Target - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, 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   April 30, 2005

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, (2) has been subject to such filing requirements for the past 90 days, and (3) is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

The number of shares outstanding of common stock as of April 30, 2005 was 883,370,639.

TABLE OF CONTENTS

TARGET CORPORATION

PART I.  FINANCIAL INFORMATION

See accompanying Notes to Consolidated Financial Statements.

* The January 29, 2005 Consolidated Statement of Financial Position is condensed from the audited consolidated financial statement.

See accompanying Notes to Consolidated Financial Statements.

Amounts in this statement are presented on a cash basis and therefore may differ from those shown elsewhere in this 10-Q report. See accompanying Notes to Consolidated Financial Statements.

Accounting Policies

The accompanying consolidated financial statements should be read in conjunction with the financial statement disclosures contained in our 2004 Annual Report to Shareholders throughout pages 28-37.  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, except for the adjustments in relation to the sale of Marshall Field’s and Mervyn’s.

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.

We operate as a single business segment.

Discontinued Operations

As previously disclosed in our 2004 Annual Report to Shareholders, we completed the sale of our Marshall Field’s and Mervyn’s businesses during 2004.  In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the financial results of Marshall Field’s and Mervyn’s are reported as discontinued operations.

There were no financial results included in discontinued operations for the three months ended April 30, 2005.  For the three months ended May 1, 2004, total revenue included in discontinued

operations was $1,406 million and earnings from discontinued operations, net of $25 million tax, was $40 million.

There were no assets or liabilities of Marshall Field’s or Mervyn’s included in our Consolidated Statements of Financial Position at April 30, 2005 or January 29, 2005.  The major classes of assets and liabilities of discontinued operations in the Consolidated Statements of Financial Position at May 1, 2004 are as follows:

Earnings Per Share

Basic earnings per share (EPS) is net earnings divided by the average number of common shares outstanding during the period.  Diluted EPS includes the incremental shares that are assumed to be issued upon the exercise of stock options.

There were no antidilutive shares issuable upon exercise at April 30, 2005 or May 1, 2004.

Accounts Receivable

Accounts receivable are recorded net of an allowance for expected losses. The allowance, recognized in an amount equal to the anticipated future write-offs based on delinquencies, risk scores, aging trends, industry risk trends and our historical experience, was $394 million at April 30, 2005, compared to $387 million at January 29, 2005 and $349 million at May 1, 2004.

Contingencies

We expect to receive a share of proceeds from the $3 billion Visa / MasterCard antitrust litigation settlement, as we are a member of the class action lawsuit.  The amount and timing of the payment are not certain at this time; however, we now expect to obtain greater clarity on this issue during 2005.

We are exposed to claims and litigation arising out of 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. Our policy is to disclose pending lawsuits and other known claims that we expect may have a material impact on our results of operations, cash flows or financial condition. Other than the matter discussed above, we do not believe any of the currently identified claims and litigated matters meet this criterion, either individually or in the aggregate.

Long-Term Debt and Derivatives

There were no significant long term debt repurchases during the first quarter of 2005.  During the first three months of 2004, we repurchased $88 million of long-term debt with a weighted average interest rate of 6.7 percent. These transactions resulted in a pre-tax loss of $15 million ($.01 per share), which is included in net interest expense in the Consolidated Results of Operations.

Our derivative instruments are primarily interest rate swaps which hedge the fair value of certain debt by effectively converting interest from a fixed rate to a variable rate. The fair value of our outstanding interest rate swaps is reflected in the Consolidated Statements of Financial Position as a component of other current assets, other non-current assets or other non-current liabilities. No ineffectiveness was recognized related to these instruments.

At April 30, 2005, January 29, 2005 and May 1, 2004, interest rate swaps were outstanding in notional amounts totaling $3,500 million, $2,850 million and $2,150 million, respectively. The recent increase in swap exposure relates to our new practice of assessing finance charges on our credit card receivables at a prime-based floating rate instead of a fixed rate. At April 30, 2005, the fair value of outstanding interest rate swaps and net unamortized gains from terminated interest rate swaps was $26 million, compared to $45 million at January 29, 2005 and $52 million at May 1, 2004.

Stock-Based Compensation

We elected to adopt the provisions of SFAS No. 123R, “Share-Based Payment,” in the fourth quarter of 2004 under the modified retrospective transition method.  SFAS No. 123R eliminates accounting for share-based compensation transactions using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and requires instead that such transactions be accounted for using a fair-value-based method.  Under the modified retrospective transition method, all prior period financial statements were restated in the fourth quarter of 2004 to recognize compensation cost in the amounts previously reported in the Notes to Consolidated Financial Statements.  Total compensation expense related to stock-based compensation was $30 million for the three months ended April 30, 2005 and $18 million for the three months ended May 1, 2004.

In certain circumstances under our stock-based compensation plans, we allow for the vesting of employee awards to continue post-employment.  Accordingly, for awards granted subsequent to our adoption of SFAS No. 123R and to the extent those awards continue to vest post-employment, we have accelerated expense recognition, such that the value of the award is fully expensed over the service period.  The affect of this accelerated recognition of expense is included in the compensation expense amount disclosed above for the three months ended April 30, 2005.  Awards granted prior to the adoption of SFAS No. 123R will continue to be expensed over the explicit vesting period in accordance with SEC guidelines.  The impact of using the accelerated expense recognition policy prior to the adoption of SFAS No. 123R would have been immaterial to the compensation expense recognized for the three months ended May 1, 2004.

Defined Contribution Plans

In addition to our defined contribution 401(k) plan, we maintain non-qualified, unfunded plans that allow participants who are otherwise limited by qualified plan statutes or regulations to defer compensation and earn returns tied to the results of either our 401(k) plan investment choices, including Target stock, or in the case of a frozen plan, market levels of interest rates, plus an additional return determined by the terms of each plan.  During the first quarter of 2004, certain current and retired executives accepted our offer to exchange our obligation to them under our frozen non-qualified plan for cash or deferrals in our current non-qualified plans, which resulted in expense of approximately $10 million for the three month period ended May 1, 2004.  There were no such exchange transactions during the three months ended April 30, 2005.

Pension and Postretirement Health Care Benefits

We have a qualified defined benefit pension plan that covers all U.S. employees who meet certain age, length of service and hours worked per year requirements. We also have unfunded non-qualified pension plans for employees who have qualified plan compensation restrictions. Benefits are provided based upon years of service and the employee’s compensation. Retired employees 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.

Net Pension Expense

Analysis of Continuing Operations

Earnings from continuing operations for the three month period ended April 30, 2005 were $494 million, or $.55 per share, compared with $392 million, or $.43 per share, for the same period last year.

Revenues and Comparable-Store Sales

Total revenues for the quarter increased 12.7 percent to $11,477 million compared with $10,180 million for the same period a year ago. Our revenue growth for the quarter is due to the contribution from new store expansion, a 6.2 percent comparable-store sales increase and growth in net credit revenues.  Comparable-store sales are sales from stores open longer than one year, including stores that were moved to a new location or remodeled as a general merchandise store.

Gross Margin Rate

Gross margin rate represents gross margin (sales less cost of sales) as a percent of sales.  Cost of sales primarily include purchases, markdowns, shortage and other costs associated with our merchandise.  In the first quarter, our overall gross margin rate improved when compared to the prior year, reflecting favorable markup and shortage performance.

Selling, General and Administrative Expense Rate

Our selling, general and administrative (SG&A) expense rate represents payroll, benefits, advertising, distribution, buying and occupancy, start-up and other expenses as a percent of sales. SG&A expense excludes depreciation and amortization and expenses associated with our credit card operations, which are reflected separately in our Consolidated Results of Operations. In the first quarter of 2005, our operating expense rate was unfavorable to prior year, with about half of the variance due to differences in the timing of expenses and to strategies that drive incremental gross margin rate.

Other Performance Factors

In the first quarter of 2005, total net interest expense was $111 million, representing a $32 million decrease from the first quarter of 2004. The decrease in net interest expense reflects the benefit of lower average funded balances resulting from the application of proceeds from the Marshall Field’s and Mervyn’s sale transactions and a lower loss on debt repurchase, partially offset by a higher average portfolio interest rate.

The effective income tax rate for the first quarter of 2005 was 37.9 percent versus 37.8 percent for the first quarter of 2004.

Credit Card Contribution

Our credit card program strategically supports our core retail operation and remains an important contributor to our overall profitability.  Credit card contribution to continuing operations was as follows:

The allowance for doubtful accounts on receivables was as follows:

A summary of other continuing credit card contribution information is as follows:

Average receivables rose 11 percent from the same period a year ago and net write-off and delinquency rates improved significantly, reflecting the excellent credit quality of our portfolio.

Analysis of Discontinued Operations

There were no financial results included in discontinued operations for the three months ended April 30, 2005. For the three months ended May 1, 2004, total revenue included in discontinued operations was $1,406 million and earnings from discontinued operations, net of $25 million tax, was $40 million.

Analysis of Financial Condition of Continuing Operations

Liquidity and Capital Resources

Our financial condition remains strong. In assessing our financial condition, we consider factors such as cash flows provided or used by operations, capital expenditures and debt service obligations. We continue to fund the growth in our business and the execution of our share repurchase program through a combination of internally generated funds and the utilization of a portion of the proceeds from the dispositions of Marshall Field’s and Mervyn’s.

During the first quarter, gross receivables increased $562 million, or 12.0 percent, over the first quarter of last year. Inventory increased $934 million, or 20.9 percent, over the first quarter of last year, reflecting the natural increase required to support additional square footage, same-store sales growth and our strategic focus on increasing direct imports. In addition, approximately 9 percent of the increase in inventory reflects the refinement of our measurement of the point in our supply chain at which effective ownership occurs. The growth in inventory was mainly funded by a $755 million, or 17.3 percent, increase in accounts payable.

Capital expenditures for the first three months of 2005 were $717 million, compared with $632 million for the same period a year ago.  This increase is primarily attributable to growth in our new store expansion program.

Store Data

During the quarter, we opened a total of 26 new stores. Net of relocations and closings, these openings included 17 general merchandise stores and 5 SuperTarget stores. At April 30, 2005, our number of stores and retail square feet were as follows:

* In thousands, reflects total square feet, less office, warehouse and vacant space.

Outlook for Fiscal Year 2005

We expect a low double-digit increase in revenue in 2005, resulting from the combination of net new square footage growth of approximately 8 percent, an expected mid-single digit increase in comparable store sales and growth in our credit card revenues.  We believe this increase in revenue, combined with other factors, will contribute to meaningful growth in earnings and earnings per share from continuing operations for the full year.

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 (including the effects of competitor liquidation activities), shifting consumer demand, changing consumer credit markets, changing health care costs, 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 this Form 10-Q Report, which contains additional important factors that may cause actual results to differ materially from those predicted in the forward-looking statements.

As of the end of the period covered by this quarterly report, we conducted an evaluation, under supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (Exchange Act).  Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective.  Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the Securities and Exchange Commission (SEC) under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table presents information with respect to purchases of common stock of the Company made during the three months ended April 30, 2005, by Target Corporation or any “affiliated purchaser” of Target Corporation, as defined in Rule 10b-18(a)(3) under the Exchange Act.

(1)   In June of 2004, our Board of Directors authorized the repurchase of $3 billion of our common stock. The repurchase of our common stock is expected to be made primarily in open market transactions, subject to market conditions, and is expected to be completed over two to three years. Since the inception of this share repurchase program, we have repurchased a total of approximately 38 million shares of our common stock at a total cost of approximately $1,728 million ($45.89 per share).

(2)   In addition to shares purchased under our share repurchase program, we acquire shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price on option exercises or tax withholding on equity awards as part of our long-term incentive plans. From January 30, 2005 through April 30, 2005, we acquired 957 shares at an average price per share of $52.25 which were tendered pursuant to our long-term incentive plans and are not included in the table above.

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

a)        The Corporation held its Annual Shareholders’ Meeting on May 18, 2005.

b)       The shareholders voted for the election of two nominees to serve as Class II directors for three-year terms expiring in 2008 and until their successors are elected. The vote was as follows:

There were no abstentions and no broker non-votes.

c)        The shareholders voted to approve the appointment of Ernst & Young LLP as independent auditors of the Corporation for fiscal year 2005.  The vote was 787,590,893 for, 13,971,067 against and 6,032,108 abstentions.  There were no broker non-votes.

ITEM 6 - EXHIBITS

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.

Exhibit Index