目標百貨 (TGT) 2001 Q1 法說會逐字稿

TARGET CORPOARTION FIRST QUARTER EARNINGS CONFERENCE CALL.

Welcome to the Target Corporation first quarter earnings release conference call. During the presentation all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question and answer session. At that time if you have a question, you will need to press the '1' followed by the '4' on your telephone. As a reminder, this conference call is being recorded, Tuesday, May 22, 2001. I would now like to turn the conference call over to Mr. Bob Ulrich, Chairman and Chief Executive Officer of Target Corporation. Please go ahead, sir.

Good morning. Welcome to our 2001 first quarter earnings conference call. On the line with me today are Jerry Storch, Vice Chairman, Gregg Steinhafel, President of Target Stores, Diane Neal, President of Mervyn's, Linda Ahlers, President of Marshall Fields, and Douglas Scovanner, our Executive Vice President and Chief Financial Officer. This morning, Doug will review our first quarter results, and then Gregg will provide an update on Target's current business and outlook for the remainder of the year. Jerry will describe current developments in our web-based strategies and supply chain initiatives, as well as update you on the growth and performance of our credit operations, and finally I will wrap up the remarks. Then Jerry, Gregg, Dianne, Linda, Doug, and I will respond to your questions. Now Doug will review our results, which were released earlier this morning.

Thanks Bob. As a reminder, we are joined on this conference call by investors and others who are listening to our comments today via live web-cast. Also, please note that any forward-looking statements we make in our remarks this morning should be considered in conjunction with the cautionary statements contained in our SEC filings. In addition, any reproduction or rebroadcast of any portion of this call is prohibited. This morning Target Corporation announced first quarter net earnings from operations of $254 million, an increase of 6.4%, compared with earnings of $239 million in the first quarter of 2000. Diluted earnings per share from operations increased 7.9% for the quarter to 28 cents from 26 cents a year ago. First quarter 2001 reflects solid overall performance, as we compare this year's results to the outstanding results in last year's first quarter. Target Corporation's revenues grew by 7.7% in the first quarter, driven by 10.7% year-over-year growth at Target Stores. Our consolidated gross margin rate contracted 24 basis points in the first quarter to a rate of 31.42%, principally due to the impact of growth at Target, our lowest gross margin rate division. By division, gross margin rate improved somewhat at Mervyn's and Fields and was down slightly at Target. Our consolidated operating expense rate improved 30 basis points compared to last year, again reflecting the benefit of more rapid growth at Target, our lowest expense rate division. Operating expense rate improved slightly at Target Stores and was somewhat unfavorable at Mervyn's and Fields mainly due to lack of sales leverage of these two businesses. Total interest expense, that is our net interest expense as reported on the CNL, combined with the payments made to holders of our securitized receivables increased to $10 million in the quarter, primarily due to higher

average funded balances, partially offset by lower average rates. Our effective income tax rate for the first quarter of 2001 was 38.0% compared with 38.5% a year ago. Pre-tax segment profit for the three divisions rose to 5.9% from last year's first quarter to $573 million. These results were driven by growth and pre-tax profit of 7.7% at our Target division to $502 million from $467 million a year ago. Mervyn's pre-tax profit also increased in the quarter in line with our expectations, up 3.9% to $48 million. At Marshall Fields, pre-tax profit declined to $6 million or 20% mainly due to weak sales performance. Other expense, that is the expense recorded outside our three segments, was $45 million, unchanged from the prior year. Now let me turn to the Balance Sheet. Inventory levels for the Corporation at the end of the first quarter were 9.9% above prior year levels, primarily reflecting new-store growth at Target. On a comparable basis, inventories for the Corporation increased 4.1%, but segment inventories were in very good condition at all three divisions. In summary, we were pleased with our overall performance in the first quarter of 2001, particularly given the strength of our results in the first quarter last year. Throughout the remainder of 2001, we expect modestly stronger sales and earnings growth, as we annualize on somewhat easier comparisons in the next three quarters. Specifically, our outlook for 2001 is consistent with the earnings per share levels in the range of current First Call media in estimates, which are 30 cents per share for the second quarter and $1.55 for the full year. In a more difficult environment, we could fall somewhat short of these figures. By contrast, we can also envision a scenario in which we might

exceed them. Over the long term, we remain confident in our ability to generate at least 15% average annual earnings per share growth. Now Gregg will review Target's results and current business trends, as well as our plans and outlook for the remainder of the year. Gregg.

Thanks Doug. This year's first quarter presented several challenges for Target, including more modest economic growth, and the need to hurdle a 26% rise in Target's pre-tax profit in first quarter last year. In light of these challenges, we are quite pleased with our performance. Target's first quarter revenues increased 10.7% to $6.8 billion. Comparable store sales in the period increased 2.8% reflecting consistent growth in our average transaction amount partially offset by a small decline in traffic. New stores combined with growth in credit revenue contributed an additional 7.9% to our top-line increase. Pre-tax profits improved 7.7% to $502 million in line with our expectation. Several important vendor alliances that were introduced or expanded in the first quarter contributed to this performance. In particular, our new Massimo collection, a unique line of contemporary apparels, shoes, and accessories for the entire family has been well received by our guests. Year to date, sales of Massimo products have exceeded our expectations. Target's introduction of Waverly has also surpassed our expectations in the first three months. Renowned for its outstanding style and quality, Waverly Designs are providing Target guests with fresh, new, coordinated looks, and exceptional value in tabletop, domestics, and stationery. Michael Grave's designs throughout the store continue to generate excitement and demand. Earlier this spring, we introduced a new garden collection by Grave and just recently we added an expanded assortment of board games to complement the highly successful chess sets. Later this year, we plan to broaden our offering of Grave's Designs with

collections and other merchandized categories as well. In sporting goods, our new lines of Eddie Bauer camping gear and equipment is off to a good start, and we have been pleased with the launch of our Carter's "Baby Tykes" program, particularly the novelty and gift-oriented items. Each of these initiatives supports Target's promise to deliver a constant flow of fresh ideas and create excitement for our guests. Together, they strengthen our brand, further differentiate our merchandized assortment, and provide our guests with more reasons to shop at Target. In addition to innovative merchandizing, Target also remains focused on maintaining our consistent pattern of growth. During the first quarter, we opened a total of 20 new stores, including seven new SuperTarget Stores. Net of relocations and closings, we now operate 991 stores in 46 states. For the full year, Target plans to open approximately 90 new stores in 32 states. On a net basis, our 2001 store openings include 32 new SuperTarget Stores and approximately 40 new discount stores. This represents a net increase in square footage for the year of about 10.5%. Long term, our annual growth rate is expected to be in the range of 8% to 10% in line with historical levels. At SuperTarget, we continue to focus on providing a differentiated upscale growth-free offering with particular emphasis on quality and freshness. At the same time, we continue to integrate SuperTarget into Target's Systems and Processes to increase our efficiency and consistency. We are pleased with the progress we are making and with our recent sales and profit performance. The average transaction size of SuperTarget continues to modestly exceed our Discount Store transaction size, and

frequency of visits to SuperTarget remain consistently above the same statistics for our traditional discount stores, approaching two times more often. With more than 30 new SuperTarget Stores opening this year, essentially doubling our size, our store base is growing rapidly. This growth reflects our confidence in the appeal of this concept to Target's guests and in our ability to deliver financial return to that of our Discount Stores. Relative to the overall retail environment, we believe that Target will continue to deliver solid financial performance for the remainder of 2001. During the past week, there has been more than the usual amount of buzz surrounding possible pricing action by Wal-Mart and Kmart. Through the first quarter, we did not observe any meaningful change by either competitor, but in the past 2 to 3 weeks, we have seen selected pricing activity at K-Mart through its Blue Light Special. While we have not yet observed any material reaction by Wal-Mart, we continue to carefully monitor the pricing environment and match Wal-Mart's prices on like items locally. Through our commitment to innovation, our ability to adapt in a fluid environment, and our financial and operational discipline, we expect to continue to create opportunities to set drive a low double-digit sales growth and increase our market share, even as we pursue initiatives to control costs and improve gross margin. Our relentless determination to constantly surprise and delight our guests by delivering on both sides of the expect-more-pay-less equation is at the core of our past success and our future promise. Now, Jerry Storch will give you an update on Target Financial Services, Target's supply chain efforts, and the Corporation's e-commerce initiatives. Jerry.

Thanks Gregg. As this year began, many experts believed that the US economy would continue to slow, that consumer confidence would decline, and that the quality of consumer credit portfolios would deteriorate. In light of these predictions and the favorable trends in both credit quality and growth, we have enjoyed for the past several years. We adopted a much more cautious plan for our 2001 credit business. Our expectations for the year envisioned a more challenging credit-risk environment compared with fiscal 2000. Our actual credit results, fortunately, were favorable to these expectations in the first quarter. While we have seen an increase in bankruptcy write-offs in the first three months, our overall delinquency and net write-off trends are favorable to what we had anticipated, and credit quality across each of our portfolios remains very good. Contributions in credit increased in the quarter fueled by continued growth of the Target Guest Cards. It improved performance of the credit portfolios in all three business units. At quarter end, gross accounts receivable service for the corporation were $2.7 billion, of which $800 million has been sold in securitization transactions. We are very pleased with our first quarter results and are confident that our credit operations will deliver solid performance for the remainder of 2001. For the full year, we expect credit contribution, both absolute dollars and rate of growth, to exceed last year's level, reflecting strong revenue growth and superior expense control. Target Financial Services also continues to extend the Target brand and our relationship with our guests, offering new products and services. Earlier this year, we announced plans to expand our e-trade alliance, increasing its in-store presence with 20 additional e-trade zones. We also continue to evaluate the test of our Target Visa Card.

This card was offered to Target guest cardholders in three markets, Denver, Phoenix, and Atlanta, last fall. Today, this portfolio includes approximately 130,000 active account holders and represents about $100 million in accounts receivable. We are pleased with our results from this test to date, and expect to make a decision later this year about the potential rollout of this card. Now let me shift our focus and provide a brief update on our Internet initiatives. Our primary intention in the business-to-consumer arena continues to be focused on enhancing our target.com website and increasing traffic to that site. Here to date, we have made tremendous progress and are excited about our results. But the volume from this business is small in the context of the total corporation. Tracks to target.com increased more than 300% in the first quarter, and sales of merchandized increased more than 500% from a year ago. Gift giving continues to represent a significant portion of our online business and our growth, driven by our "Club Wedd" bridal registry and sales of online gift cards. We have also added additional guest conveniences in recent months including the ability to order prescriptions online for pick up at a nearby Target Store, the ability to print coupons for use at SuperTarget, and the ability to make payments electronically on your Target Guest Card accounts. During the first quarter, we also launched a redesigned website and gift registry for Marshall Fields, leveraging the strength of our recently renamed stores, and the power of this highly recognized department store brand. Early results have surpassed our expectations for both sales and reach. In fact, in just the first three weeks of operation, we sold products to guests in all fifty states in the country. We remain convinced that our strategy to integrate our web-based and store-based efforts provides the maximum benefit of both channels to our guests.

By building complementary businesses and leveraging the synergies of our physical and virtual space, we strengthen and deepen the relationship with more guests and increase our opportunities for profitable long-term growth. In addition to our business-to-consumer efforts, we believe that the Internet has important applications for other aspects of our operations as well. As a result, we are continuing to integrate Internet technology throughout our organization. For example, we currently have initiative in human resources to create a more self-service environment for our team members to online technology, and we have developed and begun to implement an automotive procurement process for a broad array of supplies from construction to office supplies, to store fixtures and equipment. Also, we continue to source products from our vendors over the Internet via both direct Internet links and through e-auctions. And we are piloting collaborative planning, forecasting, and replenishment, or CPFR, with approximately a dozen vendors. We believe that this more formalized and more transparent approach to planning and replenishment can lead to significantly improved in-stock levels by elevating potential issues to a level awareness sooner and more often. Our supply chain initiatives are also keenly focused on improving in-stock positions, as well as further increasing productivity. We believe that Target's supply chain is among the best in retailing, but we know we can still improve. Already, we are implementing some close in opportunities such as investing in import warehouses, free distribution arrangements with our vendors, and the reduction of buffer inventory is in the pipeline including store-level onsite warehouses. Also, we are expanding our item segmentation pilot that allows us to differentiate how we handle fast-moving and slow-moving products in our GCs. Additionally, we are aggressively investing in new regional distribution centers, over the next five years, to ensure we have the capacity to implement our new distribution strategies.

And to enrich our thinking, we have increasingly been looking outside our industry for ideas, benchmarking best-in-class logistics companies, and other industries, such as manufacturing and transportation, to identify additional improvement opportunities. Just as innovation is integral to our merchandizing strategy at Target, so is it vital to our business processes. Through new applications of technology and new approaches to reach our fundamentals, we believe Target will continue to strengthen its competitive position and deliver profitable growth for many years. Now Bob has a few final comments.

As Doug, Gregg and Jerry have just explained, we are pleased with our overall performance in the first quarter and believe that we are well-positioned to meet near term economic and competitive challenges and to continue to grow and prosper in 2001. We are confident in the strategy of our core businesses and excited about our growth opportunities for new Target Discount Stores, new SuperTarget Stores, new financial service initiatives, and expanding Internet operations. We believe these opportunities, combined with our dedication to merchandizing innovation, solid execution, financial discipline, and superior guest service, will allow us to generate substantial value for our shareholders well into the future. That concludes our prepared remarks. Now Gregg, Diane, Linda, Doug, Jerry, and I will be happy to respond to your questions.

Ladies and gentlemen, if you wish to register a question for today's question and answer session, you will need to press the '1' followed by the '4' on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered, and you would like to withdraw your polling request, you may do so by pressing the '1' followed by the '3'. If you are on a speakerphone, please pick up your handset before entering your request, one moment please for the first question. George Strachan from Goldman Sachs, please go ahead.

Thank-you. Yeah, my question is for Diane Neal. You have been at Mervyn's for a very short time now, but you have got a tremendous history at the Corporation, primarily in merchandizing, and it looks as though your job would be to get the top line moving at Mervyn's. So, what sorts of preliminary opportunities have you identified there?

Well George, actually I have a lot of ideas, but I think because I have only been out there two weeks, it is probably premature to share all that with you at this time.

Sorry George, but we will keep working on it and give you a more definitive answer as we go through the next few weeks.

Okay. Thank-you.

Next question comes from Rick Church from Salomon Smith Barney, please go ahead.

Thank-you. I have a question for Gregg. Could you provide us an update on where you stand with the Montgomery Stores acquisitions, and how many have you taken control of and timing on those, if any of that has changed? And then secondly, a question either for Doug or Jerry with regard to credit, was there any change in your reserve in the quarter?

This is Jerry, in response to the Montgomery Ward's question, we have taken possession of all the stores, and we are proceeding on the same schedule we have talked about in the past.

Doug on the reserve question.

Yes, we had a meaningful increase in profitability in credit operations in the quarter driven in part by the substantial growth in the Target Guest Card balances and in part by improved performance across all three portfolios. There was no material change in our reserving practices during the quarter.

Thank-you.

The next question comes from Jeffery Klinefelter from Piper Jaffray, please go ahead.

Yes. I have a question first of all on pricing, the pricing environment. Gregg you mentioned that there may be a need to lower some prices to match Wal-Mart during the quarter, if they, in fact, do start to lower those prices. Could you share with us a little perspective on maybe last year? This seems to happen every few quarters and that there is some sort of either rumor or actual pricing reduction. What sort of impact did we see last year during the fourth quarter or other quarters and how might that impact at the quarters going forward?

Well Jeff, as I said in my remarks we have not seen any material change up to this point, and as we have seen in prior years and prior quarters, there is a lot of pricing activities. Wal-Mart typically produces between $10 billion and $12 billion worth of the rollbacks per year. We expect that activity to continue this year. You know, we will respond to Wal-Mart, if Wal-Mart chooses to make any pricing changes, but at this particular point in time we are not seeing anything meaningful out there and really do not expect to see any significant changes. I mean, obviously with K-Mart's Blue Light Specials and their Blue Light Hours Programs, there is, you know, some selected stores that are lowering prices primarily to get competitive with Wal-Mart and Target, but apart from that we have not seen anything material.

Okay, and a follow up would be on the advertising front. Your advertising looks great right now. Any change in terms of pricing structure of that or how often you will be doing it this year with respect to the co-op money that you are getting from your advertising partners?

No. Not really. We appreciate the comment, but we agree, we think it looks great, and we will continue to have it look great going forward. But there is no significant change to our pricing position in circulars.

Okay. Thank-you.

Brothers please go ahead. The next question will come from Geoffrey Fiener from Lehman Brothers.

Thanks. Gregg, just one more touching on that pricing point, if the K-Mart Blue Light Special becomes even more relevant in the sense of the breadth of products in the number of stores and Wal-Mart does not make changes in its pricing strategy, are you going to respond at all to what K-Mart is doing? And a quick question for Doug, can you talk a little bit about thoughts about re-implementation of the buy-back program?

This is Bob here. Geoff, the Blue Light Special, which is the in-store announcements, we certainly are not going to react to that. We do not think that is going to have a huge impact. The Blue Light Hours Program, which is where they are starting to lower some more basics, again, as we see it, is simply to become more competitive with Wal-Mart and Target. We do not see it going to a new lower level. Now, if it should do that, then obviously we will go down with it, but we really see it as more trying to get themselves in the ballgame.

In terms of share repurchase, Geoff, our thinking is perfectly consistent with what we described a couple of months ago. Given this year's substantial capital investment program, including the acquisition and renovation of the Ward sites, we will re-investing in the business $3.3 billion or $3.5 billion and in light of that program, we have decided to pull back on our share re-purchase activity for the time being.

Thanks, I appreciate it.

Next question come from Daniel Barry from Merrill Lynch. Please go ahead with your questions or comments.

Good morning, just a more elaboration on the Montgomery Ward Stores. I know there is some concern out there about those stores not getting a normal return because a lot of them are in Malls, and the cost is high and there is some cannibalization in California. Can you just give us some comfort on that and those questions?

Those concerns are completely unfounded. We did not compromise our financial return criteria in deciding how much we were willing to pay for the rights to acquire those stores, and we fully incorporated into our analysis the total cost to renovate the stores, and in essence, what we are dealing with here is a group of much higher than average potential volume sites that will drive financial returns at or above chain-wide averages, totally unfounded.

I would add, by moving aggressively after this acquisition, we basically picked the stores that we wanted and did not take the ones we did not want, and ones that we took half of them are in California. They are very high volume locations and we are very excited about their potential.

Great. Thank-you. I appreciate it.

[_______________] from Robertson Humphrey, please go ahead with your question.

Thanks. Good morning everyone. I wanted to focus on the expense ratio for a moment, the 30 basis points of leverage. I know that the Target division increase as a percent of the total by about 220 basis points, so it seems to me that there is something more than just the shift and the mix here that is leveraging your expenses. Were there any favorable variances in your accruals or any other issue, which might have helped you get some better expense rates despite higher fuel and utility cost?

On a net basis, about a hundred percent of the favorable expense-rate change was due to the shift in mix of our businesses. In other words, Target's expense rate is substantially lower than that of Mervyn's and Fields, and the higher growth rate of Target alone created about a 30 basis point change in operating expenses or percent of revenues. Certainly, inside expenses at each company, their pluses and minuses, frankly nothing particularly meaningful at Target. Target on a net basis was the little bit favorable, slightly favorable. At Fields and Mervyn's, the key issue is that because of shortfalls in revenue, we were not able to favorably leverage operating expenses, and so expenses as a percent of sales changed unfavorably at those two businesses. But in summary, on a net basis about 100% of change to our consolidated financials is driven by the shift in mix of our businesses.

Okay. Thank-you.

Bruce Misset from Morgan Stanley. Please go ahead.

Hi! Couple of quick questions, one is, again on the SG&A side. If you got even a little bit of leverage out of Target at a 2.8% comp, that is better than we might have thought. Can you give us a little elaboration on where you were able to apply controls, etc? The other is on the gross margin side for Target. The new products you have are very visible items. Are they also visible in the way gross margins add up so that mix is helping you on the gross margin side?

I will address the expense question. I will let Gregg tackle the other question, as well. Again, I do not want to overplay this expense leverage favorability at Target. It was "slight"; that is the word that we use.

But it's a poke in the eye, Doug.

Apparently, performance in our financial services business had as much to do with that "slight" favorability as anything else. We had strong growth and balances, over 20% increase in service receivables at Target during the quarter, and the fact that profitability in our financial services business was up sharply, as the result of a very favorable performance of operating expenses in the credit business during the quarter.

[_______________], in terms of the new merchandising initiative, all of those programs are at or better than the category gross margin that they are a part of, so we have seen slight improvement in our margin performance in all our merchandising initiatives.

Right, and their impact is big enough that it actually, you know, would show up on the radar screen.

Well, I would not say it is that significant, I mean, that the Massimo initiative is certainly is a big initiative, but the combination of the others are not as meaningful.

So Bruce you get some enhancement of gross margin and couple of those initiatives, but then in this fairly tough economic environment, we sharpened up some of the prices, so we really see it more as a stable factor right now.

Right. Good. Thank you very much.

Mark Miller from William Blair, please go ahead.

Following up on that point about the unique product assortment, how much of the sales at Target right now would you consider to be unique for Target relative to other mass competitors, and then, where do you see these vendor alliances going forward? Is this something where you see, you know, a lot of incremental opportunity with traditional department stores having weak sales or have you kind of plateaued in terms of that opportunity?

Well, we do not think that we have plateaued in terms of that opportunity, and I really cannot give you a, you know, specific percentage of the rates to what represents private brand and unique merchandising initiatives, but if you push me to a number I would say somewhere around half of the store might be combination of private brand and unique merchandising initiatives, or exclusive brands that we get that our other discount competitors don't have.

Thanks. Gregg, a lot of times in these conference calls you talk about new vendor alliances. You did not here, you know, specifically in this quarter. Can you, kind of, comment on the backlog or somehow evaluate your, kind of, current discussions with vendors?

I am not sure what you are referring to, I mean, many of the merchandising initiatives I referenced, these were in 2001 introductions. The Massimo, Waverly, Carter's, Eddie Bauer, they are all brand new this year. So these are, I believe, very fresh, very current merchandising initiatives.

I guess what I am getting at in terms of, you know, looking out to 2002, should we expect a similar rate of, you know, announcements going forward or can you size that up?

We really don't know, we are working on a variety of things. There will always be some excitement coming out of Target. We could not tell you right now, but it's at the level or slightly more or slightly less, but we will always be looking for that innovation and uniqueness.

The next question will come from Mark Picard from Lazard, please go ahead.

Thank-you. Most of my questions have been answered, but a quick one on California and utility prices and its impact on Target SG&A in the quarter, and some expectation around on just absolute rising expense structure in the face of what was obviously good performance this quarter?

Utility costs clearly are increasing as a percent of sales that is true at Target. It is also true at Mervyn's and Fields. While it's an unfortunate effect of what is going on right now in the macro world I would put it in a category of four or five different kinds of expenses where we are seeing some pressure. Wages and benefits continue to increase, as well.

You want to quantify energy along.

You know, in general concepts, energy as a percentage of sales is more or less 0.5% of sale, so mathematically a 20% increase in energy cost per unit would drive ten basis points of increased cost. I don't mean to tell you that's to the basis point what is happening here, but conceptually that's consistent with our experience.

Okay. Thank-you.

The next question comes from Maureen Depp from State Street Research, please go ahead.

Yes. Thank-you. You mentioned supply chain initiatives and actually went through them very, very quickly, and I was hoping that you perhaps could elaborate in a little bit more detail on what the meaning of some of these things are, and what the potential you think is in terms of your gross margin as these are rolled out. You know what kind of potential expansion could we see from these initiatives?

We are not really looking for a lot of growth margin, expansion, or initiatives. If possible, certainly they will get a little bit from our import warehouse, because we will hold backup shipments, and we will be able to resume throughout the country as the weather patterns change around the country, but by and large, it is really in order to get more efficiency and to dramatically improve our in-stocks and it is really a little early to try and quantify that. I think the important thing is that we've recognized the importance of the whole logistics equation and working very hard on it.

Okay. Thank-you.

The next question comes from Daniel Binder from Buckingham Research Group, please go ahead.

Hi! This is Dan Binder, just a couple of questions for you. If you were to maintain, I guess the favorable plan in the credit or favorable results in the credit relative to what you have planned for, what kind of a benefit would that give you on the full year. That is the first question and second question and this is not to beat the pricing issue to death, but if you were to see K-Mart lowering prices, presumably if they were to generate comps they would be taking market shares from somewhere, so would it be your inclination to lower pricing further to maintain what has been a more of a historical gap in pricing relative to K-Mart?

Well, first of all if K-Mart takes their prices down, there is no question, as we said before they are just really trying to get more competitive and that is just fine. If, as you would speculate they would actually drive the equation down, certainly we would be there, Wal-Mart would be there. They would dramatically impact their gross margin negatively; they would not increase their share of market by one iota.

In terms of your debts credit question, in a very favorable credit scenario for the rest of the year, we could see an extra penny or two of earnings per share impact, all else being equal.

The next question comes from Cecil Godman from Highland Capital Management, please go ahead.

Yes, Good Morning. I just want to touch on base for couple of things on Target, particularly on the growth and revenue that you saw on the quarter and the growth and inventory you talked about. Would you please speak a little bit about whether those were inline, what you feel about your inventories, and what your outlook is in trying to manage inventories in the second half of the year? Thank-you.

Well, in summary, our inventories at Target are in great shape. Revenue for the quarter at Target increased 10.7%. Inventory increased at quarter end compared to the same point last year by 12.8%. There is no meaningful marked-down risk in our current inventories.

Okay. Thank-you.

[_______________] from UBS Warburg, please go ahead.

Oh yeah, what was your capex spending during the quarter and what will you expect it to be for the year?

For the year, we continue to expect our capital expenditures to lie in the range of $3.3 billion to $3.5 billion, and I don't have a precise figure at my finger tips for capex in the quarter, but it was up in the quarter over last year, consistent with the annual outlook that we have outlined. Last year for reference for the full year capex was about $2.5 billion.

One more question on inventory, I think the last question was on Mervyn's Inventory. I sort of could not hear it but the...

Last question was on Target.

Target inventory. Okay. All right. Great. Thank you very much.

Steve Roorda from American Express, please go ahead.

Can you talk about either sequentially or year-over-year, what you are seeing in terms of labor rates and labor rate increases, how you are managing that and give us a sense of if there is any slackening at all in labor pool right now?

Wages and benefits continue to increase in a mid-single digit percentage range or may be a little higher. So far, we have not seen any backing-off from that range of increases. We have prevented wages and benefits from sharply increasing as a percent of sales, by continuing to enjoy productivity increases. In our sense of the word productivity that means that our sales or revenues per hour of labor continue to increase.

A followup question, in the Target stores, discount stores division, you said your SG&A, you had some slight improvement, however, you commented that it was mostly driven by creditors. So should I assume you had some deleveraging of your store operating expenses with the 2.9% comps in the Target Stores Division in the first quarter?

No, I understand why you would frame the question that way, but in fact if I cannot drive the overall expense rate improvement as slight, driven in the name by credit, I would say that its very, very slight improvement excluding credit. We essentially were even with last year in terms of expenses as a percent of sales at target stores excluding credit.

Thanks Doug.

The next question will come from Jack Millers from Fourteen Research, please go ahead.

Doug, I have a question, when I noticed in your footnotes that your pension contribution substantially declined to $1 million in 2000, from $100 million in 1999. Could you explain why that happened and what your quarterly accruals were particularly in the fourth quarter last year, and what your quarterly accruals and expectation is for this year?

Well, as you know there is a substantial disconnect between contributions and accrued pension expense. In that same note to the annual report where you correctly noted that our contribution fell quite considerably during 2000, you'd see that our pension expense did not change meaningfully, and we spread pension expense across the year in an appropriate fashion. So nothing quarter-over-quarter during 2000 affected pension expenses. Similarly, we expect pension expenses this year to be inline with those of last years as a percent of revenues. This year, we may go back to making contributions to the plan. Our pension fund remains soundly funded and somewhat over funded.

One other question regarding shrinkage? What has been the trend in shrinkage for the past couple of years and this year, and what is it as a percentage?

Shrink has improved quite substantially over the last several years. More recently, we are fairly stable at quite meaningfully improved levels of shrink as a percent of sales. We have not disclosed a specific figure.

Okay. Thank-you.

Shari Eberts from J. P. Morgan Chase, Please go ahead.

Good morning everybody, can you talk a little bit more about the performances of SuperTarget in the quarter, and is the food components are they helping, the comps maintain some support relative to the discount stores and then also where do you see that your gaining share from on the food side?

First of all, we are very pleased with overall SuperTarget performance. Certainly, we remain committed to it. We are getting increased comps, for example, I have heard Wal-Mart say that food is getting much stronger comps than the rest of their business. Frankly, we are not seeing that. We are seeing some increase better than the rest of the merchandize, but we would expect that anyway because there is less mature new store base for SuperTarget. So again modest improvements in line with what we would expect for those types of stores.

And can you talk about where you think your gaining share from on the food side?

Well, we are not a huge factor in food at this point in time, and a lot of markets we are in, we are in Dallas, we are in Houston. We are still a fairly small, in fact, I am assuming that we are taking it a little bit from everywhere.

Okay, and a second question just on credit. You did mention that it could add about a penny or two cents in a very favorable environment. Can you just define a little bit more what would constitute a very favorable environment?

If we work to continue to enjoy the same set of conditions that we enjoyed in the first quarter for the balance of the year, then I think that just credit operations could add as much as a penny or two to earnings per share, all else being equal. First quarter was characterized by a very, very strong P&L. Our revenue generation was excellent across the board and our write-off experience and delinquency experience was relatively stable at a quite acceptable level in absolute terms. We were the only dark cloud on the horizon at this point. It is the first time bankruptcies are up sharply, possibly, as a result of some advertising by some of very aggressive members of the Bar to file early before the federal law changes.

Okay. Thank-you.

Wayne Hood from Prudential Securities, please go ahead.

I had a question for Jerry and Doug. Jerry, why would not you roll out the Target Visa. Are you seeing something that might preclude you from doing that. And if you did, would it be incremental to the 15% earnings growth rate target for the overall company?

I will answer your first part and we will let Doug go from there. As you know, our credit business we are very quantitative and very factually based. We need to have a certain amount of experience with the card before we are comfortable rolling out on a broad-based basis. We will have that experience by this summer, and we will make a decision at that time. So far, the experience is excellent and the guests seemed quite excited about the card.

I think that the answer for the second question, we can take a lesson from history. We have now well surpassed a billion dollars in managed balances at Target. In the early goings, as you know there was not a lot of incremental profitability because we positioned our balance sheet along the reasonable spectrum towards the conservative end. I think that our practice if we were to rule out the visa card would mirror that practice from a balance sheet standpoint.

I just had a question about return on invested capital in 1999 and 2000, had kind of hit peak numbers and the economy certainly helped to bring those numbers down in 2001, and I am wondering if the economy does improve in the back half of this year or next year, can you get back to the return on invested capital levels you were a year or so ago, even exceed those levels and what would you take for you to get there?

First of all, we are a lot more focused internally on net percent value and EVA than on percentage returns on invested capital. But addressing the question more specifically, first of all, we would consider the mix internally. We are quite proud of our return on invested capital in our financial services business, but as you know, those are much more highly leveragable assets, and therefore the expected return on invested capital should be somewhat lower for those assets than for bricks and mortar in retail based assets. This return on invested capital question frankly has a whole lot to do with mix, not only gets credit versus retail, but also target relative to other two companies. It's frankly an outcome, not a statistic we try to manage toward.

All right. Thanks Doug.

Jeff Stinson from Midwest Research Maxis Group, please go ahead.

Two questions. One, could you specify when the import center will open, and where you might be using offside warehouses at the store level to help with in-stock positions and then after that any comment on Marshall Fields and you might be doing there to mitigate the downside in that business?

First of all, import centers. We will open our first one this fall and then we will open an expansion of that next year. When you are talking about the offside warehouses that is really kind of a small percentage. It's only designed to help out very large volume stores where we don't have enough square footage to add on to our back room, so it's really not a meaningful figure. In terms of Marshall Fields, we are looking at a number of things to try and improve sales momentum. So far we haven't got a lot attraction, but we have a number of initiatives as we go into the fall and we are hoping for better things.

With Marshal Fields, might you be will the more aggressive with inventories in the back half of the year to grow sales or we are going to see a similar conservative position?

We are continuing to focus on the opportunity of proper improvement with Marshal Fields, and we have seen some improvements already in first quarter in terms of our margin performance and to do that we want to make sure that we keep inventories well managed. We are not pulling inventories out of things that are selling obviously that would be the wrong thing to do. We are focused on some of the more small volume stores and pulling inventories that are there, so we have been very focused with our inventory management reduction.

Mr. Stinson does that answer your question.

Yes. Thank-you.

Thank-you. Michael Exstein from CS First Boston, please go ahead.

I am following up on Geoff's comments, Linda. Can you just further talk about your performance versus your other peers in the department store business? I mean that business in general seems to be very slow. What do you see? Is it Target getting so much better, or close or what do you think is missing in the department store business as a whole?

Well, I think overall there is definitely an impact to the economy on these businesses. What we are seeing is less of an impact in our promotional business that has been healthier than our overall regular price business. Again, that does not say that we are shifting at all to Target Stores of the World, but it is clear that customer is much more sensitive to promotions and at the same time this regular price business a lot of it seen driven still by the reduction that we are filling in the main collection businesses like Polo and Tommy. These were very, very well developed businesses for us, and I am sure for other department stores, as well, and those businesses are taken a chunk out of our high right now.

Women's is better right.

Yeah. Women's apparel business has been consistently strong this spring season. It really has been concentrated it in the men's and children's area, again where we have a high concentration of those collection businesses.

Linda, just following up are you seeing any stabilization in the men's business.

Not right now.

Thanks so much.

The next question comes from [_______________] from CS First Boston, please go ahead.

Yes. Good morning. [_______________] Research here. Can you please comment on your general level of satisfaction with the current arrangements you have with Super Value and Fleming and would you consider going to an exclusive arrangement as you continue to grow the SuperTargets. Thank-you.

We are very pleased with our relations with both Super Value and Fleming and that we are going to continue doing business with both of them at this time.

Thanks.

Shelley Hale from Bank of America Securities, please go ahead.

Good morning. Given the slowdown in consumer spending, could you talk about the change in mix at Target, what was selling above the comp and what is coming in at lower than the comp?

In terms of mix at Target, actually we have not seen any real significant changes in mix through our first quarter, except the fact that our apparel business was actually stronger in the first quarter than it had been most of 2000. So from a mix standpoint, we saw the fashion business and in categories that introduced newness seem to have performed better than some of the more basic categories.

And then with Target, could you outline your store openings and closings scheduled for the second quarter?

Would you follow up with Susan [_______________] on that. Anyone who would need any detail on that, Susan, will be happy to provide it.

Okay, and the PP&E in the quarter increased about 690 million sequentially. Could you outline the components of that?

Well, we are building a lot of new TargetStores, some of which are open and some of which are under construction. That remains the single largest category of expenditure and that will be through next quarter and the one after and the after and the one after, as well.

Okay, would the purchase of the Ward Stores be included in the first quarter?

Purchase price of the rights of the Ward Stores would be included in that quarter that's correct.

Okay, thank you very much.

Linda Kristiansen from UBS Warburg, please go ahead with your question.

Good morning. It's Linda Kristiansen. I was wondering if you could just review your same-store sales outlook for the rest of the year by division?

Well obviously, our plans are moderated, tempered somewhat by our current experience. I think that at Target, historically in stronger times, you have heard us talk about various themes around mid-single digits comp store sales growth. For the rest of this year, I think our growth expectations would be slightly lower than that think low to mid-single digit growth. You know our other two businesses, we are cycling some weaker performance from last year that certainly would tend to have us boost sale forecast, but the current trends that would not support that kind of outlook. So I think that here in the current month, we are expecting a low to mid-single digit increase at both Mervyn's and Target and slightly down slightly at Fields. We will clarify those expectations by period as we move forward, but I think that our outlook is consistent with that short run outlook.

Deborah Weinstein from Bear Stearns, please go ahead with your questions or comments.

Good morning. You kind of touched on the, but with the economic uncertainty, are you seeing more private label sales than opening price for merchandise at the Target divisions?

We are seeing strong sales at the opening price point level, but I mean opening price point have always represented strong business for us so it's you know not materially different than what we experienced in the past.

Thank you very much.

Elizabeth Armstrong from Invesco, please go ahead.

Thank-you, I would like to ask two questions. The first is Doug, the follow from comments you made before about having a slight improvement in operating margin or SG&A to sales on Target. Could you tell us what level of comps you need to get leverage on SG&A above the target and also of the other two divisions and see if Mervyn's be able to actually have an improvement in operating margin or EBITDA margin given a actually negative comps, so, if you could just talk about it, and secondly a little bit of followup on the mix issue. Are you seeing more product sales coming from promoted products or in other words do you see the customer cherry pick the products at all or have you not really seen any change in customer's shopping patterns?

That's a lot of questions. If I don't catch them all, please follow up.

You know I will.

First of all, over the course of the year, it would probably require something in the neighborhood of 3% to 4% percent comps in each of our businesses to leverage expenses. In any given quarter, the answer can be quite different because of timing differences of all kinds of things, advertising and everything else. But generally speaking, we should be able to leverage operating expenses at a three to four comp. At Mervyn's, as I mentioned earlier, during the quarter on the plus side, we enjoyed an expansion of gross margin rate principally driven by a favorable markup. We enjoyed the benefits of favorable performance in the Guest credit business. On the down side, we incurred higher operating expenses with percent of sales as a result of weak top line performance. So all of that together and it is a slight single or low single digit increase in segment profit.

In terms of presenting promotional business, Target is really very, very close up just slightly. Mervyn'S Stores is highly promotional. Their promotions really are running at about the same level as they have been and the department store is up slightly, as well.

Right. Thank you very much.

Rick Church from Salomon, Smith and Barney, please go ahead with your followup question.

Yes, question for Linda please. Linda, a couple of your competitors in the department store sector are changing their way of sourcing product and how they are negotiating with their vendors in terms of sourcing low-up from product costs, accounting for winter allowances differently. Is there anything you see in terms of benefits to your business from this any advantages from this and would it be applicable to your business?

It is applicable to our business and we are also taking somewhat of a moderated approach to the old approach, which was to wait for the end of the season or the end of the year and then go in with proverbial tin cup looking for a help with markdown. So, we are working to moderate that approach and focus on getting markup up front.

Is that something that's in process right now that will benefit margin over the next?

May be you could elaborate just little bit make sure we understand what you mean when you are talking about some of the other department stores. Could you be a little more specific and say what exactly they are doing?

Right. At Dillards for example, Sachs have indicated that they are going to be negotiating with their vendors to source at low initial product cost right upfront as opposed to taking vendor allowances later in the season.

Well that initiative is actually probably one that we started several years ago, and it is becoming a more important aspect of our business. I think we have been the leaders in that area, and we will still move in that direction. Yes.

Right. Thank-you.

Daniel Binder from Buckingham Research Group, please go ahead with your followup question.

Yes, I just got a followup question. Looks like the tax rate was a little bit lower this quarter versus first quarter in the last year, about 38%. What do you expect that to be for the full year?

At this point, we would expect that 38.0% book effective tax rate as a whole for the whole year.

And the other question is related to, what is your interest in perhaps pursuing other opportunities to open two tier stores beyond the Ward stores that you currently have in possession?

We currently have half a dozen stores, multilevel stores and this will add another 15, 16, 17, and normally they are little bit more expensive to operate, but when the sales volume is there and there aren't other locations available, we will do that. We find them very good for us, but our preference would still be single level, if the real estate is available.

Are you looking at any other two tier locations in the market right now?

Well, we are looking at them all the time depending on what is available ...

I would expect we would do a single digit number of two level stores each year going up. Depending upon the real estate, but it's a very small number.

Great. Thank-you.

If there are any additional questions, please press the '1' followed by the '4' at this time. I am sure there are no additional questions. Please continue with your closing remarks.

Well, I would just like to thank all of you for joining us. That concludes Target Corporation's first quarter earnings conference call. Thank-you.

Ladies and gentlemen that does conclude our conference call for today. You may all disconnect and thank you for ...