Why is Target reviewing sales of Mervyn's and Marshall Field's?

On March 10, 2004, management began evaluating strategic alternatives for these two divisions, including possible sale to existing retailers or other qualified buyers. Both segments have seen declining revenues and comparable-store sales, and their pre-tax segment profit fell in 2003, with Mervyn's down to $160 million from $238 million and Marshall Field's down to $107 million from $135 million. The filing states that the review is in early stages and that outcomes are uncertain.

How strong is Target's growth engine, and what drives it?

Growth is concentrated at Target, which accounted for 86% of revenues and 93% of pre-tax segment profit. About half of Target's 12% revenue increase came from new store expansion, with the rest from a 4.4% comparable-store sales gain and higher credit card revenues. The company plans to open 95 to 100 new Target stores in 2004, implying net square footage growth of 8 to 9%.

Are there risks in the credit card business?

Credit card revenues rose 14% to $1.48 billion, but bad debt provisions rose to $532 million from $460 million. Net write-offs on Target Visa increased to 9.2% of average receivables from 5.8%, and the allowance for doubtful accounts reached 6.8% of year-end receivables. Management expects the credit operation to grow more modestly in 2004, with pre-tax credit contribution in the 10 to 11% range of average receivables.

What is the company's financial position and cash generation?

Operating cash flow was $3.16 billion in 2003, up from $1.59 billion, and capital expenditures were $3.0 billion. Long-term debt was $10.2 billion, with total debt including current portion of $11.1 billion. The interest coverage ratio improved to 5.5x from 4.9x, and the company has $1.6 billion in committed credit lines that were undrawn during 2003 and 2002.

What should investors expect for margins and earnings in 2004?

Management expects the consolidated gross margin rate to be roughly flat with 2003 at about 32.0%, and the SG&A expense rate to rise slightly from 22.9% as expenses for pensions, insurance, and stock options grow faster than sales. Interest expense is expected to be essentially flat, and the effective tax rate is expected to be about 37.8%. The filing's forward-looking statements highlight competition, consumer spending, credit conditions, and the outcome of the strategic review as key risks.

TGT 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 5, 2004. Cited figures are marked; the original filing is the authoritative source.

Target Corporation's fiscal 2003 10-K (fiscal year ended January 31, 2004) shows a company still delivering strong top-line and earnings growth while signaling a notable strategic shift.

Total revenues rose 9.7% to $48.2 billion^a, net earnings grew 11.3% to $1.84 billion, and diluted EPS reached $2.01 versus $1.81 a year earlier. Growth was driven overwhelmingly by Target, which generated 93% of consolidated pre-tax segment profit and posted a 12% revenue increase, with comparable-store sales up 4.4%. Store count reached 1,553, with a plan to open 95 to 100 new Target stores in 2004 and invest $3.2 to $3.4 billion in capital spending.

The key development for investors is that on March 10, 2004, management began reviewing strategic alternatives for Mervyn's and Marshall Field's, including a possible sale of one or both divisions. Those two segments contributed only about 12% of 2003 revenues and their revenues and comparable-store sales declined, with pre-tax segment profit falling to $160 million^b and $107 million respectively. The filing notes the outlook does not reflect any impact of this review.

Credit card operations are a growing contributor, with pre-tax credit card contribution of $641 million^c and Target Visa receivables expanding rapidly, though bad debt provisions rose to $532 million and the allowance for doubtful accounts reached 6.8% of year-end receivables. Financially, the balance sheet remains strong, with investment-grade ratings (A2/A+/A), an interest coverage ratio of 5.5x, $1.6 billion in undrawn committed credit lines, and operating cash flow of $3.16 billion, up from $1.59 billion.

Shareholder equity rose to $11.1 billion^d. Management guided to modest margin pressure in 2004 from rising SG&A costs, a flat gross margin rate, and a stable effective tax rate of about 37.8%.

02—Key points

Key Highlights

Total revenues rose 9.7% to $48.2 billion; comparable-store sales increased 2.9% overall and 4.4% at Target.
Net earnings increased 11.3% to $1.84 billion; diluted EPS rose to $2.01 from $1.81, and the dividend was raised to $0.27 per share from $0.24.
Target generated 93% of consolidated pre-tax segment profit, with 1,225 stores and 2004 plans for 95 to 100 new stores and $3.2 to $3.4 billion in capital expenditures.
Management began a strategic review of Mervyn's and Marshall Field's on March 10, 2004, including a possible sale of one or both divisions, which together account for about 12% of revenues.
Credit card pre-tax contribution rose to $641 million, but bad debt provisions increased to $532 million and Target Visa past-due rates climbed to 3.6% from 3.1%.
Operating cash flow more than doubled to $3.16 billion, and the company maintains strong investment-grade credit ratings (A2/A+/A) with $1.6 billion of undrawn credit facilities.
Gross margin rate rose to 32.0%, largely from the EITF 02-16 vendor income reclassification, while the SG&A rate increased to 22.9%, and management expects SG&A to rise slightly further in 2004.

03—Questions

Frequently Asked Questions

Why is Target reviewing sales of Mervyn's and Marshall Field's?
On March 10, 2004, management began evaluating strategic alternatives for these two divisions, including possible sale to existing retailers or other qualified buyers. Both segments have seen declining revenues and comparable-store sales, and their pre-tax segment profit fell in 2003, with Mervyn's down to $160 million from $238 million and Marshall Field's down to $107 million from $135 million. The filing states that the review is in early stages and that outcomes are uncertain.
How strong is Target's growth engine, and what drives it?
Growth is concentrated at Target, which accounted for 86% of revenues and 93% of pre-tax segment profit. About half of Target's 12% revenue increase came from new store expansion, with the rest from a 4.4% comparable-store sales gain and higher credit card revenues. The company plans to open 95 to 100 new Target stores in 2004, implying net square footage growth of 8 to 9%.
Are there risks in the credit card business?
Credit card revenues rose 14% to $1.48 billion, but bad debt provisions rose to $532 million from $460 million. Net write-offs on Target Visa increased to 9.2% of average receivables from 5.8%, and the allowance for doubtful accounts reached 6.8% of year-end receivables. Management expects the credit operation to grow more modestly in 2004, with pre-tax credit contribution in the 10 to 11% range of average receivables.
What is the company's financial position and cash generation?
Operating cash flow was $3.16 billion in 2003, up from $1.59 billion, and capital expenditures were $3.0 billion. Long-term debt was $10.2 billion, with total debt including current portion of $11.1 billion. The interest coverage ratio improved to 5.5x from 4.9x, and the company has $1.6 billion in committed credit lines that were undrawn during 2003 and 2002.
What should investors expect for margins and earnings in 2004?
Management expects the consolidated gross margin rate to be roughly flat with 2003 at about 32.0%, and the SG&A expense rate to rise slightly from 22.9% as expenses for pensions, insurance, and stock options grow faster than sales. Interest expense is expected to be essentially flat, and the effective tax rate is expected to be about 37.8%. The filing's forward-looking statements highlight competition, consumer spending, credit conditions, and the outcome of the strategic review as key risks.

04—Continue

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