Target ends year on upswing

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MINNEAPOLIS — Target Corp. finished fiscal 2009 with an impressive fourth quarter rebound that was driven by better-than-expected holiday sales and strong gross margin performance, as well as a return to profitability in its credit card business.

Target Corp. finished fiscal 2009 with an impressive fourth quarter rebound that was driven by better-than-expected holiday sales and strong gross margin performance, as well as a return to profitability in its credit card business.

But although management expressed confidence in its strategy, it took a cautious outlook toward fiscal 2010.

The bottom line for the three months ended January 30 soared 53.7% to $936 million, or $1.24 per diluted share, beating the consensus estimate of $1.16 per share from analysts polled by Thomson Reuters. Net income for the year, meanwhile, climbed 12.4% to $2.49 billion, or $3.30 per diluted share.

Retail sales in the fourth quarter gained 3.7% to $19.72 billion, as revenue from new store openings was supplemented by a 0.6% uptick in comparable-store results. Credit card revenues, though, tumbled 13.9% to $462 million, holding total revenues to a 3.2% rise to $20.18 billion.

Full-year retail sales edged up 0.9% to $63.44 billion, as new store openings overcame a 2.5% dip in comparable-store results. With credit card segment revenue declining 6.9% to $1.92 billion, total revenues moved up 0.6% to $65.36 billion.

“We’re very pleased with our fourth quarter and full-year 2009 financial performances, which reflect substantial innovation and disciplined execution by teams across the company,” said chairman, president and chief executive officer Gregg Steinhafel in a statement.

Earnings before interest expense and income taxes (EBIT) vaulted 40.1% in the quarter to $1.62 billion, or 8.04% of total revenues, up 212 basis points from a year ago, and advanced 6.2% to $4.67 billion, or 7.37% of revenues, over the 12 months. The EBIT ratio for the year represented an improvement of 59 basis points.

Net interest expense for the final three months decreased 0.5% to $213 million, while the full-year expense slid 7.5% to $801 million. Management attributed the slight fourth quarter decrease to lower average debt balances offset by a higher average portfolio interest rate and a $16 million charge related to the early retirement of debt.

The sharper reduction in full-year interest expense was driven by a lower average portfolio interest rate that was partially countered by the early debt retirement charge. With that, earnings before income taxes skyrocketed 49.3% to $1.41 billion in the final quarter and gained 9.5% to $3.87 billion for the year.

In January Target resumed a share repurchase program initiated in November 2007, buying up about 8.3 million shares at an average price of $50.74 for a total investment of $423 million.

Turning to Target’s core retail business, fourth quarter earnings before interest, taxes, depreciation and amortization (EBITDA) escalated 21.6% to $2.09 billion, or 10.6% of sales, while depreciation and amortization expense climbed 13.6% to $533 million. Including depreciation, EBIT leapt 24.7% to $1.56 billion, or 7.91% of sales — representing a 133-basis-point rebound in EBIT ratio.

The segment’s profit recovery was driven by gross margin, which increased dramatically by 176 basis points to 29.09%, fueled by margin rate improvement within various categories that was slightly offset by faster sales growth in lower-margin nondiscretionary categories. Selling, general and administrative (SG&A) expenses increased 20 basis points to 18.48% of sales, in line with management’s expectations.

Full-year EBITDA rose 8.4% to $6.38 billion, or 10.1% of sales, marking an increase in the EBITDA ratio of 70 basis points over fiscal 2008. After including an 11% increase in depreciation and amortization to $2.01 billion, EBIT improved 7.3% to $4.38 billion, or 6.9% of sales.

The 12-month profit gain was propelled by a 76-basis-point expansion in gross margin to 30.54%, while SG&A expense was held to a 6-basis-point increase to 20.48% of sales.

“Our fourth quarter marketing and merchandising programs generated better-than-expected sales growth, particularly in the holiday season, which combined with continued disciplined inventory management to deliver outstanding gross margin and profit performance,” Steinhafel told analysts during a conference call.

Target finished fiscal 2009 with 1,740 locations, a year-over-year increase of 58. Of that total, 251 were SuperTargets, up from 239 at the end of fiscal 2009.

During the conference call, chief financial officer Douglas Scovanner outlined management’s expectations for fiscal 2010. In the retail segment, executives expect comparable-store sales to improve 2% to 4% for the year, including an expected 1-percentage-point lift from store remodels. Retail segment EBIT is projected to grow in the mid single digits.

Capital expenditures for the current year are slated to range between $2 billion and $2.5 billion, with plans for 30 new stores (including relocations) and 340 remodels, a dramatic increase over previous years, Steinhafel noted.

Scovanner said analysts’ average prediction of $3.62 in earnings per share for fiscal 2010 is “clearly within a potential range of achievability,” though management’s own outlook is somewhat lower. But Wall Street’s consensus estimate of 76 cents per share for the first quarter “feels somewhat stronger than a middle-of-the-road outlook,” he commented.



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