Target Corporation Third Quarter Earnings Per Share $0.56
Company Announces $10 Billion Share Repurchase Authorization and
Provides Update on Credit Card Receivables Ownership Review
MINNEAPOLIS--(BUSINESS WIRE)--Nov. 20, 2007--Target Corporation (NYSE:TGT) today reported net earnings of $483 million, or 56 cents per share, for the third quarter ended November 3, 2007 compared with $506 million, or 59 cents per share, in the third quarter ended October 28, 2006. All earnings per share figures refer to diluted earnings per share.
The company also announced that its Board of Directors has authorized a new $10 billion share repurchase program, replacing the previous authorization.
Third Quarter Earnings
"Our third quarter earnings were disappointing due to soft sales in our higher margin categories, leading to lower-than-expected gross margin in our core retail operations," said Bob Ulrich, chairman and chief executive officer. "However, we have not observed any meaningful change in the intensity of the competitive environment and continue to believe that we are well-positioned to operate in a variety of sales environments going forward."
Total revenues in the third quarter increased 9.3 percent to $14.835 billion from $13.570 billion in 2006, reflecting a 3.7 percent increase in comparable-store sales combined with the contribution from new stores and credit card operations. (Total revenues include retail sales and net credit card revenues. Comparable-store sales are sales from stores open longer than one year.)
Earnings before interest and income taxes (EBIT) were $958 million, compared with $957 million in the third quarter a year ago. A key factor in this EBIT performance was unfavorable gross margin performance resulting from weaker sales in higher margin categories such as apparel and home. Third quarter expense rate was essentially unchanged from prior year, while the contribution from credit card operations remained strong. (Gross margin rate represents sales less cost of sales expressed as a percentage of sales. Expense rate represents selling, general and administrative expenses expressed as a percentage of sales.)
The contribution from the company's credit card operations to third quarter earnings before taxes (EBT), net of the allocated interest expense, was $157 million, an increase of $23 million, or 17.1 percent, from the same period in 2006. This increase was driven by strong revenue growth, offset by higher bad debt expense. Average receivables in the quarter increased 19.6 percent over 2006, partially driven by a product change from proprietary Target Cards to higher-limit Target Visa cards for a group of higher credit-quality Target Card guests.
Net interest expense for the quarter increased $28 million compared with third quarter 2006 primarily due to higher average debt balances, including the debt to fund growth in accounts receivable.
The company's effective income tax rate for the third quarter was 38.1 percent in 2007 compared with 37.4 percent in 2006. For the full year, the effective income tax rate is still expected to increase modestly from last year's 38.0 percent rate.
Share Repurchase
Under a share repurchase program that began in 2004 and was increased by the Board to an $8 billion authorization in June 2007, the company repurchased $172 million of its common stock during the third quarter of 2007, acquiring 3.0 million shares at an average price of $57.29 per share. During the first three quarters of 2007, the company repurchased $1.2 billion of its common stock, acquiring 19.7 million shares at an average price of $60.72 per share. Program-to-date, the company has acquired 90.7 million shares of its common stock at an average price per share of $51.20, reflecting a total investment of approximately $4.6 billion.
Target also announced today that its board has authorized a new $10 billion share repurchase program that replaces the prior authorization. At recent share price levels, this authorization represents more than 20 percent of outstanding shares. The program is expected to be completed within three years, with the pace of repurchase activity being dependent on many factors, including: the strength of our business operations, the maintenance of an appropriate credit profile, capital reinvestment opportunities, access to adequate liquidity and debt and equity capital market conditions. Based on current conditions and outlook, a significant portion of the program is expected to be completed by the end of 2008. This new authorization is not contingent on any specific outcome from the review of the ownership of Target's credit card receivables.
"This repurchase program will be partially funded by an increase in the use of debt in our capital structure," Bob Ulrich said. "We believe this new program will maintain our strong investment-grade debt ratings within a prudent range while allowing for substantial value to be returned to our shareholders. Given our prospects for continued profitable market-share growth, we believe share repurchase is a particularly attractive use of our capital at this time."
Credit Card Receivables Ownership Review
On September 12, 2007, Target announced that it would review potential ownership alternatives for its credit card receivables, specifically whether Target or a financial institution is better suited to own those receivables. The focus of the company's review remains on the economics of possible alternatives, while maintaining the highest brand standards for its financial products and services, continuing to invest in its outstanding financial services team and delivering an exceptional and integrated credit and retail guest experience.
"At this point in the review, it is clear that if a transaction occurs, it would involve sharing a meaningful portion of our future pre-tax credit card contribution with a new partner," said Doug Scovanner, chief financial officer. "As a result, we are continuing to evaluate whether the benefits of a potential transaction outweigh its expected dilutive impact on earnings per share. Regardless of the outcome, we remain committed to maintaining our core financial services operation and growing and developing our best-in-class Target Financial Services team."
For reference, pre-tax contribution from our credit card operations in 2007 is expected to total approximately $600 million. The outcome of the credit card receivables ownership review remains uncertain at this time, but it is expected to be completed by the end of December.
Miscellaneous
Target Corporation will webcast its third quarter earnings conference call at 9:30am 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 11:30am CST today through the end of business on November 23, 2007. The replay number is (800) 642-1687 (passcode: 7390928).
Forward-looking statements in this release, including the outlook for earnings, market share growth, credit card performance, full year tax rate, and the timing to complete the new share repurchase program, should be read in conjunction with the cautionary statements in Exhibit (99)A to the company's 2006 Form 10-K.
Target Corporation's continuing operations include large, general merchandise and food discount stores, as well as an on-line business called Target.com. At quarter-end, the company operated 1,591 Target stores in 47 states.
Target Corporation news releases are available at www.target.com.
Consolidated Statements of Operations
---------------------------------------------------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
Nov. 3, Oct. 28, Nov. 3, Oct. 28,
(millions, except
per share data)
(unaudited) 2007 2006 Change 2007 2006 Change
---------------------------------------------------------------------
Sales $ 14,342 $ 13,156 9.0 % $ 42,132 $ 38,609 9.1%
Net credit card
revenues 493 414 19.0 1,364 1,171 16.4
---------------------------------------------------------------------
Total revenues 14,835 13,570 9.3 43,496 39,780 9.3
Cost of sales 9,771 8,891 9.9 28,396 26,050 9.0
Selling, general
and
administrative
expenses 3,455 3,151 9.7 9,875 9,016 9.5
Credit card
expenses 222 182 21.8 574 512 12.0
Depreciation and
amortization 429 389 10.2 1,225 1,094 12.0
---------------------------------------------------------------------
Earnings before
interest expense
and income taxes 958 957 0.1 3,426 3,108 10.2
Net interest
expense 177 149 18.2 467 421 10.9
---------------------------------------------------------------------
Earnings before
income taxes 781 808 (3.2) 2,959 2,687 10.1
Provision for
income taxes 298 302 (1.3) 1,138 1,019 11.7
---------------------------------------------------------------------
Net earnings $ 483 $ 506 (4.4)% $ 1,821 $ 1,668 9.1%
---------------------------------------------------------------------
Basic earnings
per share $ 0.57 $ 0.59 (3.0)% $ 2.14 $ 1.93 10.7%
---------------------------------------------------------------------
Diluted earnings
per share $ 0.56 $ 0.59 (3.5)% $ 2.11 $ 1.92 10.2%
---------------------------------------------------------------------
Weighted average
common shares
outstanding
Basic 845.6 857.8 850.8 863.1
Diluted 851.0 864.4 856.3 869.7
Subject to reclassification
Consolidated Statements of Financial Position
----------------------------------------------------------------------
Nov. 3, Oct. 28,
(millions) (unaudited) 2007 2006
----------------------------------------------------------------------
Assets
Cash and cash equivalents $ 627 $ 451
Accounts receivable, net 7,120 5,634
Inventory 8,746 7,797
Other current assets 1,841 1,466
----------------------------------------------------------------------
Total current assets 18,334 15,348
Property and equipment
Land 5,387 4,739
Buildings and improvements 17,211 14,992
Fixtures and equipment 3,659 3,311
Computer hardware and software 2,361 2,078
Construction-in-progress 2,524 2,483
Accumulated depreciation (7,536) (6,677)
----------------------------------------------------------------------
Property and equipment, net 23,606 20,926
Other non-current assets 1,349 1,593
----------------------------------------------------------------------
Total assets $43,289 $37,867
----------------------------------------------------------------------
Liabilities and Shareholders' Investment
Accounts payable $ 7,852 $ 7,086
Accrued and other current liabilities 2,812 2,582
Current portion of long-term debt and notes payable 2,899 2,253
----------------------------------------------------------------------
Total current liabilities 13,563 11,921
Long-term debt 11,239 9,123
Deferred income taxes 421 714
Other non-current liabilities 1,906 1,309
----------------------------------------------------------------------
Shareholders' investment
Common stock 70 72
Additional paid-in-capital 2,636 2,307
Retained earnings 13,630 12,423
Accumulated other comprehensive loss (176) (2)
----------------------------------------------------------------------
Total shareholders' investment 16,160 14,800
----------------------------------------------------------------------
Total liabilities and shareholders' investment $43,289 $37,867
----------------------------------------------------------------------
Common shares outstanding 845.0 858.9
----------------------------------------------------------------------
Subject to reclassification
Consolidated Statements of Cash Flows
----------------------------------------------------------------------
Nine Months Ended
-------------------
Nov. 3, Oct. 28,
(millions) (unaudited) 2007 2006
----------------------------------------------------------------------
Operating Activities
Net earnings $ 1,821 $ 1,668
Reconciliation of net earnings to operating cash
flows
Depreciation and amortization 1,225 1,094
Share-based compensation expense 59 64
Deferred income taxes (72) (167)
Bad debt provision 311 278
Loss on disposal of property and equipment, net 34 58
Other non-cash items affecting earnings 82 33
Changes in operating accounts providing /
(requiring) cash:
Accounts receivable originated at Target (260) (44)
Inventory (2,492) (1,961)
Other current assets (164) (111)
Other non-current assets 4 4
Accounts payable 1,277 818
Accrued liabilities (297) (66)
Other non-current liabilities 58 44
----------------------------------------------------------------------
Cash flow provided by operations 1,586 1,712
----------------------------------------------------------------------
Investing Activities
Expenditures for property and equipment (3,418) (3,004)
Proceeds from disposal of property and equipment 53 20
Change in accounts receivable originated at
third parties (978) (203)
Other investments (189) (119)
----------------------------------------------------------------------
Cash flow required for investing activities (4,532) (3,306)
----------------------------------------------------------------------
Financing Activities
Change in commercial paper, net 578 955
Additions to short-term notes payable 1,000 -
Additions to long-term debt 3,650 1,250
Reductions of long-term debt (1,254) (752)
Dividends paid (324) (277)
Repurchase of stock (1,071) (901)
Stock option exercises and related tax benefit 204 126
Other (23) (4)
----------------------------------------------------------------------
Cash flow provided by financing activities 2,760 397
----------------------------------------------------------------------
Net decrease in cash and cash equivalents (186) (1,197)
Cash and cash equivalents at beginning of period 813 1,648
----------------------------------------------------------------------
Cash and cash equivalents at end of period $ 627 $ 451
----------------------------------------------------------------------
Subject to reclassification
Number of Stores, Retail Square Feet and Comparable-store Sales
----------------------------------------------------------------------
Number of Stores Retail Square Feet (a)
------------------- --------------------------
Nov. 3, Oct. 28, Nov. 3, Oct. 28,
(unaudited) 2007 2006 2007 2006 Change
----------------------------------------------------------------------
Target general
merchandise stores 1,381 1,318 170,518 161,152 5.8%
SuperTarget stores 210 176 37,022 31,073 19.1%
----------------------------------------------------------------------
Total 1,591 1,494 207,540 192,225 8.0%
----------------------------------------------------------------------
(a) In thousands; reflects total square feet, less office,
distribution center and vacant space.
---------------------------------------------------------------
Three Months Ended Nine Months Ended
------------------- -------------------
Nov. 3, Oct. 28, Nov. 3, Oct. 28,
(unaudited) 2007 2006 2007 2006
---------------------------------------------------------------
Comparable-store sales
(b) 3.7% 4.6% 4.3% 4.8%
---------------------------------------------------------------
(b) Comparable-store sales growth is calculated by comparing sales in
current year periods to comparable, prior year periods of equivalent
length.
Credit Card Contribution to Earnings Before Tax
Effective February 2007, the Company redefined Credit Card
Contribution to Earnings Before Taxes (EBT). We have reclassified
prior period amounts to conform to the current year disclosure. These
reclassifications had no effect on our Consolidated Statements of
Operations.
---------------------------------------------------------------
Three Months Ended Nine Months Ended
------------------- -------------------
Nov. 3, Oct. 28, Nov. 3, Oct. 28,
(millions) (unaudited) 2007 2006 2007 2006
---------------------------------------------------------------
Revenues
Finance charges $ 334 $ 279 $ 935 $ 812
Interest expense (a) (86) (72) (243) (202)
---------------------------------------------------------------
Net interest income 248 207 692 610
---------------------------------------------------------------
Late fees and other
revenues 113 101 311 261
Third-party merchant
fees 46 34 118 98
New account and loyalty
rewards discounts (b) (24) (22) (72) (72)
---------------------------------------------------------------
Non-interest income 135 113 357 287
---------------------------------------------------------------
Total credit card
revenues 383 320 1,049 897
---------------------------------------------------------------
Expenses
Bad debt provision 130 97 311 278
Operations and
marketing 92 85 263 234
Allocated depreciation
charge (c) 4 4 12 11
---------------------------------------------------------------
Total expenses 226 186 586 523
---------------------------------------------------------------
Credit card
contribution to EBT $ 157 $ 134 $ 463 $ 374
---------------------------------------------------------------
As a percentage of
average receivables
(annualized) 8.6% 8.8% 8.9% 8.3%
Net interest margin
(annualized) (d) 13.6% 13.6% 13.4% 13.5%
---------------------------------------------------------------
---------------------------------------------------------------
Receivables
(millions)
---------------------------------------------------------------
Period-end receivables $ 7,652 $ 6,148
Average receivables $ 7,324 $ 6,123 $ 6,908 $ 6,007
Accounts with three or
more payments (60+
days) past due as a
percentage of period-
end receivables 3.8% 3.9%
Accounts with four or
more payments (90+
days) past due as a
percentage of period-
end receivables 2.6% 2.5%
---------------------------------------------------------------
---------------------------------------------------------------
Allowance for Doubtful
Accounts
(millions)
---------------------------------------------------------------
Allowance at beginning
of period $ 509 $ 501 $ 517 $ 451
Bad debt provision 130 97 311 278
Net write-offs (107) (84) (296) (215)
---------------------------------------------------------------
Allowance at end of
period $ 532 $ 514 $ 532 $ 514
---------------------------------------------------------------
As a percentage of
period-end receivables 7.0% 8.4% 7.0% 8.4%
---------------------------------------------------------------
Net write-offs as a
percentage of average
receivables
(annualized) 5.8% 5.5% 5.7% 4.8%
---------------------------------------------------------------
(a) Represents an allocation of consolidated interest expense based on
estimated funding costs for average net accounts receivable
and other financial services assets and is included in net interest
expense in our Consolidated Statements of Operations.
(b) Primarily consists of new account and loyalty rewards program
discounts on our REDcard products, which are included as
reductions of sales in our Consolidated Statements of Operations.
(c) Included in depreciation and amortization in our Consolidated
Statements of Operations.
(d) Net interest income divided by average accounts receivable.
CONTACT: Target Corporation
Susan Kahn, 612-761-6735
or
John Hulbert, 612-761-6627
SOURCE: Target Corporation