TARGET CORPORATION Executive Summary
Third quarter 2019 includes the following notable items:
• GAAP earnings per share from continuing operations were
• Adjusted earnings per share from continuing operations were
• Total revenue increased 4.7 percent, driven by a comparable sales increase
and sales from new stores.
• Comparable sales increased 4.5 percent, driven by a 3.1 percent increase in
traffic.
• Comparable store sales grew 2.8 percent.
• Digital channel sales increased 31 percent, contributing 1.7 percentage
points to comparable sales growth.
• Operating income of
comparable prior-year period.
Sales were$18,414 million for the three months endedNovember 2, 2019 , an increase of$824 million , or 4.7 percent, from the same period in the prior year. Operating cash flow provided by continuing operations was$4,141 million for the nine months endedNovember 2, 2019 , an increase of$527 million , or 14.6 percent, from$3,614 million for the nine months endedNovember 3, 2018 . Earnings Per Share from Three Months Ended Nine Months Ended Continuing Operations November 2, November 3,
2019 2018 Change 2019 2018 Change
GAAP diluted earnings per
share $ 1.37 $ 1.16 18.2 % $ 4.71 $ 3.98 18.5 %
Adjustments (0.01 ) (0.07 ) (0.01 ) (0.11 )
Adjusted diluted earnings
per share $ 1.36 $ 1.09 24.9 % $ 4.70 $ 3.87 21.4 %
Note: Amounts may not foot due to rounding. Adjusted diluted earnings per share
from continuing operations (Adjusted EPS), a non-GAAP metric, excludes the
impact of certain items. Management believes that Adjusted EPS is useful in
providing period-to-period comparisons of the results of our continuing
operations. A reconciliation of non-GAAP financial measures to GAAP measures is
provided on page 17.
For the trailing twelve months ended November 2, 2019 , after-tax return on
invested capital from continuing operations (ROIC) was 15.0 percent, compared
with 15.8 percent for the trailing twelve months ended November 3, 2018 .
Excluding the discrete impacts of the Tax Cuts and Jobs Act of 2017 (Tax Act),
ROIC was 15.1 percent and 13.9 percent for the trailing twelve months ended
November 2, 2019 , and November 3, 2018 , respectively. The calculation of ROIC is
provided on page 19.
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Analysis of Results of Operations
Summary of Operating Income Three Months Ended
Nine Months Ended
November 2, November 3, November 2, November 3,
(dollars in millions) 2019 2018 Change 2019 2018 Change
Sales $ 18,414 $ 17,590 4.7 % $ 53,997 $ 51,699 4.4 %
Other revenue 251 231 8.8 716 680 5.3
Total revenue 18,665 17,821 4.7 54,713 52,379 4.5
Cost of sales 12,935 12,535 3.2 37,808 36,400 3.9
Selling, general and
administrative expenses 4,153 3,937 5.5 11,728 11,347 3.4
Depreciation and
amortization (exclusive
of depreciation included
in cost of sales) 575 530 8.5 1,717 1,639 4.8
Operating income $ 1,002 $ 819 22.3 % $ 3,460 $ 2,993 15.6 %
Rate Analysis Three Months Ended Nine Months Ended
November 2, November 3, November 2, November 3,
2019 2018 2019 2018
Gross margin rate 29.8 % 28.7 % 30.0 % 29.6 %
SG&A expense rate 22.3 22.1 21.4 21.7
Depreciation and amortization
(exclusive of depreciation included in
cost of sales) expense rate 3.1 3.0 3.1 3.1
Operating income margin rate 5.4 4.6 6.3 5.7
Note: Gross margin rate is calculated as gross margin (sales less cost of sales) divided by sales. All other rates are calculated by dividing the applicable amount by total revenue.
Sales
Sales include all merchandise sales, net of expected returns, and gift card breakage. Comparable sales is a measure that highlights the performance of our stores and digital channels by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales include all sales, except sales from stores open less than 13 months, digital acquisitions we have owned less than 13 months, stores that have been closed, and digital acquisitions that we no longer operate. Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies. Digitally originated sales include all sales initiated through mobile applications and our websites. Our stores fulfill the majority of digitally originated sales, including shipment from stores to guests, store pick-up or drive-up, and delivery via our wholly-owned subsidiary, Shipt. Digitally originated sales may also be fulfilled through our distribution centers, our vendors, or other third parties.
The increase in sales during the three and nine months ended
Comparable Sales Three Months Ended Nine Months Ended
November 2, November 3, November 2, November 3,
2019 2018 2019 2018
Comparable sales change 4.5 % 5.1 % 4.2 % 4.9 %
Drivers of change in comparable sales
Number of transactions 3.1 5.3 3.3 5.1
Average transaction amount 1.4 (0.2 ) 0.9 (0.2 )
Note: Amounts may not foot due to rounding.
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Contribution to Comparable Sales Change Three Months Ended Nine Months Ended
November 2, November 3, November 2, November 3,
2019 2018 2019 2018
Stores channel comparable sales change 2.8 % 3.2 % 2.3 % 3.4 %
Digital channel contribution to
comparable sales change 1.7 1.9 1.9 1.5
Total comparable sales change 4.5 % 5.1 % 4.2 % 4.9 %
Note: Amounts may not foot due to rounding.
Sales by Channel Three Months Ended Nine Months Ended
November 2, November 3, November 2, November 3,
2019 2018 2019 2018
Stores originated 92.5 % 94.0 % 92.7 % 94.4 %
Digitally originated 7.5 6.0 7.3 5.6
Total 100 % 100 % 100 % 100 %
Note 2 to the Consolidated Financial Statements provides sales by product category. The collective interaction of a broad array of macroeconomic, competitive, and consumer behavioral factors, as well as sales mix, and transfer of sales to new stores makes further analysis of sales metrics infeasible.
We monitor the percentage of purchases that are paid for using RedCards (RedCard Penetration) because our internal analysis has indicated that a meaningful portion of the incremental purchases on RedCards are also incremental sales forTarget . Guests receive a 5 percent discount on virtually all purchases when they use a RedCard atTarget . RedCard Penetration Three Months Ended Nine Months Ended November 2, November 3, November 2, November 3, 2019 2018 2019 2018 Target Debit Card 12.5 % 12.9 % 12.7 % 13.1 % Target Credit Cards 10.7 10.8 10.6 10.8 Total RedCard Penetration 23.1 % 23.7 % 23.3 % 23.9 %
Note: Amounts may not foot due to rounding.
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--------------------------------------------------------------------------------Gross Margin Rate
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For the three months ended November 2, 2019 , our gross margin rate was 29.8
percent compared with 28.7 percent in the comparable period last year. The
increase was due to merchandising efforts to optimize costs, pricing,
promotions, and assortment, combined with favorable category sales mix. For the
three months ended November 2, 2019 , aggregate supply chain and digital
fulfillment costs had an insignificant impact on our gross margin rate relative
to the comparable prior-year period.
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For the nine months ended
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--------------------------------------------------------------------------------Selling, General, and Administrative Expense Rate
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For the three months ended
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For the nine months ended
Store Data
Change in Number of Stores Three Months Ended Nine Months Ended
November 2, November 3, November 2, November 3,
2019 2018 2019 2018
Beginning store count 1,853 1,835 1,844 1,822
Opened 9 12 20 25
Closed - (1 ) (2 ) (1 )
Ending store count 1,862 1,846 1,862 1,846
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-------------------------------------------------------------------------------- Number of Stores and Number of Stores
Retail Square Feet (a)
Retail Square Feet
2019 2019 2018 2019 2019 2018
170,000 or more sq. ft. 272 272 273 48,619 48,604 48,778
50,000 to 169,999 sq. ft. 1,504 1,501 1,505 189,164 188,900 189,496
49,999 or less sq. ft. 86 71 68 2,475 2,077 1,984
Total 1,862 1,844 1,846 240,258 239,581 240,258
(a) In thousands, reflects total square feet less office, distribution center, and vacant space.
Other Performance Factors Net Interest Expense Net interest expense was$113 million and$359 million for the three and nine months endedNovember 2, 2019 , respectively, and$115 million and$352 million for the three and nine months endedNovember 3, 2018 , respectively.
Provision for Income Taxes
Our effective income tax rate from continuing operations for the three and nine months endedNovember 2, 2019 , was 21.7 percent and 22.4 percent, respectively, compared with 13.6 percent and 19.9 percent, respectively, for the comparable periods last year. The effective income tax rates for the three and nine months endedNovember 3, 2018 , included$39 million of discrete benefits of the Tax Act and, to a lesser extent, rate benefits from our global sourcing operations. 16 --------------------------------------------------------------------------------
Reconciliation of Non-GAAP Financial Measures to GAAP Measures
To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share from continuing operations (Adjusted EPS). This metric excludes certain items presented below. We believe this information is useful in providing period-to-period comparisons of the results of our continuing operations. This measure is not in accordance with, or an alternative to, generally accepted accounting principles in theU.S. (GAAP). The most comparable GAAP measure is diluted earnings per share from continuing operations. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP. Other companies may calculate Adjusted EPS differently, limiting the usefulness of the measure for comparisons with other companies. Reconciliation of Non-GAAP Adjusted EPS Three Months Ended November 2, 2019 November 3, 2018 Per Share Per Share (millions, except per share data) Pretax Net of Tax Amounts Pretax Net of Tax Amounts GAAP diluted earnings per share from continuing operations$ 1.37 $ 1.16 Adjustments Tax Act (a) $ - $ - $ - $ -$ (39 ) $ (0.07 ) Other (c) (9 ) (6 ) (0.01 ) - - - Adjusted diluted earnings per share from continuing operations$ 1.36 $ 1.09 Reconciliation of Non-GAAP Adjusted EPS Nine Months Ended November 2, 2019 November 3, 2018 Per Share Per Share (millions, except per share data) Pretax Net of Tax Amounts Pretax Net of Tax Amounts GAAP diluted earnings per share from continuing operations$ 4.71 $ 3.98 Adjustments Tax Act (a) $ - $ - $ - $ -$ (39 ) $ (0.07 ) Income tax matters (b) - - - - (18 ) (0.03 ) Other (c) (9 ) (6 ) (0.01 ) - - - Adjusted diluted earnings per share from continuing operations$ 4.70 $ 3.87 Note: Amounts may not foot due to rounding. (a) Represents discrete items related to the Tax Act. (b) Represents benefits from the resolution of certain income tax matters unrelated to current period operations. (c) Represents an insurance recovery related to the 2013 data breach. 17
-------------------------------------------------------------------------------- Earnings from continuing operations before interest expense and income taxes (EBIT) and earnings before interest expense, income taxes, depreciation and amortization (EBITDA) are non-GAAP financial measures which we believe provide meaningful information about our operational efficiency compared with our competitors by excluding the impact of differences in tax jurisdictions and structures, debt levels, and for EBITDA, capital investment. These measures are not in accordance with, or an alternative to, GAAP. The most comparable GAAP measure is net earnings from continuing operations. EBIT and EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP. Other companies may calculate EBIT and EBITDA differently, limiting the usefulness of the measure for comparisons with other companies. EBIT and EBITDA Three Months Ended Nine Months Ended (dollars in November 2, November 3, November 2, November 3, millions) (unaudited) 2019 2018 Change 2019 2018 Change Net earnings from continuing operations$ 706 $ 616 14.5 %$ 2,436 $ 2,132 14.3 % + Provision for income taxes 195 97 100.8 703 530 32.8 + Net interest expense 113 115 (1.6 ) 359 352 2.0 EBIT$ 1,014 $ 828 22.4 %$ 3,498 $ 3,014 16.1 % + Total depreciation and amortization (a) 637 592 7.6 1,905 1,826 4.3 EBITDA$ 1,651 $ 1,420 16.2 %$ 5,403 $ 4,840 11.6 %
(a) Represents total depreciation and amortization, including amounts classified
within Depreciation and Amortization and within Cost of Sales.
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-------------------------------------------------------------------------------- We have also disclosed after-tax ROIC, which is a ratio based on GAAP information. We believe this metric is useful in assessing the effectiveness of our capital allocation over time. Other companies may calculate ROIC differently, limiting the usefulness of the measure for comparisons with other companies. After-Tax Return onInvested Capital (dollars in millions) Trailing Twelve Months November 2, November 3, Numerator 2019 2018 (a) Operating income$ 4,577 $ 4,122 + Net other income / (expense) 45 35 EBIT 4,622 4,157 + Operating lease interest (b) 86 83 - Income taxes (c)(d) 1,043 524 Net operating profit after taxes$ 3,665 $ 3,716 November 2, November 3, October 28, Denominator 2019 2018 2017
Current portion of long-term debt and other borrowings
10,513 10,104 11,090
+ Shareholders' equity 11,545 11,080 11,092
+ Operating lease liabilities (e) 2,390 2,208 2,041
- Cash and cash equivalents 969 825 2,725
- Net assets of discontinued operations (f) - - 4
Invested capital $ 24,638 $ 24,102 $ 22,860
Average invested capital (g) $ 24,369 After-tax return on invested capital (d) 15.0 % 15.8 % After-tax return on invested capital excluding discrete impacts of Tax Act (d) 15.1 % 13.9 % (a) Consisted of 53 weeks. (b) Represents the add-back to operating income driven by the hypothetical
interest expense we would incur if the property under our operating leases
were owned or accounted for as finance leases. Calculated using the discount
rate for each lease and recorded as a component of rent expense within SG&A
Expenses. Operating lease interest is added back to operating income in the
ROIC calculation to control for differences in capital structure between us
and our competitors.
(c) Calculated using the effective tax rates for continuing operations, which
were 22.1 percent and 12.3 percent for the trailing twelve months ended
twelve months ended
effect of
and
interest.
(d) The effective tax rate for the trailing twelve months ended November 2 ,
2019, and
(e) Total short-term and long-term operating lease liabilities included within
Accrued and Other Current Liabilities and Noncurrent Operating Lease
Liabilities.
(f) Included in Other Assets and Liabilities.
(g) Average based on the invested capital at the end of the current period and
the invested capital at the end of the comparable prior period.
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Analysis of Financial Condition
Liquidity and Capital Resources
Our cash and cash equivalents balance was$969 million ,$1,556 million , and$825 million atNovember 2, 2019 ,February 2, 2019 , andNovember 3, 2018 , respectively. Our cash and cash equivalents balance includes short-term investments of$163 million ,$769 million , and$42 million as ofNovember 2, 2019 ,February 2, 2019 , andNovember 3, 2018 , respectively. Our investment policy is designed to preserve principal and liquidity of our short-term investments. This policy allows investments in large money market funds or in highly rated direct short-term instruments that mature in 60 days or less. We also place dollar limits on our investments in individual funds or instruments.
Capital Allocation
We follow a disciplined and balanced approach to capital allocation based on the following priorities, ranked in order of importance: first, we fully invest in opportunities to profitably grow our business, create sustainable long-term value, and maintain our current operations and assets; second, we maintain a competitive quarterly dividend and seek to grow it annually; and finally, we return any excess cash to shareholders by repurchasing shares within the limits of our credit rating goals.
We expect 2019 capital expenditures to total approximately
Operating Cash Flows
Operating cash flow provided by continuing operations was$4,141 million for the nine months endedNovember 2, 2019 , compared with$3,614 million for the nine months endedNovember 3, 2018 . The operating cash flow increase was primarily driven by higher net earnings during the nine months endedNovember 2, 2019 , compared with the same period in the prior year.
Inventory
Inventory was$11,396 million as ofNovember 2, 2019 , compared with$9,497 million and$12,393 million atFebruary 2, 2019 , andNovember 3, 2018 , respectively. The increase fromFebruary 2, 2019 , reflects the seasonal inventory build ahead of the November and December holiday sales period. Inventory levels were lower as ofNovember 2, 2019 , compared withNovember 3, 2018 , partially due to timing of receipts because theThanksgiving holiday is later in the current year. In addition, elevated inventory levels in the prior year reflected investments in toys and baby-related merchandise.
Dividends
We paid dividends totaling$337 million ($0.66 per share) and$995 million ($1.94 per share) for the three and nine months endedNovember 2, 2019 , respectively, and$337 million ($0.64 per share) and$1,001 million ($1.88 per share) for the three and nine months endedNovember 3, 2018 , respectively, a per share increase of 3.1 percent and 3.2 percent, respectively. We declared dividends totaling$338 million ($0.66 per share) during the third quarter of 2019, a per share increase of 3.1 percent over the$338 million ($0.64 per share) of declared dividends during the third quarter of 2018. We have paid dividends every quarter since our 1967 initial public offering, and it is our intent to continue to do so in the future.
Share Repurchase
We returned
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--------------------------------------------------------------------------------Financing
Our financing strategy is to ensure liquidity and access to capital markets, to maintain a balanced spectrum of debt maturities, and to manage our net exposure to floating interest rate volatility. Within these parameters, we seek to minimize our borrowing costs. Our ability to access the long-term debt and commercial paper markets has provided us with ample sources of liquidity. Our continued access to these markets depends on multiple factors, including the condition of debt capital markets, our operating performance, and maintaining strong credit ratings. As ofNovember 2, 2019 , our credit ratings were as follows: Credit Ratings Moody's Standard and Poor's Fitch Long-term debt A2 A A- Commercial paper P-1 A-1 F1 If our credit ratings were lowered, our ability to access the debt markets, our cost of funds, and other terms for new debt issuances could be adversely impacted. Each of the credit rating agencies reviews its rating periodically and there is no guarantee our current credit ratings will remain the same as described above. Fitch raised our commercial paper rating from F2 to F1 during the three months endedAugust 3, 2019 .
In
We have additional liquidity through a committed$2.5 billion revolving credit facility obtained through a group of banks. InOctober 2018 , we extended this credit facility by one year toOctober 2023 . No balances were outstanding at any time during 2019 or 2018. Most of our long-term debt obligations contain covenants related to secured debt levels. In addition to a secured debt level covenant, our credit facility also contains a debt leverage covenant. We are, and expect to remain, in compliance with these covenants. Additionally, as ofNovember 2, 2019 , no notes or debentures contained provisions requiring acceleration of payment upon a credit rating downgrade, except that certain outstanding notes allow the note holders to put the notes to us if within a matter of months of each other we experience both (i) a change in control; and (ii) our long-term credit ratings are either reduced and the resulting rating is noninvestment grade, or our long-term credit ratings are placed on watch for possible reduction and those ratings are subsequently reduced and the resulting rating is noninvestment grade. We believe our sources of liquidity will continue to be adequate to maintain operations, finance anticipated expansion and strategic initiatives, fund debt maturities, pay dividends, and execute purchases under our share repurchase program for the foreseeable future. We continue to anticipate ample access to commercial paper and long-term financing.
Contractual Obligations and Commitments
As of the date of this report, other than the new borrowings discussed in Note 5
to the Consolidated Financial Statements, there were no material changes to
our contractual obligations and commitments outside the ordinary course of
business since
New Accounting Pronouncements
We do not expect any recently issued accounting pronouncements to have a material effect on our financial statements.
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--------------------------------------------------------------------------------Forward-Looking Statements
This report contains forward-looking statements, which are based on our current assumptions and expectations. These statements are typically accompanied by the words "expect," "may," "could," "believe," "would," "might," "anticipates," or similar words. The principal forward-looking statements in this report include: our financial performance, statements regarding the adequacy of and costs associated with our sources of liquidity, the funding of debt maturities, the continued execution of our share repurchase program, our expected capital expenditures and new lease commitments, the expected compliance with debt covenants, the expected impact of new accounting pronouncements, our intentions regarding future dividends, the expected return on plan assets, the expected outcome of, and adequacy of our reserves for, claims, litigation and the resolution of tax matters, the expected impact of changes in information technology systems, and changes in our assumptions and expectations. All such forward-looking statements are intended to enjoy the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. Although we believe there is a reasonable basis for the forward-looking statements, our actual results could be materially different. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth on our description of risk factors in Item 1A of our Form 10-K for the fiscal year endedFebruary 2, 2019 , which should be read in conjunction with the forward-looking statements in this report. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.
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