Better-than-expected profitability; comparable sales in line with guidance
Second quarter GAAP EPS from continuing operations of $1.07 and Adjusted EPS of $1.23 were above the high end of guidance1.
The Company is on pace to exceed its goal to save $2 billion in costs over the 2-year period ending in 2016.
Second quarter comparable sales decreased 1.1 percent, in line with guidance of flat to down 2 percent.
Comparable sales growth in Signature Categories outpaced total comparable sales by approximately 3 percentage points; digital channel sales increased 16 percent.
Target (TGT) returned $1.7 billion to shareholders in the second quarter through dividends and share repurchases.
Target Corporation (NYSE: TGT) today reported a second quarter 2016 comparable sales decrease of 1.1 percent and GAAP earnings per share (EPS) from continuing operations of $1.07, a decrease of 11.6 percent from second quarter 2015. Second quarter adjusted earnings per share from continuing operations2 (Adjusted EPS), which excludes $161 million of pre-tax early debt retirement losses, were $1.23, an increase of 0.5 percent from second quarter 2015. The attached tables provide a reconciliation of non-GAAP to GAAP measures.
“While we recognize there are opportunities in the business, and are addressing the challenges we are facing in a difficult retail environment, we are pleased that our team delivered second quarter profitability above our expectations,” said Brian Cornell, chairman and CEO of Target. “Looking ahead, we remain focused on our enterprise priorities as we continue to see the benefits of investing in Signature Categories, store experience, new flex-format stores and digital capabilities. Although we are planning for a challenging environment in the back half of the year, we believe we have the right strategy to restore traffic and sales growth over time.”
Third Quarter and Fiscal 2016 Guidance
While Target has plans in place to strengthen results over time, based on the current retail environment the Company believes it is prudent to lower its expectations for comparable sales in the second half of the year. In both the third and fourth quarters of 2016, Target now expects comparable sales growth in the range of (2.0) percent to flat.
In third quarter 2016, Target expects both GAAP EPS from continuing operations and Adjusted EPS of $0.75 to $0.95.
For full-year 2016, Target now expects GAAP EPS from continuing operations of $4.36 to $4.76, compared with prior guidance of $4.76 to $4.96. The Company expects full-year 2016 Adjusted EPS of $4.80 to $5.20, compared with prior guidance of $5.20 to $5.40. The 44-cent difference between the guidance ranges for GAAP EPS from continuing operations and Adjusted EPS primarily reflects early debt retirement losses already reported in 2016.
Third quarter and full-year 2016 GAAP EPS from continuing operations may include the impact of certain discrete items which will be excluded in calculating Adjusted EPS. The Company is not currently aware of any such discrete items beyond those already reported in the first and second quarters of 2016.
Second quarter 2016 sales decreased 7.2 percent to $16.2 billion from $17.4 billion last year, reflecting a 1.1 percent decrease in comparable sales combined with the removal of pharmacy and clinic revenues from this year’s results. Comparable digital channel sales grew 16 percent and contributed 0.5 percentage points to comparable sales growth. Segment earnings before interest expense and income taxes (EBIT), which is Target’s measure of segment profit, were $1,241 million in second quarter 2016, a decrease of 8.1 percent from $1,350 million in 2015.
Second quarter EBITDA and EBIT margin rates were 11.2 percent and 7.7 percent, respectively, compared with 10.9 percent and 7.7 percent, respectively, in 2015. Second quarter gross margin rate was 31.3 percent, compared with 30.9 percent in 2015, reflecting the benefit of the sale of the Company’s pharmacy and clinic businesses and ongoing cost savings initiatives, partially offset by investments in promotions and increased digital shipping costs. Second quarter SG&A expense rate was 20.1 percent in 2016, compared with 19.9 percent in 2015, as the deleveraging impact of lower sales and investments in team offset benefits from the sale of the Company’s pharmacy and clinic businesses and continued expense discipline across the organization.
Interest Expense and Taxes from Continuing Operations
The Company’s second quarter 2016 net interest expense was $307 million, compared with $148 million last year, driven by a $161 million charge related to the early retirement of debt. Second quarter 2016 effective income tax rate from continuing operations was 33.6 percent, compared with 34.6 percent last year. The decrease was primarily due to losses related to the early retirement of debt.
Capital Returned to Shareholders
In second quarter 2016, the Company returned $1,680 million to shareholders, which consisted of:
Repurchasing 19.0 million shares of common stock at an average price of $70.91, for a total investment of $1,350 million.
Paying dividends of $330 million.
Since the beginning of the current $10 billion share repurchase program, the Company repurchased 125.0 million common shares at an average price of $70.57, for a total investment of approximately $8.8 billion.
For the trailing twelve months through second quarter 2016, after-tax return on invested capital (ROIC) was 15.8 percent, compared with 13.3 percent for the twelve months through second quarter 2015. Excluding the net gain on the sale of the pharmacy and clinic businesses, ROIC for the trailing twelve months through second quarter 2016 was 13.7 percent, reflecting higher profits on a modestly lower base of invested capital. See the “Reconciliation of Non-GAAP Financial Measures” section of this release for additional information about the Company’s ROIC calculation.
Second quarter net earnings from discontinued operations were $55 million, compared with after-tax losses of ($20) million last year. Second quarter 2016 net earnings from discontinued operations primarily reflect tax benefits from investment losses in Canada recognized upon court approval of Target Canada’s liquidation plan.
Statements in this release regarding third quarter, fourth quarter and full-year 2016 earnings per share and comparable sales guidance are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties which could cause the Company’s actual results to differ materially. The most important risks and uncertainties are described in Item 1A of the Company’s Form 10-K for the fiscal year ended Jan. 30, 2016. Forward-looking statements speak only as of the date they are made, and the Company does not undertake any obligation to update any forward-looking statement.
In addition to the GAAP results provided in this release, the Company provides Adjusted EPS for the three and six-month periods ended July 30, 2016, and Aug. 1, 2015. The Company also provides ROIC for the twelve-month periods ended July 30, 2016, and Aug. 1, 2015, respectively, which is a ratio based on GAAP information, with the exception of adjustments made to capitalize operating leases. Operating leases are capitalized as part of the ROIC calculation to control for differences in capital structure between the Company and its competitors. Adjusted EPS, capitalized operating lease obligations and operating lease interest are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. Management believes Adjusted EPS is useful in providing period-to-period comparisons of the results of the Company’s ongoing retail operations. Management believes ROIC is useful in assessing the effectiveness of its capital allocation over time. The most comparable GAAP measure for adjusted diluted EPS is diluted EPS from continuing operations. The most comparable GAAP measure for capitalized operating lease obligations and operating lease interest is total rent expense. Adjusted EPS, capitalized operating lease obligations and operating lease interest should not be considered in isolation or as a substitution for analysis of the Company’s results as reported under GAAP. Other companies may calculate Adjusted EPS and ROIC differently than the Company does, limiting the usefulness of the measure for comparisons with other companies.
Minneapolis-based Target Corporation (NYSE: TGT) serves guests at 1,797 stores and at Target.com. Since 1946, Target has given 5 percent of its profit to communities, which today equals more than $4 million a week. For more information, visit Target.com/Pressroom.
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