XNYS:TGT Target Corp Quarterly Report 10-Q Filing - 4/28/2012

Effective Date 4/28/2012

XNYS:TGT (Target Corp): Fair Value Estimate
Premium
XNYS:TGT (Target Corp): Consider Buying
Premium
XNYS:TGT (Target Corp): Consider Selling
Premium
XNYS:TGT (Target Corp): Fair Value Uncertainty
Premium
XNYS:TGT (Target Corp): Economic Moat
Premium
XNYS:TGT (Target Corp): Stewardship
Premium
 

 

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 28, 2012

 

Commission File Number 1-6049

 


 

GRAPHIC

 

TARGET CORPORATION

(Exact name of registrant as specified in its charter)

 

Minnesota

 

41-0215170

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1000 Nicollet Mall, Minneapolis, Minnesota

 

55403

(Address of principal executive offices)

 

(Zip Code)

 

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  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).             Yes  x   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  x  Accelerated filer  o  Non-accelerated filer  o  Smaller Reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).                Yes o  No x

 

Indicate the number of shares outstanding of each of registrant’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $0.0833, outstanding at May 18, 2012 were 661,205,822.

 



 

TARGET CORPORATION

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

Consolidated Statements of Operations

1

 

Consolidated Statements of Comprehensive Income

2

 

Consolidated Statements of Financial Position

3

 

Consolidated Statements of Cash Flows

4

 

Consolidated Statements of Shareholders’ Investment

5

 

Notes to Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

22

 

 

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3.

Defaults Upon Senior Securities

23

Item 4.

Mine Safety Disclosures

23

Item 5.

Other Information

23

Item 6.

Exhibits

24

 

 

 

 

 

 

Signature

 

25

Exhibit Index

 

26

 



 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated Statements of Operations

 

 

 

 

 

Three Months Ended

 

 

 

April 28,

 

April 30,

 

(millions, except per share data) (unaudited)

 

2012

 

2011

 

Sales

 

$

16,537

 

$

15,580

 

Credit card revenues

 

330

 

355

 

Total revenues

 

16,867

 

15,935

 

Cost of sales

 

11,541

 

10,838

 

Selling, general and administrative expenses

 

3,392

 

3,233

 

Credit card expenses

 

120

 

88

 

Depreciation and amortization

 

529

 

512

 

Earnings before interest expense and income taxes

 

1,285

 

1,264

 

Net interest expense

 

184

 

183

 

Earnings before income taxes

 

1,101

 

1,081

 

Provision for income taxes

 

404

 

392

 

Net earnings

 

$

697

 

$

689

 

Basic earnings per share

 

$

1.05

 

$

0.99

 

Diluted earnings per share

 

$

1.04

 

$

0.99

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

666

 

693

 

Diluted

 

672

 

697

 

 

See accompanying Notes to Consolidated Financial Statements.

 

1



 

Consolidated Statements of Comprehensive Income

 

 

 

 

 

Three Months Ended

 

 

 

April 28,

 

April 30,

 

(millions) (unaudited)

 

2012

 

2011

 

Net earnings

 

$

697

 

$

689

 

Other comprehensive income, net of tax

 

 

 

 

 

Pension and other benefit liabilities, net of taxes of $9 and $5

 

14

 

9

 

Currency translation adjustment and cash flow hedges, net of taxes of $17 and $1

 

26

 

2

 

Other comprehensive income

 

40

 

11

 

Comprehensive income

 

$

737

 

$

700

 

 

See accompanying Notes to Consolidated Financial Statements.

 

2



 

Consolidated Statements of Financial Position

 

 

 

 

 

 

 

 

 

April 28,

 

January 28,

 

April 30,

 

(millions)

 

2012

 

2012

 

2011

 

Assets

 

(unaudited)

 

 

 

(unaudited)

 

Cash and cash equivalents, including short-term investments of $18, $194 and $872

 

$

675

 

$

794

 

$

1,424

 

Credit card receivables, net of allowance of $395, $430 and $565

 

5,548

 

5,927

 

5,721

 

Inventory

 

7,670

 

7,918

 

7,696

 

Other current assets

 

1,698

 

1,810

 

1,527

 

Total current assets

 

15,591

 

16,449

 

16,368

 

Property and equipment

 

 

 

 

 

 

 

Land

 

6,136

 

6,122

 

5,989

 

Buildings and improvements

 

27,037

 

26,837

 

23,197

 

Fixtures and equipment

 

4,979

 

5,141

 

4,691

 

Computer hardware and software

 

2,275

 

2,468

 

2,270

 

Construction-in-progress

 

1,232

 

963

 

837

 

Accumulated depreciation

 

(12,151

)

(12,382

)

(11,336

)

Property and equipment, net

 

29,508

 

29,149

 

25,648

 

Other noncurrent assets

 

1,076

 

1,032

 

980

 

Total assets

 

$

46,175

 

$

46,630

 

$

42,996

 

Liabilities and shareholders’ investment

 

 

 

 

 

 

 

Accounts payable

 

$

6,292

 

$

6,857

 

$

6,296

 

Accrued and other current liabilities

 

3,671

 

3,644

 

3,229

 

Unsecured debt and other borrowings

 

2,483

 

3,036

 

1,124

 

Nonrecourse debt collateralized by credit card receivables

 

 

750

 

189

 

Total current liabilities

 

12,446

 

14,287

 

10,838

 

Unsecured debt and other borrowings

 

13,467

 

13,447

 

10,640

 

Nonrecourse debt collateralized by credit card receivables

 

1,500

 

250

 

3,776

 

Deferred income taxes

 

1,209

 

1,191

 

916

 

Other noncurrent liabilities

 

1,690

 

1,634

 

1,596

 

Total noncurrent liabilities

 

17,866

 

16,522

 

16,928

 

Shareholders’ investment

 

 

 

 

 

 

 

Common stock

 

55

 

56

 

57

 

Additional paid-in capital

 

3,595

 

3,487

 

3,345

 

Retained earnings

 

12,854

 

12,959

 

12,398

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

Pension and other benefit liabilities

 

(610

)

(624

)

(532

)

Currency translation adjustment and cash flow hedges

 

(31

)

(57

)

(38

)

Total shareholders’ investment

 

15,863

 

15,821

 

15,230

 

Total liabilities and shareholders’ investment

 

$

46,175

 

$

46,630

 

$

42,996

 

Common shares outstanding

 

661

 

669

 

689

 

 

See accompanying Notes to Consolidated Financial Statements.

 

3



 

Consolidated Statements of Cash Flows

 

 

 

 

 

Three Months Ended

 

 

 

April 28,

 

April 30,

 

(millions) (unaudited)

 

2012

 

2011

 

Operating activities

 

 

 

 

 

Net earnings

 

$

697

 

$

689

 

Reconciliation to cash flow

 

 

 

 

 

Depreciation and amortization

 

529

 

512

 

Share-based compensation expense

 

25

 

21

 

Deferred income taxes

 

7

 

100

 

Bad debt expense

 

52

 

12

 

Non-cash (gains)/losses and other, net

 

2

 

19

 

Changes in operating accounts:

 

 

 

 

 

Accounts receivable originated at Target

 

142

 

149

 

Inventory

 

248

 

(99

)

Other current assets

 

88

 

84

 

Other noncurrent assets

 

(3

)

14

 

Accounts payable

 

(566

)

(330

)

Accrued and other current liabilities

 

28

 

(103

)

Other noncurrent liabilities

 

58

 

(16

)

Cash flow provided by operations

 

1,307

 

1,052

 

Investing activities

 

 

 

 

 

Expenditures for property and equipment

 

(829

)

(632

)

Proceeds from disposal of property and equipment

 

1

 

1

 

Change in accounts receivable originated at third parties

 

185

 

271

 

Other investments

 

(16

)

(10

)

Cash flow required for investing activities

 

(659

)

(370

)

Financing activities

 

 

 

 

 

Additions to short-term debt

 

450

 

 

Additions to long-term debt

 

500

 

 

Reductions of long-term debt

 

(1,005

)

 

Dividends paid

 

(201

)

(174

)

Repurchase of stock

 

(592

)

(812

)

Stock option exercises and related tax benefit

 

82

 

16

 

Other

 

(2

)

 

Cash flow required for financing activities

 

(768

)

(970

)

Effect of exchange rate changes on cash and cash equivalents

 

1

 

 

Net decrease in cash and cash equivalents

 

(119

)

(288

)

Cash and cash equivalents at beginning of period

 

794

 

1,712

 

Cash and cash equivalents at end of period

 

$

675

 

$

1,424

 

 

See accompanying Notes to Consolidated Financial Statements.

 

4



 

Consolidated Statements of Shareholders’ Investment

 

 

Common

 

Stock

 

Additional

 

 

 

Accumulated Other

 

 

 

 

 

Stock

 

Par

 

Paid-in

 

Retained

 

Comprehensive

 

 

 

(millions, except footnotes)

 

Shares

 

Value

 

Capital

 

Earnings

 

Income/(Loss)

 

Total

 

January 29, 2011

 

704

 

$

59

 

$

3,311

 

$

12,698

 

$

(581

)

$

15,487

 

Net earnings

 

 

 

 

2,929

 

 

2,929

 

Other comprehensive loss

 

 

 

 

 

(100

)

(100

)

Dividends declared

 

 

 

 

(777

)

 

(777

)

Repurchase of stock

 

(37

)

(3

)

 

(1,891

)

 

(1,894

)

Stock options and awards

 

2

 

 

176

 

 

 

176

 

January 28, 2012

 

669

 

$

56

 

$

3,487

 

$

12,959

 

$

(681

)

$

15,821

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

697

 

 

697

 

Other comprehensive income

 

 

 

 

 

40

 

40

 

Dividends declared

 

 

 

 

(199

)

 

(199

)

Repurchase of stock

 

(10

)

(1

)

 

(603

)

 

(604

)

Stock options and awards

 

2

 

 

108

 

 

 

108

 

April 28, 2012

 

661

 

$

55

 

$

3,595

 

$

12,854

 

$

(641

)

$

15,863

 

 

Dividends declared per share were $0.30 and $0.25 for the three months ended April 28, 2012 and April 30, 2011, respectively. For the fiscal year ended January 28, 2012, dividends declared per share were $1.15.

 

See accompanying Notes to Consolidated Financial Statements.

 

5



 

Notes to Consolidated Financial Statements (unaudited)

 

1. Accounting Policies

 

The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statement disclosures contained in the 2011 Form 10-K for Target Corporation (Target or the Corporation). The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. See the notes in our Form 10-K for the fiscal year ended January 28, 2012, for those policies. 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.

 

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

 

2. Earnings Per Share

 

Basic earnings per share (EPS) is calculated as net earnings divided by the weighted average number of common shares outstanding during the period. Diluted EPS includes the potentially dilutive impact of share-based awards outstanding at period end, consisting of the incremental shares assumed to be issued upon the exercise of stock options and the incremental shares assumed to be issued under performance share and restricted stock unit arrangements.

 

Earnings Per Share

 

Three Months Ended

 

 

 

April 28,

 

April 30,

 

(millions, except per share data)

 

2012

 

2011

 

Net earnings

 

$

697

 

$

689

 

Basic weighted average common shares outstanding

 

666

 

693

 

Dilutive impact of share-based awards(a)

 

6

 

4

 

Dilutive weighted average common shares outstanding

 

672

 

697

 

Basic earnings per share

 

$

1.05

 

$

0.99

 

Dilutive earnings per share

 

$

1.04

 

$

0.99

 

 

(a) Excludes 12 million and 15 million share-based awards for the three months ended April 28, 2012 and April 30, 2011, respectively, because their effects were antidilutive.

 

3. Fair Value Measurements

 

Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).

 

6



 

Fair Value Measurements - Recurring Basis

 

 

 

Fair Value at April 28, 2012

 

Fair Value at January 28, 2012

 

Fair Value at April 30, 2011

 

(millions)

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

18

 

$

 

$

 

$

194

 

$

 

$

 

$

872

 

$

 

$

 

Other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

 

15

 

 

 

20

 

 

 

 

 

Prepaid forward contracts

 

74

 

 

 

69

 

 

 

65

 

 

 

Other noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

 

104

 

 

 

114

 

 

 

132

 

 

Company-owned life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

insurance investments(b)

 

 

372

 

 

 

371

 

 

 

370

 

 

Total

 

$

92

 

$

491

 

$

 

$

263

 

$

505

 

$

 

$

937

 

$

502

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

$

 

$

5

 

$

 

$

 

$

7

 

$

 

$

 

$

 

$

 

Other noncurrent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

 

65

 

 

 

69

 

 

 

54

 

 

Total

 

$

 

$

70

 

$

 

$

 

$

76

 

$

 

$

 

$

54

 

$

 

 

(a) There was one interest rate swap designated as an accounting hedge at April 28, 2012 and January 28, 2012, and none at April 30, 2011. See Note 7 for additional information on interest rate swaps.

(b) Company-owned life insurance investments consist of equity index funds and fixed income assets. Amounts are presented net of loans that are secured by some of these policies of $677 million at April 28, 2012, $669 million at January 28, 2012 and $648 million at April 30, 2011.

 

Position

 

Valuation Technique

Short-term investments

 

Cash equivalents approximate fair value because maturities are less than three months.

 

 

 

Prepaid forward contracts

 

Initially valued at transaction price. Subsequently valued by reference to the market price of Target common stock.

 

 

 

Interest rate swaps

 

Valuation models are calibrated to initial trade price. Subsequent valuations are based on observable inputs to the valuation model (e.g., interest rates and credit spreads). Model inputs are changed only when corroborated by market data. A credit risk adjustment is made on each swap using observable market credit spreads.

 

 

 

Company-owned life insurance investments

 

Includes investments in separate accounts that are valued based on market rates credited by the insurer.

 

The following table presents the carrying amounts and estimated fair values of financial instruments not measured at fair value in the Consolidated Statements of Financial Position. The fair value of marketable securities is determined using available market prices at the reporting date and would be classified in Level 1. The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for similar types of financial instruments and would be classified in Level 2.

 

7



 

Financial Instruments Not Measured at Fair Value

 

April 28, 2012

 

January 28, 2012

 

April 30, 2011

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(millions)

 

Amount

 

Value

 

Amount

 

Value

 

Amount

 

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities(a)

 

$

43

 

$

43

 

$

35

 

$

35

 

$

24

 

$

24

 

Other noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities(a)

 

2

 

2

 

6

 

6

 

2

 

2

 

Total

 

$

45

 

$

45

 

$

41

 

$

41

 

$

26

 

$

26

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt(b)

 

$

15,630

 

$

18,057

 

$

15,680

 

$

18,142

 

$

15,251

 

$

16,859

 

Total

 

$

15,630

 

$

18,057

 

$

15,680

 

$

18,142

 

$

15,251

 

$

16,859

 

 

(a)  Held-to-maturity investments that are held to satisfy the regulatory requirements of Target Bank and Target National Bank.

(b) Represents the sum of nonrecourse debt collateralized by credit card receivables and unsecured debt and other borrowings excluding unamortized swap valuation adjustments and capital lease obligations.

 

Based on various inputs and assumptions, including discussions with third parties in the context of our intended sale, we believe the gross balance of our credit card receivables approximates fair value at April 28, 2012. The carrying amounts of accounts payable and certain accrued and other current liabilities also approximate fair value at April 28, 2012.

 

4. Credit Card Receivables

 

Credit card receivables are recorded net of an allowance for doubtful accounts and are our only significant class of financing receivables. Substantially all past-due accounts accrue finance charges until they are written off. Accounts are written off when they become 180 days past due.

 

Age of Credit Card Receivables

 

April 28, 2012

 

January 28, 2012

 

April 30, 2011

 

 

 

 

 

Percent of

 

 

 

Percent of

 

 

 

Percent of

 

(millions)

 

Amount

 

Receivables

 

Amount

 

Receivables

 

Amount

 

Receivables

 

Current

 

$

5,488

 

92.4

%

 

$

5,791

 

91.1

%

 

$

5,749

 

91.5

%

 

1-29 days past due

 

221

 

3.7

 

 

260

 

4.1

 

 

227

 

3.6

 

 

30-59 days past due

 

74

 

1.2

 

 

97

 

1.5

 

 

100

 

1.6

 

 

60-89 days past due

 

45

 

0.8

 

 

62

 

1.0

 

 

59

 

0.9

 

 

90+ days past due

 

115

 

1.9

 

 

147

 

2.3

 

 

151

 

2.4

 

 

Period-end gross credit card receivables

 

$

5,943

 

100

%

 

$

6,357

 

100

%

 

$

6,286

 

100

%

 

 

Allowance for Doubtful Accounts

 

The allowance for doubtful accounts is recognized in an amount equal to the anticipated future write-offs of existing receivables and includes provisions for uncollectible finance charges and other credit-related fees. We estimate future write-offs on the entire credit card portfolio collectively based on historical experience of delinquencies, risk scores, aging trends and industry risk trends.

 

8



 

Allowance for Doubtful Accounts

 

Three Months Ended

 

 

 

April 28,

 

April 30,

 

(millions)

 

2012

 

2011

 

Allowance at beginning of period

 

$

430

 

$

690

 

Bad debt expense

 

52

 

12

 

Write-offs(a)

 

(127

)

(184

)

Recoveries(a)

 

40

 

47

 

Allowance at end of period

 

$

395

 

$

565

 

 

 

(aWrite-offs include the principal amount of losses (excluding accrued and unpaid finance charges), and recoveries include current period collections on previously written-off balances. These amounts combined represent net write-offs.

 

Deterioration of the macroeconomic conditions in the United States could adversely affect the risk profile of our credit card receivables portfolio based on credit card holders’ ability to pay their balances. If such deterioration were to occur, it could lead to an increase in bad debt expense. We monitor both the credit quality and the delinquency status of the credit card receivables portfolio. We consider accounts 30 or more days past due as delinquent, and we update delinquency status daily. We also monitor risk in the portfolio by assigning internally generated scores to each account and by obtaining current FICO scores, a nationally recognized credit scoring model, for a statistically representative sample of accounts each month. The credit-quality segmentation presented below is consistent with the approach used in determining our allowance for doubtful accounts.

 

Receivables Credit Quality

 

April 28, 2012

 

January 28, 2012

 

April 30, 2011

 

 

 

 

 

Percent of

 

 

 

Percent of

 

 

 

Percent of

 

(millions)

 

Amount

 

Receivables

 

Amount

 

Receivables

 

Amount

 

Receivables

 

Nondelinquent accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FICO score of 700 or above

 

$

2,810

 

47.3

%

 

$

2,882

 

45.4

%

 

$

2,771

 

44.1

%

 

FICO score of 600 to 699

 

2,329

 

39.2

 

 

2,463

 

38.7

 

 

2,503

 

39.8

 

 

FICO score below 600

 

570

 

9.6

 

 

706

 

11.1

 

 

702

 

11.2

 

 

Total nondelinquent accounts

 

5,709

 

96.1

 

 

6,051

 

95.2

 

 

5,976

 

95.1

 

 

Delinquent accounts (30+ days past due)

 

234

 

3.9

 

 

306

 

4.8

 

 

310

 

4.9

 

 

Period-end gross credit card receivables

 

$

5,943

 

100

%

 

$

6,357

 

100

%

 

$

6,286

 

100

%

 

 

Under certain circumstances, we offer cardholder payment plans that meet the accounting definition of a troubled debt restructuring (TDR). These plans modify finance charges, minimum payments and/or extend payment terms. Modified terms do not change the balance of the loan. These concessions are made on an individual cardholder basis for economic or legal reasons specific to each individual cardholder’s circumstances. Cardholders are not allowed additional charges while participating in a payment plan.

 

Troubled Debt Restructurings

 

Three Months Ended

 

 

 

April 28,

 

April 30,

 

(dollars in millions, contracts in thousands)

 

2012

 

2011

 

Average receivables

 

$

257

 

$

376

 

Finance charges

 

$

4

 

$

6

 

Troubled Debt Restructurings Defaulted During the Period(a)

 

 

 

 

 

Number of contracts

 

3

 

7

 

Amount defaulted(b)

 

$

9

 

$

24

 

 

(a) Includes loans modified within the twelve months prior to each respective period end.

(b) Represents account balance at the time of default. We define default as not paying the full fixed payment amount for two consecutive billing cycles.

 

Receivables in cardholder payment plans that meet the definition of a TDR are treated consistently with other receivables in determining our allowance for doubtful accounts. Accounts that complete their assigned payment plan are no longer considered TDRs. As of April 28, 2012 and April 30, 2011 there were 109 thousand and 141 thousand modified contracts with outstanding receivables of $247 million and $365 million, respectively. Payments received on troubled debt restructurings are first applied to finance charges and fees, then to the unpaid principal balance.

 

9



 

Funding for Credit Card Receivables

 

As a method of providing funding for our credit card receivables, we sell, on an ongoing basis, all of our consumer credit card receivables to Target Receivables LLC (TR LLC), a wholly owned, bankruptcy remote subsidiary. TR LLC then transfers the receivables to the Target Credit Card Master Trust (the Trust), which from time to time will sell debt securities to third parties, either directly or through a related trust. These debt securities represent undivided interests in the Trust assets. TR LLC uses the proceeds from the sale of debt securities and its share of collections on the receivables to pay the purchase price of the receivables to the Corporation.

 

We consolidate the receivables within the Trust and any debt securities issued by the Trust, or a related trust, in our Consolidated Statements of Financial Position. The receivables transferred to the Trust are not available to general creditors of the Corporation.

 

All interests in our Credit Card Receivables issued by the Trust are accounted for as secured borrowings. Interest and principal payments are satisfied provided the cash flows from the Trust assets are sufficient and are nonrecourse to the general assets of the Corporation. If the cash flows are less than the periodic interest, the available amount, if any, is paid with respect to interest. Interest shortfalls will be paid to the extent subsequent cash flows from the assets in the Trust are sufficient. Future principal payments will be made from the third party’s pro rata share of cash flows from the Trust assets.

 

Securitized Borrowings

 

April 28, 2012

 

January 28, 2012

 

April 30, 2011

 

(millions)

 

Debt Balance

 

Collateral

 

Debt Balance

 

Collateral

 

Debt Balance

 

Collateral

 

2008 Series

 

$

 

$

 

$

 

$

 

$

2,965

 

$

3,061

 

2006/2007 Series

 

1,500

 

1,899

 

1,000

 

1,266

 

1,000

 

1,266

 

Total

 

$

1,500

 

$

1,899

 

$

1,000

 

$

1,266

 

$

3,965

 

$

4,327

 

 

In March 2012 we amended the 2006/2007 Series Variable Funding Certificate to obtain additional funding of $500 million and to extend the maturity to 2013. Parties who hold the Variable Funding Certificate receive interest at a variable short-term market rate.

 

5. Commitments and Contingencies

 

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. We do not believe that any of the currently identified claims or litigation will be material to our results of operations, cash flows or financial condition.

 

6. Notes Payable and Long-Term Debt

 

We obtain short-term financing from time to time under our commercial paper program, a form of notes payable.

 

Commercial Paper

 

Three Months Ended

 

 

 

April 28,

 

April 30,

 

(millions)

 

2012

 

2011

 

Maximum daily amount outstanding during the period

 

$

605

 

$

 

Average daily amount outstanding during the period

 

162

 

 

Amount outstanding at period-end

 

450

 

 

Weighted average interest rate

 

0.15%

 

 

 

7. Derivative Financial Instruments

 

Historically our derivative instruments have primarily consisted of interest rate swaps, which are used to mitigate interest rate risk. We have counterparty credit risk with large global financial institutions resulting from our derivative instruments. We monitor this concentration of counterparty credit risk on an ongoing basis. See Note 3 for a description of the fair value measurement of our derivative instruments.

 

10



 

As of April 28, 2012, one swap was designated as a fair value hedge for accounting purposes, and no ineffectiveness was recognized during the three months ended April 28, 2012. There were no derivative instruments designated as accounting hedges as of April 30, 2011.

 

Periodic payments, valuation adjustments and amortization of gains or losses on our derivative contracts had the following effect on our Consolidated Statements of Operations:

 

Derivative Contracts - Effect on Consolidated Results of Operations

 

Three Months Ended

 

(millions)

 

 

 

April 28,

 

April 30,

 

Type of Contract

 

Classification of Income/(Expense)

 

2012

 

2011

 

Interest rate swaps

 

Net interest expense

 

$

10

 

$

11

 

 

The amount remaining on unamortized hedged debt valuation gains from terminated or de-designated interest rate swaps that will be amortized into earnings over the remaining lives of the underlying debt totaled $102 million, $111 million and $142 million, at April 28, 2012, January 28, 2012 and April 30, 2011, respectively.

 

8. Income Taxes

 

We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations for years before 2011 and, with few exceptions, are no longer subject to state and local or non-U.S. income tax examinations by tax authorities for years before 2003.

 

At April 28, 2012, foreign net operating loss carryforwards of approximately $255 million (resulting in a $66 million deferred tax asset) are available to offset future income. These carryforwards expire in 2032 and are expected to be fully utilized prior to expiration.

 

It is reasonably possible that the amount of our unrecognized tax benefits will significantly increase or decrease during the next twelve months; however, an estimate of the amount or range of the change cannot be made at this time.

 

9. Share Repurchase

 

We repurchase shares primarily through open market transactions under a $5 billion share repurchase program authorized by our Board of Directors in January 2012. During the first quarter of 2012, we completed a $10 billion share repurchase program that was authorized by our Board of Directors in November 2007.

 

Share Repurchases

 

Three Months Ended

 

 

 

April 28,

 

April 30,

 

(millions, except per share data)

 

2012

 

2011

 

Total number of shares purchased

 

10.5

 

15.4

 

Average price paid per share

 

$

57.31

 

$

53.32

 

Total investment

 

$

604

 

$

819

 

 

11



 

Of the shares reacquired, a portion was delivered upon settlement of prepaid forward contracts as follows:

 

Settlment of Prepaid Forward Contracts(a)

 

Three Months Ended

 

 

 

April 28,

 

April 30,

 

(millions)

 

2012

 

2011

 

Total number of shares purchased

 

0.2

 

0.1

 

Total cash investment

 

$

12

 

$

7

 

Aggregate market value(b)

 

$

12

 

$

7

 

 

(a) These contracts are among the investment vehicles used to reduce our economic exposure related to our nonqualified deferred compensation plans. The details of our positions in prepaid forward contracts have been provided in Note 10.

(b)  At their respective settlement dates.

 

10. Pension, Postretirement Health Care and Other Benefits

 

We have qualified defined benefit pension plans covering team members who meet age and service requirements, including in certain circumstances, date of hire. We also have unfunded nonqualified pension plans for team members with qualified plan compensation restrictions. Eligibility for, and the level of, these benefits varies depending on team members’ date of hire, length of service and/or team member compensation. Upon early retirement and prior to Medicare eligibility, team members 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. Effective January 1, 2009, our qualified defined benefit pension plan was closed to new participants, with limited exceptions.

 

Net Pension and Postretirement

 

Pension Benefits

 

Postretirement Health Care Benefits

 

Health Care Benefits Expense

 

Three Months Ended

 

Three Months Ended

 

 

 

April 28,

 

April 30,

 

April 28,

 

April 30,

 

(millions)

 

2012

 

2011

 

2012

 

2011

 

Service cost benefits earned during the period

 

$

30

 

$

29

 

$

2

 

$

2

 

Interest cost on projected benefit obligation

 

36

 

34

 

2

 

1

 

Expected return on assets

 

(55

)

(51

)

 

 

Amortization of losses

 

25

 

16

 

1

 

1

 

Amortization of prior service cost

 

 

(1

)

(3

)

(2

)

Total

 

$

36

 

$

27

 

$

2

 

$

2

 

 

We are not required to make any contributions in 2012. However, depending on investment performance and plan funded status, we may elect to make a contribution.

 

Our unfunded, nonqualified deferred compensation plan is offered to approximately 3,500 current and retired team members whose participation in our 401(k) plan is limited by statute or regulation. These team members choose from a menu of crediting rate alternatives that are the same as the investment choices in our 401(k) plan, including Target common stock. We credit an additional 2 percent per year to the accounts of all active participants, excluding members of our management executive committee, in part to recognize the risks inherent to their participation in a plan of this nature. We also maintain a nonqualified, unfunded deferred compensation plan that was frozen during 1996, covering substantially fewer than 100 participants, most of whom are retired. In this plan, deferred compensation earns returns tied to market levels of interest rates plus an additional 6 percent return, with a minimum of 12 percent and a maximum of 20 percent, as determined by the plan’s terms.

 

We mitigate some of our risk of offering the nonqualified plans through investing in vehicles, including company-owned life insurance and prepaid forward contracts in our own common stock, that offset a substantial portion of our economic exposure to the returns of these plans. These investment vehicles are general corporate assets and are marked to market with the related gains and losses recognized in the Consolidated Statements of Operations in the period they occur.

 

The total change in fair value for contracts indexed to our own common stock recognized in earnings was pretax income/(loss) of $11 million and $(7) million during the three months ended April 28, 2012 and April 30, 2011, respectively. For the three months ended April 28, 2012 and April 30, 2011, we invested $7 million and $16 million, respectively, in such investment instruments, and this activity is included in the Consolidated Statements of Cash Flows within other investing activities. Adjusting our position in these investment vehicles may involve repurchasing shares of Target common stock

 

12



 

when settling the forward contracts as described in Note 9. The settlement dates of these instruments are regularly renegotiated with the counterparty.

 

Prepaid Forward Contracts on Target Common Stock

 

 

 

Contractual

 

 

 

 

 

 

 

Number of

 

Price Paid

 

Contractual

 

Total Cash

 

(millions, except per share data)

 

Shares

 

per Share

 

Fair Value

 

Investment

 

April 30, 2011

 

1.3

 

$

45.12

 

$

65

 

$

60

 

January 28, 2012

 

1.4

 

44.21

 

69

 

61

 

April 28, 2012

 

1.3

 

45.56

 

74

 

58

 

 

11. Segment Reporting

 

Our segment measure of profit is used by management to evaluate the return on our investment and to make operating decisions.

 

Business Segment Results

 

Three Months Ended April 28, 2012

 

Three Months Ended April 30, 2011

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

U.S.

 

Credit

 

 

 

 

 

U.S.

 

Credit

 

 

 

 

 

(millions)

 

Retail

 

Card

 

Canadian

 

Total

 

Retail

 

Card

 

Canadian

 

Total

 

Sales/Credit card revenues

 

$

16,537

 

$

330

 

$

 

$

16,867

 

$

15,580

 

$

355

 

$

 

$

15,935

 

Cost of sales

 

11,541

 

 

 

11,541

 

10,838

 

 

 

10,838

 

Bad debt expense(a)

 

 

52

 

 

52

 

 

12

 

 

12

 

Selling, general and administrative/ Operations and marketing

 

3,293

 

133

 

34

 

3,460

 

3,173

 

125

 

11

 

3,309

 

expenses(a), (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

504

 

4

 

21

 

529

 

507

 

5

 

 

512

 

Earnings/(loss) before interest expense and income taxes

 

1,199

 

141

 

(55

)

1,285

 

1,062

 

213

 

(11

)

1,264

 

Interest expense on nonrecourse debt collateralized by credit card receivables(c)

 

 

2

 

 

2

 

 

19

 

 

19

 

Segment profit/(loss)

 

$

1,199

 

$

139

 

$

(55

)

$

1,283

 

$

1,062

 

$

194

 

$

(11

)

$

1,245

 

Unallocated (income) and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other net interest expense(c)

 

 

 

 

 

 

 

182

 

 

 

 

 

 

 

164

 

Earnings before income taxes

 

 

 

 

 

 

 

$

1,101

 

 

 

 

 

 

 

$

1,081

 

 

Note: The sum of the segment amounts may not equal the total amounts due to rounding.

(a) The combination of bad debt expense and operations and marketing expenses, less amounts the U.S. Retail Segment charges the U.S. Credit Card Segment for loyalty programs, within the U.S. Credit Card Segment represent credit card expenses on the Consolidated Statements of Operations.

(b) Loyalty program charges were $65 million and $49 million for the three months ended April 28, 2012 and April 30, 2011, respectively. In all periods, these amounts were recorded as reductions to SG&A expenses within the U.S. Retail Segment and increases to operations and marketing expenses within the U.S. Credit Card Segment.

(c) The combination of interest expense on nonrecourse debt collateralized by credit card receivables and other net interest expense represent net interest expense on the Consolidated Statements of Operations.

 

Total Assets by Segment

 

April 28,

 

January 28,

 

April 30,

 

(millions)

 

2012

 

2012

 

2011

 

U.S. Retail

 

$

36,841

 

$

37,108

 

$

37,032

 

U.S. Credit Card

 

5,756

 

6,135

 

5,934

 

Canadian

 

3,578

 

3,387

 

30

 

Total

 

$

46,175

 

$

46,630

 

$

42,996

 

 

13



 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Executive Summary

 

Consolidated revenues were $16,867 million for the three months ended April 28, 2012, an increase of $932 million or 5.9 percent from the same period in the prior year. Consolidated earnings before interest expense and income taxes for first quarter 2012 increased by $21 million or 1.6 percent over first quarter 2011 to $1,285 million. Cash flow provided by operations was $1,307 million and $1,052 million for the three months ended April 28, 2012 and April 30, 2011, respectively. Diluted earnings per share in the first quarter increased 5.0 percent to $1.04 from $0.99 in the same period a year ago. Adjusted diluted earnings per share, which we believe is useful in providing period-to-period comparisons of the results of our U.S. operations, increased 11.5 percent to $1.11 in first quarter 2012 from $0.99 in the same period a year ago.

 

Earnings Per Share

 

Three Months Ended

 

 

 

 

 

April 28

,

April 30

,

 

 

 

 

2012

 

2011

 

Change

 

GAAP diluted earnings per share

 

$

1.04

 

$

0.99

 

5.0

%

Adjustments(a)

 

0.07

 

 

 

 

Adjusted diluted earnings per share

 

$

1.11

 

$

0.99

 

11.5

%

 

Note: A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 20.

(a) Adjustments represent the diluted EPS impact of our planned 2013 Canadian market entry and the favorable resolution of various income tax matters.

 

Our financial results for the first quarter of 2012 in our U.S. Retail Segment reflect increased sales of 6.1 percent over the same period last year due to a 5.3 percent comparable-store increase combined with the contribution from new stores. In first quarter 2012 we experienced U.S. Retail Segment EBITDA and EBIT margin rate improvements compared to first quarter 2011, driven by strong year-over-year sales growth resulting in leverage on selling, general and administrative (SG&A) expenses.

 

In the U.S. Credit Card Segment, we experienced a decrease in segment profit due to annualizing over a significant reserve reduction in the prior year and a smaller portfolio resulting in lower finance charge revenue, partially offset by lower interest expense.

 

During the three months ended April 28, 2012, loss before interest expense and income taxes in our Canadian Segment totaled $55 million, comprised of start-up costs and depreciation, compared to $11 million during the three months ended April 30, 2011.

 

Analysis of Results of Operations

 

U.S. Retail Segment

 

U.S. Retail Segment Results

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

April 28

,

April 30

,

Percent

 

(millions)

 

 

 

 

 

 

 

 

2012

 

2011

 

Change

 

Sales

 

 

 

 

 

 

 

 

$

16,537

 

$

15,580

 

6.1

  %

Cost of sales

 

 

 

 

 

 

 

 

11,541

 

10,838

 

6.5

 

Gross margin

 

 

 

 

 

 

 

 

4,996

 

4,742

 

5.4

 

SG&A expenses(a)

 

 

 

 

 

 

 

 

3,293

 

3,173

 

3.8

 

EBITDA

 

 

 

 

 

 

 

 

1,703

 

1,569

 

8.5

 

Depreciation and amortization

 

 

 

 

 

 

 

 

504

 

507

 

(0.7

)

EBIT

 

 

 

 

 

 

 

 

$

1,199

 

$

1,062

 

12.9

  %

 

EBITDA is earnings before interest expense, income taxes, depreciation and amortization.

EBIT is earnings before interest expense and income taxes.

Note: See Note 11 to our consolidated financial statements for a reconciliation of our segment results to earnings before income taxes.

(a) Loyalty program charges were $65 million and $49 million for the three months ended April 28, 2012 and April 30, 2011, respectively. In all periods, these amounts were recorded as reductions to SG&A expenses within the U.S. Retail Segment and increases to operations and marketing expenses within the U.S. Credit Card Segment.

 

14



 

U.S. Retail Segment Rate Analysis

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

April 28,

 

April 30,

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

Gross margin rate

 

 

 

 

 

 

 

 

 

 

30.2

 %

30.4

 %

SG&A expense rate

 

 

 

 

 

 

 

 

 

 

19.9

 

20.4

 

EBITDA margin rate

 

 

 

 

 

 

 

 

 

 

10.3

 

10.1

 

Depreciation and amortization expense rate

 

 

 

 

 

 

3.0

 

3.3

 

EBIT margin rate

 

 

 

 

 

 

 

 

 

 

7.3

 

6.8

 

Rate analysis metrics are computed by dividing the applicable amount by sales.

 

Sales

 

Sales include merchandise sales, net of expected returns, from our stores and our online business, as well as gift card breakage. See Item 1 in our Form 10-K for the fiscal year ended January 28, 2012 for a description of our product categories.

 

Sales by Product Category

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

April 28,

 

April 30,

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

Household essentials

 

 

 

 

 

 

 

 

 

 

26

 %

26

 %

Hardlines

 

 

 

 

 

 

 

 

 

 

16

 

17

 

Apparel and accessories

 

 

 

 

 

 

 

 

 

 

20

 

20

 

Food and pet supplies

 

 

 

 

 

 

 

 

 

 

21

 

20

 

Home furnishings and décor

 

 

 

 

 

 

 

 

 

 

17

 

17

 

Total

 

 

 

 

 

 

 

 

 

 

100

 %

100

 %

 

Comparable-store sales is a measure that highlights the performance of our existing stores by measuring the change in sales for such stores for a period over the comparable, prior-year period of equivalent length. The method of calculating comparable-store sales varies across the retail industry. As a result, our comparable-store sales calculation is not necessarily comparable to similarly titled measures reported by other companies.

 

Comparable-store sales are sales from our online business and stores open longer than one year, including:

·                          sales from stores that have been remodeled or expanded while remaining open (including our current store remodel program)

·                          sales from stores that have been relocated to new buildings of the same format within the same trade area, in which the new store opens at about the same time as the old store closes

 

Comparable-store sales do not include:

·                          sales from general merchandise stores that have been converted, or relocated within the same trade area, to a SuperTarget store format

·                          sales from stores that were intentionally closed to be remodeled, expanded or reconstructed

 

Comparable-Store Sales

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

April 28,

 

April 30,

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

2011

 

Comparable-store sales change

 

 

 

 

 

 

 

 

 

 

5.3

 %

2.0

 %

Drivers of change in comparable-store sales:

 

 

 

 

 

 

 

 

 

 

     Number of transactions

 

 

 

 

 

 

 

 

 

 

2.0

 

0.4

 

     Average transaction amount

 

 

 

 

 

 

 

 

 

 

3.2

 

1.6

 

          Units per transaction