This summary is based on the third quarter fiscal 2008 earnings call conducted by Target Corp. (TGT) on November 17, 2008.
Management:
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President, Chief Executive Officer, Director: Gregg W. Steinhafel
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Chief Financial Officer, Executive Vice President: Douglas A. Scovanner
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Executive Vice President, Merchandising: Kathryn A. Tesija
Key Investors Issues
- Earnings of $369 million or 49 cents a share decreased 13.8% from $483 million or 56 cents a share in 2007.
- Revenues were up 2% to $15 billion from $14.8 billion in 2007.
- The company repurchased 2.5 million shares of its common stock.
Year to Date Highlights:
- Revenues were $45.4 billion, up 4.4% from the prior year.
- Net income was 12% down to $1.61 billion or $2.07.
Third Quarter Highlights
Net earnings of $369 million or 49 cents a share decreased 13.8% from $483 million or 56 cents a share in the prior year reflecting the significant macroeconomic challenges facing the retail and credit card segments.
- The firm reported a 2% increase in revenue to $15 billion from $14.8 billion in 2007, driven by a 7% growth in credit card revenue and a 2% growth in retail sales.
- Net interest expense increased $58 million due to higher average debt balances supporting capital investment, share repurchase and the receivables portfolio, partially offset by lower average net interest rates.
The company repurchased approximately 2.5 million shares of its common stock at an average price of $54.93, for a total investment of $140 million.
- The outlook for capital investment in 2009 is now more likely to be closer to $3 billion plus or minus than to the previous estimate of nearly $4 billion.
- A substantial portion of this change is the reduced estimate of investment in 2009 in support of stores that would have opened in 2010 and beyond.
- In addition, the firm continues to carefully review and will likely reduce the number of new stores expected to open in the October cycle next year.
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Retail comparable store sales fell 3.3% and this decline, combined with the contribution from new stores, led to total sales growth of only 1.7% to $14.6 billion.
- This performance is meaningfully slower than the already soft sales performance experienced through the first two quarters of the year and below the expectation laid out 90 days ago.
- Against the backdrop of this weaker sales performance, Retail segment EBIT margin rate was stronger than expected, driven by strong gross margin rate performance.
Gross margin rate improved 52 basis points over last year driven by rate improvements within categories which were only partially offset by the mix impact of faster sales in lower margin consumable and commodity categories.
- Category gross margin rate improvement was driven partly by the array of long-term initiatives and was in part the result of a variety of timing issues that lead to variability.
- SG&A expense rate was even with last year''s rate, reflecting disciplined control of the growth in expenses, only 1.7% higher than a year ago, against the backdrop of unexpectedly soft sales performance.
- Strong productivity improvements in stores are being partially offset by challenges in other store expenses, such as utilities.
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Credit Card remains affected by write-offs and the related need to build appropriate reserves.
- The firm saw continued deterioration in delinquency and write-off performance leading to higher-than-expected bad debt expense.
- Average receivables increased 19.4% to $8.7 billion from $7.3 billion in 2007 as average receivables directly funded by Target declined 27% to $3.3 billion from $4.5 billion in 2007, reflecting JPMorgan Chase’s investment in the receivables portfolio.
Segment profitability declined 83% to $35 million from $202 million last year, as a result of a decline in overall portfolio performance, Target’s reduced investment in the portfolio, and a decrease in interest rates.
- Overall portfolio performance declined due to higher bad debt expense resulting from current period write-offs and additions to the reserve for future periods.
- Target continues to tighten all aspects of portfolio underwriting, granting fewer new accounts with lower average credit lines, aggressively reducing open credit lines on many existing accounts, and pursuing more proactive collections.
Operational Highlights:
- To deliver profitable performance in this environment, the firm has carefully reviewed and edited merchandise assortments to ensure that content are relevant for guests.
- It has reinforced the focus on in-stock reliability and superior guest service and controlled the growth of expenses.
- Target has repositioned its in-store signing and holiday marketing campaign to clearly convey its commitment to value, reasserted commitment to being a low price leader in the market, and strategically invested capital.
- It has also suspended share repurchases to retain strong investment grade credit rating.
Merchandise Initiatives:
