- While Target’s third quarter U.S. comparable sales increase of 0.9 percent was near the low end of prior guidance, adjusted earnings per share of $0.84 were near the mid-point of the expected range
- Third quarter GAAP earnings per share of $0.54 were below expectations as a result of higher than-expected dilution of (29) cents related to the Canadian Segment
- Target opened 32 stores in the third quarter – 23 in Canada and 9 in the U.S.; the Company remains on track to have 124 Canadian Target stores open by year end
Target Corporation (NYSE: TGT) today reported third quarter net earnings of $341 million, or $0.54 per share, which includes EPS dilution related to the Canadian Segment of (29) cents per share. Adjusted earnings per share, a measure the Company believes is useful in providing period-to-period comparisons of the results of its U.S. operations, were $0.84 in third quarter 2013, down 6.0 percent from $0.90 in 2012. A reconciliation of non-GAAP financial measures to GAAP measures is provided in the tables attached to this press release. All earnings per share figures refer to diluted earnings per share.
“Target’s third quarter financial results reflect continued strong execution in our U.S. Segment in an environment where consumer spending remains constrained,” said Gregg Steinhafel, chairman, president, and chief executive officer of Target Corporation. “As our focus shifts to the fourth quarter, we are intently focused on delivering outstanding merchandise, an easy, fun shopping experience and an unbeatable combination of everyday low prices, weekly ad discounts, 5% REDcard Rewards and price match policies throughout the U.S. and Canada. And, in our Canadian Segment, we are also focused on improving performance as we transition from opening to operating our 124 stores.”
Fiscal 2013 Earnings Guidance
In fourth quarter 2013, the Company expects adjusted EPS of $1.50 to $1.60, Canadian Segment dilution of (22) to (32) cents and (2) cents related to the expected reduction in the beneficial interest asset1. This performance would lead to fourth quarter GAAP EPS in a range centered around $1.26.
For full-year 2013, Target now expects adjusted EPS of $4.59 to $4.69, Canadian Segment dilution of ($0.95) to ($1.05) and a net impact of approximately (12) cents related to:
- Losses related to the early retirement of debt of (42) cents per share, and;
- Net accounting gains of approximately 28 cents associated with the sale of Target’s entire consumer credit card receivables portfolio to TD Bank Group, and;
- Non-recurring tax benefits of approximately 2 cents.
This performance would lead to full-year 2013 GAAP EPS in a range centered around $3.52.
1See the “Accounting Considerations” section of this release for more information related to the beneficial interest asset.
U.S. Segment Results
As a reminder, following the sale of the U.S. credit card portfolio in March 2013, Target’s historical U.S. Retail Segment and U.S. Credit Card Segment results were combined to form a new U.S. Segment. Selling, General and Administrative (SG&A) expenses in the new U.S. Segment include income from the profit-sharing arrangement with TD Bank Group, net of servicing expenses. In prior periods, credit card revenues, net of credit card expenses, from the historical U.S. Credit Card Segment have been classified within U.S. Segment SG&A expenses.2
In addition, beginning with fiscal 2013, Target made changes to certain vendor agreements regarding payments received in support of marketing programs. As a result, these payments are being recorded as a reduction to U.S. Segment cost of sales rather than a reduction to SG&A expenses, creating equivalent year-over-year increases in both gross margin and SG&A expense rates. This change has no effect on U.S. Segment EBITDA and EBIT margin rates.
In third quarter 2013, sales increased 2.0 percent to $16.9 billion from $16.6 billion last year, reflecting a 0.9 percent increase in comparable sales combined with the contribution from new stores. Segment earnings before interest expense and income taxes (EBIT) were $977 million in the third quarter of 2013, a decrease of 11.4 percent from $1,104 million in 2012.
Third quarter EBITDA margin rate was 8.7 percent, compared with 9.8 percent in the revised U.S. Segment and 8.9 percent in the historical U.S. Retail Segment in third quarter 2012. Third quarter EBIT margin rate was 5.8 percent, compared with 6.6 percent in the revised U.S. Segment and 5.8 percent in the historical U.S. Retail Segment in third quarter 2012.
Third quarter gross margin rate decreased to 30.0 percent in 2013 from 30.3 percent in 2012, reflecting category rate pressure from seasonal markdowns combined with the impact of Target’s integrated growth strategies, partially offset by approximately 0.2 percentage-points of benefit from changes to the Company’s vendor agreements. Third quarter SG&A expense rate was 21.2 percent in 2013, compared with 2012 rates of 20.5 percent in the revised U.S. Segment and 21.4 percent in the historical U.S. Retail Segment. Compared with the revised U.S. Segment in third quarter 2012, the increase was driven by a smaller contribution from the credit card portfolio, which raised the SG&A rate by approximately 0.6 percentage points, continued investments in technology and supply chain in support of multichannel initiatives and the change to Target’s vendor agreements. These pressures were partially offset by favorable leverage of compensation expenses and the continued benefit of the Company’s expense optimization efforts.
2Quarterly and full-year historical information for the three most recently completed years reflecting the impact of the reclassification, and
the results for our two segments, U.S. and Canadian, are attached as Exhibit (99) to our current report on Form 8-K filed April 16, 2013.
Canadian Segment Results
In third quarter 2013 the Canadian Segment generated sales of $333 million at a gross margin rate of 14.8 percent, driven by efforts to clear excess inventory. Canadian Segment EBIT for the third quarter was $(238) million, as gross margin of $49 million was offset by $221 million of start-up and operating expenses and $66 million of depreciation and amortization. Canadian operations reduced Target’s GAAP earnings per share by (29) cents in third quarter 20133.
3This amount includes interest expense and tax expense that are not included in the segment measure of profit. A reconciliation of non-
GAAP measures is included in the tables attached to this release.
Interest Expense and Taxes
In third quarter 2013, net interest expense decreased to $165 million from $192 million in 2012, benefiting from debt retirement resulting from the use of proceeds from the sale of the credit card portfolio.
The Company’s effective income tax rate was 36.6 percent in the third quarter, compared with 34.5 percent in third quarter 2012. The increase of 2.1 percentage points was driven by a lower yearover-year benefit associated with the favorable resolution of various income tax matters combined with the net effect of increased losses related to Canadian operations.
Capital Returned to Shareholders
In third quarter 2013, the Company paid dividends of $271 million. Target did not repurchase any shares of its common stock during the quarter, reflecting current performance and the Company’s commitment to maintain its strong investment-grade credit ratings.
Year-to-date, the Company has repurchased approximately 21.9 million shares of its common stock at an average price of $67.41 for a total investment of $1.47 billion, and paid dividends of $734 million.
At the close of the sale of its entire U.S. consumer credit card receivables portfolio to TD Bank Group in first quarter 2013, Target recognized a $225 million beneficial interest asset, which effectively represented a receivable for the present value of future profit-sharing Target expected to receive on the receivables sold. The Company estimates the asset will be reduced over the four-year period following the close of the transaction, with larger reductions in the early years. The beneficial interest asset was reduced by $36 million in the third quarter 2013 and $82 million year-to-date 2013.
The Company’s third quarter 2012 GAAP EPS included a benefit of approximately 15 cents related to the agreement to sell the entire U.S. consumer credit card receivables portfolio to TD Bank Group. The benefit was driven by a change in the accounting treatment of Target’s receivables from “held for investment” to “held for sale” at the time of the announcement.
Target Corporation will webcast its third quarter earnings conference call at 9:30 a.m. CST today. Investors and the media are invited to listen to the call through the Company’s website at www.target.com/investors (click on “events & presentations”). A telephone replay of the call will be available beginning at approximately 11:30 a.m. CST today through the end of business on November 23, 2013. The replay number is (855) 859-2056 (passcode: 78421689).
Statements in this release regarding fourth quarter and full year 2013 earnings guidance are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements speak only as of the date they are made and are subject to risks and uncertainties which could cause the Company’s actual results to differ materially. The most important risks and uncertainties are described in Item 1A of the Company’s Form 10-K for the fiscal year ended February 2, 2013.
In addition to the GAAP results provided in this release, the Company provides adjusted diluted earnings per share for the three- and nine-month periods ended November 2, 2013 and October 27, 2012, respectively. This measure is not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The most comparable GAAP measure is diluted earnings per share. Management believes adjusted EPS is useful in providing period-toperiod comparisons of the results of the Company’s U.S. operations. Adjusted EPS should not be considered in isolation or as a substitution for analysis of the Company’s results as reported under GAAP. Other companies may calculate adjusted EPS differently than the Company does, limiting the usefulness of the measure for comparisons with other companies.
Minneapolis-based Target Corporation (NYSE: TGT) serves guests at 1,919 stores – 1,797 in the United States and 122 in Canada – and at Target.com. Since 1946, Target has given 5 percent of its profit through community grants and programs; today, that giving equals more than $4 million a week. For more information about Target’s commitment to corporate responsibility, visit target.com/corporateresponsibility.