Target Reports Second Quarter 2015 Earnings

  • Second quarter Adjusted EPS of $1.22 was above the company’s expected range of $1.04 to $1.14. The Company now expects full-year 2015 Adjusted EPS of $4.60 to $4.75, compared with prior guidance of $4.50 to $4.65.
  • Second quarter comparable sales growth of 2.4 percent was in line with the company’s expectations, driven primarily by growth in comparable transactions.
  • Comparable sales in signature categories (Style, Baby, Kids and Wellness) grew three times faster than the company average, resulting in comparable sales growth of four to five percent in both Home and Apparel.
  • Digital channel sales increased 30 percent, contributing 0.6 percentage points to comparable sales growth.
  • Target returned $1.0 billion to shareholders in the second quarter through dividends and share repurchases.

MINNEAPOLIS – Target Corporation (NYSE: TGT) today reported second quarter 2015 adjusted earnings per share from continuing operations1 (Adjusted EPS) of $1.22, up 20.6 percent from $1.01 in 2014. GAAP EPS from continuing operations were $1.21, compared with $0.61 in second quarter 2014. The tables attached to this press release provide a reconciliation of non-GAAP to GAAP measures. All earnings per share figures refer to diluted EPS.

1Adjusted EPS, a non-GAAP financial measure, excludes restructuring charges and the impact of certain matters not related to the Company’s single segment, such as discontinued operations, data breach expenses and certain other expenses that are discretely managed. See the “Discontinued Operations Update” and “Miscellaneous” sections of this release for additional information about the items that have been excluded from Adjusted EPS.
 

“We’re very pleased with our second quarter financial results, as traffic growth, strong sales in our signature categories and continued expense discipline drove better-than-expected profitability,” said Brian Cornell, chairman and CEO of Target. “While the momentum in our financial results is encouraging, we have much more to accomplish. Looking ahead, we are focused on making further progress against our strategic priorities and are committed to improving operations as we move through the important back-to-school, back-to-college and holiday seasons.”

Fiscal 2015 Earnings Guidance

In third quarter 2015, Target expects Adjusted EPS of $0.79 to $0.89 compared with $0.79 in third quarter 2014.

The Company now expects full-year 2015 Adjusted EPS of $4.60 to $4.75, compared with prior guidance of $4.50 to $4.65.

Segment Results

Second quarter 2015 sales increased 2.8 percent to $17.4 billion from $17.0 billion last year, reflecting a 2.4 percent increase in comparable sales combined with sales from new stores. Digital channel sales grew 30 percent and contributed 0.6 percentage points to comparable sales growth. Segment earnings before interest expense and income taxes (EBIT) were $1,350 million in second quarter 2015, an increase of 17.5 percent from $1,149 million in 2014.

Second quarter EBITDA and EBIT margin rates were 10.9 percent and 7.7 percent, respectively, compared with 9.9 percent and 6.8 percent in 2014. Second quarter gross margin rate was 30.9 percent, compared with 30.4 percent in 2014, reflecting the benefit of annualizing heightened promotional markdowns in second quarter 2014, and a favorable merchandise mix in second quarter 2015. Second quarter SG&A expense rate was 19.9 percent in 2015, compared with 20.5 percent in 2014, reflecting ongoing cost savings initiatives and expense timing.

Interest Expense and Taxes from Continuing Operations

The Company’s second quarter 2015 net interest expense was $148 million, compared with $433 million last year. Last year’s interest expense included a $285 million charge related to the early retirement of debt. Second quarter 2015 effective income tax rate from continuing operations was 34.6 percent, compared with 33.7 percent last year, driven primarily by the impact on the consolidated tax rate from higher pretax earnings.

Shareholder Returns

In second quarter 2015, the Company repurchased 8.2 million shares of common stock at an average price of $81.94, for a total investment of $675 million. The Company also paid dividends of $331 million during second quarter 2015, an increase of 22 percent from $272 million last year. In total, the Company returned $1,006 million to shareholders in second quarter 2015, representing more than 133 percent of net income.

Year-to-date, the company has repurchased 15.2 million shares at an average price of $81.41, for a total investment of $1.2 billion. Under the current $10 billion share repurchase program, through second quarter 2015, the Company has repurchased 65.1 million shares of common stock at an average price of $67.19, for a total investment of approximately $4.4 billion.

For the trailing twelve months through second quarter 2015, after-tax return on invested capital (ROIC) was 13.3 percent, compared with 11.3 percent for the twelve months through second quarter 2014. See the “Reconciliation of Non-GAAP Financial Measures” section of this release for additional information about the Company’s ROIC calculation.

Discontinued Operations Update

Target Canada Co. completed a court-approved real estate sales process during second quarter 2015. Consistent with expectations, after-tax losses from discontinued operations were $20 million in second quarter 2015, compared with $157 million last year. Second quarter losses from discontinued operations include an increase to the Company’s accrual for estimated probable losses, primarily guarantees of leases, and adjustments to the tax benefit from our investment loss in Canada.

Certain assets and liabilities of Target’s discontinued operations are based on estimates. The recorded assets include estimated receivables, and the remaining liabilities include accruals for estimated losses related to claims that may be asserted against Target Corporation, primarily under guarantees of certain leases. These estimates involve significant judgment and are based on currently available information, an assessment of the validity of certain claims and estimated payments by the Canada Subsidiaries. These estimates are subject to change, and the Company believes it is reasonably possible that adjustments to these amounts could be material to its results of operations in future periods. Any such adjustments would be recorded in discontinued operations.

Conference Call Details

Target Corporation will webcast its second quarter earnings conference call at 9:30 a.m. CST today. Investors and the media are invited to listen to the call at Target.com/Investors (hover over “company” then click on “events & presentations” in the “investors” column). A telephone replay of the call will be available beginning at approximately 11:30 a.m. CST today through the end of business on August 21, 2015. The replay number is (855) 859-2056 (passcode: 50798511).

Miscellaneous

Statements in this release regarding third quarter and full-year 2015 earnings per share guidance and future expenses related to discontinued 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 Jan. 31, 2015.

In addition to the GAAP results provided in this release, the Company provides Adjusted EPS for the three- and six-month periods ended Aug. 1, 2015, and Aug. 2, 2014. The Company also provides ROIC for the twelve-month periods ended Aug. 1, 2015, and Aug. 2, 2014, respectively, which is a ratio based on GAAP information, with the exception of adjustments made to capitalize operating leases. Operating leases are capitalized as part of the ROIC calculation to control for differences in capital structure between the Company and its competitors. Adjusted EPS, capitalized operating lease obligations and operating lease interest are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. Management believes Adjusted EPS is useful in providing period-to-period comparisons of the results of the Company’s ongoing retail operations. Management believes ROIC is useful in assessing the effectiveness of its capital allocation over time. The most comparable GAAP measure for adjusted diluted EPS is diluted EPS from continuing operations. The most comparable GAAP measure for capitalized operating lease obligations and operating lease interest is total rent expense. Adjusted EPS, capitalized operating lease obligations and operating lease interest 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 and ROIC differently than the Company does, limiting the usefulness of the measure for comparisons with other companies.

About Target

Minneapolis-based Target Corporation (NYSE: TGT) serves guests at 1,799 stores and at Target.com. Since 1946, Target has given 5 percent of its profit to communities, that giving equals more than $4 million a week. For more information, visit Target.com/Pressroom. For a behind-the-scenes look at Target, visit Target.com/abullseyeview or follow @TargetNews on Twitter.

TARGET CORPORATION

                 
                   

Consolidated Statements of Operations

                 
    Three Months Ended         Six Months Ended    
    August 1,   August 2,         August 1,   August 2,    
(millions, except per share data) (unaudited)   2015   2014   Change     2015   2014   Change
Sales   $ 17,427     $ 16,957     2.8 %     $ 34,546     $ 33,614     2.8 %
Cost of sales   12,051     11,798     2.1       23,962     23,546     1.8  
Selling, general and administrative expenses   3,495     3,599     (2.9 )     7,009     6,974     0.5  
Depreciation and amortization   551     537     2.5       1,090     1,049     4.0  
Earnings before interest expense and income taxes   1,330     1,023     30.0       2,485     2,045     21.5  
Net interest expense   148     433     (65.6 )     305     585     (48.0 )
Earnings before income taxes   1,182     590     100.3       2,180     1,460     49.3  
Provision for income taxes   409     199     105.7       756     498     51.9  
Net earnings from continuing operations   773     391     97.6       1,424     962     48.0  
Discontinued operations, net of tax   (20 )   (157 )   (87.8 )     (36 )   (309 )   (88.4 )
Net earnings   $ 753     $ 234     221.9 %     $ 1,388     $ 653     112.7 %
Basic earnings/(loss) per share                          
Continuing operations   $ 1.21     $ 0.62     96.9 %     $ 2.23     $ 1.52     46.8 %
Discontinued operations   (0.03 )   (0.25 )         (0.06 )   (0.49 )    
Net earnings per share   $ 1.18     $ 0.37     220.7 %     $ 2.17     $ 1.03     111.1 %
Diluted earnings/(loss) per share                          
Continuing operations   $ 1.21     $ 0.61     96.8 %     $ 2.21     $ 1.51     46.7 %
Discontinued operations   (0.03 )   (0.25 )         (0.06 )   (0.49 )    
Net earnings per share   $ 1.18     $ 0.37     220.6 %     $ 2.16     $ 1.02     110.9 %
Weighted average common shares outstanding                          
Basic   635.8     633.5     0.4 %     638.3     633.4     0.8 %
Dilutive impact of share-based awards   5.2     4.9    

 

    5.4     4.9      
Diluted   641.0     638.4     0.4 %     643.7     638.3     0.8 %
Antidilutive shares       5.1               5.2      
                                   

Subject to reclassification

TARGET CORPORATION

           
             

Consolidated Statements of Financial Position

           
    August 1,   January 31,   August 2,
(millions)   2015   2015   2014
    (unaudited)       (unaudited)
Assets            
Cash and cash equivalents, including short term investments of $1,985, $1,520 and $3   $ 2,742     $ 2,210     $ 766  
Inventory (a)   8,269     8,290     7,929  
Assets of discontinued operations   97     1,333     693  
Other current assets (a)   2,250     2,254     2,166  
Total current assets   13,358     14,087     11,554  
Property and equipment            
Land   6,120     6,127     6,109  
Buildings and improvements   26,726     26,613     26,231  
Fixtures and equipment   5,145     5,329     5,042  
Computer hardware and software   2,550     2,552     2,280  
Construction-in-progress   494     424     652  
Accumulated depreciation   (15,452 )   (15,093 )   (14,182 )
Property and equipment, net   25,583     25,952     26,132  
Noncurrent assets of discontinued operations   456     442     5,705  
Other noncurrent assets   989     923     1,064  
Total assets   $ 40,386     $ 41,404     $ 44,455  
Liabilities and shareholders’ investment            
Accounts payable   $ 6,944     $ 7,759     $ 6,986  
Accrued and other current liabilities   3,768     3,783     3,644  
Current portion of long-term debt and other borrowings   841     91     294  
Liabilities of discontinued operations   60     103     412  
Total current liabilities   11,613     11,736     11,336  
Long-term debt and other borrowings   11,883     12,705     12,625  
Deferred income taxes   1,319     1,321     1,233  
Noncurrent liabilities of discontinued operations   276     193     1,333  
Other noncurrent liabilities   1,353     1,452     1,495  
Total noncurrent liabilities   14,831     15,671     16,686  
Shareholders’ investment            
Common stock   53     53     53  
Additional paid-in capital   5,271     4,899     4,561  
Retained earnings   9,099     9,644     12,611  
Accumulated other comprehensive loss            
Pension and other benefit liabilities   (444 )   (561 )   (408 )
Currency translation adjustment and cash flow hedges   (37 )   (38 )   (384 )
Total shareholders’ investment   13,942     13,997     16,433  
Total liabilities and shareholders’ investment   $ 40,386     $ 41,404     $ 44,455  

Common Stock Authorized 6,000,000,000 shares, $.0833 par value; 630,446,029, 640,213,987 and 633,644,605 shares issued and outstanding at August 1, 2015, January 31, 2015 and August 2, 2014, respectively.

Preferred Stock Authorized 5,000,000 shares, $.01 par value; no shares were issued or outstanding at August 1, 2015, January 31, 2015 or August 2, 2014.

(a) At August 1, 2015, $464 million of pharmacy prescription inventory is classified as held for sale and included in other current assets. At January 31, 2015 and August 2, 2014, $500 million and $479 million, respectively, of pharmacy prescription inventory has been reclassified to conform with the current period presentation.

Subject to reclassification

TARGET CORPORATION

     
       

Consolidated Statements of Cash Flows

     
    Six Months Ended  
    August 1,     August 2,  
(millions) (unaudited)   2015     2014  
Operating activities            
Net earnings   $ 1,388       $ 653    
Losses from discontinued operations, net of tax   (36 )     (310 )  
Net earnings from continuing operations   1,424       963    
Adjustments to reconcile net earnings to cash provided by operations:            
Depreciation and amortization   1,090       1,049    
Share-based compensation expense   54       40    
Deferred income taxes   (45 )     (158 )  
Loss on debt extinguishment         285    
Noncash (gains)/losses and other, net   (34 )     26    
Changes in operating accounts:            
Inventory   18       (130 )  
Other assets   156       179    
Accounts payable and accrued liabilities   (697 )     (319 )  
Cash provided by operating activities—continuing operations   1,966       1,935    
Cash provided by/ (required for) operating activities—discontinued operations   823       (421 )  
Cash provided by operations   2,789       1,514    
Investing activities            
Expenditures for property and equipment   (710 )     (881 )  
Proceeds from disposal of property and equipment   13       44    
Proceeds from sale of business   8          
Cash paid for acquisitions, net of cash assumed         (20 )  
Other investments   38       46    
Cash required for investing activities—continuing operations   (651 )     (811 )  
Cash provided by/ (required for) investing activities—discontinued operations   19       (171 )  
Cash required for investing activities   (632 )     (982 )  
Financing activities            
Change in commercial paper, net         109    
Additions to long-term debt         1,993    
Reductions of long-term debt   (54 )     (2,039 )  
Dividends paid   (665 )     (545 )  
Repurchase of stock   (1,237 )        
Stock option exercises and related tax benefit   331       55    
Cash required for financing activities   (1,625 )     (427 )  
Effect of exchange rate changes on cash and cash equivalents         3    
Net increase in cash and cash equivalents   532       108    
Cash and cash equivalents at beginning of period   2,210       695   (a)
Cash and cash equivalents at end of period   $ 2,742       $ 803   (b)

(a) Includes cash of our discontinued operations of $25 million at February 1, 2014.
(b) Includes cash of our discontinued operations of $37 million at August 2, 2014.

Subject to reclassification

TARGET CORPORATION

                 
                   

Segment Results

                 
    Three Months Ended         Six Months Ended    
    August 1,   August 2,         August 1,   August 2,    
(millions) (unaudited)   2015   2014   Change     2015   2014   Change
Sales   $ 17,427     $ 16,957     2.8 %     $ 34,546     $ 33,614     2.8 %
Cost of sales   12,051     11,798     2.1       23,962     23,546     1.8  
Gross margin   5,376     5,159     4.2       10,584     10,068     5.1  
SG&A expenses(a)   3,475     3,473     0.1       6,883     6,817     1.0  
EBITDA   1,901     1,686     12.7       3,701     3,251     13.8  
Depreciation and amortization   551     537     2.5       1,090     1,049     4.0  
EBIT   $ 1,350     $ 1,149     17.5 %     $ 2,611     $ 2,202     18.5 %

Note: We operate as a single segment which includes all of our continuing operations, excluding net interest expense, data breach related costs and certain other expenses that are discretely managed. Our segment operations are designed to enable guests to purchase products seamlessly in stores, online or through mobile devices. Beginning with the first quarter of 2015, segment EBIT includes the impact of the reduction of the beneficial interest asset. For comparison purposes, prior year segment EBIT has been revised.
(a) SG&A includes $159 million and $311 million of net profit-sharing income under our credit card program agreement for the three and six months ended August 1, 2015, respectively, and $156 million and $305 million for the three and six months ended August 2, 2014, respectively.

         
    Three Months Ended   Six Months Ended
Segment Rate Analysis   August 1,   August 2,   August 1,   August 2,
(unaudited)   2015   2014   2015   2014
Gross margin rate   30.9

 %

  30.4

 %

  30.6

 %

  30.0

 %

SG&A expense rate   19.9     20.5     19.9     20.3  
EBITDA margin rate   10.9     9.9     10.7     9.7  
Depreciation and amortization expense rate   3.2     3.2     3.2     3.1  
EBIT margin rate   7.7     6.8     7.6     6.6  

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

         
    Three Months Ended   Six Months Ended
Sales by Channel   August 1,   August 2,   August 1,   August 2,
(unaudited)   2015   2014   2015   2014
Stores   97.3

 %

  97.8

 %

  97.2

 %

  97.9

 %

Digital   2.7     2.2     2.8     2.1  
Total   100

 %

  100

 %

  100

 %

  100

 %

         
    Three Months Ended   Six Months Ended
Comparable Sales   August 1,   August 2,   August 1,   August 2,
(unaudited)   2015   2014   2015   2014
Comparable sales change   2.4

 %

 

 %

  2.4

 %

  (0.2 )%
Drivers of change in comparable sales                
Number of transactions   1.6     (1.3 )   1.3     (1.8 )
Average transaction amount   0.8     1.3     1.1     1.7  
Selling price per unit   3.8     3.0     4.5     2.4  
Units per transaction   (2.9 )   (1.7 )   (3.2 )   (0.7 )

Note: Amounts may not foot due to rounding.

       
         

Contribution to Comparable Sales Change
(unaudited)

  Three Months Ended   Six Months Ended
 

August 1,
2015

  August 2,
2014
  August 1,
2015
  August 2,
2014
Stores channel comparable sales change   1.8

 %

  (0.6 )%   1.7

 %

  (0.7 )%
Digital channel contribution to comparable sales change   0.6     0.6     0.7     0.5  
Total comparable sales change   2.4

 %

 

 %

  2.4

 %

  (0.2 )%

Note: Amounts may not foot due to rounding.

       
         
    Three Months Ended   Six Months Ended
REDcard Penetration   August 1,   August 2,   August 1,   August 2,
(unaudited)   2015   2014   2015   2014
Target Debit Card   12.0

 %

  11.1

 %

  12.0

 %

  11.2

 %

Target Credit Cards   10.1     9.7     9.8     9.4  
Total REDcard Penetration   22.1

 %

  20.8

 %

  21.8

 %

  20.6

 %

Note: Amounts may not foot due to rounding.

                       
                         
         
    Number of Stores   Retail Square Feet(a)
Number of Stores and Retail Square Feet   August 1,   January 31,   August 2,   August 1,   January 31,   August 2,
(unaudited)   2015   2015   2014   2015   2015   2014
Expanded food assortment stores   1,297   1,292   1,278   167,659   167,026   165,198
SuperTarget stores   249   249   249   44,151   44,151   44,152
General merchandise stores   239   240   259   27,847   27,945   30,121
CityTarget stores   9   8   8   987   820   820
TargetExpress stores   5   1   1   92   21   21
Total   1,799   1,790   1,795   240,736   239,963   240,312

(a) In thousands: reflects total square feet, less office, distribution center and vacant space.

Subject to reclassification

TARGET CORPORATION

Reconciliation of Non-GAAP Financial Measures

To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share from continuing operations (Adjusted EPS). This metric excludes restructuring costs, net expenses related to the 2013 data breach and other matters presented below. We believe this information is useful in providing period-to-period comparisons of the results of our continuing operations. 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 from continuing operations. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP. Other companies may calculate Adjusted EPS differently than we do, limiting the usefulness of the measure for comparisons with other companies. Prior year amounts have been revised to present Adjusted EPS on a continuing operations basis.

         
Adjusted EPS   Three Months Ended    
    August 1, 2015   August 2, 2014    
        Net of   Per Share       Net of   Per Share    
(millions, except per share data) (unaudited)   Pretax   Tax   Amounts   Pretax   Tax   Amounts   Change
GAAP diluted earnings per share from continuing operations           $ 1.21             $ 0.61     96.8 %
Adjustments                            
Restructuring costs (a)   $ 11     $ 8     $ 0.01     $     $     $      
Data Breach-related costs (b)   9     5     0.01     111     71     0.11      
Loss on early retirement of debt               285     174     0.27      
Impairments               16     9     0.01      
Resolution of income tax matters       (5 )   (0.01 )                
Adjusted diluted earnings per share from continuing operations           $ 1.22             $ 1.01     20.6 %
         
    Six Months Ended    
    August 1, 2015   August 2, 2014    
        Net of   Per Share       Net of   Per Share    
(millions, except per share data)   Pretax   Tax   Amounts   Pretax   Tax   Amounts    
GAAP diluted earnings per share from continuing operations           $ 2.21             $ 1.51     46.7 %
Adjustments                            
Restructuring costs (a)   $ 114     $ 72     $ 0.11     $     $     $      
Data Breach-related costs (b)   12     7     0.01     129     83     0.13      
Loss on early retirement of debt               285     174     0.27      
Impairments               16     9     0.01      
Card brand conversion costs (c)               13     8     0.01      
Resolution of income tax matters       (8 )   (0.01 )       (1 )        
Adjusted diluted earnings per share from continuing operations           $ 2.32             $ 1.93     20.1 %

Note: Amounts may not foot due to rounding. Beginning with the first quarter 2015, we no longer adjust for the reduction of the beneficial interest asset because it is no longer meaningful. For comparison purposes, prior year Adjusted EPS has been revised.
(a) Costs related to our previously announced corporate restructuring.
(b) For the three and six months ended August 1, 2015, we recorded $9 million and $12 million of pretax Data Breach-related expenses, respectively, primarily for legal and other professional services. For the three and six months ended August 2, 2014, we recorded $148 million and $175 million of pretax expenses, respectively. Along with legal and other professional services, the 2014 expenses included an increase to the accrual for what we believe to be the vast majority of actual and potential Data Breach-related claims, including claims by payment card networks. We also recorded expected insurance proceeds of $38 million and $46 million for the three and six months ended August 2, 2014, respectively, for net pretax expenses of $111 million and $129 million.
(c) Expense related to converting the co-branded REDcard program to MasterCard.

We have also disclosed after-tax return on invested capital for continuing operations (ROIC), which is a ratio based on GAAP information, with the exception of adjustments made to capitalize operating leases. Operating leases are capitalized as part of the ROIC calculation to control for differences in capital structure between us and our competitors. We believe this metric provides a meaningful measure of the effectiveness of our capital allocation over time. Other companies may calculate ROIC differently than we do, limiting the usefulness of the measure for comparisons with other companies.

     
After-Tax Return on Invested Capital    
         
Numerator   Trailing Twelve Months    
    August 1,   August 2,    
(dollars in millions) (unaudited)   2015   2014    
Earnings from continuing operations before interest expense and income taxes   $ 4,974     $ 4,301      
+ Operating lease interest (a)(b)   90     94      
Adjusted earnings from continuing operations before interest expense and income taxes   5,064     4,395      
- Income taxes (c)   1,694     1,492      
Net operating profit after taxes   $ 3,370     $ 2,903      
             
Denominator   August 1,   August 2,   August 2,
(dollars in millions) (unaudited)   2015   2014   2013
Current portion of long-term debt and other borrowings   $ 841     $ 294     $ 1,828
+ Noncurrent portion of long-term debt   11,883     12,625     11,386
+ Shareholders' equity   13,942     16,433     16,020
+ Capitalized operating lease obligations (b)(d)   1,497     1,573     1,631
- Cash and cash equivalents   2,742     766     810
- Net assets of discontinued operations   217     4,653     4,165
Invested capital   $ 25,204     $ 25,506     $ 25,890
Average invested capital (e)   $ 25,356     $ 25,698      
                 
After-tax return on invested capital   13.3 %   11.3 %    

(a) Represents the hypothetical capitalization of our operating leases, using eight times our trailing twelve months rent expense and an estimated interest rate of six percent.
(b) See the following Reconciliation of Capitalized Operating Leases table for the adjustments to our GAAP total rent expense to obtain the hypothetical capitalization of operating leases and related operating lease interest.
(c) Calculated using the effective tax rate for continuing operations, which was 33.4% and 33.9% for the trailing twelve months ended August 1, 2015 and August 2, 2014.
(d) Calculated as eight times our trailing twelve months rent expense.
(e) Average based on the invested capital at the end of the current period and the invested capital at the end of the prior period.

Capitalized operating lease obligations and operating lease interest are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The most comparable GAAP measure is total rent expense. Capitalized operating lease obligations and operating lease interest should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP.

     
Reconciliation of Capitalized Operating Leases   Trailing Twelve Months
    August 1,   August 2,   August 2,
(dollars in millions) (unaudited)   2015   2014   2013
Total rent expense   $ 187     $ 197     $ 204
Capitalized operating lease obligations (Total rent expense x 8)   1,497     1,573     1,631
Operating lease interest (Capitalized operating lease obligations x 6%)   90     94     n/a

Subject to reclassification

 

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