UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2011
Commission File Number 1-6049
TARGET CORPORATION
(Exact name of registrant as specified in its charter)
|
Minnesota |
|
41-0215170 |
|
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
1000 Nicollet Mall, Minneapolis, Minnesota |
|
55403 |
|
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code: 612/304-6073
Former name, former address and former fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller Reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of registrant’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $0.0833, outstanding at May 23, 2011 were 689,145,299.
TARGET CORPORATION
TABLE OF CONTENTS
|
| ||
|
| ||
|
|
1 | |
|
|
2 | |
|
|
3 | |
|
|
4 | |
|
|
5 | |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
13 | |
|
22 | ||
|
22 | ||
|
|
|
|
|
| ||
|
23 | ||
|
23 | ||
|
23 | ||
|
23 | ||
|
23 | ||
|
23 | ||
|
24 | ||
|
|
|
|
|
|
|
|
|
|
25 | |
|
|
26 |
Consolidated Statements of Operations
|
|
|
|
Three Months Ended |
| ||||
|
|
|
|
April 30, |
|
May 1, |
| ||
|
(millions, except per share data) (unaudited) |
|
|
2011 |
|
2010 |
| ||
|
Sales |
|
|
$ |
15,580 |
|
$ |
15,158 |
|
|
Credit card revenues |
|
|
355 |
|
435 |
| ||
|
Total revenues |
|
|
15,935 |
|
15,593 |
| ||
|
Cost of sales |
|
|
10,838 |
|
10,412 |
| ||
|
Selling, general and administrative expenses |
|
|
3,233 |
|
3,143 |
| ||
|
Credit card expenses |
|
|
88 |
|
280 |
| ||
|
Depreciation and amortization |
|
|
512 |
|
516 |
| ||
|
Earnings before interest expense and income taxes |
|
|
1,264 |
|
1,242 |
| ||
|
Net interest expense |
|
|
|
|
|
| ||
|
Nonrecourse debt collateralized by credit card receivables |
|
|
19 |
|
23 |
| ||
|
Other interest expense |
|
|
164 |
|
165 |
| ||
|
Interest income |
|
|
— |
|
(1 |
) | ||
|
Net interest expense |
|
|
183 |
|
187 |
| ||
|
Earnings before income taxes |
|
|
1,081 |
|
1,055 |
| ||
|
Provision for income taxes |
|
|
392 |
|
384 |
| ||
|
Net earnings |
|
|
$ |
689 |
|
$ |
671 |
|
|
Basic earnings per share |
|
|
$ |
0.99 |
|
$ |
0.91 |
|
|
Diluted earnings per share |
|
|
$ |
0.99 |
|
$ |
0.90 |
|
|
Weighted average common shares outstanding |
|
|
|
|
|
| ||
|
Basic |
|
|
692.6 |
|
739.9 |
| ||
|
Diluted |
|
|
697.4 |
|
745.7 |
| ||
|
See accompanying Notes to Consolidated Financial Statements. |
Consolidated Statements of Financial Position
|
|
|
April 30, |
|
January 29, |
|
May 1, |
| |||
|
(millions) |
|
2011 |
|
2011 |
|
2010 |
| |||
|
Assets |
|
(unaudited) |
|
|
|
(unaudited) |
| |||
|
Cash and cash equivalents, including marketable securities of $872, $1,129 and $1,015 |
|
$ |
1,424 |
|
$ |
1,712 |
|
$ |
1,578 |
|
|
Credit card receivables, net of allowance of $565, $690 and $930 |
|
5,721 |
|
6,153 |
|
6,330 |
| |||
|
Inventory |
|
7,696 |
|
7,596 |
|
7,249 |
| |||
|
Other current assets |
|
1,527 |
|
1,752 |
|
2,065 |
| |||
|
Total current assets |
|
16,368 |
|
17,213 |
|
17,222 |
| |||
|
Property and equipment |
|
|
|
|
|
|
| |||
|
Land |
|
5,989 |
|
5,928 |
|
5,803 |
| |||
|
Buildings and improvements |
|
23,197 |
|
23,081 |
|
22,332 |
| |||
|
Fixtures and equipment |
|
4,691 |
|
4,939 |
|
4,597 |
| |||
|
Computer hardware and software |
|
2,270 |
|
2,533 |
|
2,428 |
| |||
|
Construction-in-progress |
|
837 |
|
567 |
|
497 |
| |||
|
Accumulated depreciation |
|
(11,336) |
|
(11,555) |
|
(10,445) |
| |||
|
Property and equipment, net |
|
25,648 |
|
25,493 |
|
25,212 |
| |||
|
Other noncurrent assets |
|
980 |
|
999 |
|
889 |
| |||
|
Total assets |
|
$ |
42,996 |
|
$ |
43,705 |
|
$ |
43,323 |
|
|
Liabilities and shareholders’ investment |
|
|
|
|
|
|
| |||
|
Accounts payable |
|
$ |
6,296 |
|
$ |
6,625 |
|
$ |
6,150 |
|
|
Accrued and other current liabilities |
|
3,229 |
|
3,326 |
|
3,183 |
| |||
|
Unsecured debt and other borrowings |
|
1,124 |
|
119 |
|
797 |
| |||
|
Nonrecourse debt collateralized by credit card receivables |
|
189 |
|
— |
|
67 |
| |||
|
Total current liabilities |
|
10,838 |
|
10,070 |
|
10,197 |
| |||
|
Unsecured debt and other borrowings |
|
10,640 |
|
11,653 |
|
10,642 |
| |||
|
Nonrecourse debt collateralized by credit card receivables |
|
3,776 |
|
3,954 |
|
4,152 |
| |||
|
Deferred income taxes |
|
916 |
|
934 |
|
916 |
| |||
|
Other noncurrent liabilities |
|
1,596 |
|
1,607 |
|
1,819 |
| |||
|
Total noncurrent liabilities |
|
16,928 |
|
18,148 |
|
17,529 |
| |||
|
Shareholders’ investment |
|
|
|
|
|
|
| |||
|
Common stock |
|
57 |
|
59 |
|
62 |
| |||
|
Additional paid-in capital |
|
3,345 |
|
3,311 |
|
3,010 |
| |||
|
Retained earnings |
|
12,398 |
|
12,698 |
|
13,098 |
| |||
|
Accumulated other comprehensive loss |
|
(570) |
|
(581) |
|
(573) |
| |||
|
Total shareholders’ investment |
|
15,230 |
|
15,487 |
|
15,597 |
| |||
|
Total liabilities and shareholders’ investment |
|
$ |
42,996 |
|
$ |
43,705 |
|
$ |
43,323 |
|
|
Common shares outstanding |
|
689.0 |
|
704.0 |
|
738.9 |
| |||
|
See accompanying Notes to Consolidated Financial Statements. |
Consolidated Statements of Cash Flows
|
|
|
|
Three Months Ended |
| ||||
|
|
|
|
April 30, |
|
May 1, |
| ||
|
(millions) (unaudited) |
|
|
2011 |
|
2010 |
| ||
|
Operating activities |
|
|
|
|
|
| ||
|
Net earnings |
|
|
$ |
689 |
|
$ |
671 |
|
|
Reconciliation to cash flow |
|
|
|
|
|
| ||
|
Depreciation and amortization |
|
|
512 |
|
516 |
| ||
|
Share-based compensation expense |
|
|
21 |
|
25 |
| ||
|
Deferred income taxes |
|
|
100 |
|
109 |
| ||
|
Bad debt expense |
|
|
12 |
|
197 |
| ||
|
Non-cash (gains)/losses and other, net |
|
|
19 |
|
(119 |
) | ||
|
Changes in operating accounts: |
|
|
|
|
|
| ||
|
Accounts receivable originated at Target |
|
|
149 |
|
201 |
| ||
|
Inventory |
|
|
(99 |
) |
(70 |
) | ||
|
Other current assets |
|
|
84 |
|
(56 |
) | ||
|
Other noncurrent assets |
|
|
14 |
|
(35 |
) | ||
|
Accounts payable |
|
|
(330 |
) |
(361 |
) | ||
|
Accrued and other current liabilities |
|
|
(103 |
) |
63 |
| ||
|
Other noncurrent liabilities |
|
|
(16 |
) |
17 |
| ||
|
Cash flow provided by operations |
|
|
1,052 |
|
1,158 |
| ||
|
Investing activities |
|
|
|
|
|
| ||
|
Expenditures for property and equipment |
|
|
(632 |
) |
(407 |
) | ||
|
Proceeds from disposal of property and equipment |
|
|
1 |
|
12 |
| ||
|
Change in accounts receivable originated at third parties |
|
|
271 |
|
238 |
| ||
|
Other investments |
|
|
(10 |
) |
(18 |
) | ||
|
Cash flow required for investing activities |
|
|
(370 |
) |
(175 |
) | ||
|
Financing activities |
|
|
|
|
|
| ||
|
Reductions of long-term debt |
|
|
— |
|
(1,170 |
) | ||
|
Dividends paid |
|
|
(174 |
) |
(126 |
) | ||
|
Repurchase of stock |
|
|
(812 |
) |
(378 |
) | ||
|
Stock option exercises and related tax benefit |
|
|
16 |
|
69 |
| ||
|
Cash flow required for financing activities |
|
|
(970 |
) |
(1,605 |
) | ||
|
Net decrease in cash and cash equivalents |
|
|
(288 |
) |
(622 |
) | ||
|
Cash and cash equivalents at beginning of period |
|
|
1,712 |
|
2,200 |
| ||
|
Cash and cash equivalents at end of period |
|
|
$ |
1,424 |
|
$ |
1,578 |
|
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Shareholders’ Investment
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
| ||||||||
|
(millions, except footnotes) |
|
Common |
|
Stock |
|
Additional |
|
Retained |
|
|
Pension and |
|
Derivative |
|
|
Total |
| ||||||
|
January 30, 2010 |
|
744.6 |
|
$ |
62 |
|
$ |
2,919 |
|
$ |
12,947 |
|
|
$ |
(537 |
) |
$ |
(44 |
) |
|
$ |
15,347 |
|
|
Net earnings |
|
— |
|
— |
|
— |
|
2,920 |
|
|
— |
|
— |
|
|
2,920 |
| ||||||
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Pension and other benefit liability adjustments, net of taxes of $4 |
|
— |
|
— |
|
— |
|
— |
|
|
(4 |
) |
— |
|
|
(4 |
) | ||||||
|
Net change on cash flow hedges, net of taxes of $2 |
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
3 |
|
|
3 |
| ||||||
|
Currency translation adjustment, net of taxes of $1 |
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
1 |
|
|
1 |
| ||||||
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,920 |
| ||||||
|
Dividends declared |
|
— |
|
— |
|
— |
|
(659 |
) |
|
— |
|
— |
|
|
(659 |
) | ||||||
|
Repurchase of stock |
|
(47.8 |
) |
(4 |
) |
— |
|
(2,510 |
) |
|
— |
|
— |
|
|
(2,514 |
) | ||||||
|
Stock options and awards |
|
7.2 |
|
1 |
|
392 |
|
— |
|
|
— |
|
— |
|
|
393 |
| ||||||
|
January 29, 2011 |
|
704.0 |
|
$ |
59 |
|
$ |
3,311 |
|
$ |
12,698 |
|
|
$ |
(541 |
) |
$ |
(40 |
) |
|
$ |
15,487 |
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Net earnings |
|
— |
|
— |
|
— |
|
689 |
|
|
— |
|
— |
|
|
689 |
| ||||||
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Pension and other benefit liability adjustments, net of taxes of $5 |
|
— |
|
— |
|
— |
|
— |
|
|
9 |
|
— |
|
|
9 |
| ||||||
|
Net change on cash flow hedges, net of taxes of $0 |
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
1 |
|
|
1 |
| ||||||
|
Currency translation adjustment, net of taxes of $0 |
|
— |
|
— |
|
— |
|
— |
|
|
— |
|
1 |
|
|
1 |
| ||||||
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
700 |
| ||||||
|
Dividends declared |
|
— |
|
— |
|
— |
|
(172 |
) |
|
— |
|
— |
|
|
(172 |
) | ||||||
|
Repurchase of stock |
|
(15.4 |
) |
(2 |
) |
— |
|
(817 |
) |
|
— |
|
— |
|
|
(819 |
) | ||||||
|
Stock options and awards |
|
0.4 |
|
— |
|
34 |
|
— |
|
|
— |
|
— |
|
|
34 |
| ||||||
|
April 30, 2011 |
|
689.0 |
|
$ |
57 |
|
$ |
3,345 |
|
$ |
12,398 |
|
|
$ |
(532 |
) |
$ |
(38 |
) |
|
$ |
15,230 |
|
Dividends declared per share were $0.25 and $0.17 for the three months ended April 30, 2011 and May 1, 2010, respectively. For the fiscal year ended January 29, 2011, dividends declared per share were $0.92.
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
1. Accounting Policies
The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statement disclosures contained in the 2010 Form 10-K for Target Corporation (Target or the Corporation). The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. See the notes in our Form 10-K for the fiscal year ended January 29, 2011, for those policies. In the opinion of management, all adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature.
Due to the seasonal nature of our business, quarterly revenues, expenses, earnings and cash flows are not necessarily indicative of the results that may be expected for the full year. All amounts are in U.S. dollars unless otherwise stated.
2. Earnings Per Share
Basic earnings per share (EPS) is calculated as net earnings divided by the weighted average number of common shares outstanding during the period. Diluted EPS includes the potentially dilutive impact of stock-based awards outstanding at period end, consisting of the incremental shares assumed to be issued upon the exercise of stock options and the incremental shares assumed to be issued under performance share and restricted stock unit arrangements.
|
Earnings Per Share |
|
|
|
|
|
|
(millions, except per share data) |
|
April 30, 2011 |
|
May 1, 2010 |
|
|
Net earnings |
|
$ 689 |
|
$ 671 |
|
|
Basic weighted average common shares outstanding |
|
692.6 |
|
739.9 |
|
|
Dilutive impact of stock-based awards |
|
4.8 |
|
5.8 |
|
|
Diluted weighted average common shares outstanding |
|
697.4 |
|
745.7 |
|
|
Basic earnings per share |
|
$ 0.99 |
|
$ 0.91 |
|
|
Diluted earnings per share |
|
$ 0.99 |
|
$ 0.90 |
|
For the quarter ended April 30, 2011 and May 1, 2010, 14.5 million and 11.6 million stock options, respectively, were excluded from the calculation of weighted average shares for diluted EPS because their effects were antidilutive.
3. Fair Value Measurements
Fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).
The following table presents financial assets and liabilities measured at fair value on a recurring basis:
|
Fair Value Measurements — |
|
|
|
|
|
|
| |||||||||||||||||||||
|
Recurring Basis |
|
Fair Value at |
|
Fair Value at |
|
Fair Value at |
| |||||||||||||||||||||
|
|
|
April 30, 2011 |
|
January 29, 2011 |
|
May 1, 2010 |
| |||||||||||||||||||||
|
(millions) |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Level 1 |
|
Level 2 |
|
Level 3 |
| |||||||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Marketable securities |
|
$ |
872 |
|
$ |
— |
|
$ |
— |
|
$ |
1,129 |
|
$ |
— |
|
$ |
— |
|
$ |
1,015 |
|
$ |
— |
|
$ |
— |
|
|
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Prepaid forward contracts |
|
65 |
|
— |
|
— |
|
63 |
|
— |
|
— |
|
69 |
|
— |
|
— |
| |||||||||
|
Other |
|
— |
|
4 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
|
— |
| |||||||||
|
Other noncurrent assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Interest rate swaps(a) |
|
— |
|
132 |
|
— |
|
— |
|
139 |
|
— |
|
— |
|
133 |
|
— |
| |||||||||
|
Company-owned life insurance investments(b) |
|
— |
|
370 |
|
— |
|
— |
|
358 |
|
— |
|
— |
|
343 |
|
— |
| |||||||||
|
Total |
|
$ |
937 |
|
$ |
506 |
|
$ |
— |
|
$ |
1,192 |
|
$ |
497 |
|
$ |
— |
|
$ |
1,084 |
|
$ |
476 |
|
$ |
— |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Other noncurrent liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Interest rate swaps(a) |
|
$ |
— |
|
$ |
54 |
|
$ |
— |
|
$ |
— |
|
$ |
54 |
|
$ |
— |
|
$ |
— |
|
$ |
29 |
|
$ |
— |
|
|
Total |
|
$ |
— |
|
$ |
54 |
|
$ |
— |
|
$ |
— |
|
$ |
54 |
|
$ |
— |
|
$ |
— |
|
$ |
29 |
|
$ |
— |
|
(a) There were no interest rate swaps designated as accounting hedges at April 30, 2011, January 29, 2011 or May 1, 2010.
(b) Company-owned life insurance investments consist of equity index funds and fixed income assets. Amounts are presented net of loans that are secured by some of these policies of $648 million at April 30, 2011, $645 million at January 29, 2011, and $615 million at May 1, 2010.
|
Position |
|
Valuation Technique |
|
Marketable securities |
|
Initially valued at transaction price. Carrying value of cash equivalents (including money market funds) approximates fair value because maturities are less than three months.
|
|
Prepaid forward contracts |
|
Initially valued at transaction price. Subsequently valued by reference to the market price of Target common stock.
|
|
Interest rate swaps |
|
Valuation models are calibrated to initial trade price. Subsequent valuations are based on observable inputs to the valuation model (e.g., interest rates and credit spreads). Model inputs are changed only when corroborated by market data. A credit risk adjustment is made on each swap using observable market credit spreads.
|
|
Company-owned life insurance investments |
|
Includes investments in separate accounts that are valued based on market rates credited by the insurer. |
Certain assets are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). The fair value measurements related to long-lived assets held for sale and held and used in the following table were determined using available market prices at the measurement date based on recent investments or pending transactions of similar assets, third-party independent appraisals, valuation multiples or public comparables, less cost to sell where appropriate. We classify these measurements as Level 2.
|
Fair Value Measurements — Nonrecurring Basis |
|
|
|
|
| ||
|
|
|
Other current assets |
|
Property and equipment |
| ||
|
(millions) |
|
Long-lived assets held for sale |
|
Long-lived assets held and used(a) |
| ||
|
Measured during the three months ended April 30, 2011: |
|
|
|
|
| ||
|
Carrying amount |
|
$ |
2 |
|
$ |
30 |
|
|
Fair value measurement |
|
|
2 |
|
|
22 |
|
|
Gain/(loss) |
|
$ |
— |
|
$ |
(8 |
) |
|
Measured during the three months ended May 1, 2010: |
|
|
|
|
|
|
|
|
Carrying amount |
|
$ |
— |
|
$ |
29 |
|
|
Fair value measurement |
|
|
— |
|
|
26 |
|
|
Gain/(loss) |
|
$ |
— |
|
$ |
(3 |
) |
(a) Primarily relates to real estate and buildings intended for sale in the future but not currently meeting the held for sale criteria.
The following table presents the carrying amounts and estimated fair values of financial instruments not measured at fair value in the Consolidated Statements of Financial Position. The fair value of marketable securities is determined using available market prices at the reporting date. The fair value of debt is generally measured using a discounted cash flow analysis based on our current market interest rates for similar types of financial instruments.
|
Financial Instruments Not Measured at Fair Value |
|
April 30, 2011 |
|
January 29, 2011 |
|
May 1, 2010 |
| ||||||||||||
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
| ||||||||
|
(millions) |
|
Amount |
|
Value |
|
Amount |
|
Value |
|
Amount |
|
Value |
| ||||||
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Marketable securities(a) |
|
$ |
24 |
|
$ |
24 |
|
$ |
32 |
|
$ |
32 |
|
$ |
34 |
|
$ |
34 |
|
|
Other noncurrent assets |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Marketable securities(a) |
|
2 |
|
2 |
|
4 |
|
4 |
|
3 |
|
3 |
| ||||||
|
Total |
|
$ |
26 |
|
$ |
26 |
|
$ |
36 |
|
$ |
36 |
|
$ |
37 |
|
$ |
37 |
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Total debt(b) |
|
$ |
15,251 |
|
$ |
16,859 |
|
$ |
15,241 |
|
$ |
16,661 |
|
$ |
15,291 |
|
$ |
16,659 |
|
|
Total |
|
$ |
15,251 |
|
$ |
16,859 |
|
$ |
15,241 |
|
$ |
16,661 |
|
$ |
15,291 |
|
$ |
16,659 |
|
(a) Held-to-maturity government-issued investments that are held to satisfy the regulatory requirements of Target Bank and Target National Bank.
(b) Represents the sum of nonrecourse debt collateralized by credit card receivables and unsecured debt and other borrowings excluding unamortized swap valuation adjustments and capital lease obligations.
The carrying amounts of credit card receivables, net of allowance, accounts payable, and certain accrued and other current liabilities approximate fair value at April 30, 2011.
4. Credit Card Receivables
Credit card receivables are recorded net of an allowance for doubtful accounts and are our only significant class of receivables. Substantially all accounts continue to accrue finance charges until they are written off. All past due accounts were incurring finance charges at April 30, 2011, January 29, 2011, and May 1, 2010. Accounts are written off when they become 180 days past due.
|
Age of Credit Card Receivables |
|
April 30, 2011 |
|
January 29, 2011 |
|
May 1, 2010 |
| |||||||||
|
|
|
|
|
Percent of |
|
|
|
Percent of |
|
|
|
Percent of |
| |||
|
(dollars in millions) |
|
Amount |
|
Receivables |
|
Amount |
|
Receivables |
|
Amount |
|
Receivables |
| |||
|
Current |
|
$ |
5,749 |
|
91.5% |
|
$ |
6,132 |
|
89.6 |
% |
$ |
6,425 |
|
88.5% |
|
|
1-29 days past due |
|
227 |
|
3.6 |
|
292 |
|
4.3 |
|
283 |
|
3.9 |
| |||
|
30-59 days past due |
|
100 |
|
1.6 |
|
131 |
|
1.9 |
|
166 |
|
2.3 |
| |||
|
60-89 days past due |
|
59 |
|
0.9 |
|
79 |
|
1.1 |
|
107 |
|
1.5 |
| |||
|
90+ days past due |
|
151 |
|
2.4 |
|
209 |
|
3.1 |
|
279 |
|
3.8 |
| |||
|
Period-end gross credit card receivables |
|
$ |
6,286 |
|
100% |
|
$ |
6,843 |
|
100 |
% |
$ |
7,260 |
|
100% |
|
Allowance for Doubtful Accounts
The allowance for doubtful accounts is recognized in an amount equal to the anticipated future write-offs of existing receivables and includes provisions for uncollectible finance charges and other credit-related fees. We estimate future write-offs on the entire credit card portfolio collectively based on historical experience of delinquencies, risk scores, aging trends and industry risk trends.
|
Allowance for Doubtful Accounts |
|
|
|
|
|
|
|
|
(millions) |
|
April 30, 2011 |
|
January 29, 2011 |
|
May 1, 2010 |
|
|
Allowance at beginning of period |
|
$ 690 |
|
$ 1,016 |
|
$ 1,016 |
|
|
Bad debt expense |
|
12 |
|
528 |
|
197 |
|
|
Write-offs(a) |
|
(184 |
) |
(1,007 |
) |
(318 |
) |
|
Recoveries(a) |
|
47 |
|
153 |
|
35 |
|
|
Allowance at end of period |
|
$ 565 |
|
$ 690 |
|
$ 930 |
|
(a) Write-offs include the principal amount of losses (excluding accrued and unpaid finance charges), and recoveries include current period principal collections on previously written-off balances. These amounts combined represent net write-offs.
Deterioration of the macroeconomic conditions in the United States would adversely affect the risk profile of our credit card receivables portfolio based on credit card holders’ ability to pay their balances. If such deterioration were to occur, it would lead to an increase in bad debt expense. The Corporation monitors both the credit quality and the delinquency status of the credit card receivables portfolio. We consider accounts 30 or more days past due as delinquent, and we update delinquency status daily. We also monitor risk in the portfolio by assigning internally generated scores to each account and by periodically obtaining a statistically representative sample of current FICO scores, a nationally recognized credit scoring model. We update these FICO scores monthly, most recently in April 2011. The credit quality segmentation presented below is consistent with the approach used in determining our allowance for doubtful accounts.
|
Receivables Credit Quality |
|
|
|
|
|
|
|
|
(millions) |
|
April 30, 2011 |
|
January 29, 2011 |
|
May 1, 2010 |
|
|
Nondelinquent accounts (Current and 1 – 29 days past due) |
|
|
|
|
|
|
|
|
FICO score of 700 or above |
|
$ 2,771 |
|
$ 2,819 |
|
$ 2,812 |
|
|
FICO score of 600 to 699 |
|
2,503 |
|
2,737 |
|
2,861 |
|
|
FICO score below 600 |
|
702 |
|
868 |
|
1,034 |
|
|
Total nondelinquent accounts |
|
5,976 |
|
6,424 |
|
6,707 |
|
|
Delinquent accounts (30+ days past due) |
|
310 |
|
419 |
|
553 |
|
|
Period-end gross credit card receivables |
|
$ 6,286 |
|
$ 6,843 |
|
$ 7,260 |
|
Under certain circumstances, we offer cardholder payment plans that modify finance charges and minimum payments, which meet the accounting definition of a troubled debt restructuring (TDR). These concessions are made on an individual cardholder basis for economic or legal reasons specific to each individual cardholder’s circumstances. As a percentage of period-end gross receivables, receivables classified as TDRs were 5.8 percent at April 30, 2011, 5.9 percent at January 29, 2011 and 6.5 percent at May 1, 2010. Receivables classified as TDRs are treated consistently with other aged receivables in determining our allowance for doubtful accounts.
Funding for Credit Card Receivables
As a method of providing funding for our credit card receivables, we sell, on an ongoing basis, all of our consumer credit card receivables to Target Receivables LLC (TR LLC), formerly known as Target Receivables Corporation (TRC), a wholly owned, bankruptcy remote subsidiary. TR LLC then transfers the receivables to the Target Credit Card Master Trust (the Trust), which from time to time will sell debt securities to third parties, either directly or through a related trust. These debt securities represent undivided interests in the Trust assets. TR LLC uses the proceeds from the sale of debt securities and its share of collections on the receivables to pay the purchase price of the receivables to the Corporation.
We consolidate the receivables within the Trust and any debt securities issued by the Trust, or a related trust, in our Consolidated Statements of Financial Position based upon the applicable accounting guidance. The receivables transferred to the Trust are not available to general creditors of the Corporation.
During 2006 and 2007, we sold an interest in our credit card receivables by issuing a Variable Funding Certificate. Parties who hold the Variable Funding Certificate receive interest at a variable short-term market rate. The Variable Funding Certificate matures in 2012 and 2013.
In the second quarter of 2008, we sold an interest in our credit card receivables to JPMorgan Chase (JPMC). The interest sold represented 47 percent of the receivables portfolio at the time of the transaction. In the event of a decrease in the receivables principal amount such that JPMC’s interest in the entire portfolio would exceed 47 percent for three consecutive months, TR LLC (using the cash flows from the assets in the Trust) would be required to pay JPMC a pro rata amount of principal collections such that the portion owned by JPMC would not exceed 47 percent, unless JPMC provides a waiver. Conversely, at the option of the Corporation, JPMC may be required to fund an increase in the portfolio to maintain their 47 percent interest up to a maximum principal balance of $4.2 billion. Due to declines in gross credit card receivables, TR LLC repaid JPMC $566 million during 2010. No payments were made during the first quarter of 2011. On May 25, 2011, TR LLC repaid an additional $189 million to JPMC.
If a three-month average of monthly finance charge excess (JPMC’s prorata share of finance charge collections less write-offs and specified expenses) is less than 2 percent of the outstanding principal balance of JPMC’s interest, the Corporation must implement mutually agreed-upon underwriting strategies. If the three-month average finance charge excess falls below 1 percent of the outstanding principal balance of JPMC’s interest, JPMC may compel the Corporation to implement underwriting and collections activities, provided those activities are compatible with the Corporation’s systems, as well as consistent with similar credit card receivable portfolios managed by JPMC. If the Corporation fails to implement the activities, JPMC has the right to cause the accelerated repayment of the note payable issued in the transaction. As noted in the preceding paragraph, payments would be made solely from the Trust assets. In the first quarter of 2011, this agreement was amended to allow the Corporation to prepay the principal balance on the note payable to JPMC between September 30, 2011 and January 31, 2012. If we elect to prepay the outstanding balance, we will be required to pay a make-whole premium ranging from $85 million to $103 million, dependent upon the prepayment date.
All interests in our Credit Card Receivables issued by the Trust are accounted for as secured borrowings. Interest and principal payments are satisfied provided the cash flows from the Trust assets are sufficient and are nonrecourse to the general assets of the Corporation. If the cash flows are less than the periodic interest, the available amount, if any, is paid with respect to interest. Interest shortfalls will be paid to the extent subsequent cash flows from the assets in the Trust are sufficient. Future principal payments will be made from the third party’s prorata share of cash flows from the Trust assets.
|
Securitized Borrowings |
|
April 30, 2011 |
|
January 29, 2011 |
|
May 1, 2010 |
| ||||||||||||
|
|
|
Debt |
|
|
|
Debt |
|
|
|
Debt |
|
|
| ||||||
|
(millions) |
|
Balance |
|
Collateral |
|
Balance |
|
Collateral |
|
Balance |
|
Collateral |
| ||||||
|
2008 Series(a) |
|
$ |
2,965 |
|
$ |
3,061 |
|
$ |
2,954 |
|
$ |
3,061 |
|
$ |
3,219 |
|
$ |
3,372 |
|
|
2006/2007 Series |
|
1,000 |
|
1,266 |
|
1,000 |
|
1,266 |
|
1,000 |
|
1,266 |
| ||||||
|
Total |
|
$ |
3,965 |
|
$ |
4,327 |
|
$ |
3,954 |
|
$ |
4,327 |
|
$ |
4,219 |
|
$ |
4,638 |
|
(a) The debt balance for the 2008 Series is net of a 7% discount from JPMC. The unamortized portion of this discount was $96 million, $107 million and $153 million as of April 30, 2011, January 29, 2011, and May 1, 2010, respectively.
5. Commitments and Contingencies
In January 2011, we entered into an agreement to purchase the leasehold interests in up to 220 sites in Canada currently operated by Zellers Inc. (Zellers), in exchange for C$1,825 million (Canadian dollars), due in two equal installments, one on May 27, 2011 and one in the third quarter of this year. We believe this transaction will allow us to open 100 to 150 Target stores in Canada, primarily during 2013. We are still in the process of evaluating each location currently leased by Zellers. We have selected 105 locations and expect to finalize the acquisition of these sites by early June 2011. We have the right to select up to 115 additional leases in advance of the second payment in third quarter 2011. We plan to invest between $1.8 billion to $2.3 billion over the next three years to renovate sites that we intend to convert into Target stores, establish supply chain capabilities, and build information-technology infrastructure. The amount we ultimately invest will be largely dependent on the number of sites we elect to convert into Target stores. During the three months ended April 30, 2011, the value of $1.00 ranged from C$0.95 to C$1.00. On May 23, 2011, the value of $1.00 was equivalent to C$0.98.
We are exposed to claims and litigation arising in the ordinary course of business and use various methods to resolve these matters in a manner that we believe serves the best interest of our shareholders and other constituents. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities. We do not believe that any of the currently identified claims or litigation matters will materially affect our results of operations, cash flows or financial condition.
6. Notes Payable and Long-Term Debt
We obtain short-term financing from time to time under our commercial paper program, a form of notes payable. There were no amounts outstanding under our commercial paper program at April 30, 2011, January 29, 2011, or May 1, 2010.
There were no amounts outstanding under our commercial paper program at any time during the three months ended April 30, 2011 or May 1, 2010.
In April 2010, TR LLC repurchased and retired the entire $900 million series of nonrecourse debt collateralized by credit card receivables, at par, that otherwise would have matured in October 2010. No gain or loss was recorded other than insignificant expenses associated with retiring this debt.
In addition, TR LLC has made payments to JPMC to reduce its interest in our credit card receivables as described in Note 4, Credit Card Receivables.
7. Derivative Financial Instruments
Derivative financial instruments are reported at fair value on the Consolidated Statements of Financial Position. Historically our derivative instruments have primarily consisted of interest rate swaps. We use these derivatives to mitigate our interest rate risk. We have counterparty credit risk resulting from our derivative instruments. This risk lies primarily with two global financial institutions. We monitor this concentration of counterparty credit risk on an ongoing basis.
Historically, the majority of our derivative instruments qualified for fair value hedge accounting treatment. During 2008, we terminated or de-designated certain interest rate swaps that were accounted for as hedges. Total net gains amortized into net interest expense for terminated or de-designated swaps were $10 million and $11 million during the three months ended April 30, 2011 and May 1, 2010, respectively. The amount remaining on unamortized hedged debt valuation gains from terminated or de-designated interest rate swaps that will be amortized into earnings over the remaining lives of the underlying debt totaled $142 million, $152 million and $186 million, at April 30, 2011, January 29, 2011 and May 1, 2010, respectively.
Periodic payments, valuation adjustments and amortization of gains or losses from the termination or de-designation of derivative contracts are summarized below:
|
Derivative Contracts – Effect on Results of Operations |
|
|
|
Three Months Ended |
| ||||||||||
|
|
|
Classification of |
|
|
|
|
|
April 30, |
|
May 1, |
| ||||
|
(millions) |
|
Income/(Expense) |
|
|
|
|
|
2011 |
|
2010 |
| ||||
|
Interest Rate Swaps |
|
Other interest expense |
|
|
|
|
|
|
|
$ |
11 |
|
$ |
14 |
|
At April 30, 2011, there were no derivative instruments designated as accounting hedges. See Note 3, Fair Value Measurements, for a description of the fair value measurement of derivative contracts and their classification on the Consolidated Statements of Financial Position.
8. Income Taxes
We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations for years before 2010 and, with few exceptions, are no longer subject to state and local or non-U.S. income tax examinations by tax authorities for years before 2003.
We accrue for the effects of uncertain tax positions and the related potential penalties and interest.
It is reasonably possible that the amount of the unrecognized tax benefit liabilities with respect to our other unrecognized tax positions will increase or decrease during the next twelve months; however an estimate of the amount or range of the change cannot be made at this time.
9. Share Repurchase
We repurchased shares primarily through open market transactions under a $10 billion share repurchase plan authorized by our Board of Directors in November 2007. Share repurchases for the three months ended April 30, 2011 and May 1, 2010 were as follows:
|
Share Repurchases |
|
Total Number of |
|
Average Price |
|
Total |
| ||
|
Three months ended May 1, 2010 |
|
7.5 |
|
$ |
52.27 |
|
$ |
394 |
|
|
Three months ended April 30, 2011 |
|
15.4 |
|
53.32 |
|
819 |
| ||
Of the shares reacquired, a portion was delivered upon settlement of prepaid forward contracts as follows:
|
Settlement of Prepaid Forward Contracts(a) |
|
Total Cash |
|
Aggregate |
(b) | ||
|
Three months ended May 1, 2010 |
|
$ |
15 |
|
$ |
16 |
|
|
Three months ended April 30, 2011 |
|
7 |
|
7 |
| ||
(a)These contracts are among the investment vehicles used to reduce our economic exposure related to our nonqualified deferred compensation plans. The details of our positions in prepaid forward contracts have been provided in Note 10.
(b)At their respective settlement dates.
10. Pension, Postretirement Health Care and Other Benefits
We have qualified defined benefit pension plans covering team members who meet age and service requirements, including in certain circumstances, date of hire. We also have unfunded, nonqualified pension plans for team members with qualified plan compensation restrictions. Eligibility for, and the level of, these benefits varies depending on team members’ date of hire, length of service and/or team member compensation. Upon early retirement and prior to Medicare eligibility, team members also become eligible for certain health care benefits if they meet minimum age and service requirements and agree to contribute a portion of the cost. Effective January 1, 2009, our qualified defined benefit pension plan was closed to new participants, with limited exceptions.
The following table provides a summary of the amounts recognized in our Consolidated Statements of Financial Position for our postretirement benefit plans:
|
Net Pension and Postretirement |
|
Pension Benefits |
|
Postretirement Health Care Benefits |
| ||||||||
|
Health Care Benefits Expense |
|
Three Months Ended |
|
Three Months Ended |
| ||||||||
|
|
|
April 30, |
|
May 1, |
|
April 30, |
|
May 1, |
| ||||
|
(millions) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
|
Service cost |
|
$ |
29 |
|
$ |
29 |
|
$ |
2 |
|
$ |
2 |
|
|
Interest cost |
|
34 |
|
32 |
|
1 |
|
1 |
| ||||
|
Expected return on assets |
|
(51 |
) |
(48 |
) |
— |
|
— |
| ||||
|
Recognized losses |
|
16 |
|
11 |
|
1 |
|
1 |
| ||||
|
Recognized prior service cost |
|
(1 |
) |
(1 |
) |
(2 |
) |
(2 |
) | ||||
|
Total |
|
$ |
27 |
|
$ |
23 |
|
$ |
2 |
|
$ |
2 |
|
Even though we are not required to make any contributions, we may elect to make contributions depending on investment performance and the pension plan funded status in 2011.
We also maintain a nonqualified, unfunded deferred compensation plan for approximately 3,500 current and retired team members whose participation in our 401(k) plan is limited by statute or regulation. These team members choose from a menu of crediting rate alternatives that are the same as the investment choices in our 401(k) plan, including Target common stock. We credit an additional 2 percent per year to the accounts of all active participants, excluding executive officer participants, in part to recognize the risks inherent to their participation in a plan of this nature. We also maintain a nonqualified, unfunded deferred compensation plan that was frozen during 1996, covering substantially fewer than 100 participants, most of whom are retired. In this plan, deferred compensation earns returns tied to market levels of interest rates plus an additional 6 percent return, with a minimum of 12 percent and a maximum of 20 percent, as determined by the plan’s terms.
We mitigate some of our risk of offering the nonqualified plans through investing in vehicles, including company-owned life insurance and prepaid forward contracts in our own common stock, that offset a substantial portion of our economic exposure to the returns of these plans. These investment vehicles are general corporate assets and are marked to market with the related gains and losses recognized in the Consolidated Statements of Operations in the period they occur.
The total change in fair value for contracts indexed to our own common stock recognized in earnings was pretax income/(loss) of $(7) million during the three months ended April 30, 2011 and $7 million during the three months ended May 1, 2010. During first quarter 2011, we invested approximately $16 million in such investment instruments. This activity is included in the Consolidated Statements of Cash Flows within other investing activities. No investments were made in first quarter 2010. Adjusting our position in these investment vehicles may involve repurchasing shares of Target common stock when settling the forward contracts. For the three months ended April 30, 2011 and May 1, 2010, these repurchases totaled 0.1 million and 0.3 million shares, respectively, and are included in the total share repurchases described in Note 9.
At April 30, 2011, January 29, 2011 and May 1, 2010, our outstanding interest in contracts indexed to our common stock was as follows:
|
Prepaid Forward Contracts on Target |
|
|
|
Contractual |
|
|
|
|
| |||
|
(millions, except per share data) |
|
Number of |
|
Price Paid |
|
Fair |
|
Total Cash |
| |||
|
May 1, 2010 |
|
1.2 |
|
$ |
41.67 |
|
$ |
69 |
|
$ |
51 |
|
|
January 29, 2011 |
|
1.2 |
|
44.09 |
|
63 |
|
51 |
| |||
|
April 30, 2011 |
|
1.3 |
|
45.12 |
|
65 |
|
60 |
| |||
11. Segment Reporting
In January 2011, we entered into an agreement to purchase leasehold interests in up to 220 sites in Canada currently operated by Zellers. We believe this transaction will allow us to open 100 to 150 Target stores in Canada, primarily during 2013. We are still in the process of evaluating each location currently leased by Zellers. We have selected 105 locations and expect to finalize the acquisition of these sites by early June 2011. We have the right to select up to 115 additional leases in advance of the second payment in third quarter 2011. As a result of this transaction, we now have three reportable business segments: U.S. Retail, U.S. Credit Card and Canadian.
Our measure of profit for each segment is a measure that management considers analytically useful in measuring the return we are achieving on our investment.
|
Business Segment Results |
|
Three Months Ended April 30, 2011 |
|
Three Months Ended May 1, 2010 |
| |||||||||||||||||||||
|
|
|
U.S. |
|
U.S. |
|
|
|
|
|
U.S. |
|
U.S. |
|
|
|
|
| |||||||||
|
(millions) |
|
Retail |
|
Card |
|
Canadian |
|
Total |
|
Retail |
|
Card |
|
Canadian |
|
Total |
| |||||||||
|
Sales/Credit card revenues |
|
$ |
15,580 |
|
$ |
355 |
|
$ |
— |
|
|
$ |
15,935 |
|
$ |
15,158 |
|
$ |
435 |
|
$ |
— |
|
$ |
15,593 |
|
|
Cost of sales |
|
10,838 |
|
— |
|
|
— |
|
|
10,838 |
|
10,412 |
|
— |
|
— |
|
10,412 |
| |||||||
|
Bad debt expense(a) |
|
— |
|
12 |
|
|
— |
|
|
12 |
|
— |
|
197 |
|
— |
|
197 |
| |||||||
|
Selling, general and administrative/ Operations and marketing expenses(a), (b) |
|
3,173 |
|
125 |
|
|
11 |
|
|
3,309 |
|
3,126 |
|
100 |
|
— |
|
3,226 |
| |||||||
|
Depreciation and amortization |
|
507 |
|
5 |
|
|
— |
|
|
512 |
|
512 |
|
4 |
|
— |
|
516 |
| |||||||
|
Earnings/(loss) before interest expense and income taxes |
|
1,062 |
|
213 |
|
|
(11 |
) |
|
1,264 |
|
1,108 |
|
134 |
|
— |
|
1,242 |
| |||||||
|
Interest expense on nonrecourse debt collateralized by credit card receivables |
|
— |
|
19 |
|
|
— |
|
|
19 |
|
— |
|
23 |
|
— |
|
23 |
| |||||||
|
Segment profit/(loss) |
|
$ |
1,062 |
|
$ |
194 |
|
$ |
(11 |
) |
|
$ |
1,245 |
|
$ |
1,108 |
|
$ |
111 |
|
$ |
— |
|
1,219 |
| |
|
Unallocated (income) and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
Other interest expense |
|
|
|
|
|
|
|
164 |
|
|
|
|
|
|
|
165 |
| |||||||||
|
Interest income |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
(1 |
) | |||||||||
|
Earnings before income taxes |
|
|
|
|
|
|
|
$ |
1,081 |
|
|
|
|
|
|
|
$ |
1,055 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
(a) The combination of bad debt expense and operations and marketing expenses, less amounts reimbursed to the U.S. Retail Segment, within the U.S. Credit Card Segment represent credit card expenses on the Consolidated Statements of Operations.
(b) Loyalty Program discounts are recorded as reductions to sales in our U.S. Retail Segment. Effective with the October 2010 nationwide launch of our new 5% REDcard Rewards loyalty program, we changed the formula under which our U.S. Credit Card segment reimburses our U.S. Retail Segment to better align with the attributes of the new program. In the three months ended April 30, 2011, these reimbursed amounts were $49 million compared with $17 million in the corresponding period in 2010. In all periods these amounts were recorded as reductions to SG&A expenses within the U.S. Retail Segment and increases to operations and marketing expenses within the U.S. Credit Card Segment.
Note: The sum of the segment amounts may not equal the total amounts due to rounding.
|
Total Assets by Segment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
April 30, 2011 |
|
January 29, 2011 |
|
May 1, 2010 |
| ||||||||||||||||||||||||||||||
|
|
|
U.S. |
|
U.S. |
|
|
|
|
|
U.S. |
|
U.S. |
|
|
|
|
|
U.S. |
|
U.S. |
|
|
|
|
| ||||||||||||
|
(millions) |
|
Retail |
|
Card |
|
Canadian |
|
Total |
|
Retail |
|
Card |
|
Canadian |
|
Total |
|
Retail |
|
Card |
|
Canadian |
|
Total |
| ||||||||||||
|
Total assets |
|
$ |
37,032 |
|
$ |
5,934 |
|
$ |
30 |
|
$ |
42,996 |
|
$ |
37,324 |
|
$ |
6,381 |
|
$ |
— |
|
$ |
43,705 |
|
$ |
36,633 |
|
$ |
6,690 |
|
$ |
— |
|
$ |
43,323 |
|
Substantially all of our revenues are generated in, and long-lived assets are located in, the United States. However, as we expand our operations, an increasing proportion of our business will be in Canada.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Consolidated revenues were $15,935 million for the three months ended April 30, 2011, an increase of $342 million or 2.2 percent from the same period in the prior year. Consolidated earnings before interest expense and income taxes for first quarter 2011 increased by $22 million or 1.8 percent over first quarter 2010 to $1,264 million. Cash flow provided by operations was $1,052 million and $1,158 million for the three months ended April 30, 2011 and May 1, 2010, respectively. We opened 6 new stores in the first quarter of 2011 (5 net of 1 relocation). During the three months ended May 1, 2010, we did not open any new stores or close any existing stores.
Our financial results for the first quarter of 2011 in our U.S. Retail Segment reflect increased sales of 2.8 percent over the same period last year due to a 2.0 percent comparable-store increase combined with the contribution from new stores. Our U.S. Retail Segment EBITDA and EBIT margin rates decreased to 10.1 percent and 6.8 percent, respectively, in first quarter 2011 compared to 10.7 percent and 7.3 percent in first quarter 2010 due largely to a decrease in gross margin rate reflecting the impact of our 5% REDcard Rewards program and the increase in the number of stores with an expanded food assortment.
In the U.S. Credit Card Segment, we achieved a significant increase in segment profit primarily due to declining bad debt expense driven by improved trends in key measures of risk.
In January 2011, we entered into an agreement to purchase the leasehold interests in up to 220 sites in Canada currently operated by Zellers Inc. (Zellers), in exchange for C$1,825 million (Canadian dollars), due in two equal installments, one on May 27, 2011 and one in the third quarter of this year. We believe this transaction will allow us to open 100 to 150 Target stores in Canada, primarily during 2013. We are still in the process of evaluating each location currently leased by Zellers. We have selected 105 locations and expect to finalize the acquisition of these sites by early June 2011. We have the right to select up to 115 additional leases in advance of the second payment in third quarter 2011. During the three months ended April 30, 2011, start-up costs totaled $11 million and primarily consisted of legal, payroll, and consulting expenses. These expenses are reported in SG&A expense within the consolidated statement of operations.
Analysis of Results of Operations
U.S. Retail Segment
|
U.S. Retail Segment Results |
|
Three Months Ended |
| ||||||
|
|
|
April 30, |
|
May 1, |
|
Percent |
| ||
|
(millions) |
|
2011 |
|
2010 |
|
Change |
| ||
|
Sales |
|
$ |
15,580 |
|
$ |
15,158 |
|
2.8 |
% |
|
Cost of sales |
|
10,838 |
|
10,412 |
|
4.1 |
| ||
|
Gross margin |
|
4,742 |
|
4,746 |
|
(0.1 |
) | ||
|
SG&A expenses(a) |
|
3,173 |
|
3,126 |
|
1.5 |
| ||
|
EBITDA |
|
1,569 |
|
1,620 |
|
(3.1 |
) | ||
|
Depreciation and amortization |
|
507 |
|
512 |
|
(0.8 |
) | ||
|
EBIT |
|
$ |
1,062 |
|
$ |
1,108 |
|
(4.2 |
)% |
EBITDA is earnings before interest expense, income taxes, depreciation and amortization.
EBIT is earnings before interest expense and income taxes.
(a) Loyalty Program discounts are recorded as reductions to sales in our U.S. Retail Segment. Effective with the October 2010 nationwide launch of our new 5% REDcard Rewards loyalty program, we changed the formula under which our U.S. Credit Card segment reimburses our U.S. Retail Segment to better align with the attributes of the new program. In the three months ended April 30, 2011, these reimbursed amounts were $49 million compared with $17 million in the corresponding period in 2010. In all periods these amounts were recorded as reductions to SG&A expenses within the U.S. Retail Segment and increases to operations and marketing expenses within the U.S. Credit Card Segment.
|
U.S. Retail Segment Rate Analysis |
|
Three Months Ended | |||
|
|
|
April 30, |
|
May 1, |
|
|
|
|
2011 |
|
2010 |
|
|
Gross margin rate |
|
30.4% |
|
31.3% |
|
|
SG&A expense rate |
|
20.4% |
|
20.6% |
|
|
EBITDA margin rate |
|
10.1% |
|
10.7% |
|
|
Depreciation and amortization expense rate |
|
3.3% |
|
3.4% |
|
|
EBIT margin rate |
|
6.8% |
|
7.3% |
|
U.S. Retail Segment rate analysis metrics are computed by dividing the applicable amount by sales.
Sales
Sales include merchandise sales, net of expected returns, from our stores and our online business, as well as gift card breakage. Comparable-store sales is a measure that indicates the performance of our existing stores by measuring the growth in sales for such stores for a period over the comparable, prior-year period of equivalent length. The method of calculating comparable-store sales varies across the retail industry. As a result, our comparable-store sales calculation is not necessarily comparable to similarly titled measures reported by other companies.
Comparable-store sales are sales from our online business and sales from general merchandise and SuperTarget stores open longer than one year, including:
· sales from stores that have been remodeled or expanded while remaining open (including our current store remodel program)
· sales from stores that have been relocated to new buildings of the same format within the same trade area, in which the new store opens at about the same time as the old store closes
Comparable-store sales do not include:
· sales from general merchandise stores that have been converted, or relocated within the same trade area, to a SuperTarget store format
· sales from stores that were intentionally closed to be remodeled, expanded or reconstructed
|
Comparable-Store Sales |
|
Three Months Ended |
| ||
|
|
|
April 30, |
|
May 1, |
|
|
|
|
2011 |
|
2010 |
|
|
Comparable-store sales |
|
2.0 % |
|
2.8 % |
|
|
Components of changes in comparable-store sales: |
|
|
|
|
|
|
Number of transactions |
|
0.4 % |
|
2.2 % |
|
|
Average transaction amount |
|
1.6 % |
|
0.7 % |
|
|
Units per transaction |
|
4.4 % |
|
1.3 % |
|
|
Selling price per unit |
|
(2.6)% |
|
(0.7)% |
|
The comparable-store sales increases or decreases above are calculated by comparing sales in fiscal year periods with comparable prior fiscal year periods of equivalent length.
The collective interaction of a broad array of macroeconomic, competitive and consumer behavioral factors, as well as sales mix, and transfer of sales to new stores makes further analysis of sales metrics infeasible.
Our Credit Card Segment offers credit to qualified guests through our branded proprietary credit cards, the Target Visa Credit Card and the Target Credit Card (Target Credit Cards). Additionally, we offer a branded proprietary Target Debit Card. Collectively, we refer to these products as REDcards®. In October 2010, guests began to receive a 5 percent discount on virtually all purchases at checkout every day when they use a REDcard at any Target store or on Target.com.
We monitor the percentage of store sales that are paid for using REDcards (REDcard Penetration), because our internal analysis has indicated that a meaningful portion of the incremental purchases on our REDcards are also incremental sales for Target, with the remainder of the incremental purchases on the REDcards representing a shift in tender type.
|
REDcard Penetration |
|
Three Months Ended | |||
|
|
|
April 30, |
May 1, |
| |
|
|
|
2011 |
2010 |
| |
|
Target Credit Cards |
|
5.9 |
% |
4.4% |
|
|
Target Debit Card |
|
1.7 |
% |
0.5% |
|
|
Total Store REDcard Penetration |
|
7.6 |
% |
4.9% |
|
Gross Margin Rate
Gross margin rate represents gross margin (sales less cost of sales) as a percentage of sales. See Note 3 in our Form 10-K for the fiscal year ended January 29, 2011 for a description of costs included in cost of sales. Markup is the difference between an item’s cost and its retail price (expressed as a percentage of its retail price). Factors that affect markup include vendor offerings and negotiations, vendor income, sourcing strategies, market forces like raw material and freight costs, and competitive influences. Markdowns are the reduction in the original or previous price of retail merchandise. Factors that affect markdowns include inventory management, competitive influences and economic conditions.
For the three months ended April 30, 2011, our gross margin rate was 30.4 percent, decreasing from 31.3 percent in the comparable period last year due primarily to our 5% REDcard Rewards strategy and our expanded food assortment initiative, which together accounted for approximately two-thirds of the change. The 5% REDcard Rewards program drove a lower margin rate due primarily to the 5 percent discount, whereas our expanded food assortment initiative resulted in sales growth in lower-margin product categories that outpaced sales growth in higher-margin categories. The remaining decline in margin rate was primarily due to an increase in clearance and competitive markdowns.
Selling, General and Administrative Expense Rate
Our selling, general and administrative (SG&A) expense rate represents SG&A expenses as a percentage of sales. See Note 3 in our Form 10-K for the fiscal year ended January 29, 2011 for a description of costs included in SG&A expenses. SG&A expenses exclude depreciation and amortization, as well as expenses associated with our credit card operations, which are reflected separately in our Consolidated Statements of Operations.
For the three months ended April 30, 2011, the SG&A expense rate was 20.4 percent, a decrease from 20.6 percent in the same period last year. The change in rate was primarily driven by an approximate 0.4 percentage point impact from favorable leverage of overall compensation expense, including productivity improvements in our stores, partially offset by a net increase in aggregate expenses in all other areas, none of which were individually significant.
Depreciation and Amortization Expense Rate
Our depreciation and amortization expense rate represents depreciation and amortization expense as a percentage of sales. For the three months ended April 30, 2011, our depreciation and amortization expense rate was 3.3 percent, compared with 3.4 percent last year.
Store Data
During the three months ended April 30, 2011, we opened 6 new stores (5 net of 1 relocation). During the three months ended May 1, 2010, we did not open any new stores or close any existing stores. During the first quarter of 2011, we remodeled 83 stores under our current store remodel program, compared with 96 in first quarter 2010.
|
Number of Stores and Retail Square Feet |
|
Number of Stores |
|
Retail Square Feet(a) |
| ||||||||
|
|
|
April 30, |
|
January 29, |
|
May 1, |
|
April 30, |
|
January 29, |
|
May 1, |
|
|
|
|
2011 |
|
2011 |
|
2010 |
|
2011 |
|
2011 |
|
2010 |
|
|
Target general merchandise stores |
|
953 |
|
1,037 |
|
1,285 |
|
116,462 |
|
127,292 |
|
160,250 |
|
|
Expanded food assortment |
|
550 |
|
462 |
|
204 |
|
73,253 |
|
61,823 |
|
27,199 |
|
|
SuperTarget stores |
|
252 |
|
251 |
|
251 |
|
44,681 |
|
44,503 |
|
44,503 |
|
|
Total |
|
1,755 |
|
1,750 |
|
1,740 |
|
234,396 |
|
233,618 |
|
231,952 |
|
(a) In thousands; reflects total square feet, less office, distribution center and vacant space.
U.S. Credit Card Segment
We offer credit to qualified guests through the Target Visa Credit Card and the Target Credit Card. Our credit card program supports our core retail operations and remains an important contributor to our overall profitability and engagement with our guests. Beginning October 2010, guests receive a 5 percent discount on virtually all purchases at checkout every day when they use a REDcard at any Target store or on Target.com.
Credit card revenues are comprised of finance charges, late fees and other revenue, and third party merchant fees, or the amounts received from merchants who accept the Target Visa Credit Card.
In January 2011, we announced our plan to actively pursue the sale of our credit card receivables portfolio. We intend to execute a transaction only if appropriate strategic and financial conditions are met. Our ability to sell the portfolio is affected by the limited number of potential buyers, an inactive market, the complexity of the contemplated transaction, and the portfolio size. We will classify the credit card receivables portfolio as held for sale when a transaction that allows us to meet our strategic objectives, including sale treatment, has been agreed upon in principle with one or more potential partners.
|
U.S. Credit Card Segment Results |
|
|
Three Months Ended |
|
|
Three Months Ended |
| ||||||
|
|
|
|
April 30, 2011 |
|
|
May 1, 2010 |
| ||||||
|
|
|
|
Amount |
|
Annualized |
|
|
Amount |
|
Annualized |
| ||
|
(millions) |
|
|
(in millions) |
|
Rate(d) |
|
|
(in millions) |
|
Rate(d) |
| ||
|
Finance charge revenue |
|
|
$ |
292 |
|
18.1% |
|
|
$ |
350 |
|
18.5% |
|
|
Late fees and other revenue |
|
|
42 |
|
2.6 |
|
|
59 |
|
3.1 |
| ||
|
Third party merchant fees |
|
|
21 |
|
1.3 |
|
|
26 |
|
1.4 |
| ||
|
Total revenues |
|
|
355 |
|
22.0 |
|
|
435 |
|
23.0 |
| ||
|
Bad debt expense |
|
|
12 |
|
0.8 |
|
|
197 |
|
10.5 |
| ||
|
Operations and marketing expenses(a) |
|
|
125 |
|
7.8 |
|
|
100 |
|
5.3 |
| ||
|
Depreciation and amortization |
|
|
5 |
|
0.3 |
|
|
4 |
|
0.2 |
| ||
|
Total expenses |
|
|
142 |
|
8.8 |
|
|
301 |
|
16.0 |
| ||
|
EBIT |
|
|
213 |
|
13.2 |
|
|
134 |
|
7.1 |
| ||
|
Interest expense on nonrecourse debt collateralized by credit card receivables |
|
|
19 |
|
|
|
|
23 |
|
|
| ||
|
Segment profit |
|
|
$ |
194 |
|
|
|
|
$ |
111 |
|
|
|
|
Average receivables funded by Target(b) |
|
|
$ |
2,504 |
|
|
|
|
$ |
2,361 |
|
|
|
|
Segment pretax ROIC(c) |
|
|
30.9% |
|
|
|
|
18.8% |
|
|
| ||
|
(a) |
Loyalty Program discounts are recorded as reductions to sales in our U.S. Retail Segment. Effective with the October 2010 nationwide launch of our new 5% REDcard Rewards loyalty program, we changed the formula under which our U.S. Credit Card segment reimburses our U.S. Retail Segment to better align with the attributes of the new program. In the three months ended April 30, 2011, these reimbursed amounts were $49 million, compared with $17 million in t |