Financial News Release

Target Corporation Announces Strong Third Quarter Earnings
11/17/09

Remains Cautious on Fourth Quarter Outlook

MINNEAPOLIS--(BUSINESS WIRE)--Nov. 17, 2009-- Target Corporation (NYSE:TGT) today reported net earnings of $436 million for the third quarter ended October 31, 2009, compared with $369 million in the third quarter ended November 1, 2008. Earnings per share in the third quarter increased 18.6 percent to $0.58 from $0.49 in the same period a year ago. All earnings per share figures refer to diluted earnings per share.

“We’re very pleased with our third quarter earnings performance, which reflects strong execution and a commitment to continued innovation by teams throughout the company,” said Gregg Steinhafel, chairman, president and chief executive officer of Target Corporation. “Profitability in our retail segment during the third quarter was well above expectations, and credit card segment profitability also improved due to continued thoughtful portfolio management in a challenging credit environment. As we look ahead, we remain keenly focused on delighting our guests with exciting merchandise, exceptional prices and superior service during the holiday season and believe we are well-positioned to capture profitable market share.”

Retail Segment Results

Sales increased 1.4 percent in the third quarter to $14.8 billion in 2009 from $14.6 billion in 2008, due to the contribution from new store expansion, partially offset by a 1.6 percent decline in comparable-store sales. Retail segment earnings before interest expense and income taxes (EBIT) were $791 million in the third quarter of 2009, a 2.4 percent increase from $772 million in 2008.

Third quarter gross margin rate increased to 30.8 percent from 30.6 percent in 2008, due to gross margin rate improvements within categories, partially offset by a smaller-than-expected mix impact of faster sales growth in non-discretionary lower margin rate categories. Third quarter selling, general and administrative (SG&A) expense dollars were up 0.5 percent compared to 2008, as the expense related to operating additional stores was substantially offset by productivity improvements. At quarter-end, the company was operating 59 more stores than a year ago.

Depreciation and amortization was $533 million in the third quarter, up 14.8 percent from $465 million in 2008. More than half of this increase was driven by the recognition of accelerated depreciation on store assets that are expected to be replaced as part of the company’s 2010 store remodel program.

Credit Card Segment Results

Average credit card receivables in the quarter decreased $547 million, or 6.3 percent, from the third quarter of 2008, and quarter-end receivables decreased $717 million, or 8.2 percent, from the same period a year ago.

Credit card segment profit in the quarter increased to $60 million from $35 million last year as a result of improved portfolio performance that more than offset the impact of lower floating interest rates. Target’s pretax return on invested capital (ROIC) from its investment in the credit card segment increased to 9.0 percent in the third quarter from 4.3 percent in 2008.

Net write-offs in the quarter were $280 million, in line with expectations. The allowance for doubtful accounts was $1,025 million at quarter-end, compared with $1,004 million at the end of the second quarter.

Other Expenses

Net interest expense for the quarter decreased $43 million from third quarter 2008 to $191 million, reflecting a lower average portfolio interest rate combined with lower average debt balances.

The company’s effective income tax rate for the third quarter was 36.1 percent in 2009, down from 41.7 percent in 2008, primarily due to a decrease in the amount of reserves recorded for tax uncertainties and a higher proportion of earnings that are not subject to tax. For the full year, the company now expects an effective income tax rate in the range of 36.5 to 37.5 percent.

Fourth Quarter Outlook

In light of the current and projected economic environment and expectations for a highly promotional holiday season, Target remains cautious about fourth quarter performance and is planning conservatively in both business segments.

Miscellaneous

Target Corporation will webcast its third quarter earnings conference call at 9:30 a.m. CST 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 11:30 a.m. CST today through the end of business on November 19, 2009. The replay number is (800) 642-1687 (passcode: 73959981).

The statements on the expected tax rate and fourth quarter outlook are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements speak only as of the date they are made and are subject to risks and uncertainties which could cause the company's actual results to differ materially. The most important risks and uncertainties are described in Item 1A of the company's Form 10-K for the fiscal year ended January 31, 2009.

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 1,743 Target stores in 49 states.

Target Corporation news releases are available at www.target.com.

           
 
TARGET CORPORATION
 
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
October 31, November 1, October 31, November 1,

(millions, except per share data)

 

2009

 

2008

 

Change

   

2009

 

2008

 

Change

 
(unaudited) (unaudited) (unaudited) (unaudited)
Sales $ 14,789 $ 14,588 1.4 % $ 43,717 $ 43,861 (0.3 ) %
Credit card revenues     487       526     (7.5 )       1,459       1,527     (4.5 )  
Total revenues 15,276 15,114 1.1 45,176 45,388 (0.5 )
Cost of sales 10,229 10,130 1.0 30,080 30,332 (0.8 )
Selling, general and administrative expenses 3,255 3,245 0.3 9,405 9,436 (0.3 )
Credit card expenses 381 403 (5.5 ) 1,153 1,023 12.7
Depreciation and amortization     537       469     14.5         1,487       1,352     9.9    
Earnings before interest expense and income taxes 874 867 0.9 3,051 3,245 (6.0 )
Net interest expense

Nonrecourse debt collateralized by credit card receivables

23 60 (60.6 ) 74 126 (41.4 )
Other interest expense 168 180 (6.8 ) 517 550 (6.1 )
Interest income     -       (6 )   (96.4 )       (3 )     (24 )   (89.2 )  
Net interest expense     191       234     (18.3 )       588       652     (9.8 )  
Earnings before income taxes 683 633 8.0 2,463 2,593 (5.0 )
Provision for income taxes     247       264     (6.5 )       911       988     (7.7 )  
Net earnings   $ 436     $ 369     18.4   %   $ 1,552     $ 1,605     (3.3 ) %
Basic earnings per share   $ 0.58     $ 0.49     18.7   %   $ 2.06     $ 2.07     (0.2 ) %
Diluted earnings per share   $ 0.58     $ 0.49     18.6   %   $ 2.06     $ 2.06     0.0   %
Weighted average common shares outstanding
Basic 751.8 753.5 752.0 776.4
Diluted     755.7       756.6             754.3       780.1        
 
Subject to reclassification
 
     
 
TARGET CORPORATION
 
Consolidated Statements of Financial Position
October 31, January 31, November 1,
(millions)   2009   2009   2008
Assets (unaudited) (unaudited)
Cash and cash equivalents, including marketable securities of $273, $302 and $397 $ 864 $ 864 $ 918
Credit card receivables, net of allowance of $1,025, $1,010 and $765 7,023 8,084 7,999
Inventory 9,382 6,705 9,050
Other current assets     2,314       1,835       2,272  
Total current assets 19,583 17,488 20,239
Property and equipment
Land 5,754 5,767 5,727
Buildings and improvements 22,250 20,430 20,454
Fixtures and equipment 4,732 4,270 4,212
Computer hardware and software 2,599 2,586 2,610
Construction-in-progress 291 1,763 1,320
Accumulated depreciation     (10,035 )     (9,060 )     (8,798 )
Property and equipment, net 25,591 25,756 25,525
Other noncurrent assets     805       862       1,277  
Total assets   $ 45,979     $ 44,106     $ 47,041  
Liabilities and shareholders' investment
Accounts payable $ 7,641 $ 6,337 $ 7,590
Accrued and other current liabilities 3,117 2,913 3,057
Unsecured debt and other borrowings 577 1,262 2,849
Nonrecourse debt collateralized by credit card receivables     1,063       -       -  
Total current liabilities 12,398 10,512 13,496
Unsecured debt and other borrowings 11,432 12,000 11,966
Nonrecourse debt collateralized by credit card receivables 4,463 5,490 5,478
Deferred income taxes 804 455 589
Other noncurrent liabilities     1,911       1,937       1,932  
Total noncurrent liabilities 18,610 19,882 19,965
Shareholders' investment
Common stock 63 63 63
Additional paid-in capital 2,866 2,762 2,725
Retained earnings 12,559 11,443 10,967
Accumulated other comprehensive loss     (517 )     (556 )     (175 )
Total shareholders' investment     14,971       13,712       13,580  
Total liabilities and shareholders' investment   $ 45,979     $ 44,106     $ 47,041  
Common shares outstanding     752.2       752.7       752.8  
 
Subject to reclassification
 
         
 
TARGET CORPORATION
 
Consolidated Statements of Cash Flows
Nine Months Ended
October 31, November 1,
(millions) (unaudited)         2009   2008
Operating activities
Net earnings $ 1,552 $ 1,605
Reconciliation to cash flow
Depreciation and amortization 1,487 1,352
Share-based compensation expense 72 43
Deferred income taxes 451 (32 )
Bad debt provision 900 751
Loss on disposal of property and equipment, net 85 33
Other non-cash items affecting earnings 44 165
Changes in operating accounts providing / (requiring) cash
Accounts receivable originated at Target 190 (313 )
Inventory (2,677 ) (2,270 )
Other current assets (251 ) (322 )
Other noncurrent assets 27 5
Accounts payable 1,303 869
Accrued and other current liabilities (148 ) (270 )
Other noncurrent liabilities (8 ) 4
Other           -       160  
Cash flow provided by operations           3,027       1,780  
Investing activities
Expenditures for property and equipment (1,440 ) (2,827 )
Proceeds from disposal of property and equipment 25 26
Change in accounts receivable originated at third parties (29 ) (383 )
Other investments           10       (179 )
Cash flow required for investing activities           (1,434 )     (3,363 )
Financing activities
Change in commercial paper, net - 1,382
Reductions of short-term notes payable - (500 )
Additions to long-term debt - 3,557
Reductions of long-term debt (1,255 ) (1,254 )
Dividends paid (369 ) (345 )
Repurchase of stock - (2,815 )
Stock option exercises and related tax benefit 31 34
Other           -       (8 )
Cash flow (required for)/provided by financing activities           (1,593 )     51  
Net increase/(decrease) in cash and cash equivalents - (1,532 )
Cash and cash equivalents at beginning of period           864       2,450  
Cash and cash equivalents at end of period         $ 864     $ 918  
 
Subject to reclassification
 
       
 
TARGET CORPORATION
 
Retail Segment
       
Retail Segment Results Three Months Ended Nine Months Ended
October 31, November 1, October 31, November 1,
(millions) (unaudited)   2009   2008   Change   2009   2008 Change  
Sales $ 14,789 $ 14,588 1.4 % $ 43,717 $ 43,861 (0.3 ) %
Cost of sales     10,229     10,130   1.0       30,080     30,332 (0.8 )  
Gross margin 4,560 4,458 2.3 13,637 13,529 0.8
SG&A expenses(a)     3,236     3,221   0.5       9,345     9,361 (0.2 )  
EBITDA 1,324 1,237 7.1 4,292 4,168 3.0
Depreciation and amortization     533     465   14.8       1,476     1,339 10.2    
EBIT   $ 791   $ 772   2.4   % $ 2,816   $ 2,829 (0.4 ) %
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 $19 million and $59 million for the three and nine months ended October 31, 2009, respectively, and $24 million and $75 million for the three and nine months ended November 1, 2008, respectively, are recorded as a reduction to SG&A expenses within the Retail Segment.
 
 
 
Retail Segment Rate Analysis Three Months Ended Nine Months Ended
October 31, November 1, October 31, November 1,
(unaudited)   2009   2008   2009   2008
Gross margin rate 30.8 % 30.6 % 31.2 % 30.8 %
SG&A expense rate 21.9 % 22.1 % 21.4 % 21.3 %
EBITDA margin rate 9.0 % 8.5 % 9.8 % 9.5 %
Depreciation and amortization expense rate 3.6 % 3.2 % 3.4 % 3.1 %
EBIT margin rate     5.3 %     5.3 %   6.4 %     6.4 %
Retail Segment rate analysis metrics are computed by dividing the applicable amount by sales.
 
 
Comparable-Store Sales Three Months Ended Nine Months Ended
October 31, November 1, October 31, November 1,
(unaudited)   2009   2008   2009   2008
Comparable-store sales (1.6 )% (3.3 )% (3.9 )% (1.5 )%
Drivers of changes in comparable-store sales:
Number of transactions 0.6

 %

(3.6 )% (1.1 )% (2.5 )%
Average transaction amount (2.2 )% 0.3

 %

(2.8 )% 1.0

 %

Units per transaction (1.6 )% (1.5 )% (2.4 )% (1.3 )%
Selling price per unit     (0.6 )%     1.8

 %

  (0.4 )%     2.3

 %

The comparable-store sales increases or decreases above are calculated by comparing sales in fiscal year periods with comparable prior year periods of equivalent length.
 
 
                         
Number of Stores and Retail Square Feet Number of Stores Retail Square Feet(a)

October 31,

January 31, November 1, October 31, January 31, November 1,
(unaudited)   2009   2009   2008   2009     2009   2008
Target general merchandise stores 1,491 1,443 1,445 187,481 180,321 180,200
SuperTarget stores     252     239   239     44,645     42,267   42,220
Total     1,743     1,682   1,684     232,126     222,588   222,420

(a) In thousands; reflects total square feet, less office, distribution center and vacant space.

 
Subject to reclassification
 
 
 

TARGET CORPORATION

             
Credit Card Segment
     
Credit Card Segment Results Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
October 31, 2009 November 1, 2008 October 31, 2009 November 1, 2008
Amount Annualized Amount Annualized Amount Annualized Amount Annualized
(millions) (unaudited)   (in millions)   Rate(d)     (in millions)   Rate(d)     (in millions)   Rate(d)     (in millions)  

Rate(d)

 
Finance charge revenue $ 365 17.8 % $ 366 16.7 % $ 1,097 17.4 % $ 1,060 16.5 %
Late fees and other revenue 92 4.5 123 5.6 270 4.3 352 5.5
Third party merchant fees     30       1.5         37         1.7         92     1.5         115     1.8    
Total revenues     487       23.8         526         24.1         1,459     23.1         1,527     23.8    
Bad debt expense 301 14.7 314 14.4 900 14.3 751 11.7
Operations and marketing expenses(a) 99 4.8 113 5.2 312 4.9 347 5.4
Depreciation and amortization     4       0.2         4         0.2         11     0.2         13     0.2    
Total expenses     404       19.7         431         19.7         1,223     19.4         1,111     17.3    
EBIT 83 4.1 95 4.3 236 3.7 416 6.5

Interest expense on nonrecourse debt collateralized by credit card receivables

    23             60               74             126        
Segment profit   $ 60           $ 35             $ 162           $ 290        

Average gross credit card receivables funded by Target(b)

$ 2,677 $ 3,272 $ 2,910 $ 4,392
Segment pretax ROIC(c)     9.0 %           4.3 %             7.4 %           8.8 %      

(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 $19 million and $59 million for the three and nine months ended October 31, 2009, respectively, and $24 million and $75 million for the three and nine months ended November 1, 2008, respectively, are recorded as an increase to operations and marketing expenses within the Credit Card Segment.

 

(b) Amounts represent the portion of average credit card receivables funded by Target. These amounts exclude $5,520 million and $5,508 million for the three and nine months ended October 31, 2009, respectively, and $5,473 million and $4,176 million for the three and nine months ended November 1, 2008, respectively, of receivables funded by nonrecourse debt collateralized by credit card receivables.

 

(c) ROIC is return on invested capital, and this rate represents segment profit divided by average receivables funded by Target, expressed as an annualized rate.

 

(d) As an annualized percentage of average gross credit card receivables.

     
Spread Analysis - Total Portfolio Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
October 31, 2009 November 1, 2008 October 31, 2009 November 1, 2008
Yield Yield Yield Yield
Amount Annualized Amount Annualized

Amount

Annualized Amount Annualized
(unaudited)  

(in millions)

  Rate     (in millions)   Rate    

(in millions)

  Rate     (in millions)   Rate  
EBIT $ 83 4.1 % (b) $ 95 4.3 % (b) $ 236 3.7 % (b) $ 416 6.5 % (b)
LIBOR(a) 0.3 % 3.1 % 0.3 % 2.8 %
Spread to LIBOR(c)   $ 78       3.8 % (b)   $ 27       1.2 % (b)   $ 213     3.4 % (b)   $ 235     3.7 % (b)

(a) Balance-weighted average 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 earns 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.

 
Receivables Rollforward Analysis Three Months Ended Nine Months Ended
October 31, November 1, October 31, November 1,
(millions) (unaudited)   2009   2008     Change     2009     2008   Change  
Beginning gross credit card receivables $ 8,293 $ 8,641 (4.0 ) % $ 9,094 $ 8,624 5.4 %
Charges at Target 799 955 (16.4 ) 2,445 2,923 (16.3 )
Charges at third parties 1,648 2,082 (20.8 ) 5,080 6,488 (21.7 )
Payments (2,870 ) (3,221 ) (10.9 ) (9,071 ) (10,209 ) (11.1 )
Other     178       307         (42.0 )       500         938     (46.7 )  
Period-end gross credit card receivables   $ 8,048     $ 8,764         (8.2 ) %   $ 8,048       $ 8,764     (8.2 ) %
Average gross credit card receivables   $ 8,197     $ 8,745         (6.3 ) %   $ 8,418       $ 8,568     (1.7 ) %

Accounts with three or more payments (60+ days) past due as a percentage of period-end gross credit card receivables

    6.5 %     5.6 %             6.5 %       5.6 %      

Accounts with four or more payments (90+ days) past due as a percentage of period-end gross credit card receivables

    4.6 %     3.8 %             4.6 %       3.8 %      
 
Allowance for Doubtful Accounts Three Months Ended Nine Months Ended
October 31, November 1, October 31, November 1,
(millions) (unaudited)   2009   2008     Change     2009     2008   Change  
Allowance at beginning of period $ 1,004 $ 661 52.0 % $ 1,010 $ 570 77.1 %
Bad debt provision 301 314 (4.3 ) 900 751 19.9
Net write-offs(a)     (280 )     (210 )       33.4         (885 )       (556 )   59.2    
Allowance at end of period   $ 1,025     $ 765         33.9   %   $ 1,025       $ 765     33.9   %

As a percentage of period-end gross credit card receivables

    12.7 %     8.7 %             12.7 %       8.7 %      

Net write-offs as a percentage of average gross credit card receivables (annualized)

    13.7 %     9.6 %             14.0 %       8.7 %      

(a) Net write-offs include the principal amount of losses (excluding accrued and unpaid finance charges) less current period principal recoveries.

 
Subject to reclassification
 

Source: Target Corporation

Target Corporation
John Hulbert, 612-761-6627 (Investors)
or
Eric Hausman, 612-761-2054 (Financial Media)