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)

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