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Target Corporation Reports Second Quarter Earnings image

Target Corporation Reports Second Quarter Earnings

  • Comparable sales grew 6 percent, on top of 8.9 percent growth last year.
    • Comparable sales growth reflected 7 percent traffic growth.
  • Growth reflected continued strength in Food & Beverage, Beauty and Household
  • The Company gained unit share in all five of its core merchandising categories in the second quarter.
  • Store comparable sales increased 3 percent, on top of 8.7 percent growth last year.
  • Digital comparable sales grew 0 percent, following growth of 9.9 percent last year.
  • Same-day services (Order Pickup, Drive Up and Shipt) grew nearly 11 percent this year, led by Drive Up, which grew in the mid-teens on top of more than 80 percent last year.
  • More than 95 percent of Target’s second quarter sales were fulfilled by its
  • Operating margin rate of 2 percent reflected gross margin pressure from actions to reduce excess inventory as well as higher freight and transportation costs.
  • As a result of the Company’s inventory actions in the second quarter, the Company reduced its inventory exposure in discretionary categories while investing in rapidly-growing frequency categories. Additionally, Fall season receipts in discretionary categories were reduced by more than $1.5 billion.

Minneapolis, MN — Target Corporation announced its second quarter 2022 financial results, which reflected continued sales and traffic growth on top of unprecedented increases over the last two years, and profit pressure driven primarily by the Company’s inventory reduction effort

The Company reported second quarter GAAP earnings per share (EPS) of $0.39, down 89.2 percent from

$3.65 in 2021. Second quarter Adjusted EPS1 of $0.39 decreased 89.2 percent compared with $3.64 in 2021. The attached tables provide a reconciliation of non-GAAP to GAAP measures. All earnings per share figures refer to diluted EPS.

“I’m really pleased with the underlying performance of our business, which continues to grow traffic and sales while delivering broad-based unit-share gains in a very challenging environment,” said Brian Cornell, chairman and chief executive officer of Target Corporation. “I want to thank our team for their tireless work to deliver on the inventory rightsizing goals we announced in June. While these inventory actions put significant pressure on our near-term profitability, we’re confident this was the right long-term decision in support of our guests, our team and our business. Looking ahead, the team is energized and ready to serve our guests in the back half of the year, with a safe, clean, uncluttered shopping experience, compelling value across every category, and a fresh assortment to serve our guests’ wants and needs.”

Fiscal 2022 Guidance 

While the Company is planning cautiously for the remainder of the year, current trends support the company’s prior guidance for full-year revenue growth in the low- to mid-single digit range, and an operating margin rate in a range around 6% in the back half of the year.

Operating Results 

Comparable sales grew 2.6 percent in the second quarter, reflecting comparable store sales growth of 1.3 percent and comparable digital sales growth of 9.0 percent. Total revenue of $26.0 billion grew 3.5 percent compared with last year, reflecting total sales growth of 3.3 percent and a 14.8 percent increase in other revenue. Operating income was $321 million in second quarter 2022, down 87.0 percent from $2.5 billion in 2021, reflecting a decline in the Company’s gross margin rate.

Second quarter operating income margin rate was 1.2 percent in 2022, compared with 9.8 percent in 2021. Second quarter gross margin rate was 21.5 percent, compared with 30.4 percent in 2021. This year’s gross margin rate reflected higher markdown rates, driven primarily by inventory impairments and actions taken to address lower-than-expected sales in discretionary categories, as well as higher merchandise, inventory shrink, and freight costs. Additionally, gross margin rate was pressured by increased compensation and headcount in our distribution centers, the costs of managing excess inventory, and higher per-unit last-mile shipping costs. Second quarter SG&A expense rate was 19.2 percent in 2022, compared with 19.3 percent in 2021, reflecting the impact of lower incentive compensation, partially offset by cost increases across our business, including investments in hourly team member wages.

Interest Expense and Taxes 

The Company’s second quarter 2022 net interest expense was $112 million, compared with $104 million last year, reflecting higher commercial paper and average long-term debt levels.

Second quarter 2022 effective income tax rate was 15.8 percent, compared with the prior year rate of 23.4 percent, reflecting the impact of tax benefits on lower pre-tax earnings compared with last year.

Capital Deployment and Return on Invested Capital 

The Company paid dividends of $417 million in the second quarter, compared with $336 million last year, reflecting a 32.4 percent increase in the dividend per share, partially offset by a decline in average share count.

Final settlement of an Accelerated Share Repurchase (ASR) arrangement, which the Company initiated during the first quarter of 2022 occurred in early June. As a result, the Company recorded the repurchase of $2.6 billion worth of its shares through the ASR, reflecting the retirement of 12.5 million shares of common stock at an average price of $211.58. As of the end of the second 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 second quarter 2022, after-tax return on invested capital (ROIC) was 18.4 percent, compared with 31.7 percent for the trailing twelve months through second quarter 2021. The decrease in ROIC was driven primarily by lower profitability in second quarter 2022. The tables in this release provide additional information about the Company’s ROIC calculation.

TARGET CORPORATION

Consolidated Statements of Operations 

Three Months Ended                                                       Six Months Ended

 

 

(millions, except per share data) (unaudited) July 30, 2022 July 31, 2021 Change July 30, 2022 July 31, 2021 Change
Sales $       25,653 $       24,826 3.3 % $       50,483 $         48,705 3.7 %
Other revenue 384 334 14.8 724 652 10.9
Total revenue 26,037 25,160 3.5 51,207 49,357 3.7
Cost of sales 20,142 17,280 16.6 38,603 33,996 13.6
Selling, general and administrative expenses 5,002 4,849 3.1 9,764 9,358 4.3
Depreciation and amortization (exclusive of depreciation included in cost of sales)  

572

 

564

 

1.5

 

1,173

 

1,162

 

0.9

Operating income 321 2,467 (87.0) 1,667 4,841 (65.6)
Net interest expense 112 104 8.0 224 212 5.8
Net other (income) / expense (8) (7) 5.2 (23) (350) (93.5)
Earnings before income taxes 217 2,370 (90.8) 1,466 4,979 (70.6)
Provision for income taxes 34 553 (93.8) 274 1,065 (74.3)
Net earnings $            183 $         1,817 (89.9)% $         1,192 $           3,914 (69.6)%
Basic earnings per share $           0.40 $           3.68 (89.2)% $           2.57 $             7.89 (67.4)%
Diluted earnings per share $           0.39 $           3.65 (89.2)% $           2.55 $             7.82 (67.4)%
Weighted average common shares outstanding            
Basic 461.5 493.1 (6.4)% 463.8 495.8 (6.5)%
Diluted 463.6 497.5 (6.8)% 466.8 500.4 (6.7)%
Antidilutive shares 1.3   1.0  
Dividends declared per share $           1.08 $           0.90 20.0 % $           1.98 $             1.58 25.3 %

 

(millions, except footnotes) (unaudited) July 30, 2022 January 29, 2022 July 31, 2021
Assets      
Cash and cash equivalents $            1,117 $            5,911 $            7,368
Inventory 15,320 13,902 11,259
Other current assets 2,016 1,760 1,604
Total current assets 18,453 21,573 20,231
Property and equipment      
Land 6,161 6,164 6,148
Buildings and improvements 33,694 32,985 32,133
Fixtures and equipment 6,744 6,407 5,892
Computer hardware and software 2,684 2,505 2,260
Construction-in-progress 2,245 1,257 944
Accumulated depreciation (21,708) (21,137) (20,133)
Property and equipment, net 29,820 28,181 27,244
Operating lease assets 2,542 2,556 2,503
Other noncurrent assets 1,655 1,501 1,407
Total assets $          52,470 $          53,811 $          51,385
Liabilities and shareholders’ investment      
Accounts payable $          14,891 $          15,478 $          12,632
Accrued and other current liabilities 5,905 6,098 5,600
Current portion of long-term debt and other borrowings 1,649 171 1,190
Total current liabilities 22,445 21,747 19,422
Long-term debt and other borrowings 13,453 13,549 11,589
Noncurrent operating lease liabilities 2,543 2,493 2,462
Deferred income taxes 1,862 1,566 1,146
Other noncurrent liabilities 1,575 1,629 1,906
Total noncurrent liabilities 19,433 19,237 17,103
Shareholders’ investment      
Common stock 38 39 41
Additional paid-in capital 6,502 6,421 6,332
Retained earnings 4,421 6,920 9,200
Accumulated other comprehensive loss (369) (553) (713)
Total shareholders’ investment 10,592 12,827 14,860
Total liabilities and shareholders’ investment $          52,470 $          53,811 $          51,385

TARGET CORPORATION

 Consolidated Statements of Cash Flows 

Six Months Ended

(millions) (unaudited) July 30, 2022 July 31, 2021
Operating activities    
Net earnings $           1,192 $           3,914
Adjustments to reconcile net earnings to cash (required for) provided by operating activities:    
Depreciation and amortization 1,329 1,300
Share-based compensation expense 122 138
Deferred income taxes 227 143
Gain on Dermstore sale (335)
Noncash losses / (gains) and other, net 108 7
Changes in operating accounts:    
Inventory (1,418) (606)
Other assets (179) 3
Accounts payable (784) (311)
Accrued and other liabilities (644) (831)
Cash (required for) provided by operating activities (47) 3,422
Investing activities    
Expenditures for property and equipment (2,523) (1,338)
Proceeds from disposal of property and equipment 4 15
Proceeds from Dermstore sale 356
Other investments 1 (5)
Cash required for investing activities (2,518) (972)
Financing activities    
Change in commercial paper, net 1,545
Reductions of long-term debt (113) (72)
Dividends paid (842) (676)
Repurchase of stock (2,821) (2,850)
Stock option exercises 2 5
Cash required for financing activities (2,229) (3,593)
Net decrease in cash and cash equivalents (4,794) (1,143)
Cash and cash equivalents at beginning of period 5,911 8,511
Cash and cash equivalents at end of period $           1,117 $           7,368


Rate Analysis                                                                                                     
Three Months Ended                                                                                                                                                                         Six Months Ended

(unaudited) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021
Gross margin rate 21.5 % 30.4 % 23.5 % 30.2 %
SG&A expense rate 19.2 19.3 19.1 19.0
Depreciation and amortization expense rate (exclusive of depreciation included in cost of sales)  

2.2

 

2.2

 

2.3

 

2.4

Operating income margin rate 1.2 9.8 3.3 9.8

Comparable Sales                                                                                              Three Months Ended                                                                                                                                                                         Six Months Ended

(unaudited) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021
Comparable sales change 2.6 % 8.9 % 3.0 % 15.3 %
Drivers of change in comparable sales        
Number of transactions (traffic) 2.7 12.7 3.3 14.8
Average transaction amount 0.0 (3.4) (0.3) 0.5

 

Comparable Sales by Channel Three Months Ended Six Months Ended
(unaudited) July 30, 2022        July 31, 2021 July 30, 2022        July 31, 2021
Stores originated comparable sales change 1.3 %               8.7 % 2.3 %             13.0 %
Digitally originated comparable sales change 9.0                   9.9 6.1                 27.3
 

Sales by Channel                                                                                                Three Months Ended                             Six Months Ended

(unaudited) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021
Stores originated 82.1 % 83.0 % 81.9 % 82.3 %
Digitally originated 17.9 17.0 18.1 17.7
Total 100 % 100 % 100 % 100 %
Sales by Fulfillment Channel                                                                           Three Months Ended                             Six Months Ended
(unaudited) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021
Stores 96.6 % 96.6 % 96.6 % 96.4 %
Other 3.4 3.4 3.4 3.6
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.

RedCard Penetration                                                                                         Three Months Ended                                                                                                                                                                         Six Months Ended

(unaudited) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021
Target Debit Card 11.2 % 11.6 % 11.4 % 11.9 %
Target Credit Cards 8.9 8.7 8.8 8.6
Total RedCard Penetration 20.1 % 20.3 % 20.2 % 20.4 %
Note: Amounts may not foot due to rounding.        

 

Number of Stores and Retail Square Feet   Number of Stores     Retail Square Feet (a)  
  July 30, January 29, July 31, July 30, January 29, July 31,
(unaudited) 2022 2022 2021 2022 2022 2021
170,000 or more sq. ft. 273 274 273 48,798 49,071 48,798
50,000 to 169,999 sq. ft. 1,521 1,516 1,510 190,734 190,205 189,624
49,999 or less sq. ft. 143 136 126 4,256 4,008 3,709
Total 1,937 1,926 1,909 243,788 243,284 242,131

 

 

Reconciliation of Non-GAAP   Three Months Ended  
Adjusted EPS   July 30, 2022 July 31, 2021    
(millions, except per share data) (unaudited) Pretax Net of Tax      Per Share                         Pretax Net of Tax Per Share Change
GAAP diluted earnings per share   $     0.39   $     3.65 (89.2)%
Adjustments          
Other (a) $        — $         —  $        —  $           (5) $         (4) $ (0.01)  
Adjusted diluted earnings per share   $     0.39   $     3.64 (89.2)%

 

Reconciliation of Non-GAAP     Six Months Ended  
Adjusted EPS   July 30, 2022   July 31, 2021    
(millions, except per share data) (unaudited) Pretax Net of Tax Per Share                           Pretax Net of Tax Per Share Change
GAAP diluted earnings per share     $     2.55   $     7.82 (67.4)%
Adjustments            
Gain on Dermstore sale $          — $         — $        —  $  (335) $     (269) $ (0.54)  
Other (a) 20 15 0.03             36 27 0.05  
Adjusted diluted earnings per share     $     2.59   $     7.34 (64.8)%
Note: Amounts may not foot due to rounding.            

EBIT and EBITDA                                                        Three Months Ended                                                     Six Months Ended

(dollars in millions) (unaudited) July 30, 2022 July 31, 2021 Change July 30, 2022 July 31, 2021 Change
Net earnings $              183 $           1,817 (89.9)% $           1,192 $           3,914 (69.6)%
+ Provision for income taxes 34 553 (93.8) 274 1,065 (74.3)
+ Net interest expense 112 104 8.0 224 212 5.8
EBIT $              329 $           2,474 (86.7)% $           1,690 $           5,191 (67.4)%
+ Total depreciation and amortization (a) 650 633 2.8 1,329 1,300 2.3
EBITDA $              979 $           3,107 (68.5)% $           3,019 $           6,491 (53.5)%

(dollars in millions) (unaudited)

Trailing Twelve Months

Numerator July 30, 2022 July 31, 2021  
Operating income $         5,773 $           8,611
+ Net other income / (expense) 54 346
EBIT 5,827 8,957
+ Operating lease interest (a) 88 84
Income taxes (b) 1,282 1,918
Net operating profit after taxes $         4,633 $           7,123

(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 21.7 percent and 21.2 percent for the trailing twelve months ended July 30, 2022, and July 31, 2021, respectively. For the twelve months ended July 30, 2022, and July 31, 2021, includes tax effect of $1.3 billion and $1.9 billion, respectively, related to EBIT, and $19 million and $18 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

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