Target Q4 2005 Earnings Conference Call Transcript (TGT)

Target 4th Quarter 2005 Earnings Conference Call Transcript (TGT)

February 16, 2006

Executives

Bob Ullrich, Chairman and CEO
Doug Scovanner, EVP and CFO
Greg Steinhafel, President
Bart Butzer, EVP Stores

Analysts

Jeff Kleinfelder, Piper Jaffrey.
Virginia Genereau, Merrill Lynch
Deborah Wenzig, Citigroup
Charles Grohm, JP Morgan Chase
Bob Zerbal, Lehman Brothers
Mark Miller from William Blair
Adrianne Shakira, Goldman Sachs
Christine Augustine from Bear Stearns
Michael Eckstein with Credit Suisse
Mark Hassan, HSBC
Greg Selig, Morgan Stanley
Dan Bender from Buckingham Research
Neil Curry from UBS
David Strasser, Bank of America

Presentation

Bob Ullrich, Chairman and CEO.

Thank you. Good morning and welcome to our 2005 Q4 and year end earnings conference call. On the line with me today are Doug Scovanner, EVP and CFO, Greg Steinhafel, President and Bart Butzer, EVP Stores. During this call, Doug will first review our financial results for the quarter and describe our outlook for the coming year. Then Greg will provide an update on Target’s recent business and new merchandise initiatives. And finally I will wrap up our remarks and we will open the phone lines for a question and answer session.

Now Doug will review our results which were released earlier this morning.

Doug Scovanner, EVP and CFO.

Thanks, Bob. As a reminder, we are joined on this conference cal by investors and others who are listening to our comments today live via web cast. We plan to keep today’s call to 60 minutes, including our Q&A session. But as always, Susan Kahn and I will be available to address any follow up questions you may have. Also, any forward looking statements that we make in our remarks this morning should be considered in conjunction with precautionary statements contained in our SEC filings. This morning, Target announced another quarter of outstanding financial results, concluding a year in which our sales and profitability grew well in excess of both internal and external expectations. For the 4th quarter of 2005, our total revenue grew 11.5%, EBIT grew 14.0%, earnings from continuing operations grew 15.9% and on the same basis, diluted EPS rose 18.4% to $1.06 from $.90 a year ago.

The key drivers of our EBIT growth in the quarter included a same store sales increase of 4.2%, primarily attributable to growth in average transaction amount, a slight improvement in gross margin rate, in line with our earlier guidance, a somewhat higher expense rate, reflecting lower transition services income related to discontinued operations and the effect of a planned shift in the timing of some advertising, which in conjunction with several additional factors more than offset the year over year favorability resulting from last year’s lease accounting adjustments. And, a strong contribution to EBIT from our credit card operations, reflecting continued strong underlying portfolio performance and the beneficial effect of rising interest rates on our finance charge revenue.

The combination of these factors produced fourth quarter EBIT of $1.6 billion, an increase of 14% from $1.4 billion in the fourth quarter of 2004. Net interest expense increased $17 million in the quarter from $107 million a year ago to $124 million this year, driven by higher average funded balances, partially offset by a lower average portfolio interest rate.

Earnings from continuing operations and EPS grew even faster than EBIT due in part to the net effect of several non-recurring favorable elements of our provision for income taxes. In total, these elements added about $.02 per share to fourth quarter and full year EPS, relative to our expectations for EPS and income tax rate at the end of the 3rd quarter. In the future we are likely to continue to settle tax uncertainties or refine or provision to reflect non-recurring tax events and that will affect our underlying tax rate.

Separately, based on our annual analysis of retail prices, which was completed during the 4th quarter, we experienced no inflation or deflation during 2005 and we expect no LIFO charge or credit for the foreseeable future.

Two comments on the balance sheet.

First, net accounts receivable at the end of the fourth quarter were $5.7 billion, 11.8% above our receivables level at this time last year. Over the same period, we’ve increased our allowance for doubtful accounts at a slightly faster pace, to $451 million or 7.4% of gross receivables at quarter end.

Next, our balance sheet inventory position grew 8.4% from a year ago, in line with AP growth and overall, our inventory content and levels remained in very good position.

Finally, we continued to repurchase shares of Target common stock during the 4th quarter under our aggregate $5 billion authorization. Specifically, we repurchased 5.5 million shares of common stock at an average price of $54.41 per share for a total investment of $300 million in the quarter. As a result, weighted average diluted shares outstanding in the quarter reflected a reduction of nearly 20 million shares or a little over 2% from a corresponding figure last year.

For the full year, we repurchased just over 23 million shares of common stock, at an average price of $51.88 per share, for a total investment of nearly $1.2 billion. Under the current program, we now have about $2.5 billion of remaining authorization and our recent pace of execution remains consistent with our expectation to complete the aggregate program over the next 2-3 years.

Looking at our overall balance sheet, we funded the growth in our balance sheet in 2005 through more or less equal parts debt and equity. Specifically, about a $1 billion increase in shareholder’s investment and about a $1 billion increase in debt, net of marketable securities.

Now let’s put our full year 2005 operating results in perspective and use them to provide some guidance for 2006.

As a reminder, our accounting calendar in 2006 includes a 53rd week. But this is not meaningful to our outlook for annual EPS.

From the full year 2005, our merchandise sales, our gross margin rate and the overall performance of our credit card operations exceeded our internal expectations. And, in combination, these factors allowed us to exceed our EPS expectations. Our actual EPS results from continuing operations for 2005 reflect a 31% increase over 2004 and are $.16 above the first call EPS consensus for this period when the year began.

As we plan our business for 2006, we expect that Target will continue to achieve profitable market share gains. Specifically, again we expect to invest in a group of new high quality stores which, in total, will add about 8% net to our square footage and yet again we expect o generate a 4-6% increase in same store sales.

Our outlook also reflects the expectation that we will be able to replicate our record 2005 retail EBIT margin rate, without meaningful full year changes in either our gross margin rate or expense rate.

In addition, our 2006 outlook for our credit card operations remains bright. We again expect to grow our receivables at a low double-digit percentage rate while maintaining our underwriting disciplines. And while our delinquencies and write off rates will likely increase from today’s artificially low levels, we believe we are already amply reserved for this expectation.

Finally, we’ll continue to enjoy higher yields because the vast majority of our portfolio now earns finance charges on a variable rate basis.

In summary, we expect another great year at Target. While we participate in a hotly competitive, overall US retail marketplace, which is likely to continue to grow at about a 4-5% aggregate rate, we expect to grow our revenue at 2-3 times this rate of growth.

This would again result in a low double-digit percentage revenue growth and would reflect continued market share gains. And again, we expect our EPS to grow somewhat faster than our revenue, at a rate likely consistent with our long term, average annual mid-teens percentage growth objectives.

Now Greg will provide a brief review and update on Target’s merchandising initiatives. Greg?

Greg Steinhafel, President.

Thanks Doug. Target delivered another year of outstanding performance in 2005 fueled by a 5.6% increase in comparable store sales, gross margin rate expansion of 71 basis points and a strong contribution from our credit card operation. By focusing on great design, innovation and disciplined execution of our strategy, we continue to offer differentiated merchandise and compelling value to delight our guests and profitably increase our overall market share.

Specifically, we provided newness and excitement with brand launches such as Fieldcrest, LA Looks, California Closets and Fiorucci and design collections from Isaac Mizrahi and Thomas O’Brien. Introduction of new on brand foods including Troxie and Sutton and Dodge and an entirely new post holiday presentation of global bazaar. We launched PRX and innovate new pharmacy system in bottle design; we generated increases in guest traffic with the expansion of our food offerings in Target general merchandise stores and our continued super Target store growth.

We continue to improve operational speed, reliability and consistency through advances in our supply chain and new application of technology and we remain dedicated to preserving the integrity of our Target brand by continuing to invest in our existing stores, through remodel and right-sizing projects.

During eh past year, we opened 109 total new stores in 32 states. Net of relocations and store closings, this expansion program includes 67 general merchandise stores and 22 super Target stores, representing a net increase in s.f. of 8% for the year.

In 2006, we plan to add approximately 110 total new stores and open 3 new distribution centers to support our continue growth. Our first cycle of store openings, in March, includes 24 general merchandise stores and 1 super Target.

In 2006, we also plan to continue striving to do the best for our guests, our team, our shareholders and our community by supporting programs that improve the health and safety of the local communities in which we operate, by creating a workplace that attracts and retains a team of talented and diverse individuals by demanding integrity, discipline, speed and innovation throughout our entire organization and by reinforcing our commitment to our expect more/pay less brand promise.

Reflecting these principles, several of our current merchandise initiatives combine unique design with distinctly affordable prices exciting our guests with fashion freshness and exceptional value that keeps them coming back to shop at Target.

For example, earlier this month we launched O international, a series of limited engagement apparel collections from internationally renowned designers, geared to our credit-conscious, junior and contemporary guests. The debut collection, which is available through April, features British designer Lewella Bartley and beginning in May, Target will introduce exclusive styles and accessories from Canadian born Paris Rave .

Two additional design collections, each available in our stores for about 90 days, will be launched later this fall. To compliment our indoor home assortment, our partnership with Smith and Hawken provides an exclusive line of garden accessories and décor. The collection is now available in our garden centers and next month will be in our stores nationwide.

We also recently introduced time to play, an assortment of affordably price, premium quality, European manufactured toys. Our offering includes specialty brands such as Schlenk, Educational insights and Olenhart, as well as our own brand of wooden toys called Play Wonder. In addition, we are undertaking significant reinvention in both our intimate apparel and both and body assortment.

Within our intimate apparel category, which includes sleepwear, foundations, hosiery and performance apparel, we are intensifying our focus on quality, process and the overall shopping experience. In particular, we are enhancing the quality and fit of foundations and sleepwear, delivering a more coherent, high quality fit hosiery selection with exclusive brands from industry leaders such as Lushen and package shapewear, extending our offering of performance apparel in uptrending categories such as performance swimwear, women’s field sports and rugged terrain sports. And, leveraging our in-house design and sourcing capabilities to improve speed to market, order flexibility.

Within bath and body we are launching a new collection of over 500 items for both men and women. The collection includes exclusive brands that typically only available in US and European specialty stores and a stylized line of matching accessories and cosmetic bags.

Finally, we have significantly improved our soft lines presentation and finding with the introduction of enhanced pictures in intimates, ladies apparel, men’s and kids. These new pictures allow us to more prominently display our designer brands and make it easier and faster for all our guests to make their clothing selections.

We also continue to enhance our grocery assortment within our general merchandise and super Target stores to provide greater guests convenience and drive more frequent guests visits.

At the end of 2005, approximately half of our store base contained the expanded food assortment, consistent with our key 2004 prototype format and we expect to remodel or right-size a meaningful number of additional stores in the coming years. In addition, at Super Target we plan to add more self-service deli items and more offerings including soup, sides, salads, value-added meats and desserts that make meal preparation fast and easy.

We are proud of our many 2005 achievements at Target and we are dedicated to building on this performance in 2006.

Throughout our company we are unwavering in our commitment to delight our guests with great designs, outstanding value and superior reliability. We remain focused on delivering fast, fun and friendly guest service in every store, every day.

As Doug indicated, we expect to deliver strong financial results in 2006 and believe we will continue to enjoy substantial market share gains in 2006 and for many years to come.

Now, Bob has a few concluding remarks.

Bob Ullrich.

As you’ve just heard in detail, we are very pleased at our 9overall results in the 4th quarter and for the full year of 2005. Through our continued strategic investments and unwavering focus on delighting our guests, we have delivered another year of outstanding performance.

As we look to 2006 and beyond, we believe that we can continue to deliver an exceptional shopping experience for our guests, a workplace that is preferred by our team members a supportive environment for the communities where we operate and a superior return for our shareholders. This concludes our prepared remarks and now Doug, Greg, Bart and I will be happy to respond to your questions.

Operator:

At this time I would like to remind everyone if you would like to ask a question, please press * “1