UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 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 3, 1997 Commission file number 1-6049 Dayton Hudson Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Minnesota 41-0215170 - -------------------------------------------------------------------------------- (State of incorporation or organization) (I.R.S. Employer Identification No.) 777 Nicollet Mall Minneapolis, Minnesota 55402 - 2055 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (612) 370-6948 - -------------------------------------------------------------------------------- None - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. 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 3, 1997 was 217,659,121.
DAYTON HUDSON CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS PAGE NO. PART I FINANCIAL INFORMATION: ITEM 1 - FINANCIAL STATEMENTS Condensed Consolidated Results of Operations for the Three 1 Months and Twelve Months ended May 3, 1997 and May 4, 1996 Condensed Consolidated Statements of Financial Position at 2 May 3, 1997, February 1, 1997 and May 4, 1996 Condensed Consolidated Statements of Cash Flows for the 3 Three Months ended May 3, 1997 and May 4, 1996 Notes to Condensed Consolidated Financial Statements 4-5 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS 6-9 AND FINANCIAL CONDITION PART II OTHER INFORMATION: ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10 ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 11 Signatures 12 Exhibit Index 13
PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> CONDENSED CONSOLIDATED Dayton Hudson Corporation RESULTS OF OPERATIONS and Subsidiaries (Millions of Dollars, Except Per Share Data) Three Months Ended Twelve Months Ended - ------------------------------------------------------------------------------------------------------------------- MAY 3, May 4, MAY 3, May 4, (Unaudited) 1997 1996 1997 1996* - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> REVENUES $ 5,889 $ 5,380 $ 25,879 $ 24,139 COSTS AND EXPENSES Cost of retail sales, buying and occupancy 4,253 3,949 18,932 17,972 Selling, publicity and administrative 1,034 983 4,340 4,137 Depreciation and amortization 170 157 663 607 Interest expense, net 107 109 440 444 Taxes other than income taxes 117 112 450 426 Real estate repositioning charge - - 134 - - ------------------------------------------------------------------------------------------------------------------- Total Costs and Expenses 5,681 5,310 24,959 23,586 - ------------------------------------------------------------------------------------------------------------------- Earnings Before Income Taxes and Extraordinary Charge 208 70 920 553 Provision for Income Taxes 82 28 363 211 - ------------------------------------------------------------------------------------------------------------------- NET EARNINGS BEFORE EXTRAORDINARY CHARGE $ 126 $ 42 $ 557 $ 342 Extraordinary Charge from Purchase and Redemption of Debt, Net of Tax 21 1 31 1 - ------------------------------------------------------------------------------------------------------------------- NET EARNINGS 105 41 526 341 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- PRIMARY EARNINGS PER SHARE: Earnings Before Extraordinary Charge $ .55 $ .17 $ 2.45 $ 1.48 Extraordinary Charge .10 - .14 - - ------------------------------------------------------------------------------------------------------------------- PRIMARY EARNINGS PER SHARE $ .45 $ .17 $ 2.31 $ 1.48 - ------------------------------------------------------------------------------------------------------------------- FULLY DILUTED EARNINGS PER SHARE: Earnings Before Extraordinary Charge $ .53 $ .16 $ 2.35 $ 1.42 Extraordinary Charge .09 - .13 - - ------------------------------------------------------------------------------------------------------------------- FULLY DILUTED EARNINGS PER SHARE $ .44 $ .16 $ 2.22 $ 1.42 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- DIVIDENDS DECLARED PER COMMON SHARE $ .16 $ .15 $ .64 $ .59 AVERAGE COMMON SHARES OUTSTANDING (Millions): Primary 219.8 217.8 219.2 217.2 Fully Diluted 231.7 230.3 230.9 229.6 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- * Consisted of 53 weeks. </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. 1
<TABLE> <CAPTION> CONDENSED CONSOLIDATED STATEMENTS Dayton Hudson Corporation OF FINANCIAL POSITION and Subsidiaries MAY 3, February 1, May 4, (Millions of Dollars) 1997 1997* 1996 - ---------------------------------------------------------------------------------------------------- <S> <C> <C> <C> ASSETS (UNAUDITED) (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 257 $ 201 $ 230 Accounts receivable 1,547 1,720 1,383 Merchandise inventories 3,330 3,031 3,175 Other 391 488 217 - ---------------------------------------------------------------------------------------------------- Total Current Assets 5,525 5,440 5,005 PROPERTY AND EQUIPMENT 10,593 10,469 10,389 Accumulated depreciation (3,042) (3,002) (3,006) ------ ------ ------ Property and Equipment, net 7,551 7,467 7,383 OTHER 491 482 397 - ---------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 13,567 $13,389 $12,785 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES Current portion of long-term debt and notes payable $ 338 $ 233 $ 362 Accounts payable 2,356 2,528 2,080 Other 1,329 1,350 1,104 - ---------------------------------------------------------------------------------------------------- Total Current Liabilities 4,023 4,111 3,546 LONG-TERM DEBT 5,000 4,808 5,125 DEFERRED INCOME TAXES AND OTHER 623 630 628 CONVERTIBLE PREFERRED STOCK, NET 44 50 51 SHAREHOLDERS' INVESTMENT 3,877 3,790 3,435 - ---------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $13,567 $ 13,389 $12,785 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- COMMON SHARES OUTSTANDING (Millions) 217.7 217.2 216.3 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- * Condensed from the audited financial statements. </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. 2
CONDENSED CONSOLIDATED Dayton Hudson Corporation STATEMENTS OF CASH FLOWS and Subsidiaries (Millions of Dollars) Three Months Ended - ------------------------------------------------------------------------------ MAY 3, May 4, (Unaudited) 1997 1996 - ------------------------------------------------------------------------------ OPERATING ACTIVITIES Net earnings before extraordinary charge $ 126 $ 42 Reconciliation to cash flow: Depreciation and amortization 169 157 Deferred tax provision (28) (28) Other non-cash items affecting earnings (3) 44 Changes in operating accounts providing/(requiring) cash: Accounts receivable 173 127 Merchandise inventories (300) (157) Accounts payable (188) (167) Other 23 73 - ------------------------------------------------------------------------------ Cash Flow (Required)/Provided by Operations (28) 91 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ INVESTING ACTIVITIES Expenditures for property and equipment (254) (350) Proceeds from disposals of property and equipment 102 - - ------------------------------------------------------------------------------ Cash Flow Required for Investing Activities (152) (350) - ------------------------------------------------------------------------------ Net Financing Requirements (180) (259) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ FINANCING ACTIVITIES Increase in notes payable, net 319 131 Additions to long-term debt - 300 Reductions of long-term debt (209) (85) Sale of subsidiary preferred stock 160 - Dividends paid (40) (37) Other 6 5 - ------------------------------------------------------------------------------ Cash Flow Provided by Financing Activities 236 314 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ Net Increase in Cash and Cash Equivalents 56 55 Cash and Cash Equivalents at Beginning of Period 201 175 - ------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 257 $ 230 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Amounts in this statement are presented on a cash basis and therefore may differ from those shown elsewhere in this 10-Q report. Cash paid for income taxes was $133 million and $95 million for the first three months of 1997 and 1996, respectively. Cash paid for interest (including interest capitalized) in the first three months of 1997 and 1996 was $89 million and $69 million, respectively. See accompanying Notes to Condensed Consolidated Financial Statements. 3
NOTES TO CONDENSED CONSOLIDATED Dayton Hudson Corporation FINANCIAL STATEMENTS and Subsidiaries ACCOUNTING POLICIES The accompanying condensed consolidated financial statements should be read in conjunction with the financial statement disclosures contained in our 1996 Annual Shareholders' Report throughout pages 23-34. As explained on page 33 of the Annual Report, 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, earnings for periods which exclude the holiday season are not necessarily indicative of the operating results that may be expected for the full fiscal year. PER SHARE DATA References to earnings per share relate to fully diluted earnings per share. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, EARNINGS PER SHARE, which is required to be adopted at our fiscal year end. At that time we will calculate "basic" and "diluted" earnings per share and restate prior periods. The differences from primary and fully diluted earnings per share will be immaterial. LONG-TERM DEBT During the first quarter of 1997, we repurchased $126 million of long-term debt for $144 million. We also committed to repurchase an additional $126 million of long-term debt for $140 million, which settled in the second quarter. The total debt repurchased had an average rate of approximately 9.5% and an average remaining maturity of 17 years. An extraordinary charge, net of tax, of $21 million ($.09 per share) for early extinguishment of debt was recorded related to the transactions. The replacement of this debt with lower interest rate financing is expected to result in future interest expense savings. In first quarter 1997, Retail Properties, Inc., a subsidiary of the Corporation, was formed as a real estate investment trust (REIT) and issued $160 million of preferred stock with an effective financing cost of 7.9%. The net proceeds from the offering were used for general corporate purposes. The subsidiary preferred stock is included in Long-Term Debt in our Consolidated Statement of Financial Position at May 3, 1997. The preferred stock may be redeemed if, as a result of a change in tax laws, rules or regulations, certain tax attributes of the REIT transaction are recharacterized. REAL ESTATE REPOSITIONING In first quarter 1997, Mervyn's exited the Florida and Georgia markets and closed one other under performing store; and DSD closed one store. Exit costs incurred in the quarter approximated $12 million and were charged against the reserve established in fourth quarter 1996. 4
RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current-year presentation. SUBSEQUENT EVENT The Company has historically deducted for income tax purposes the inventory shortage expense that it has accrued for book purposes, consistent with industry practice. Effective with the Company's 1983 tax return, the Internal Revenue Service (IRS) challenged the practice of deducting accrued shortage not supported with a year-end physical inventory. On June 11, 1997, the United States Tax Court returned a judgment on this issue in favor of the IRS. The Company continues to believe strongly in its position and will seek a review by the full Tax Court and/or an appeal to the U.S. 8th Circuit Court of Appeals. In the event that the Company's efforts are unsuccessful, the Corporation will owe $50 to $60 million in federal and state taxes and net accrued interest. A portion of this potential liability is related to timing differences and the remainder, if any, will be charged against existing Company reserves. Accordingly, even in the event that the Company's efforts are unsuccessful, no impact on the Company's results of operations is expected. 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION FIRST QUARTER 1997 ANALYSIS OF OPERATIONS Our first quarter 1997 net earnings were $105 million, or $.44 per share, compared with $41 million, or $.16 per share, for the same period last year. First quarter 1997 and 1996 net earnings include extraordinary charges, net of tax, related to the early extinguishment of debt of $21 million ($.09 per share) and $1 million, respectively. The improvement in first quarter net earnings is primarily due to strong sales and profit performance at Target, margin improvement at Mervyn's and a major operating expense reduction initiative at DSD. The following table reflects the significant components of the year-over-year change in our earnings per share: First Quarter ------------------------------------------------------------- 1996 Earnings Per Share $.16 Changes in earnings per share due to: Revenues .15 Gross margin rate .11 Operating expense rate .12 Start-up expense (.01) Extraordinary charge from redemption of debt (.09) ------------------------------------------------------------- 1997 Earnings Per Share $.44 ------------------------------------------------------------- ------------------------------------------------------------- Strong growth at Target, our lowest margin and expense rate division, continues to impact our business mix. As a result, the Corporation's overall revenue growth and total operating expense rate were favorably affected, while the gross margin rate was unfavorably affected. If the sales mix between divisions had remained constant with first quarter 1996, the gross margin rate variance would have been $.04 more favorable while the operating expense rate would have been $.05 less favorable. The overall gross margin rate favorability to prior year is the result of improvement at Target and Mervyn's offset somewhat by higher markdowns at DSD and Target's growing influence on the Corporation's overall margin structure. The overall operating expense rate improvement reflects strong sales leveraging and operating expense improvement at Target, as well as Target's increasing influence on our expense rate structure, and DSD's significant operating expense reduction initiative, partially offset by poor sales leveraging at Mervyn's and DSD. 6
REVENUES - -------- Total revenues increased 9% in the first quarter, while comparable-store revenues (revenues from stores open longer than a year) rose 4%. Revenues by business segment were as follows: First Quarter Percentage Change --------------------- ------------------- MAY 3, May 4, All Comparable (Millions of Dollars) 1997 1996 Stores Stores ------ ------ ------ ---------- Target $4,254 $3,723 14% 6% Mervyn's 946 967 (2) - DSD 689 690 - (3) ------ ------ ------ ---------- Total $5,889 $5,380 9% 4% ------ ------ ------ ---------- ------ ------ ------ ---------- Target's increase over the prior year reflects the strength of base-business sales, new-store expansion and increased sales and credit revenues associated with the continued growth of the Target Guest Card. Mervyn's and DSD were also positively impacted by a year-over-year increase in credit revenues. Mervyn's total revenues decreased 2% reflecting the closure of 25 stores while comparable-store revenues were equal to first quarter last year. DSD's total revenues were flat to last year while comparable-store revenues declined as DSD continues to refine the execution of its merchandise strategy. OPERATING PROFIT - ---------------- Our first quarter 1997 operating profit increased 68% over the prior year. Operating profit is LIFO earnings from operations before corporate expense, interest and income taxes. Operating profit by business segment was as follows: Three Months Ended ---------------------------------- MAY 3, May 4, Percentage (Millions of Dollars) 1997 1996 Increase ------ ------ ---------- Target $ 251 $ 133 88% Mervyn's 51 39 30 DSD 35 28 26 ------ ------ ------ Total $ 337 $ 200 68% ------ ------ ------ ------ ------ ------ Operating profit reflects a reduction of credit revenues and a reduction of bad debt expense related to the sale of securitized accounts receivable and, as of January 1, 1997, the net effect of SFAS No. 125. For the three months ended May 3, 1997, the net impact on operating profit by business segment was a reduction of $1 million for Target, an increase of $1 million for Mervyn's and no impact for DSD. In first quarter 1996, the net operating profit reductions were $1 million, $3 million and $2 million for Target, Mervyn's and DSD, respectively. 7
TARGET'S first quarter operating profit increased 88% over the same period last year, reflecting comparable-store revenue growth of 6%, as well as gross margin rate and operating expense rate improvements. Its gross margin rate improved primarily due to substantially better markup while the operating expense rate was favorable due to strong sales leveraging and continued progress on Target's multi-year effort to reduce operating expenses as a percentage of sales. Target is on-track to realize $60 - $70 million in annualized cost savings identified as part of its multi-year cost reduction program. For the balance of 1997, Target's rate of operating profit growth is expected to slow somewhat as the gross margin rate annualizes against the unusually strong improvements experienced in the last four quarters. The operating expense rate should continue to be favorable to last year, reflecting further progress on its expense reduction program and favorable sales leveraging. MERVYN'S operating profit increased 30% over first quarter last year. Its gross margin rate increased over the prior year due to lower markdowns. Despite good expense control, the operating expense rate was unfavorable to last year due to poor sales leveraging and higher bad debt expense associated with higher credit revenues. In 1997, despite lost revenue and profits from the previously announced 25 to 35 store closings, Mervyn's is expected to continue to achieve year-over-year operating profit growth through modest comparable-store revenue growth and moderate gross margin rate favorability versus last year. DSD'S first quarter operating profit increased 26% over the same period last year as operating expense improvement was somewhat offset by gross margin deterioration. The first quarter operating expense rate improved over last year due to year-to-date savings associated with its $50 million operating expense reduction initiative. The gross margin rate decreased reflecting higher markdowns. DSD's 1997 operating profit is expected to be substantially better than last year, reflecting modest gross margin rate favorability and continued operating expense rate improvement. Other Performance Factors - ------------------------- The last-in, first-out (LIFO) provision, included in cost of retail sales, was zero for both first quarter 1997 and 1996. The cumulative LIFO provision was $86 million at May 3, 1997 and February 1, 1997, and $77 million at May 4, 1996. Net interest expense for the quarter decreased $2 million over last year reflecting savings from lower average debt balances. Annual interest expense for 1997 is expected to be somewhat lower than 1996. The estimated annual effective income tax rate for 1997 is 39.5%, unchanged from the first quarter 1996 rate. 8
ANALYSIS OF FINANCIAL CONDITION Our financial condition remains strong. The ratio of debt to total capitalization attributable to our retail operations was 52% at the end of first quarter 1997, compared with 56% a year ago and 50% at year end. Due to the seasonality of our business, quarterly comparisons will fluctuate, but we expect the ratio throughout 1997 to remain lower than last year. At May 3, 1997, working capital was $1,502 million, up 3% compared with a year ago. Accounts receivable declined 10% from year end, reflecting a typical reduction from seasonally high levels. However, accounts receivable increased 12% from first quarter last year, primarily as a result of expansion of the Target Guest Card. Compared with last year, merchandise inventories increased approximately $155 million, or 5%, as a result of new store growth at Target, partially offset by good inventory control at all divisions. The inventory growth was more than fully funded by a $276 million, or 13%, increase in accounts payable. First quarter 1997 capital expenditures were $254 million, as expected; this compares with $350 million for the same period a year ago. Approximately 83% of these expenditures were made by Target, 5% by Mervyn's and 12% by DSD. Proceeds of $102 million were received during the quarter from the disposal of property and equipment, primarily from the sale of Mervyn's Florida and Georgia stores. We continue to fund the growth in our business through a combination of debt, securitization of accounts receivable and retained earnings. Our debt has decreased $149 million compared with a year ago, while our shareholders' investment has grown by $442 million. STORE DATA During the quarter, we opened 16 net new Target stores and 1 Mervyn's store. In connection with the real estate repositioning initiated in fourth quarter 1996, we closed 25 Mervyn's stores and one DSD store. At May 3, 1997, Target operated 752 stores in 39 states, Mervyn's operated 276 stores in 15 states and DSD operated 64 stores in nine states. Retail square footage was as follows: (In thousands, reflects total square MAY 3, February 1, May 4, feet, less office, warehouse and 1997 1997 1996 vacant space) ------------------------------------------------------------------------- Target 81,353 79,360 73,301 Mervyn's 22,424 24,518 24,281 DSD 13,995 14,111 13,870 ------------------------------------------------------------------------- Total 117,772 117,989 111,452 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 9
PART II. OTHER INFORMATION ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The Company held its Annual Shareholders' Meeting on May 21, 1997. c) (1). The shareholders voted for four director nominees for three-year terms. The vote was as follows: Name of Candidate For Withheld ----------------- ----------- --------- Betty Ruth Hollander 200,130,783 2,762,244 Richard M. Kovacevich 200,085,405 2,807,622 Solomon D. Trujillo 200,104,031 2,788,996 Robert J. Ulrich 199,817,198 3,075,829 There were no abstentions and no broker non-votes. (2). The shareholders voted to approve the appointment of Ernst & Young LLP as independent auditors of the Corporation. The vote was 201,640,709 for, 488,282 against and 764,036 abstentions. There were no broker non-votes. (3). The shareholders voted to amend the Corporation's Long-Term Incentive Plan of 1981 (the LTIP) for the purpose of permitting the Corporation to continue deducting for federal tax purposes certain compensation under the LTIP. The vote was 193,880,789 for, 7,433,939 against and 1,578,299 abstentions. There were no broker non-votes. (4). The shareholders voted to amend the Corporation's Executive Incentive Plan (the EIP) for the purpose of permitting the Corporation to continue deducting for federal tax purposes certain compensation under the EIP. The vote was 193,235,212 for, 7,749,442 against and 1,908,373 abstentions. There were no broker non-votes. 10
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits (2). Not applicable (4). Instruments defining the rights of security holders, including indentures. Registrant agrees to furnish the Commission on request copies of instruments with respect to long-term debt. (10). A. Agreement B. Director Stock Option Plan of 1995 (as amended January 1, 1997) (11). Statements re Computations of Per Share Earnings (12). Statements re Computations of Ratios (15). Not applicable (18). Not applicable (19). Not applicable (22). Not applicable (23). Not applicable (24). Not applicable (27). Financial Data Schedule (99). Not applicable b) Reports on form 8-K. Registrant did not file any reports on Form 8-K during the quarter ended May 3, 1997. 11
SIGNATURES ---------- 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. DAYTON HUDSON CORPORATION Registrant Date: June 17, 1997 By /s/ Douglas A. Scovanner ------------------------ Douglas A. Scovanner Senior Vice President and Chief Financial Officer Date: June 17, 1997 By /s/ J.A. Bogdan ---------------------- JoAnn Bogdan Controller and Chief Accounting Officer 12
EXHIBIT INDEX - ------------- (10). A. Agreement B. Director Stock Option Plan of 1995 (as amended January 1, 1997) (11). Statements re Computations of Per Share Earnings (12). Statements re Computations of Ratios (27). Financial Data Schedule 13