Inside This Issue - News
December 19th, 2011
MINNEAPOLIS – Target Corp. reported another strong performance in the third quarter, as both its retail and credit card segments continued to gain momentum.
The performance handily beat Wall Street’s estimates, while management’s forecast for the fourth quarter and the year are in line with those of analysts.
Despite the unfavorable impact of special items, net income for the three months ended October 29 advanced 3.7% to $555 million, or 82 cents per diluted share. Earnings per share received a boost from the repurchase of about 4.5 million shares at a cost of $226 million, resulting in a 5.9% year-over-year reduction in the number of diluted shares outstanding at the end of the quarter. Excluding the share repurchase, earnings would have been around 77 cents per diluted share, still ahead of the 74 cents average estimate among analysts polled by FactSet.
Results for both the fiscal 2011 and 2010 quarters were affected by special items. The most recent period included $35 million, after tax, in costs related to Target’s investment in preparations for the 2013 Canadian market entry, while the third quarter of fiscal 2010 benefited by $45 million from favorable state income tax settlements. Factoring out those items, adjusted earnings climbed 20.4% to $590 million.
Retail sales gained 5.4% to $16.05 billion, driven once again by Target’s PFresh store remodel effort and its 5% REDcard Rewards program. Credit card revenues, meanwhile, decreased 8.2% to $348 million, holding total revenues to a 5.1% increase to $16.40 billion, exceeding the $16.31 billion expected by analysts.
“We’re very pleased with our third quarter financial results, which reflect strong performance in our U.S. retail and U.S. credit card segments,” Gregg Steinhafel, chairman, president and chief executive officer, said in a statement. “We’re confident that we have the right strategy and team in place to drive continued strong performance this holiday season and well into the future.”
Earnings before interest expense and income taxes (EBIT) climbed 9.4% to $1.06 billion, while net interest expense rose 2.9% to $200 million, including $15 million in interest on capitalized leases related to Target’s entry into Canada. Nonetheless, earnings before income taxes surged 11% to $857 million.
Year-to-date net earnings gained 3.4% to $1.95 billion, or $2.84 per share. Excluding $76 million in costs associated with the Canada entry this year and the aforementioned $45 million tax benefit in the 2010 span, adjusted earnings climbed 9.8% to $2.02 billion on a 4% rise in total revenues to $48.58 billion. Retail sales for the nine months improved 4.4% to $47.53 billion while credit card revenues tumbled 14.1% to $1.05 billion. EBIT for the first three quarters advanced 4.2% to $3.62 billion.
With net interest expense edging up 1.2% to $574 million, pretax income grew faster than EBIT, expanding 4.8% to $3.05 billion.
Turning now to Target’s U.S. retail segment (for details on the credit card segment, see story below), EBIT jumped 14.1% to $931 million, or 5.8% of sales, representing an increase in EBIT ratio of about 40 basis points.
Comparable-store sales escalated 4.3% (compared with a 1.6% uptick a year ago), reflecting a 4.1% increase in the average transaction that bolstered a slim 0.3% rise in the number of transactions. Adding more detail to the sales performance, the company reported that the number of units per transaction increased 2.5%, while the selling price per unit edged up 1.6%. With slower growth recorded earlier in the year, nine-month comparable-store sales were up 3.4% (following a 2% gain in the 2010 span).
Kathryn Tesija, executive vice president of merchandising, told analysts that third quarter sales were strong in food, beauty care and health care, while apparel has also shown solid momentum. Successful back-to-school and back-to-college promotions drove housewares and seasonal, she added. “We believe we’ve positioned our home category for continued improvement, but we expect progress will be slow and uneven in light of continued weakness in jobs and the housing market,” she said during the company’s third quarter conference call.
Third quarter gross margin contracted 18 basis points to 30.45%, while sales leverage and disciplined expense controls enabled the segment to reduce selling, general and administrative (SG&A) expense by 42 basis points to 21.38% of sales.
Segment earnings before interest, taxes, depreciation and amortization (EBITDA) gained 8.2% to $1.46 billion, while the EBITDA ratio expanded about 30 basis points to 9.1% of sales.
Year-to-date EBITDA for the retail segment rose 2.5% to $4.67 billion as sales advanced 4.4% to $47.53 billion. Gross margin shrank by 46 basis points to 30.83%, while SG&A expense was well controlled, receding 28 basis points to 21.01% of sales.
Depreciation and amortization edged downward 0.3% to $1.53 billion, helping boost EBIT by 3.9% to $3.14 billion.
"We’ve been disappointed by the absence of any meaningful improvement in the economy so far this year as the most recent U.S. unemployment rate of 9% was unchanged from last January," said Steinhafel. "Until the U.S. begins to see robust improvement in jobs and signs of recovery in the housing market, we believe consumer spending will likely continue to be soft and uneven, requiring retailers to carefully manage their expenses while finding innovative ways to drive profitable sales and market share."
With another impressive quarter on the books, Target management forecast fourth quarter earnings between $1.43 and $1.53 per diluted share, compared with an average estimate of $1.47 among analysts.
During the conference call chief financial officer Douglas Scovanner added a revised take on full-year earnings, which the company projected to range between $4.15 and $4.30 per share at the end of the second quarter.
"At the midpoint of this [fourth quarter] range, we would earn about $4.32 for the year, driven by over $4.50 in the U.S.," he said. "Either way you measure it, these figures are well above our expectations as we entered the year, reinforcing our confidence in the likelihood of generating $8 or more in EPS by 2017, enabling us to pay an annualized dividend per share of $3 or more at that time."
Analysts, on average, expect full-year earnings of $4.37 per share.
During the third quarter Target opened six new stores, wrapping up its 2011 new store program, according to Steinhafel. The company also completed 133 remodels and finished the period with 1,767 stores, up from 1,750 a year ago. The total includes 252 SuperTarget stores, one more than in the 2010 period. Meanwhile, the total number of stores receiving expanded food assortments through the PFresh remodel program jumped to 875 from 462 a year ago.
"Three years ago this format was only a concept we were testing in two Minnesota stores," recalled Steinhafel. "And in a very short time frame it has become our core format, incorporating a more relevant assortment and a completely transformed environment that’s visually compelling and easy to shop."