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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 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 August 3, 2002
Commission file number 1-6049
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 and (2) has been subject to such filing requirements for the past 90 days.
The number of shares outstanding of common stock as of August 3, 2002 was 908,388,817.
TABLE OF CONTENTS
TARGET CORPORATION
PART I. FINANCIAL INFORMATION
See accompanying Notes to Consolidated Financial Statements.
* The February 2, 2002 Consolidated Statement of Financial Position is condensed from the audited financial statement.
Amounts in this statement are presented on a cash basis and therefore may differ from those shown elsewhere in this 10-Q report.
Accounting Policies
The accompanying consolidated financial statements should be read in conjunction with the financial statement disclosures contained in our 2001 Annual Shareholders' Report throughout pages 28-36. The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. 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.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Due to the seasonal nature of the retail industry, quarterly earnings are not necessarily indicative of the results that may be expected for the full fiscal year.
Extraordinary Items
In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." We elected to early adopt this Statement in the first quarter of 2002. Previously, all gains and losses from the early extinguishment of debt were required to be aggregated and classified as an extraordinary item in the Consolidated Results of Operations, net of the related tax effect. Under SFAS No. 145, gains and losses from the early extinguishment of debt will be included in interest expense. Prior year financial statements have been restated to reflect this change. The adoption of SFAS No. 145 has no impact on current year or previously reported net earnings, cash flows or financial position.
Derivatives
During the second quarter, we entered into an interest rate swap with a notional amount of $400 million. The swap hedges the fair value of certain debt by effectively converting interest from fixed rate to variable. During the quarter we also terminated an interest rate swap with a notional amount of $500 million. This transaction did not have a material impact on net earnings for the quarter.
During the first quarter we entered into an interest rate swap with a notional amount of $500 million.
The fair value of our outstanding swaps is reflected in the financial statements and any "hedge ineffectiveness" is recognized in interest expense. At August 3, 2002, the fair value of our existing swaps was immaterial.
Goodwill and Other Intangible Assets
In the first quarter, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." We have complied with all of the adoption provisions of the Statement. The adoption of SFAS No. 142 reduced second quarter and year to date amortization expense by approximately $3 million and $5 million, respectively (less than $.01 per share). Additionally, we have completed our initial impairment test and concluded that our $155 million of goodwill and indefinite lived intangible assets are not impaired.
Per Share Data
Share Repurchase Program
Prior to 2001, our Board of Directors authorized the repurchase of $2 billion of our common stock. Since the inception of our share repurchase program, we have repurchased a total of 40.5 million shares of our common stock at a total cost of $1,186 million ($29.29 per share), net of the premium from exercised and expired put options.
Common stock repurchases under our program have been essentially suspended. Consequently, common stock repurchases did not have a material impact on our second quarter or year to date 2002 earnings and financial position.
Long-term Debt
During the second quarter and first half of 2002, we repurchased $46 million and $50 million, respectively, of long-term debt with a weighted average interest rate of approximately 9.7 percent for each period. These transactions resulted in a pre-tax loss of $16 million and $18 million ($.01 per share) in the second quarter and first half of 2002, respectively, which is included in interest expense in the Consolidated Results of Operations.
During the second quarter we issued $750 million of long-term debt, bearing interest at 5.38 percent, maturing in June 2009. Also during the quarter, Target Receivables Corporation sold, through the Target Credit Card Master Trust, $750 million of credit card receivables to the public in a secured debt transaction. This issue of receivable-backed securities has an expected maturity of five years and a floating rate initially set at 1.99 percent. During the first quarter we issued $1 billion of long-term debt, bearing interest at 5.88 percent, maturing in March 2012.
Accounts Receivable
Accounts receivable is recorded net of an allowance for expected losses. The allowance, estimated from historical portfolio performance and projections of trends, was $332 million at August 3, 2002 and $261 million at February 2, 2002.
Benefit Plans
Certain non-qualified pension and survivor benefits owed to current executives were exchanged for deferrals in an existing defined contribution employee benefit plan. Additionally, certain retired executives accepted our offer to exchange our obligation to them in a frozen non-qualified plan for deferrals in the existing defined contribution plan. These exchanges resulted in second quarter pre-tax net expense of $15 million ($.01 per share) and year to date pre-tax net expense of $35 million ($.02 per share). These amounts reflect $20 million and $47 million for the quarter and year to date, respectively, of additional defined contribution plan benefits expense partially offset by reduced net pension expense.
We will enjoy lower future expenses as a result of these transactions because they were designed to be economically neutral or slightly favorable to us.
Segment Disclosures (Millions)
Revenues by segment were as follows:
Pre-tax segment profit and the reconciliation to pre-tax earnings were as follows:
Analysis of Operations
Second quarter 2002 net earnings were $344 million, or $.38 per share, compared with $271 million, or $.30 per share, for the same period last year. First half 2002 net earnings were $689 million, or $.75 per share, compared with $525 million, or $.58 per share for first half 2001.
Revenues and Comparable-Store Sales
Total revenues for the quarter increased 12.6 percent to $10,068 million compared with $8,941 million for the same period a year ago. Total comparable-store sales (sales from stores open longer than one year) increased 3.0 percent. Our revenue growth reflected Target's new store expansion and comparable-store sales growth combined with growth in our credit card operations.
Year-over-year changes in comparable-store sales by business segment were as follows:
Gross Margin Rate
The gross margin rate represents gross margin (sales less cost of sales) as a percent of sales. In the second quarter, our gross margin rate was favorable to the second quarter of last year, reflecting strong gross margin rate improvement at Target and Mervyn's.
Operating Expense Rate
The operating expense rate represents selling, general and administrative expense as a percent of sales. In the second quarter, our operating expense rate was unfavorable to the second quarter of last year, as growth in expense was only partially offset by the benefit of overall growth at Target, our lowest expense rate division.
Pre-tax Segment Profit
We define pre-tax segment profit as earnings before LIFO, securitization effects, interest, other expense and unusual items. Our second quarter pre-tax segment profit increased 31.4 percent to $785 million compared with $598 million for the same period a year ago. Pre-tax segment profit in the first half of 2002 increased 32.1 percent to $1,547 million compared with $1,171 million for the same period a year ago. During the second quarter 2002, Target's pre-tax profit increased 35.5
percent from the same period a year ago while Mervyn's pre-tax profit decreased 1.2 percent and Marshall Field's pre-tax profit improved 18.0 percent. A reconciliation of pre-tax segment profit to pre-tax earnings is provided in the Notes to Consolidated Financial Statements.
Other Performance Factors
The total of interest expense and interest equivalent was $154 million and $289 million in the second quarter and first half of 2002, representing a $32 million and $48 million increase, respectively, from the same periods last year. The increase in interest expense and interest equivalent was due to the repurchase of high interest rate debt at a premium and higher average funded balances, partially offset by the benefit of a lower average portfolio interest rate. For analytical purposes, the amounts that represented payments accrued to holders of sold securitized receivables prior to August 22, 2001 are considered as "interest equivalent." After that date such payments constitute interest expense.
Our estimated annual effective income tax rate is 38.2 percent in 2002, compared with 38.0 percent for 2001.
Analysis of Financial Condition
Our financial condition remains strong. We continue to fund the growth in our business through a combination of internally generated funds and debt.
For the second quarter, total gross receivables serviced increased $1,949 million, or 72.5 percent, over the second quarter of last year. The growth in receivables serviced was driven by the company's national roll-out of the Target Visa card. Inventory increased $141 million, or 3.2 percent, over the second quarter of last year primarily reflecting new square footage growth at Target. The inventory growth was more than fully funded by a $452 million, or 12 percent, increase in accounts payable.
Capital expenditures for the first half of 2002 were $1,479 million, compared with $1,586 million for the same period a year ago. The 2001 expenditures included the acquisition of rights to 35 former Montgomery Wards stores. Investment in Target stores accounted for 94 percent of current year capital expenditures.
Our share repurchase program is described in the Notes to Consolidated Financial Statements.
Credit Card Operations (Millions)
Our credit card programs strategically support our core retail operations and are an integral component of each business segment. Therefore, included in each segment's pre-tax profit is revenue and expense from its credit card operations.
Credit card contribution to pre-tax segment profit on an accounts receivable serviced basis was as follows:
Total receivables serviced were as follows:
*Accounts with two or more payments past due as a percent of total outstanding receivables.
The allowance for doubtful accounts on serviced receivables was as follows:
Store Data
During the quarter, we opened a total of 33 new Target stores. Net of relocations and closings, these openings included 19 discount stores and 7 SuperTarget stores. At August 3, 2002, our number of stores and retail square feet were as follows:
*In thousands, reflects total square feet, less office, warehouse and vacant space
Supplemental Information (Millions)
We provide the following supplemental information derived from our financial statements because we believe it provides a meaningful aid to the analysis of our performance by segment. We define segment EBITDA as pre-tax segment profit before depreciation and amortization expense. Our definition of EBITDA and pre-tax segment profit may differ from definitions used by other companies. This presentation is not intended to be a substitute for GAAP reported measures of profitability and cash flow. A reconciliation of pre-tax segment profit to pre-tax earnings is provided in the Notes to Consolidated Financial Statements. Segment EBITDA and the reconciliation of pre-tax segment profit were as follows:
Outlook for Fiscal Year 2002
For the full year, we believe that we are well positioned to deliver strong growth in revenues and earnings. We expect this growth to be driven by increases in comparable-store sales and contributions from new store growth at Target as well as by continued growth in contribution from our credit card operations, primarily through the Target Visa credit card. For the Corporation overall, gross margin rate and operating expense rates are expected to remain essentially even with 2001.
Interest expense is expected to be considerably higher than interest expense and interest equivalent in 2001 due to higher average funded balances to support expansion of Target stores and credit card receivables.
Forward-Looking Statements
The preceding Management's Discussion and Analysis contains forward-looking statements regarding our performance, liquidity and the adequacy of our capital resources. Those statements are based on our current assumptions and expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. We caution that the forward-looking statements are qualified by the risks and challenges posed by increased competition, shifting consumer demand, changing consumer credit markets, changing capital markets and general economic conditions, hiring and retaining effective team members, sourcing merchandise from domestic and international vendors, investing in new business strategies, achieving our growth objectives, the outbreak of war and other significant national and international events, and other risks and uncertainties. As a result, while we believe that there is a reasonable basis for the forward-looking statements, you should not place undue reliance on those statements. You are encouraged to review Exhibit (99)C attached to our Form 10-K Report for the year ended February 2, 2002, which contains additional important factors that may cause actual results to differ materially from those predicted in the forward-looking statements.
PART II. OTHER INFORMATION
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Certifications
I, Robert J. Ulrich, certify that:
I, Douglas A. Scovanner, certify that: