How did Target Corporation perform in fiscal 1999?

Target delivered revenue growth of 9.9 percent to $33.7 billion and net earnings of $1,144 million, or $2.45 per diluted share, up from $1.98 in 1998. Earnings before unusual items were $2.54 per share. Growth was driven primarily by the Target discount chain, which accounted for about 78 percent of revenue.

What drove the improvement in profitability?

The main driver was gross margin rate expansion at Target, which came from better markup and markdown management. The operating expense rate was roughly flat, helped by Target's growth and lower bad debt expense, offset by weaker sales leverage at Mervyn's and the Department Stores. Target's margin rose to 7.8 percent from 6.9 percent.

What are the company's capital allocation priorities?

Management plans to reinvest $2.5 to $3 billion in 2000 through capital spending and share repurchases. Capital expenditures were $1.9 billion in 1999, with 69 percent going to new stores, expansions and remodels. The company repurchased $581 million of stock in 1999 and authorized another $1 billion buyback in March 2000. Dividends were $0.40 per share for the year.

What is the outlook for fiscal 2000?

Management expects another year of strong revenue and earnings growth, driven by comparable-store sales and new store openings at Target. About 80 new stores are planned, including entry into West Virginia and Connecticut, and gross margin is expected to be roughly flat. Interest expense is expected to rise moderately, and the effective tax rate should be about 38.5 percent. These are forward-looking statements subject to the risks listed in the filing, including competition, consumer demand and economic conditions.

Are there risks investors should be aware of?

Yes. Growth is concentrated in Target, while Mervyn's profit declined 14 percent and the Department Stores grew only 6 percent. The business faces intense competition from discount, department, off-price and Internet retailers, and depends on accurately predicting consumer trends. Its credit operations are sensitive to changes in consumer credit and default rates. Management also cautioned that Year 2000 issues could still emerge, although none had been significant to date, and that the company's 2000 results could be affected by interest rates, labor conditions and foreign sourcing risks.

TGT 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 10, 2000. Cited figures are marked; the original filing is the authoritative source.

Target Corporation (formerly Dayton Hudson, renamed effective fiscal 2000) reported fiscal 1999 (year ended January 29, 2000) results that marked its fourth consecutive year of diluted EPS growth above 20 percent.

Total revenues rose 9.9 percent to $33.7 billion^a, comparable-store sales grew 5.1 percent, and net earnings reached $1,144 million, or $2.45 per diluted share, up from $1.98 in 1998. Net earnings before unusual items were $2.54 per diluted share. The growth was driven almost entirely by Target, the discount chain, whose pre-tax segment profit rose 28 percent to $2,022 million and whose profit margin widened to 7.8 percent from 6.9 percent, largely on gross margin rate expansion.

Mervyn's and the Department Stores were comparatively weak or flat, with Mervyn's pre-tax profit down 14 percent. The balance sheet and cash generation look solid. Operating cash flow was $2,252 million^b, capital expenditures were $1,918 million, and the company repurchased $581 million of stock in 1999.

Management's retail debt ratio was 40 percent, the total debt ratio including credit operations was 49 percent, and interest coverage improved to 4.6x. Credit ratings were upgraded by Duff & Phelps and, after year-end, by Moody's. The Board authorized an additional $1 billion^c share repurchase in March 2000, and management expects to reinvest $2.5 to $3 billion in 2000 through capital spending and buybacks.

Looking ahead, management guides to another year of strong revenue and earnings growth, with about 80 new stores planned, including entry into West Virginia and Connecticut, and retail square footage growth of 8 to 10 percent annually. Gross margin rate is expected to be roughly flat, the operating expense rate should modestly benefit from fixed-cost leverage, and the effective tax rate is expected near 38.5 percent.

Year 2000 readiness reported no significant disruptions to date. Investors should weigh the strong Target-driven growth and capital return program against the company's reliance on one segment and on continued comparable-store sales momentum.

02—Key points

Key Highlights

Diluted EPS of $2.45 in fiscal 1999, up 24 percent from $1.98, marking the fourth consecutive year of EPS growth above 20 percent; EPS before unusual items was $2.54
Total revenues rose 9.9 percent to $33.7 billion, with comparable-store sales up 5.1 percent; Target alone grew revenues 13.3 percent
Target segment pre-tax profit rose 28 percent to $2.02 billion, with its profit margin expanding to 7.8 percent from 6.9 percent, while Mervyn's profit fell 14 percent
Operating cash flow of $2.25 billion funded $1.92 billion in capital expenditures, with 61 net new stores opened during 1999
Share repurchases of $581 million in 1999, and a new $1 billion repurchase authorization approved in March 2000
Retail debt ratio improved to 40 percent from 41 percent, and interest coverage rose to 4.6x from 4.0x; Moody's and Duff & Phelps upgraded debt ratings
Fiscal 2000 guidance calls for continued strong growth, roughly 80 new stores, 8 to 10 percent annual square footage growth, and a 38.5 percent effective tax rate

03—Questions

Frequently Asked Questions

How did Target Corporation perform in fiscal 1999?
Target delivered revenue growth of 9.9 percent to $33.7 billion and net earnings of $1,144 million, or $2.45 per diluted share, up from $1.98 in 1998. Earnings before unusual items were $2.54 per share. Growth was driven primarily by the Target discount chain, which accounted for about 78 percent of revenue.
What drove the improvement in profitability?
The main driver was gross margin rate expansion at Target, which came from better markup and markdown management. The operating expense rate was roughly flat, helped by Target's growth and lower bad debt expense, offset by weaker sales leverage at Mervyn's and the Department Stores. Target's margin rose to 7.8 percent from 6.9 percent.
What are the company's capital allocation priorities?
Management plans to reinvest $2.5 to $3 billion in 2000 through capital spending and share repurchases. Capital expenditures were $1.9 billion in 1999, with 69 percent going to new stores, expansions and remodels. The company repurchased $581 million of stock in 1999 and authorized another $1 billion buyback in March 2000. Dividends were $0.40 per share for the year.
What is the outlook for fiscal 2000?
Management expects another year of strong revenue and earnings growth, driven by comparable-store sales and new store openings at Target. About 80 new stores are planned, including entry into West Virginia and Connecticut, and gross margin is expected to be roughly flat. Interest expense is expected to rise moderately, and the effective tax rate should be about 38.5 percent. These are forward-looking statements subject to the risks listed in the filing, including competition, consumer demand and economic conditions.
Are there risks investors should be aware of?
Yes. Growth is concentrated in Target, while Mervyn's profit declined 14 percent and the Department Stores grew only 6 percent. The business faces intense competition from discount, department, off-price and Internet retailers, and depends on accurately predicting consumer trends. Its credit operations are sensitive to changes in consumer credit and default rates. Management also cautioned that Year 2000 issues could still emerge, although none had been significant to date, and that the company's 2000 results could be affected by interest rates, labor conditions and foreign sourcing risks.

04—Continue

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