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Target Has Booked a Jump in Third-Quarter Profits

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Core Tip: US retailer Target Corp. has booked a jump in third-quarter profits, which benefited from higher sales and one-off gains. In a filing yesterday (15 Novemb

US retailer Target Corp. has booked a jump in third-quarter profits, which benefited from higher sales and one-off gains.

In a filing yesterday (15 November) Target said it had earned US$637m, or $0.96 per share, in the third quarter ended 27 October. In the comparable period of last year, Target booked earnings of $555m, or $0.82 a share.

The company's bottom line was boosted by a gain from the group's pending sale of credit card receivables. Excluding this, earnings were slightly down on  last year at $0.81 a share.

Third-quarter sales rose by 3.4% to $16.6bn, while same-store sales were up 2.9%. The company has driven revenue gains by opening more stores and building loyalty through its promotional programme, which offers Target card holders a 5% discount. However, these initiatives have weighed on margins, which slipped 0.2 points to 30.3% of sales in the quarter.

 Adjusted EPS of $0.90 Up 4.3% from Third Quarter 2011;

GAAP EPS of $0.96 Includes 15-cent Gain from Pending Receivables Sale1

MINNEAPOLIS--(BUSINESS WIRE)--Nov. 15, 2012-- Target Corporation (NYSE: TGT) today reported third quarter net earnings of $637 million, or $0.96 per share, which includes a 15-cent gain from the pending sale of its credit-card receivables portfolio.1 Adjusted earnings per share, a measure the company believes is useful in providing period-to-period comparisons of the results of its U.S. operations, were $0.90 in third quarter 2012, up 4.3 percent from $0.86 in 2011. A reconciliation of non-GAAP financial measures to GAAP measures is provided in the tables attached to this press release. All earnings per share figures refer to diluted earnings per share.

"We're pleased with Target's third quarter financial performance, which reflects superb execution across each of our business segments," said Gregg Steinhafel, chairman, president, and chief executive officer of Target Corporation. "We are well-positioned to deliver strong fourth quarter performance by offering compelling merchandise and unbeatable value through initiatives like the Target/Neiman Marcus Holiday Collection, 5% REDcard Rewards and our new Holiday Price Match which allow our guests to shop at Target with confidence throughout the holiday season."

1Please refer to the detail provided in the reconciliation of GAAP to adjusted EPS in the tables attached to this release.

Fiscal 2012 Earnings Guidance

For fourth quarter 2012, the company expects adjusted EPS of $1.64 to $1.74 and GAAP EPS of $1.45 to $1.55. The 19-cent difference between these ranges reflects the expected EPS impact of expenses related to the company's Canadian market entry.

U.S. Retail Segment Results

As previously reported, sales increased 3.4 percent to $16.6 billion in third quarter 2012 from $16.1 billion last year, reflecting a 2.9 percent increase in comparable-store sales combined with the contribution from new stores.

Segment earnings before interest expense and income taxes (EBIT) were $963 million in the third quarter of 2012, an increase of 3.4 percent from $931 million in 2011. Third quarter EBITDA and EBIT margin rates were 8.9 percent and 5.8 percent, respectively, compared with 9.1 percent and 5.8 percent in 2011. Third quarter gross margin rate declined to 30.3 percent in 2012 from 30.5 percent in 2011, reflecting the impact of the company's integrated growth strategies partially offset by underlying rate improvements within categories. Third quarter selling, general and administrative (SG&A) expense rate was 21.4 percent in 2012, unchanged from 2011.

U.S. Credit Card Segment Results2

Third quarter average receivables decreased 4.7 percent to $5.9 billion in 2012 from $6.2 billion in 2011. Third quarter 2012 portfolio spread to LIBOR was $138 million, or 9.3 percent, compared with $158 million, or 10.2 percent, in 2011. Performance in third quarter 2012 reflected a $20 million reduction in the allowance for doubtful accounts, compared with a $49 million reduction in third quarter 2011.

2The Company intends to continue reporting a U.S. Credit Card segment until the credit card receivables transaction with TD Bank closes in 2013. The segment results will continue to be reported on the same basis as historical results.

Canadian Segment Results

Third quarter 2012 EBIT was $(96) million, due to start-up expenses, depreciation and amortization related to the company's expected market entry in 2013. Total expenses related to investments in Target's Canadian market entry reduced Target's earnings per share by approximately 13 cents in third quarter 2012.3

Interest Expense and Taxes

Net interest expense for the quarter was $192 million, including $20 million of interest on capitalized leases related to Target's Canadian market entry. Net interest expense was $200 million in third quarter 2011.

The company's effective income tax rate was 34.5 percent in third quarter 2012, including the favorable resolution of various income tax matters that benefited third quarter EPS by approximately 4 cents.

Capital Returned to Shareholders

In third quarter 2012, the company repurchased approximately 1.7 million shares of its common stock at an average price of $62.90, for a total investment of $104 million. The company also paid dividends of $236 million during the quarter.

Year-to-date the company has repurchased approximately 21.8 million shares of its common stock at an average price of $57.53, for a total investment of $1.25 billion, and paid dividends of $635 million.

3This amount includes interest expense and tax expense that are not included in the segment measure of profit. A reconciliation of non-GAAP measures is included in the tables attached to this release.

Accounting Considerations

As a result of Target's recently announced agreement to sell its credit card receivables portfolio to TD Bank Group, third quarter 2012 GAAP earnings per share reflect a pre-tax gain of $156 million due to a change in the accounting treatment of its receivables from "held for investment" to "held for sale".

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