Why is the 2004 net earnings figure so much higher than the prior year?

Net earnings were $3.2B versus $1.8B in 2003, but this includes a one-time $1.24B after-tax gain from selling Marshall Field's and Mervyn's, recorded as discontinued operations. Earnings from continuing operations, which better reflect the core business, grew 16% to $1.885B.

What is Target doing with the cash from the divestitures?

Target used part of the roughly $4.9B in proceeds to pay down debt, which fell by about $1.2B, and to repurchase $1.29B of stock in 2004. It also reinvested in the business through capex of $3.07B, and it had $2.2B of cash at year-end. A new $3B buyback authorization is expected to be completed over two to three years.

What does the 2005 outlook look like?

Management expects low double-digit revenue growth driven by new stores and comparable-store sales, with a gross margin roughly equal to or slightly above 2004 and an SG&A rate flat to slightly higher. Capex is planned at $3.2–3.4B for 105–110 new stores and about 75 remodels, and net interest expense is expected to decline.

What risks should investors watch in the credit card business?

Net credit card revenue is about $1.16B, and in 2005 most receivables will move to a prime-based floating rate from a fixed rate, so revenue will rise and fall with the prime rate. Target plans to hold floating-rate debt to offset this. Credit quality improved, with the bad-debt provision falling to $451M and the past-due rate dropping to 3.5%, but changes in consumer credit and default rates remain key risks.

Are there any notable accounting changes affecting comparability?

Yes. Target adopted SFAS 123R (share-based compensation expensed at fair value) using the modified retrospective method, and prior periods were restated. It also changed its lease accounting for certain owned stores on leased land, which added a $65M non-cash charge in Q4 2004 and contributed about half of the year-over-year SG&A rate increase.

TGT 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 11, 2005. Cited figures are marked; the original filing is the authoritative source.

Target Corporation's 10-K for fiscal 2004 (year ended January 29, 2005) shows a company in strong operating shape that also completed a major portfolio reshaping.

Continuing-operations revenue grew 11.5% to $46.8 billion^a, driven by new store expansion (98 stores opened, 1,308 total) and growth in comparable-store sales and net credit card revenue. Earnings from continuing operations rose 16.4% to $1.885 billion, and diluted EPS from continuing operations reached $2.07 versus $1.76 in 2003. Gross margin improved 0.6 points to 31.2%, though the SG&A rate rose to 21.4%, partly due to a lease accounting change and higher workers' compensation costs.

The headline figure is the $3.2 billion^b net earnings (diluted EPS of $3.51), which includes a $1.24 billion after-tax gain from selling Marshall Field's and Mervyn's. Those divestitures generated about $4.9 billion in cash proceeds, which funded a $1.29 billion share buyback in 2004 and a new $3 billion repurchase authorization over two to three years. Year-end cash rose to $2.2 billion, and long-term debt fell to $9.0 billion from $10.2 billion.

Credit ratings remain strong (A2/A+/A+), and the interest coverage ratio improved to 5.4x. Looking ahead, management guided to low double-digit revenue growth in 2005, a flat-to-slightly-higher SG&A rate, a gross margin roughly equal to or slightly above 2004, and capital expenditures of $3.2 to $3.4 billion^c to support 105 to 110 new stores.

Investors should note that the 2004 net earnings figure is inflated by one-time divestiture gains, so continuing-operations earnings are the better measure of underlying performance. The credit card business is also exposed to prime-rate changes, since most receivables will shift to floating-rate pricing in 2005.

02—Key points

Key Highlights

Continuing-operations revenue rose 11.5% to $46.8B, with sales up 11.6% on new stores and comparable-store growth.
Diluted EPS from continuing operations was $2.07 (up from $1.76), while total diluted EPS was $3.51 including a $1.36/share gain on divestitures.
Sold Marshall Field's and Mervyn's for about $4.9B in cash proceeds, recording a total pre-tax-of-tax gain of $1,999M before taxes ($1,238M after tax).
Gross margin improved 0.6 points to 31.2%; SG&A rate increased to 21.4%, partly from a lease accounting change and higher workers' compensation costs.
Launched a $3B share repurchase program (June 2004); repurchased 29M shares for $1.29B in 2004, with about $1.7B remaining under the program.
Balance sheet strengthened: long-term debt reduced to $9.0B, year-end cash of $2.2B, and A2/A+/A+ credit ratings with interest coverage at 5.4x.
2005 guidance: low double-digit revenue growth, capex of $3.2–3.4B, 105–110 new stores, and about 75 remodels.

03—Questions

Frequently Asked Questions

Why is the 2004 net earnings figure so much higher than the prior year?
Net earnings were $3.2B versus $1.8B in 2003, but this includes a one-time $1.24B after-tax gain from selling Marshall Field's and Mervyn's, recorded as discontinued operations. Earnings from continuing operations, which better reflect the core business, grew 16% to $1.885B.
What is Target doing with the cash from the divestitures?
Target used part of the roughly $4.9B in proceeds to pay down debt, which fell by about $1.2B, and to repurchase $1.29B of stock in 2004. It also reinvested in the business through capex of $3.07B, and it had $2.2B of cash at year-end. A new $3B buyback authorization is expected to be completed over two to three years.
What does the 2005 outlook look like?
Management expects low double-digit revenue growth driven by new stores and comparable-store sales, with a gross margin roughly equal to or slightly above 2004 and an SG&A rate flat to slightly higher. Capex is planned at $3.2–3.4B for 105–110 new stores and about 75 remodels, and net interest expense is expected to decline.
What risks should investors watch in the credit card business?
Net credit card revenue is about $1.16B, and in 2005 most receivables will move to a prime-based floating rate from a fixed rate, so revenue will rise and fall with the prime rate. Target plans to hold floating-rate debt to offset this. Credit quality improved, with the bad-debt provision falling to $451M and the past-due rate dropping to 3.5%, but changes in consumer credit and default rates remain key risks.
Are there any notable accounting changes affecting comparability?
Yes. Target adopted SFAS 123R (share-based compensation expensed at fair value) using the modified retrospective method, and prior periods were restated. It also changed its lease accounting for certain owned stores on leased land, which added a $65M non-cash charge in Q4 2004 and contributed about half of the year-over-year SG&A rate increase.

04—Continue

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