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Target Reports Second Quarter 2014 Earnings; Adjusted EPS of $0.78 and GAAP EPS of $0.37, Consistent with August 5 Update

August 21, 2014



ENP Newswire - 21 August 2014

Release date- 20082014 - Target's digital sales, including flexible fulfilment, grew more than 30 percent in the second quarter, approximately double the industry growth rate.

Second quarter U.S. Segment transactions declined 1.3 percent, an improvement of one percentage point compared with the first quarter.

Canadian Segment sales increased 63.1 percent to $449 million from $275 million last year.

Second quarter GAAP EPS reflects an accrual for what the Company believes to be the vast majority of actual and potential claims related to the December 2013 data breach.

In second quarter 2014, Target paid dividends of $272 million, an increase of 18 percent from $231 million last year. In June, the Board of Directors increased the quarterly dividend 21 percent from 43 cents to 52 cents per share, beginning with the dividend payable on September 10, 2014.

MINNEAPOLIS (August 20, 2014) - Target Corporation (NYSE: TGT) today reported second quarter Adjusted earnings per share1 of $0.78, a decrease of 20.6 percent from $0.98 per share in 2013, and GAAP earnings per share of $0.37. In addition to operating results, second quarter GAAP earnings per share reflect:

Net pre-tax data breach expenses of $111 million, or (11) cents per share2;

Pre-tax early debt retirement losses of $285 million, or (27) cents per share2;

Pre-tax impairment losses on undeveloped U.S. land of $16 million, or (1) cent per share, and;

A (1)-cent impact related to the reduction of the beneficial interest asset2.

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.

'While results from the quarter didn't meet our expectations, we are seeing some early signs of progress as we work to improve results in the U.S. and Canada,' said John Mulligan, executive vice president and chief financial officer of Target Corporation. 'In the U.S., traffic trends continue to recover and monthly sales are improving, with July comparable sales up more than 1 percent. Better U.S. sales have continued into August, driven by early back-to-school results. In Canada, the team is making important changes to operations and the merchandise assortment with a focus on delivering improved results by this holiday season.'

'Target is an extraordinary company. I'm excited to join the team as we work to drive U.S. traffic and sales, improve Canadian operations and accelerate Target's digital transformation,' said Brian Cornell, chairman and chief executive officer of Target Corporation. 'In the coming weeks and months I will be focused on listening and learning from Target team members in the U.S. and Canada, and working with the leadership team to develop guest-focused, strategic plans to position Target for long-run success.'

Fiscal 2014 Earnings Guidance

In third quarter 2014, the Company expects Adjusted EPS, reflecting operating results in its U.S. and Canadian Segments, of 40 cents to 50 cents. This measure excludes approximately (2) cents related to the expected reduction of the beneficial interest asset2, as well as any future data breach-related expenses.

Target now expects full-year 2014 Adjusted EPS of $3.10 to $3.30, compared with prior guidance of $3.60 to $3.90. Full-year 2014 GAAP EPS is expected to be (48) cents below Adjusted EPS, reflecting:

Year-to-date net pre-tax data breach expenses of $129 million, or (13) cents per share2;

Pre-tax early debt retirement losses, recognized in interest expense, of $285 million, or (27) cents per share2;

Pre-tax impairment losses on undeveloped U.S. land of $16 million, or (1) cent per share;

Pre-tax expense of $13 million, or (1) cent per share, related to Target's decision to convert existing co-branded cards to MasterCard in early 2015, and;

A (6)-cent impact related to the expected reduction of the beneficial interest asset2.

??GAAP EPS guidance does not include an estimate of future data breach-related expenses.

1Adjusted diluted earnings per share ('Adjusted EPS'), a non-GAAP financial measure, excludes the impact of certain matters not related to the Company's ongoing retail operations, such as data breach expenses, losses associated with the early retirement of debt, the reduction in the beneficial interest asset and land impairment losses.

2See the 'Accounting Considerations' section of this release for additional information about expenses related to the data breach, losses on early debt retirement, and the beneficial interest asset.

U.S. Segment Results

In second quarter 2014, sales increased 0.7 percent to $17.0 billion from $16.8 billion last year, reflecting the contribution from new stores and flat comparable sales. Segment earnings before interest expense and income taxes (EBIT) were $1,160 million in second quarter 2014, a decrease of 12.8 percent from $1,330 million in 2013.

Second quarter EBITDA and EBIT margin rates were 10.0 percent and 6.8 percent, respectively, compared with 10.8 percent and 7.9 percent in 2013. Second quarter gross margin rate declined to 30.4 percent from 31.4 percent in 2013, driven by an increase in promotions. Second quarter SG&A expense rate decreased to 20.4 percent in 2014 compared with 20.6 percent in 2013, reflecting disciplined control of expenses across the organization, including the benefit from Target's expense optimization efforts, partially offset by the de-leveraging impact of flat comparable sales.

Canadian Segment Results

Second quarter Canadian Segment sales increased 63.1 percent to $449 million from $275 million last year, reflecting the contribution from new stores partially offset by an 11.4 percent decline in comparable sales. Second quarter 2014 is the first period with reported comparable sales for the Canadian Segment, reflecting results in 48 Canadian stores that became mature at various points during the quarter. The second-quarter decline in comparable sales reflects the comparison to strong grand opening sales surges in 2013, combined with the impact of market densification later in 2013 which redistributed sales from earlier store openings. Segment EBIT was $(204) million in second quarter compared with $(169) million in 2013.

Second quarter 2014 gross margin rate was 18.4 percent, reflecting the continued impact of efforts to clear excess inventory, compared with 31.6 percent in second quarter 2013, which reflected unusually low clearance markdowns resulting from the short time stores had been open. SG&A expense rate of 48.3 percent in second quarter 2014 compares with 75.2 percent last year, reflecting increased scale in the Canadian Segment and pre-opening costs in last year's results.

Interest Expense and Taxes

Second quarter 2014 net interest expense was $453 million, compared with $171 million last year, driven by a $285 million charge related to the early retirement of debt.

The Company's effective income tax rate was 36.1 percent in the second quarter, compared with 36.4 percent in second quarter 2013. The decrease of 0.3 percentage points was due to a variety of factors, none of which was individually significant.

Capital Returned to Shareholders

The Company paid dividends of $272 million in second quarter 2014, an increase of 18% from $231 million last year.

In second quarter, Target repurchased 614 thousand shares of its common stock at an average price of $55.36, due entirely to the non-cash settlement of forward contracts related to the Company's deferred compensation plans. Beyond this settlement, Target did not repurchase additional shares of its common stock.

Accounting Considerations

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. In second quarter 2014, the Company incurred gross breach-related expenses of $148 million, partially offset by the recognition of a $38 million insurance receivable. Expenses for the quarter include an increase to the accrual for estimated probable losses for what the Company believes to be the vast majority of actual and potential breach-related claims, including claims by payment card networks. Given the varying stages of claims and related proceedings and the inherent uncertainty surrounding them, the Company's estimates involve significant judgment and are based on currently available information, historical precedents and an assessment of the validity of certain claims. These estimates may change as new information becomes available and, although the Company does not believe it is probable, it is reasonably possible that the Company may incur a material loss in excess of the amount accrued. The Company is unable to estimate the amount of such reasonably possible excess loss exposure at this time. The accrual does not reflect future breach-related legal, consulting or administrative fees, which are expensed as incurred and not expected to be material in any individual period. Since the data breach in fourth quarter 2013, the Company has incurred total net breach-related expenses of $146 million, reflecting $236 million of gross expenses, partially offset by the recognition of a $90 million insurance receivable.

In second quarter 2014, Target completed tender offers in which the Company paid $1.0 billion to retire, at market value, $725 million of its long-term debt3. As a result, the Company incurred a pre-tax loss of $285 million, or (27) cents per share, which was recognized as net interest expense in Target's second-quarter Consolidated Statements of Operations.

At the close of the sale of its entire U.S. consumer credit card receivables portfolio to TD Bank Group in first quarter 2013, Target recognized a $225 million beneficial interest asset, which effectively represented a receivable for the present value of future profit-sharing Target expected to receive on the receivables sold. The beneficial interest asset was reduced in second quarter 2014 by $11 million, compared with a $29 million reduction in second quarter 2013. Since the close of the transaction, the beneficial interest asset has been reduced by $127 million.

3See Target's Form 8-K filed on July 16, 2014 for more information about the results of the tender offers.

Miscellaneous

Target Corporation will webcast its second 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 August 22, 2014. The replay number is (855) 859-2056 (passcode: 38951472).

Statements in this release regarding third quarter and full-year 2014 earnings guidance and excess exposure related to the data breach 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- and six-month periods ended August 2, 2014 and August 3, 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-toperiod 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.

About Target

Minneapolis-based Target Corporation (NYSE: TGT) serves guests at 1,925 stores - 1,795 in the United States and 130 in Canada - 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 ABullseyeView.com or follow @TargetNews on Twitter.


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Source: ENP Newswire


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