目標百貨 (TGT) 2001 Q3 法說會逐字稿

Ladies and gentlemen, please continue to stand by.

Your conference call will begin momentarily. Once again, please continue to stand by. Thank you for your patience. Ladies and gentlemen, thank you for standing by. Welcome to the Target Third Quarter Earnings Release conference call. During the presentation, all participants will be in a

listen-only mode. Afterwards, you'll be invited to participate in the question and answer session. At that time, if you have a question, you'll need to the "1" followed by the "4" on your telephone. As a reminder, this conference is being recorded Tuesday November 20, 2001. I would now like to turn the conference over to Mr. Bob Ulrich, chairman and CEO. Please go ahead, sir.

Good morning, welcome to the 2001 third quarter earnings conference call. On the line with me today are: Jerry Storch, Vice-Chairman; Greg Steinhafel, President of Target Stores; Dianne Neal, President of Mervyn's; Linda Ahlers, President of Marshall Fields; and Douglas Scovanner, Executive Vice-President and Chief Financial Officer. This morning Doug will review our overall third quarter results and our financial outlook for the remainder of the year. Then Greg will provide a brief update on Target Stores current business, Jerry will describe current developments in our credit operations, web-based strategies and supply chain initiatives. Finally, I'll wrap up our remarks. Then our management team will respond to your questions. Now Doug will review our results which were released earlier this this morning.

Thanks Bob.

As a reminder, we're joined on this conference call by investors and others who are listening to our comments today via live web-cast. Any forward looking statements 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 expressly prohibited. This morning, Target Corporations announced 3rd quarter earnings per share of $.25, excluding the impact of the charge of $.05 cents per share which we had previously disclosed. This unusual charge is the P & L effect of restoring $800 million of face value of sold receivables-backed securities to our financial statements. Actual EPS, therefore, was $.20. These results are at the upper end of the range of expectations we communicated to you last month, they were driven by strong financial results in our Target Stores segment. Excluding the unusual charge, net earnings grew about 5% to $226 million this year compared to $216 million earned in the third quarter of 2000. Year to date on the same basis, net earnings grew 6% to $753 million this year compared to $712 million last year. In the third quarter, Target Corporations' overall revenues grew by 9%, driven by nearly 13% year-over-year growth at Target Stores. Revenues generated by the credit operations grew by 32% in the quarter. More about that in a few minutes. Our consolidated gross margin rate contracted ten basis points in the third quarter to a rate of 30.5% reflecting the mix impact of growth at Target, our lowest gross margin rate division. At both Target and Mervyn's, third quarter gross margin rate improved somewhat. While gross margin rate declined in Marshall Fields. At reported basis, our consolidated operating expense rate was 79 basis points unfavorable to last year as the beneficial mix impact of growth at Target, our lowest expense rate division, was more than offset by two additional factors.

These other factors are, first, the effect on operating expense of the unusual charge I discussed a moment ago, and, secondly, the ongoing impact of higher credit expenses associated with higher credit revenue growth. Higher credit revenue growth, in turn, was driven by growth in our underlying receivables and by the ongoing impact for the next 12 months of accounting for all of our receivables on our financial statements. Net interest expense, that is the interest expense reported on our P & L combined with the interest equivalent representing payments made to third party holders of the [securitized] accounts receivable increased $3 million in the quarter primarily due to higher average funded balances largely offset by a considerably lower average portfolio rate. Effective on August 22nd of this year, date we restored these previously-sold securities to our financial statements as owned receivables, the payments made to holders of these securities changed from so-called interest equivalent to interest expense. In concept, you can think of these transactions in the future as secured loans. As you know, we've consistently advocated combining interest expense with interest equivalent for analytical purposes. That'll be especially important for the next four quarter as we cycle quarters in which base periods include sold receivables. Importantly, none of these accounting issues has any effect whatsoever on our segment profits, or beyond this quarter on, our bottom line. Our segment reporting has always reflected the effect of the credit operations without regard to any aspect of securitization accounting. For those of you who keep detailed financial models, three individual lines of the consolidated P & L will be affected by this new required accounting method over the next four quarters. From august 22nd this year through August 21st next year, we'll report higher reported credit revenues in an amount precisely offset by the combination of higher SG & A expense and higher interest expense.

As always, Susan Conn and I stand ready explain any of this in detail for those of you with a technical interest in the pieces of this overall equation. Our effective tax rate for the third quarter was 38%. The same rate we experienced in the first and second quarters. Now, let's turn to the performance of our business segment. Pretax segment profit for our three segments combined rose 6% from last year's third quarter to $522 million this year. These results were driven by outstanding growth in Target's pretax profit producing $444 million in this year's third quarter, an increase of 15% from $386 million a year ago. This performance was fueled by a low-double-digit percentage growth in our quarter retail operations and further enhanced by strong growth and contribution to Target's results from guest credit operations. This is the best year over year increase in segment profit in Target Stores in six quarters and brings Target's year-to-date segment profit of nearly $1.5 billion to 10% above last year's level. Mervyn's pretax profit declined 22% in the quarter to $47 million from $60 million in the third quarter 2000 due entirely to soft sales performance. Our profit formula remains quite stable at Mervyn's. At Marshall Fields, segment profit declined 32% to $31 million. Other expense, that is the expense recorded outside our three segments, was $33 million, $12 million higher than the prior year. No one issue is substantial here. Now, let me turn to the balance sheet. Inventory levels for the corporation at the end of the third quarter were 10.7% above prior-year levels primarily reflecting new square footage growth at Target Stores. Adjusting for this growth, Target Stores' inventory was up in line with comparable store sales. Additionally, inventories are up somewhat at Mervyn's and down somewhat at Marshall Fields.

On balance, inventories are at very good condition at all three divisions. Accounts payable leveraging was 77% of inventory at quarter end, one point higher than last year's record performance. At the margin, 85% of the net year-over-year inventory growth was vendor funded. At the end of the third quarter, net accounts receivable for the corporation were $2.7 billion, an increase of about $1.1 billion from the value of the receivables-backed securities we owned last year. This increase reflects restoration of the previously sold receivables to our balance sheet at fair value and also reflects $300+ million of year-over-year growth in managed receivables at quarter end. We continue to expect this figure on grow by another $1 billion or more in the next 90 days due to the combined effect of the rollout of the Target Visa Card and natural holiday seasonality. Finally, I want to share comments with you on our outlook for the remainder of 2001. In light of the current environment, we've planned our business conservatively in the 4th quarter both in terms of sales and inventories. The one-week calender shift due to last year's 53rd week will benefit fiscal November sales and depress fiscal December sales relative to last year. But, for the 4th quarter overall, comparable stores sales growth for the corporation is expected to be in the low single-digits consistent with the year-to-date growth. From today's vantage point, we believe the current median first-call estimate of $1.48 per share for the full year appears to be a reasonable single point estimate. Implying about $.65 in the 4th quarter. I say implying because an unusually high number of sell-side analysts, a total of six who contribute to that database, are showing an annual figure which isn't equal to the sum of the quarters. Resulting in a $.66 consensus for the quarter in that database.

While quarters don't always add to the annual figure, I know of no reason for that to be an intentional element of anyone's earnings models at this point. For reference we earned $.61 in the 4th quarter last year. Now, Gregg will review Target's recent business trends and our future store growth plan. Gregg?

Thank's, Doug.

Target's third quarter performance again re-enforces Target's unique strategy and excellent operational discipline. We continued to gain market share as total revenues in the quarter grew 12.6% to $7.6 billion in comparable store sales in the quarter again rose modestly increasing 3%. Despite a challenging environment, we believe that Target delivered exceptional third-quarter financial results. Pretax profit grew 15% to $444 million. Profit margin expanded 11 basis points to 5.86% for the quarter. This improved profitability is attributable to a modest improvement in gross margin rate and the contribution of credit. Average ticket and guest traffic patterns during the quarter continued our year-to-date trends. Average ticket increased a low to mid-single-digit percentage while traffic was flat to down slightly from a year ago. Year-to-date, revenues at Target stores rose 11.7% reflecting 3.1% growth in same-store sales and 8.6% contribution from new stores and credit. For the nine months, pretax profits grew 10.3%. These strong financial results continue to be driven by Target's steadfast commitment to our expect more/pay less strategy. We remain focused on creating excitement for our guests through innovative merchandising, marketing and presentation and by maintaining our vigilance in delivering great value to our guests through competitive pricing and financial and operational discipline throughout our organization. During the third quarter, we opened a total of 39 new stores including 28 new discount stores and 11 new

SuperTarget stores completing our new store growth program for 2001. Net to relocations and closings we now operate 1,055 stores in 47 states including 62 SuperTarget stores. For the full year our new store growth produced a net increase in square footage of about 11%. Modestly higher than our historical growth rate of 8% to 10% rate annually. Similarly, in 2002, we also expect net new square footage growth of approximately 12% to be higher than our historical growth rate as we open most of the 35 former Montgomery Ward stores and 75 to 85 other locations. We remain on track with these plans and expect to open our first wave of stores including 19 discount stores and 13 SuperTarget stores in March. As we move beyond 2002, we expect our annual rate of growth to return to our more normalized increase in the range of 8% to 10%. Our performance in the first nine months of 2001, despite a difficult retail environment gives us even greater confidence in Target's ability to continue to thrive and prosper. So we expect competitive pressures particularly in the near term to remain intense; We believe our strategy positions us well to gain market share and deliver strong profit growth for many years to come. Now, Jerry will give you a brief update on the credit business and on-line businesses and our progress on in-stocks. Jerry?

Thanks, Gregg.

Two significant developments occurred during the third quarter. We began our national rollout of the Target Visa Card, and we announced and launched the Target.Com store on Amazon.Com. Both of these initiatives helped us strengthen our relationships with Target guests, drive incremental retail sales and extend our differentiated brand image. In early September, we began upgrading current Target Guest Card holders to the Target Visa Smart Card. We're pleased with our guests' response to this innovative new credit vehicle. To date, we've activated more than 1.4 million cards and we expect to have over 2 million active accounts at year end. Card usage has been completely consistent with our expectations based on patterns observed in our three test markets. We continue to expect Visa to contribute $1 billion or more in incremental receivables by year end. During the third quarter, about half of our total accounts receivable growth is attributable to Visa. Pretax contribution from credit remains strong. Fueled by growth in credit revenues at all three divisions and particularly Target. Credit contribution increased in the third quarter essentially in line with growth in average receivables serviced. Delinquencies and net write-off experience remains well within our expected ranges. Additionally, we continued to maintain a somewhat more conservative approach to potential credit risk than many competitors. Positioning our balance sheet for modest net deterioration in delinquencies and write-offs. As we further expand our credit business to the growth of Target Visa, we plan to remain consistent with this practice. We remain excited about the future growth potential of our credit business and are confident that credit will continue to deliver solid performance for the remainder of this year and well beyond.

The other major development in the quarter was our strategic alliance with Amazon.Com. We believe this partnership represents a breakthrough for our guests and internet shopping. And creates a strong competitive advantage for Target. The alliance has two major components. First, several weeks ago, we launched a Target Store on Amazon.Com. The site is initially offering an edited assortment of Target merchandise but will expand next year to a more comprehensive merchandise selection. Second, in addition to this site on Amazon.Com, we'll launch an upgraded Target.Com site next summer, that combines our entire assortment from Target.Com, Marshall Fields.Com, and Gift Catalog.Com. And includes Amazon's entire selection of books, music, and videos. Our guests will enjoy all of the customer care, technological sophistication and ease of shopping available from Amazon by being able to select from Target's broad array of differentiated merchandise. We believe this alliance with Amazon.Com will accelerate our online growth, deepen our relationships with existing guests and position us to capture considerable market share as the internet continues to develop. Year-to-date through October, traffic to our sites is about 2 1/2 times higher than a year ago. And sales are approximately 3 1/2 times greater than last year's levels. We're quite pleased with this performance. We believe that this exceptional growth affirms the wisdom of our integrated store and web strategy. Finally, several times in the past six months, we shared information with you about important new supply chain

initiatives and our heightened focus on improving in-stock levels. I'm very pleased to tell you that our efforts are producing tangible and positive results. Today, we have the highest in-stocks in our company history on the top 1,000 items and also among the highest in-stock levels ever recorded on the rest of the assortment. We're making tremendous progress in implementing our supply chain vision for the future and believe these steps are critical to our ability to gain market share and deliver increased profitability in the coming years. Now, Bob has a few final comments before we take your questions.

Thanks, Jerry. As you've heard from us many times before and heard again this morning, we're taking measured and disciplined actions to ensure we continue to grow and prosper even in a difficult environment. We continue to invest in our core strategies and identify new opportunities that extend and strengthen our store brands. Our third quarter performance, particularly at Target Stores, demonstrates the importance and the benefit of our commitment to our differentiated strategy. We believe that our continued focus of enhancing guest relationships through delivery of innovation and value positions us well to generate substantial shareholder value for many years to come. That concludes our prepared remarks. Now Gregg, Doug, Jerry, Dianne, Linda, and I will be happy to respond to your questions.

Thank you, ladies and gentlemen, if you would wish to register a question, you'll need to press the "1" followed by the "4" on your telephone. You'll hear a three-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your request, you may do so by pressing the "1" followed by the "3." If you're on a speaker phone, pick up the handset before doing the request. Our first question comes from George Strachan from Goldman Sachs. Please go ahead.

Two questions if I could, it looks like receivables were up about 12% in light of Jerry's comment about anticipation of some deterioration in trends. Are you increasing reserves commensurately with the receivables increase? Second question would be, you obviously have a big class of super centers that are now online. What are you learning from them? What's different from new openings in the past?

Let me just first respond. The comment about degeneration was saying we reserved to be able to absorb deterioration if it were to occur. But in fact, the quality of [INAUDIBLE] remains very good. And our current trends of delinquencies and write-offs are well within our expected levels. In fact, we're pleased in what we're seeing in delinquencies right now.

Regarding super centers, George, we're pleased with the performance in our super centers. We continue to evolve in terms of our assortments. We continue to expand our micro-marketing emphasis. We continue to focus hard on improving the productivity in our stores and in our overall profit formula in SuperTarget. But, overall, we're continuing to be pleased.

And you're seeing productivity up relative to earlier super center openings?

That's correct. We are.

Our next question comes from Jeff Feiner with Lehman Brothers. Please, go ahead.

Doug, in regard to the $.65 4th quarter number you referenced, could you elaborate a bit more on expense numbers inside of the general expense ratios where you see expenses going up and going down and talk to gross margins as it relates to merchandise margins for the 4th quarter?

Yes, first of all, i think we need to split the expense rate discussion into our retail businesses and our credit business. Certainly expenses in the credit business will rise sharply. I expect those expenses, oh, by the way, to rise no higher than the increase in credit revenues. So I expect continued forward progress in profitability in our credit business. But it's a very important issue to understand that that increase in credit expenses will certainly have an adverse effect on reported SG & A as a percent of revenue. Inside our retail businesses, I'm going to start with gross margin rate and go to operating expense rate. Certainly at Target, our equation remains quite strong in light of today's environment. Obviously, if the top line were stronger, it would be a delightful profit outcome. But with -- but with the kind of experience we've had year-to-date, more or less 3% comp store sales performance, we've essentially held the line on the gross margin rate line and generally preserved the profit dynamics at the expense rate line as well. Of course, we're moving into a period where we begin to cycle the substantial progress we made in the expenses beginning in the 4th quarter of last year. At Mervyn's, the profit equation remains very sound. We fell off track a bit in the current quarter in terms of reported profitability, because the top line was quite a bit weaker than it had been through the first two quarters of this year. I expect a good solid profit performance of Mervyn's in the 4th quarter, with essentially no meaningful changes in operating expense rate or margin rate. Fields, of course, continues to struggle. I would not expect Marshall Fields' margin rate in the 4th quarter to be favorable on either the gross margin or operating expense line.

Thank you, Doug.

Uh-huh.

Our next question comes from Dan Barry with Merrill Lynch. Please, go ahead.

Good morning. I realize the Amazon and internet business is somewhat small, but can you give us the impact on the third quarter? Was it meaningful? Was it negative year-to-year? When do you think you might be profitable in that part of the business?

The overall impact of the internet is clearly still very small in our business. As for whether it is profitable or not, we clearly don't sell merchandise at a loss. The web sites do more than simply sell merchandise. There's a lot of marketing activity and brand building activity on the sites. And we still do make an investment in those sites. And probably will for at least, you know, the next year or two. Bit it's not a very big number compared to the size of our company as a whole or our expenses.

Overall business was up in the area of 3.5 times what it had been running for last year.

But did it help or hurt the third quarter versus last year?

Immaterially different. I made the comment earlier that other unsegmented activity, net year-over-year pretax declined -- was unfavorable, $12 million. I also made the comment that no one issue was very large. So, what I'm saying is this activity is an immaterial contributor plus or minus to the $12 million [unfavorability] on that line.

Thank you, Doug.

Our next question comes from Jeffrey Klinefelter with Piper Jaffray. Go ahead, sir.

Yes, a couple of quick questions for you, Doug. What impact will year-over-year advertising have, the expense of advertising in Q4. And then, any insights into how you anticipate the launch of these new game systems and in particular the licensed product coming off these two big movies in the 4th quarter on year over all business.

Well, in terms of the advertising expense rate, we're expecting similar expenditures this year versus last year. So there's not a material difference between the two years. In terms of what is selling in terms of gaming and toys. As you know, within the last week was a big week for the video game category. And we like all the other retailers sold through the hardware of both systems. We're very pleased with the results and very pleased with the software sales there. Additionally the sales of the retail products associated with the movies like "Monsters" and "Harry Potter" have been exceptional. We've seen strong trends in toys. Strong trends in electronics and strong trends so far this holiday in the home categories.

Thank you.

Our next question comes from Emme Kozloff with Bernstein. Please go ahead.

Good morning. I have a question for Jerry. Could you us the details on the average credit line issued on the Target Visa and potential -- the average revolving balance on the Visa. One other question for Gregg, just in terms of gross margin improvement in the Target division, can you just describe what it was a function of? Higher [IMU's] Lower markdown? Et cetera?

In general, the credit line starting visa runs between the $2,500 range up to the $10,000 range. We obviously do not have the portfolio matured yet enough to tell you what the average actual balance outstanding will be. But it will be several thousand dollars near the -- you know, my assumption would be, in the $3,000 to $5,000 range. But, it hasn't matured yet.

Regarding the gross margin performance at Target, the results of that improvement was principally through strong or improvement in our markdown control due to strong inventory managements and tight controls that we've had on our business all year long. And as Doug said, our inventories are well positioned as we head into 4th quarter as well.

Great, thank you very much.

Our next question comes from Linda Kristiansen with UBS Warburg. Please, go ahead.

Two questions. First, I was wondering what's your latest thinking with respect to self-distribution at the super centers? Secondly, on the credit business, you continue to sound very confident certainly about the next 12 months. Given the outlook for the unemployment rate I was just wondering why you are so confident.

First on the self-distribution for the super centers, we continued to increase the percentage of the goods in the super centers that we carry through our existing distribution system particularly of dry grocery goods. We continue also to explore alternative methods of distributing the perishable products. In the near term, it is very likely that we'll continue to use wholesalers for distribution for super centers given the disperse nature of the stores. That probably will not change for perishables for sometime to come. In regards to our confidence in the credit business, we believe that we've done a good job underwriting the portfolios. We continue to see, in fact, favorable trends compared to what we'd expected and goaled. That's why we remain quite confident for the future here.

Thank you.

Our next question comes from Bruce Missett with Morgan Stanley. Please go ahead.

Good morning. Could you give us a little idea -- You've indicated you have the highest in stock particularly in top thousand items, I believe it was that you said, Jerry. Could you give us an idea as to what you've done differently if there are big items? And two, if it shows up at all in the comp store sales' numbers maybe for those segments that you've had the most success on in getting the in-stock numbers up.

Sure, I'll give you very quickly. I think the major initiative in regards to the top 1,000 is that we increased the amount of those goods that we kept closer to the stores at our regional distribution centers so that we'd have an ability to respond rapidly to sales trends that emerged. Additionally, we highlighted those items in the stores with special stickers on the shelves and training for the stores so that we're heavily focused as an entire team in returning in-stocks of those top thousand and we have supplies ready to replenish as they sell through. That focus has been the major reason for the increase in the top 1,000. There are many initiatives across the supply chain beyond those. We opened our first import warehouse this year, which will help us to distribute correctly imported merchandise to the different regions of the country. We implemented our predistribution system recently which enables vendors to put together the correct color and skew assortments in the individual stores. And those are just some examples. A vast array of supply chain initiatives. And we're just going to get better and better in that area.

In terms of the sales by segment, a lot of these fast-moving items are in the commodities, health and beauty aids, those categories. And sales in those areas have been a little stronger than in the balance of the assortment.

The most important thing there is we want to make sure and we are sure that we're the most reliable supplier of those products for our guests so they know they'll be there when they come to Target and they'll buy all kinds of other stuff too.

Can I lob in a quick last question? Gross margins have been a question for other discounters because there's been a lot of promotional activity. This didn't even come up as a topic. What's your sense on what is going on out there particularly as it effects you guys rather than the whole world?

Well, I mean, it's been very competitive all year. And we continue to stay very focused on Wal-Mart as the primary price leader in our segment. To a lesser extent, we're focused on, you know, the recent changes at K-mart and their competitive posture. We haven't seen anything out of the ordinary or anything unusually different at this time of the year compared to other times of the year. People are very aggressive. They drop big toy catalogs. They're aggressively priced throughout their store. But it's not different from what we've experienced over the last couple of years.

But you're not seeing a [C] change in the way these pricing environments -- are for your competitors?

Not really. I mean every year, everybody takes their shots on the items that they believe to be -- or they want to take the most competitive position on, and, um, you know, over all it's very much a give and take, but we don't believe when we add it all up that the environment is materially different than it has been in the past.

And also, we're executing a very similar promotional plan to the one we executed last year. You won't see any dramatic changes from Target. Obviously, we'll be extraordinarily competitive and make sure we have the best values for our guests, but it's not as though we're changing our market significantly.

These things have been slow by quarter, of course, Bruce. But I think it's quite remarkable when I look at Target Stores' gross margin rate year-to- date. Not only has it immaterially changed from year-to-date last year but no one element of that gross margin rate has changed very much. Couple are up immaterially. Couple are down immaterially. Essentially, we've preserved the dynamics of delivering gross margin rate this year that were in place a year ago.

Terrific, thank you very much.

Our next question comes from Jeff Stinson with Midwest Research has our next question. Please go ahead.

Can you comment on the promotional strategy for both Mervyn's and Marshall Field's during the holiday season?

I'll have Dianne comment first on Mervyn's and then we'll have Linda follow up with Marshall Field's.

As compared to last year, we have an increased print and broadcast exposure for 4th quarter. We've added in additional sense of urgency events. Two-day and three-day sales. We've seen great success so far on those events. We'll continue that through the 4th quarter.

At Marshall Field's, we've also redirected our marketing expense to be more traffic driving. We've added one event to the calender. It's not dramatic increase in promotional activity, but we're focused on more traffic-driving, harder-hitting price-oriented promotions for the Christmas selling season.

Any of that include direct mail related to the credit card?

Not at Marshall Field's.

Nothing of any great significance. We've had some as we went through the year. But there's nothing special planned for the next 30 days.

Our next question comes from Shari Eberts with JP Morgan. Please go ahead.

Good morning, everybody. You mentioned at Target that toys and the electronics were off to a good start. Can you talk a little bit about why it looks like a month for the whole of November is off to a slow start in that division and how you expected to see that progress?

Well, as I said is, the strength in our business is in the home categories and some toys and electronics. On the flip side of that, the start of November has been softer than we would have liked in our apparel categories. It's been a bit soft in sporting goods as well. So that is the combination of the sales' dynamics for the first two weeks.

Okay and then a question just on the credit. Can you talk about what the Visa rollout contribution was to the pretax segment profit growth for the quarter? And then how we should expect to see that progress over time.

Visa contributed immaterially in the third quarter to our growth in pretax segment product. Guest credit at Target Stores contributed quite strongly, but it wasn't Visa. It was the regular Target red card or guest card that produced the excess, extra profitability over last year's levels. Obviously as we move forward and generate huge Visa receivables, I expect Visa to begin contributing quite meaningfully to Target's profitability growth in 2002.

Okay. And so the quarter at the Target division, is it fair to say, it was about half of the increase or half of the growth?

No. My comments earlier were that of Target's 15% increase in segment profit, our retail operations were up low double digits. Think of that as 10%, 11%, 12% of the growth driven by the retail operation. So in essence, guest credit contributed around 1/4 of the year-over-year increase in profitability at Target Stores, our retail operations contributed about 3/4.

Thank you.

Our next question comes from Deborah Weinswig with Bear Stearns.

Good morning. A quick question on inventories. This year, year-over-year in the 3rd quarter inventories at the Target division were up 14.6 versus 12.9 last year. Is that that a function of the higher in-stock levels? What's driving the higher levels?

The main thing that's driving those levels is our year-over-year change in Square footage is higher this year compared to last than it was in last year compared to '99. Essentially our square footage growth year-over-year is up low double digits.

And my last question is, I -- just from physically being to the SuperTargets, I have noticed a fantastic improvement in just very high in-stock levels. Would you say that anything has changed as far as how you're operating with either your percentage of products that's being distributed by supervalue or [fleming] or is it just as you've experience has occurred?

I think it's just experience in doing everything I talked about earlier. You know, continuing to do it better.

Thank you very much.

Our next question comes from Brian James with [Loomis Sales], please go ahead.

Hi, as you add more receivables to your Target guest card and separately as you add receivables to your Visa portfolio, what kind of reserves are you layering on the balance sheet for those incremental receivables? I know originally I think on the Target card you were putting in 7%. Is that still the case?

We lay out all the statistics, of course, in careful detail annually in our annual report. And we have had some discussion internally and externally about what level of incremental disclosure will move forward on a quarterly basis. But, the answer to your question in essence is we continue to reserve consistent -- on a consistent basis with our prior practices and that means quite specifically that we pay careful attention to individual subsegments of our credit portfolio and reserve appropriate to the risk of the subsegments. Over the last couple of years, the portfolio has grown to be somewhat higher in credit quality, somewhat lower write-off experience, and, therefore, reserves as a percentage of receivables have fallen somewhat. Very importantly, reserves as a multiple of current-year write-offs have been steady as a rock at 1.4 to 1.5 times current-year write-offs. And I expect that relationship to remain quite steady for sometime to come. It'll remain quite steady until some fundamental dynamic were to change in our credit portfolio.

Okay. Thank you.

Our next question comes from Rick Church with Salomon Smith Barney. Please, go ahead.

Thank you. A question for Dianne. I was wondering if you might share with us, you know, some discussions that you've had in looking out over the next two to three years in preparing for increased competitive intensity in the California markets specifically and how you can go about protecting the profit formula of Mervyn's?

I think we have a stable profit formula in place right now. Our emphasis specifically for 2002 we're working on is maximizing our top-line sales growth. As I mentioned on the last call, we're really looking to go after some of the [uptrending] areas which happen to be our petite misses and women's. Our junior and young men's business our decorative home. And then key items across all divisions. Obviously denim is still a real important part of our business as well as being more aggressive in downsizing some of our unprotective areas within the store. We're also expanding some of the new brands that we've implemented this fall that have been successful and continue to look for new brands to bring into our assortment. Um, we've increased, as I mentioned earlier -- increased our penetration in both print and broadcast exposure. We're continuing that through 2002 with sense of urgency events and different events throughout the season. We're rolling out a new hispanic initiative for next year which we're currently working on. Let's see, we're also --

I was thinking more --

We have a signing package that we're putting in the stores for spring '02 that will not only make the shopping experience easier for our guests but will make it for our team members within the stores.

I think he's also referring to what you're doing freshening up in the California stores.

Oh, absolutely. We have probably have a 37 to 40 stores right now that we are doing some basic freshening up and face-lifts with new carpeting, new fixtures and new fitting rooms and looking at the outsides of the store and also.

I was specifically interested in thinking along the lines of 03, '04, beyond '02, how you will protect the profit formula as clothes enters the California market.

It is our overall business initiative. Obviously, we're also looking at the real estate. We're freshening up and remodeling. We think we'll be well set for them. But we're works as hard as we can. That's basically the basic profit formula rather than doing anything particularly erratic. You have to remember, of course, that we already compete with them in Texas, Michigan, Minnesota and Colorado. So we've learned a fair amount about their entries. We're comfortable.

Also, while they're a fine competitor. Keep in mind that in any one market, there's a small share of the middle market when you view the large-scale size of Sears and Penney's and Mervyn's and also the fact that Wards, now has gone out of business. And they were a major player in the same markets in California as you know.

A quick question, Jerry. You referred to your two components to your Amazon initiative by next year. The second one being the integration of the -- was it all three Target divisions into one site or was it just Marshall Fields and Target Stores?

We'll offer all of our merchandise at the same site, at one site, which, you know, Target.Com as the portal into that.

That'll include Mervyn's?

It'll include some Mervyn's merchandise, yes. But that's not the major focus. The major focus is Target and Marshall Field's and the gift catalog merchandise from the wireless signals and seasons.

Thank you.

Our next question comes from Sally Wallach.

Could you talk a bit more about the roll out of the Target Visa card. What percentage of Target Guest Card holders have been offered that card? What happens from here? Next year, for example, do you continue to offer it to more of your Target Guest card holders do you begin to go beyond that pool of potential card holders? Anything? Any color on that would be helpful?

We targeted the top tier of the Target Guest Card holders for the initial upgrade which is the launch that we've almost completed now. And think of that as taking a look at maybe the top half of the portfolio and figuring out which of those would be most likely to use that card. Going forward, most of the growth will come from new accounts opened up in store where the Target Visa will be the principle offer in the store with the Target Guest card still being offered for those who don't qualify for the Target Visa.

Okay. Thank you. And, um, also, you may have mentioned this but how many SuperTargets do you plan to open next year?

30 or more.

Okay. Thank you.

If there are any additional questions, please press the "1" by the "4" on your telephone. Our next question from Jeffrey Klinefelter with Piper Jaffray. Please, go ahead with your follow-up.

Quick follow-up for Jerry. Can you comment at all as the Target Visa rolls out sort of what type of access to data you have that's differentiated if the past cards and with the smart chip technology you anticipate the early benefits being?

Sure. You know, clearly some of the best data we'll get that we don't get today is where else our guests are shopping. And that's always fascinating to take a look at. With the chip itself, that will provide us with the ability to have offers which the card will carry on the chip across our platform. For example, you'll be able to go to Target.Com, download offers which you'll use in the store and vice versa in the store have offers which are downloaded to the chip which you can use at Target.Com. We also think the chip will have applications down the line for more integrated loyalty programs across our company and maybe with outside companies as well. So we're very excited about the innovation represented by the card. It is already today the largest Visa Smart card in the U.S. as we've completed the first stage of our launch.

Thank you.

Once again, if you do have a question, please press the "1" followed by the "4" on your telephone. I'm showing no further questions at this time. Please continue with with your presentation or any closing remarks.

Thank you all for your participation. We hope that you all have a great holiday season. Please remember to shop at Target, Target.Com, Mervyn's and Marshall Field's. That concludes Target Corporation's Third Quarter Earnings conference call.