01—Abstract
Summary
Summary of the 10-K filed April 21, 1994. Cited figures are marked; the original filing is the authoritative source.
Dayton Hudson Corporation (Target's parent, NYSE: DH, now known as Target Corp. TGT) reported fiscal 1993 (ended January 29, 1994) revenues of $19.2 billiona, up 7% year over year, but net earnings fell 2% to $375 million from $383 million, and fully diluted EPS slipped to $4.77 from $4.82.
The shortfall against management's own expectations was driven mainly by Mervyn's, whose operating profit fell 37% to $179 millionb on lower revenue and margin pressure. Target was the bright spot: revenues rose 13% to $11.7 billion and operating profit rose 15% to $662 million, while the Department Store Division posted record operating profit of $268 million. Total operating profit hit a record $1,109 million, but the headline earnings were held back by interest expense, a Los Angeles earthquake loss, and a $4 million Tax Reform Act charge.
A substantial LIFO credit, largely from adopting internal price indices at Mervyn's and DSD, flattered 1993 operating profit, and management warned that gross margins may continue to decline as value pricing expands. Balance sheet and cash flow were solid. Cash flow from operations rose to $1.22 billionc from $984 million, and the debt ratio improved to 59% from 61%, within a 45% to 65% policy range.
Capital spending was $978 milliond in 1993 and is planned at about $1.3 billion in 1994, with roughly 60 new Target stores and 10 new Mervyn's stores. Investors should weigh the strong top-line growth and Target's momentum against thinning margins, the Mervyn's slump, and a higher planned capital budget. The company also raised its quarterly dividend to $.42 and reported 11,787 holders of record with the stock at $74.75 as of March 24, 1994.
This filing is a 10-K that incorporates much of its content by reference from the 1993 Annual Report to Shareholders (Exhibit 13). Kenneth Macke was succeeded as CEO by Robert Ulrich on April 13, 1994, a leadership change investors should note.
02—Key points
Key Highlights
- Revenues rose 7% to $19.2 billion, though comparable-store revenues grew only 1%.
- Net earnings declined 2% to $375 million; fully diluted EPS was $4.77 versus $4.82 in 1992, below management's expectations.
- Target was the growth engine: revenues up 13% to $11.7 billion and operating profit up 15% to $662 million.
- Mervyn's operating profit fell 37% to $179 million, with operating margin dropping to 4.0% from 6.3%, and was the main source of the earnings shortfall.
- A substantial LIFO credit of $91 million pre-tax, largely from new internal price indices, boosted 1993 operating profit; management warned gross margin may keep declining.
- Financial position is sound: year-end debt ratio of 59%, investment-grade ratings (A+/A3/A), and operating cash flow up 24% to $1.22 billion.
- Capital expenditures of $978 million in 1993 are expected to reach about $1.3 billion in 1994, and the quarterly dividend was raised to $.42. CEO Kenneth Macke was succeeded by Robert Ulrich on April 13, 1994.
03—Questions
Frequently Asked Questions
Why did earnings decline in 1993 even though revenue and operating profit reached record levels?
Total operating profit hit a record $1,109 million, but interest expense rose to $446 million, and the company absorbed a $15 million uninsured earthquake loss at Mervyn's, a $7 million loss at Target, and a $4 million tax-reform charge. The biggest drag was Mervyn's, whose operating profit fell 37%. Fully diluted EPS slipped to $4.77 from $4.82 as a result.
How healthy is Dayton Hudson's balance sheet and debt load?
The year-end debt ratio fell to 59% from 61% and remains within the company's 45% to 65% target range. Long-term debt was $4,279 million, and the company had $1 billion in undrawn revolving credit lines. Credit ratings are investment grade (A+ from Duff & Phelps, A3 from Moody's, A from S&P). Operating cash flow of $1.22 billion comfortably covered capital spending of $978 million and dividends of $138 million.
Is the 1993 profit quality sustainable, given the LIFO credit?
Probably not entirely. The company recorded a LIFO credit of $91 million pre-tax, of which $77 million came from adopting internal price indices at Mervyn's and DSD, and management said the effects of prior years cannot be determined. Management also expects the gross margin rate to continue declining as Target's value-pricing strategy expands, so investors should not extrapolate 1993's operating profit.
What are the company's growth plans and capital spending priorities for 1994?
Capital expenditures are planned at about $1.3 billion in 1994, up from $978 million in 1993. Plans call for roughly 60 new Target stores, 10 new Mervyn's stores, and about 45 remodels. Target is the primary growth vehicle, accounting for about 73% of 1993 capital spending. Management says most of the spending is uncommitted, preserving flexibility.
Are there leadership changes investors should know about?
Yes. Robert J. Ulrich, Chairman and CEO of Target, became CEO of Dayton Hudson on April 13, 1994, succeeding Kenneth A. Macke, who remains Chairman of the Board and Chairman of the Executive Committee. Stephen Watson is President, and Henry DeNero is Vice Chairman.
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