UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  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   October 30, 2004

 

 

Commission file number 1-6049

 

 

Target Corporation
(Exact name of registrant as specified in its charter)
Minnesota			41-0215170
(State 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
N/A
(Former name, former address and former fiscal year, if changed since last report.)

 

 

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, (2) has been subject to such filing requirements for the past 90 days, and (3) is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

The number of shares outstanding of common stock as of October 30, 2004 was 895,425,855.

 

 

TABLE OF CONTENTS

 

TARGET CORPORATION

 

 

PART I	FINANCIAL INFORMATION:
	Item 1 – Financial Statements
	Consolidated Results of Operations for the Three Months, Nine Months and Twelve Months ended October 30, 2004 and November 1, 2003
	Consolidated Statements of Financial Position at October 30, 2004, January 31, 2004 and November 1, 2003
	Consolidated Statements of Cash Flows for the Nine Months ended October 30, 2004 and November 1, 2003
	Notes to Consolidated Financial Statements
	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 4 – Controls and Procedures
PART II	OTHER INFORMATION:
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
	Item 6 – Exhibits
	Signature
	Exhibit Index

 

 

PART I.  FINANCIAL INFORMATION

 

CONSOLIDATED RESULTS OF OPERATIONS		TARGET CORPORATION
(millions, except per share data)
		Three Months Ended						Nine Months Ended						Twelve Months Ended
(Unaudited)		October 30, 2004			November 1, 2003			October 30, 2004			November 1, 2003			October 30, 2004			November 1, 2003
Sales		$	10,619		$	9,552		$	30,805		$	27,539		$	44,194		$	39,377
Net credit revenues		290			275			840			810			1,127			1,083
Total revenues		10,909			9,827			31,645			28,349			45,321			40,460
Cost of sales		7,319			6,643			21,097			19,050			30,436			27,449
Selling, general and administrative expense		2,437			2,164			6,879			6,051			9,433			8,193
Credit expense		185			180			532			530			725			721
Depreciation and amortization		324			277			915			812			1,201			1,066
Earnings from continuing operations before interest expense and income taxes		644			563			2,222			1,906			3,526			3,031
Interest expense		113			131			463			427			592			580
Earnings from continuing operations before income taxes		531			432			1,759			1,479			2,934			2,451
Provision for income taxes		201			161			665			559			1,109			930
Earnings from continuing operations		330			271			1,094			920			1,825			1,521
Earnings from discontinued operations, net of $2, $18, $46, $54, $108 and $108 tax		4			31			75			89			176			176
Gain on disposal of discontinued operations, net of $132, $782 and $782 tax		203			—			1,222			—			1,222			—
Net earnings		$	537		$	302		$	2,391		$	1,009		$	3,223		$	1,697
Basic earnings per share
Continuing operations		$	.37		$	.30		$	1.21		$	1.01		$	2.01		$	1.67
Discontinued operations		—			.03			.08			.10			.19			.19
Gain from discontinued operations		.23			—			1.35			—			1.35			—
Basic earnings per share		$	.60		$	.33		$	2.64		$	1.11		$	3.55		$	1.86
Diluted earnings per share
Continuing operations		$	.37		$	.30		$	1.20		$	1.00		$	2.00		$	1.66
Discontinued operations		—			.03			.08			.10			.19			.19
Gain from discontinued operations		.23			—			1.34			—			1.34			—
Diluted earnings per share		$	.60		$	.33		$	2.62		$	1.10		$	3.53		$	1.85
Dividends declared per common share		$	.080		$	.070		$	.230		$	.200		$	.300		$	.260
Weighted average common shares outstanding:
Basic		896.0			911.3			906.7			910.8			907.9			910.4
Diluted		902.1			918.0			913.5			917.1			914.5			916.4

 

See accompanying Notes to Consolidated Financial Statements.

 

 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

TARGET CORPORATION

 

(millions)		October 30, 2004			January 31, 2004*			November 1, 2003
		(Unaudited)						(Unaudited)
Assets
Cash and cash equivalents		$	1,587		$	708		$	487
Accounts receivable, net		4,551			4,621			4,293
Inventory		6,559			4,531			5,214
Other		1,080			976			1,042
Current assets of discontinued operations		—			2,092			2,248
Total current assets		13,777			12,928			13,284
Property and equipment
Property and equipment		21,626			19,880			19,476
Accumulated depreciation		(5,153		)	(4,727		)	(4,654		)
Property and equipment, net		16,473			15,153			14,822
Other		1,536			1,377			1,392
Non-current assets of discontinued operations		—			1,934			1,926
Total assets		$	31,786		$	31,392		$	31,424
Liabilities and shareholders’ investment
Accounts payable		$	6,164		$	4,956		$	4,631
Current portion of long-term debt and notes payable		506			863			1,471
Other		1,815			1,670			1,478
Current liabilities of discontinued operations		—			825			1,016
Total current liabilities		8,485			8,314			8,596
Long-term debt		9,082			10,155			10,940
Deferred income taxes and other		1,821			1,592			1,373
Non-current liabilities of discontinued operations		—			266			250
Shareholders’ investment		12,398			11,065			10,265
Total liabilities and shareholders’ investment		$	31,786		$	31,392		$	31,424
Common shares outstanding		895.4			911.8			911.5

 

* The January 31, 2004 Consolidated Statement of Financial Position is condensed from the audited consolidated financial statement.

 

See accompanying Notes to Consolidated Financial Statements.

 

 

CONSOLIDATED STATEMENTS		TARGET CORPORATION
OF CASH FLOWS (millions)

 

		Nine Months Ended
(Unaudited)		October 30, 2004			November 1, 2003
Net earnings		$	2,391		$	1,009
Gain and earnings from discontinued operations		1,297			89
Earnings from continuing operations		1,094			920
Reconciliation to cash flow
Depreciation and amortization		915			812
Deferred tax provision		136			—
Bad debt provision		327			350
Losses on disposal of fixed assets, net		40			25
Other non-cash items affecting earnings		79			31
Changes in operating accounts providing / (requiring) cash:
Accounts receivable		(257		)	(362		)
Inventory		(2,028		)	(1,262		)
Other current assets		(35		)	(301		)
Other assets		(155		)	(156		)
Accounts payable		1,208			396
Accrued liabilities		135			1
Income taxes payable		(53		)	(37		)
Other		(17		)	19
Cash flow provided by operations		1,389			436
Investing activities
Expenditures for property and equipment		(2,206		)	(2,110		)
Proceeds from disposals of property and equipment		15			16
Proceeds from sale of discontinued operations		4,893			—
Cash flow provided / (required) by investing activities		2,702			(2,094		)
Financing activities
Increase in notes payable, net		—			1,308
Additions to long-term debt		—			1,200
Reductions of long-term debt		(1,486		)	(1,178		)
Dividends paid		(200		)	(173		)
Repurchase of stock		(958		)	—
Other		87			21
Cash flow (required) / provided by financing activities		(2,557		)	1,178
Net cash (required) / provided by discontinued operations		(655		)	217
Net increase / (decrease) in cash and cash equivalents		879			(263		)
Cash and cash equivalents at beginning of period		708			750
Cash and cash equivalents at end of period		$	1,587		$	487

 

Amounts in this statement are presented on a cash basis and therefore may differ from those shown elsewhere in this 10-Q report. See accompanying Notes to Consolidated Financial Statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

TARGET CORPORATION

 

Accounting Policies

 

The accompanying consolidated financial statements should be read in conjunction with the financial statement disclosures contained in our 2003 Annual Report to Shareholders throughout pages 30-39.  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 presentation of quarterly operating results are reflected herein and are of a normal, recurring nature, except for the adjustments in relation to the sale of Marshall Field’s and Mervyn’s.

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

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

 

We operate as a single business segment.

 

New Accounting Pronouncements

 

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51” (FIN No. 46). FIN No. 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interest in the entity. Currently, entities are generally consolidated by an enterprise when it has a controlling financial interest through ownership of a majority voting interest in the entity. FIN No. 46 was effective at the end of the first reporting period that ends after March 15, 2004. The adoption of FIN No. 46 did not have a material impact on our net earnings, cash flows or financial position.

 

The Medicare Prescription Drug, Improvements and Modernization Act of 2003 (The Act) was signed into law in December 2003.  The Act introduces a prescription drug benefit under Medicare (Medicare Part D), as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a prescription drug benefit that is at least actuarially equivalent to Medicare Part D.  In May 2004, the FASB issued Staff Position (FSP) No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.”  This FSP is effective for interim or annual periods beginning after June 15, 2004. Final regulations that would define actuarial equivalency have not yet been issued.  However, we have made a preliminary determination that our plans will be actuarially equivalent. As a result, we recorded a reduction in our accumulated post-retirement benefit obligation of $7 million in the third quarter. In addition, the expense amounts shown in the Pension and Postretirement Health Care Benefits Note reflect a $1 million reduction due to the amortization of the actuarial gain and reduction in interest cost due to the effects of the Act.

 

 

Discontinued Operations

 

On March 10, 2004, we began a review of strategic alternatives for Mervyn’s and Marshall Field’s which included, but was not limited to, the possible sale of one or both of these segments as ongoing businesses to existing retailers or other qualified buyers.  On June 9, 2004, we entered into an agreement to sell our interest in Marshall Field’s and the Mervyn’s stores located in Minnesota to The May Department Stores Company (May). The sale of Marshall Field’s was completed on July 31, 2004 while the sale of the Minnesota Mervyn’s stores was completed on August 24, 2004. May acquired total assets and liabilities with a net carrying value of $1.49 billion, in exchange for $3.24 billion cash consideration which resulted in a gain on sale of approximately $1 billion or $1.11 per share, net of tax. On July 29, 2004, we entered into an agreement to sell the balance of Mervyn’s retail stores and distribution centers to an investment consortium including Sun Capital Partners, Inc., Cerberus Capital Management, L.P., and Lubert-Adler/Klaff and Partners, L.P. and to sell Mervyn’s credit card receivables to GE Consumer Finance, a unit of General Electric Company, for total consideration of approximately $1.65 billion in cash. This sale transaction was completed as of August 28, 2004 and resulted in a gain on sale of approximately $200 million or $.23 per share, net of tax. To calculate the gains, we took into account certain transaction-related expenses such as professional fees and stock option expenses. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the financial results of Marshall Field’s and Mervyn’s are reported as discontinued operations for all periods presented. Income taxes payable resulting from the gain on the Marshall Field’s and Mervyn’s transactions are included in current liabilities of continuing operations.

 

In connection with the sale of Marshall Field’s, May will secure transition support services from us until the earlier of March 31, 2005 or until May is able to develop long-term service providers for these services.  In connection with the sale of Mervyn’s, we will also provide transition services for a fee for a period of up to two to three years or until long-term service providers are developed for these services. Consideration received as a result of providing these services will essentially offset expenses incurred, which is consistent with our prior accounting practices.

 

The financial results included in discontinued operations were as follows:

 

		Three Months Ended						Nine Months Ended
(millions)		Oct. 30, 2004			Nov. 1, 2003			Oct. 30, 2004			Nov. 1, 2003
Revenue		$	294		$	1,459		$	3,095		$	4,244
Earnings from discontinued operations before income taxes		6			49			121			143
Earnings from discontinued operations, net of $2, $18, $46 and $54 tax, respectively		4			31			75			89
Gain on sale of discontinued operations, net of $132 and $782 tax, respectively		203			—			1,222			—
Total income from discontinued operations, net of tax		$	207		$	31		$	1,297		$	89

 

 

The major classes of assets and liabilities of discontinued operations in the Consolidated Statements of Financial Position on January 31, 2004 and November 1, 2003 are as follows:

 

(millions)		January 31, 2004			Nov. 1, 2003
Cash and cash equivalents		$	8		$	8
Accounts receivable, net		1,155			1,074
Inventory		812			1,055
Other		117			111
Current assets of discontinued operations		2,092			2,248
Property and equipment, net		1,816			1,806
Other		118			120
Non-current assets of discontinued operations		1,934			1,926
Accounts payable		492			697
Accrued liabilities		330			316
Current portion of long-term debt and notes payable		3			3
Current liabilities of discontinued operations		825			1,016
Long-term debt		62			63
Deferred income taxes and other		204			187
Non-current liabilities of discontinued operations		$	266		$	250

 

Earnings Per Share

 

Basic earnings per share amounts are based on the weighted-average outstanding common shares. Diluted earnings per share are based on the weighted-average outstanding common shares including the dilutive effect of stock options amounting to a weighted average of 6.1 million, 6.8 million and 6.6 million shares, respectively, for the three, nine and twelve month periods ending October 30, 2004.  The dilutive effects of stock options for the same periods in 2003 were 6.7 million, 6.3 million and 6.0 million shares, respectively.

 

Long-term Debt and Derivatives

 

During the first nine months of 2004, we repurchased $542 million of long-term debt with a weighted average interest rate of approximately 7.0 percent. These transactions resulted in a pre-tax loss of $89 million ($.06 per share), which is included in interest expense in the Consolidated Results of Operations. There were no long term debt repurchases during the third quarter.

 

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 variable rate. The fair value of our outstanding swaps is reflected in the financial statements as a component of other current assets, other long-term assets or other long-term liabilities. No ineffectiveness was recognized during the first nine months of 2004 related to these instruments.

 

 

At October 30, 2004, January 31, 2004 and November 1, 2003, interest rate swaps were outstanding in notional amounts totaling $2,150 million. At October 30, 2004, the fair value of our existing swaps and unamortized gains from terminated interest rate swaps was $69 million, compared to $97 million at January 31, 2004 and $89 million at November 1, 2003.

 

Accounts Receivable

 

Accounts receivable is recorded net of an allowance for expected losses. The allowance, estimated from historical portfolio performance and projections of trends, was $363 million at October 30, 2004, compared to $352 million at January 31, 2004 and $341 million at November 1, 2003.

 

Stock Option Plans

 

In accordance with SFAS No. 148, “Accounting For Stock-Based Compensation – Transition and Disclosure,” the fair value based method has been applied prospectively to awards granted subsequent to February 1, 2003 (the last day of our 2002 fiscal year). Awards granted in fiscal year 2002 and earlier years will continue to be accounted for under the intrinsic value method, and the pro forma impact of accounting for those awards at fair value will continue to be disclosed until the last of those awards vest in January of 2007.

 

Historically, and through February 1, 2003, we applied the intrinsic value method prescribed in APB No. 25, “Accounting for Stock Issued to Employees,” to account for our stock option plans. No compensation expense related to options was recognized because the exercise price of our employee stock options equals the market price of the underlying stock on the grant date. The expense related to the intrinsic value of performance-based and restricted stock awards issued was not significant to third quarter or year-to-date 2004 net earnings, cash flows or financial position.  If we had elected to recognize compensation cost based on the fair value of the awards at the grant date, earnings from continuing operations would have been the pro forma amounts shown below.

 

 

		Three Months Ended						Nine Months Ended
(millions, except per share data)		Oct. 30, 2004			Nov. 1, 2003			Oct. 30, 2004				Nov. 1, 2003
Earnings from continuing operations – as reported		$	330		$	271		$		1,094		$	920
Stock-based employee compensation expense included in reported earnings from continuing operations, net of tax		1			1			9				3
Stock-based employee compensation expense determined under fair value based method, net of tax		(7		)	(9		)	(28			)	(27		)
Earnings from continuing operations – pro forma		$	324		$	263		$	1,075			$	896
Earnings per share:
Basic – continuing operations as reported		$	.37		$	.30		$	1.21			$	1.01
Basic – continuing operations pro forma		$	.36		$	.29		$	1.19			$	.98
Diluted – continuing operations as reported		$	.37		$	.30		$	1.20			$	1.00
Diluted – continuing operations pro forma		$	.36		$	.29		$	1.17			$	.97

 

Defined Contribution Plans

 

In addition to our defined contribution 401(k) plan, we maintain non-qualified, unfunded plans that allow participants who are otherwise limited by qualified plan statutes or regulations to defer compensation and earn returns either tied to the results of our 401(k) plan investment choices or market levels of interest rates.  During the three and nine months ended October 30, 2004, certain current and retired executives accepted our offer to exchange our obligation to them in a frozen non-qualified plan for cash or deferrals in an existing plan, which resulted in a pre-tax net expense of approximately $1 million (less than $.01 per share) and $14 million ($.01 per share), respectively, for the three and nine month periods ending October 30, 2004. We expect lower future expenses as a result of these transactions because they were designed to be economically neutral or slightly favorable to us.

 

Pension and Postretirement Health Care Benefits

 

We have qualified defined benefit pension plans that cover all employees who meet certain age, length of service and hours worked per year requirements. We also have unfunded non-qualified pension plans for employees who have qualified plan compensation restrictions. Benefits are provided based upon years of service and the employee’s compensation. Retired 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. During the second and third quarters of 2004, we recorded pre-tax net curtailment gains of approximately $2 million and $4 million due to the sales of Marshall Field’s and Mervyn’s, respectively. These curtailment gains are included in the gain on disposal of discontinued operations as a result of freezing the benefits for Marshall Field’s and Mervyn’s team members and retaining the related assets and obligations of the plans.

 

 

Net Pension Expense

 

		Pension Benefits
		Three Months Ended						Nine Months Ended						Twelve Months Ended
(millions)		Oct. 30, 2004			Nov. 1, 2003			Oct. 30, 2004			Nov. 1, 2003			Oct. 30, 2004			Nov. 1, 2003
Service cost benefits earned during the period		$	17		$	19		$	59		$	56		$	78		$	70
Interest cost on projected benefit obligation		22			19			64			57			81			75
Expected return on assets		(30		)	(29		)	(90		)	(86		)	(118		)	(112		)
Recognized losses		9			5			27			14			32			16
Recognized prior service cost		(2		)	(2		)	(6		)	(6		)	(7		)	(5		)
Settlement/curtailment charges (gain)		(1		)	—			—			—			—			(3		)
Total		$	15		$	12		$	54		$	35		$	66		$	41

 

 

		Postretirement Healthcare Benefits
		Three Months Ended						Nine Months Ended						Twelve Months Ended
		Oct. 30, 2004			Nov.1, 2003			Oct. 30, 2004			Nov.1, 2003			Oct. 30, 2004			Nov.1, 2003
Service cost benefits earned during the period		$	1		$	1		$	2		$	2		$	3		$	2
Interest cost on projected benefit obligation		2			2			6			6			7			8
Expected return on assets		—			—			—			—			—			—
Recognized losses		—			—			—			—			—			1
Recognized prior service cost		—			—			1			—			1			—
Settlement/curtailment (gain)		(4		)	—			(7		)	—			(7		)	—
Total		$	(1	)	$	3		$	2		$	8		$	4		$	11

 

The expense amounts shown in the table above reflect a $1 million reduction in expense due to the amortization of the actuarial gain and reduction in interest cost due to the effects of the Medicare Prescription Drug, Improvements and Modernization Act of 2003.

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

TARGET CORPORATION

 

 

Analysis of Continuing Operations

 

Earnings from continuing operations for the three and nine month periods ended October 30, 2004 were $330 million and $1,094 million, respectively, or $.37 and $1.20 per share, compared with $271 million and $920 million, or $.30 and $1.00 per share, for the same periods last year.  Our earnings from continuing operations in the third quarter were reduced by a pre-tax adjustment of $18 million, or about $.01 per share, related to accounting for certain store leases.  This adjustment resulted from a detailed review of our leases which we began in conjunction with the sale of Mervyn’s and Marshall Field’s.

 

Revenues and Comparable-Store Sales

 

Total revenues for the quarter increased 11.0 percent to $10,909 million compared with $9,827 million for the same period a year ago. For the nine month period ending October 30, 2004, total revenues increased 11.6 percent to $31,645 compared to $28,349 million for the same period a year ago. Our revenue growth for the quarter is due to a 4.5 percent comparable-store sales increase and the contribution from new store growth.

 

Total comparable-store sales (sales from stores open longer than one year) increased 4.5 percent and 5.2 percent, respectively, for the three and nine month periods ended October 30, 2004.

 

Gross Margin Rate

 

Gross margin rate represents gross margin (sales less cost of sales) as a percent of sales.  In the third quarter, our overall gross margin rate improved when compared to the prior year, primarily due to markup improvements.

 

Selling, General and Administrative Expense Rate

 

Our selling, general and administrative (SG&A) expense rate represents payroll, benefits, advertising, distribution, buying and occupancy, start-up and other expenses as a percent of sales. SG&A expense excludes depreciation and amortization and expenses associated with our credit card operations because those items are separately disclosed in our Consolidated Results of Operations. In the third quarter of 2004, our operating expense rate was slightly unfavorable to last year with slightly more than half of the variance due to the lease accounting adjustment.

 

Other Performance Factors

 

In the third quarter and first nine months of 2004, total interest expense was $113 million and $463 million, representing an $18 million decrease and a $36 million increase from the third quarter and first nine months of 2003, respectively. The decrease in interest expense for the third quarter was due to lower average funded balances, partially offset by a higher average portfolio interest rate.  The increase in interest expense for the nine months ended October 30, 2004 was due mainly to a year-over-year pre-tax increase of $74 million in loss on debt repurchase in 2004 (reflecting a $89 million loss in the

 

 

nine months ended October 30, 2004 compared to a $15 million loss in the first nine months of 2003) along with higher average portfolio rates offset by lower average funded balances.

 

The estimated annual effective income tax rate in the third quarter 2004 and 2003 was 37.8 percent. The effective income tax rate for the third quarter of 2004 was 37.8 percent compared to the 37.3 percent rate reflected in the third quarter of 2003.

 

Credit Card Operations (millions)

 

Our credit card program strategically supports our core retail operation.  Credit card contribution to continuing operations was as follows:

 

		Three Months Ended							Nine Months Ended
		Oct. 30, 2004				Nov. 1, 2003			Oct. 30, 2004			Nov. 1, 2003
Revenues
Finance charges, late fees and other revenues		$		264		$	255		$	771		$	751
Merchant fees
Intracompany		15				12			43			33
Third-party		26				20			69			59
Total revenues		305				287			883			843
Expenses
Bad debt		111				122			327			350
Operations and marketing		74				58			205			180
Total expenses		185				180			532			530
Pre-tax credit card contribution		$	120			$	107		$	351		$	313
As a percent of total average receivables (annualized)		10.0			%	9.2		%	9.8		%	9.1		%

 

 

The allowance for doubtful accounts on receivables was as follows:

 

		Three Months Ended						Nine Months Ended
		Oct. 30, 2004			Nov. 1, 2003			Oct. 30, 2004			Nov. 1, 2003
Allowance at beginning of period		$	351		$	334		$	352		$	320
Bad debt provision		111			122			327			350
Net write-offs		(99		)	(115		)	(316		)	(329		)
Allowance at end of period		$	363		$	341		$	363		$	341
As a percent of period-end receivables		7.4		%	7.3		%	7.4		%	7.3		%

 

 

A summary of other continuing credit card contribution information is as follows:

 

		Oct. 30, 2004			Nov. 1, 2003
Total period-end receivables		$	4,914		$	4,634
Accounts with three or more payments past due as a percent of total outstanding receivables:		3.8		%	4.4		%

 

		Three Months Ended						Nine Months Ended
		Oct. 30, 2004			Nov. 1, 2003			Oct. 30, 2004			Nov. 1, 2003
Total revenues as a percent of average receivables (annualized):		25.3		%	24.7		%	24.6		%	24.6		%
Net write-offs as a percent of average receivables (annualized):		8.2		%	9.9		%	8.8		%	9.6		%
Total average receivables		$	4,821		$	4,640		$	4,786		$	4,571

 

 

Analysis of Discontinued Operations

 

On March 10, 2004, we began a review of strategic alternatives for Mervyn’s and Marshall Field’s which included, but was not limited to, the possible sale of one or both of these segments as ongoing businesses to existing retailers or other qualified buyers.  On June 9, 2004, we entered into an agreement to sell our interest in Marshall Field’s and the Mervyn’s stores located in Minnesota to The May Department Stores Company (May). The sale of Marshall Field’s was completed on July 31, 2004 while the sale of the Minnesota Mervyn’s stores was completed on August 24, 2004. May acquired total assets and liabilities with a net carrying value of $1.49 billion, in exchange for $3.24 billion cash consideration which resulted in a gain on sale of approximately $1 billion or $1.11 per share, net of tax. On July 29, 2004, we entered into an agreement to sell the balance of Mervyn’s retail stores and distribution centers to an investment consortium including Sun Capital Partners, Inc., Cerberus Capital Management, L.P., and Lubert-Adler/Klaff and Partners, L.P. and to sell Mervyn’s credit card receivables to GE Consumer Finance, a unit of General Electric Company, for total consideration of approximately $1.65 billion in cash. This sale transaction was completed as of August 28, 2004 and resulted in a gain on sale of approximately $200 million or $.23 per share, net of tax. To calculate the gains, we took into account certain transaction related expenses such as professional fees and stock option expenses. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the financial results of Marshall Field’s and Mervyn’s are reported as discontinued operations for all periods presented. Income taxes payable resulting from the gain on the Marshall Field’s and Mervyn’s transactions are included in current liabilities of continuing operations.

 

 

Pre-tax earnings from discontinued operations for the three and nine month periods ended October 30, 2004 were $6 million and $121 million, respectively, or $.00 and $.08 per share, compared with $49 million and $143 million, respectively, or $.03 and $.10 per share, for the same periods last year.

 

Analysis of Financial Condition of Continuing Operations

 

Liquidity and Capital Resources

 

Our financial condition remains strong. In assessing our financial condition, management considers factors such as cash flows provided by operations, capital expenditures and debt service obligations. We continue to fund the growth in our business through a combination of internally generated funds and debt.  In addition, we intend to utilize a portion of the proceeds from dispositions to fund growth and pay down debt.

 

During the third quarter, total gross receivables increased $280 million, or 6.0 percent, over the third quarter of last year. Inventory increased $1,345 million, or 26 percent, over the third quarter of last year. More than half of this increase is due to our refinement of the measurement of the point in the supply chain where ownership of direct imports occurs. The remaining increase is attributable to additional square footage, same-store sales growth and our strategic focus on increasing direct imports. The inventory growth was more than fully funded by a $1,533 million, or 33 percent, increase in accounts payable.

 

Capital expenditures for the first nine months of 2004 were $2,206 million, compared with $2,110 million for the same period a year ago.

 

Store Data

 

During the quarter, we opened a total of 46 new stores. Net of relocations and closings, these openings included 31 discount stores and 10 SuperTarget stores. At October 30, 2004, our number of stores and retail square feet were as follows:

 

		Number of Stores						Retail Square Feet*
		Oct. 30, 2004		Jan. 31, 2004		Nov. 1, 2003		Oct. 30, 2004		Jan. 31, 2004		Nov. 1, 2003
Target General Merchandise Stores		1,177		1,107		1,109		141,503		131,638		131,832
SuperTarget Stores		136		118		118		24,057		20,925		20,925
Total		1,313		1,225		1,227		165,560		152,563		152,757

 

* In thousands, reflects total square feet, less office, warehouse and vacant space.

 

 

Outlook for Fiscal Year 2004

 

For the full year, we believe that Target Corporation is well-positioned to deliver meaningful growth in earnings from continuing operations, primarily due to expected increases in comparable store sales and new store expansion at Target. In addition we expect to benefit from continued growth in contribution from our credit card operations.

 

We may or may not enter into long-term debt repurchase transactions during the balance of the year.  Excluding the effect of any additional repurchase of debt, we expect interest expense in the fourth quarter of 2004 to be lower than the same period in 2003, due to lower average net debt outstanding resulting from the application of transaction proceeds, partially offset by higher portfolio interest rates.

 

Forward-Looking Statements

 

The preceding Management’s Discussion and Analysis contains forward-looking statements regarding our performance, liquidity and the adequacy of our capital resources.  Those statements are based on our current assumptions and expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected.  We caution that the forward-looking statements are qualified by the risks and challenges posed by increased competition (including the effects of competitor liquidation activities), shifting consumer demand, changing consumer credit markets, changing health care costs, changing capital markets and general economic conditions, hiring and retaining effective team members, sourcing merchandise from domestic and international vendors, investing in new business strategies, achieving our growth objectives, the outbreak of war and other significant national and international events, and other risks and uncertainties.  As a result, while we believe that there is a reasonable basis for the forward-looking statements, you should not place undue reliance on those statements.  You are encouraged to review Exhibit (99)C attached to our Form 10-K Report for the year ended January 31, 2004, which contains additional important factors that may cause actual results to differ materially from those predicted in the forward-looking statements.

 

 

CONTROLS AND PROCEDURES

TARGET  CORPORATION

 

As of the end of the period covered by this quarterly report, we conducted an evaluation, under supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (Exchange Act).  Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective.  Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the Securities and Exchange Commission (SEC) under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation date.

 

 

PART II. OTHER INFORMATION

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

The following table presents information with respect to purchases of common stock of the Company made during the three months ended October 30, 2004, by Target Corporation or any “affiliated purchaser” of Target Corporation, as defined in Rule 10b-18(a)(3) under the Exchange Act.

 

Period		Total Number of Shares Purchased (2)		Average Price Paid per Share (2)			Total Number of Shares Purchased as Part of Publicly Announced Program (1)(2)		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1)
August 1, 2004 through August 28, 2004		7,463,700		$	44.02		18,500,472		$		2,199,151,219
August 29, 2004 through October 2, 2004		3,619,500		44.89			22,119,972		2,036,671,890
October 3, 2004 through October 30, 2004		309,387		38.82			22,429,359		2,024,662,600
Total		11,392,587		$	44.16		22,429,359		$	2,024,662,600

 

(1)   In June of 2004, our Board of Directors authorized the aggregate repurchase of $3 billion of our common stock. The repurchase of our common stock is expected to be made primarily in open market transactions, subject to market conditions, and is expected to be completed within two to three years. Since the inception of this share repurchase program, we have repurchased a total of approximately 22 million shares of our common stock at a total cost of approximately $975 million ($43.48 per share).

 

(2)   In addition to shares purchased under our share repurchase program, we acquire shares of common stock held by employees who wish to tender owned shares to satisfy the exercise price on option exercises or tax withholding on equity awards as part of our long-term incentive plans. From August 1, 2004 through October 30, 2004, we purchased 4,829 shares at an average price per share of $42.01 which were tendered pursuant to our long-term incentive plans and are not included in the table above.

 

 

Item 6.	Exhibits
a)	Exhibits
	(2).		Not applicable
	(4).		Instruments defining the rights of security holders, including indentures.  Registrant agrees to furnish the Commission on request copies of instruments with respect to long-term debt.
	(10).		Not applicable
	(11).		Not applicable
	(12).		Statements re Computations of Ratios
	(15).		Not applicable
	(18).		Not applicable
	(19).		Not applicable
	(22).		Not applicable
	(23).		Not applicable
	(24).		Not applicable
	(31)A.		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	(31)B.		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	(32)A.		Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	(32)B.		Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

Signature

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	TARGET CORPORATION
Dated:  December 3, 2004	By:	/s/ Douglas A. Scovanner
		Douglas A. Scovanner Executive Vice President, Chief Financial Officer and Chief Accounting Officer

 

 

Exhibit Index

 

Exhibit		Description		Manner of Filing
(12).		Statements re Computations of Ratios		Filed Electronically
(31)A.		Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed Electronically
(31)B.		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.		Filed Electronically
(32)A.		Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Filed Electronically
(32)B.		Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Filed Electronically