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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 May 5, 2001
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 May 5, 2001 was 900,073,471.
TABLE OF CONTENTS
TARGET CORPORATION
PART I. FINANCIAL INFORMATION
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.
Accounting Policies
The accompanying consolidated financial statements should be read in conjunction with the financial statement disclosures contained in our 2000 Annual Shareholders' Report throughout pages 24-36. 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.
Derivatives
In the first quarter, we adopted Financial Accounting Standards Board Statement (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. The adoption did not have a material impact on our earnings or financial position.
From time to time we use interest rate swaps to hedge our exposure to interest rate risk. The fair value of the swaps is reflected in the financial statements and any hedge ineffectiveness is recognized in interest expense. The fair value of existing swaps is immaterial.
Receivable-backed Securities
In the first quarter, we adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," that replaces in its entirety SFAS 125. We made all newly required disclosures for the year ended February 3, 2001. The adoption did not have a material impact on our earnings or financial position. Also, as required, we will apply the new rules prospectively to transactions beginning in 2001.
Per Share Data
In 2000, we distributed to shareholders one additional share of common stock for each share owned, resulting in a two-for-one common share split. All earnings per share, dividends per share and common shares outstanding reflect this share split.
References to earnings per share relate to diluted earnings per share.
Share Repurchase Program
Prior to 2001, our Board of Directors authorized the repurchase of $2 billion of our common stock. 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 the first quarter of 2001, we repurchased 0.3 million shares of our common stock at a total cost of $6 million ($16.22 per share), net of the premium from exercised and expired put options. No put options were sold during the first quarter. The put options on 1.4 million shares outstanding at the end of first quarter entitle their holders to sell shares of our common stock to us at prices ranging from $28.60 to $32.63 per share on specific dates in May 2001 and June 2001.
Since the inception of our share repurchase program, we have repurchased a total of 40.3 million shares of our common stock at a total cost of $1,184 million ($29.39 per share), net of the premium from exercised and expired put options.
Long-term Debt
During the first quarter we repurchased $103 million of long-term debt with a weighted average interest rate of approximately 9.3 percent.
Also during the first quarter we issued $500 million of long-term debt, bearing interest at 5.50 percent, maturing in April 2007. Subsequent to the first quarter, we issued $550 million of notes bearing interest at 5.95 percent, maturing in May 2006. Proceeds from these issuances 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:
Analysis of Operations
First quarter 2001 net earnings before extraordinary items were $254 million, or $.28 per share, compared with $239 million, or $.26 per share, for the same period last year.
Revenues and Comparable-Store Sales
Total revenues for the quarter increased 7.7 percent to $8,345 million compared with $7,746 million for the same period a year ago. Total comparable-store sales (sales from stores open longer than one year) increased 1.7 percent. Our revenue growth reflected Target's new store expansion, combined with growth in credit revenue.
Year-over-year changes in comparable-store sales by business segment were as follows:
Gross Margin Rate
In the first quarter, our gross margin rate was unfavorable to last year, principally due to the impact of growth at Target, our lowest gross margin rate division.
Operating Expense Rate
Our operating expense rate improved compared to last year, principally due to the impact of growth at Target, our lowest expense rate division.
Pre-tax Segment Profit
Our first quarter pre-tax segment profit increased 6 percent to $573 million compared with $542 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's pre-tax profit increased 8 percent and Mervyn's pre-tax profit increased 4 percent. Marshall Field's pre-tax profit decreased 20 percent, primarily due to weak sales performance.
Other Performance Factors
Our proprietary credit 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 receivable-backed securities not publicly held (the form in which we own the assets representing our credit card receivables which are on our balance sheet). Income on receivable-backed securities not publicly held increased from the prior year due to improved performance of the receivable portfolios underlying the securities, including improved finance charge revenue, favorable trends in delinquencies and write-offs, and continued growth of the Target Guest Card.
Our Consolidated Results of Operations include reductions of finance charge revenue and expense related to publicly held receivable-backed securities. 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." The total of
interest expense and interest equivalent was $118 million in the first three months of 2001, representing a $10 million increase from 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 first quarter 2001 and 2000. The cumulative LIFO provision was $57 million at May 5, 2001 and $53 million at April 29, 2000.
The estimated annual effective income tax rate was 38.0 percent in the first quarter of 2001, compared to 38.5 percent in the first quarter of 2000.
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.
Receivable-backed securities not publicly held increased $281 million, or 19 percent, over last year reflecting continued growth of the Target Guest Card. Inventory increased $386 million, or 10 percent, over last year primarily due to new store growth at Target. This increase was slightly higher than our sales increase for the quarter.
Capital expenditures for the first three months of 2001 were $857 million, compared with $428 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 accounted for 96 percent of current year 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.
Store Data
During the quarter, we opened a total of 20 new Target stores, including six relocations. At May 5, 2001, our number of stores and retail square feet were as follows:
Outlook for Fiscal Year 2001
For the full year, we expect to deliver reasonable growth in revenues and earnings, in the context of the broader economic environment. We expect this growth to be driven principally by increases in comparable-store sales and contributions from new store growth at Target. Our credit operations are also expected to contribute to our earnings growth as we continue to open new accounts and invest in programs that reinforce the use of our proprietary cards.
We are currently analyzing the results of a pilot program to offer an enhanced Target credit card with Visa capabilities. We may conduct further tests or proceed with a rollout of this program this year. If such a rollout proceeds in 2001, it is not expected to have a meaningful effect on this year's consolidated results of operations, although it could lead to considerably higher levels of serviced receivables.
The total of interest expense and interest equivalent in 2001 is expected to be moderately higher than 2000 due to higher average funded balances, partially offset by a lower average portfolio interest rate.
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 February 3, 2001, 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
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
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