This summary is based on the third quarter fiscal 2007 earnings call conducted by Target Corp. (TGT) on November 20, 2007.
Management:
President: Gregg Steinhafel
Chairman and CEO: Bob Ulrich
EVP and CFO: Doug Scovanner
Key Investors Issues
- EPS were 56 cents per share compared to 59 cents per share last year.
- Net income was $483 million, down from $506 million in the prior year.
- Sales were up 9%, to $14.84 billion from $13.57 billion in the year-earlier period.
Third Quarter Highlights
Total revenues grew 9.3% to $14.8 billion, fueled by the contribution from new stores, a 3.7% increase in comparable store sales and the growth in revenue from credit card operations.
In retail operations, the company experienced weaker than expected sales performance in higher margin categories, especially apparel. Even the sales of consumables and commodities remained strong.
Gross margin rate was 31.9% of sales, 54 basis points lower than last year.
- Net decrease resulted from soft sales of higher margin merchandise.
- While expense rate increased by 14 basis points rate analysis continues to be affected by a couple of small financial reporting refinements that have benefited gross margin rate and have had a parallel inverse effect on expense rate over the past four quarters.
Credit operations continued to deliver strong profit performance.
Average receivables grew 19.6% over last year, faster than pace of sales, primarily due to changing the product features for yet another group of higher credit quality Target Card accounts to become higher limit Target Visa accounts. This most recent wave of activity resulted in higher receivables balances due to increased charge activity both within and outside of stores.
As a result of both, increase in receivables and a modest increase in the core risk metrics in portfolio, the company increased reserve by $23 million. At this level, the company continues to believe that it is adequately reserved for expected losses in the portfolio consistent with past practice. On an annualized basis, credit card contribution to earnings before taxes as a percent of average receivable was 8.6% this year compared to 8.8% a year ago.
Net interest expense increased $28 million from $149 million a year ago to $177 million this year, primarily due higher average funded balances, including the debt to fund substantial receivables growth.
Effective income tax rate was 38.1% compared with 37.4% in last year''s third quarter. This increase was driven by an unusually low rate in this quarter last year.
Earnings fell short of last year''s performance.
- Specifically, net earnings decreased 4.4% to $483 million compared with $506 million last year and earnings per share fell 3.5% to 56 cents from 59 cents per share a year ago.
- Balance sheet inventory position grew 12.2% from a year ago, faster than the 9% sales increase. However, the relationship between these two growth rates was influenced by the shift in fiscal calendar, which moved third quarter end one week closer to the holiday season compared to last year, capturing a greater portion of typical seasonal inventory build.
The company invested $172 million to buy approximately 3 million shares of common stock at a weighted average price of $57.29 per share.
- Since the program''s inception in June 2004, the company has repurchased 90.7 million shares of common stock, representing over 10% of current shares outstanding at an average price of $51.20 per share for a total investment of approximately $4.6 billion.
- Weighted average shares outstanding in the most recent quarter were more than 13 million shares lower than the corresponding figure last year, a reduction of more than 1.5%.
- On September 12th, the company announced that it would conduct a review of the use of debt in capital structure in the pace of share repurchase activity. The company announced the results of that review. Board has approved a new $10 billion share repurchase program that replaces the remaining authorization under previous program.
- Execution of new program would represent a gross reduction of more than 20% of current outstanding shares. The company expects to complete this new share repurchase program within approximately three years, and under the right combination of business results, liquidity and share price, the company would expect to complete half or more of the program by the end of 2008.
