10-QPeriod: Q1 FY2015

TARGET CORP Quarterly Report for Q1 Ended May 3, 2014

Filed May 29, 2014For Securities:TGT

Summary

Target Corporation reported first-quarter 2014 results showing modest sales growth driven by the U.S. segment, though comparable sales experienced a slight decline. Net earnings saw a decrease compared to the prior year, impacted by a variety of factors including the ongoing costs and potential liabilities associated with the significant data breach experienced in late 2013. The company is investing in technology to enhance security and customer payment experiences, such as upgrading to chip-enabled card readers and transitioning to a chip-and-PIN solution for its REDcard portfolio. While the Canadian segment showed substantial sales growth due to its early stage of development, it continues to operate at a loss. Financially, Target's cash flow from operations was significantly lower than the prior year, largely due to the absence of proceeds from the credit card receivables sale in 2013. The company maintained its dividend payments and did not repurchase shares during the quarter, prioritizing its credit rating. The data breach remains a significant overhang, with ongoing investigations and potential claims creating uncertainty regarding future financial impacts, though the company is pursuing insurance recoveries and investing in security upgrades.

Financial Highlights

46 data points
Beta

Revenue

$16.66B

29.5% Gross Margin

Net Income

$418.00M

2.5% Net Margin

EPS (Diluted)

$0.66

Total Assets

$44.04B

Free Cash Flow

$49.00M

Financial Statements
Beta
Revenue$16.66B
Cost of Revenue$11.75B
Gross Profit$4.91B
SG&A Expenses$3.38B
Operating Income$1.05B
Interest Expense$152.00M
Net Income$418.00M
EPS (Basic)$0.66
EPS (Diluted)$0.66
Shares Outstanding (Basic)633.30M
Shares Outstanding (Diluted)638.20M

Key Highlights

  • 1Total sales increased by 2.1% to $17.05 billion, primarily driven by the U.S. segment.
  • 2Net earnings decreased to $418 million ($0.66 per diluted share) from $498 million ($0.77 per diluted share) in the prior year's first quarter.
  • 3The company incurred $18 million in net data breach-related expenses in the quarter, with cumulative net expenses of $35 million to date, and continues to accrue for potential payment card network claims.
  • 4Investments are being made in chip-enabled payment technology, with new card readers expected in all U.S. stores by September 2014.
  • 5Canadian segment sales saw a significant increase of 357.0% to $393 million, though the segment continued to report an operating loss (EBIT of $(211) million).
  • 6Cash flow from operations was $520 million, a substantial decrease from $3,230 million in the prior year, largely due to the absence of proceeds from the 2013 credit card receivables sale.
  • 7Target's credit rating was reviewed, with Standard & Poor's lowering its long-term debt rating from A+ to A, while maintaining the commercial paper rating.

Frequently Asked Questions

In the first quarter of 2014, Target recorded $18 million in net data breach-related expenses, primarily for legal and professional services, partially offset by expected insurance proceeds. The company has also accrued for potential claims from payment card networks and faces ongoing litigation and governmental investigations related to the breach, creating future financial uncertainty. Cumulative net expenses for the data breach stood at $35 million as of May 3, 2014.

The U.S. segment reported sales of $16.66 billion, a slight increase of 0.2%, with comparable sales declining by 0.3%. The Canadian segment showed substantial sales growth, increasing to $393 million from $86 million in the prior year, driven by store expansion. However, the Canadian segment continued to operate at a loss, with an EBIT of $(211) million for the quarter.

Target is accelerating its investment in chip-enabled smart-card technology, planning to equip all U.S. stores with new card readers by September 2014 and transition its REDcard portfolio to a chip-and-PIN solution by early 2015. The company also noted an increase in REDcard penetration in the U.S. segment to 20.4%, up from 17.1% in the prior year, indicating growing customer adoption of its loyalty program despite slower growth rates post-data breach.

Cash flow provided by operations was $520 million for the first quarter of 2014, a significant decrease from $3,230 million in the same period of 2013. This substantial difference is primarily attributed to the $2.7 billion in cash received in the prior year from the sale of Target's U.S. consumer credit card receivables, a transaction that did not recur in the current quarter.