<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the quarterly period ended JULY 31, 1999
Commission file number 1-6049
Dayton Hudson Corporation
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0215170
- ------------------------------------------------------------------------------
(State of incorporation or organization) (I.R.S. Employer Identification No.)
777 Nicollet Mall Minneapolis, Minnesota 55402-2055
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 370-6948
- ------------------------------------------------------------------------------
None
- ------------------------------------------------------------------------------
(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 July 31, 1999 was
440,650,606.
<PAGE>
DAYTON HUDSON CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NO.
<S> <C> <C>
PART I FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS
Condensed Consolidated Results of Operations for the Three Months, Six Months 1
and Twelve Months ended July 31, 1999 and August 1, 1998
Condensed Consolidated Statements of Financial Position at July 31, 1999, 2
January 30, 1999 and August 1, 1998
Condensed Consolidated Statements of Cash Flows for the Six Months ended July 3
31, 1999 and August 1, 1998
Notes to Condensed Consolidated Financial Statements 4-5
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION 6-10
PART II OTHER INFORMATION:
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 11
Signatures 12
Exhibit Index 13
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED Dayton Hudson Corporation
RESULTS OF OPERATIONS and Subsidiaries
(Millions of Dollars, Except Per Share Data) Three Months Ended Six Months Ended Twelve Months Ended
-----------------------------------------------------------------------------------------------------------------------------
JULY 31, August 1, JULY 31, August 1, JULY 31, August 1,
(Unaudited) 1999 1998 1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 7,752 $ 7,056 $14,966 $13,524 $32,393 $29,099
COSTS AND EXPENSES:
Cost of retail sales, buying and occupancy 5,603 5,143 10,843 9,870 23,607 21,351
Selling, publicity and administrative 1,333 1,214 2,557 2,288 5,346 4,705
Depreciation and amortization 212 193 418 377 821 727
Interest expense 98 101 192 197 393 399
Taxes other than income taxes 132 121 265 243 528 483
-----------------------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 7,378 6,772 14,275 12,975 30,695 27,665
-----------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES AND EXTRAORDINARY
CHARGES 374 284 691 549 1,698 1,434
Provision for Income Taxes 146 112 269 217 646 567
-----------------------------------------------------------------------------------------------------------------------------
NET EARNINGS BEFORE EXTRAORDINARY CHARGES 228 172 422 332 1,052 867
Extraordinary Charges from Purchase and Redemption
of Debt, Net of Tax 4 - 4 2 29 21
-----------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 224 $ 172 $ 418 $ 330 $ 1,023 $ 846
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
Earnings before extraordinary charges $ .51 $ .38 $ .94 $ .74 $ 2.34 $ 1.94
Extraordinary charges (.01) - (.01) (.01) (.06) (.05)
-----------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ .50 $ .38 $ .93 $ .73 $ 2.28 $ 1.89
-----------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
Earnings before extraordinary charges $ .49 $ .36 $ .90 $ .70 $ 2.24 $ 1.84
Extraordinary charges (.01) - (.01) (.01) (.06) (.05)
-----------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ .48 $ .36 $ .89 $ .69 $ 2.18 $ 1.79
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED PER COMMON SHARE $ .10 $ .09 $ .20 $ .18 $ .38 $ .35
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (Millions):
Basic 441.1 439.6 441.7 439.1 441.3 438.0
Diluted 466.4 467.6 468.0 467.1 467.7 465.6
-----------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS Dayton Hudson Corporation
OF FINANCIAL POSITION and Subsidiaries
JULY 31, January 30, August 1,
(Millions of Dollars) 1999 1999* 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS (Unaudited) (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 238 $ 255 $ 237
Retained securitized receivables 1,363 1,656 1,295
Merchandise inventories 3,973 3,475 3,697
Other 655 619 926
- ------------------------------------------------------------------------------------------------------------------------
Total Current Assets 6,229 6,005 6,155
PROPERTY AND EQUIPMENT 13,213 12,737 12,240
Accumulated depreciation (3,805) (3,768) (3,676)
------ ------ ------
Property and Equipment, net 9,408 8,969 8,564
OTHER 778 692 589
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $16,415 $15,666 $15,308
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $3,111 $ 3,150 $ 2,852
Current portion of long-term debt and notes payable 219 256 351
Other 1,529 1,651 1,462
- ------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 4,859 5,057 4,665
LONG-TERM DEBT 5,178 4,452 5,132
DEFERRED INCOME TAXES AND OTHER 888 822 750
CONVERTIBLE PREFERRED STOCK, NET 6 24 20
SHAREHOLDERS' INVESTMENT 5,484 5,311 4,741
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $16,415 $15,666 $15,308
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING (Millions) 440.7 441.8 439.9
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The January 30, 1999 Consolidated Statement of Financial Position is
condensed from the audited financial statement.
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED Dayton Hudson Corporation
STATEMENTS OF CASH FLOWS and Subsidiaries
(Millions of Dollars) Six Months Ended
- ------------------------------------------------------------------------------------------------------------------------------
JULY 31, August 1,
(Unaudited) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings before extraordinary charges $ 422 $ 332
Reconciliation to cash flow:
Depreciation and amortization 418 377
Deferred tax provision 82 10
Other non-cash items affecting earnings 68 14
Changes in operating accounts providing/(requiring) cash:
Retained securitized receivables 293 305
Merchandise inventories (498) (420)
Other current assets (88) (106)
Other assets (78) 13
Accounts payable (39) 39
Accrued liabilities (124) (58)
Income taxes payable 1 (53)
Securities in trust for principal payment on sold securitized receivables - (270)
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flow Provided by Operations 457 183
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures for property and equipment (863) (793)
Proceeds from disposals of property and equipment 13 29
Acquisition of subsidiaries, net of cash received - (100)
Other (4) (6)
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flow Required by Investing Activities (854) (870)
- -------------------------------------------------------------------------------------------------------------------------------
Net Financing Requirements (397) (687)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in notes payable, net 673 466
Additions to long-term debt 225 400
Reductions of long-term debt (215) (87)
Dividends paid (98) (89)
Repurchase of stock (243) -
Other 38 23
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flow Provided by Financing Activities 380 713
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Net (Decrease)/Increase in Cash and Cash Equivalents (17) 26
Cash and Cash Equivalents at Beginning of Period 255 211
- ------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 238 $ 237
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Amounts in this statement are presented on a cash basis and therefore may
differ from those shown elsewhere in this 10-Q report.
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 1998
Annual Shareholders' Report throughout pages 25-36. As explained on page 36
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.
PER SHARE DATA
References to earnings per share relate to diluted earnings per share.
<TABLE>
<CAPTION>
Basic EPS Diluted EPS
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Six Months Twelve Months Three Months Six Months Twelve Months
Ended Ended Ended Ended Ended Ended
- ----------------------------------------------------------------------------------------------------------------------------------
JUL 31, Aug 1, JUL 31, Aug 1, JUL 31, Aug 1, JUL 31, Aug 1, JUL 31, Aug 1, JUL 31, Aug 1,
1999 1998 1999 1998 1999 1998 1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net earnings* $ 228 $ 172 $ 422 $ 332 $1,052 $ 867 $ 228 $ 172 $ 422 $ 332 $1,052 $ 867
Less: ESOP net
earnings adjustment (4) (5) (9) (10) (19) (20) (1) (3) (2) (6) (4) (12)
- ----------------------------------------------------------------------------------------------------------------------------------
Adjusted net earnings* $ 224 $ 167 $ 413 $ 322 $1,033 $ 847 $ 227 $ 169 $ 420 $ 326 $1,048 $ 855
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares
Outstanding 441.1 439.6 441.7 439.1 441.3 438.0 441.1 439.6 441.7 439.1 441.3 438.0
Performance shares - - - - - - - .9 .1 .9 .4 1.0
Stock options - - - - - - 5.6 6.0 6.2 5.8 5.7 4.9
Assumed conversion of ESOP
Preferred shares - - - - - - 19.7 21.1 20.0 21.3 20.3 21.7
- ---------------------------------------------------------------------------------------------------------------------------------
Total common equivalent shares
Outstanding 441.1 439.6 441.7 439.1 441.3 438.0 466.4 467.6 468.0 467.1 467.7 465.6
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings per share* $ .51 $ .38 $ .94 $ .74 $ 2.34 $1.94 $ .49 $ .36 $ .90 $ .70 $ 2.24 $1.84
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Before extraordinary charges
SHARE REPURCHASE PROGRAM
In January 1999, our Board of Directors authorized the repurchase of $1
billion of our common stock. We expect to complete our repurchase program
over the next eighteen months. In the second quarter and first half of 1999,
we repurchased 2.3 and 3.8 million shares of our common stock at average
costs of $63 and $65 per share, respectively. As of the end of second
quarter, we have repurchased $248 million of our common stock, net of the
premium from exercised and expired put options.
We issued put options for 1.0 and 2.0 million shares in the second quarter
and first half of 1999, respectively. Holders of options on the 1.0 million
shares which were outstanding at the end of the second quarter are entitled
to sell shares of our common stock to us at prices ranging from $61 to $70
per share on specific dates during
4
<PAGE>
August through October 1999. Premiums received from the sale of the put
options, which settled during the quarter and first half, totaled $5.9 and
$9.8 million, respectively, and were recorded in retained earnings.
LONG-TERM DEBT
During the second quarter, we repurchased $58 million of long-term debt with
a weighted average interest rate of 9.4 percent, resulting in an after-tax
extraordinary charge of $4 million ($.01 per share).
Also during the second quarter, we issued $100 million and $125 million of
notes bearing interest at floating rates initially set at 5.52 percent and
5.43 percent, respectively. These notes mature in July 2001.
Subsequent to second quarter 1999, we issued $60 million of additional notes
bearing interest at a floating rate initially set at 5.32 percent, maturing
in September 2001.
The proceeds from these issuances were used for general corporate purposes.
SEGMENT DISCLOSURES (Millions of Dollars)
Revenues by segment were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- -------------------------------
JULY 31, August 1, JULY 31, August 1,
1999 1998 1999 1998
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Target $ 5,961 $ 5,294 $ 11,449 $ 10,101
Mervyn's 949 935 1,861 1,825
DSD 744 732 1,488 1,458
Corporate and other 98 95 168 140
------------- ------------- -------------- -------------
Total revenues $ 7,752 $ 7,056 $ 14,966 $ 13,524
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
</TABLE>
Pre-tax segment profit and reconciliation to pre-tax earnings were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- -------------------------------
JULY 31, August 1, JULY 31, August 1,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Target $ 430 $ 337 $ 800 $ 639
Mervyn's 45 40 90 83
DSD 49 45 97 86
------------- ------------- ------------- -------------
Total pre-tax segment profit 524 422 987 808
Securitization adjustment (interest equivalent) (12) (12) (24) (24)
Interest expense (98) (101) (192) (197)
Corporate and other (40) (25) (80) (38)
------------- ------------- ------------- -------------
Earnings before income taxes
and extraordinary charges $ 374 $ 284 $ 691 $ 549
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The revenues and operating results of The Associated Merchandising
Corporation and Rivertown Trading Company acquired in February and April
1998, respectively, were immaterial in 1999 and 1998 and are included in
corporate and other.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
SECOND QUARTER 1999
ANALYSIS OF OPERATIONS
Second quarter 1999 net earnings before extraordinary charges were $228
million, or $.49 per share, compared with $172 million, or $.36 per share,
for the same period last year. First half 1999 net earnings before
extraordinary charges were $422 million, or $.90 per share, compared with
$332 million, or $.70 per share, on the same basis, for first half 1998. The
extraordinary charges relate to the early extinguishment of debt and were $4
million ($.01 per share), net of tax, in the second quarter and first half of
1999, and $2 million ($.01 per share), net of tax, in the first half of 1998.
Target represented 91 percent and 90 percent of our net growth in pre-tax
segment profit for the second quarter and first half, respectively.
REVENUES AND COMPARABLE-STORE SALES
Total revenues for the quarter increased 9.9 percent to $7,752 million
compared with $7,056 million for the same period a year ago. Total revenues
for the first half increased 10.7 percent to $14,966 million compared with
$13,524 million for the same period a year ago. Total comparable-store sales
(sales from stores open longer than one year) increased 5.7 percent and 6.3
percent for the three and six-month periods, respectively. Year-over-year
increases in revenues and comparable-store sales by business segment were as
follows:
<TABLE>
<CAPTION>
Three Months Six Months
Percentage Increase Percentage Increase
-------------------------------------- --------------------------------------
Comparable- Comparable-
Revenues Store Sales Revenues Store Sales
----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Target 12.6% 6.5% 13.4% 7.3%
Mervyn's 1.5 2.8 2.0 3.1
DSD 1.6 2.7 2.0 3.0
----------------- ----------------- ----------------- ----------------
Total 9.9% 5.7% 10.7% 6.3%
----------------- ----------------- ----------------- ----------------
----------------- ----------------- ----------------- ----------------
</TABLE>
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 24 percent to $524
million compared with $422 million for the same period a year ago. Pre-tax
segment profit in the first half increased 22 percent to $987 million
compared with $808 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 Increase Percentage Increase
-------------------- --------------------
<S> <C> <C>
Target 27% 25%
Mervyn's 13 9
DSD 9 13
-------------------- --------------------
Total 24% 22%
-------------------- --------------------
-------------------- --------------------
</TABLE>
6
<PAGE>
TARGET'S second quarter and first half pre-tax profit increased 27 and 25
percent, respectively, to $430 and $800 million compared with $337 and $639
million for the same periods a year ago, reflecting comparable-store sales
growth of 6.5 and 7.3 percent, respectively. During the second quarter and
first half, the gross margin rate improved significantly due to favorable
markup and markdown performance, while the operating expense rate was
modestly unfavorable. For the remainder of 1999, we expect mid-single-digit
comparable-store sales growth at Target and a pre-tax profit margin rate
somewhat expanded over that of 1998.
MERVYN'S second quarter and first half pre-tax profit increased 13 and 9
percent, respectively, to $45 and $90 million compared with $40 and $83
million for the same periods a year ago, reflecting comparable-store sales
growth of 2.8 and 3.1 percent, respectively. During the second quarter and
first half, the gross margin rate increased primarily due to favorable
markup. The operating expense rate improved slightly for second quarter and
was essentially even with last year for the first half. We expect
low-single-digit comparable-store sales increases for the remainder of 1999
and measurable improvement in our pre-tax profit margin rate, principally in
the fourth quarter.
DSD'S second quarter and first half pre-tax profit increased 9 and 13
percent, respectively, to $49 and $97 million compared with $45 and $86
million for the same periods a year ago, reflecting comparable-store sales
growth of 2.7 and 3.0 percent, respectively. For the second quarter, the
gross margin rate was essentially even with last year, while the gross margin
rate improved for the first half due to favorable markdowns and shortage
results. The operating expense rate improved modestly for second quarter and
slightly for the first half. We expect low single-digit comparable-store
sales growth at DSD for the remainder of 1999 and a modest increase in our
1999 pre-tax profit margin rate.
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 for the second quarter and first half increased over the prior
year, principally due to continued growth of the Target Guest Card. We expect
to continue to grow guest credit's contribution during 1999 by acquiring new
accounts, enhancing guest loyalty programs, controlling bad debt expense and
leveraging operating expenses.
The last-in, first-out (LIFO) provision, included in cost of retail sales,
was zero in the second quarter and first half for both 1999 and 1998. The
cumulative LIFO provision was $60 million at July 31, 1999 and January 30,
1999, and $92 million at August 1, 1998.
"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 in 1999. For analytical purposes, we
combine interest equivalent with interest expense.
Combined interest expense and interest equivalent was $110 and $216 million
in the second quarter and first half of 1999, representing a $3 and $5
million decrease, respectively, from last year due to a lower average
portfolio interest rate, partially offset by higher average funded balances.
Combined interest expense and interest equivalent in 1999 is expected to be
similar to 1998, as we anticipate the continuing benefit of a lower average
portfolio interest rate, offset by higher debt levels, for the remainder of
the year.
7
<PAGE>
The estimated annual effective income tax rate was 38.8 percent in the second
quarter and first half 1999 compared to 39.5 percent for the same periods
last year.
YEAR 2000 READINESS DISCLOSURE
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
substantially completed all phases for the three elements. We have used both
internal and external resources to implement our plan.
For our IT systems, we assessed both existing and newly implemented hardware,
application software and operating systems. Substantially all of our hardware
is year 2000 ready. The only implementation remaining is continuing
installments of new hardware during the third quarter to support growth in
our stores' systems. All application software has been tested and is ready
for the year 2000. Upgrades to our key operating systems are 98 percent
complete, and we anticipate final installments over the next three months.
Our year 2000 readiness in this area was significantly enhanced by our
substantial common systems development initiatives through which we have
invested heavily in IT over the past three years.
We began addressing non-IT systems, or embedded technology/infrastructure,
risks at our stores, distribution centers and headquarters facilities early
in our initiative. Substantially all of our non-IT systems are ready, with
only a few items remaining in the implementation phase. We anticipate
finishing the balance in the third quarter.
We have identified our key business partners and have been working closely
with them to assess their readiness and mitigate the risk to us if they are
not prepared for the year 2000. We have installed the year 2000 ready version
of Electronic Data Interchange (EDI) software, have completed EDI testing
with 95 percent of our key vendors, and are now exchanging data
electronically with some of these vendors using the new version of EDI. We
expect to finalize testing of EDI and other electronic transmissions with key
business partners in the third quarter.
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. Our contingency plans for non-IT areas are complete and are
being implemented in key areas, such as our stores. We plan to allocate
internal resources and retain dedicated consultants and vendor
representatives to be ready to take action if necessary.
We have contacted substantially all of our critical business partners to
assess their readiness and will finalize the development of certain
individual contingency plans in the third quarter. 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. However, the lead time involved in sourcing certain
goods may result in temporary shortages of relatively few items; therefore,
we have arranged advance delivery of a limited amount of product. We also
recognize the risks to us if other key suppliers in areas such as utilities,
communications, transportation, banking and
8
<PAGE>
government are not ready for the year 2000, and are developing contingency
plans to minimize the potential adverse impacts of these risks.
In the second quarter and first half of 1999, we expensed $7 and $14 million,
respectively, related to year 2000 readiness. Prior to 1999, we expensed $32
million related to year 2000 readiness. We estimate another $3 million will
be expensed as incurred to complete the year 2000 readiness program, with
most of the spending occurring over the next three months. In addition, this
program has accelerated the timing of approximately $15 million of planned
capital expenditures. To date, we have incurred $14 million of these planned
capital expenditures. All expenditures related to our year 2000 readiness
initiative have been funded by cash flow from operations and have not
materially impacted our other operating or investment plans.
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 45 percent at the end of second
quarter 1999, compared with 49 percent a year ago and 41 percent at year-end.
Due to the seasonality of our business, quarterly comparisons will fluctuate.
At July 31, 1999, working capital was $1,370 million, down 8 percent compared
with a year ago, principally due to securities held in trust for principal
payment on sold securitized receivables in the prior year. Retained
securitized receivables increased $68 million, or 5 percent, over last year
principally reflecting continued growth of the Target Guest Card. Merchandise
inventories increased $276 million, or 7 percent, over last year due to new
store growth at Target and Mervyn's planned investment in certain merchandise
areas, principally designed to improve basic in-stock positions. The
inventory growth was nearly fully funded by a $259 million, or 9 percent,
increase in accounts payable.
Capital expenditures for the first six months of 1999 were $863 million,
compared with $793 million for the same period a year ago; 85 percent of the
current year expenditures were made by Target, 6 percent by Mervyn's and 9
percent by DSD.
Our share repurchase program is described on page 4. The reduction in shares
outstanding and incremental interest expense related to the share repurchase
program had an insignificant impact on earnings per share.
STORE DATA
During the quarter, we opened 22 net new Target stores and closed one
Mervyn's store. At July 31, 1999, Target operated 881 stores in 44 states,
Mervyn's operated 267 stores in 14 states and DSD operated 63 stores in eight
states.
Retail square footage was as follows:
<TABLE>
<CAPTION>
(In thousands, reflects total square feet, less office, JULY 31, January 30, August 1,
warehouse and vacant space) 1999 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Target 98,679 94,553 91,445
Mervyn's 21,661 21,729 21,810
DSD 13,890 13,890 13,935
- ---------------------------------------------------------------------------------------------------------------------
Total retail square footage 134,230 130,172 127,190
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
FORWARD-LOOKING STATEMENTS
The preceding Management's Discussion and Analysis contains forward-looking
statements regarding our performance, liquidity and the adequacy of our
capital resources. Those statements are based on our current assumptions and
expectations and are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected. We caution
that the forward-looking statements are qualified by the risks and challenges
posed by 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 we believe that there is a reasonable basis
for the forward-looking statements, you should not place undue reliance on
those statements. You are encouraged to review Exhibit (99)C attached to our
Form 10-K Report for the year ended January 30, 1999, which contains
additional important factors that may cause actual results to differ
materially from those predicted in the forward-looking statements.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
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.
(10). Not applicable
(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
b) Reports on Form 8-K:
Registrant did not file any reports on Form 8-K during
the quarter ended July 31, 1999.
</TABLE>
11
<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 10, 1999 By /s/ Douglas A. Scovanner
-------------------------------
Douglas A. Scovanner
Senior Vice President and
Chief Financial Officer
Date: September 10, 1999 By /s/ J.A. Bogdan
---------------------------------
JoAnn Bogdan
Controller and
Chief Accounting Officer
12
<PAGE>
EXHIBIT INDEX
(12). Statements re Computations of Ratios
(27). Financial Data Schedule
13
<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 JULY 31, 1999 AND AUGUST 1, 1998
AND FOR THE FIVE YEARS ENDED JANUARY 30, 1999
(Millions of Dollars)
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year Ended
-------------------- ------------------------------------------------
Jul 31, Aug 1, Jan. 30, Jan. 31, Feb. 1, Feb. 3, Jan. 28,
1999 1998 1999 1998 1997 1996 1995
---------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges:
Earnings:
Consolidated net earnings before
extraordinary charges ........................ $ 422 $ 332 $ 962 $ 802 $ 474 $ 311 $ 434
Income taxes...................................... 269 217 594 524 309 190 280
--------- --------- --------- --------- --------- --------- --------
Total earnings before extraordinary charges ... 691 549 1,556 1,326 783 501 714
--------- --------- --------- --------- --------- --------- --------
Fixed charges:
Interest expense.................................. 202 209 421 437 464 461 439
Interest portion of rental expense................ 33 30 63 59 59 59 56
--------- --------- --------- --------- --------- --------- --------
Total fixed charges............................ 235 239 484 496 523 520 495
--------- --------- --------- --------- --------- --------- --------
Less:
Capitalized interest.............................. (9) (11) (16) (16) (16) (14) (7)
--------- --------- --------- --------- --------- --------- --------
Fixed charges in earnings....................... 226 228 468 480 507 506 488
--------- --------- --------- --------- --------- --------- --------
Earnings available for fixed charges............... $ 917 $ 777 $ 2,024 $ 1,806 $ 1,290 $ 1,007 $ 1,202
--------- --------- --------- --------- --------- --------- --------
--------- --------- --------- --------- --------- --------- --------
Ratio of earnings before extraordinary charges
to fixed charges.............................. 3.91 3.26 4.18 3.65 2.46 1.94 2.43
---------- --------- --------- --------- --------- --------- --------
---------- --------- --------- --------- --------- --------- --------
Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends:
Total fixed charges, as above...................... $ 235 $ 239 $ 484 $ 496 $ 523 $ 520 $ 495
Dividends on preferred stock
(pre-tax basis)................................... 15 16 32 35 37 37 39
---------- --------- --------- --------- --------- --------- --------
Total fixed charges and preferred
stock dividends.............................. 250 255 516 531 560 557 534
---------- --------- --------- --------- --------- --------- --------
Earnings available for fixed charges
and preferred stock dividends..................... $ 917 $ 777 $ 2,024 $ 1,806 $ 1,290 $ 1,007 $ 1,202
---------- --------- --------- --------- --------- --------- --------
---------- --------- --------- --------- --------- --------- --------
Ratio of earnings before extraordinary charges to
fixed charges and preferred stock dividends..... 3.67 3.05 3.92 3.40 2.30 1.81 2.25
---------- --------- --------- --------- --------- --------- --------
---------- --------- --------- --------- --------- --------- --------
</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 JULY 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 238
<SECURITIES> 0
<RECEIVABLES> 1363
<ALLOWANCES> 0
<INVENTORY> 3973
<CURRENT-ASSETS> 6229
<PP&E> 13213
<DEPRECIATION> 3805
<TOTAL-ASSETS> 16415
<CURRENT-LIABILITIES> 4859
<BONDS> 5178
6
0
<COMMON> 73
<OTHER-SE> 5411
<TOTAL-LIABILITY-AND-EQUITY> 16415
<SALES> 14966
<TOTAL-REVENUES> 14966
<CGS> 10843
<TOTAL-COSTS> 10843
<OTHER-EXPENSES> 683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> 691
<INCOME-TAX> 269
<INCOME-CONTINUING> 422
<DISCONTINUED> 0
<EXTRAORDINARY> 4
<CHANGES> 0
<NET-INCOME> 418
<EPS-BASIC> .93
<EPS-DILUTED> .89
</TABLE>
