Target Corporation (NYSE: TGT) today reported earnings per share for the third quarter ended November 1, 2003 of 33 cents, compared with 30 cents in the third quarter ended November 2, 2002. All earnings per share figures refer to diluted earnings per share. Third quarter net earnings increased 8.7 percent to $302 million, compared with $277 million in 2002.
"We are pleased with our overall third quarter results, which reflect strong performance at Target Stores, partially offset by weak performance at both Mervyn's and Marshall Field's," said Bob Ulrich, chairman and chief executive officer of Target Corporation. "For the fourth quarter, we remain optimistic about our potential for strong sales and earnings growth at Target Stores, while our outlook for the corporation is tempered by the near-term sales and business trends at Mervyn's and Marshall Field's. Long-term, we remain confident in our ability to generate average annual earnings per share growth of 15 percent or more over time."
In the first quarter of 2003, as required, the company adopted EITF No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor". In the third quarter, the company refined its implementation of this accounting standard, resulting in a financial statement reclassification of certain consideration received from vendors. The effect of this reclassification was to reduce third quarter and year-to-date cost of goods sold by $36 and $98 million, respectively, and to increase third quarter and year-to-date selling, general, and administrative expenses by like amounts. These reclassifications had no impact on our sales, net earnings, cash flows or financial position for any period. The discussion of changes in gross margin rate and expense rate in this release are net of the impact of these reclassifications.
Total revenues in the third quarter increased 10.7 percent to $11.286 billion from $10.194 billion in 2002, driven by a 13.9 percent revenue increase at Target Stores, principally resulting from new store expansion and the growth in our credit card operations. Comparable-store sales for the corporation in the third quarter 2003 rose 4.3 percent. (Total revenues include retail sales and net credit revenues. Comparable-store sales are sales from stores open longer than one year.)
For the quarter, pre-tax segment profit increased 4.3 percent to $650 million, compared with $623 million in the third quarter 2002. Pre-tax profit at Target Stores increased $67 million, or 12.5 percent. Pre-tax profit declined at both Mervyn's and Marshall Field's by $21 million and $19 million, respectively. (Pre-tax segment profit is earnings before LIFO, interest, other expense and unusual items.)
In the third quarter, the company's gross margin rate was unfavorable to the prior year, due to a modest rate decline at Target Stores as well as the mix impact of more rapid growth at Target, our lowest gross margin rate division. (Gross margin rate represents gross margin as a percentage of sales.) Expense rate, excluding credit card operations, was also unfavorable to prior year due to a lack of sales leverage at Mervyn's and Marshall Field's, partially offset by the benefit of overall growth at Target, our lowest expense rate division. (Expense rate represents selling, general and administrative expenses as a percentage of sales. It includes buying and occupancy, advertising, start-up and other expense, and excludes depreciation and expenses associated with credit card operations.)
Contribution to pre-tax segment profit from the company's credit card operations increased to $162 million in the third quarter from $138 million a year ago. At quarter-end, gross receivables were $5.778 billion, a slight increase from $5.754 billion in balances at the end of second quarter 2003, and a significant increase from the $5.242 billion in receivables at the end of third quarter a year ago, due to the continued growth in issuance and usage of the Target Visa card. The provision for bad debt expense was equal to the company's net write-offs in the quarter at $132 million, reflecting development in line with previous expectations. Results of credit card operations are included in the pre-tax segment profit for each of the company's three business segments.
Net interest expense for the quarter declined $14 million compared with third quarter 2002 reflecting the benefit of a lower average portfolio interest rate, partially offset by higher average funded balances.
The company's annual effective income tax rate was adjusted in the quarter to a new rate of 37.8 percent from the 38.0 percent rate reflected in the first and second quarters of this year. The adjustment added approximately $3 million to net income in the quarter (less than $0.01 per share). In 2002, the annual effective tax rate in the third quarter was 38.2 percent.
Target Corporation will webcast its third quarter earnings conference call at 9:30am CT today. Investors and the media are invited to listen to the call through the company's website at www.target.com (click on "company/Target Corporation/investor information/webcasts"). A telephone replay of the call will be available beginning at approximately 11:30am CT today through the end of business on November 14, 2003. The replay number is (402) 280-9973.
Forward-looking statements in this release should be read in conjunction with the cautionary statements in Exhibit (99)C to the company's 2002 Form 10- K.
Target Corporation operates large-store general merchandise formats, including discount stores, moderate-priced promotional and traditional department stores, as well as a direct mail and on-line business called target.direct. The company currently operates 1,556 stores in 47 states. This included 1,227 Target stores, 267 Mervyn's stores and 62 Marshall Field's stores.
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