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 November 2, 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 (Exchange Act) 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 November 2, 2002 was 908,771,586.

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.

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 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. We also terminated an interest rate swap with a notional amount of $500 million, which did not have a material impact on net earnings.

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 November 2, 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 third quarter and year-to-date amortization expense by approximately $3 million and $8 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 41.0 million shares of our common stock at a total cost of $1,199 million ($29.27 per share), net of the premium from exercised and expired put options.

Common stock repurchases under our program have been essentially suspended and did not have a material impact on our third quarter or year-to-date 2002 earnings and financial position.

Long-term Debt

During the third quarter and first nine months of 2002, we repurchased $16 million and $66 million, respectively, of long-term debt with a weighted average interest rate of approximately 9.6 percent and 9.7 percent, respectively. These transactions resulted in a pre-tax loss of $5 million and $24 million (less than $.01 and $.02 per share, respectively) in the third quarter and first nine months of 2002, respectively, which is included in interest expense in the Consolidated Results of Operations.

During the third quarter, we issued $600 million of long-term debt, bearing interest at 6.35 percent, maturing in November 2032. Proceeds of this issuance were used for general corporate purposes.

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 $360 million on November 2, 2002 and $261 million on February 2, 2002.

Benefit Plans

During the year, 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 have resulted in year-to-date pre-tax net expense of $35 million ($.02 per share). This amount reflects $47 million 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

Third quarter 2002 net earnings were $277 million, or $.30 per share, compared with $185 million, or $.20 per share, for the same period last year. Net earnings for the first nine months of 2002 were $966 million, or $1.06 per share, compared with $710 million, or $.78 per share for first nine months of 2001. Included in the third quarter and year-to-date 2001 earnings is an unusual pre-tax charge of $67 million, or $.05 per share, to restore $800 million (face value) of previously sold receivable-backed securities to our financial statements at their fair value.

Revenues and Comparable-Store Sales

Total revenues for the quarter increased 9.3 percent to $10,194 million compared with $9,331 million for the same period a year ago. Total comparable-store sales (sales from stores open longer than one year) increased 0.1 percent. Our revenue growth reflected Target's new store expansion and 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 third quarter, our gross margin rate was favorable to the third quarter of last year, reflecting gross margin rate improvement at all three divisions.

Operating Expense Rate

The operating expense rate represents selling, general and administrative expense as a percent of sales. In the third quarter, our operating expense rate was unfavorable to the third 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 third quarter pre-tax segment profit increased 19.5 percent to $623 million compared with $522 million for the same period a year ago. Pre-tax segment profit in the first nine months of 2002 increased 28.2 percent to $2,170 million compared with $1,693 million for the same period a year ago. In third quarter 2002, Target's pre-tax profit increased 21.2 percent from the same period a year ago while Mervyn's pre-tax profit increased 10.4 percent and Marshall Field's pre-tax profit increased 8.3 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 $145 million and $434 million in the third quarter and first nine months of 2002, representing a $21 million and $69 million increase, respectively, from the same periods last year. The increase in interest expense and interest equivalent was due to higher average funded balances and the repurchase of high interest rate debt, 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 third quarter, total gross receivables serviced increased $2,317 million, or 79.2 percent, compared with the third quarter of last year. The growth in receivables serviced was driven by continued growth in usage of the Target Visa card. Inventory decreased $168 million, or 2.9 percent, compared with the third quarter of last year primarily reflecting conservative inventory management and a year-over-year change in timing of inventory receipts.

Capital expenditures for the first nine months of 2002 were $2,393 million, compared with $2,418 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 92 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 49 new Target stores. Net of relocations and closings, these openings included 29 discount stores and 12 SuperTarget stores. At November 2, 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 earnings growth in line with our overall objective to achieve average annual earnings per share growth of 15 percent or more over time. This outlook reflects our significant gross margin rate expansion year-to-date, combined with our expectation of a double-digit increase in revenue for the full year. Our revenue growth is driven by modest growth in comparable store sales as well as contribution from new stores. Additionally, in 2002 we expect profitable incremental growth in our credit card operations, primarily due to the expanded usage and penetration of Target Visa.

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.

Within the 90 days prior to the filing date of this 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-14(c) and 15d-14(c) 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 have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation date.

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:

1.

I have reviewed this quarterly report on Form 10-Q of Target Corporation;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b.

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c.

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a.

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

I, Douglas A. Scovanner, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Target Corporation;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a.

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b.

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c.

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a.

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b.

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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