10-QPeriod: Q2 FY2015

TARGET CORP Quarterly Report for Q2 Ended Aug 2, 2014

Filed August 27, 2014For Securities:TGT

Summary

Target Corporation's (TGT) second-quarter 2014 results, ending August 2, 2014, showed a modest increase in sales to $17.4 billion, up 1.7% year-over-year. However, net earnings significantly declined to $234 million ($0.37 per share) from $611 million ($0.95 per share) in the prior year's quarter. This decline was heavily influenced by a $285 million loss on debt extinguishment and $111 million in net expenses related to the prior year's data breach. Excluding these and other non-recurring items, adjusted diluted earnings per share (Adjusted EPS) were $0.78, down from $0.98 in the prior year's quarter, indicating ongoing operational pressures. The Canadian segment continued to show significant sales growth, though it remained unprofitable. The company's financial position remained solid, with total assets of $44.5 billion. Cash flow from operations was $1.5 billion for the first six months of the year, though this was significantly lower than the prior year, which benefited from the sale of credit card receivables. Target highlighted growth in digital sales exceeding 30% and an increase in REDcard penetration, suggesting positive trends in customer engagement and e-commerce. Despite the earnings dip, the company maintained its dividend payments and announced an increase in the quarterly dividend, signaling confidence in its future cash flow generation.

Financial Highlights

47 data points
Beta

Revenue

$16.96B

30.4% Gross Margin

Net Income

$234.00M

1.4% Net Margin

EPS (Diluted)

$0.37

Total Assets

$44.45B

Free Cash Flow

$584.00M

Financial Statements
Beta
Revenue$16.96B
Cost of Revenue$11.80B
Gross Profit$5.16B
SG&A Expenses$3.60B
Operating Income$1.15B
Interest Expense$433.00M
Net Income$234.00M
EPS (Basic)$0.37
EPS (Diluted)$0.37
Shares Outstanding (Basic)633.50M
Shares Outstanding (Diluted)638.40M

Key Highlights

  • 1Total sales increased by 1.7% to $17.4 billion for the second quarter of fiscal 2014.
  • 2Net earnings for the quarter significantly decreased to $234 million ($0.37 per share) from $611 million ($0.95 per share) in the prior year, impacted by a large loss on debt extinguishment and data breach expenses.
  • 3Adjusted diluted earnings per share (non-GAAP) were $0.78, down from $0.98 in the prior year's quarter.
  • 4Digital sales experienced robust growth, increasing by more than 30% year-over-year.
  • 5The Canadian segment saw substantial sales growth of 63.1% to $449 million but remained unprofitable.
  • 6The company declared an increased quarterly dividend of $0.52 per share, signaling confidence in future cash flow.
  • 7Significant charges were incurred related to the 2013 data breach, with net expenses of $111 million in the quarter.

Frequently Asked Questions

The substantial decrease in net earnings was primarily due to a significant loss of $285 million on the early retirement of debt, as well as $111 million in net expenses related to the 2013 data breach. These one-time or significant non-recurring charges heavily impacted the reported net income.

The Canadian segment experienced strong sales growth of 63.1% in the quarter, reaching $449 million. However, the segment continues to be unprofitable, reporting an EBIT of $(204) million for the quarter. Management believes the segment's long-term assets are recoverable but notes potential for impairment if forecasts are not met.

Despite the decline in net earnings, Target announced an increase in its quarterly dividend to $0.52 per share. The company has a history of consistent dividend payments and stated its intent to continue doing so, indicating management's confidence in its long-term financial health and cash flow generation.

Target recorded $111 million in net expenses related to the data breach during the quarter, which includes an increase to its accrual for estimated probable losses from claims by payment card networks and other parties. The company is actively managing these claims through expected negotiated settlements and has recorded $182 million in liabilities related to the breach as of August 2, 2014, offset by a $70 million insurance receivable.