Target Corporation Reports First Quarter Earnings
Target sales grew 0.5 percent, reflecting flat comparable sales combined with the benefit of sales from new locations.
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- Traffic grew 0.9 percent, on top of 3.9 percent in Q1 2022.
- Comparable stores sales grew 0.7 percent, offset by a decline in comparable digital sales.
- Among the components of comparable digital sales, same-day services saw mid-single digit growth, led by high-single digit growth in Drive-Up.
- Strength in frequency businesses (Beauty, Food & Beverage and Household Essentials) offset continued softness in discretionary categories.
- Inventory at the end of Q1 was 16 percent lower than last year, reflecting more than a 25 percent reduction in discretionary categories, partially offset by inventory investments to support rapidly-growing frequency categories, and strategic investments to support long-term market-share opportunities.
- First quarter GAAP and Adjusted EPS of $2.05, and operating margin rate of 5.2 percent, were ahead of expectations, reflecting a higher gross margin rate compared with last year.
Minneapolis, MN — Target Corporation (NYSE: TGT) today announced its first quarter 2023 financial results, which reflected continued traffic and sales growth in an increasingly challenging environment.
The Company reported first quarter GAAP earnings per share (EPS) of $2.05, down 4.8 percent from $2.16 in 2022. First quarter Adjusted EPS1 of $2.05 decreased 6.2 percent compared with $2.19 in 2022. The attached tables provide a reconciliation of non-GAAP to GAAP measures. All earnings per share figures refer to diluted EPS.
Brian Cornell, chair and CEO of Target Corporation, said, “We came into the year clear-eyed about the challenges consumers are facing, and we were determined to build on the trust we’ve established with our guests. It’s required agility and the ability to flex across our multi-category portfolio as we lean into value and the product categories our guests need most right now. Thanks to the team’s dedication, we saw an increase in guest traffic in Q1, with total sales increasing and profitability ahead of expectations.
As we look ahead, we now expect shrink will reduce this year’s profitability by more than $500 million compared with last year. While there are many potential sources of inventory shrink, theft and organized retail crime are increasingly important drivers of the issue. We are making significant investments in strategies to prevent this from happening in our stores and protect our guests and our team. We’re also focused on managing the financial impact on our business so we can continue to keep our stores open, knowing they create local jobs and offer convenient access to essentials.
For the full year, we are maintaining our full-year financial guidance, based on the expected benefit from efficiency and cost-savings efforts and our team’s continued focus on agility, flexibility and retail fundamentals in the face of continued challenges including inventory shrink. At the same time, we will continue making long-term investments in our stores, supply chain and our team, positioning Target for profitable growth and market-share gains in the years ahead.”
Guidance
Based on softening sales trends in the first quarter, the Company is planning for a wide range of sales outcomes in the second quarter, centered around a low-single digit decline in comparable sales. GAAP EPS and Adjusted EPS are both expected to range from $1.30 to $1.70.
For the full year, the Company is maintaining its prior guidance, which includes expected comparable sales in a wide range from a low-single digit decline to a low-single digit increase, operating income growth of more than $1 billion, and both GAAP EPS and Adjusted EPS of $7.75 to $8.75.
Operating Results
Comparable sales were flat to last year in the first quarter, reflecting comparable store sales growth of 0.7 percent and comparable digital sales down (3.4) percent. Total revenue of $25.3 billion grew 0.6 percent compared with last year, reflecting total sales growth of 0.5 percent and a 10.2 percent increase in other revenue. Operating income of $1.3 billion in first quarter 2023, was down 1.4 percent from last year, driven by an increase in the Company’s SG&A expense rate.
First quarter operating income margin rate was 5.2 percent in 2023, compared with 5.3 percent in 2022. First quarter gross margin rate was 26.3 percent, compared with 25.7 percent in 2022. This year’s gross margin rate reflected the benefit of lower freight costs, retail price increases, lower clearance markdown rates, and lower digital fulfillment costs driven by lower digital volume and a favorable mix of lower-cost same-day services. These benefits were partially offset by higher inventory shrink. First quarter SG&A expense rate was 19.8 percent in 2023, compared with 18.9 percent in 2022, reflecting the impact of cost inflation across multiple parts of the business, including investments in team member pay and benefits.
Interest Expense and Taxes
The Company’s first quarter 2023 net interest expense was $147 million, compared with $112 million last year, reflecting higher average long-term debt balances combined with the impact of higher floating interest rates.
First quarter 2023 effective income tax rate was 21.1 percent, compared with the prior year rate of 19.2 percent, reflecting the rate impact of higher discrete tax benefits in the prior year.
Capital Deployment and Return on Invested Capital
The Company paid dividends of $497 million in the first quarter, compared with $424 million last year, reflecting a 20.0 percent increase in the dividend per share, partially offset by a decline in average share count.
The Company did not repurchase any stock in the first quarter. As of the end of the quarter, the Company had approximately $9.7 billion of remaining capacity under the repurchase program approved by Target’s Board of Directors in August 2021.
For the trailing twelve months through first quarter 2023, after-tax return on invested capital (ROIC) was 11.4 percent, compared with 25.3 percent for the trailing twelve months through first quarter 2022. The decrease in ROIC was driven primarily by lower profitability coupled with an increase in invested capital. The tables in this release provide additional information about the Company’s ROIC calculation.
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TARGET CORPORATION |
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Consolidated Statements of Operations |
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Three Months Ended |
||||||
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(millions, except per share data) (unaudited) |
April 29, 2023 |
April 30, 2022 |
Change |
|||
|
Sales |
$ 24,948 |
$ 24,830 |
0.5 % |
|||
|
Other revenue |
374 |
340 |
10.2 |
|||
|
Total revenue |
25,322 |
25,170 |
0.6 |
|||
|
Cost of sales |
18,386 |
18,461 |
(0.4) |
|||
|
Selling, general and administrative expenses |
5,025 |
4,762 |
5.5 |
|||
|
Depreciation and amortization (exclusive of depreciation included in cost of sales) |
583 |
601 |
(3.0) |
|||
|
Operating income |
1,328 |
1,346 |
(1.4) |
|||
|
Net interest expense |
147 |
112 |
31.2 |
|||
|
Net other income |
(23) |
(15) |
58.1 |
|||
|
Earnings before income taxes |
1,204 |
1,249 |
(3.6) |
|||
|
Provision for income taxes |
254 |
240 |
6.0 |
|||
|
Net earnings |
$ 950 |
$ 1,009 |
(5.8) % |
|||
|
Basic earnings per share |
$ 2.06 |
$ 2.17 |
(5.2) % |
|||
|
Diluted earnings per share |
$ 2.05 |
$ 2.16 |
(4.8) % |
|||
|
Weighted average common shares outstanding |
||||||
|
Basic |
460.9 |
464.0 |
(0.7) % |
|||
|
Diluted |
462.9 |
467.8 |
(1.1) % |
|||
|
Antidilutive shares |
1.2 |
— |
||||
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Dividends declared per share |
$ 1.08 |
$ 0.90 |
20.0 % |
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TARGET CORPORATION |
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Consolidated Statements of Financial Position |
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(millions, except footnotes) (unaudited) |
April 29, 2023 |
January 28, 2023 |
April 30, 2022 |
|||
|
Assets |
||||||
|
Cash and cash equivalents |
$ 1,321 |
$ 2,229 |
$ 1,112 |
|||
|
Inventory |
12,616 |
13,499 |
15,083 |
|||
|
Other current assets |
1,836 |
2,118 |
1,758 |
|||
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Total current assets |
15,773 |
17,846 |
17,953 |
|||
|
Property and equipment |
||||||
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Land |
6,493 |
6,231 |
6,164 |
|||
|
Buildings and improvements |
35,198 |
34,746 |
33,300 |
|||
|
Fixtures and equipment |
7,473 |
7,439 |
6,459 |
|||
|
Computer hardware and software |
3,067 |
3,039 |
2,588 |
|||
|
Construction-in-progress |
2,822 |
2,688 |
1,444 |
|||
|
Accumulated depreciation |
(22,657) |
(22,631) |
(21,285) |
|||
|
Property and equipment, net |
32,396 |
31,512 |
28,670 |
|||
|
Operating lease assets |
2,640 |
2,657 |
2,571 |
|||
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Other noncurrent assets |
1,341 |
1,320 |
1,648 |
|||
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Total assets |
$ 52,150 |
$ 53,335 |
$ 50,842 |
|||
|
Liabilities and shareholders’ investment |
||||||
|
Accounts payable |
$ 11,935 |
$ 13,487 |
$ 14,053 |
|||
|
Accrued and other current liabilities |
5,732 |
5,883 |
5,582 |
|||
|
Current portion of long-term debt and other borrowings |
200 |
130 |
1,089 |
|||
|
Total current liabilities |
17,867 |
19,500 |
20,724 |
|||
|
Long-term debt and other borrowings |
16,010 |
16,009 |
13,379 |
|||
|
Noncurrent operating lease liabilities |
2,621 |
2,638 |
2,581 |
|||
|
Deferred income taxes |
2,289 |
2,196 |
1,752 |
|||
|
Other noncurrent liabilities |
1,758 |
1,760 |
1,632 |
|||
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Total noncurrent liabilities |
22,678 |
22,603 |
19,344 |
|||
|
Shareholders’ investment |
||||||
|
Common stock |
38 |
38 |
39 |
|||
|
Additional paid-in capital |
6,541 |
6,608 |
5,592 |
|||
|
Retained earnings |
5,448 |
5,005 |
5,495 |
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|
Accumulated other comprehensive loss |
(422) |
(419) |
(352) |
|||
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Total shareholders’ investment |
11,605 |
11,232 |
10,774 |
|||
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Total liabilities and shareholders’ investment |
$ 52,150 |
$ 53,335 |
$ 50,842 |
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Common Stock Authorized 6,000,000,000 shares, $0.0833 par value; 461,552,843, 460,346,947, and 463,683,711 shares issued and outstanding as of April 29, 2023, January 28, 2023, and April 30, 2022, respectively. |
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Preferred Stock Authorized 5,000,000 shares, $0.01 par value; no shares were issued or outstanding during any period presented. |
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TARGET CORPORATION |
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Consolidated Statements of Cash Flows |
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Three Months Ended |
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(millions) (unaudited) |
April 29, 2023 |
April 30, 2022 |
||
|
Operating activities |
||||
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Net earnings |
$ 950 |
$ 1,009 |
||
|
Adjustments to reconcile net earnings to cash (required for) provided by operating activities: |
||||
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Depreciation and amortization |
667 |
679 |
||
|
Share-based compensation expense |
43 |
83 |
||
|
Deferred income taxes |
95 |
115 |
||
|
Noncash losses / (gains) and other, net |
(11) |
52 |
||
|
Changes in operating accounts: |
||||
|
Inventory |
883 |
(1,181) |
||
|
Other assets |
34 |
(86) |
||
|
Accounts payable |
(1,463) |
(1,560) |
||
|
Accrued and other liabilities |
67 |
(505) |
||
|
Cash provided by (required for) operating activities |
1,265 |
(1,394) |
||
|
Investing activities |
||||
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Expenditures for property and equipment |
(1,605) |
(952) |
||
|
Proceeds from disposal of property and equipment |
2 |
2 |
||
|
Other investments |
1 |
2 |
||
|
Cash required for investing activities |
(1,602) |
(948) |
||
|
Financing activities |
||||
|
Change in commercial paper, net |
90 |
945 |
||
|
Reductions of long-term debt |
(46) |
(48) |
||
|
Dividends paid |
(497) |
(424) |
||
|
Repurchase of stock |
— |
(10) |
||
|
Accelerated share repurchase pending final settlement |
— |
(2,750) |
||
|
Shares withheld for taxes on share-based compensation |
(118) |
(171) |
||
|
Stock option exercises |
— |
1 |
||
|
Cash required for financing activities |
(571) |
(2,457) |
||
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Net decrease in cash and cash equivalents |
(908) |
(4,799) |
||
|
Cash and cash equivalents at beginning of period |
2,229 |
5,911 |
||
|
Cash and cash equivalents at end of period |
$ 1,321 |
$ 1,112 |
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TARGET CORPORATION |
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Operating Results |
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Rate Analysis |
Three Months Ended |
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(unaudited) |
April 29, 2023 |
April 30, 2022 |
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Gross margin rate |
26.3 % |
25.7 % |
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SG&A expense rate |
19.8 |
18.9 |
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Depreciation and amortization expense rate (exclusive of depreciation included in cost of sales) |
2.3 |
2.4 |
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Operating income margin rate |
5.2 |
5.3 |
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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. Other revenue includes $174 million and $185 million of profit-sharing income |
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Comparable Sales |
Three Months Ended |
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|
(unaudited) |
April 29, 2023 |
April 30, 2022 |
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Comparable sales change |
0.0 % |
3.3 % |
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Drivers of change in comparable sales |
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Number of transactions (traffic) |
0.9 |
3.9 |
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Average transaction amount |
(0.9) |
(0.6) |
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Comparable Sales by Channel |
Three Months Ended |
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(unaudited) |
April 29, 2023 |
April 30, 2022 |
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Stores originated comparable sales change |
0.7 % |
3.4 % |
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Digitally originated comparable sales change |
(3.4) |
3.2 |
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Sales by Channel |
Three Months Ended |
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|
(unaudited) |
April 29, 2023 |
April 30, 2022 |
||||||||||||||||||||||
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Stores originated |
82.5 % |
81.8 % |
||||||||||||||||||||||
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Digitally originated |
17.5 |
18.2 |
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Total |
100 % |
100 % |
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Sales by Fulfillment Channel |
Three Months Ended |
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(unaudited) |
April 29, 2023 |
April 30, 2022 |
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Stores |
97.2 % |
96.5 % |
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Other |
2.8 |
3.5 |
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Total |
100 % |
100 % |
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Note: Sales fulfilled by stores include in-store purchases and digitally originated sales fulfilled by shipping merchandise from |
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RedCard Penetration |
Three Months Ended |
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(unaudited) |
April 29, 2023 |
April 30, 2022 |
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Total RedCard Penetration |
19.0 % |
20.3 % |
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Number of Stores and Retail Square Feet |
Number of Stores |
Retail Square Feet (a) |
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(unaudited) |
April 29, |
January 28, |
April 30, |
April 29, |
January 28, |
April 30, |
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170,000 or more sq. ft. |
274 |
274 |
274 |
48,985 |
48,985 |
49,071 |
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50,000 to 169,999 sq. ft. |
1,530 |
1,527 |
1,519 |
191,543 |
191,241 |
190,461 |
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49,999 or less sq. ft. |
150 |
147 |
140 |
4,465 |
4,358 |
4,147 |
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Total |
1,954 |
1,948 |
1,933 |
244,993 |
244,584 |
243,679 |
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(a) |
In thousands; reflects total square feet less office, supply chain facilities, and vacant space. |
TARGET CORPORATION
Reconciliation of Non-GAAP Financial 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, 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.
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Reconciliation of Non-GAAP Adjusted EPS |
Three Months Ended |
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April 29, 2023 |
April 30, 2022 |
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(millions, except per share data) (unaudited) |
Pretax |
Net of Tax |
Per Share |
Pretax |
Net of Tax |
Per Share |
Change |
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|
GAAP diluted earnings per share |
$ 2.05 |
$ 2.16 |
(4.8) % |
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Adjustments |
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Other (a) |
$ — |
$ — |
$ — |
$ 20 |
$ 15 |
$ 0.03 |
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Adjusted diluted earnings per share |
$ 2.05 |
$ 2.19 |
(6.2) % |
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(a) Other items unrelated to current period operations, none of which were individually significant. |
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Reconciliation of Non-GAAP Adjusted EPS Guidance |
Guidance |
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|
Q2 2023 |
Full Year 2023 |
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(unaudited) |
Per Share |
Per Share |
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GAAP diluted earnings per share guidance |
$1.30 – $1.70 |
$7.75 – $8.75 |
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Estimated adjustments |
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Other (a) |
$ — |
$ — |
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Adjusted diluted earnings per share guidance |
$1.30 – $1.70 |
$7.75 – $8.75 |
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(a) |
Second quarter and full-year 2023 GAAP EPS may include the impact of certain discrete items, which will be excluded in calculating Adjusted EPS. In the past, these items have included losses on the early retirement of debt and certain other items that are discretely managed. The Company is not currently aware of any such discrete items. |
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.
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EBIT and EBITDA |
Three Months Ended |
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|
(dollars in millions) (unaudited) |
April 29, 2023 |
April 30, 2022 |
Change |
|||
|
Net earnings |
$ 950 |
$ 1,009 |
(5.8) % |
|||
|
+ Provision for income taxes |
254 |
240 |
6.0 |
|||
|
+ Net interest expense |
147 |
112 |
31.2 |
|||
|
EBIT |
$ 1,351 |
$ 1,361 |
(0.7) % |
|||
|
+ Total depreciation and amortization (a) |
667 |
679 |
(1.8) |
|||
|
EBITDA |
$ 2,018 |
$ 2,040 |
(1.1) % |
|||
|
(a) |
Represents total depreciation and amortization, including amounts classified within Depreciation and Amortization and within Cost of Sales. |
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.
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After-Tax Return on Invested Capital |
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(dollars in millions) (unaudited) |
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Trailing Twelve Months |
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Numerator |
April 29, 2023 |
April 30, 2022 |
||||
|
Operating income |
$ 3,830 |
$ 7,918 |
||||
|
+ Net other income |
57 |
55 |
||||
|
EBIT |
3,887 |
7,973 |
||||
|
+ Operating lease interest (a) |
96 |
87 |
||||
|
– Income taxes (b) |
770 |
1,804 |
||||
|
Net operating profit after taxes |
$ 3,213 |
$ 6,256 |
||||
|
Denominator |
April 29, 2023 |
April 30, 2022 |
May 1, 2021 |
|||
|
Current portion of long-term debt and other borrowings |
$ 200 |
$ 1,089 |
$ 1,173 |
|||
|
+ Noncurrent portion of long-term debt |
16,010 |
13,379 |
11,509 |
|||
|
+ Shareholders’ investment |
11,605 |
10,774 |
14,959 |
|||
|
+ Operating lease liabilities (c) |
2,921 |
2,854 |
2,563 |
|||
|
– Cash and cash equivalents |
1,321 |
1,112 |
7,816 |
|||
|
Invested capital |
$ 29,415 |
$ 26,984 |
$ 22,388 |
|||
|
Average invested capital (d) |
$ 28,199 |
$ 24,686 |
||||
|
After-tax return on invested capital |
11.4 % |
25.3 % |
||||
|
(a) |
Represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as finance leases. Calculated using the discount rate for each lease and recorded as a component of rent expense within SG&A. Operating lease interest is added back to Operating Income in the ROIC calculation to control for differences in capital structure between us and our competitors. |
|
(b) |
Calculated using the effective tax rates, which were 19.3 percent and 22.4 percent for the trailing twelve months ended April 29, 2023, and April 30, 2022, respectively. For the twelve months ended April 29, 2023, and April 30, 2022, includes tax effect of $0.8 billion and $1.8 billion, respectively, related to EBIT, and $18 million and $19 million, respectively, related to operating lease interest. |
|
(c) |
Total short-term and long-term operating lease liabilities included within Accrued and Other Current Liabilities and Noncurrent Operating Lease Liabilities, respectively. |
|
(d) |
Average based on the invested capital at the end of the current period and the invested capital at the end of the comparable prior period. |
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