE:TGT) today reported net earnings of $602 million for the first
quarter ended May 3, 2008, compared with $651 million in the first
quarter ended May 5, 2007. Earnings per share in the first quarter
decreased 1.4 percent to $0.74 from $0.75 in the same period a year
ago. All earnings per share figures refer to diluted earnings per
share.
The company also announced today that the transaction to sell an
undivided interest in approximately 47 percent of its credit card
receivables to JPMorgan Chase for cash proceeds of about $3.6 billion
was completed on Monday, May 19, 2008. This transaction is expected to
provide Target with sufficient liquidity to implement its business
plans, including previously announced capital investment and share
repurchase activity, without the need to access term debt capital
markets again this year.
"Our first quarter earnings per share met our expectations despite
softer-than-expected sales performance," said Gregg Steinhafel,
president and chief executive officer. "Though the current economic
environment remains challenging, we will continue to generate
long-term value for our shareholders by remaining focused on the
disciplined execution of our strategy. In addition, we believe our
shareholders will benefit over time from our significant share
repurchase activity and the unique relationship that has been created
through this innovative agreement with JPMorgan Chase."
As previously disclosed, beginning this quarter, the company is
reporting two business segments for all periods presented: retail and
credit card.
Retail Segment Results
Sales grew 5.0 percent in the first quarter to $14.3 billion in
2008 from $13.6 billion in 2007, due to the contribution from new
store expansion partially offset by a 0.7 percent decline in
comparable store sales. Retail segment earnings before interest
expense and income taxes (EBIT) were $959 million in the first quarter
of 2008, down 2.2 percent from $980 million in 2007.
First quarter gross margin rate declined slightly from last year,
driven by faster sales growth in lower margin rate categories,
substantially offset by increased margin rates within categories.
First quarter selling, general and administrative (SG&A) expense rate
grew modestly from 2007, benefiting from well-controlled dollar growth
offset by the de-leveraging effect of slower-than-expected sales
growth. As a reminder, for all periods presented, reported gross
margin and SG&A expense rates reflect the reclassification of
distribution and other supply chain costs from SG&A expense into cost
of sales.
Credit Card Segment Results
Average credit card receivables in the quarter grew $1.9 billion,
or 28.3 percent, from the first quarter of 2007, although quarter-end
receivables declined $204 million, or 2.4 percent, from year-end 2007.
The dollar spread to one-month LIBOR earned on the portfolio
during the quarter increased 3.9 percent to $138 million from $132
million in 2007. As expected, the benefit of sharply higher
receivables balances was substantially offset by a decline in the
annualized yield spread to LIBOR, which fell from 8.1 percentage
points last year to 6.5 percentage points in 2008.
Also, as expected, net write-offs increased in the quarter to an
annualized rate of 7.6 percent from 6.0 percent in the first quarter
of 2007.
Interest Expense and Income Taxes
Net interest expense for the quarter increased $65 million from
first quarter 2007, due to higher average debt balances supporting
capital investment, share repurchase and receivables growth, slightly
offset by lower average debt portfolio interest rates. Over the past
four quarters, the company has invested $4.1 billion in capital
expenditures, $3.7 billion in share repurchase and grown its
investment in accounts receivable by $1.9 billion.
The company's effective income tax rate for the first quarter was
37.1 percent in 2008, down from 38.8 percent in 2007, due in part to
favorable resolution during the quarter of specific tax uncertainties.
For the full year, the company now expects an effective income tax
rate in the range of 37.5 to 38.5 percent.
Share Repurchase
In the first quarter, under the share repurchase program announced
in November 2007, the company repurchased approximately 30.5 million
shares of its common stock at an average price of $51.55, for a total
investment of approximately $1.6 billion.
Program-to-date through the end of the first quarter, the company
has acquired approximately 57.0 million shares of its common stock at
an average price per share of $52.98, reflecting a total investment of
approximately $3.0 billion. The company expects to complete the
program by the end of 2010 or sooner, and under the right combination
of business results, liquidity and share price would expect to
complete half or more of the $10 billion authorization by the end of
2008.
Subsequent to the end of the first quarter, the company
repurchased an additional 10 million shares related to a set of
derivatives transactions executed in the fourth quarter of 2007, for a
total investment of approximately $502 million. Including these
repurchases, outstanding shares have been reduced approximately 8
percent since the announcement of this share repurchase program six
months ago.
Miscellaneous
Target Corporation will webcast its first quarter earnings
conference call at 9:30am CDT today. Investors and the media are
invited to listen to the call through the company's website at
www.target.com/investors (click on "webcasts"). A telephone replay of
the call will be available beginning at approximately 11:30am CDT
today through the end of business on May 22, 2008. The replay number
is (800) 642-1687 (passcode: 4007363).
For additional details on Target's credit card receivables
transaction with JPMorgan Chase please refer to Target's May 5, 2008
news release and May 6, 2008 conference call, which are available on
the company's website at www.target.com/investors.
Previously presented consolidated results have been reclassified
to conform to the current year presentation with respect to the
company's retail and credit card segments, and the reclassification of
distribution and other supply chain costs from SG&A expense into cost
of sales within the retail segment. Reclassified results by quarter
for 2005 through 2007 are available on the company's website at
www.target.com/investors.
Forward-looking statements in this release, including expectations
for liquidity, effective income tax rate and timing to complete the
current share repurchase program, should be read in conjunction with
the cautionary statements in Exhibit (99)A to the company's 2007 Form
10-K.
Target Corporation's retail segment includes large, general
merchandise and food discount stores, and a fully integrated on-line
business called Target.com. In addition, the company operates a credit
card segment that offers branded proprietary and Visa credit card
products. At quarter-end, the company operated 1,613 Target stores in
47 states.
Target Corporation news releases are available at www.target.com.
Consolidated Statements of Operations
----------------------------------------------------------------------
Three Months Ended
------------------
May 3, May 5,
(millions, except per share data)
(unaudited) 2008 2007 Change
----------------------------------------------------------------------
Sales $14,302 $13,623 5.0 %
Credit card revenues 500 418 19.8
----------------------------------------------------------------------
Total revenues 14,802 14,041 5.4
Cost of sales 9,898 9,416 5.1
Selling, general and administrative
expenses 3,037 2,863 6.2
Credit card expenses 274 170 61.1
Depreciation and amortization 435 392 11.1
----------------------------------------------------------------------
Earnings before interest expense and income
taxes 1,158 1,200 (3.5)
Interest expense, net
Nonrecourse debt collateralized by credit
card receivables 18 26 (29.9)
Other interest expense 191 112 70.5
Interest income (8) (2) 274.2
----------------------------------------------------------------------
Net interest expense 201 136 47.7
----------------------------------------------------------------------
Earnings before income taxes 957 1,064 (10.1)
Provision for income taxes 355 413 (14.1)
----------------------------------------------------------------------
Net earnings $ 602 $ 651 (7.5)%
----------------------------------------------------------------------
Basic earnings per share $ 0.75 $ 0.76 (1.7)%
----------------------------------------------------------------------
Diluted earnings per share $ 0.74 $ 0.75 (1.4)%
----------------------------------------------------------------------
Weighted average common shares outstanding
Basic 805.5 855.9
Diluted 809.6 862.8
----------------------------------------------------------------------
Subject to reclassification
Consolidated Statements of Financial Position
----------------------------------------------------------------------
May 3, Feb 2, May 5,
(millions) (unaudited) 2008 2008 2007
----------------------------------------------------------------------
Assets
Cash and cash equivalents $ 620 $ 2,450 $ 969
Credit card receivables, net of allowance
of $590, $570 and $504 7,830 8,054 6,006
Inventory 6,836 6,780 6,387
Other current assets 1,473 1,622 1,347
----------------------------------------------------------------------
Total current assets 16,759 18,906 14,709
Property and equipment
Land 5,618 5,522 5,061
Buildings and improvements 18,817 18,329 16,168
Fixtures and equipment 3,959 3,858 3,476
Computer hardware and software 2,337 2,421 2,078
Construction-in-progress 2,012 1,852 2,450
Accumulated depreciation (8,077) (7,887) (6,973)
----------------------------------------------------------------------
Property and equipment, net 24,666 24,095 22,260
Other noncurrent assets 1,405 1,559 1,315
----------------------------------------------------------------------
Total assets $42,830 $44,560 $38,284
----------------------------------------------------------------------
Liabilities and shareholders' investment
Accounts payable $ 5,959 $ 6,721 $ 5,877
Accrued and other current liabilities 3,137 3,097 2,898
Unsecured debt and other borrowings 1,863 1,464 572
Nonrecourse debt collateralized by credit
card receivables - 500 750
----------------------------------------------------------------------
Total current liabilities 10,959 11,782 10,097
Unsecured debt and other borrowings 13,230 13,226 8,251
Nonrecourse debt collateralized by credit
card receivables 1,900 1,900 1,900
Deferred income taxes 493 470 430
Other noncurrent liabilities 1,891 1,875 1,895
----------------------------------------------------------------------
Shareholders' investment
Common stock 66 68 71
Additional paid-in capital 2,678 2,656 2,437
Retained earnings 11,789 12,761 13,386
Accumulated other comprehensive loss (176) (178) (183)
----------------------------------------------------------------------
Total shareholders' investment 14,357 15,307 15,711
----------------------------------------------------------------------
Total liabilities and shareholders'
investment $42,830 $44,560 $38,284
----------------------------------------------------------------------
Common shares outstanding 788.6 818.7 851.4
----------------------------------------------------------------------
Subject to reclassification
Consolidated Statements of Cash Flows
----------------------------------------------------------------------
Three Months Ended
------------------
May 3, May 5,
(millions) (unaudited) 2008 2007
----------------------------------------------------------------------
Operating activities
Net earnings $ 602 $ 651
Reconciliation to cash flow
Depreciation and amortization 435 392
Share-based compensation expense 16 18
Deferred income taxes 20 (27)
Bad debt provision 181 86
Loss on disposal of property and equipment,
net 7 14
Other non-cash items affecting earnings 23 19
Changes in operating accounts providing /
(requiring) cash
Accounts receivable originated at Target 21 48
Inventory (56) (133)
Other current assets 79 110
Other noncurrent assets 8 (4)
Accounts payable (762) (698)
Accrued and other current liabilities 12 (32)
Other noncurrent liabilities (6) 18
Other 160 -
----------------------------------------------------------------------
Cash flow provided by operations 740 462
----------------------------------------------------------------------
Investing activities
Expenditures for property and equipment (950) (1,183)
Proceeds from disposal of property and
equipment 2 4
Change in accounts receivable originated at
third parties 23 53
Other investments (41) (5)
----------------------------------------------------------------------
Cash flow required for investing activities (966) (1,131)
----------------------------------------------------------------------
Financing activities
Change in commercial paper, net 902 -
Reductions of short-term notes payable (500) -
Additions to long-term debt - 1,900
Reductions of long-term debt (501) (501)
Dividends paid (115) (103)
Repurchase of stock (1,403) (500)
Stock option exercises and related tax benefit 13 36
Other - (7)
----------------------------------------------------------------------
Cash flow (required for) / provided by financing
activities (1,604) 825
----------------------------------------------------------------------
Net (decrease) / increase in cash and cash
equivalents (1,830) 156
Cash and cash equivalents at beginning of
period 2,450 813
----------------------------------------------------------------------
Cash and cash equivalents at end of period $ 620 $ 969
----------------------------------------------------------------------
Subject to reclassification
Retail Segment
--------------------------------------------------------
Retail Segment Results Three Months Ended
------------------
May 3, May 5,
(millions) (unaudited) 2008 2007 Change
--------------------------------------------------------
Sales $14,302 $13,623 5.0 %
Cost of sales 9,898 9,416 5.1
--------------------------------------------------------
Gross margin 4,404 4,207 4.7
SG&A expenses (a) 3,014 2,839 6.2
--------------------------------------------------------
EBITDA 1,390 1,368 1.6
Depreciation and
amortization 431 388 11.1
--------------------------------------------------------
EBIT $ 959 $ 980 (2.2)%
--------------------------------------------------------
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 $23
million in the first quarter of 2008 and $24 million in the first
quarter of 2007 are recorded as a reduction to SG&A expenses within
the Retail segment.
----------------------------------------------
Retail Segment Rate
Analysis Three Months Ended
------------------
May 3, May 5,
(unaudited) 2008 2007
----------------------------------------------
Gross margin rate 30.8% 30.9%
SG&A expense rate 21.1% 20.8%
EBITDA margin rate 9.7% 10.0%
EBIT margin rate 6.7% 7.2%
----------------------------------------------
----------------------------------------------
Comparable-Store Sales Three Months Ended
------------------
May 3, May 5,
(unaudited) 2008 2007
----------------------------------------------
Comparable-store sales (0.7)% 4.3%
----------------------------------------------
Comparable-store sales growth is calculated by comparing sales in
current year periods with comparable, prior fiscal-year periods of
equivalent length.
----------------------------------------------------------------------
Number of Stores and Retail Retail Square
Square Feet Number of Stores Feet (a)
------------------ -----------------------
May 3, May 5, May 3, May 5,
(unaudited) 2008 2007 2008 2007 Change
----------------------------------------------------------------------
Target general merchandise
stores 1,395 1,318 173,015 161,860 6.9%
SuperTarget stores 218 182 38,514 32,129 19.9%
----------------------------------------------------------------------
Total 1,613 1,500 211,529 193,989 9.0%
----------------------------------------------------------------------
(a) In thousands; reflects total square feet, less office,
distribution center and vacant space.
Subject to reclassification
Credit Card Segment
-----------------------------------------------------------------
Credit Card Segment Results Three Months
Ended
-------------
May 3, May 5,
(millions) (unaudited) 2008 2007 Change
-----------------------------------------------------------------
Finance charge revenue $354 $296 19.8 %
Late fee and other revenue 108 88 22.4
Third party merchant fees 38 34 13.4
-----------------------------------------------------------------
Total revenues 500 418 19.8
-----------------------------------------------------------------
Bad debt expense 181 86 108.8
Operations and marketing expenses (a) 116 108 8.8
Depreciation and amortization 4 4 14.1
-----------------------------------------------------------------
Total expenses 301 198 52.7
-----------------------------------------------------------------
EBIT $199 $220 (9.6)%
-----------------------------------------------------------------
(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 $23
million in the first quarter of 2008 and $24 million in the first
quarter of 2007 are recorded as an increase to Operations and
Marketing expenses within the Credit Card segment.
-----------------------------------------------------------------
EBIT Analysis Three Months Ended Three Months Ended
May 3, 2008 May 5, 2007
-------------------- ---------------------
Yield Yield
-------------------- ---------------------
Amount Annualized Amount Annualized
(unaudited) (in millions) Rate (in millions) Rate
-----------------------------------------------------------------
EBIT $199 9.4%(b) $220 13.4%(b)
LIBOR (a) 2.9% 5.3%
Spread to LIBOR $138 6.5%(b) $132 8.1%(b)
-----------------------------------------------------------------
(a) Balance-weighted average 1-month LIBOR rate
(b) As a percentage of average receivables
----------------------------------------------------------------------
Return Analysis Three Months Ended May 3, 2008
------------------------------------
Average Yield
----------------------
Amount Amount Annualized
(in millions)(in millions) Rate
(unaudited) (a) (b) (c)
----------------------------------------------------------------------
Gross credit card receivables $8,443 $199 9.4%
Portion funded by third parties
(d) 2,180 18 3.4%
----------------------------------------------------------------------
Portion funded by Target $6,263 $181 11.5%
----------------------------------------------------------------------
----------------------------------------------------------------------
Return Analysis Three Months Ended May 5, 2007
------------------------------------
Average Yield
-----------------------
Amount Amount Annualized
(in millions)(in millions) Rate
(unaudited) (a) (b) (c)
----------------------------------------------------------------------
Gross credit card receivables $6,582 $220 13.4%
Portion funded by third parties
(d) 1,859 26 5.6%
----------------------------------------------------------------------
Portion funded by Target $4,723 $194 16.4%
----------------------------------------------------------------------
(a) Amounts represent the aggregate of principal and accrued revenues
receivable before the allowance for doubtful accounts, the amount
funded by nonrecourse debt collateralized by credit card receivables
and the residual portion funded by Target, respectively.
(b) Amounts represent total portfolio EBIT, interest paid to holders
of nonrecourse debt collateralized by credit card receivables and the
pretax profit attributable to the residual portion funded by Target,
respectively.
(c) Rates represent amounts shown in column (b) divided by amounts
shown in column (a), expressed as an annualized rate.
(d) Amounts relate to nonrecourse debt collateralized by credit card
receivables.
-----------------------------------------------------------------
Receivables Rollforward Analysis Three Months
Ended
-----------------
May 3, May 5,
(millions) (unaudited) 2008 2007 Change
-----------------------------------------------------------------
Beginning receivables $ 8,624 $ 6,711 28.5 %
Charges at Target 946 942 0.4
Charges at third parties 2,148 1,889 13.7
Payments (3,629) (3,344) 8.5
Other 331 312 6.3
----------------------------------------------------------------
Period-end receivables $ 8,420 $ 6,510 29.3 %
----------------------------------------------------------------
Average receivables $ 8,443 $ 6,582 28.3 %
----------------------------------------------------------------
Accounts with three or more payments (60+ days)
past due as a percentage of period-
end receivables 4.2% 3.2%
----------------------------------------------------------------
Accounts with four or more payments (90+ days)
past due as a percentage of period-
end receivables 2.9% 2.1%
----------------------------------------------------------------
----------------------------------------------------------------
Allowance for Doubtful Accounts Three Months
Ended
-----------------
May 3, May 5,
(millions) (unaudited) 2008 2007 Change
-----------------------------------------------------------------
Allowance at beginning of period $ 570 $ 517 10.4 %
Bad debt provision 181 86 108.8
Net write-offs (161) (99) 61.5
----------------------------------------------------------------
Allowance at end of period $ 590 $ 504 17.2 %
----------------------------------------------------------------
As a percentage of period-end
receivables 7.0% 7.7%
----------------------------------------------------------------
Net write-offs as a percentage of
average receivables (annualized) 7.6% 6.0%
----------------------------------------------------------------
Subject to reclassification
CONTACT: Target Corporation
John Hulbert (Investors), 612-761-6627
or
Lena Michaud (Financial Media), 612-761-6796
SOURCE: Target Corporation
