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Nov. 24, 2021, 3:59 p.m. EST

10-Q: TARGET CORP

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial Summary

Third quarter 2021 included the following notable items:

GAAP diluted earnings per share were $3.04.

Sales were $25.3 billion for the three months ended October 30, 2021, an increase of $3.0 billion, or 13.2 percent, from the comparable prior-year period. Cash flow provided by operating activities was $5.6 billion for the nine months ended October 30, 2021, a decrease of $1.4 billion, or (20.5) percent, from $7.0 billion for the nine months ended October 31, 2020. The drivers of the operating cash flow decrease are described on page 21 .







        Earnings Per Share                        Three Months Ended                                               Nine Months Ended
                                                                  October 31,                                                      October 31,
                                         October 30, 2021            2020                  Change        October 30, 2021             2020                  Change
        GAAP diluted earnings per share $     3.04               $     2.01               51.6  %       $       10.87             $     5.91               83.9  %
        Adjustments                          (0.01)                    0.78                                     (0.50)                  0.83
        Adjusted diluted earnings per
        share                           $     3.03               $     2.79                8.7  %       $       10.37             $     6.75               53.7  %
        


Note: Amounts may not foot due to rounding. Adjusted diluted earnings per share (Adjusted EPS), a non-GAAP metric, excludes the impact of certain items. Management believes that Adjusted EPS is useful in providing period-to-period comparisons of the results of our operations. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 18 .

We report after-tax return on invested capital (ROIC) because we believe ROIC provides a meaningful measure of our capital allocation effectiveness over time. For the trailing twelve months ended October 30, 2021, after-tax ROIC was 31.3 percent, compared with 19.9 percent for the trailing twelve months ended October 31, 2020. The calculation of ROIC is provided on page 20 .

COVID-19

Since the onset of the COVID-19 pandemic, we have experienced strong comparable sales growth and significant volatility in our sales category and channel mix.

Supply Chain Disruptions

In recent months, we have seen increasing supply chain disruptions, including country of origin production and port delays. Additionally, trucker and dockworker shortages, a broad-based surge in consumer demand, and other factors have led to industry-wide U.S. port and ground transportation delays. In response, we have taken various actions, including ordering merchandise earlier, securing ocean freight routes, and increased use of air transport for certain merchandise. While our inventory position is over $2 billion higher than a year ago, if we are unable to continue to source enough inventory and move it through our supply chain to our stores on a timely basis, we may experience increased out-of-stocks and lost sales. Some of these supply chain disruptions and resulting actions have resulted in increased costs. The Gross Margin Rate analysis on page 16 provides additional information.

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents ANALYSIS OF RESULTS OF OPERATIONS

Analysis of Results of Operations

Summary of Operating Income Three Months Ended Nine Months Ended October 31, October 30, October 31, (dollars in millions) October 30, 2021 2020 Change 2021 2020 Change Sales $ 25,290 $ 22,336 13.2 % $ 73,995 $ 64,403 14.9 % Other revenue 362 296 22.3 1,014 819 23.9 Total revenue 25,652 22,632 13.3 75,009 65,222 15.0 Cost of sales 18,206 15,509 17.4 52,202 45,692 14.2 Selling, general and

Rate Analysis Three Months Ended Nine Months Ended October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Gross margin rate 28.0 % 30.6 % 29.5 % 29.1 % SG&A expense rate 18.9 20.5 19.0 20.2 Depreciation and amortization expense rate (exclusive of depreciation included in cost of sales) 2.2 2.4 2.3 2.5 Operating income margin rate 7.8 8.5 9.1 7.2

Note: Gross margin rate is calculated as gross margin (sales less cost of sales) divided by sales. All other rates are calculated by dividing the applicable amount by total revenue.

Sales

Sales include all merchandise sales, net of expected returns, and our estimate of gift card breakage. We use comparable sales to evaluate the performance of our stores and digital channel sales by measuring the change in sales for a period over the comparable prior-year period of equivalent length. Comparable sales include all sales-except sales from stores open less than 13 months, digital acquisitions we have owned less than 13 months, stores that have been closed, and digital acquisitions that we no longer operate. Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies. Digitally originated sales include all sales initiated through mobile applications and our websites. Our stores fulfill the majority of digitally originated sales, including shipment from stores to guests, store Order Pickup or Drive Up, and delivery via our wholly owned subsidiary, Shipt. Digitally originated sales may also be fulfilled through our distribution centers, our vendors, or other third parties.

Sales growth-from both comparable sales and new stores-represents an important driver of our long-term profitability. We expect that comparable sales growth will drive the majority of our total sales growth. We believe that our ability to successfully differentiate our guests' shopping experience through a careful combination of merchandise assortment, price, convenience, guest experience, and other factors will, over the long-term, drive both increasing shopping frequency (traffic) and the amount spent each visit (average transaction amount).







        Comparable Sales                                                 Three Months Ended                                  Nine Months Ended
                                                               October 30, 2021            October 31, 2020       October 30, 2021       October 31, 2020
        Comparable sales change                                              12.7  %                20.7  %                14.4  %                18.7  %
        Drivers of change in comparable sales
        Number of transactions                                               12.9                    4.5                   14.0                    2.6
        Average transaction amount                                           (0.2)                  15.6                    0.3                   15.7
        


TARGET CORPORATION [[Image Removed: tgt-20211030_g2.jpg]] Q3 2021 Form 10-Q 14







        --------------------------------------------------------------------------------
            MANAGEMENT'S DISCUSSION AND ANALYSIS      Table of Contents
             ANALYSIS OF RESULTS OF OPERATIONS
        Comparable Sales by Channel                                  Three Months Ended                                  Nine Months Ended
                                                           October 30, 2021            October 31, 2020       October 30, 2021       October 31, 2020
        Stores originated comparable sales change                         9.7  %                 9.9  %                11.9  %                 7.3  %
        Digitally originated comparable sales change                     28.9                  154.5                   27.8                  163.9
        Sales by Channel                                                  Three Months Ended                                  Nine Months Ended
                                                                October 30, 2021            October 31, 2020       October 30, 2021       October 31, 2020
        Stores originated                                                     82.4  %                84.3  %                82.3  %                83.9  %
        Digitally originated                                                  17.6                   15.7                   17.7                   16.1
        Total                                                                  100  %                 100  %                 100  %                 100  %
        Sales by Fulfillment Channel                                 Three Months Ended                                  Nine Months Ended
                                                           October 30, 2021            October 31, 2020       October 30, 2021       October 31, 2020
        Stores                                                           96.7  %                96.1  %                96.5  %                96.2  %
        Other                                                             3.3                    3.9                    3.5                    3.8
        Total                                                             100  %                 100  %                 100  %                 100  %
        


Note: Sales fulfilled by stores include in-store purchases and digitally originated sales fulfilled by shipping merchandise from stores to guests, Order Pickup, Drive Up, and Shipt.







        Sales by Product Category                              Three Months Ended                             Nine Months Ended
                                                     October 30, 2021       October 31, 2020       October 30, 2021       October 31, 2020
        Apparel and accessories                                 17  %                  18  %                  18  %                  17  %
        Beauty and household essentials                         28                     27                     27                     28
        Food and beverage                                       20                     20                     20                     20
        Hardlines                                               15                     15                     16                     16
        Home furnishings and d�cor                              20                     20                     19                     19
        Total                                                  100  %                 100  %                 100  %                 100  %
        


The collective interaction of a broad array of macroeconomic, competitive, and consumer behavioral factors, as well as sales mix and the transfer of sales to new stores, makes further analysis of sales metrics infeasible.

We monitor the percentage of purchases that are paid for using RedCards (RedCard Penetration) because our internal analysis has indicated that a meaningful portion of the incremental purchases on RedCards are also incremental sales for Target. Guests receive a 5 percent discount on virtually all purchases when they use a RedCard at Target. RedCard sales increased for the three and nine months ended October 30, 2021, and October 31, 2020; however, RedCard penetration declined as total Sales increased at a faster pace.







        RedCard Penetration                                             Three Months Ended                             Nine Months Ended
                                                              October 30, 2021       October 31, 2020       October 30, 2021       October 31, 2020
        Target Debit Card                                              11.7  %                12.2  %                11.8  %                12.2  %
        Target Credit Cards                                             8.9                    9.3                    8.7                    9.2
        Total RedCard Penetration                                      20.7  %                21.5  %                20.5  %                21.4  %
        


Note: Amounts may not foot due to rounding.

TARGET CORPORATION [[Image Removed: tgt-20211030_g2.jpg]] Q3 2021 Form 10-Q 15

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents ANALYSIS OF RESULTS OF OPERATIONS

Gross Margin Rate

pressure from higher merchandise and freight costs and higher inventory shrink, partially offset by the benefit of historically low promotional and clearance markdown rates;

[[Image Removed: tgt-20211030_g4.jpg]] For the nine months ended October 30, 2021, our gross margin rate was 29.5 percent compared with 29.1 percent in the comparable prior-year period. This increase reflected the net impact of

favorable mix in the relative growth rates of higher and lower margin categories;

Selling, General, and Administrative Expense Rate

For the three months ended October 30, 2021, our SG&A expense rate was 18.9 percent compared with 20.5 percent for the three months ended October 31, 2020. For the nine months ended October 30, 2021, our SG&A expense rate was 19.0 percent compared with 20.2 percent for the nine months ended October 31, 2020. The decreases reflect the net leverage benefit from strong revenue growth.

TARGET CORPORATION [[Image Removed: tgt-20211030_g2.jpg]] Q3 2021 Form 10-Q 16







        --------------------------------------------------------------------------------
            MANAGEMENT'S DISCUSSION AND ANALYSIS      Table of Contents
             ANALYSIS OF RESULTS OF OPERATIONS
        Store Data
        Change in Number of Stores                                   Three Months Ended                                         Nine Months Ended
                                                      October 30, 2021               October 31, 2020            October 30, 2021               October 31, 2020
        Beginning store count                               1,909                          1,871                       1,897                          1,868
        Opened                                                 15                             27                          29                             30
        Closed                                                  -                             (1)                         (2)                            (1)
        Ending store count                                  1,924                          1,897                       1,924                          1,897
        Number of Stores and                                     Number of Stores                                                      Retail Square Feet (a)
        Retail Square Feet                October 30, 2021       January 30, 2021      October 31, 2020            October 30, 2021       January 30, 2021      October 31, 2020
        170,000 or more sq. ft.                   274                    273                      273                   49,071                 48,798                   48,798
        50,000 to 169,999 sq. ft.               1,515                  1,509                    1,509                  190,116                189,508                  189,508
        49,999 or less sq. ft.                    135                    115                      115                    3,952                  3,342                    3,342
        Total                                   1,924                  1,897                    1,897                  243,139                241,648                  241,648
        


(a)In thousands, reflects total square feet less office, distribution center, and vacant space.

Other Performance Factors

Net Interest Expense

Net interest expense was $105 million and $317 million for the three and nine months ended October 30, 2021, respectively, compared with $632 million and $871 million, respectively, in the comparable prior-year period. The decrease in net interest expense was primarily due to a loss on early retirement of debt of $512 million for the three and nine months ended October 31, 2020, compared with the current-year periods.

Net Other (Income) / Expense

Net Other (Income) / Expense was $(6) million and $(356) million for the three and nine months ended October 30, 2021, respectively, compared with $5 million and $16 million, respectively, in the comparable prior-year periods. The nine months ended October 30, 2021, included the $335 million gain on the February 2021 sale of Dermstore. Note 3 to the Financial Statements provides additional information.

Provision for Income Taxes

Our effective income tax rate for the three and nine months ended October 30, 2021, was 22.1 percent and 21.6 percent, respectively, compared with 21.9 percent and 21.7 percent, respectively, in the comparable prior-year periods.

TARGET CORPORATION [[Image Removed: tgt-20211030_g2.jpg]] Q3 2021 Form 10-Q 17

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Notes

Reconciliation of Non-GAAP Financial Measures to GAAP Measures

To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share (Adjusted EPS). This metric excludes certain items presented below. We believe this information is useful in providing period-to-period comparisons of the results of our operations. This measure is not in accordance with, or an alternative to, U.S. GAAP. The most comparable GAAP measure is diluted earnings per share. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate Adjusted EPS differently, limiting the usefulness of the measure for comparisons with other companies.







        Reconciliation of Non-GAAP Adjusted EPS                                                      Three Months Ended
                                                                           October 30, 2021                                         October 31, 2020
                                                                                                  Per Share                                              Per Share
        (millions, except per share data)                   Pretax            Net of Tax           Amounts           Pretax          Net of Tax           Amounts
        GAAP diluted earnings per share                                                          $    3.04                                              $    2.01
        Adjustments
        Loss on debt extinguishment                      $    -             $         -          $       -          $  512          $      379          $    0.75
        Loss on investment (a)                                -                       -                  -               8                   9               0.02
        Other (b)                                            (9)                     (7)             (0.01)              8                   6               0.01
        Adjusted diluted earnings per share                                                      $    3.03                                              $    2.79
        Reconciliation of Non-GAAP Adjusted EPS                                                       Nine Months Ended
                                                                         October 30, 2021                                          October 31, 2020
                                                                                               Per Share                                                  Per Share
        (millions, except per share data)                 Pretax           Net of Tax           Amounts             Pretax            Net of Tax           Amounts
        GAAP diluted earnings per share                                                       $   10.87                                                  $    5.91
        Adjustments
        Gain on Dermstore sale                           $ (335)         $      (269)         $   (0.54)         $    -             $         -          $       -
        Loss on debt extinguishment                           -                    -                  -             512                     379               0.75
        Loss on investment (a)                                -                    -                  -              19                      18               0.03
        Other (b)                                            27                   20               0.04              33                      24               0.05
        Adjusted diluted earnings per share                                                   $   10.37                                                  $    6.75
        


Note: Amounts may not foot due to rounding.

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Notes

Earnings before interest expense and income taxes (EBIT) and earnings before interest expense, income taxes, depreciation, and amortization (EBITDA) are non-GAAP financial measures. We believe these measures provide meaningful information about our operational efficiency compared with our competitors by excluding the impact of differences in tax jurisdictions and structures, debt levels, and, for EBITDA, capital investment. These measures are not in accordance with, or an alternative to, GAAP. The most comparable GAAP measure is net earnings. EBIT and EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate EBIT and EBITDA differently, limiting the usefulness of the measures for comparisons with other companies.







        EBIT and EBITDA                                 Three Months Ended                                            Nine Months Ended
                                                                        October 31,                             October 30,        October 31,
        (dollars in millions)                  October 30, 2021             2020              Change               2021                2020              Change
        Net earnings                          $       1,488             $   1,014                46.8  %       $    5,402          $   2,988                80.8  %
        + Provision for income taxes                    423                   284                48.7               1,488                828                79.7
        + Net interest expense                          105                   632               (83.2)                317                871               (63.5)
        EBIT                                  $       2,016             $   1,930                 4.5  %       $    7,207          $   4,687                53.8  %
        + Total depreciation and
        amortization (a)                                652                   603                 7.9               1,952              1,848                 5.6
        EBITDA                                $       2,668             $   2,533                 5.3  %       $    9,159          $   6,535                40.2  %
        


(a)Represents total depreciation and amortization, including amounts classified within Depreciation and Amortization and within Cost of Sales.

TARGET CORPORATION [[Image Removed: tgt-20211030_g2.jpg]] Q3 2021 Form 10-Q 19

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Notes

We have also disclosed after-tax ROIC, which is a ratio based on GAAP information, with the exception of the add-back of operating lease interest to operating income. We believe this metric is useful in assessing the effectiveness of our capital allocation over time. Other companies may calculate ROIC differently, limiting the usefulness of the measure for comparisons with other companies.







             After-Tax Return on Invested Capital
             (dollars in millions)
                                                                    Trailing Twelve Months
             Numerator                                      October 30, 2021        October 31, 2020
             Operating income                            $      8,687              $           5,901
              + Net other income / (expense)                      358                            (46)
             EBIT                                               9,045                          5,855
              + Operating lease interest (a)                       85                             87
        . . .
        


Nov 24, 2021

COMTEX_397631328/2041/2021-11-24T15:58:31

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