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TARGET CORP
10-Q, 2000-09-08
VARIETY STORES

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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 July 29, 2000

Commission file number 1-6049

Target 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
N/A
(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 29, 2000 was 903,187,497.

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TABLE OF CONTENTS

TARGET CORPORATION

PART I		FINANCIAL INFORMATION:
		Item 1 - Financial Statements
		Consolidated Results of Operations for the Three Months, Six Months and Twelve Months ended July 29, 2000 and July 31, 1999
		Consolidated Statements of Financial Position at July 29, 2000, January 29, 2000 and July 31, 1999
		Consolidated Statements of Cash Flows for the Six Months ended July 29, 2000 and July 31, 1999
		Notes to Consolidated Financial Statements
		Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
PART II		OTHER INFORMATION:
		Item 6 - Exhibits and Reports on Form 8-K
		Signature
		Exhibit Index

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PART I. FINANCIAL INFORMATION

CONSOLIDATED RESULTS OF OPERATIONS

TARGET CORPORATION

(Millions, except per share data)			Three Months Ended						Six Months Ended						Twelve Months Ended
(Unaudited)			July 29, 2000			July 31, 1999			July 29, 2000			July 31, 1999			July 29, 2000			July 31, 1999
Sales			$	8,123		$	7,569		$	15,736		$	14,602		$	34,346		$	31,642
Net credit revenues				128			118			261			243			508			476
	Total revenues			8,251			7,687			15,997			14,845			34,854			32,118
Cost of sales				5,593			5,193			10,796			10,044			23,781			21,987
Selling, general and administrative expense				1,910			1,810			3,744			3,500			7,734			7,219
Depreciation and amortization				230			212			454			418			890			821
Interest expense				100			98			196			192			397			393
Earnings before income taxes and extraordinary items				418			374			807			691			2,052			1,698
Provision for income taxes				161			146			311			269			793			646
Net earnings before extraordinary items				257			228			496			422			1,259			1,052
Extraordinary gain / (charge) from debt extinguishment, net of tax				1			(4	)		1			(4	)		(36	)		(29	)
Net earnings			$	258		$	224		$	497		$	418		$	1,223		$	1,023
Earnings before extraordinary charges			$	.28		$	.25		$	.55		$	.46		$	1.40		$	1.17
Extraordinary charges				-			-			-			-			(.04	)		(.03	)
Basic earnings per share			$	.28		$	.25		$	.55		$	.46		$	1.36		$	1.14
Earnings before extraordinary charges			$	.28		$	.24		$	.54		$	.45		$	1.36		$	1.12
Extraordinary charges				-			-			-			-			(.04	)		(.03	)
Diluted earnings per share			$	.28		$	.24		$	.54		$	.45		$	1.32		$	1.09
Dividends declared per common share			$	.05		$	.05		$	.10		$	.10		$	.20		$	.20
Weighted average common shares outstanding:
	Basic			906.6			882.2			908.5			883.5			895.1			882.6
	Diluted			915.2			932.7			918.2			935.9			922.4			935.5

See accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

TARGET CORPORATION

(Millions)			July 29, 2000			January 29, 2000*			July 31, 1999
			(Unaudited)						(Unaudited)
Assets
Cash and cash equivalents			$	339		$	220		$	238
Retained securitized receivables				1,574			1,837			1,363
Inventory				4,071			3,798			3,973
Other				683			628			655
	Total current assets			6,667			6,483			6,229
Property and equipment				14,576			13,824			13,213
	Accumulated depreciation			(4,116	)		(3,925	)		(3,805	)
	Property and equipment, net			10,460			9,899			9,408
Other				805			761			778
Total assets			$	17,932		$	17,143		$	16,415
Liabilities and shareholders' investment
Accounts payable			$	3,347		$	3,514		$	3,111
Current portion of long-term debt and notes payable				1,405			498			219
Other				1,749			1,838			1,529
	Total current liabilities			6,501			5,850			4,859
Long-term debt				4,520			4,521			5,178
Deferred income taxes and other				937			910			888
Convertible preferred stock, net				-			-			6
Shareholders' investment				5,974			5,862			5,484
Total liabilities and shareholders' investment			$	17,932		$	17,143		$	16,415
Common shares outstanding				903.2			911.7			881.3

*

The January 29, 2000 Consolidated Statement of Financial Position is condensed from the audited financial statement.

See accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

TARGET CORPORATION

(Millions)				Six Months Ended
(Unaudited)				July 29, 2000			July 31, 1999
Operating activities
Net earnings				$	496		$	422
Reconciliation to cash flow:
	Depreciation and amortization				454			418
	Deferred tax provision				44			82
	Other non-cash items affecting earnings				66			68
	Changes in operating accounts providing/(requiring) cash:
		Retained securitized receivables			263			293
		Inventory			(273	)		(498	)
		Other current assets			(120	)		(88	)
		Other assets			8			(78	)
		Accounts payable			(167	)		(39	)
		Accrued liabilities			(51	)		(124	)
		Income taxes payable			(36	)		1
Cash flow provided by operations					684			457
Investing activities
Expenditures for property and equipment					(1,052	)		(863	)
Proceeds from disposals of property and equipment					22			13
Cash flow required by investing activities					(1,030	)		(850	)
Net financing requirements					(346	)		(393	)
Financing activities
Increase in notes payable, net					819			673
Additions to long-term debt					500			225
Reductions of long-term debt					(432	)		(215	)
Dividends paid					(91	)		(98	)
Repurchase of stock					(350	)		(243	)
Other					19			34
Cash flow provided by financing activities					465			376
Net increase/(decrease) in cash and cash equivalents					119			(17	)
Cash and cash equivalents at beginning of period					220			255
Cash and cash equivalents at end of period				$	339		$	238

    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 Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

TARGET CORPORATION

Accounting Policies

    The accompanying consolidated financial statements should be read in conjunction with the financial statement disclosures contained in our 1999 Annual Shareholders' Report throughout pages 24-37. 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

    On July 19, 2000, we distributed to shareholders of record as of June 30, 2000, one additional share of common stock for each share owned, resulting in a two-for-one common share split. All earnings per share, dividends per share and common shares outstanding reflect this share split.

    References to earnings per share relate to diluted earnings per share.

		Basic EPS																		Diluted EPS
		Three Months Ended						Six Months Ended						Twelve Months Ended						Three Months Ended						Six Months Ended						Twelve Months Ended
		Jul 29, 2000			Jul 31, 1999			Jul 29, 2000			Jul 31, 1999			Jul 29, 2000			Jul 31, 1999			Jul 29, 2000			Jul 31, 1999			Jul 29, 2000			Jul 31, 1999			Jul 29, 2000			Jul 31, 1999
Net earnings*		$	257		$	228		$	496		$	422		$	1,259		$	1,052		$	257		$	228		$	496		$	422		$	1,259		$	1,052
Less: ESOP net earnings adjustment			-			(4	)		-			(9	)		(9	)		(19	)		-			(1	)		-			(2	)		(2	)		(4	)
Adjusted net earnings*		$	257		$	224		$	496		$	413		$	1,250		$	1,033		$	257		$	227		$	496		$	420		$	1,257		$	1,048
Weighted average common shares outstanding			906.6			882.2			908.5			883.5			895.1			882.6			906.6			882.2			908.5			883.5			895.1			882.6
Performance shares			-			-			-			-			-			-			-			-			-			.3			-			.8
Stock options			-			-			-			-			-			-			8.4			11.1			9.5			12.3			10.2			11.5
Put options			-			-			-			-			-			-			.2			-			.2			-			.1			-
Assumed conversion of ESOP preferred shares			-			-			-			-			-			-			-			39.4			-			39.8			17.0			40.6
Total common equivalent shares outstanding			906.6			882.2			908.5			883.5			895.1			882.6			915.2			932.7			918.2			935.9			922.4			935.5
Earnings per share*		$	.28		$	.25		$	.55		$	.46		$	1.40		$	1.17		$	.28		$	.24		$	.54		$	.45		$	1.36		$	1.12

*

Before extraordinary charges

Share Repurchase Program

    In March 2000, our Board of Directors authorized the repurchase of $1 billion of our common stock, in addition to the $1 billion authorized in January 1999. Repurchases are made primarily in open market transactions, subject to market conditions. Our program also includes the sale of put options that entitle the holder to sell shares of our common stock to us, on a specified date and at a specified price, if the holder exercises the option.

    In the second quarter and first half of 2000, we repurchased 7.7 and 11.9 million shares of our common stock at a total cost of $229 million ($29.67 per share) and $355 million ($29.90 per share), respectively, net of the premiums from exercised and expired put options. The $6.8 and $13.7 million of premiums received from the sale of put options on 2.3 and 4.5 million shares during the second quarter and first half of 2000, respectively, were recorded in retained earnings. The put options on 4.1 million shares outstanding at the end of second quarter entitle their holders to sell shares of our common stock to us at prices ranging from $27.56 to $37.56 per share on specific dates in August through December 2000.

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    Since the inception of our share repurchase program, we have repurchased a total of 30.7 million shares of our common stock at a total cost of $943 million ($30.75 per share), net of the premium from exercised and expired put options.

Long-term Debt

Extinguishment

    During the second quarter, we repurchased $18 million of long-term debt at a weighted average interest rate of 10.0 percent, resulting in an after-tax loss of $2 million. Also during the second quarter, $300 million of puttable long-term debt was extinguished resulting in an after-tax gain of $3 million. The net impact of these transactions was a $1 million gain (less than $.01 per share).

Issuance

    During the first quarter, we issued $500 million of long-term debt bearing interest at 7.50 percent, maturing in February 2005. Subsequent to second quarter 2000, we issued $600 million of additional long-term debt bearing interest at 7.50 percent, maturing in August 2010. The proceeds from these issuances were used for general corporate purposes.

Segment Disclosures (Millions)

    Revenues by segment were as follows:

			Three Months Ended								Six Months Ended
			July 29, 2000			July 31, 1999			% Change		July 29, 2000			July 31, 1999			% Change
Target			$	6,541		$	5,952		9.9	%	$	12,656		$	11,434		10.7	%
Mervyn's				940			950		(1.0	)		1,831			1,861		(1.6	)
Department Stores				661			687		(3.9	)		1,328			1,382		(3.9	)
Other				109			98		10.3			182			168		7.9
Total			$	8,251		$	7,687		7.3	%	$	15,997		$	14,845		7.8	%

    Pre-tax segment profit and the reconciliation to pre-tax earnings were as follows:

				Three Months Ended								Six Months Ended
				July 29, 2000			July 31, 1999			% Change		July 29, 2000			July 31, 1999			% Change
Target				$	478		$	430		11.6	%	$	945		$	800		18.2	%
Mervyn's					55			45		20.3			101			90		11.7
Department Stores					35			49		(27.8	)		64			97		(33.4	)
	Total pre-tax segment profit				568			524		8.6			1,110			987		12.5
Securitization adjustment (interest equivalent)					(12	)		(12	)				(24	)		(24	)
Interest expense					(100	)		(98	)				(196	)		(192	)
Other					(38	)		(40	)				(83	)		(80	)
Earnings before income taxes and extraordinary items				$	418		$	374		12.0	%	$	807		$	691		16.8	%

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MANAGEMENT'S DISCUSSION AND ANALYSIS

TARGET CORPORATION

ANALYSIS OF OPERATIONS

    Second quarter 2000 net earnings before extraordinary items were $257 million, or $.28 per share, compared with $228 million, or $.24 per share, for the same period last year. First half 2000 net earnings before extraordinary items were $496 million, or $.54 per share, compared with $422 million, or $.45 per share, on the same basis, for first half 1999. The extraordinary items relate to the early extinguishment of debt and were a $1 million gain (less than $.01 per share), net of tax, in the second quarter and first half of 2000, and a $4 million charge (less than $.01 per share), net of tax, in the second quarter and first half of 1999.

Revenues and Comparable-Store Sales

    Total revenues for the quarter increased 7.3 percent to $8,251 million compared with $7,687 million for the same period a year ago. Total comparable-store sales (sales from stores open longer than one year) increased 2.0 percent. Our revenue growth in the second quarter reflected Target's comparable-store sales growth and new store expansion.

    Year-over-year changes in comparable-store sales by business segment were as follows:

Gross Margin Rate

    Our gross margin rate declined slightly, due to the business mix impact of strong growth at Target, our lowest gross margin rate division.

Operating Expense Rate

    Our operating expense rate improved slightly, again due to the business mix impact of strong growth at Target, our lowest expense rate division.

Pre-tax Segment Profit

    Our second quarter pre-tax segment profit increased 9 percent to $568 million compared with $524 million for the same period a year ago. Pre-tax segment profit in the first half of 2000 increased 13 percent to $1,110 million compared with $987 million for the same period a year ago. Pre-tax segment profit is earnings before LIFO, securitization effects, interest, other expense, and unusual items. Target provided substantially all of our pre-tax profit growth in second quarter 2000 with a 12 percent pre-tax profit increase. Mervyn's pre-tax profit increased 20 percent compared with last year; the Department Stores' pre-tax profit decreased 28 percent due to weak sales performance.

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Other Performance Factors

    Our proprietary 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 our credit operations for the second quarter increased over the prior year, principally due to continued growth of the Target Guest Card and improving trends in delinquencies and writeoffs.

    Our Consolidated Results of Operations include reductions of finance charge revenue and bad debt expense related to sold securitized receivables. For analytical purposes, the amounts that represent payments to holders of our sold securitized receivables are included in our pre-tax earnings reconciliation in the Notes to Consolidated Financial Statements as "interest equivalent". The total of interest expense and interest equivalent was $112 million and $220 million in the second quarter and first half of 2000, representing a $2 million and $4 million increase, respectively, from last year. For the quarter, the increase was due to higher average funded balances; year-to-date the increase was due to higher average funded balances, partially offset by a lower average portfolio interest rate.

    The last-in, first-out (LIFO) provision, included in cost of retail sales, was zero for both second quarter 2000 and 1999. The cumulative LIFO provision was $53 million at July 29, 2000 and January 29, 2000, and $60 million at July 31, 1999.

    The estimated annual effective income tax rate was 38.5 percent in the second quarter and first half of 2000, compared to 38.8 percent for the same periods last year.

ANALYSIS OF FINANCIAL CONDITION

    Our financial condition remains strong. We continue to fund the growth in our business through a combination of internally generated funds, debt and sold securitized receivables.

    Retained securitized receivables increased $211 million, or 16 percent, over last year reflecting continued growth of the Target Guest Card. Inventory increased $98 million, or 3 percent, over last year due to new store growth at Target. The inventory growth was more than fully funded by a $236 million, or 8 percent, increase in accounts payable.

    Capital expenditures for the first six months of 2000 were $1,052 million, compared with $863 million for the same period a year ago. Investment in Target accounted for 90 percent of current year capital expenditures.

    Our share repurchase program is described in the Notes to Consolidated Financial Statements. The reduction in shares outstanding and incremental interest expense related to the share repurchase program had an insignificant impact on earnings per share.

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STORE DATA

    During the quarter, we opened a total of 23 new Target stores, including two relocations. At July 29, 2000, our number of stores and retail square feet were as follows:

			Number of Stores						Retail Square Feet*
			July 29, 2000		Jan 29, 2000		July 31, 1999		July 29, 2000		Jan 29, 2000		July 31, 1999
Target			942		912		881		107,278		102,945		98,679
Mervyn's			267		267		267		21,635		21,635		21,661
Department Stores			64		64		63		14,175		14,060		13,890
Total			1,273		1,243		1,211		143,088		138,640		134,230

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*

In thousands, reflects total square feet, less office, warehouse and vacant space

OUTLOOK FOR FISCAL YEAR 2000

    We expect our gross margin rate to decline slightly in the second half of the year, principally due to the business mix impact of growth at Target, our lowest gross margin rate division. We expect our operating expense rate to improve slightly as Target, our lowest expense rate division, continues to represent an increasing percentage of our overall business mix. The contribution from our credit operations is also expected to increase for the full year 2000. In light of current business trends and the strength of last year's results, we expect third quarter earnings per share to decline somewhat from last year. We expect our growth in earnings per share to resume in the fourth quarter, and we remain confident in our ability to deliver average annual earnings per share growth of 15 percent over time, despite our outlook for lower double-digit growth in 2000.

    The total of interest expense and interest equivalent is expected to be moderately higher than 1999 due to higher average funded balances.

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, changing capital markets and general economic conditions, hiring and retaining effective team members, sourcing merchandise from domestic and international vendors, investing in new business strategies, achieving our growth objectives, 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 29, 2000, which contains additional important factors that may cause actual results to differ materially from those predicted in the forward-looking statements.

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PART II. OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

a)		Exhibits
		(2).		Not applicable
		(3)A.		Restated Articles of Incorporation (as amended July 19, 2000)
		(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)A.		Agreement
		(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 29, 2000.

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Signature

     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.

		TARGET CORPORATION
Dated: September 8, 2000		By:	/s/ Douglas A. Scovanner Douglas A. Scovanner Executive Vice President, Finance, Chief Financial Officer and Chief Accounting Officer

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Exhibit Index

(3)A.		Restated Articles of Incorporation (as amended July 19, 2000)
(10)A.		Agreement
(12).		Statements re Computations of Ratios
(27).		Financial Data Schedule

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QuickLinks

TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

Signature

Exhibit Index

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