10-QPeriod: Q2 FY2016

TARGET CORP Quarterly Report for Q2 Ended Aug 1, 2015

Filed August 25, 2015For Securities:TGT

Summary

Target Corporation's (TGT) Q2 2015 10-Q filing reveals a significant increase in profitability and sales compared to the prior year's second quarter. Net earnings surged to $753 million from $234 million, driven by strong performance in continuing operations. Sales grew by 2.8% to $17.4 billion, with digital channel sales showing robust growth of 30%, contributing positively to comparable sales. The company also returned substantial capital to shareholders through dividends and an expanded share repurchase program. Key strategic moves include the pending sale of its pharmacy and clinic businesses to CVS for approximately $1.9 billion, which is expected to result in a significant pre-tax gain and free up capital for shareholder returns. Despite ongoing challenges like the data breach and the exit from Canada, Target demonstrated operational improvements, including an increased gross margin rate and a decreased SG&A expense rate. The company's financial position remains solid, with substantial operating cash flow and a strong liquidity position.

Financial Highlights

47 data points
Beta

Revenue

$17.43B

30.8% Gross Margin

Net Income

$753.00M

4.3% Net Margin

EPS (Diluted)

$1.18

Total Assets

$40.19B

Free Cash Flow

$894.00M

Financial Statements
Beta
Revenue$17.43B
Cost of Revenue$12.05B
Gross Profit$5.38B
SG&A Expenses$3.50B
Operating Income$1.35B
Interest Expense$148.00M
Net Income$753.00M
EPS (Basic)$1.18
EPS (Diluted)$1.18
Shares Outstanding (Basic)635.80M
Shares Outstanding (Diluted)641.00M

Key Highlights

  • 1Net earnings significantly increased to $753 million ($1.18 per share) from $234 million ($0.37 per share) in the prior year's second quarter.
  • 2Total sales grew by 2.8% to $17.4 billion, with comparable sales increasing by 2.4%, driven by a rise in comparable transactions.
  • 3Digital channel sales surged by 30%, indicating strong online growth and contributing positively to overall comparable sales.
  • 4The company announced an agreement to sell its pharmacy and clinic businesses to CVS for approximately $1.9 billion, expected to generate a significant gain and improve capital allocation.
  • 5Shareholder returns were robust, with $1.0 billion returned in the quarter via dividends and share repurchases, supported by an expanded $10 billion share repurchase program.
  • 6Gross margin rate improved to 30.9% from 30.4% due to lower promotional activity and a favorable sales mix.
  • 7Operating cash flow from continuing operations remained strong at $1,966 million for the six months ended August 1, 2015.

Frequently Asked Questions

The primary drivers of earnings growth were a significant increase in net earnings from continuing operations, driven by higher sales, improved gross margin rates due to lower promotional activity and a favorable sales mix, and a decrease in the SG&A expense rate. The pending sale of the pharmacy and clinic businesses is also a significant positive event for future profitability.

The sale is expected to result in a pre-tax gain of approximately $550 million at closing, which will be recorded outside of segment results. Target also expects to record deferred income of approximately $800 million over 23 years. The $1.4 billion in after-tax proceeds will be used to settle liabilities and return capital to shareholders. The transaction is anticipated to be accretive to EPS and increase Return on Invested Capital (ROIC).

Target has entered into a settlement agreement with Visa for up to $67 million to resolve claims from eligible Visa card issuers. The company continues to dispute other claims from payment card networks. A settlement agreement in March 2015 is poised to resolve claims from a class of guests, involving a $10 million payment and administrative costs. Claims from issuing banks and shareholders remain pending, as do investigations by state and federal agencies. Target has accrued for estimated probable losses but acknowledges the possibility of further material losses.

Target is returning capital to shareholders through both dividends and share repurchases. In Q2 2015, the company returned $1.0 billion through these methods. They also expanded their share repurchase program by $5 billion, bringing the total authorization to $10 billion, and had repurchased $4.4 billion worth of stock under this program by August 1, 2015.