目標百貨 (TGT) 2001 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Target second quarter earnings release conference call. During the presentation, all the participants will be in a listen-only mode. Afterwards you all will be invited to participate in the question and answer session. At that time if you have a question, you will need to press 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Tuesday August 21, 2001. I would now like to turn the conference over to Mr. Bob Ulrich Chairman and Chief Executive Officer. Please go ahead sir.

Good morning. Welcome to our 2001-second quarter earnings conference call. On the line with me today are Gerry Storch Vice Chairman, Greg Steinhafel President of Target, Diane Neal President of Mervyn's, Linda Ahlers President of Marshall Fields, Dough Scovanner Executive Vice President and Chief Financial Officer, and Jim Hale Executive Vice President General Council and Corporate Secretary. This morning Dough will review our second quarter results, our recent financing, and our outlook for the remainder of the year. Then Greg will provide an update on Target Store's current business and it's near-term outlook. Jerry will describe current developments in our web-based strategies, supply chain initiatives, and credit operations. And finally I will wrap-up our remarks. Then our management team will respond our questions. Now, Dough will review our results, which were released earlier this morning. Thanks Bob.

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 webcast. Also please note that any forward-looking statements we make in our remarks this morning should be considered in conjunction with precautionary statements contained in our SEC filings. In addition, any reproduction or rebroadcast any portion of this call is prohibited. This morning Target Corporation announced second quarter net earnings from operation of $272 million an increase of 5.7% compared with earnings of $257 million in the second quarter of 2000. Diluted earnings per share from operations increased 6.5% for the quarter to $0.30 from $0.28 year ago. Second quarter 2001 reflects reasonable overall performance consistent with our first quarter results and consistent with the outlook we shared with you 90 days ago. Target Corporation's revenue grew by 8.5% in the second quarter driven by 11.8% year-over-year growth at Target Stores. Our consolidated gross margin rate contracted 42 basis points in the second quarter to a rate of 30.72% reflecting a modest decline in gross margin rate of Target and the mixed impact of growth of Target our lowest gross margin rate division. Target's modest decline in gross margin rate in the quarter is principally due to a higher rate of sales growth in lower margin merchandise categories. At both Mervyn's and Field's gross margin rate improved somewhat. Our consolidated operating expense rate was 31 basis points favorable to last year benefitting for modest improvement in Target's operating expense rate and the more rapid growth at Target our lowest expense rate division. Operating expense rate at the other segments deteriorated in the quarter mainly due to lack of sales leverage. Total interest expense i.e. our net interest expense as reported in the P&L combined with the payments made to holders of our sold securitized receivables increased $10 million in the quarter primarily due to higher average funded balances partially offset by a lower average portfolio interest rate. Our effective tax rate for the second quarter 2001 was 38.0% compared with 38.5% a year ago. Pretax segment profit for the three divisions rose 5.1% from last year's second quarter to $598 million. These results were driven by growth in pretax profit of 9.2% at our Target division to $522 million from $478 million year ago. Mervyn's pretax profit also increased in the quarter - up 9.5% in the $60 million. At marshal Fields, pretax profit declined to $19 million or 56.4% mainly due to weak sales performance. Other expense i.e. the expense recorded outside the three segments was $37 million, $1 million lower than the prior year. Now let me turn to balance sheet.

Inventory levels for the cooperation at the end of the second quarter were 8.3% above prior year levels primarily reflecting new store growth at Target. Inventories increased inline with sales at Target and were essentially at level last year Mervyn's. At Fields we achieved a meaningful reduction down 8.4% from last year's high inventory position despite weak sales trend. Our balance inventories were in very good condition at all three divisions. Accounts payable leveraging improved to 85% of inventory at quarter end - a three full points from last year. Due to another way, more than a 100% of the growth in the inventory year-over-year was vendor funded. At the end of the second quarter growth of accounts receivable serviced for the corporation were $2.7 billion of which $800 million had been sold in securitization transactions. Late last week, subsequent to the end of the second quarter we entered into a new $750 million credit card receivable secured financing transaction. This three-year transaction was priced on a floating rate basis at 30-day live work plus 11 basis points, equating to an initial rate of just 3.69%. We decided to document this transaction as a secured financing for accounting purposes not only for this new deal, but also for our outstanding transactions. This will result in our bringing the full $800 million in previously sold receivables net of an appropriate allowance for doubtful accounts back onto our balance sheet in the third quarter.

Let me briefly describe why we have chosen this approach and the full impact of this decision on our financial statements. Most importantly this change will allow us greater simplicity and clarity in describing the future results of our debts credit operations. For example, in the future you will see receivables as opposed to receivable backed securities on our balance sheet. We think this is especially important in light of our previously announced decision to grow these operations at a sharply higher rate due to the national rollout of the target visa card. Jerry will describe this rollout in more detail shortly. During the third quarter, we will record an unusual and non-recurring pretax charge of $67 million or $0.5 per share to appropriately restore the $800 million of gross receivables to our financial statement. This charge is the near image of the unusual gains we have previously recorded and carefully disclosed upon the initial sale of these receivables. It is also the same amount we would have ultimately recorded in the future if we had chosen to conform with the new sale requirements of SFAS-140 effected this year. On an ongoing basis, payments to third party holders of these securities formerly referred to, as interest equivalents in our segment profit reconciliation will be classified as interest expense instead. As always, Susan and I are available to explain the mechanics of these accounting entries for those of you who maintain the tail financial models. Finally, I would like to share our comments with you on our outlook for the remainder of 2001.

Many or even most elements of our strategies are working very well in the short run and we expect these performance trends to continue. Sales of course continued to be somewhat softer than we wish and Marshal Fields performance in particular has been and will likely continue to be disappointing in the short run. The median first call estimate for our 2001 EPS is a $53. While I stop short of saying we are comfortable in our ability to achieve this performance it remains a single point estimate for the year. If we do achieve it we are more likely to see stronger EPS performance in the fourth quarter than the third quarter as our excellent expense control, higher financial and operational leverage create a platform for potentially greater EPS growth in the holiday season. Specifically, we think the most sales side forecasts are too aggressive in the third quarter and perhaps too conservative in the fourth quarter. If we fall short of achieving EPS of $53 for the full year, the cause would most likely be weaker than expected performance at Marshal Fields or acceleration in the modest adverse sales mixed trend we experience at Target in the second quarter. Over the long-term, we remain confident in our ability to generate at least 15% leverage annual earnings per share growth. Now, Greg will review Target's recent business trends, our future store growth plans, and provide a brief update on SuperTarget initiatives. Greg.

Thanks Dough. Target's second quarter performance is a clear validation of Target's unique strategy and excellent operational discipline. On an absolute basis, we delivered solid profit growth on modest comparable sales gain. However, when viewed in the context of the overall economic environment, we believe that Target delivered exceptional second quarter results continuing to grow market share while generating 9.2% increase to $522 million increased tax profit. Revenues in the quarter increased to 11.8% to $7.3 billion. Comparable Stores sales rose 3.4% and new stores in credit contributed an additional 8.4% to total topline growth. Target's expect more pay less strategy continues to drive our action and our business. We remained focused on exciting our guests with exceptional quality and fashion [_____] throughout our merchandized assortment. In [_____] for example, our offering for this fall includes a broad assortment of Denim jeans in varying styles and leather jackets for men and women at exceptional prices. Our Michael Graves collection features new additions in kitchen appliances and accessories such as a toaster, a coffee grinder, and a cookware set that the college remains an important focus for us as well within an rate of affordable furnishings in electronics to meet the versatile needs of today's colleges students. We reinforced Target to meet with brand with innovative marketing. Earlier this month for example we viewed the Target town house a 6000 square foot town house in Manhattan furnished from top-to-bottom with the best of Target's home, fashion, and beauty assortment. Visitors of Target.Com were able to enjoy a virtual tour of the home as well as purchase hundreds of items displayed throughout the house.

We have intensified our efforts to ensure that we are in stock on our guest's most wanted items and we have made measurable progress. Jerry will describe these initiatives for you shortly in more detail. We have broadened our assortment from convenience food in growing number of traditional discount stores to include and expand of refrigerated and frozen products such as pizza, ice cream, and frozen dinners and we remain vigilant about delivering value to our guests. Despite the increased attention in [_____] relative to [Camers] pricing action and Wal-Mart's potential response, we have not observed any meaningful change in the pricing environment. We are determined to remain competitive on pricing and to continue our longstanding practice of matching Wal-Mart's prices on like items locally. Each of these initiatives supports or expects more pay less promise. They strengthen our brand and provide our guests with more reasons to shop at Target. We also continued to give our guests more convenience by increasing our store presence. During the second quarter, we opened a total of 34 new stores including 20 new discount stores and 14 new SuperTarget stores. Net of relocation's and clothing's we now operate 1019 stores in 46 days. In October, we opened our third and final wave of stores for this year comprised of approximately 28 discount stores and the 11 SuperTarget Stores and including an entry into our 47 states. For the full year, this store-reopening program results in a net increase in square footage of nearly 11% - modestly higher than our historical growth rate of 8-10% annually. We remain on track with our store opening plans for 2002 as well. We continued to expect that the majority of the 35 former Montgomery stores as well as the three former Bradley stores, we have acquired earlier this year will open as Target stores in 2002. At the present time, we expect to add yet new square footage of approximately 12% net next year. As we move beyond 2002, we expect our annual rate of growth to return to a more normalized increase in a range of 8-10%. At SuperTarget we continue to focus on providing differentiated upscale growth re-offering with particular emphasis on quality and trust. We are expanding our offering on premium products under the Archer firm's brand and have added an opening price point level called market pantry for basic consumable item. We are increasingly more competitive on pricing of nationally branded [_____], dairy, and dry grocery item and continue to integrate SuperTarget into Target system and processes to increase our efficiency and consistency. We remained pleased with the financial results at SuperTarget and especially enjoyed continued incremental progress as we further expand our store base. Relative to the overall retail environment, we believe, that Target will continue to deliver solid financial performance for the remainder of 2001. 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 opportunity that drive low double-digit sales growth and increase our market share. Even as we pursue initiatives to control costs and improve gross margin. This formula has been the heart of our success in the past and we expect that it will continue to drive our success with guests and shareholders well into the future. Now, Jerry Stertz will give you an update on Target financial services, Target supply chain efforts, and the corporations of e-commerce initiative. Jerry?

Thank Greg. One of the most exciting developments at Target's financial services joining the second quarter with our decision following our successful pre-market test to roll out the Target Visa cards including [Smart Chip] technology on a national basis getting this fall. This decision provides a significant opportunity for Target to strengthen and deepen our relationship with our guests by upgrading current Target guest's cardholders to this new and truly innovative great vehicle. The smart target visa card provides target guests with greater convenience, broader utility, and increased value while extending targets differentiate branding image and underscoring our commitment to innovation. We expect to issue millions of Smart Target Visa cards in time for this holiday season - one of the largest rollouts of Smart cards in US history. We have the opportunity to employ smart card technology in a way no other US organization has because as both the card issuer and the retail merchant we have everything we need in our own world to make this initiative successful. We will issue the cards from our own bank and offer our guests exciting real world applications with the ship at both Target.Com and Target Stores. To support this effort we will offer cardholders a free chip reader for in home use and we will have chip readers installed in every check lane in the chain by about this time next year. We believe our guests will realize how revolutionary and cool this opportunity is and we will shop Target even more. Also, the smart target visa is good for our credit business and we expected to generate an incremental billion dollars or more in profitable accounts receivables by yearend. As we continued to leverage the opportunities of the smart Target visa card, we expect to enjoy incremental accounts receivable growth of a billion to a half a billion dollars in 2002 as well. And of course we expected to drive incremental retails sales at both our physical target stores and the virtual space at Target. Com. Our existing credit business continue to outperform our 2001 financial plans which assume more challenging credit risk environment compared with fiscal 2000. Continuing the trends we experienced in the first quarter our overall delinquency and net write offs in the second quarter were favorable what we have anticipated and credit quality across each of our portfolios remains very good. Contribution from credit increase in the quarter fueled by the continue growth of Target guests cards and improved performance of the credit portfolios in all three business segments. We are very pleased with our second 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 years level reflecting both revenue growth and superior expense control. Now let me shift our focus and provide a brief update on several of our supply chain initiatives.

As I mentioned last quarter, despite our belief that target supply chain is among the best in retailing we are devoting significant resources to improve our in-stock positions and further increase our productivity. For example, we are expanding our item segmentation pilot that will allow us to differentiate how we handle our fast-moving and slow-moving products in our distribution centers. Linking with our vendors to arrange timesaving and increase distribution of many goods and reducing buffer majorities in the pipeline including store level off port warehouses. We opened our first in-port warehouse in Ontario, California during the second quarter and we are aggressively investing in new regional distributional centers during the next five years to ensure that we have the capacity to implement our new strategies. One of the new strategies that we implemented during July is a program focussed on the strategic use of our distribution centers to improve in-stock levels on our top 1000 items. These items are primarily basic commodities and consumables and our extremely important drivers of traffic and sales at Target. Based on the strong positive results of this program in just its first month we are confident and excited that we are succeeding. In stock on this highly visible top 1000 items have already increased dramatically and most of these products are now in stock at the highest levels we have ever recorded. In this retail environment we are dedicated to giving our guests more reasons to make us their store of choice and expect to take more market share in the process. Another reason supply chain initiative relates to improving in-stock levels during major transition in our stores. While newness in fashion and freshness are inherent elements of Target strategy and success their network consequence is the need for frequent merchandized transitions. Beginning next month, we are rolling out our new systems to all categories that will allow us to stagger the timing of seasonal transitions based on rate of sale by item by store. As a result, we expect to enjoy better in stock and improved sales as we manage future transitions more effectively. Finally, let me spend a few minutes on updating you on the progress and success of our [_____] first year target direct.

Our primary focus in the business and consumer arena is continuing to enhance the extensive functionality of our Target.com website and increasing our traffic in sales. Year-to-date, we are quite pleased with our performance. Sales growth compared with last year are greater than 400% inline with our expectations, increasing traffic in the range of 200-300%, and a conversion rate of visitors to purchasers that has nearly doubled last year's level. Looking at external data month after month for a longtime now Target.com has consistently been one of the fastest growing retail website proving our ultimate wisdom of our integrated stores and web strategy. Gift giving particularly in home-related merchandize categories continues to be a significant driver of our growth reflecting the strength of our online gift registries and sales of gift cards. In recent months, we have added new functionality to our store web sites including wish list capability that allows guest to create and share a personal wish list with family and friends in an occasional reminder service to prevent the embarrassment of forgetting an important birth date or anniversary. We have also combined our catalogue sites for wireless signals and seasons creating a single omnibus gift catalogue site called gift catalogue.com that leverages our existing technology across all these great catalogue brands. We continue to look for opportunities that will increase the profitable growth of this business long-term and we remain confident that our integrated strategy, leverages Target's expertise and resources, and provides the maximum benefit to Target's physical and virtual operations. Just as innovation is integral in our merchandizing strategy at Target so it is vital to our credit business, our Internet business, our supply chain, and our other business processes to view applications of technology and new approaches to retail fundamentals we believe Target will continue to deepen our relationships with our guests, strengthen our competitive position, and deliver profitable growth for many years. Now, Bob has a few final comments.

Thanks Jerry. Before I wrap our comments, this morning I have asked Jim Hale to update you on a lawsuit we filed this morning against K-Mart. Jim?

This morning Target cooperation filed a lawsuit in US history at the court of Minnesota charging K-Mart Cooperation with perpetrating a nation wide false advertising campaign. Based on audits by an independent market research firm that found a 74% error rate in K-Mart's dare to compare advertising. The suit charges K-Mart with violating several truths in advertising laws and Minnesota's consumer protection laws. Price competition is in the consumer's best interest, but the first priority of any retailer ought to be to treat the guest with respect not lie to the consumer as K-Mart is doing. It's in the store signing contains an astounding number of errors that includes regularly misstating K-Mart's own prices using the wrong target price and making comparisons on items that the competing Target store does not even sell. These errors have occurred nationwide and we believe that K-Mart should be held accountable for this reprehensible behavior. Bob?

Thank you Jim. As Doug, Greg, and Jerry have described this morning we are pleased with our performance in the second quarter and we believe that we are well positioned to deliver a reasonable growth and our financial results throughout the remainder of 2001 and well in to the future. We recognize that in order to overcome economic and competitive challenges and continue to grow and prosper we cannot be complacent. As a result, we continue to invest in our core strategies and identify new opportunities to extend and strengthen our store brands. We believe that this continued focus on innovation and newness in our merchandizing and business process combined with dedication to the fundamental elements of our retail operations, superior guest service, financial discipline, and consolidated execution will allow us to generate substantial value for our shareholders for many years to come. That concludes our prepared remarks. Now, Greg, Dough, Jerry, Diane, Linda, Jim, and I will be happy to respond to your questions.

Thank you. Ladies and gentleman 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 wish to withdraw your polling request you may do so by pressing the 1 followed by the 3. If you're using a speakerphone please pickup your handset before entering your request. One moment please for the first question. Our first question for today comes from [Jeff Liner] with Lehman brothers. Please go ahead with your question.

Question for Bob or Dough. Dough you referred to the fact that the Street may be a little bit aggressive as relates to the third quarter and there might be some room on the fourth quarter and touched briefly some of the components. Could you talk a little bit more about where those expectations are on the gross margin line or on the SG&A line where you think we might be too optimistic as it relates to the third quarter versus the fourth quarter?

Yes. In essence, we have a set of strategies that in current environment have delivered a mid-to-high single-digit EPS growth rate in each of the first two quarters this year and what I am suggesting is that continuation of those trends will reduces similar kinds of result in the third quarter. Right now the median street estimate is for the third quarter to be up $0.4 to $0.28 from $0.24 a year ago in each of these first two quarters we produced a $0.2 increase on the result I have just described. Basically, I guess, another way to say the same thing Jeff is that today I think that we would be more comfortable with the lower end of Street third quarter estimates and perhaps we will be able to achieve somethings towards the higher end of fourth quarter street estimates.

And any specific thing about gross margin or SG&A inside those?

No what I am suggesting is that its current trends that will deliver those results not some of kind of new trends that you haven't carefully analyzed and understood to this point.

Great. Thanks a lot.

Our next question comes from [George Strapman] with Goldman Sachs. Please go ahead with your question.

Listen attentively to what Jerry had to say about the expansion of receivables. I just want to make sure we have got it right and what the implications are. I think Jerry you said a billion in incremental accounts receivable by yearend and then an additional 1-2 billion in 2002 as well as incremental sales, and I was wondering how you are recruiting these customers for the visa card ... are you basically converting people from the target card and, you know, what demographic you are targeting there? Are you using teaser rates as there is going to be a negative impact on yield initially to get these new cardholders on board? How does this play out and what do you think the long-term incremental opportunity to earnings is as a result of the visa rollout?

Let me see to answer this question if I could remember. Firstly, the target visa business we believe quite strongly will be more profitable for us on an accountholder basis than the existing target guest card business. I will say that we would not be doing this if we didn't think we would be more successful. So, net we think that this is going to improve our performance. We have been testing this card for almost a year now in three markets. So we have a lot experience with it. I mean we know what we are doing. The largest number of initial cards will come from conversions of existing Target cardholders in to the Target visa smart card products and that will be the basic source of most of the growth in that new product for this year. Additionally starting this fall however the target visa will be available in store on an instant credit basis just like our existing cards, and that should fuel the growth in later years in that product. We are not offering teaser rates. We believe that it is inconsistent with the Target brand. This card has a lot of fabulous benefits. While the rates are lower than our existing cards, we believe, that the net profitability will be higher because the expense rate will get leveraged across the larger receivable on each card. So it is more profitable card, so it just has lower rates, and it has the ability to earn money for your kid's school, you know, [_____] schools everywhere you spend in the country and additionally the opportunity to earn towards a discounted shopping day at Target and then there is the fabulous smart card technology, which we would take up an entire hour to describing all the great things that we can do with that, but this will be one of the largest if not the largest application of smart cards in the US and people are just flocking to us with ideas about how to use that chip and [_____].

I will see if I can answer what I think are a few more questions that were there. First of all to clarify what Jerry said about balance growth is at least a billion dollars of incremental receivables by year end this year and additional ones to one and a half billion of receivables next year. We don't expect this program to have a meaningful impact on the third or fourth quarter earnings this year as the incremental interest income will essentially be offset by the incremental interest expense associated with funding the new receivables beginning next year. However, we expect this to be clearly accredited to earnings. Our earnings will be higher than they otherwise would have been as a result of launching this program.

And could you give us a sense of again long-term, could this add at the point to the growth rate, is that kind of reasonable way of looking at it?

Point to which growth rate, George? You mean comp store sales? Do you mean EPS growth?

EPS growth.

Certainly, this program has the possibility to add a point or more to EPS growth rates than otherwise would have occurred. I don't think we are yet bold enough to tell you that you can take our long-term statement of 15% growth and begin adding to it because of this. I think this gives me personally greater confidence in our ability to achieve our 15% or higher EPS growth rate objective over the long-term.

Thanks a lot. It is great news.

Our next question comes from [Daniel Barry] with Merrill Lynch. Please go ahead with your question.

Good morning. Just a follow up on Georges' comments. You haven't given any indication of what this the card might add to your sales. You said it wouldn't add to earnings, but do we get a boost to sales in that billion dollars in total receivables or can you quantify it?

That's always a very difficult thing to quantify as you might imagine. In our test markets, we believe we did see an increase in sales due to the launch of the card in the test markets. So we expect that that will help, but that general increase is moderate on the base of our company's target size.

Okay, thanks.

Our next question comes from [Jeff Cliental] with U.S. Banc Corp Piper Jeffery. Please go ahead with your question.

My question is regarding the mix you were talking about with respect to pricing and target stores. Could you give us a little bit more color on this, if this is a shift towards more lower price point products within each product category or if the shift is just toward more commodities away from the higher margin categories like Home Decor and Apparel and if so, should we be looking for a gross margin rate that is similar during Q3 to Q2?

Let me see if I can clarify the comment that I made. Basically, this boils down to the fact that our lower gross margin rate categories enjoy higher rates of comp sales stores growth in the second quarter than our higher margin rate categories. This is not about pricing; it is not about a shift to opening price point sales, which still enjoyed a modest increase in our average sale price per unit of merchandise sold. The comments that I made in the forward-looking sense simply reflected on the fact that if this trend were to accelerate, that would pressure margins moving forward, but obviously in the second quarter, we have accommodated it well within our existing profits.

And then anything with respect to the trend on the soft line business due to Mossimo launch, are you continuing to see a positive trend in that category as a percent of total sales?

Well, overall our apparel business that we characterize as decent, certainly Mossimo has been very strong for us all Spring, and it continues to be strong during Back To School and the apparel business right now, that the strength are really in the Ladies Apparel, foot wear, and children.

Okay. Thank you.

Our next question comes from [Emmy Cazella] with Sanford. Please go ahead with your question.

Good morning. I have a question for Diane Neal. I was wondering if you could identify some opportunities to get the topline moving from Mervyn's now that you had about a quarter to adjust things.

Actually, we have quite a few categories that are trending quite well here out of Mervyn's. So we are really looking at maximizing some of these trending categories, creepy guidance categories, and brands and devoting more inventory chart here and drivers, improving insets and improving our market share.

Just to give a couple of more specifics, Diane, in terms of lines or particular categories, Junior for example, I know has been very strong for you.

Yes, our Junior business has been exceptionally and brands like [_____] and some of the secondary brands that have been great for us. Our children's business across the board has been, our back to school business in children's have been phenomenal along with our back pack business, our also our missing key item business in women's has been extremely, our casuals businesses have been extremely strong.

What about your denim business, how do you see the market start since major saturation on this? Are you seeing any issues with it?

Our denim business is very strong. I think that one of the things that we have lot trends is that brands at small prices and that is what is driving our business in the denim areas because of the big branded business.

Okay, Great. Thank you very much.

Our next question comes from [Jeff Simpson] with Midwest Research. Please go ahead with your question.

Fred, could you talk about a little bit about the changes seen just back in the school categories at Target and then also Linda, could you talk a little bit about maybe some of the changes in strategy for Marshal Fields in second half of this year?

well, both our back to school and our back to college businesses are very healthy. As Diane said, denim is very, very strong and are doing well for us, the footwear trends are very, very positive. All of our basic consumables items in back to school supplies and back packs are doing well and our home related products in small electronics for the back to college students have done exceptionally strong this quarter; these would be storage items and lighting and some light furniture and things like that have been way beyond our expectations.

There are several things that we are doing at Marshal Fields to help get our business back on track. As you know, we are completing the transition to the name change in Marshal Field in our Eaton and Hudson's region and as part of that we have got the brand's marketing campaign which includes issuing 2 million new Marshal Field credit cards to those guests and we have included an incentive to drive both traffic and sales into our stores short term. A little bit longer term we are working on rebalancing our assortment. In terms of our product mix we are putting more emphasis on some of the more moderate aspects of our business balancing back in some of the key brands, emphasizing Jockey, [_____] businesses have been successful for us and we are going to continue to expand them. But having successfully implemented it already in some of our moderate Mississippi business and in Petit and we are going to be expanding this and having Eaton and further implementation of this strategy for fourth quarter and certainly if we enter 2002. Incidentally, we recently [Lewis Pedia who is the FVP of Softline] Target and he is now the Executive Vice President for Merchandising for Fields to help us put some focus on merchandizing execution.

Does that answer your question, sir?

Yes.

Our next question comes from [Jack Balos] with [_____] Research. Please go ahead with your question.

Regarding pricing, I am just putting aside for the moment, whatever inadequacies you might had found at K-Mart, my question is did you notice if K-Mart did reduce some prices, and perhaps top 1000 on high turnover items, and did you notice whether or not to some degree Wall Mart did reduce some of their prices and did Target react to that?

We really have not seen any major changes. We have seen K-Mart a little more sharper on some of their advertising changes in commodities and there is no question they have done some things with their blue light specials in their stores, but on an overall basis, we have tracked a lot of items and we have not seen any sort of tectonic shifts, just minor adjustments.

Yes, minor adjustments. So therefore, I assume then there were minor adjustments from Wall Mart or yourself.

Yeah, but that is sort of an ongoing all the time basis. Most of the regular price reduction brought their pricing more in line with where Target and Wall Mart were already at. They did not come below where we were; they simply brought their prices down to the level that we had been operating at some time.

I understand that. My impression is that Wall Mart still wanted to maintain the original pricing differential in that they were going to come down to maintain it.

I'm sure that they have, on specific items that came out has driven down, but according to our shopping now, as we are very close to Wall Mart, that they are still a little bit lower than us on a broad sampling basis and we are still lower than K-Mart on a broad sampling basis and the relative position has not changed a lot.

Okay, the other question that I have regards the target's inventories looking ahead to the holiday season. Do you have an idea as to what you are planning to do in terms of year-over-year inventory at the time you are entering the holiday season? Do you still expect, now roughly the same 8% increase in inventory year over year or what are your plans going forward?

Well we are planning our business conservatively for the fourth quarter, so we are anticipating very modest comp store sales increases and as a result of that, we will continue to manage our inventories very, very tightly to make sure that we support the growth opportunities in the key items and in the businesses that we really expect to drive the sales during the fourth quarter, but overall we are going to continue to manage our inventories tight and well like we have this past year. To clarify the numbers in the quarter just ended, our revenues in Target were up right at 12%, our quarter end inventory was up about 11%.

Okay, thank you.

Our next question comes from [Theresa Donahue] with New Burger Berman. Please go ahead with your question.

My question has been answered, thanks.

Our next question comes from [Mark Peggart] with [_____]. Please go ahead with your question.

Yes, Hi, thanks, this is Mark, two quick questions. With respect to the shift in EPS from the third quarter to fourth quarter, can you add a little more clearly, when I look back to 1999, the first half of this year did experience some net income growth against 1999 and yet as we move in to the third quarter based on your earlier comments, some of that growth starts to disappear when we look at flat comparisons relatively 1999 and I don't know if you look at it at that way and I just want a little more clarification on the reason for the net income shift into the fourth and then secondly, you did a great job on the SG&A line obviously in the quarter. Can you talk about some of the things beyond leverage that is going into it and why some of your peers are having so much cost pressure and are you feeling that, you know wages, benefits, energy and what are the things that are enabling you to offset some of that?

First of all, the issue in question in terms of what is going on, back to 1999. Third quarter 1999 Target performance as many of you would have heard me say again and again and again was probably the most spectacular quarter that we enjoyed in the last half of the decade in the 90s. Last year's reduction in EPS in the third quarter was driven to a great extent by nothing other than having to cycle that spectacular performance. Last year's third quarter represents a normalized quarter in the sequence of the kind of performance that we delivered throughout last year. So if there is an EPS shift here, it is only a shift in someone's model. What we are trying to suggest is last year's third quarter is a normalized base. So far, this year we have been up, mid to upper single digit kind of EPS increase, continuation of current trends will deliver those kinds of results in the third quarter, nothing shifting around here in terms of our business.

Okay.

One comment on the SG&A. We started an heightened focus on cost and expense last fall and we believe the best time to do these things is when the business is going great and that has helped to bear fruit as we come into this year and that is one of the reasons why we see favorable expense performance across our entire company. Certainly we are experiencing the same kinds of pressures, energy costs, health care benefit costs and so on that others referred to, but we have been working diligently for a long time to minimize the direct impact of those varied categories of costs separately to work hard on other areas to offset the pain.

Okay and provided comp stay in the similar range as it has in recent history, there is no reason for that trend to change?

No, there isn't.

Okay, thank you.

Our next question is from [Brian James with Luma Sales]. Please go ahead with your question.

Yeah, hi, thanks. My question regards the change in accounting for the securitized receivables. You say you are taking a $0.05 charge, I guess that means that you can book at $0.05 a share over a coming period of time in line with the maturities of the receivables. Does that change the shape of the earnings from receivables over the next several quarters or is it exactly the same as it would have been under the old accounting rule?

Let me see if I can clarify. First of all, the entire 67 million pre-tax, which equates to $0.05 per share after tax, will be reflected in our third quarter financials not across time. I think that if we had our technical accountants here, they would not like to hear the phrase, change in accounting, in a technical sense, this isn't a change in the technical sense. We are essentially pulling back in onto our balance sheet to account moving forward as if those receivables have always been owned and managed as receivables, not managed as securities backed by receivables. If you would like to go into another level of technical detail on this, I really would like to reconnect with Susan and I would invite anyone in this call who wants to have that kind of understanding to reconnect with Susan as well.

Just one followup, when the Gatsby first announced that they wanted people to go in this direction, I think your decision at that time was not to classify your receivables or your securitization in that way and that you would not have to, what you are doing now is, am I right in that, in that you have changed your mind or what?

Let me answer, and then we do need to move this to followup. This is not a technical accounting forum here. It was the launch of our new transaction that triggered this question and we made this decision in the third quarter to not modify our documentation for the new transaction in a manner that would allow us to preserve sale accounting. It is that decision and that documentation and that launch in the third quarter that caused the existing receivables to need to be accounted for the future in a different fashion.

Thank you.

Our next question comes from [Sheri Evert] from J.P. Morgan. Please go ahead with your question.

Hi everybody. And Greg, can you just talk a little bit more about the performances of the super target in the quarter. Are you seeing performance hold up there better on the sale line given that the food component?

Well, we continue to be pleased with our performance at SuperTarget. As you know, we still have less than half the number of SuperTarget we are hoping are mature at this point in time. But both the mature performing stores and the new not so mature are meeting our expectations, we continue to focus on topline growth, on improving our gross margins due to improving our ability to control spoilage and shrink and we continue to press for expense reduction through productivity gains of our workforce in our stores. So overall we are very pleased that we are right on track and the new stores that we opened just a couple of weeks ago incidentally are procuring very, very well as well.

Okay and a question for Doug ... just a followup on the third quarter and fourth quarter issue. I can understand third quarter is off of the normalized phase. Can you talk about why you would expect results then in terms of the growth to accelerate in the fourth quarter on an EPS basis and talk about what the comp plan is for the different positions in the third quarter versus the fourth quarter.

It is really just an issue of algebra. We have a substantial base of fixed costs here and an even higher base than many of the other firms you might cover as a result of our intentional decision to carry a lot of financial leverage relative to some of those competitors. Therefore, when we are operating at levels of segment profitability growth higher than these fixed costs, then we have some very favorable and sometimes very powerful operational and financial leverage at work that we believe will cause EPS growth in the fourth quarter all others being equal, to be higher than any of the first three quarters on the same level of underlying operating performance.

And what comp plan, is that included in the Q3 and Q4 then?

We are really looking at similar comp increase while what we have had as Greg just reminded you. Our inventories were basically buying the trends we are anticipating... the current trend to continue unless we see something change in the overall environment. Specifically in the third quarter, we have already released our comp plans, which we expect to be in the low single-digit increase range of Target in Mervyn's and low to mid single-digit decline at Fields we have not clarified fourth quarter guidance on comps at this point.

Okay, thank you.

Our next question comes from [Deborah Wineswake] with Bear Sterns. Please go ahead with your question.

Just a followup on Sherry's prior question on SuperTarget. Can you talk about the performance of SuperTarget specifically the terms in which Fields performance is helping comps and also do you see a change in how you distribute food at SuperTarget and food continued to grow as a percentage of the sales base.

I'm not sure that we understood the last question and let me answer the first one first. SuperTarget is doing very well, but we are not seeing those extraordinarily high comp stores sales in the grocery side of the business as we hear from Wall Mart and part of that is that we don't have that many mature stores yet, and part of it is that we put these in and we are getting hit by competitors. Overall, it is doing about as well or better and we expect it to improve but we are not seeing huge increases and I didn't understand the second part of your question.

The second part of my question is that right now you are using two distributors to distribute to SuperTarget position, do you see that as SuperTarget becomes a larger percentage of your sales base or just the food portion of it, will you start looking to distributing food through Target yourself?

For the foreseeable future, we will continue to use the major food distributors. We do take some of the products of course through our own distribution centers particularly some of the dry grocery and that might grow incrementally in the near term. Over the long term of course, anything is fair game and that is something we will evaluate as we get a few more years into the program.

Thank you very much.

Our next question comes from [FLORIANO ANDREWS] with Better Rate Investors]. Please go ahead with your question.

Hi, do you have first half capital expenditure and has the 2001 capital expenditure been all revived and will we still be repurchasing shares with that capital expenditure, as you previously know.

Yes, first of all, year-to-date through two quarters, we have invested just under 1.6 billion in our business, more than 1.5 billion of course is the Target Stores, and for the beginning of the year, we said we expected to invest some more in the range of 3.3 to 3.5 billion and our outlook remains unchanged. At that same time, we said that for the foreseeable future we would curtail share repurchase activity and our outlook remains unchanged on that score as well.

Okay, and you mentioned about the credit trends and delinquencies and those write-ups about what you estimated. Do you have these numbers?

You can look to our securitization filings that are made monthly with the SEC to see that information that are gory level of detail, but other than that format, we don't release information on a quarterly basis. Essentially our trends are in line with or better than our expectations and therefore on balance growth in line with our expectations, profits are actually ahead of plan year to date in our guest credit operation. Conceptionally speaking, what we are seeing is delinquencies which are little worse than last year, but we expected it to be worse, but yet our delinquencies are better than they were two years ago, which was considered a pretty good year.

Bankruptcies increased sharply at the beginning of the year and that rate of growth has moderated significantly in recent months.

Do you expect any of those numbers to get higher, or are you getting more from delinquencies write-offs with the new Target Visa rule off?

Generally speaking, Target Visa carries a lower delinquency rate than the store cards and the proprietary cards. We have very good estimates as to what the delinquencies should be. As I mentioned we have been testing this card for over a year and our projections and plans for the business remains or reflects the same conservative stature towards potential delinquencies that we always had in our financial services business.

Okay, thank you.

[Laura Star] with [Equinox Capital Management]. Please go ahead with your question.

Yes, I have a question for Jerry Storch. You mentioned, are you going to revamp the whole idea of the Smart Cards and getting the leaders into consumer's hands this year. I guess I don't understand this completely, is this going to swipe your cards of that, is that something I am going to be hooking up to my computer at home and I mean, am I just going to be doing that instead of typing in my number when I buy stuff on the Internet and what else can I use that for, why is that such a great thing?

I will give you a few examples. Initially, one of the greatest things you can do is that you will have a card reader, which you can attach to your PC. You stick the card into the reader; it must be in the reader in order to make a purchase to provide a significantly enhanced level of security to what occurs today when you type in a number, and we have seen in survey after survey that one of the major impediments in shopping on the Internet is concern about theft of credit card or theft of identity. This will significantly reduce that potential. Additionally, the same added levels of security would exist in the stores once we install the card readers in the stores next year. And then, you can start doing the card also as a marketing platform where for example you go to target.com and we could download on your card special offers which you could then redeem in the stores by fitting the card on the reader in the store and there is almost an unlimited capacity for the card to be a carrier for various forms cross platform loyalty programs. So it has as much memory or it is a kind of a second generation IBM PC. So it provides really a spectacular opportunity to provide creativity to what you can do with the card.

And then for example if I have this card, I have the leader at home, and maybe I have to pay my utility bills, so I do that on line, I could just swipe the card to that, pay that, I'm also billing up balances on your account, than I can make it better than what we used to?

The card has its own operating platform and additionally you can have all kinds of programs on the card, so the potential is unlimited, the application you are talking about is not one that we would envision this short-term, but we are highly focussed on applications that would apply in the vertical between target.com and Target Stores. And that is where we will be focusing.

And then any other consumer partners that you might bring out.

We have been approached for this by everyone because this will be our largest Smart Cards that exist in the country and we are coming through out to see whether any of those loyalty partnerships make any sense for us, but that is not our primary focus. Our primary focus is increasing loyalty to target, Target Stores and Target. com.

And then, did I hear you right lastly, you wanted to get several million these out to your customers this year?

Yes.

Okay, thanks a lot.

Our next question comes from [Philip Crossen] with Credit Suisse First Boston. Please go ahead with your question. [PHILIP CROSSEN] Yes, good morning. Two questions. First with the chapter 11 filing of AIMS, do you see new real estate opportunities particularly in the North Eastern part of the country? Second, as a result of the close link between Fleming and K-Mart at what point in time do you start feeling uncomfortable spending your programs with Fleming? Thanks.

As far as AIMS, we have of course known that they were in some financial difficulty for sometime, we are aware of all of their sites. Actually the vast majority of them are too small or not properly located for us to use, so there may be some opportunity, they almost always is one when one of these competitors goes bankrupt, but I do not see those as a major opportunities for Target. The second question is about Fleming and the relationship with K-Mart. We have been working closely with Fleming, we feel comfortable with our relationship with Fleming as things are continuing today, we don't see problems in their relationship with K-Mart.

Thanks very much.

The next question comes from [Wayne Hertz] with Prudential Securities.. Please go ahead with your question.

Yes Doug, looking at 2002, it looks like you will need about a little over or about $2.2 billion in funding due to the receivables growth in capital spending. I am wondering if that is correct, and would interest expense for the full year 2002 approach a little over 500 million. Can you comment on those two?

Yes, we haven't put together carefully documented 2002 plan, but conceptually you are on the right track. Certainly, we will have two billion or more in incremental funding needs, principally as a result of the Visa rollout partially due to our capital expenditure plan. Clearly, we are fortunate that interest expense was driven by the Visa problem now, we will be not just offset by, but far more than offset by profitability associated with the Visa Card.

And the rate on that will also be, can you talk about the fund and what you think the weighted average cost of capital is and that might be for next year and associated interest expense?

Well, as you know, we have a portfolio of liabilities and in the most recently priced PC WARE portfolio initially priced at 3.69%. I would be delighted to tell if we can get the whole portfolio down to that rate, but of course, we can't. We have reduced the cost of our funding on a portfolio basis every year in the last seven years. We may be toward the end of that line. All depends on the mix of new funding, so I would expect next year's rate to be at or slightly below our current rates and where we end up, it has a whole lot to do with what the FED does here in the next nine to twelve months.

Does that answer your question, sir?

Yeah, thanks Doug.

[Theresa Donohue] with New Burger Berman. Please go ahead with your question.

I know I keep bugging you guys about this, but in terms of the SG&A could you just review what your sources of savings are coming from because it is a very impressive performance. I think you had earlier indicated at one point, there were some deferrals of intermediate-term projects in there, but I am wondering what else is gone on there that you have discovered.

There is no mystery here. This is a three arch in a cloud of dust, kinds of issues. It is benefitting from excellent control across the board, each item of which produces a small contribution of the overall total. There is no single magic issue underneath the surface, but the fact that it is so broad-based gives me comfort in looking forward and believing that broad-based effort of ours will mitigate to a large extent the key cost drivers that are in our expense base and everybody else's too. It is no secret that wages and benefits are increasing relentlessly. It is no secret that the energy component of our overall utilities cost remains troublesome even today. So we have a lot of other small things going on, a huge number of huge things going on, they are helping us control the overall outcome. But there have not been any significant delays. But they have not been any significant delays in any major projects. We still are continuing to invest in growth, as we mentioned, in distribution and import distribution, increased square footage for this year and next year, so we continue to invest for the future. We have been working really hard on this and I think you should do those SG&A savings as programmatic savings from good execution, not as a sort of a deferral of projects or as economy gimmicks.

Are there any other questions on the line?

If you have additional questions, please press the #1 followed by the #4 on your telephone. No, sir, there are no further questions. Please continue with your presentation and closing remarks.

I just would like to thank everyone for your participation and that concludes Target Corporation's second quarter earnings conference call. Thank you.

Ladies and gentlemen, that does conclude your conference call for today. You may disconnect and thank you for participating.