Target - 10-Q quarterly report FY

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 April 29, 2006

Commission File Number 1-6049

®

TARGET CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 612/304-6073

Former name, former address and former fiscal year, if changed since last report: N/A

Indicate by check mark whether 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.               Yes  ý   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer  ý   Accelerated filer  o   Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes  o   No  ý

Indicate the number of shares outstanding of each of issuer’s classes of common stock, as of the latest practicable date.

May 27, 2006: 863,403,912 shares outstanding of common stock, par value $.0833.

TABLE OF CONTENTS

TARGET CORPORATION

PART I.  FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF OPERATIONS

(millions, except per share data)

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

*  The January 28, 2006 Consolidated Statement of Financial Position is condensed from the audited consolidated financial statement.

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ INVESTMENT

Dividends  Quarterly dividends declared per share were $.10 and $.08 as of April 29, 2006 and April 30, 2005, respectively.

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(millions)

Amounts presented herein are on a cash basis and therefore may differ from those shown in other sections of this Form 10-Q report.

See accompanying Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Accounting Policies

The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statement disclosures contained in our 2005 Annual Report to Shareholders.  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 statement of quarterly operating results are reflected herein and are of a normal, recurring nature.

Due to the seasonal nature of the retail industry, quarterly revenues, expenses, earnings and cash flows are not necessarily indicative of the results that may be expected for the full fiscal year.

We operate as a single business segment.

2.  New Accounting Pronouncements

In March 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140” (SFAS No. 156), which requires that an entity separately recognize acquired servicing assets and liabilities at fair value. SFAS No. 156 also allows an entity to choose one of two methods when subsequently measuring recorded servicing assets and servicing liabilities: (1) the amortization method or (2) the fair value measurement method. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006.  The adoption of this statement is not expected to have a material impact on our consolidated net earnings, cash flows or financial position.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140” (SFAS No. 155).  SFAS No. 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation in accordance with SFAS No. 133.  SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006.  The adoption of this statement is not expected to have a material impact on our consolidated net earnings, cash flows or financial position.

3.  Earnings per Share

Basic earnings per share (EPS) is net earnings divided by the weighted average number of common shares outstanding during the period.  Diluted EPS includes the incremental shares assumed to be issued upon the exercise of stock options and potentially issuable under performance share arrangements.

Our diluted EPS calculation excludes any shares related to stock options for which the effect would have been antidilutive.  The number of stock options excluded from the calculation of the weighted average shares for diluted EPS because their effects were antidilutive was 7.3 million and none at April 29, 2006 and April 30, 2005, respectively.

4.  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, including an increment of write-offs expected to begin in the third quarter of 2006 associated with our recent mandated increase in minimum monthly payments for certain guests, was $476 million at April 29, 2006, compared to $451 million at January 28, 2006 and $394 million at April 30, 2005.  We estimate future write-offs based on delinquencies, risk scores, aging trends, industry risk trends and our historical experience.  Substantially all accounts continue to accrue finance charges until they are written off.  Accounts are written off when they become 180 days past due.

5.  Contingencies

The terms of a significant portion of the Visa/MasterCard antitrust litigation settlement were finalized during the third quarter of fiscal 2005.  Consequently, we recorded a $27 million ($.02 per share) gain in the third quarter of fiscal 2005 for our share of the proceeds, which we expect to collect during fiscal 2006.  We also expect to receive an additional smaller payment; however, the amount and timing of that payment are not certain at this time.  Accordingly, no additional gain was recorded at April 29, 2006.

We are exposed to claims and litigation arising in 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. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities.  Our policy is to disclose pending lawsuits and other known claims that may have a material adverse impact on our results of operations, cash flows or financial condition. We do not believe that any of the currently identified claims or litigated matters meet this criterion.

6.  Derivatives

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 floating rate. These instruments qualify for hedge accounting and the associated assets and liabilities are recorded in the Consolidated Statements of Financial Position.  The changes in market value of an interest rate swap as well as the offsetting change in market value of the hedged debt are recognized within earnings in the current period. No ineffectiveness was recognized related to these instruments during the thirteen weeks ended April 29, 2006 or April 30, 2005.

At April 29, 2006, January 28, 2006 and April 30, 2005, interest rate swaps were outstanding in notional amounts totaling $3.3 billion, $3.3 billion and $3.5 billion, respectively. At April 29, 2006, the book value of outstanding interest rate swaps and net unamortized gains/(losses) from terminated interest rate swaps was $(50) million, compared to $(21) million at January 28, 2006 and $26 million at April 30, 2005.

7.  Share-Based Compensation

Share-based compensation transactions are accounted for in accordance with the provisions of SFAS No. 123(R), “Share-Based Payment”.  We estimate the fair value of all share-based awards on the date of grant, which we define as the date the award is approved by our Board of Directors (or management with relevant authority).  The substantial majority of granted awards are nonqualified stock options that vest annually in equal amounts over a four-year period and all have an exercise price equal to the fair market value of our common stock on the date of grant.  Generally, we recognize compensation expense for awards on a straight-line basis over the four-year vesting period.  However, in certain circumstances under our share-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. 123(R) and to the extent those awards continue to vest post-employment because the employee met certain age and service requirements on the date of grant, we accelerate expense recognition, such that the value of the award is fully expensed over the employee’s minimum service period instead of over the explicit vesting period.  Awards granted prior to the adoption of SFAS No. 123(R) continue to be expensed over the explicit vesting period.  Total compensation expense related to share-based awards was $20 million and $30 million, respectively, for the thirteen weeks ended April 29, 2006 and April 30, 2005.

8.  Pension and Postretirement Health Care Benefits

We have a qualified defined benefit pension plan covering all U.S. employees who meet age and service requirements. We also have unfunded nonqualified pension plans for employees with qualified plan compensation restrictions. Benefits are provided based on years of service and the employee’s compensation. Upon retirement, 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 consisted of the following:

9.  Repurchase of Stock

In June 2004, our Board of Directors authorized the repurchase of $3 billion of our common stock.  In November 2005, our Board of Directors increased the aggregate authorization by $2 billion, for a total authorization of $5 billion.  We expect to continue to execute this program primarily in open market transactions, subject to market conditions.  We expect to complete the total program by year-end 2008, or sooner.  In the first quarter we repurchased a total of 6.6 million shares of our common stock for a total investment of $350 million ($53.11 per share).  Since the inception of this share repurchase program, we have repurchased a total of 58.1 million shares of our common stock for a total investment of $2,822 million ($48.54 per share).

10.  Cost of Sales and Selling, General and Administrative (SG&A) Expenses

The following illustrates the primary costs classified in each major expense category:

Compensation, benefits, and other expenses for buying, merchandising, and distribution operations classified in selling, general and administrative expenses for the three months ended April 29, 2006 and April 30, 2005 were approximately $294 million and $268 million, respectively.

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Analysis of Results of Operations

Net earnings for the thirteen weeks ended April 29, 2006 were $554 million, or $.63 per share, compared with $494 million, or $.55 per share for the same period last year.  All earnings per share figures refer to diluted earnings per share.

Revenues and Comparable-Store Sales

Sales include merchandise sales, net of expected returns, from our stores and our on-line business, as well as gift card breakage.  Total revenues include sales and net credit card revenues.  Total revenues do not include sales tax as we consider ourselves a pass-through conduit for collecting and remitting sales taxes.  Total revenues for the quarter increased 12.1 percent to $12,863 million compared with $11,477 million for the same period a year ago. Our revenue growth for the quarter is due to the contribution from new store expansion, a 5.1 percent comparable-store sales increase as well as growth in net credit card revenues.  Comparable-store sales are sales from stores open longer than one year, including stores that have relocated and general merchandise stores that have been remodeled. Comparable-store sales do not include sales from general merchandise stores that have been converted to a SuperTarget store format in the past twelve months, sales from stores that were intentionally closed to be remodeled or sales from our on-line business.  The method of calculating comparable-store sales varies across the retail industry.

Gross Margin Rate

Gross margin rate represents gross margin (sales less cost of sales) as a percent of sales.  Cost of sales includes purchases, net of discounts, markdowns, inventory shrink, and other costs associated with our merchandise, as well as all freight to move merchandise and vendor income that is not reimbursement of specific, incremental and identifiable costs.  In the first quarter of 2006, our overall gross margin rate decreased from 32.4 percent to 32.2 percent when compared to the same period last year, primarily reflecting a decline in markup and an increase in markdowns, partially offset by continued favorable shrinkage performance and a shift of our  in-store photo finishing labs from a leased to an owned business model.  Markup is the difference between an item’s cost and its retail price (expressed as a percentage of its retail price).  Factors that affect markup include vendor offerings and negotiations, vendor income, sourcing strategies, market forces like the cost of raw materials and freight and competitive influences.  Markdowns are the reduction in the original or previous price of retail merchandise.  Factors that affect markdowns include inventory management and competitive influences.  The definition and method of calculating markup, markdowns and gross margin varies across the retail industry.

Selling, General and Administrative Expense Rate

Our selling, general and administrative (SG&A) expense rate represents compensation and benefits costs, occupancy and operating costs of retail, distribution, and headquarters facilities, advertising expenses, facilities pre-opening costs, and other administrative costs as a percent of sales. SG&A expenses exclude depreciation and amortization and expenses associated with our credit card operation, which are reflected separately in our Consolidated Statements of Operations. In the first quarter of 2006, our operating expense rate increased from 22.3 percent to 23.0 percent when compared to the same period last year.  This increase is primarily due to increased compensation and utility costs, operating expenses related to the shift of our in-store photo finishing labs to an owned business model, and differences in the timing of expenses.