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   July 30, 2005

 

 

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, (3) is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act), and (4) is not a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

The number of shares outstanding of common stock as of July 30, 2005 was 884,664,439.

 


 

TABLE OF CONTENTS

 

TARGET CORPORATION

 

PART I

FINANCIAL INFORMATION:

 

 

 

 

 

Item 1 – Financial Statements

 

 

 

 

 

Consolidated Results of Operations for the Three Months and Six
Months ended July 30, 2005 and July 31, 2004

 

 

 

 

 

Consolidated Statements of Financial Position at July 30, 2005,
January 29, 2005 and July 31, 2004

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months ended
July 30, 2005 and July 31, 2004

 

 

 

 

 

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

 

Six Months Ended

 

 

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

(Unaudited)

 

2005

 

2004

 

2005

 

2004

 

Sales

 

$

11,667

 

$

10,277

 

$

22,838

 

$

20,186

 

Net credit revenues

 

323

 

279

 

629

 

550

 

Total revenues

 

11,990

 

10,556

 

23,467

 

20,736

 

Cost of sales

 

7,828

 

7,009

 

15,384

 

13,778

 

Selling, general and administrative expense

 

2,650

 

2,289

 

5,145

 

4,461

 

Credit expense

 

187

 

173

 

366

 

347

 

Depreciation and amortization

 

346

 

299

 

686

 

591

 

Earnings from continuing operations before interest expense and income taxes

 

979

 

786

 

1,886

 

1,559

 

Net interest expense

 

110

 

207

 

221

 

350

 

Earnings from continuing operations before income taxes

 

869

 

579

 

1,665

 

1,209

 

Provision for income taxes

 

329

 

219

 

631

 

457

 

Earnings from continuing operations

 

540

 

360

 

1,034

 

752

 

Earnings from discontinued operations, net of taxes of $19 and $44

 

 

31

 

 

71

 

Gain on disposal of discontinued operations, net of taxes of $650 and $650

 

 

1,019

 

 

1,019

 

Net earnings

 

$

540

 

$

1,410

 

$

1,034

 

$

1,842

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.61

 

$

.40

 

$

1.17

 

$

.82

 

Discontinued operations

 

 

.03

 

 

.08

 

Gain on disposal of discontinued operations

 

 

1.12

 

 

1.12

 

Basic earnings per share

 

$

.61

 

$

1.55

 

$

1.17

 

$

2.02

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

.61

 

$

.39

 

$

1.16

 

$

.81

 

Discontinued operations

 

 

.03

 

 

.08

 

Gain on disposal of discontinued operations

 

 

1.11

 

 

1.11

 

Diluted earnings per share

 

$

.61

 

$

1.53

 

$

1.16

 

$

2.00

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

.10

 

$

.08

 

$

.18

 

$

.15

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

883.3

 

911.5

 

885.1

 

912.1

 

Diluted

 

891.2

 

919.2

 

892.4

 

920.3

 

 

See accompanying Notes to Consolidated Financial Statements.

 


 

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

TARGET CORPORATION

 

 

 

 

 

 

 

 

 

 

 

July 30,

 

January 29,

 

July 31,

 

(millions)

 

2005

 

2005*

 

2004

 

 

 

(Unaudited)

 

 

 

(Unaudited)

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

696

 

$

2,245

 

$

1,735

 

Accounts receivable, net

 

5,012

 

5,069

 

4,365

 

Inventory

 

5,628

 

5,384

 

4,914

 

Other current assets

 

1,001

 

1,224

 

984

 

Current assets of discontinued operations

 

 

 

1,064

 

Total current assets

 

12,337

 

13,922

 

13,062

 

Property and equipment

 

 

 

 

 

 

 

Property and equipment

 

23,652

 

22,272

 

20,894

 

Accumulated depreciation

 

(5,629

)

(5,412

)

(4,914

)

Property and equipment, net

 

18,023

 

16,860

 

15,980

 

Other non-current assets

 

1,559

 

1,511

 

1,319

 

Non-current assets of discontinued operations

 

 

 

958

 

Total assets

 

$

31,919

 

$

32,293

 

$

31,319

 

 

 

 

 

 

 

 

 

Liabilities and shareholders’ investment

 

 

 

 

 

 

 

Accounts payable

 

$

5,472

 

$

5,779

 

$

4,740

 

Current portion of long-term debt and notes payable

 

753

 

504

 

606

 

Other current liabilities

 

1,812

 

1,937

 

2,082

 

Current liabilities of discontinued operations

 

 

 

517

 

Total current liabilities

 

8,037

 

8,220

 

7,945

 

Long-term debt

 

8,226

 

9,034

 

9,057

 

Deferred income taxes

 

973

 

973

 

768

 

Other non-current liabilities

 

1,161

 

1,037

 

987

 

Non-current liabilities of discontinued operations

 

 

 

122

 

Shareholders’ investment

 

13,522

 

13,029

 

12,440

 

Total liabilities and shareholders’ investment

 

$

31,919

 

$

32,293

 

$

31,319

 

 

 

 

 

 

 

 

 

Common shares outstanding

 

884.7

 

890.6

 

903.3

 

 

*  The January 29, 2005 Consolidated Statement of Financial Position is condensed from the audited consolidated financial statement.

 

See accompanying Notes to Consolidated Financial Statements.

 


 

CONSOLIDATED STATEMENTS
OF CASH FLOWS

 

TARGET CORPORATION

 

(millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

July 30,

 

July 31,

 

(Unaudited)

 

2005

 

2004

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

Net earnings

 

$

1,034

 

$

1,842

 

Earnings from and gain on disposal of discontinued operations, net of tax

 

 

(1,090

)

Earnings from continuing operations

 

1,034

 

752

 

Reconciliation to cash flow:

 

 

 

 

 

Depreciation and amortization

 

686

 

591

 

Deferred income tax

 

 

136

 

Bad debt provision

 

217

 

216

 

Loss on disposal of fixed assets, net

 

43

 

24

 

Other non-cash items affecting earnings

 

12

 

40

 

Changes in operating accounts providing / (requiring) cash:

 

 

 

 

 

Accounts receivable originated at Target

 

17

 

36

 

Inventory

 

(244

)

(383

)

Other current assets

 

191

 

79

 

Other non-current assets

 

(8

)

29

 

Accounts payable

 

(307

)

(216

)

Accrued liabilities

 

85

 

79

 

Income taxes payable

 

(286

)

309

 

Other

 

18

 

 

Cash flow provided by operations

 

1,458

 

1,692

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Expenditures for property and equipment

 

(1,774

)

(1,397

)

Proceeds from disposal of fixed assets

 

13

 

10

 

Change in accounts receivable originated at third parties

 

(177

)

5

 

Proceeds from sale of discontinued operations

 

 

3,200

 

Cash flow (required) / provided by investing activities

 

(1,938

)

1,818

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Reductions of long-term debt

 

(513

)

(1,385

)

Dividends paid

 

(142

)

(128

)

Repurchase of stock

 

(533

)

(487

)

Stock option exercises

 

120

 

75

 

Other

 

(1

)

 

Cash flow required by financing activities

 

(1,069

)

(1,925

)

 

 

 

 

 

 

Net cash required by discontinued operations

 

 

(558

)

Net (decrease) / increase in cash and cash equivalents

 

(1,549

)

1,027

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

2,245

 

708

 

Cash and cash equivalents at end of period

 

$

696

 

$

1,735

 

 

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 2004 Annual Report to Shareholders throughout pages 28-37.  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

 

On July 14, 2005, the Financial Accounting Standards Board (FASB) issued a proposed Interpretation, “Accounting for Uncertain Tax Positions, an Interpretation of FASB Statement No. 109.”  This proposed Interpretation would clarify the accounting for uncertain tax positions as described in FASB Statement No. 109, “Accounting for Income Taxes,” and would require an enterprise to recognize, in its financial statements, the best estimate of the impact of a tax position only if that position is probable of being sustained on audit based solely on the technical merits of the position. The proposed Interpretation is expected to be effective as of the end of the first fiscal year ending after December 15, 2005.  We are in the process of assessing the impact that this new guidance will have on our net earnings, cash flows and financial position.

 

In June 2005, the FASB’s Emerging Issues Task Force reached a consensus on Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination” (EITF 05-6).  EITF 05-6 provides guidance on the amortization period for leasehold improvements in operating leases that are either acquired after the beginning of the initial lease term or acquired as the result of a business combination.  This guidance requires leasehold improvements purchased after the beginning of the initial lease term to be amortized over the shorter of the assets’ useful life or a term that includes the original lease term plus any renewals that are reasonably assured at the date the leasehold improvements are purchased.  This guidance is effective for reporting periods beginning after June 29, 2005.  The adoption of this statement did not have an impact on our net earnings, cash flows or financial position.

 

Discontinued Operations

 

As previously disclosed in our 2004 Annual Report to Shareholders, we completed the sale of our Marshall Field’s and Mervyn’s businesses during 2004.  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.

 


 

There were no financial results included in discontinued operations for the three or six month periods ended July 30, 2005.  For the three months and six months ended July 31, 2004, total revenues included in discontinued operations were $1,395 million and $2,801 million, respectively, and earnings from discontinued operations were $31 million and $71 million, net of taxes of $19 million and $44 million, respectively.

 

There were no assets or liabilities of Marshall Field’s or Mervyn’s included in our Consolidated Statements of Financial Position at July 30, 2005 or January 29, 2005.  The major classes of assets and liabilities of discontinued operations in the Consolidated Statements of Financial Position at July 31, 2004 are as follows:

 

(millions)

 

July 31,
2004

 

Cash and cash equivalents

 

$

4

 

Accounts receivable, net

 

440

 

Inventory

 

562

 

Other current assets

 

58

 

Current assets of discontinued operations

 

$

1,064

 

 

 

 

 

Property and equipment, net

 

$

951

 

Other non-current assets

 

7

 

Non-current assets of discontinued operations

 

$

958

 

 

 

 

 

Accounts payable

 

$

377

 

Accrued liabilities

 

137

 

Current portion of long-term debt and notes payable

 

3

 

Current liabilities of discontinued operations

 

$

517

 

 

 

 

 

Long-term debt

 

$

21

 

Deferred income taxes

 

 

Other non-current liabilities

 

101

 

Non-current liabilities of discontinued operations

 

$

122

 

 

Earnings Per Share

 

Basic earnings per share (EPS) is net earnings divided by the average number of common shares outstanding during the period.  Diluted EPS includes the incremental shares assumed to be issued upon the exercise of stock options, performance shares or restricted stock.

 


 

 

 

Basic EPS

 

Diluted EPS

 

 

 

Three Months
Ended

 

Six Months
Ended

 

Three Months
Ended

 

Six Months
Ended

 

(millions, except per share data)

 

Jul 30,
2005

 

Jul 31,
2004

 

Jul 30,
2005

 

Jul 31,
2004

 

Jul 30,
2005

 

Jul 31,
2004

 

Jul 30,
2005

 

Jul 31,
2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

540

 

$

1,410

 

$

1,034

 

$

1,842

 

$

540

 

$

1,410

 

$

1,034

 

$

1,842

 

Basic weighted average common shares outstanding

 

883.3

 

911.5

 

885.1

 

912.1

 

883.3

 

911.5

 

885.1

 

912.1

 

Stock options, performance shares and restricted stock

 

 

 

 

 

7.9

 

7.7

 

7.3

 

8.2

 

Weighted average common shares outstanding

 

883.3

 

911.5

 

885.1

 

912.1

 

891.2

 

919.2

 

892.4

 

920.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

$

.61

 

$

1.55

 

$

1.17

 

$

2.02

 

$

.61

 

$

1.53

 

$

1.16

 

$

2.00

 

 

There were no antidilutive shares issuable upon exercise related to stock options, performance shares or restricted stock at July 30, 2005 or July 31, 2004.

 

Accounts Receivable

 

Accounts receivable are recorded net of an allowance for expected losses. The allowance, recognized in an amount equal to the anticipated future write-offs based on delinquencies, risk scores, aging trends, industry risk trends and our historical experience, was $409 million at July 30, 2005, compared to $387 million at January 29, 2005 and $351 million at July 31, 2004.

 

Contingencies

 

We expect to receive a share of proceeds from the $3 billion Visa / MasterCard antitrust litigation settlement, as we are a member of the class action lawsuit.  The amount and timing of the payment are not certain at this time and, accordingly, no gain has been recorded at July 30, 2005; however, we expect to obtain greater clarity on this issue during the second half of 2005.

 

We are exposed to claims and litigation arising out of 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. Our policy is to disclose pending lawsuits and other known claims that may have a material impact on our results of operations, cash flows or financial condition. Other than the matter discussed above, we do not believe any of the currently identified claims and litigated matters meet this criterion, either individually or in the aggregate.

 

Long-Term Debt and Derivatives
 

There were no significant long-term debt repurchases during the second quarter and first half of 2005.  During the second quarter and first half of 2004, we repurchased $455 million and $542 million, respectively, of long-term debt with a weighted average interest rate of approximately 7.0 percent for each period. These transactions resulted in a pre-tax loss of $74 million and $89 million ($.05 and $.06 per share), respectively, for the three and six month periods ended July 31, 2004, which is included in net interest expense in the Consolidated Results of Operations.

 

On June 9, 2005, we entered into a five-year credit agreement with a group of banks, for a $1.6 billion unsecured revolving credit facility.  The new facility replaced our two existing committed credit

 


 

agreements and is scheduled to expire in June 2010.  The credit agreement contains one financial covenant, leverage ratio.  We are, and expect to remain, in compliance with this covenant.  There were no outstanding balances under this agreement at any time during the second quarter 2005.

 

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 interest rate swaps is reflected in the Consolidated Statements of Financial Position as a component of other current assets, other non-current assets and other non-current liabilities. No ineffectiveness was recognized related to these instruments during the three or six months ended July 30, 2005 and July 31, 2004.

 

During the quarter, we terminated an interest rate swap with a notional amount of $200 million, resulting in a gain of $24 million that will be amortized into income over the remaining thirteen year life of the hedged debt.

 

At July 30, 2005, January 29, 2005 and July 31, 2004, interest rate swaps were outstanding in notional amounts totaling $3,300 million, $2,850 million and $2,150 million, respectively. The recent increase in swap exposure corresponds to our new practice of assessing finance charges on our credit card receivables at a prime-based floating rate instead of a fixed rate.  At July 30, 2005, the fair value of outstanding interest rate swaps and net unamortized gains from terminated interest rate swaps was $11 million, compared to $45 million at January 29, 2005 and $43 million at July 31, 2004.

 

Stock-Based Compensation

 

We elected to adopt the provisions of SFAS No. 123R, “Share-Based Payment,” in the fourth quarter of 2004 under the modified retrospective transition method.  SFAS No. 123R eliminates accounting for share-based compensation transactions using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and requires instead that such transactions be accounted for using a fair-value-based method.  Under the modified retrospective transition method, all prior period financial statements were restated in the fourth quarter of 2004 to recognize compensation cost in the amounts previously reported in the Notes to Consolidated Financial Statements.  Total compensation expense related to stock-based compensation was $26 million and $57 million, respectively, for the three and six months ended July 30, 2005 and $16 million and $34 million, respectively, for the three and six months ended July 31, 2004.

 

In certain circumstances under our stock-based compensation plans, we allow for the vesting of employee awards to continue post-employment.  Accordingly, for awards granted subsequent to our adoption of SFAS No. 123R and to the extent those awards continue to vest post-employment, we have accelerated expense recognition, such that the value of the award is fully expensed over the employee’s minimum service period instead of being expensed over the explicit vesting period.  The effect of this accelerated recognition of expense is included in the compensation expense amount disclosed above for the three and six months ended July 30, 2005.  Awards granted prior to the adoption of SFAS No. 123R will continue to be expensed over the explicit vesting period in accordance with SEC guidelines.  The impact of using the accelerated expense recognition policy prior to the adoption of SFAS No. 123R would have been immaterial to the compensation expense recognized for the three and six months ended July 31, 2004.

 

During the second quarter of 2005, 3.0 million shares were issued due to stock option exercises.  During the first quarter of 2005, 1.9 million shares were issued due to stock option exercises.  The total

 


 

stock options outstanding at July 30, 2005 were 26.8 million with exercise prices ranging between $6.26 and $54.64, and expiration dates between February 26, 2006 and June 27, 2015.

 

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 tied to the results of either our 401(k) plan investment choices, or in the case of a frozen plan, market levels of interest rates, plus an additional return determined by each plan’s terms.  During the first and second quarters of 2004, certain retired executives accepted our offer to exchange our obligation to them under our frozen non-qualified plan for cash or deferrals in our current non-qualified plans, which resulted in expense of approximately $10 million and $3 million (both less than $.01 per share), respectively.  There were no such exchange transactions during the three or six months ended July 30, 2005.

 

Pension and Postretirement Health Care Benefits

 

We have a qualified defined benefit pension plan covering all U.S. employees who meet age and service requirements. We also have unfunded non-qualified pension plans for employees with 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.

 

Net Pension Expense

 

 

 

Pension Benefits

 

 

 

Three Months Ended

 

Six Months Ended

 

(millions)

 

July 30,
2005

 

July 31,
2004

 

July 30,
2005

 

July 31,
2004

 

Service cost benefits earned during the period

 

$

17

 

$

21

 

$

34

 

$

42

 

Interest cost on projected benefit obligation

 

22

 

21

 

44

 

42

 

Expected return on assets

 

(35

)

(30

)

(69

)

(60

)

Amortization of recognized losses

 

11

 

9

 

21

 

19

 

Recognized prior service cost

 

(2

)

(2

)

(3

)

(4

)

Settlement/curtailment charges

 

 

1

 

1

 

1

 

Total

 

$

13

 

$

20

 

$

28

 

$

40

 

 


 

 

 

Postretirement Healthcare Benefits

 

 

 

Three Months Ended

 

Six Months Ended

 

(millions)

 

July 30,
2005

 

July 31,
2004

 

July 30,
2005

 

July 31,
2004

 

Service cost benefits earned during the period

 

$

1

 

$

1

 

$

1

 

$

1

 

Interest cost on projected benefit obligation

 

1

 

2

 

3

 

4

 

Amortization of recognized losses

 

 

 

 

1

 

Settlement/curtailment charges

 

 

(3

)

 

(3

)

Total

 

$

2

 

$

 

$

4

 

$

3

 

 


 

ITEM 2 - MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 

TARGET CORPORATION

 

Analysis of Continuing Operations

 

Earnings from continuing operations for the three and six month periods ended July 30, 2005 were $540 million, or $.61 per share and $1,034 million, or $1.16 per share, respectively, compared with $360 million, or $.39 per share, and $752 million, or $.81 per share, respectively, for the same periods last year.  All earnings per share figures refer to diluted earnings per share.

 

Revenues and Comparable-Store Sales

 

Total revenues for the quarter increased 13.6 percent to $11,990 million compared with $10,556 million for the same period a year ago. For the six month period ending July 30, 2005, total revenues increased 13.2 percent to $23,467 million compared to $20,736 million for the same period a year ago.  Our revenue growth is due to a 6.7 percent and 6.5 percent comparable-store sales increase for the quarter and year-to-date periods, respectively, the contribution from new store expansion, and growth in net credit revenues.  Comparable-store sales are sales from stores open longer than one year, including stores that have relocated and general merchandise stores that have been remodeled. Comparable-store sales do not include sales from our on-line business or from general merchandise stores that have been converted to a SuperTarget store format in the past twelve months.  The method of calculating comparable-store sales varies across the retail industry.  As a result, our calculation of comparable-store sales is not necessarily comparable to similarly titled measures reported by other companies.

 

Gross Margin Rate

 

Gross margin rate represents gross margin (sales less cost of sales) as a percent of sales.  Cost of sales primarily includes purchases, markdowns, shrinkage and other costs associated with our merchandise.  In the second quarter of 2005, our overall gross margin rate improved when compared to the prior year, primarily reflecting favorable markup.  Product mix was essentially neutral to gross margin for the quarter.  Markdown and shrinkage performance were also favorable during the second quarter of 2005.  For the first six months of 2005, the improvement in gross margin rate primarily reflects favorable markup and shrinkage performance.

 

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, reflected separately in our Consolidated Results of Operations. In the second quarter of 2005, our operating expense rate was unfavorable to the same period last year due to higher incentive and stock-based compensation expense, which represented somewhat over half of the increase, with the remainder of the increase due to strategies and accounting practices that result in incremental gross margin rate, including an increase in the amount of co-op advertising vendor income that offset cost of sales.  For the first half of 2005, our operating expense rate was unfavorable to the prior year due to: higher incentive and stock-based compensation expense, differences in the timing of expenses and strategies and accounting practices that result in incremental gross margin rate.

 


 

Other Performance Factors

 

In the second quarter and first half of 2005, net interest expense was $110 million and $221 million, respectively, representing a $97 million and a $129 million decrease, respectively, from the second quarter and first half of 2004. The majority of these decreases in net interest expense were attributable to last year’s loss on debt repurchase of $74 million in the second quarter and $89 million for the six-month period, respectively. The remainder of the net interest expense reduction reflects the benefit of lower average funded balances due to the application of proceeds from the Marshall Field’s and Mervyn’s sale transactions, partially offset by a higher average portfolio interest rate.

 

The effective income tax rate for continuing operations for the second quarter of 2005 was 37.9 percent versus 37.8 percent for the second quarter of 2004.

 

Credit Card Contribution

 

Our credit card program strategically supports our core retail operation and remains an important contributor to our overall profitability.  Credit card contribution to continuing operations was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

(millions)

 

2005

 

2004

 

2005

 

2004

 

Revenues

 

 

 

 

 

 

 

 

 

Finance charges, late fees and other revenues

 

$

293

 

$

256

 

$

572

 

$

507

 

Merchant fees

 

 

 

 

 

 

 

 

 

Intracompany

 

17

 

14

 

32

 

28

 

Third-party

 

30

 

23

 

57

 

43

 

Total revenues

 

340

 

293

 

661

 

578

 

Expenses

 

 

 

 

 

 

 

 

 

Bad debt provision

 

111

 

105

 

217

 

216

 

Operations and marketing

 

76

 

68

 

149

 

131

 

Total expenses

 

187

 

173

 

366

 

347

 

Pre-tax credit card contribution

 

$

153

 

$

120

 

$

295

 

$

231

 

 

 

 

 

 

 

 

 

 

 

As a percent of average receivables (annualized)

 

11.5

%

10.3

%

11.1

%

9.7

%

 

The allowance for doubtful accounts on receivables was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

 

 

2005

 

2004

 

2005

 

2004

 

Allowance at beginning of period

 

$

394

 

$

349

 

$

387

 

$

352

 

Bad debt provision

 

111

 

105

 

217

 

216

 

Net write-offs

 

(96

)

(103

)

(195

)

(217

)

Allowance at end of period

 

$

409

 

$

351

 

$

409

 

$

351

 

As a percent of period-end receivables

 

7.5

%

7.4

%

7.5

%

7.4

%

 


 

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

 

 

 

July 30,

 

July 31,

 

 

 

2005

 

2004

 

Period-end receivables

 

$

5,421

 

$

4,716

 

Accounts with three or more payments past due as a percent of period-end receivables:

 

3.0

%

3.8

%

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Total revenues as a percent of average receivables (annualized):

 

25.5

%

25.0

%

24.8

%

24.3

%

 

 

 

 

 

 

 

 

 

 

Net write-offs as a percent of average receivables (annualized):

 

7.2

%

8.8

%

7.3

%

9.1

%

 

 

 

 

 

 

 

 

 

 

Average receivables

 

$

5,328

 

$

4,697

 

$

5,336

 

$

4,756

 

 

In the second quarter and first half of 2005, our credit card operations contributed $153 million and $295 million, respectively, to earnings before interest and taxes (EBIT), representing a 27.5 percent and 27.7 percent increase, respectively, over the same periods last year.  Average receivables rose 13.4 percent and 12.2 percent, respectively, from the same three and six month periods a year ago and net write-off and delinquency rates improved significantly, reflecting the excellent credit quality of our portfolio.

 

Analysis of Discontinued Operations

 

There were no financial results included in discontinued operations for the three or six month periods ended July 30, 2005.  For the three months and six months ended July 31, 2004, total revenues included in discontinued operations were $1,395 million and $2,801 million, respectively, and earnings from discontinued operations were $31 million and $71 million, net of taxes of $19 million and $44 million, respectively.

 


 

Analysis of Financial Condition of Continuing Operations

 

Liquidity and Capital Resources

 

Our financial condition remains strong.  In assessing our financial condition, we consider factors such as cash flows provided or used by operations, capital expenditures and debt service obligations. We continue to fund the growth in our business and the execution of our share repurchase program through a combination of internally generated funds and the utilization of a portion of the proceeds from the dispositions of Marshall Field’s and Mervyn’s.

 

Gross receivables increased $705 million, or 14.9 percent, over the second quarter of last year. Inventory increased $714 million, or 14.5 percent, over the second quarter of last year, reflecting the natural increase required to support additional square footage, same-store sales growth and our strategic focus on increasing direct imports. In addition, approximately 4 percent of the increase in inventory results from inventory accounting refinements that we made in 2004. The growth in inventory was more than fully funded by a $732 million, or 15.4 percent, increase in accounts payable.

 

Capital expenditures for the first six months of 2005 were $1,774 million, compared with $1,397 million for the same period a year ago.  This increase during the first half of the year is primarily attributable to growth in our new store expansion program, as well as the timing of investments in distribution center expansion.  We expect capital expenditures to increase at a slower pace during the second half of the year.

 

On June 9, 2005, we entered into a five-year credit agreement with a group of banks, for a $1.6 billion unsecured revolving credit facility.  The new facility replaced our two existing committed credit agreements and is scheduled to expire in June 2010.  The credit agreement contains one financial covenant, leverage ratio.  We are, and expect to remain, in compliance with this covenant.  There were no outstanding balances under this agreement at any time during the second quarter 2005.

 

Store Data

 

During the quarter, we opened a total of 23 new stores. Net of relocations and closings, these openings included 21 general merchandise stores. At July 30, 2005, our number of stores and retail square feet were as follows:

 

 

 

Number of Stores

 

Retail Square Feet*

 

 

 

July 30,

 

Jan. 29,

 

July 31,

 

July 30,

 

Jan. 29,

 

July 31,

 

 

 

2005

 

2005

 

2004

 

2005

 

2005

 

2004

 

Target General Merchandise Stores

 

1,210

 

1,172

 

1,146

 

146,096

 

140,953

 

137,090

 

SuperTarget Stores

 

141

 

136

 

126

 

24,936

 

24,062

 

22,322

 

Total

 

1,351

 

1,308

 

1,272

 

171,032

 

165,015

 

159,412

 

 

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

 


 

Outlook for Fiscal Year 2005

 

We expect a low-double digit increase in revenue in 2005, resulting from the combination of net new square footage growth of approximately 8 percent, an expected mid-single digit increase in comparable store sales and continued growth in our credit card revenues. We believe this increase in revenue, combined with other factors, will contribute to meaningful growth in earnings and earnings per share from continuing operations for the full year.

 

Forward-Looking Statements

 

The preceding Management’s Discussion and Analysis contains forward-looking statements regarding our performance, liquidity and adequacy of 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, shifting 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 this Form 10-Q Report, which contains additional important factors that may cause actual results to differ materially from those predicted in the forward-looking statements.

 


 

ITEM 4 -  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 were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 


 

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 July 30, 2005, 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)

 

May 1, 2005 through May 28, 2005

 

1,688,200

 

$

47.42

 

39,344,704

 

$

1,191,956,119

 

May 29, 2005 through July 2, 2005

 

 

 

39,344,704

 

1,191,956,119

 

July 3, 2005 through July 30, 2005

 

 

 

39,344,704

 

1,191,956,119

 

Total

 

1,688,200

 

$

47.42

 

39,344,704

 

$

1,191,956,119

 

 

(1)  In June of 2004, our Board of Directors authorized the 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 over two to three years. Since the inception of this share repurchase program, we have repurchased a total of approximately 39 million shares of our common stock at a total cost of approximately $1,808 million ($45.95 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 May 1, 2005 through July 30, 2005, there were no such repurchases.

 


 

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).

Five-year credit agreement dated as of June 9, 2005 among Target Corporation, Bank of America, N.A. as Administrative Agent and the Banks listed therein.

 

 

 

 

 

 

(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.

 

 

 

 

 

 

(99)C.

Cautionary Statements Related to Forward-Looking Information.

 


 

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: September 2, 2005

 

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

 

 

 

 

 

(10).

 

Five-year credit agreement dated as of June 9, 2005 among Target Corporation, Bank of America, N.A. as Administrative Agent and the Banks listed therein.

 

Filed Electronically

 

 

 

 

 

(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

 

 

 

 

 

(99)C.

 

Cautionary Statements Related to Forward-Looking Information.

 

Filed Electronically