01—Abstract
Summary
Summary of the 10-K filed April 14, 2003. Cited figures are marked; the original filing is the authoritative source.
Target Corporation's fiscal 2002 10-K (year ended February 1, 2003) shows a company firing on all cylinders on the top line and at the bottom line.
Total revenues rose 10.3% to $43.9 billiona, comparable-store sales grew 1.1% despite roughly 3 points of price deflation, and net earnings increased 21% to $1.654 billion, or $1.81 per diluted share, versus $1.50 in 2001. Target the store chain drove the results: it generated 89% of consolidated pre-tax segment profit ($3.09 billion), with its profit margin rising to 8.4% of revenues from 7.8%. Gross margin expanded almost a full point to 31.5%, while Mervyn's and Marshall Field's were flat to weaker, with Mervyn's profit declining and Marshall Field's roughly flat.
The most important point for investors is the balance sheet and growth funding. Total assets grew to $28.6 billion, and long-term debt rose to $10.2 billionb, largely to finance the credit card receivables that now sit on the balance sheet after the August 2001 securitization accounting change under SFAS No. 140. Gross receivables rose 46% to $5.96 billion, driven by the Target Visa card, and the bad debt provision more than doubled to $460 million.
Credit card contribution rose about 20% to $532 millionc, but this growth also carries rising credit risk, with the allowance for doubtful accounts reaching 6.7% of receivables. Operating cash flow fell to $1.59 billion from $2.01 billion because of the receivables build, so the company relied on debt issuance of $3.15 billion to fund capital spending of $3.2 billion. Looking ahead, management guided to 2003 capital expenditures of $3.2 to $3.4 billion, about 80 net new stores (including 23 SuperTargets), and 8 to 10% annual square footage growth at Target.
Management expects gross margin and operating expense rates to be roughly flat with 2002 and an effective tax rate near 38%d. The company's credit ratings remain investment grade (A2/A+/A), and its debt ratio held steady at 52%. Investors should weigh strong unit growth and store-level returns against rising leverage, credit card exposure, and the reliance on continued store expansion to sustain earnings growth.
02—Key points
Key Highlights
- Revenue growth: Total revenues rose 10.3% to $43.9 billion; comparable-store sales grew 1.1% despite an approximate 3-point drag from price deflation.
- Earnings: Net earnings increased 21% to $1.654 billion, or $1.81 diluted EPS, up from $1.50 in fiscal 2001 (which included a $0.05 unusual charge).
- Segment performance: Target generated $3.09 billion of pre-tax segment profit (89% of total) with its margin expanding to 8.4% from 7.8%, while Mervyn's profit fell to $238 million and Marshall Field's was roughly flat at $135 million.
- Margins: Consolidated gross margin rate expanded almost a full percentage point to 31.5%, driven by Target and Mervyn's.
- Credit card growth and risk: Gross receivables rose 46% to $5.96 billion, and the bad debt provision more than doubled to $460 million, though credit card pre-tax contribution grew about 20% to $532 million.
- Cash flow and leverage: Operating cash flow fell to $1.59 billion from $2.01 billion due to receivables growth; long-term debt rose to $10.2 billion, with interest coverage improving to 5.1x and debt ratio steady at 52%.
- 2003 outlook: Management plans $3.2 to $3.4 billion of capital spending, roughly 80 net new stores, and 8 to 10% square footage growth, with gross margin and operating expense rates expected roughly flat.
03—Questions
Frequently Asked Questions
How profitable was Target Corporation in fiscal 2002?
Target reported net earnings of $1.654 billion, or $1.81 per diluted share, up from $1.368 billion ($1.50 per share) in fiscal 2001. Earnings before income taxes rose to $2.676 billion, and the effective tax rate was 38.2%.
What drove the company's growth in 2002?
Growth was driven primarily by new store expansion at Target, which contributed 89% of pre-tax segment profit. Target's revenues rose 13.3% and its comparable-store sales grew 2.2%, while Mervyn's and Marshall Field's revenues declined. The credit card business, especially the Target Visa card, also contributed substantially to growth.
Is the company taking on more debt, and is it financially stable?
Yes, debt increased, with long-term debt rising to $10.2 billion from $8.1 billion, largely to fund receivables growth and store expansion. The company remains financially sound, with investment-grade ratings (Moody's A2, S&P A+, Fitch A), interest coverage improving to 5.1x, a stable debt ratio of 52%, and $1.9 billion in undrawn committed credit lines.
What are the main risks highlighted for investors?
Key risks include rising credit card exposure, as bad debt provisions more than doubled to $460 million and the delinquency rate rose to 3.8%; price deflation, which weighed about 3 points on comparable-store sales in 2002; and reliance on continued store growth to deliver earnings growth. Mervyn's profit declined, and the filing notes competitive pressure from discount, off-price, and online retailers.
What is management's outlook for fiscal 2003?
Management expects another year of profitable market share growth, driven by comparable-store sales growth, new Target stores, and credit card contributions. It plans capital spending of $3.2 to $3.4 billion, about 80 net new stores including 23 SuperTargets, and expects gross margin and operating expense rates to remain roughly even with 2002, with an effective tax rate near 38%.
04—Continue