01—Abstract
Summary
Summary of the 10-K filed April 10, 2006. Cited figures are marked; the original filing is the authoritative source.
Target Corporation's fiscal 2005 (year ended January 28, 2006) was a year of strong growth in sales and profitability.
Total revenues rose 12.3% to $52.6 billiona, and comparable-store sales increased 5.6%. Earnings from continuing operations grew 27.7% to $2.408 billion, and diluted EPS rose 31.0% to $2.71. EBIT reached $4.323 billion, up more than 20% year over year.
Gross margin expanded 0.7 percentage points to 31.9%, driven mainly by improved markup and direct import penetration, while the SG&A rate rose modestly to 21.8% from 21.4%. Net credit card revenues grew 16.5%, and the credit card operation's pre-tax contribution to EBIT increased 32.8% to $645 millionb, a meaningful contributor to earnings growth. The balance sheet remains strong, with cash flow from operations of $4.451 billion (up from $3.808 billion), $1.648 billion in cash, and $9.1 billion in long-term debt.
Target carries A2/A+/A+ long-term ratings and maintains a $1.6 billionc committed revolving credit facility that was undrawn during the year. Capital expenditures rose to $3.388 billion, and management plans $3.8 to $4.0 billion in 2006 to support 110 to 115 new stores and three new distribution centers. Management guides to a low-double-digit revenue increase in 2006, a gross margin rate roughly flat with 2005, a flat SG&A rate, and a higher effective tax rate of 38.0% to 38.5%.
Capital returns were significant. Target repurchased $1.197 billiond of stock in 2005 (23.1 million shares at an average of $51.88) and raised its share repurchase authorization to $5 billion, to be completed over the next two to three years. Dividends declared rose to $0.38 per share from $0.31.
The company noted that rising interest expense is expected in 2006 because of higher average net debt tied to buybacks, and that delinquency improvements may not continue given the October 2005 bankruptcy law changes. Ernst & Young issued an unqualified opinion on both the financial statements and internal controls, and management concluded internal controls were effective.
02—Key points
Key Highlights
- Revenue of $52.6B (+12.3%) with comparable-store sales up 5.6%, driven by growth in both transaction count and average transaction size.
- Earnings from continuing operations rose 27.7% to $2.408B; diluted EPS rose 31.0% to $2.71, supported by margin expansion and credit card growth.
- Gross margin rate improved 0.7 points to 31.9%, mainly from higher markup, greater direct import penetration, and better inventory shrink, while the SG&A rate rose to 21.8%.
- Credit card operation contributed $645M to EBIT (+32.8%), with receivables up 12.1% to $6.1B and a 2.8% delinquency rate, improved from 3.5%.
- Operating cash flow reached $4.451B, which funded $3.388B in capex (store growth and remodels) and $1.197B in share repurchases.
- The board raised the buyback authorization to $5B, with $2.5B remaining, and the dividend rose to $0.38 per share from $0.31.
- Balance sheet is solid with A2/A+/A+ ratings, $1.6B in undrawn committed credit lines, and a 2006 outlook calling for low-double-digit revenue growth and 110 to 115 new stores.
03—Questions
Frequently Asked Questions
How did Target perform financially in fiscal 2005?
Target delivered strong results. Total revenues increased 12.3% to $52.6 billion, comparable-store sales rose 5.6%, and earnings from continuing operations grew 27.7% to $2.408 billion. Diluted EPS was $2.71, up 31.0%, and EBIT grew more than 20% to $4.323 billion.
What is driving Target's margin and profitability?
Gross margin expanded 0.7 points to 31.9%, mainly from improved markup and higher direct import penetration. The credit card operation was another major contributor, with its EBIT contribution rising 32.8% to $645 million on higher finance charge revenue as most receivables shifted to floating prime-based rates. The SG&A rate rose modestly to 21.8% from 21.4%, reflecting higher utilities, incentive compensation, and lower transition services income after the Marshall Field's and Mervyn's divestitures.
What is management's outlook for 2006?
Management expects a low-double-digit percentage increase in revenues, a gross margin rate roughly equal to 2005, and an SG&A rate roughly equal to 2005. The effective tax rate is expected to be 38.0% to 38.5%, and net interest expense is expected to rise because of higher average net debt from buybacks. Capital expenditures are planned at $3.8 to $4.0 billion, and the company expects to open 110 to 115 new stores and three distribution centers. Management cautions that credit card delinquency improvements may not continue as the October 2005 bankruptcy law effects cycle through.
How strong is Target's balance sheet and how is it returning capital to shareholders?
Target's balance sheet remains strong, with A2 (Moody's), A+ (S&P), and A+ (Fitch) long-term debt ratings, $1.648 billion in cash, and $9.1 billion in long-term debt. A $1.6 billion committed revolver was undrawn throughout the year. In 2005 Target repurchased $1.197 billion of stock, and the board raised the total authorization to $5 billion, with about $2.5 billion remaining, to be completed over two to three years. The quarterly dividend increased to $0.38 per share annually from $0.31 in 2004.
What are the key risks highlighted in the filing?
The filing cites competitive pressures from discount, specialty, off-price, and online retailers; the difficulty of predicting consumer trends; sensitivity of the credit card business to bankruptcy laws, interest rates, and default rates; exposure to macroeconomic factors such as energy costs and consumer confidence; labor costs, including health care and workers' compensation; site availability and construction costs for new stores; and product sourcing risks tied to international vendors, tariffs, and currency. Seasonality also means the fourth quarter, which includes the holiday season, makes up a disproportionately large share of annual earnings.
04—Continue