<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended August 1, 1998
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Commission file number 1-6049
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Dayton Hudson Corporation
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(Exact name of registrant as specified in its charter)
Minnesota 41-0215170
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(State of incorporation or organization) (I.R.S. Employer Identification No.)
777 Nicollet Mall Minneapolis, Minnesota 55402-2055
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 370-6948
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None
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(Former name, former address and former fiscal year, if changed since last
report.)
The registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90 days.
The number of shares outstanding of common stock as of August 1, 1998 was
439,944,303.
<PAGE>
DAYTON HUDSON CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NO.
<S> <C>
PART I FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Results of Operations for the Three 1
Months, Six Months and Twelve Months ended August 1, 1998
and August 2, 1997
Condensed Consolidated Statements of Financial Position at 2
August 1, 1998, January 31, 1998 and August 2, 1997
Condensed Consolidated Statements of Cash Flows for the Six 3
Months ended August 1, 1998 and August 2, 1997
Notes to Condensed Consolidated Financial Statements 4-6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND 7-12
FINANCIAL CONDITION
PART II OTHER INFORMATION:
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 13
Signatures 14
Exhibit Index 15
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED Dayton Hudson Corporation
RESULTS OF OPERATIONS and Subsidiaries
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED
- -----------------------------------------------------------------------------------------------------------------------------
AUGUST 1, August 2, AUGUST 1, August 2, AUGUST 1, August 2,
(Unaudited) 1998 1997 1998 1997 1998 1997
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<S> <C> <C> <C> <C> <C> <C>
REVENUES $7,056 $6,293 $13,524 $12,182 $29,099 $26,422
COSTS AND EXPENSES:
Cost of retail sales, buying and occupancy 5,143 4,586 9,870 8,839 21,351 19,321
Selling, publicity and administrative 1,214 1,080 2,288 2,114 4,705 4,411
Depreciation and amortization 193 174 377 344 727 678
Interest expense, net 101 107 197 214 399 436
Taxes other than income taxes 121 113 243 230 483 455
Real estate repositioning charge - - - - - 134
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Total Costs and Expenses 6,772 6,060 12,975 11,741 27,665 25,435
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EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY
CHARGES 284 233 549 441 1,434 987
Provision for Income Taxes 112 92 217 174 567 389
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NET EARNINGS BEFORE EXTRAORDINARY CHARGES 172 141 332 267 867 598
Extraordinary Charges from Purchase and Redemption
of Debt, Net of Tax - 11 2 32 21 42
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NET EARNINGS $ 172 $ 130 $ 330 $ 235 $ 846 $ 556
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BASIC EARNINGS PER SHARE:
Earnings Before Extraordinary Charges $ .38 $ .32 $ .74 $ .59 $ 1.94 $ 1.33
Extraordinary Charges - (.03) (.01) (.07) (.05) (.10)
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BASIC EARNINGS PER SHARE $ .38 $ .29 $ .73 $ .52 $ 1.89 $ 1.23
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DILUTED EARNINGS PER SHARE:
Earnings Before Extraordinary Charges $ .36 $ .29 $ .70 $ .56 $ 1.84 $ 1.27
Extraordinary Charges - (.02) (.01) (.07) (.05) (.10)
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DILUTED EARNINGS PER SHARE $ .36 $ .27 $ .69 $ .49 $ 1.79 $ 1.17
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DIVIDENDS DECLARED PER COMMON SHARE $ .09 $ .08 $ .18 $ .16 $ .35 $ .32
AVERAGE COMMON SHARES OUTSTANDING (Millions):
Basic 439.6 435.7 439.1 435.3 438.0 434.6
Diluted 467.6 463.8 467.1 463.1 465.6 461.3
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</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS Dayton Hudson Corporation
OF FINANCIAL POSITION and Subsidiaries
<TABLE>
<CAPTION>
AUGUST 1, January 31, August 2,
(MILLIONS OF DOLLARS) 1998 1998* 1997
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<S> <C> <C> <C>
ASSETS (Unaudited) (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 237 $ 211 $ 216
Retained securitized receivables 1,295 1,555 1,551
Merchandise inventories 3,697 3,251 3,363
Other 926 544 409
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Total Current Assets 6,155 5,561 5,539
PROPERTY AND EQUIPMENT 12,240 11,513 10,920
Accumulated depreciation (3,676) (3,388) (3,171)
Property and Equipment, net 8,564 8,125 7,749
OTHER 589 505 487
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TOTAL ASSETS $ 15,308 $ 14,191 $ 13,775
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LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 2,852 $ 2,727 $ 2,399
Current portion of long-term debt and notes payable 351 273 384
Other 1,462 1,556 1,264
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Total Current Liabilities 4,665 4,556 4,047
LONG-TERM DEBT 5,132 4,425 5,072
DEFERRED INCOME TAXES AND OTHER 750 720 636
CONVERTIBLE PREFERRED STOCK, NET 20 30 34
SHAREHOLDERS' INVESTMENT 4,741 4,460 3,986
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TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 15,308 $ 14,191 $ 13,775
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COMMON SHARES OUTSTANDING (Millions) 439.9 437.8 436.1
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</TABLE>
* The January 31, 1998 Consolidated Statement of Financial Position is
condensed from the audited financial statement.
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
CONDENSED CONSOLIDATED Dayton Hudson Corporation
STATEMENTS OF CASH FLOWS and Subsidiaries
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) SIX MONTHS ENDED
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AUGUST 1, August 2,
(UNAUDITED) 1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net earnings before extraordinary charges $ 332 $267
Reconciliation to cash flow:
Depreciation and amortization 377 344
Deferred tax provision 10 (60)
Other non-cash items affecting earnings 14 7
Changes in operating accounts providing/(requiring) cash, net of
acquisitions:
Retained securitized receivables 305 169
Merchandise inventories (420) (332)
Accounts payable 39 (136)
Accrued liabilities (58) 83
Income taxes payable (53) (139)
Securities in trust for principal payment on sold securitized receivables (270) -
Other (93) 54
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Cash Flow Provided by Operations 183 257
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INVESTING ACTIVITIES
Expenditures for property and equipment (793) (637)
Proceeds from disposals of property and equipment 29 110
Acquisition of subsidiaries, net of cash received (100) -
Other (6) -
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Cash Flow (Required) for Investing Activities (870) (527)
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Net Financing Requirements (687) (270)
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FINANCING ACTIVITIES
Increase in notes payable, net 466 537
Additions to long-term debt 400 100
Reductions of long-term debt (87) (438)
Principal payments received on loan to ESOP 8 9
Dividends paid (89) (80)
Sale of subsidiary preferred stock - 160
Other 15 (3)
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Cash Flow Provided by Financing Activities 713 285
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Net Increase in Cash and Cash Equivalents 26 15
Cash and Cash Equivalents at Beginning of Period 211 201
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 237 $ 216
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</TABLE>
Amounts in this statement are presented on a cash basis and therefore may differ
from those shown elsewhere in this 10-Q report. Cash paid for income taxes was
$265 million and $342 million during the first six months of 1998 and 1997,
respectively. Cash paid for interest (including interest capitalized) in the
first six months of 1998 and 1997 was $195 million and $284 million,
respectively.
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
NOTES TO CONDENSED CONSOLIDATED Dayton Hudson Corporation
FINANCIAL STATEMENTS and Subsidiaries
ACCOUNTING POLICIES
The accompanying condensed consolidated financial statements should be read in
conjunction with the financial statement disclosures contained in our 1997
Annual Shareholders' Report throughout pages 25-36. As explained on page 35 of
the Annual Report, the same accounting policies are followed in preparing
quarterly financial data as are followed in preparing annual data. In the
opinion of management, all adjustments necessary for a fair presentation of
quarterly operating results are reflected herein and are of a normal, recurring
nature.
Due to the seasonal nature of the retail industry, quarterly earnings are not
necessarily indicative of the results that may be expected for the full fiscal
year.
INTERNAL USE SOFTWARE
We adopted Statement of Position (SOP) 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" in first quarter 1998.
The adoption resulted in expense savings which increased pre-tax earnings by
approximately $23 and $38 million, net of depreciation, for the second quarter
and first half of 1998, respectively ($.03 and $.05 per share) which partially
offset our other systems expenses.
PER SHARE DATA
References to earnings per share relate to diluted earnings per share.
<TABLE>
<CAPTION>
Basic EPS
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Three Months Six Months Twelve Months
Ended Ended Ended
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AUG 1, Aug 2, AUG 1, Aug 2, AUG 1, Aug 2,
1998 1997 1998 1997 1998 1997
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<S> <C> <C> <C> <C> <C> <C>
Net earnings* $ 172 $ 141 $ 332 $ 267 $ 867 $ 598
Less: ESOP net earnings adjustment (5) (5) (10) (10) (20) (20)
- -----------------------------------------------------------------------------------------------------
Adjusted net earnings* $ 167 $ 136 $ 322 $ 257 $ 847 $ 578
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Weighted average common shares
outstanding 439.6 435.7 439.1 435.3 438.0 434.6
Performance shares - - - - - -
Stock options - - - - - -
Assumed conversion of ESOP
preferred shares - - - - - -
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Total common equivalent shares
outstanding 439.6 435.7 439.1 435.3 438.0 434.6
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Earnings Per Share* $ .38 $ .32 $ .74 $ .59 $ 1.94 $ 1.33
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<CAPTION>
Diluted EPS
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Three Months Six Months Twelve Months
Ended Ended Ended
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AUG 1, Aug 2, AUG 1, Aug 2, AUG 1, Aug 2,
1998 1997 1998 1997 1998 1997
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<S> <C> <C> <C> <C> <C> <C>
Net earnings* $ 172 $ 141 $ 332 $ 267 $ 867 $ 598
Less: ESOP net earnings adjustment (3) (4) (6) (7) (12) (13)
- --------------------------------------------------------------------------------------------------
Adjusted net earnings* $ 169 $ 137 $ 326 $ 260 $ 855 $ 585
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Weighted average common shares
outstanding 439.6 435.7 439.1 435.3 438.0 434.6
Performance shares 0.9 1.5 0.9 1.5 1.0 1.4
Stock options 6.0 4.1 5.8 3.7 4.9 2.3
Assumed conversion of ESOP
preferred shares 21.1 22.5 21.3 22.6 21.7 23.0
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Total common equivalent shares
outstanding 467.6 463.8 467.1 463.1 465.6 461.3
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Earnings Per Share* $ .36 $ .29 $ .70 $ .56 $ 1.84 $ 1.27
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</TABLE>
*Before extraordinary charges
4
<PAGE>
LONG-TERM DEBT
On June 4, 1998 we issued $200 million of long-term debt maturing in June
2010, puttable in June 2000. In addition, we sold to a third party the right
to call and remarket these securities in June 2000 to their final maturity.
On July 21, 1998 we issued $200 million of long-term debt with a coupon rate
of 6.65%, maturing in August 2028.
ACQUISITIONS
In the first quarter of 1998, we acquired The Associated Merchandising
Corporation, an international sourcing company for our three operating
divisions and other retailers, and Rivertown Trading Company, a direct
marketing firm. Both subsidiaries are included in the consolidated financial
statements. Their revenues and operating results are included in "Corporate
and other" and were immaterial in the second quarter and first half of 1998.
SEGMENT DISCLOSURES (millions of dollars)
Revenues by segment were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
AUGUST 1, August 2, AUGUST 1, August 2,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Target $ 5,294 $ 4,663 $ 10,101 $ 8,917
Mervyn's 935 945 1,825 1,891
DSD 732 685 1,458 1,374
Corporate and other 95 - 140 -
-------- -------- -------- --------
Total revenues $ 7,056 $ 6,293 $ 13,524 $ 12,182
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Pre-tax segment profit and reconciliation to pre-tax earnings were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
AUGUST 1, August 2, AUGUST 1, August 2,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Target $ 337 $ 274 $ 639 $ 526
Mervyn's 40 58 83 108
DSD 45 33 86 68
-------- -------- -------- --------
Total Pre-tax Segment Profit 422 365 808 702
Securitization adjustments:
Interest equivalent (12) (7) (24) (13)
SFAS 125 gain - 7 - 13
Interest expense (101) (107) (197) (214)
Corporate and other (25) (25) (38) (47)
-------- -------- -------- --------
Earnings before income taxes
and extraordinary charge $ 284 $ 233 $ 549 $ 441
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
5
<PAGE>
DERIVATIVES
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted for fiscal years beginning after June 15, 1999. The
adoption of this new statement is expected to have an immaterial effect on
our earnings and financial position.
SUBSEQUENT EVENTS
On August 12, 1998, Dayton Hudson Receivables Corporation (DHRC), a
special-purpose subsidiary, sold to the public $400 million of securitized
receivables. This issue of asset-backed securities has an expected maturity
of five years and a stated rate of 5.90%. Proceeds from the sale were used
for general corporate purposes, including funding the growth of receivables.
In conjunction with this transaction, DHRC retained a $123 million issue of
subordinated Class B asset-backed securities, which is classified in Retained
Securitized Receivables. As required by Statement of Financial Accounting
Standards (SFAS) No. 125, the sale transaction resulted in a pre-tax gain of
$35 million, $.05 per share. Later in the third quarter, this gain will be
offset by a $38 million pre-tax charge, $.05 per share, related to the
maturity of our 1995 securitization. The net impact will result in a
reduction of third quarter finance charge revenues and pre-tax earnings of
approximately $3 million.
We have historically deducted for income tax purposes the inventory shortage
expense accrued for book purposes in a manner consistent with industry
practice. With respect to our 1983 Federal income tax return, the Internal
Revenue Service (IRS) challenged the practice of deducting accrued shortage
not verified with a year-end physical inventory. In second quarter of 1997,
the United States Tax Court (Tax Court) returned a judgment on this issue in
favor of the IRS. We appealed the decision to the United States Court of
Appeals for the Eighth Circuit (Appeals Court) and on August 14, 1998, the
Appeals Court reversed the Tax Court decision. Final resolution of this
matter for 1983 through 1996 now depends on further action, if any, by the
IRS.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 1998
ANALYSIS OF OPERATIONS
The improvement in second quarter and first half net earnings was due to
strong sales and profit performance at Target and DSD. Second quarter and
first half 1997 net earnings included extraordinary charges related to the
early extinguishment of debt. Second quarter and first half 1998 and 1997 net
earnings were as follows:
<TABLE>
<CAPTION>
Earnings Diluted Earnings Per Share
------------------------------------ ------------------------------------
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
---------------- ---------------- ---------------- ----------------
AUG 1, Aug 2, AUG 1, Aug 2, AUG 1, Aug 2, AUG 1, Aug 2,
1998 1997 1998 1997 1998 1997 1998 1997
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net earnings before unusual items $ 172 $ 137 $ 332 $ 260 $ .36 $ .28 $ .70 $ .54
Securitization gain, net of tax (pre-tax $7
and $13 million) - 4 - 7 - .01 - .02
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Net earnings before extraordinary charge 172 141 332 267 .36 .29 .70 .56
Extraordinary charge, net of tax - (11) (2) (32) - (.02) (.01) (.07)
----------------------------------------------------------------------------
Net earnings $ 172 $ 130 $ 330 $ 235 $ .36 $ .27 $ .69 $ .49
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
REVENUES AND COMPARABLE-STORE SALES
Total revenues for the quarter increased 12.1 percent to $7,056 million
compared with $6,293 million for the same period a year ago. Total revenues
for the first half increased 11.0 percent to $13,524 million compared with
$12,182 million for the same period a year ago. Total comparable-store sales
(sales from stores open longer than one year) increased 5.2 percent for both
periods. Year-over-year changes in revenues and comparable-store sales by
business segment were as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Percentage Change Percentage Change
----------------------- -----------------------
Comparable- Comparable-
Revenues Store Sales Revenues Store Sales
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Target 13.5% 6.2% 13.3% 6.1%
Mervyn's (1.0) (1.1) (3.5) (0.4)
DSD 6.8 7.4 6.1 7.1
-------- ----------- -------- -----------
Total 12.1% 5.2% 11.0% 5.2%
-------- ----------- -------- -----------
-------- ----------- -------- -----------
</TABLE>
Target's revenue results reflect strong new and comparable-store sales
growth. Mervyn's revenues and comparable-store sales declined mainly due to
lower than expected sales in its West Coast stores. DSD's revenue results
reflect strong comparable-store sales growth.
7
<PAGE>
PRE-TAX SEGMENT PROFIT
Pre-tax segment profit is first-in, first-out (FIFO) earnings from operations
before securitization effects, interest, corporate and other, and unusual
items. Our second quarter pre-tax segment profit increased 15 percent to $422
million compared with $365 million for the same period a year ago. Pre-tax
segment profit in the first half increased 15 percent to $808 million
compared with $702 million for the same period a year ago. Year-over-year
pre-tax segment profit growth was as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Percentage Change Percentage Change
----------------- -----------------
<S> <C> <C>
Target 23% 21%
Mervyn's (32) (23)
DSD 40 27
-------- --------
Total Pre-tax Segment Profit 15% 15%
-------- --------
-------- --------
</TABLE>
TARGET'S second quarter and first half pre-tax profit increased 23 and 21
percent, respectively, over the same periods last year, reflecting
comparable-store sales growth of 6.2 and 6.1 percent, respectively. During
the second quarter and first half, the gross margin rate improved primarily
due to lower markdowns and lower inventory shortage. The operating expense
rate during the second quarter remained essentially unchanged from last year,
reflecting improved store productivity offset by higher wage rates. For the
first half, the operating expense rate was favorable to last year due to
productivity improvements, partially offset by higher wage rates. We expect
mid single-digit comparable-store sales growth at Target in the second half
of this year, and a pre-tax profit margin essentially even with 1997. These
results would reflect a pre-tax profit increase of 11 to 15 percent during the
second half of the year.
MERVYN'S second quarter and first half pre-tax profit decreased 32 and 23
percent, respectively, from the same periods last year, reflecting
comparable-store sales declines of 1.1 and 0.4 percent, respectively. The
gross margin rate declined during the second quarter and first half due to
higher markdowns. The operating expense rate declined in both periods due to
modestly higher costs on a lower sales base. By the fourth quarter, we expect
Mervyn's to reverse the year-to-date trend of year-over-year decreases in
pre-tax profit.
DSD'S second quarter and first half pre-tax profit increased 40 and 27
percent, respectively, from the same periods last year, reflecting
comparable-store sales growth of 7.4 and 7.1 percent, respectively. The gross
margin rate improvement in the second quarter and first half was primarily
due to improved markdowns. During the second quarter, the operating expense
rate was essentially unchanged from the prior year due to strong sales
leveraging offset by planned higher marketing expenses. The operating expense
rate year-to-date is favorable to last year primarily due to strong sales
leveraging. We expect low single-digit comparable-store sales growth at DSD
in the second half of this year and a modest increase in the pre-tax profit
margin. These results would reflect a more modest increase in DSD's pre-tax
profit than the 27 percent growth in the first half.
8
<PAGE>
OTHER PERFORMANCE FACTORS
Our proprietary guest credit programs strategically support our core retail
operations and are an integral component of each business segment. Therefore,
credit contribution is reflected in each business segment's pre-tax profit.
Net of all expenses, including bad debt expense, pre-tax contribution from
guest credit increased over the prior year, for both the quarter and six
month period, principally due to continued growth of the Target guest card.
We expect to continue to grow guest credit's contribution in 1998 by
acquiring new accounts, increasing participation in our guest loyalty
programs and controlling bad debt expense.
The last-in first-out (LIFO) provision, included in cost of retail sales, was
zero in the second quarter and first half for both 1998 and 1997. The
cumulative LIFO provision was $92 million at August 1, 1998 and January 31,
1998, and $86 million at August 2, 1997.
"Interest equivalent", as shown in our pre-tax earnings reconciliation on
page 5, represents payments to holders of our sold securitized receivables
and is included in our Consolidated Results of Operations as a reduction of
finance charge revenues and bad debt expense. We expect interest equivalent
of approximately $12 million per quarter for the remainder of this year. For
analytical purposes, management includes the interest equivalent in interest
expense.
Combined interest expense and interest equivalent decreased $1 million in the
second quarter and $6 million in the first half of 1998 compared to the same
periods last year due to a lower average portfolio interest rate. Combined
interest expense and interest equivalent decreased $4 million in the second
quarter and $6 million in the first half of 1997 compared to the same periods
in 1996 primarily due to lower average funded balances. For the balance of
1998, combined interest expense and interest equivalent is expected to be
similar to, or slightly above, 1997 as somewhat higher average funded
balances are partially offset by continued portfolio rate favorability.
The estimated annual effective income tax rate was 39.5 percent in the
second quarter and first half for both 1998 and 1997.
YEAR 2000
We began mitigating the risks associated with the Year 2000 date conversion
in 1993. In 1997 we established a corporate-wide, comprehensive plan of
action designed to achieve an uninterrupted transition into the year 2000.
This project includes three major elements: 1) information technology (IT)
systems, 2) non-IT, or embedded technology, systems and 3) relationships with
our key business partners. The project is divided into five phases:
awareness, assessment, renovation, validation and implementation. We have
essentially completed the awareness and assessment phases for all three
elements, and are currently at different points in the renovation, validation
and implementation phases for each of the elements. We are using both
internal and external resources to implement our plan.
9
<PAGE>
For our IT systems, we have assessed both existing and newly implemented
hardware and applications (software and operating systems), and have
substantially finalized the development of plans to address all assessed
risks. Approximately 80 percent of our hardware is year 2000 compliant, and
the remainder is currently in the renovation phase. Approximately 65 percent
of our applications are compliant, with 35 percent in the renovation phase.
We anticipate completion of the validation, or testing, phase for our
software by early/mid 1999, and we intend to extensively test our key
operating systems, through simulation of the year 2000, in late 1998 and
early/mid 1999. Our year 2000 readiness in this area has been significantly
enhanced by our recent, substantial common systems development initiatives
through which we have invested heavily in IT over the past two years.
We began addressing non-IT systems, or embedded technology/infrastructure,
risks at our stores, distribution centers and headquarters facilities early
in our initiative. Approximately 80 percent of our non-IT systems are
compliant and the remainder are currently in the renovation phase.
Validation and implementation are approximately 70 percent complete and we
anticipate substantial completion by early 1999.
We have identified our key business partners and will work closely with them
to assess their readiness and mitigate the risk to us if they are not
prepared for the year 2000. We will install the year 2000 compliant version
of Electronic Data Interchange (EDI) software by late 1998, and expect to
finalize testing of EDI and other electronic transmissions with key
business partners by mid/late 1999.
In planning for the most reasonably likely worst case scenarios, we have
addressed all three major elements in our project. We believe our IT systems
will be ready for the year 2000, but we may experience isolated incidences of
non-compliance. We plan to allocate internal resources and retain dedicated
consultants and vendor representatives to be ready to take action if these
events occur. Our contingency plans for non-IT systems are currently in
process, and we are simultaneously putting the required resources in place to
carry out those plans for key non-IT systems, such as those within our
stores. We are contacting critical business partners to assess their
readiness and will develop appropriate contingency plans by mid 1999.
Although we value our established relationships with key vendors, substitute
products for most of the goods we sell in our stores may be obtained from
other vendors. If certain vendors are unable to deliver product on a timely
basis, due to their own year 2000 issues, we anticipate there will be others
who will be able to deliver similar goods. We also recognize the risks to us
if other key suppliers in utilities, communications, transportation, banking
and government are not ready for the year 2000, and are beginning to develop
contingency plans to minimize the potential adverse impacts of these risks.
In 1998 we have expensed $8 million related to year 2000 readiness. Prior to
1998, we expensed approximately $5 million. We estimate another $35 to $40
million will be expensed as incurred to complete the year 2000 readiness
program, with most of the spending occurring over the next 12 months. In
addition, this program has accelerated the timing of approximately $30
million of planned capital expenditures. All expenditures related to our year
2000 readiness initiative will be funded by cash flow from operations
and will not impact our other operating or investment plans.
10
<PAGE>
ANALYSIS OF FINANCIAL CONDITION
Our financial condition remains strong. We continue to fund the growth in our
business through a combination of retained earnings, debt and sold
securitized receivables. The ratio of debt to total capitalization
attributable to our retail operations was 49 percent at the end of second
quarter 1998, compared with 52 percent a year ago and 45 percent at year end.
Due to the seasonality of our business, quarterly comparisons will fluctuate,
but we expect our debt ratio to continue to be below last year for the
balance of 1998.
At August 1, 1998, working capital was $1,490 million, essentially equal to a
year ago. Retained securitized receivables decreased 17 percent from second
quarter last year, reflecting $400 million of securitized receivables sold in
third quarter 1997. Compared with last year, merchandise inventories
increased $334 million, or 10 percent, as a result of new store growth at
Target, partially offset by effective inventory control at all divisions.
The inventory growth was more than fully funded by a $453 million, or 19
percent, increase in accounts payable.
Capital expenditures for the first six months of 1998 were $793 million,
compared with $637 million for the same period a year ago; 83 percent of the
current year expenditures were made by Target, 10 percent by Mervyn's and 7
percent by DSD.
STORE DATA
During the quarter, we opened 21 net new Target stores and closed one DSD
store. At August 1, 1998, Target operated 828 stores in 40 states, Mervyn's
operated 269 stores in 14 states and DSD operated 64 stores in eight states.
Retail square footage was as follows:
<TABLE>
<CAPTION>
(In thousands, reflects total square feet, AUGUST 1, January 31, August 2,
less office, warehouse and vacant space) 1998 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Target 91,445 87,158 83,393
Mervyn's 21,810 21,810 22,345
DSD 13,935 14,090 14,222
- -----------------------------------------------------------------------------
Total Retail Square Footage 127,190 123,058 119,960
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
11
<PAGE>
FORWARD-LOOKING STATEMENTS
The preceding Management's Discussion and Analysis contains forward-looking
statements regarding the Company's performance, liquidity and the adequacy of
its capital resources. Those statements are based on management's current
assumptions and expectations and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. As a result, the Company cautions that the forward-looking
statements are qualified by the risks of increased competition, shifting
consumer demand, changing consumer credit markets and general economic
conditions, hiring and retaining effective team members, sourcing merchandise
from domestic and international vendors, preparing for the impact of year
2000, and other risks and uncertainties. As a result, while management
believes that there is a reasonable basis for the forward-looking statements,
undue reliance should not be placed on those statements. Readers are
encouraged to review Exhibit (99) attached hereto which contains additional
important factors that may cause actual results to differ materially from
those predicted in the forward-looking statements.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
(2). Not applicable
(4). Instruments defining the rights of security holders,
including indentures. Registrant agrees to furnish the
Commission on request copies of instruments with respect
to long-term debt.
(11). Not applicable
(12). Statements re Computations of Ratios
(15). Not applicable
(18). Not applicable
(19). Not applicable
(22). Not applicable
(23). Not applicable
(24). Not applicable
(27). Financial Data Schedule
(99). Cautionary Statements
b) Reports on Form 8-K:
Form 8-K dated June 4, 1998 furnishing the form of the Bonds
related to a public offering of $200,000,000 aggregate principal
amount of Puttable Reset Securities due June 15, 2010.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAYTON HUDSON CORPORATION
Registrant
Date: September 11, 1998 By /s/ Douglas A. Scovanner
--------------------------------
Douglas A. Scovanner
Senior Vice President and
Chief Financial Officer
Date: September 11, 1998 By /s/ J.A. Bogdan
--------------------------------
JoAnn Bogdan
Controller and
Chief Accounting Officer
14
<PAGE>
EXHIBIT INDEX
(12). Statements re Computations of Ratios
(27). Financial Data Schedule
(99). Cautionary Statements
15
<PAGE>
EXHIBIT (12)
DAYTON HUDSON CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES AND
RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS FOR THE
SIX MONTHS ENDED AUGUST 1, 1998 AND AUGUST 2, 1997
AND FOR THE FIVE YEARS ENDED JANUARY 31, 1998
(Millions of Dollars)
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year Ended
------------------- -----------------------------------------------
AUGUST 1, August 2, Jan. 31, Feb. 1, Feb 3, Jan. 28, Jan. 29,
1998 1997 1998 1997 1996 1995 1994
-------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED CHARGES:
Earnings:
Consolidated net earnings before extraordinary
charge .............................................. $ 332 $ 267 $ 802 $ 474 $ 311 $ 434 $ 375
Income taxes........................................... 217 174 524 309 190 280 232
------ ------ ------- ------- ------- ------- -------
Total earnings before extraordinary charge........... 549 441 1,326 783 501 714 607
------ ------ ------- ------- ------- ------- -------
Fixed charges:
Interest expense....................................... 209 224 437 464 461 439 459
Interest portion of rental expense..................... 30 29 59 59 59 56 45
------ ------ ------- ------- ------- ------- -------
Total fixed charges.................................. 239 253 496 523 520 495 504
------ ------ ------- ------- ------- ------- -------
Less:
Capitalized interest................................... (11) (8) (16) (16) (14) (7) (5)
------ ------ ------- ------- ------- ------- -------
Fixed charges in earnings............................. 228 245 480 507 506 488 499
------ ------ ------- ------- ------- ------- -------
Earnings available for fixed charges.................... $ 777 $ 686 $ 1,806 $ 1,290 $ 1,007 $ 1,202 $ 1,106
------ ------ ------- ------- ------- ------- -------
------ ------ ------- ------- ------- ------- -------
Ratio of earnings before extraordinary charge
to fixed charges....................................... 3.26 2.71 3.65 2.46 1.94 2.43 2.19
------ ------ ------- ------- ------- ------- -------
------ ------ ------- ------- ------- ------- -------
RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS:
Total fixed charges, as above........................... $ 239 $ 253 $ 495 $ 523 $ 520 $ 495 $ 504
Dividends on preferred stock
(pre-tax basis)........................................ 16 17 36 37 37 39 39
------ ------ ------- ------- ------- ------- -------
Total fixed charges and preferred
stock dividends...................................... 255 270 531 560 557 534 543
------ ------ ------- ------- ------- ------- -------
Earnings available for fixed charges
and preferred stock dividends.......................... $ 777 $ 686 $ 1,806 $ 1,290 $ 1,007 $ 1,202 $ 1,106
------ ------ ------- ------- ------- ------- -------
------ ------ ------- ------- ------- ------- -------
Ratio of earnings before extraordinary charge to
fixed charges and preferred stock dividends............ 3.05 2.54 3.40 2.30 1.81 2.25 2.04
------ ------ ------- ------- ------- ------- -------
------ ------ ------- ------- ------- ------- -------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Dayton
Hudson Corporation's Form 10Q for the second quarter ended August 1, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
<CASH> 237
<SECURITIES> 0
<RECEIVABLES> 1295
<ALLOWANCES> 0
<INVENTORY> 3697
<CURRENT-ASSETS> 6155
<PP&E> 12240
<DEPRECIATION> 3676
<TOTAL-ASSETS> 15308
<CURRENT-LIABILITIES> 4665
<BONDS> 5132
20
0
<COMMON> 73
<OTHER-SE> 4668
<TOTAL-LIABILITY-AND-EQUITY> 15308
<SALES> 7056
<TOTAL-REVENUES> 7056
<CGS> 5143
<TOTAL-COSTS> 5143
<OTHER-EXPENSES> 1528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101
<INCOME-PRETAX> 284
<INCOME-TAX> 112
<INCOME-CONTINUING> 172
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172
<EPS-PRIMARY> .38
<EPS-DILUTED> .36
</TABLE>
<PAGE>
EXHIBIT 99
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING INFORMATION.
The Company and its representatives may, from time to time, make written
or verbal forward-looking statements. Those statements relate to
developments, results, conditions or other events the Company expects or
anticipates will occur in the future. Without limiting the foregoing, those
statements may relate to future revenues, earnings, store openings, market
conditions and the competitive environment. Forward-looking statements are
based on management's then current views and assumptions and, as a result,
are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected.
Any such forward-looking statements are qualified by the following which
contain certain of the important factors that could cause actual results to
differ materially from those predicted by the forward-looking statements:
COMPETITIVE PRESSURES
The retail business is highly competitive. Each of our operations
competes for customers, employees, locations, products, services and other
important aspects of their businesses with many other local, regional and
national retailers. Those competitors, some of which have a greater market
presence than the Company, include traditional and off-price store-based
retailers, direct mail businesses, entertainment and travel providers and
other forms of retail commerce. Unanticipated changes in the pricing and
other practices of those competitors may impact our expected results.
CONSUMER TRENDS
It is difficult to predict what merchandise consumers will demand,
particularly merchandise that is trend driven. A substantial part of our
business is dependent on our ability to make trend right decisions for a wide
variety of goods and services. Failure to accurately predict constantly
changing consumer tastes, preferences, spending patterns and other lifestyle
decisions could adversely affect short term results and long term
relationships with our guests.
CREDIT OPERATIONS
The Company's credit operations facilitate sales in our stores and
generate additional revenue from fees related to extending credit. Our
ability to extend credit to our guests depends on many factors including
compliance with federal and state banking and consumer protection laws, any
of which may change from time to time. In addition, changes in credit card
use, payment patterns and default rates may result from a variety of
economic, legal, social and other factors that we cannot control or predict
with certainty. Changes that adversely impact our ability to extend credit
and collect payments could negatively affect our results.
GENERAL ECONOMIC CONDITIONS
General economic factors that are beyond our control impact the
Company's forecasts and actual performance. These factors include interest
rates, recession, inflation, deflation, consumer credit availability,
consumer debt levels, tax rates and policy, unemployment trends and other
matters that influence consumer confidence and spending. Increasing
volatility in financial markets may cause these factors to change with a
greater degree of frequency and magnitude.
LABOR CONDITIONS
The Company's performance is dependent on attracting and retaining a
large and growing number of quality team members. Many of those team members
are in entry level or part time positions with historically high rates of
turnover. Our ability to meet our labor needs while controlling our costs is
subject to external factors such as unemployment levels, minimum wage
legislation and changing demographics.
<PAGE>
PRODUCT SOURCING
The products we sell are sourced from a wide variety of domestic and
international vendors. All of our vendors must comply with applicable laws
and our required standards of conduct. Our ability to find qualified vendors
and access products in a timely and efficient manner is a significant
challenge which is typically even more difficult with respect to goods
sourced outside the United States. Trade restrictions, tariffs, currency
exchange rates, transport capacity and costs and other factors significant to
this trade are beyond our control and could impact our business.
YEAR 2000 DATE CONVERSION
Our business may be adversely affected by the inability of
information systems and other technology to function properly using dates after
December 31, 1999. The scope of this issue is difficult to predict with
certainty and there can be no assurance that we, our business partners,
banks, public utilities and others whose goods or services support the retail
environment, will successfully complete every phase of the year 2000
conversion on a timely basis. Our current estimates of the cost and impact
of the year 2000 issue are based upon certain assumptions including the
continued availability of necessary resources, timely modifications to our
plans that may be necessary, the preparedness of parties on whom our business
depends and other factors. Failure of any of those assumptions could
result in higher costs, system failures or business interruptions and could
have a material, adverse impact on our future operations, earnings and
financial position.
OTHER FACTORS
Other factors that could cause actual results to differ materially from
those predicted include: weather, changes in the availability or cost of
capital, the availability of suitable new store locations on acceptable
terms, shifts in the seasonality of shopping patterns, labor strikes or other
work interruptions, the impact of excess retail capacity in our markets,
material acquisitions or dispositions, the success or failure of significant
new business ventures, adverse results in material litigation, natural
disasters, the outbreak of war or other significant national or international
events.
The foregoing list of important factors is not exclusive and the Company
does not undertake to revise any forward-looking statement to reflect events
or circumstances that occur after the date the statement is made.
