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Target Corp. (TGT)

Sanford C Bernstein Strategic Decisions Conference Transcript

May 30, 2013 2:00 PM ET


John Mulligan - Chief Financial Officer

John Hulbert - Head, Investor Relations


Colin McGranahan - Sanford C Bernstein


Colin McGranahan - Sanford C Bernstein

We are thrilled to have Target here this year. With me is John Mulligan, Target’s Chief Financial Officer. He joined Target in 1996 as a Financial Analyst and he’s held multiple positions in finance, at, human resources and took over the CFO range in March of last year 2012. And John Hulbert here in the front row, who many of you know heads Investor Relations.

Clearly, there is a lot to talk about on the Target story. The opening of the first stores in Canada couple months ago, continued progress in the U.S. with REDcard and Pfresh, ecommerce, supply chain and lots and lots more, I think John is going to start with some opening comments and then we’ll turn it into a Q&A.

John Mulligan

Thanks Colin. Good afternoon, everybody. I thought I talked just a little bit real briefly here. We announced our first quarter earnings, talk about the headline numbers there but also provide a little bit of color on the quarter. But more important I’ll talk about some of the things we are excited about going forward and the impact that will have on our business.

Before I start, as you guys know, this will contain some forward-looking statements, those should be in a context of our risks and uncertainties that are in our 10-K, you guys know to drill on that.

First quarter, two headlines really, comps store sale down 0.6%. Short of the guidance we started out with at beginning of the quarter end. Short of the update we did early in April. Sales being down, obviously led to our earnings being short of our expectations as well, both our adjusted EPS, which is EPS from our U.S. businesses and GAAP EPS, both falling short again of our initial guidance and the update we provided in early April.

So let’s go beneath the headline here and talk a little bit about it, sales. If you heard us talk about weather overtime. We talk a lot about, we use the phrase, this is Doug's favorite phrase actually, on average weather is average and he of course is correct, and we really saw that in the last two springs.

Last year very warm, very strong performance in our style category and our seasonal businesses, this year cycling against that, very cool and we saw the impact on our seasonal businesses, 6 to 7 percentage point gap between our non-seasonable and our seasonal businesses, and we always expect some of that. The seasonal businesses tend to be more in the style category. So there is always a gap between that and are less discretionary. But this gap much, much wider than we've seen in a very long time.

Economic challenges you know we started the quarter talking about some of the economic issues going on particularly the payroll tax, the impact of that and we can continue to see that impact. We survey our guest. So they aware of the payroll tax increase. They are aware of it and at least three quarters have said they reduce spending as a result of it to compensate for the loss of income.

So we definitely see continued economic challenges and lots a cross wins here, and a lots of good news, there is the stock market, housing prices, things like that, but unemployment remains high and we have the payroll tax, so lots of things working at odds with each other.

And finally, of course, we face the hardest comparison of the year, our 5.3% comp in Q1, as I said just incredibly warm, perfect weather last year and the full year obviously the 2.7%, so much lower. So, strongest quarter of the year was first quarter last year.

Looking at adjusted EPS, probably the one notable item here was the expense pressure and that was really driven by three discrete items. First one was the income from our credit card portfolio and again, there is three items that drove that.

As expected the portfolio is much smaller than it was a year ago. As we continue to see that decrease as the REDcard penetration increases. We have payment rates and the asset value comes down.

The second driver is we are cycling against the $35 million reserve release last year. And the finally, of course, we closed the receivables deal in mid-quarter and began sharing our profits with Toronto-Dominion. Those three impacts together equated to about a 50 basis point impact on expense.

Technology investments, we said during the fourth quarter conference call, we expect to increase investments in technology and that would put $0.20 to $0.25 of pressure on our P&L throughout the year, $0.25 is about $250 million divided by 4, that’s about $60 million and that almost exactly what it was in the first quarter.

We also said we expected to offset the majority of that throughout the year to expense savings, many of those savings have begun in Q1 and we’ll see those grow as the year progresses. And finally as you’d expect when we run a negative 0.6 comp, we don't see really any SG&A leverage that we would expect when our comp sales increase.

GAAP EPS, similarly down but driven in addition to the adjusted results, three discrete items once again, it’s a day of three’s I guess. Dilution related to the Canadian segment was $0.24, right -- almost right in line with what we said at the beginning of the quarter, we thought $0.23, $0.24, nothing going on there, we’ll talk a little bit more about Canada in a moment.

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