UNITED STATESSECURITIES 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 29, 2000
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 April 29, 2000 was 454,997,822.
TABLE OF CONTENTS
TARGET CORPORATION
PART I. FINANCIAL INFORMATION
CONSOLIDATED RESULTS OF OPERATIONS
See accompanying Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in this statement are presented on a cash basis and therefore may differ from those shown elsewhere in this 10-Q report.
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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 1999 Annual Shareholders' Report throughout pages 24-37. 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.
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.
Per Share Data
References to earnings per share relate to diluted earnings per share.
Share Repurchase Program
In March 2000, our Board of Directors authorized the repurchase of $1 billion of our common stock, in addition to the $1 billion authorized in January 1999. Repurchases are made primarily in open market transactions, subject to market conditions. Our program also includes the sale of put options that entitle the holder to sell shares of our common stock to us, on a specified date and at a specified price, if the holder exercises the option.
In first quarter 2000, we repurchased 2.1 million shares of our common stock at a total cost of $126 million ($60.63 per share), net of the premium from exercised and expired put options. The $6.9 million of premiums received from the sale of 1.1 million put options during first quarter 2000 were recorded in retained earnings. The put options on 1.6 million shares outstanding at the end of first quarter entitle
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their holders to sell shares of our common stock to us at prices ranging from $56 to $75 per share on specific dates in May through October 2000.
Since the inception of our share repurchase program, we have repurchased a total of 11.5 million shares of our common stock at a total cost of $713 million ($62.23 per share), net of the premium from exercised and expired put options.
Long-term Debt
During the first quarter, we issued $500 million of long-term debt bearing interest at 7.50 percent, maturing in February 2005. Proceeds were used for general corporate purposes.
Segment Disclosures (Millions)
Revenues by segment were as follows:
Pre-tax segment profit and the reconciliation to pre-tax earnings were as follows:
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MANAGEMENT'S DISCUSSION AND ANALYSIS
ANALYSIS OF OPERATIONS
First quarter 2000 net earnings were $239 million, or $.52 per share, compared with $194 million, or $.41 per share, for the same period last year.
Revenues and Comparable-Store Sales
Total revenues for the quarter increased 8.2 percent to $7,746 million compared with $7,158 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 in the first quarter reflected Target's strong comparable-store sales growth and new store expansion.
Year-over-year changes in comparable-store sales by business segment were as follows:
Gross Margin Rate
Our gross margin rate increased primarily due to substantial rate expansion at Target, resulting from improved markup and markdowns. This increase was partially offset, on a total company basis, by the business mix impact of strong growth at Target, our lowest gross margin rate division.
Operating Expense Rate
Our operating expense rate was essentially even with the same period last year, as modest expense pressure was offset by the overall growth of Target, our lowest expense rate division.
Pre-tax Segment Profit
Our first quarter pre-tax segment profit increased 17 percent to $542 million compared with $463 million for the same period a year ago. Pre-tax segment profit is earnings before LIFO, securitization effects, interest, other expense, and unusual items. Target provided substantially all of our pre-tax profit growth in first quarter 2000 with a 26 percent pre-tax profit increase. Mervyn's pre-tax profit increased 3 percent compared with last year; the Department Stores' pre-tax profit decreased 39 percent due to weak sales performance.
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Other Performance Factors
Our proprietary guest credit programs strategically support our core retail operations and are an integral component of each business segment. Therefore, credit contribution is reflected in each business segment's pre-tax profit. Net of all expenses, including bad debt expense, pre-tax contribution from our credit operations for the first quarter increased over the prior year, principally due to continued growth of the Target Guest Card.
Our Consolidated Results of Operations include reductions of finance charge revenue and bad debt expense related to sold securitized receivables. For analytical purposes, the amounts that represent payments to holders of our sold securitized receivables are included in our pre-tax earnings reconciliation in the Notes to Consolidated Financial Statements as "interest equivalent". In first quarter, the total of interest expense and interest equivalent was $108 million, $2 million higher than first quarter last year, due to higher average funded balances, partially offset by a lower average portfolio interest rate.
The last-in, first-out (LIFO) provision, included in cost of retail sales, was zero for both first quarter 2000 and 1999. The cumulative LIFO provision was $53 million at April 29, 2000 and January 29, 2000, and $60 million at May 1, 1999.
The estimated annual effective income tax rate was 38.5 percent in first quarter 2000 compared to 38.8 percent in first quarter 1999.
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, debt and sold securitized receivables.
At April 29, 2000, working capital was $1,177 million, a 27 percent decrease from a year ago, principally due to an increase in current liabilities to fund the growth in our business. Retained securitized receivables increased $215 million, or 16 percent, over last year reflecting continued growth of the Target Guest Card. Inventory increased $129 million, or 3 percent, over last year due to new store growth at Target. The inventory growth was more than fully funded by a $237 million, or 8 percent, increase in accounts payable.
Capital expenditures for the first three months of 2000 were $428 million, compared with $362 million for the same period a year ago. Investment in Target accounted for 90 percent of first quarter 2000 capital expenditures.
Our share repurchase program is described in the Notes to Consolidated Financial Statements. The reduction in shares outstanding and incremental interest expense related to the share repurchase program had an insignificant impact on earnings per share.
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STORE DATA
During the quarter, we opened a total of 16 new Target stores, including two relocations. In addition, we closed five Target stores. At April 29, 2000, our number of stores and retail square feet were as follows:
OUTLOOK FOR FISCAL YEAR 2000
For the remainder of 2000, we expect strong growth in sales, comprised of mid-single-digit comparable store sales growth and new store growth at Target. Our gross margin rate is expected to be essentially even with 1999 for the remainder of the year, and our operating expense rate is expected to benefit modestly from the leveraging of fixed costs. We expect a pre-tax profit margin rate essentially even with last year. We also expect to continue to grow credit's contribution during 2000 by acquiring new accounts and leveraging operating expenses.
The total of interest expense and interest equivalent is expected to be moderately higher than 1999 due to higher average funded balances.
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, 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 January 29, 2000, which contains additional important factors that may cause actual results to differ materially from those predicted in the forward-looking statements.
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PART II. OTHER INFORMATION
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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.
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Exhibit Index
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