01—Abstract
Summary
Summary of the 10-K filed April 15, 1998. Cited figures are marked; the original filing is the authoritative source.
Dayton Hudson Corporation (TGT) reported a strong fiscal 1997 (year ended January 31, 1998).
Net earnings rose 62% to $751 milliona, or $1.59 diluted EPS, compared with $463 million and $.97 in 1996. Excluding unusual items (a $45 million securitization gain and a $51 million extraordinary debt-redemption charge in 1997, and a $134 million real estate repositioning charge in 1996), EPS was $1.64 versus $1.18. Revenues grew 9% to $27.8 billion, with comparable-store revenues up 5%.
Pre-tax segment profit increased 23% to $1,807 millionb, driven by Target (up 23%, to $1,287 million), DSD (up 59%) and Mervyn's (up 3%). Target, which generated 74% of revenues, expanded its store base and profit margin to 6.3% from 5.9%. The balance sheet and cash generation are solid.
Operating cash flow reached $1,795 millionc, up from $1,458 million. Capital expenditures were $1,354 million, and the company plans roughly $1.6 billion for 1998, mostly for new Target stores. Total debt ratio improved to 54% from 57%, and retail debt ratio fell to 45%, within management's 45-55% target range.
The company holds investment-grade ratings (Baa1/BBB+/A-) and $1.6 billiond of committed credit lines. Management guided for continued profit growth in 1998, expecting similar Target margins, mid-single-digit comparable-store sales growth at Target, and a 15%-or-more long-term EPS growth objective. Risks include wage pressures, the Year 2000 readiness program (about $40 million over two years), an IRS dispute over a 1983 tax deduction now on appeal, and a $30-35 million charge when the 1995 securitization matures in 1998.
02—Key points
Key Highlights
- Net earnings rose 62% to $751 million; diluted EPS was $1.59 versus $.97 in 1996 ($1.64 excluding unusual items).
- Revenues increased 9% to $27.8 billion, with comparable-store revenues up 5%; Target drove growth with a 14% total revenue increase.
- Pre-tax segment profit grew 23% to $1.81 billion, led by Target (+23%) and DSD (+59%, from an improved operating expense rate).
- Operating cash flow of $1.8 billion funded $1.35 billion in capital expenditures; 1998 capex is planned at about $1.6 billion.
- Total debt ratio improved to 54% from 57%, and the average financing rate fell to 8.1%; the company retired $503 million of 9.4% high-coupon debt.
- Target opened 60 net new stores in 1997 and plans about 60 more in 1998; Mervyn's exited Florida and Georgia.
- Management expects continued profit growth in 1998, with a two-for-one stock split effective April 30, 1998 and a 1998 Year 2000 spend of about $40 million.
03—Questions
Frequently Asked Questions
How did Dayton Hudson's earnings and profitability change in fiscal 1997?
Net earnings increased 62% to $751 million, and diluted EPS rose to $1.59 from $.97. Excluding one-time items, EPS grew to $1.64 from $1.18. Target's pre-tax profit margin improved to 6.3% from 5.9%, and DSD's pre-tax profit rose 59%.
What are the main risks to investors?
Key risks include competitive pressure, shifting consumer trends, changes in credit card use and default rates, rising wage costs, and sourcing risks. Other items are the Year 2000 conversion (about $40 million estimated spend), an IRS challenge over a 1983 tax deduction that is now on appeal, and a $30-35 million pre-tax charge when the 1995 securitization matures in third quarter 1998.
Is the company financially strong, and how is it funding growth?
Yes. Operating cash flow of $1,795 million covered most of the $1,354 million in capital spending. The retail debt ratio fell to 45%, the company holds investment-grade ratings, and it has $1.6 billion of committed credit lines from 29 banks. Growth is funded through retained earnings, debt and sold securitized receivables.
What is the outlook for 1998?
Management expects continued profit growth, with Target's margin essentially unchanged, mid-single-digit comparable-store sales growth at Target, and low single-digit comparable-store sales growth at Mervyn's and DSD. Capital spending is planned at about $1.6 billion, and the company targets 15% or more annual EPS growth over time. A $60 million pre-tax benefit from adopting SOP 98-1 is expected in 1998.
How is the credit card business contributing to results?
Pre-tax credit contribution rose 29% to $272 million in 1997, while average receivables serviced grew 13% to $2.16 billion. Target Guest Card holders exceeded nine million at year-end, up from five million. Rising bad debt expense, which reached $190 million, partly offset the revenue gains, and the allowance for doubtful accounts reached 6.9% of receivables serviced.
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