- First quarter Adjusted EPS of 70 cents was above the mid-point of Target’s prior guidance of 60 cents to 75 cents.
- Target’s U.S. comparable sales decreased (0.3)% in the first quarter, near the high end of the expected range. Canadian Segment sales were $393 million, up from $86 million last year.
- The Company returned $272 million to shareholders through dividends in first quarter 2014, representing 65% of net earnings
Target Corporation (NYSE: TGT) today reported first quarter net earnings of $418 million, or $0.66 per share. Adjusted earnings per share1 were $0.70 in first quarter 2014, a decrease of 13.9 percent from $0.82 in 2013. The tables attached to this press release provide a reconciliation of non-GAAP to GAAP measures. All earnings per share figures refer to diluted earnings per share.
“First quarter financial performance in both our U.S. and Canadian Segments was in line with expectations, reflecting the benefit of continued recovery from the data breach and early signs of improvement in our Canada operations,” said John Mulligan, Interim President and CEO, CFO of Target Corporation. “While we are pleased with this momentum, we need to move more quickly. As a result, we have made changes to our management team and are investing additional resources to drive U.S. traffic and sales, improve our Canadian operations and advance our ongoing digital transformation. We have updated our 2014 earnings expectations to reflect the impact of these investments and believe that they position Target for accelerated profitable growth as a leading omnichannel retailer.”
Fiscal 2014 Earnings Guidance
In second quarter 2014, the Company expects Adjusted EPS, reflecting operating results in its U.S. and Canadian Segments, of 85 cents to $1.00. This measure excludes approximately (2) cents related to the expected reduction of the beneficial interest asset2, as well as any net expenses related to the data breach. For full-year 2014, Target now expects Adjusted EPS, reflecting operating results in its U.S. and Canadian Segments, of $3.60 to $3.90, compared with prior guidance of $3.85 to $4.15. This measure excludes approximately (7) cents related to the expected reduction of the beneficial interest asset2, as well as any net expenses related to the data breach. At this time, the Company is unable to estimate future expenses related to the data breach that occurred in fourth quarter 2013. Expenses may include payments associated with potential claims by the payment card networks for alleged counterfeit fraud losses and non-ordinary course operating expenses (such as card re-issuance costs), REDcard fraud and card re-issuance expense, payments associated with civil litigation, governmental investigations and enforcement proceedings, expenses for legal, investigative and consulting fees, and incremental expenses and capital investments for remediation activities. These costs may have a material adverse effect on Target’s results of operations in second quarter and full-year 2014 and future periods.
U.S. Segment Results
In first quarter 2014, sales increased 0.2 percent to $16.7 billion from $16.6 billion last year, reflecting the contribution from new stores partially offset by a (0.3) percent decrease in comparable sales. Segment earnings before interest expense and income taxes (EBIT) were $1,072 million in first quarter 2014, a decrease of 13.5 percent from $1,239 million in 2013.
First quarter EBITDA and EBIT margin rates were 9.5 percent and 6.4 percent, respectively, compared with 10.4 percent and 7.5 percent in the U.S. Segment in 2013. First quarter gross margin rate was 29.5 percent compared with 30.7 percent in 2013, driven primarily by additional promotional markdowns this year. First quarter SG&A expense rate was 20.0 percent in 2014 compared with 20.3 percent in the U.S. Segment in 2013. This decrease reflects disciplined control of expenses across the organization, including the benefit from Target’s expense optimization efforts, partially offset by a smaller contribution from the credit card portfolio, which raised the SG&A rate by approximately 0.2 percentage points. 3See the “Non-Segment Impacts to Consolidated GAAP Earnings per Share” section of this release for information about certain expenses that were included in the Company’s Consolidated Statements of Operations as SG&A, but were not part of its U.S. Segment results.
Canadian Segment Results
In first quarter 2014, the Canadian Segment generated sales of $393 million, compared with $86 million in first quarter 2013 when Target opened its first 24 Canadian stores. Segment EBIT was $(211) million in the first quarter 2014 compared with $(205) million in 2013.
First quarter 2014 gross margin rate of 18.7 percent reflects the continued impact of efforts to clear excess inventory, including long lead-time receipts. This compares to first quarter 2013 gross margin rate of 38.4 percent, which benefitted from a lack of clearance markdowns due to the short time stores had been open. SG&A expense rate of 55.4 percent in first quarter 2014 compares with 223.9 percent last year, reflecting increased scale in the Canadian Segment and pre-opening costs in last year’s results.
Non-Segment Impacts to Consolidated GAAP Earnings per Share
During fourth quarter 2013, Target experienced a data breach in which an intruder gained unauthorized access to its network and stole certain payment card and other guest information. The Company incurred $18 million of net expense in first quarter 2014, reflecting $26 million of total expenses partially offset by the recognition of an $8 million insurance receivable. This expense does not include any accrual for the potential claims by the payment card networks for counterfeit fraud losses. The amount accrued to date for probable losses on potential payment card network claims consists solely of operating expense reimbursement obligations. At this time the Company is unable to reasonably estimate a range of possible losses on the payment card networks’ potential claims in excess of the amount accrued.
In first quarter 2014, Target announced that, beginning in early 2015, the entire REDcard portfolio will be enabled with MasterCard’s chip-and-PIN solution, and existing co-branded cards will be reissued as MasterCard co-branded chip-and-PIN cards. The Company recorded $13 million of expense in first quarter 2014 related to the decision to convert existing co-branded cards to MasterCard.
Interest Expense and Taxes
Target’s first quarter 2014 net interest expense decreased to $170 million from $629 million in 2013. The year-over-year variance is primarily the result of a $445 million early debtretirement charge in first quarter 2013.
The Company’s effective income tax rate was 34.7 percent in the first quarter, compared with 36.0 percent in first quarter 2013. The decrease of 1.3 percentage points was due to a variety of factors, none of which was individually significant.
Capital Returned to Shareholders
In first quarter 2014, the Company paid dividends of $272 million. Target did not repurchase any shares of its common stock during the quarter, reflecting current performance and the Company’s desire to maintain its strong investment-grade credit ratings.
In first quarter 2013, Target sold its entire U.S. consumer credit card receivables portfolio to TD Bank Group. The net impact of the transaction increased first quarter 2013 GAAP EPS by 36 cents, which includes the benefit of a $225 million beneficial interest asset that was recognized at the close of the sale. This asset effectively represents a receivable for the present value of future profit-sharing Target expected to receive on the receivables sold at the time of the transaction. The Company estimates the asset will be reduced over the four-year period following the close of the transaction, with larger reductions in the early years. The beneficial interest asset was reduced in first quarter 2014 by $18 million, compared with a $17 million reduction in first quarter 2013. Since the close of the transaction, the beneficial interest asset has been reduced by $117 million.
Target Corporation will webcast its first quarter earnings conference call at 9:30 a.m. CDT today. Investors and the media are invited to listen to the call through the Company’s website at www.target.com/investors (click on “events & presentations”). A telephone replay of the call will be available beginning at approximately 11:30 a.m. CDT today through the end of business on May 23, 2014. The replay number is (855) 859-2056 (passcode: 37688688).
Statements in this release regarding second quarter and full-year 2014 earnings guidance and the impact of the data breach on the Company’s results of operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements speak only as of the date they are made and are subject to risks and uncertainties which could cause the Company’s actual results to differ materially. The most important risks and uncertainties are described in Item 1A of the Company’s Form 10-K for the fiscal year ended February 1, 2014.
In addition to the GAAP results provided in this release, the Company provides Adjusted diluted earnings per share for the three months ended May 3, 2014 and May 4, 2013, respectively. This measure is not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The most comparable GAAP measure is diluted earnings per share. Management believes Adjusted EPS is useful in providing period-to-period comparisons of the results of the Company’s ongoing retail operations. Adjusted EPS should not be considered in isolation or as a substitution for analysis of the Company’s results as reported under GAAP. Other companies may calculate Adjusted EPS differently than the Company does, limiting the usefulness of the measure for comparisons with other companies.
Minneapolis-based Target Corporation (NYSE: TGT) serves guests at 1,916 stores – 1,789 in the United States and 127 in Canada – and at Target.com. Since 1946, Target has given 5 percent of its profit through community grants and programs; today, that giving equals more than $4 million a week. For more information about Target’s commitment to corporate responsibility, visit target.com/corporateresponsibility.