Target Reports Third Quarter 2017 Earnings

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Comparable sales and EPS near the high end of expectations

  • Third quarter comparable traffic grew 1.4 percent. Comparable sales
    increased 0.9 percent.
  • Third quarter GAAP EPS from continuing operations of $0.87 and
    Adjusted EPS
    1 of $0.91 were near the
    upper-end of the guidance range of $0.75 to $0.95.
  • Comparable digital channel sales increased 24 percent, on top of 26
    percent growth in third quarter 2016.
  • In the third quarter, Target devoted $847 million to capital
    investment, paid dividends of $339 million, and returned $171 million
    through share repurchases.
  • For additional media materials, please visit: https://corporate.target.com/article/2017/11/q3-2017-earnings

Target Corporation (NYSE:TGT) today reported a third quarter
2017 comparable sales increase of 0.9 percent and GAAP earnings per
share (EPS) from continuing operations of $0.87, a decrease of 17.7
percent from third quarter 2016. Third quarter adjusted earnings per
share from continuing operations (Adjusted EPS) were $0.91, a decrease
of 13.1 percent from third quarter 2016. The attached tables provide a
reconciliation of non-GAAP to GAAP measures. All earnings per share
figures refer to diluted EPS.

 

1 Adjusted EPS, a non-GAAP financial measure, excludes
the impact of certain discretely managed items. See the
“Miscellaneous” section of this release, as well as the tables of
this release, for additional information about the items that have
been excluded from Adjusted EPS.

 

“We’re very pleased with Target’s third quarter performance, including
traffic and sales growth that demonstrate we’re building on the progress
we saw in the first half of the year,” said Brian Cornell, chairman and
chief executive officer of Target Corporation. “The investments we’re
making in our business will help Target drive long-term success and
ensure we’re well positioned to deliver for guests in the all-important
holiday season. Our assortment now includes thousands of new items from
the eight exclusive brands we’ve launched throughout 2017, including
Hearth and Hand with Magnolia, our new home goods partnership with Chip
and Joanna Gaines. Guests this holiday season will experience elevated
in-store service reflecting our investments in wages, training and
additional hours for our team, and they’ll find more value than ever
before through a combination of being priced right daily and offering
impressive deals. While we expect the fourth-quarter environment to be
highly competitive, we are very confident in our holiday season plans.”

Fourth Quarter and Fiscal 2017 Guidance
Target expects
fourth quarter 2017 comparable sales growth of flat to two percent. That
performance would translate into full-year 2017 comparable sales growth
of flat to one percent.

For fourth quarter 2017, the Company expects GAAP EPS from continuing
operations and Adjusted EPS of $1.05 to $1.25. For full-year 2017, the
Company now expects GAAP EPS from continuing operations of $4.38 to
$4.58 and Adjusted EPS of $4.40 to $4.60, compared with prior guidance
of $4.35 to $4.55 for GAAP EPS from continuing operations and $4.34 to
$4.54 for Adjusted EPS. The 2 cent difference between expected full-year
GAAP EPS from continuing operations and Adjusted EPS is driven by the
expected net impact of debt-retirement costs and tax benefits.

Fourth quarter and full-year 2017 GAAP EPS from continuing operations
may include the impact of additional discrete items which will be
excluded in calculating Adjusted EPS. The Company is not currently aware
of any such discrete items.

The Company announced today that it plans to issue a post-holiday
financial update on Tuesday, January 9, 2018.

Segment Results
Third quarter 2017 sales increased 1.4
percent to $16.7 billion from $16.4 billion last year, reflecting a 0.9
percent comparable sales increase combined with the benefit from sales
in non-mature stores. Comparable digital channel sales grew 24 percent
and contributed 0.8 percentage points to comparable sales growth.
Segment earnings before interest expense and income taxes (EBIT), which
is Target’s measure of segment profit, were $869 million in third
quarter 2017, a decrease of 17.8 percent from $1,057 million in third
quarter 2016.

Third quarter EBIT margin rate was 5.2 percent, compared with 6.4
percent in 2016. Third quarter gross margin rate2 was 29.7
percent, compared with 29.8 percent in 2016, reflecting pressure from
digital fulfillment costs and the Company’s pricing and promotion
efforts, partially offset by cost savings. Third quarter SG&A expense
rate was 21.1 percent in 2017, compared with 20.3 percent in 2016,
driven by higher compensation costs, reflecting a year-over-year
increase in team member incentives combined with the impact of
investments in store team member hours and wage rates. This was
partially offset by the benefit from the timing of some expenses and our
ongoing cost-savings efforts.

Interest Expense and Taxes from Continuing Operations
The
Company’s third quarter 2017 net interest expense was $254 million,
compared with $142 million last year. The increase was driven by a $123
million charge related to the early retirement of debt in third quarter
2017, partially offset by the benefit of lower average debt balances.

Third quarter 2017 effective income tax rate from continuing operations
was 22.3 percent compared with 33.8 percent last year. The decrease was
primarily due to the net tax effect of the Company’s global sourcing
operations, the resolution of other income tax matters and the effect of
lower pretax earnings.

 

2 Beginning in the second quarter of 2017, we
reclassified supply chain-related depreciation expense into cost
of sales and out of depreciation and amortization on our
Consolidated Statements of Operations. Prior year amounts have
been reclassified to reflect this change. Updated financials for
the thirteen quarters prior to this change have been posted on our
Investor Relations website at investors.target.com.

 

Capital Returned to Shareholders
In third quarter 2017, the
Company returned $510 million to shareholders, which consisted of:

  • Dividends of $339 million, compared with $345 million in third quarter
    2016.
  • Share repurchases totaling $171 million, including an accelerated
    share repurchase (ASR) agreement that retired 2.8 million shares of
    common stock at an average price of $57.78, for a total investment of
    $161 million. Final settlement of the ASR occurred in November, and
    0.3 million of the 2.8 million shares repurchased through the ASR were
    delivered in November.

As of the end of third quarter 2017, including the $161 million
repurchased under the ASR, the Company had approximately $4 billion of
remaining capacity under its current $5 billion share repurchase program.

For the trailing twelve months through third quarter 2017, after-tax
return on invested capital (ROIC) was 13.7 percent, compared with 16.3
percent for the twelve months through third quarter 2016. Excluding the
net gain on the sale of the pharmacy and clinic businesses, ROIC for the
trailing twelve months through third quarter 2016 was 14.3 percent. The
year-over-year decline in third quarter 2017 primarily reflected the
impact of lower profits, partially offset by the benefit of lower
working capital. See the “Reconciliation of Non-GAAP Financial Measures”
section of this release for additional information about the Company’s
ROIC calculation.

Conference Call Details
Target will webcast its third
quarter earnings conference call at 7:00 a.m. CST today. Investors and
the media are invited to listen to the call at investors.target.com
(hover over “company” then click on “events & presentations” in the
“investors” column). A telephone replay of the call will be available
beginning at approximately 10:30 a.m. CST today through the end of
business on November 17, 2017. The replay number is 866-393-0868.

Miscellaneous
Statements in this release regarding fourth
quarter and full-year 2017 earnings per share and comparable sales
guidance are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements 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. 28, 2017. Forward-looking statements speak
only as of the date they are made, and the Company does not undertake
any obligation to update any forward-looking statement.

In addition to the GAAP results provided in this release, the Company
provides Adjusted EPS, consolidated earnings from continuing operations
before interest expense and income taxes (EBIT), and earnings from
continuing operations before interest, taxes, depreciation and
amortization (EBITDA) for the three and nine-month periods ended October
28, 2017 and October 29, 2016, respectively. The Company also provides
ROIC for the twelve-month periods ended October 28, 2017 and October 29,
2016, 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 (GAAP). Management
believes Adjusted EPS is useful in providing period-to-period
comparisons of the results of the Company’s ongoing retail operations.
Management believes consolidated EBIT and EBITDA are useful in providing
meaningful information about our operational efficiency compared to our
competitors by excluding the impact of differences in tax jurisdictions
and structures, debt levels and, for EBITDA, capital investment.
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 consolidated EBIT and EBITDA is net earnings
from continuing operations. The most comparable GAAP measure for
capitalized operating lease obligations and operating lease interest is
total rent expense. These non-GAAP numbers 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,
consolidated EBIT, EBITDA 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 1,834 stores and at Target.com. Since 1946, Target
has given 5 percent of its profit to communities, which today equals
millions of dollars 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 Nine Months Ended
(millions, except per share data) October 28,   October 29, October 28,   October 29,
(unaudited)   2017   2016   Change   2017   2016   Change
Sales $ 16,667 $ 16,441 1.4 % $ 49,113 $ 48,805 0.6 %
Cost of sales (a)   11,712     11,536     1.5     34,330     33,957     1.1  
Gross margin 4,955 4,905 1.0 14,783 14,848 (0.4 )
Selling, general and administrative expenses 3,512 3,339 5.2 10,027 9,741 2.9
Depreciation and amortization (exclusive of depreciation included in
cost of sales) (a)
  574     505     13.7     1,596     1,486     7.4  
Earnings from continuing operations before interest expense and
income taxes
869 1,061 (18.1 ) 3,160 3,621 (12.7 )
Net interest expense   254     142     79.1     532     864     (38.4 )
Earnings from continuing operations before income taxes 615 919 (33.1 ) 2,628 2,757 (4.7 )
Provision for income taxes   137     311     (55.8 )   802     910     (11.9 )
Net earnings from continuing operations 478 608 (21.5 ) 1,826 1,847 (1.1 )
Discontinued operations, net of tax   2             7     73      
Net earnings   $ 480     $ 608     (21.0 )%   $ 1,833     $ 1,920     (4.5 )%
Basic earnings per share
Continuing operations $ 0.88 $ 1.07 (17.8 )% $ 3.33 $ 3.16 5.2 %
Discontinued operations               0.01     0.12      
Net earnings per share   $ 0.88     $ 1.07     (17.3 )%   $ 3.34     $ 3.29     1.6 %
Diluted earnings per share
Continuing operations $ 0.87 $ 1.06 (17.7 )% $ 3.31 $ 3.14 5.4 %
Discontinued operations               0.01     0.12      
Net earnings per share   $ 0.88     $ 1.06     (17.1 )%   $ 3.32     $ 3.26     1.8 %
Weighted average common shares outstanding
Basic 544.5 570.1 (4.5 )% 548.7 583.5 (6.0 )%
Dilutive impact of share-based awards   3.4     4.7     0   3.1     5.0      
Diluted   547.9     574.8     (4.7 )%   551.8     588.5     (6.2 )%
Antidilutive shares   4.5     0.2         4.1     0.1      
Dividends declared per share   $ 0.62     $ 0.60     3.3 %   $ 1.84     $ 1.76     4.5 %

Note: Per share amounts may not foot due to rounding.
(a)
Refer to the Segment Results section for information about a
reclassification of supply chain-related depreciation expense to cost of
sales.

Subject to reclassification

TARGET CORPORATION

     
 

Consolidated Statements of Financial Position

October 28, January 28, October 29,
(millions) (unaudited)   2017   2017   2016
Assets
Cash and cash equivalents $ 2,725 $ 2,512 $ 1,231
Inventory 10,586 8,309 10,057
Assets of discontinued operations 6 69 62
Other current assets   1,392     1,100     1,492  
Total current assets 14,709 11,990 12,842
Property and equipment
Land 6,087 6,106 6,106
Buildings and improvements 28,310 27,611 27,518
Fixtures and equipment 5,548 5,503 5,467

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