This summary is based on the first quarter fiscal 2008 earnings call conducted by Target Corp. (TGT) on May 20, 2008.
Management:
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President: Gregg Steinhafel
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Executive Vice President and Chief Financial Officer: Douglas Scovanner
Key Investors Issues
- Net earnings of $602 million or 74 cents, were down 7.5% from $651 million or 75 cents in 2007.
- Sales increased by 5.4% to $14.8 billion from $14 billion in the prior year.
- The firm purchased 30.5 million shares, investing approximately $1.6 billion.
First Quarter Highlights
The firm reported net earnings of $602 million or 74 cents, down 7.5% from $651 million or 75 cents in the same period a year ago despite sales increasing by 5.4% to $14.8 billion from $14 billion in the prior year.
- Net interest expense for the quarter increased by $65 million over last year, reflecting substantially higher debt balances slightly offset by lower funding costs.
- The firm has invested more than $9 billion in capital investment, credit card receivables growth and share repurchase over those four quarters.
- The firm purchased 30.5 million shares, investing approximately $1.6 billion.
Additionally, since the end of the first quarter it has retired another 10 million shares as the result of exercising options acquired in the second series of derivatives transactions, for a total investment of just over $500 million in the past two weeks.
- The firm announced that the transaction to sell an undivided interest in approximately 47% of its credit card receivables to JPMorgan Chase for cash proceeds of about $3.6 billion was completed on Monday, May 19, 2008.
- This transaction is expected to provide sufficient liquidity to implement business plans, including previously announced capital investment and share repurchase activity, without the need to access term debt capital markets again this year.
Retail Segment:
- Total sales grew 5% to $14.3 billion from $13.6 billion in the prior year due to the contribution from new stores offset by a 0.7% decline in same-store sales.
- Earnings before interest expense and income taxes or EBIT decreased 2.2% to $959 million from $980 million in 2007, as gross margin rate declined 9 basis points from last year.
- The margin rate was adversely affected by mix, as sales of the lower margin consumable and commodity categories outpaced sales in the higher margin apparel and home categories.
Expense rate increased 24 basis points over last year, reflecting strong control of the dollar growth in expenses, offset by the slight deleveraging effect of a relatively weak 5% sales growth.
- In addition, some year-over-year expense unfavorability was related to the timing of certain items and some was related to annualizing the benefit to last year''s rate of the $12 million federal excise tax refund.
- The depreciation and amortization rate increased 17 basis points as dollar growth in these noncash expenses grew at a low double-digit pace in line with expectations.
Credit Card Segment:
- Average receivables increased 28% over 2007, benefiting in part from the increase in receivables resulting from last year''s product change in which the firm offered higher limit Visa cards to a group of the better and best credit quality Target cardholders.
- Period end receivables declined by about $200 million from year end balances, reflecting a typical season pattern in conjunction with modest underlying account growth.
- The dollar yield on the portfolio, now measured as a spread to one-month LIBOR, increased modestly from $132 million last year to $138 million this year.
The dollar yield on the portfolio is benefiting from the year-over-year increase in receivables, substantially offset by the reduction in the rate spread on those receivables.
- Net write-offs increased from an annualized 6.0% in 2007 to 7.6% due to the unsustainably strong performance in this metric in last year''s first quarter, and increased write-offs activity concentrated in four states affected by housing-related weakness.
Macroeeconomic Insights:
- As gas and food prices continue to rise and housing markets slow, consumers are facing increased financial pressure in reducing their spending, especially in discretionary categories.
- Many home furnishings and apparel retailers such as Kohl''s, Macy''s and J.C. Penney are experiencing comparable store sales declines in this environment, while retailers such as WalMart and Costco, are continuing to generate modest comparable store sales increases.
- The Expect more, pay less brand promise continues to guide the strategy, with heightened focus on the frequency driving businesses, including pharmacy, food and commodities.
