10-QPeriod: Q1 FY2019

TARGET CORP Quarterly Report for Q1 Ended May 5, 2018

Filed May 29, 2018For Securities:TGT

Summary

Target Corporation's first-quarter 2018 results, ending May 5, 2018, show a revenue increase driven by comparable sales growth and a significant surge in digital channel sales, which grew by 28%. While total revenue rose to $16.78 billion from $16.22 billion year-over-year, operating income saw a decline of 9.9% to $1.04 billion, impacting profitability. Despite a revenue increase, the company experienced a decrease in operating cash flow from continuing operations by 59% to $512 million, largely due to higher inventory levels and timing of payments. The effective tax rate significantly decreased to 22.6% from 34.5% in the prior year, primarily due to the Tax Cuts and Jobs Act. The company continued its capital return program, paying out $334 million in dividends and actively repurchasing shares, including an accelerated share repurchase program. Key financial statement changes were influenced by the adoption of new accounting standards for revenue recognition, leases, and pensions, which are detailed in the notes to the financial statements. Investors should note the shift in revenue presentation for certain credit card profit-sharing income and the balance sheet impact of lease accounting changes.

Financial Statements
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Key Highlights

  • 1Total revenue increased by 3.4% to $16.78 billion, with comparable sales up 3.0% driven by a 3.7% increase in traffic.
  • 2Digital channel sales experienced robust growth, increasing by 28% and contributing 5.2% of total sales, up from 4.2% in the prior year.
  • 3Operating income decreased by 9.9% to $1.04 billion, and operating income margin declined to 6.2% from 7.1% year-over-year.
  • 4Operating cash flow from continuing operations saw a substantial decrease of 59% to $512 million, attributed to increased inventory and timing of payments.
  • 5The effective income tax rate decreased significantly to 22.6% from 34.5%, largely due to the Tax Cuts and Jobs Act.
  • 6The company returned $334 million to shareholders through dividends and repurchased shares, including an accelerated share repurchase program.
  • 7Adoption of new accounting standards (ASC Topic 606 for revenue recognition, ASC Topic 842 for leases, and ASU No. 2017-07 for pensions) impacted prior period comparatives and balance sheet presentation, notably increasing lease assets and liabilities.

Frequently Asked Questions

Target reported a 3.4% increase in total revenue to $16.78 billion for the first quarter ended May 5, 2018. This growth was driven by a 3.0% increase in comparable sales, fueled by a 3.7% rise in store traffic and a significant 28% jump in digital channel sales.

Profitability declined year-over-year. Operating income decreased by 9.9% to $1.04 billion, and the operating income margin rate fell from 7.1% to 6.2%. This was influenced by an increase in selling, general, and administrative expenses as a percentage of total revenue and higher digital fulfillment costs impacting gross margin.

Target adopted new accounting standards for revenue recognition (ASC Topic 606), leases (ASC Topic 842), and pensions (ASU No. 2017-07). The adoption of the lease standard, in particular, resulted in a significant increase in operating lease assets and liabilities on the balance sheet, impacting comparisons and financial ratios. These adoptions required retrospective adjustments to prior period financial statements for comparability.

Operating cash flow from continuing operations decreased substantially by 59% to $512 million, primarily due to an increase in inventory and timing of payments. Target continued its capital allocation priorities, paying $334 million in dividends and actively engaging in share repurchases, including an accelerated share repurchase program.