Target Corporation (TGT)

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Start Time: 10:37

End Time: 11:43

Target Corporation (TGT)

Q4 2013 Earnings Conference Call

February 26, 2013, 10:30 AM ET

Executives

Gregg Steinhafel - Chairman, President and CEO

Kathy Tesija - EVP, Merchandising

John Mulligan - EVP and CFO

Analysts

Sean Naughton - Piper Jaffray

Matthew Fassler - Goldman Sachs & Co.

Greg Melich - ISI Group

Matt Nemer - Wells Fargo Securities

Robert Drbul - Nomura Securities

Christopher Horvers - JPMorgan Securities

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation’s Fourth 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, February 26, 2014.

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

Gregg Steinhafel

Good morning, and welcome to our 2013 fourth 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 fourth quarter results and strategic priorities for the year ahead, and Kathy will discuss category results, guest insights, and the holiday season. And finally, John will provide more detail on our financial performance, along with our financial outlook for 2014. Following John’s remarks, we’ll open 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 the 8-K we filed this morning.

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 fourth quarter financial results reflect better than expected U.S segments performance in the first three weeks of the holiday season, followed by meaningfully softer results, following our December 19th announcement that criminals had gained access to guest payment card data in our U.S stores.

In total, fourth quarter comparable sales decreased 2.5% consistent with our updated guidance in January. Throughout the quarter our team managed the business extremely well, adjusting both inventory and expenses to match the rapidly changing pace of sales. As a result, our US operations generated fourth quarter adjusted earnings per share of $1.30 at the high-end of the updated guidance we provided in January.

In Canada, we worked diligently to leverage holiday traffic in an effort to clear excess inventory. Markdowns resulting from this effort drove a very low gross margin rate, but allowed us to reduce average inventory per store in Canada by approximately 30% between the beginning and end of the fourth quarter.

Canadian segment EPS dilution was $0.40 in the quarter, $0.05 better than the updated guidance we provided in January. We are pleased that our early cycle Canadian stores have seen the most improvement giving us confidence that we will continue to see continued improvement across all our Canadian stores in 2014.

Fourth quarter GAAP EPS of $0.81 reflects U.S and Canadian segment performance along with costs related to our recent restructuring in data breach along with small accounting and tax matters. As we work to address the impact of the mid-December data breach, we have put the welfare of our guests at the center of every decision we’ve made.

We have communicated in early and often providing the best information we had about new facts in ongoing -- on the ongoing investigation. We consistently assured our guests that they would have zero liability for any unauthorized charges on their card accounts resulting from the breach.

We increased fraud detection for REDcard holders and extended free credit monitoring and identity theft protection for any guests who has ever shopped one of our U.S stores. We are truly sorry for the impact this breach has had on our guests, team members and other stakeholders and I want to reiterate that we are committed for making things right.

We know these initial steps are part of a longer process. We continue to listen to our guests and we know that this incident and recent security breaches at other companies have shaken their confidence in both Target and the U.S payment system more broadly.

To rebuild guest confidence, we’re committed to an end-to-end review in cooperation with third-party experts to understand how the breach occurred, the identification and acceleration of solutions to provide enhanced protection in the future and engagement with third-party experts to protect the industry and consumers from future threats.

Accordingly, we're taking the following steps. We are conducting an end-to-end forensic investigation of our processes, systems and personnel to make informed decisions on potential security enhancements. We are accelerating the adoption of advanced chip enabled technology, investing more than $100 million to equip our stores and to issue Target branded smart chip credit and debit cards.

We have long supported this more secured technology; a broad adoption in the U.S market has been elusive. We believe that recent events will help the industry to reach a tipping point to an accelerated option in the U.S and we are investing to ensure that Target is a clear leader in driving this change.

We are working collaboratively with a broad set of stakeholders in the payment card space including banks, retailers, trade associations, payment processors and networks to share in advance best practices and foster future innovation.

We helped launch and will be an active leader in retail industry, cyber security and data privacy initiative. In addition, we are investing $5 million in a new coalition with the Better Business Bureau and National Cyber Security Alliance and the National Cyber Forensics and Training Alliance to advance public education around cyber security and the dangers of consumer scams.

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