Target Corporation (TGT)

TGT 
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Target Corporation (TGT)

Q2 2013 Earnings Conference Call

August 21, 2013 10:30 ET

Executives

Gregg Steinhafel - Chairman, President and Chief Executive Officer

Kathy Tesija - Executive Vice President, Merchandising

John Mulligan - Executive Vice President and Chief Financial Officer

Analysts

Sean Naughton - Piper Jaffray

Greg Melich - ISI Group

Matt Nemer - Wells Fargo Securities

Deborah Weinswig - Citigroup

Jason DeRise – UBS

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation’s Second Quarter Earnings Release Conference Call. During the presentation, all participants will be in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded Wednesday, August 21, 2013.

I would now like to turn the conference over to Mr. Gregg Steinhafel, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Gregg Steinhafel

Good morning, and welcome to our 2013 second quarter earnings conference call. On the line with me today are Kathy Tesija, Executive Vice President of Merchandising; and John Mulligan, Executive Vice President and Chief Financial Officer.

This morning, I will provide a high level summary of our second quarter results and strategic priorities for the rest of the year, and Kathy will discuss category results, guest insights, and upcoming initiatives. And finally, John will provide more detail on our financial performance, along with our outlook for the third quarter and full year. Following John’s remarks, we’ll open up the phone lines for a question-and-answer session.

As a reminder, we are joined on this conference call by investors and others who are listening to our comments via webcast. Following this conference call, John Hulbert and John Mulligan will be available throughout the day to answer any follow-up questions you may have. Also as a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, the most important of which are described in our SEC filings.

Finally, in these remarks, we refer to adjusted earnings per share, which is a non-GAAP financial measure. A reconciliation to our GAAP results is included in this morning’s press release posted on our Investor Relations website.

Target’s second quarter financial results reflect strong U.S. profit performance in spite of soft traffic and sales. Our second quarter comparable sales increased 1.2% below our expectations going into the quarter, but nearly 2 percentage points ahead of our first quarter pace. As a result, we delivered second quarter adjusted EPS of $1.19 at the high end of our expectation going into the quarter. Our GAAP EPS of $0.95 was in the middle of our expected range, reflecting higher than expected dilution of $0.21 from our Canadian segment. As we monitor the economy and consumer sentiment, we continue to see a mix of signals in which emerging optimism is balanced with continuing challenges. This year’s payroll tax increase continues to affect spending, particularly among lower and [moderate] [ph] income households and household formation in younger demographic groups remain stubbornly negative.

Recent job growth numbers have been encouraging, but labor force participation and income growth remain weak. And while emerging strength in the housing and automotive sectors is a long term positive, the near term spending on these big ticket items is crowding out other spending particularly in today’s environment in which access to consumer credit remains tight. As you’ve heard from all operators and other retailers we continue to see the impact of trip consolidation in U.S. households as our second quarter comp was entirely driven by an increase in basket size partially offset by a small decline in traffic. Second quarter sales in our digital channels grew in the teens overall with mobile traffic and sales continuing to grow at a triple digit pace.

Second quarter operating margins in the U.S. were quite strong especially in light of the pace of our sales. We delivered a healthy gross margin rate as we saw a relatively balanced mix of sales across categories and our merchant teams did a great job managing inventory and price investments. In addition we continue to benefit from very disciplined management of expenses particularly in our stores. In fact excluding the impact of the decline in the contribution from our credit card portfolio U.S. segment operating margins increased from last year’s second quarter.

Altogether we feel very good about our second quarter U.S. segment performance as we overcame softer than expected sales and the year-over-year impact of credit card profit sharing to deliver a 6.1% increase in adjusted earnings per share. These results demonstrate the resilience of our team and our operating model in the face of a challenging economic and consumer environment.

In our Canadian segment we have reached the half-way point in our 2013 market launch. We opened another 44 Canadian Target stores in the second quarter putting our total at 68 today on the way to our goal of operating 124 Canadian stores by year end.

Launching our Canadian segment has required a massive effort from teams throughout the company including building a completely new supply chain infrastructure and integrated technology solution completely reconstructing former Zellers transforming them into brand new Target stores, hiring and training more than 15,000 Canadian team members and creating unique merchandize strategies and assortments to fit the preferences of our Canadian guests including a very strong presence in our home and apparel categories.

The team’s execution on these efforts has been excellent, as a result our Canadian stores have seen strong initial traffic and the mix of our sales in home and apparel has been even higher than expected. However, now that we have successfully opened 68 stores in Canada we need to drive trips and conversion in frequency categories like healthcare, food and other basic commodities. Sales in these categories have grown much more slowly than we expected causing overall sales and profit momentum to build more slowly as well.

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