10-QPeriod: Q3 FY2014

TARGET CORP Quarterly Report for Q3 Ended Nov 2, 2013

Filed November 27, 2013For Securities:TGT

Summary

Target Corporation's (TGT) third quarter 2013 report highlights a challenging period, particularly in its Canadian operations. While U.S. segment sales saw a modest increase, overall GAAP diluted earnings per share declined significantly compared to the prior year, driven by various factors including the ongoing integration and costs associated with the Canadian market entry. The company completed the sale of its U.S. consumer credit card portfolio to TD Bank Group, recognizing a substantial gain, which provided a significant cash infusion. Despite the GAAP earnings decline, the company reported adjusted diluted earnings per share that were closer to prior year levels, excluding certain one-time impacts like Canadian expansion costs, credit card portfolio sale adjustments, and debt retirement losses. The company continued to invest in its business, including store remodels and technology, and remained committed to returning capital to shareholders through dividends and share repurchases. However, the significant operating losses in Canada and increased SG&A expenses in the U.S. segment are key areas to monitor.

Financial Highlights

46 data points
Beta

Revenue

$16.93B

30.3% Gross Margin

Net Income

$341.00M

2.0% Net Margin

EPS (Diluted)

$0.54

Total Assets

$46.37B

Free Cash Flow

-$278.00M

Financial Statements
Beta
Revenue$16.93B
Cost of Revenue$11.85B
Gross Profit$5.13B
SG&A Expenses$3.63B
Operating Income$739.00M
Interest Expense$145.00M
Net Income$341.00M
EPS (Basic)$0.54
EPS (Diluted)$0.54
Shares Outstanding (Basic)631.30M
Shares Outstanding (Diluted)637.40M

Key Highlights

  • 1GAAP diluted earnings per share decreased by 44.3% to $0.54 for the three months ended November 2, 2013, compared to $0.96 in the prior year period.
  • 2The company recognized a $391 million gain on the sale of its U.S. consumer credit card portfolio to TD Bank Group in March 2013.
  • 3Canadian Segment reported significant operating losses, with an EBIT of $(238) million for the three months ended November 2, 2013, and ongoing start-up costs and inventory challenges.
  • 4U.S. Segment sales increased by 2.0% to $16,925 million for the three months ended November 2, 2013, but Segment Profit decreased by 11.4%.
  • 5Total REDcard Penetration increased to 19.9% for the three months ended November 2, 2013, up from 14.0% in the prior year period, indicating strong customer adoption of loyalty programs.
  • 6Share repurchases were suspended during the three months ended November 2, 2013, but for the nine months ended November 2, 2013, $1,474 million was invested in repurchasing 21.9 million shares.
  • 7The company repaid $1.5 billion of debt collateralized by credit card receivables and used $1.4 billion of sale proceeds to repurchase additional debt in the first quarter of 2013.

Frequently Asked Questions

The Canadian segment incurred significant operating losses, contributing to a decline in overall earnings. For the three months ended November 2, 2013, the Canadian Segment reported an EBIT of $(238) million. The company cited lower-than-anticipated sales, supply chain challenges, and the need for inventory clearance as reasons for the poor performance in Canada.

The sale of the U.S. consumer credit card portfolio to TD Bank Group on March 13, 2013, resulted in a gain of $391 million, which positively impacted the company's earnings. The transaction also provided a significant cash infusion of $5.7 billion.

Target Corporation has a consistent history of paying dividends and intends to continue doing so. For the nine months ended November 2, 2013, dividends paid increased by 16% year-over-year. Share repurchases were temporarily halted in the third quarter of 2013 due to performance and a commitment to maintain credit ratings, but significant repurchases were made in the first nine months of the year, totaling $1,474 million.

The REDcard Penetration rate, which measures the percentage of sales paid for using Target's proprietary credit or debit cards (REDcards), has increased significantly. For the three months ended November 2, 2013, total REDcard Penetration reached 19.9%. The company views this as a key indicator of customer loyalty and believes a meaningful portion of REDcard purchases are incremental to Target's sales.