This excerpt taken from the TGT 8-K filed Nov 20, 2007.
Third Quarter Earnings
Our third quarter earnings were disappointing due to soft sales in our higher margin categories, leading to lower-than-expected gross margin in our core retail operations, said Bob Ulrich, chairman and chief executive officer. However, we have not observed any meaningful change in the intensity of the competitive environment and continue to believe that we are well-positioned to operate in a variety of sales environments going forward.
Total revenues in the third quarter increased 9.3 percent to $14.835 billion from $13.570 billion in 2006, reflecting a 3.7 percent increase in comparable-store sales combined with the contribution from new stores and credit card operations. (Total revenues include retail sales and net credit card revenues. Comparable-store sales are sales from stores open longer than one year.)
Earnings before interest and income taxes (EBIT) were $958 million, compared with $957 million in the third quarter a year ago. A key factor in this EBIT performance was unfavorable gross margin performance resulting from weaker sales in higher margin categories such as apparel and home. Third quarter expense rate was essentially unchanged from prior year, while the contribution from credit card operations remained strong. (Gross margin rate represents sales less cost of sales expressed as a percentage of sales. Expense rate represents selling, general and administrative expenses expressed as a percentage of sales.)
The contribution from the companys credit card operations to third quarter earnings before taxes (EBT), net of the allocated interest expense, was $157 million, an increase of $23 million, or 17.1 percent, from the same period in 2006. This increase was driven by strong revenue growth, offset by higher bad debt expense. Average receivables in the quarter increased 19.6 percent over 2006, partially driven by a product change from proprietary Target Cards to higher-limit Target Visa cards for a group of higher credit-quality Target Card guests.
Net interest expense for the quarter increased $28 million compared with third quarter 2006 primarily due to higher average debt balances, including the debt to fund growth in accounts receivable.
The companys effective income tax rate for the third quarter was 38.1 percent in 2007 compared with 37.4 percent in 2006. For the full year, the effective income tax rate is still expected to increase modestly from last years 38.0 percent rate.