目標百貨 (TGT) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Target Corporation's year-end earnings release conference call.

During the presentation, all participants will be in a listen-only mode.

Afterward, you will be invited to participate in a question-and-answer session.

At that time if you have a question, you will need to press star one on your telephone touch pad and star two to cancel.

As a reminder, this conference is being recorded, Thursday, February 20th, 2003.

I would now like to turn the conference over to Mr. Bob Ulrich, Chairman and Chief Executive Officer.

Good morning.

Welcome to our fourth quarter and year-end 2002 earnings conference call.

On the line with me today are Gerald Storch, Vice-Chairman;

Gregg Steinhafel, President of Target Stores;

Diane Neal, President of Mervyn's;

Linda Ahlers, President of Marshall Field's; and Doug Scovanner, Executive Vice President & Chief Financial Officer.

This morning Doug will review our 4th quarter and total year 2002 financial results and share our outlook for 2003.

Then Gregg will discuss Target's performance in more detail and highlight some of our 2003 initiatives.

Gary will describe current developments and results in our financial services business and our supply chain.

Finally, I will wrap up our remarks and facilitate the question-and-answer session at the conclusion of our prepared comments.

Now, Doug will review our 4th quarter and full-year results which were released earlier 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 live via web cast.

Also, please note that any forward looking statement we make in our remarks this morning should be considered in conjunction with the cautionary statements contained in our SEC filings.

Any reproduction or rebroadcast of this call is prohibited.

This morning, Target Corporation reported yet another year of strong growth in revenues and earnings, sustaining our consistent long-term track record of achieving profitable market share growth. 2002, our overall revenue increased slightly more than 10% to nearly $44 billion.

Our net earnings increased about 21% on a [INAUDIBLE] basis, up from 17%, compared to what we believe is a more appropriate 2001 base figure.

Our earnings per share, of $1.81, well exceeded our internal expectations for the year and the beginning of first year call median expectation of $1.75.

We believe this performance reflects the strength of our overall corporate strategies and our consistent implementation of them.

We are confident we will continue to produce strong overall results in 2003 and beyond.

Let's turn to some specific highlights of our 2002 performance and outlook for 2003.

Consolidated gross margin rate expanded by more than a full percentage point in 2002 to a rate of about 31.5%.

Attributable to both Target and Mervyn's partially offset by the mixed impact growth at Target, our lowest gross margin rate division.

This is particularly noteworthy, in light of the substantial price deflation reflected in Target's top line performance, driven in part by our policy of matching competitive pricing of like items, and in part by our initiatives to provide even greater value to our guests on merchandise throughout the store.

DNA expense--which excludes depreciation and expenses associated with our credit card operations-- rose modestly as a percentage of sales in fiscal 2002, because our same store sales occurred more slowly than we expected.

And because certain inputs, such as medical expenses grew sharply.

The effect of these issues on our overall results is partially offset by the ongoing beneficial mixed impact of more rapid growth in Target stores segment.

Depreciation and amortization expense grew about 12% for the year to $1.2 billion.

We continued aggressive reinvestment in our business.

We invested about $3.2 billion of capital in 2002 to increase our store base, to remodel our existing stores and to provide the necessary distribution and systems infrastructure to support our continued growth.

At Target stores, this translated to 15 million square feet of net new store space in 2002, resulting in a 12% larger aggregate retail footprint at year end.

In 2003, we expect to productively reinvest another $3.2 to $3.4 billion.

Net interest expense for the year increased between 17 and 18%, to $588 million from $500 million in 2001.

As a reminder, our total interest expense in 2001 includes net interest expense as reported on the P&L, along with payments made to the holders of our securitized receivables for periods prior to August 22 of 2001.

About $24 million of our net year-over-year increase in 2002 is due to the early call or repurchase on beneficial economic terms of approximately $266 million of debt.

As a reminder, the costs associated with this kind of activity prior to our adoption of SFAS-145 at the beginning of 2002, were classified as extraordinary items.

Today, these costs are included in interest expense and prior amounts have been classified to comply to current accounting.

The remaining $64 million increase in net interest expense is attributed to higher average funded balances, partially offset by the favorable effect of lower average portfolio interest rates. 2003 interest expense is expected to increase only modestly from 2002 if at all, as continued growth in the funding necessary to support both Target's expansion and our credit card operations will moderate and will likely be substantially offset by continued interest rate favorability.

Of course we may also continue to engage in attractive refinancing transactions, which would add one time amounts in interest expense in exchange for ongoing, long run savings.

The [INAUDIBLE] provision for both the fourth quarter and full year was a credit of $12 million or 1 cents per share, compared with an $8 million charge in the same periods a year ago.

Our annual effective tax rate of 38.2% is 20 basis points higher than last year's rate and consistent with the rate reflected in both the 2nd and 3rd quarters of this year.

In 2003, we expect our effective tax rate to return to the former 38.0% rate.

Let's briefly review our results by segment.

For the full year, our overall pretax segment profit increased 16.7% to $3.46 billion.

These results were driven by strong growth of pretax profits at Target stores, while segment profit at Marshall Field's was essentially equal to last year.

The annual segment profit at Mervyn's declined.

Separately, the so-called "other" line of our pretax segment profit reconciliation table, which is where we reflect the net effects of our business active outside of our three business segments, increased to $26 million to a total net expense $109 million during the year.

This increase was driven principally by the benefit plan changes [INAUDIBLE] in the year.

In 2003, we expect this group of activities to result in a net expense figure at or slightly below our 2002 level.

In the fourth quarter, pretax segment profit for the three divisions combined, increased 1.4% or $19 million to $1.29 billion.

Pretax profit at Target stores rose $87 million 8.0% in the quarter, to $1.165 billion.

This increase is attributable to continued strong gross margin rate expansion, partially offset by expense rate deterioration that was mainly a result of weaker than expected comparable store sales growth.

Credit card results also played a key role here.

And we'll discuss credit cards in a moment.

Later, Gregg will discuss Target's results in more detail.

At Mervyn's, pretax profits in the quarter declined $56 million to [INAUDIBLE].

And at Marshall Fields, fourth quarter pretax profits fell to $12 million to $51 million.

At both these divisions, the deterioration reflects the direct and indirect affects of very poor sales performance.

Now, let me turn to the balance sheet.

On an overall basis, Target Corporation's net assets grew about $3.8 billion during the year.

This growth was evenly split between fixed assets and guest accounts receivable.

We funded this overall growth through a combination of increases in net new debt totaling about $2.2 billion and through growth in shareholder investments of about $1.6 million.

At year-end, inventories were in excellent condition, reflecting a clean transition for all three retail divisions from fourth quarter to first quarter.

Growth in inventory at year-independent of $311 million overall, was more than fully funded by the $524 million increase in accounts payable.

Results in payables leveraging of a remarkable 98.4% at year end.

Our credit card operations continue to strategically support each of our retail segments while producing stable, predictable and profitable financial results.

Predictable and profitable financial results which we believe are sustainable in each quarter of 2003 and well beyond.

Our credit card operations in 2002 is the growth and performance of the Target Visa card.

As a result of discussions with many of you who analyzed our credit card results, we have decided to begin separately disclosing several key performance statistics for our Visa product and for our proprietary cards in the aggregate.

This information for each quarter of 2002 was disclosed in the supplemental release issued earlier this morning, and will be available on a quarterly basis as we move forward.

We ended the year with just under $6 billion in gross receivables.

Compared with $4.1 billion last year.

Credit cards contributed $532 million of our pretax segment profits for the year, or about 15% of the total, representing the same proportion of 2001.

Our net portfolio yield for the year, which represents our pretax return on the capital invested in receivables after all operating expenses was 11.0%.

At this rate of return, we enjoy a favorable spread to our funding costs of more than 500 basis points.

Most importantly, this net portfolio yield is after the effect of $138 million of incremental accounts receivables reserves.

We firmly believe that these reserves are fully sufficient to maintain the integrity and consistency in our practice for providing future write-offs at the time receivables are first created.

Looking forward into 2003, we believe that we are likely to continue enjoying a net portfolio yield in the range of 11%.

And even if the overall credit environment deteriorates, we believe it is very unlikely that our yield would fall below 10%.

In any event we remain quite confident in our ability to preserve our 500-plus basis point favorable spread to our funding costs, and expect to benefit from yet another reduction in our funding costs in 2003 of, perhaps, 30 to 50 basis points.

As 2003 progresses, we expect our year-over-year receivables growth to begin to moderate as cycle against periods of terrific growth in 2002.

On average for the year, we expect to enjoy the benefits of about $1 billion of additional receivables.

Our concurrent net write-offs will again increase sequentially in the first quarter of 2003, and are then likely to stabilize within a range -- within a reasonable range surrounding that figure.

As our Visa portfolio matures on schedule.

Significantly, six months lag write-offs have already reached mature levels and will likely remain near our current experience or improve somewhat as we move forward.

Bankruptcy remains a key driver of the net write-off experience for us and many other card issuers.

In summary, while we recognize that we are operating in a harsh credit card environment, our past practices and financial results have demonstrated a consistent application of disciplines in underwriting, processing, collections and financial reporting.

This record gives me a high degree of comfort that our strong credit card performance will continue in each quarter of 2003 and well beyond.

One brief accounting note before I wrap-up.

We've decided to begin expensing stock options and other kinds of stock-based compensation in 2003, by adopting SFAS-123, by using the prospective transition method.

This effect in our results will likely be less than 1 cent per share this year, but will add expense of about 1 cent per share annually to each of the following four years before reaching equilibrium .

And finally a few comments on our outlook in the aggregate for 2003 earnings.

The current average EPS expectation on first call for the full year is $2.05 and the median is $2.06.

From today's perspective, these seem to be reasonable point estimates.

Equally balanced between the risks of modest under performance in a weaker than expected environment and the prospects of delivering stronger results in a better environment.

Assuming we achieve these results, we will likely get there by achieving more modest growth in sales and earnings in the first three quarters because of the particular strength of those periods in 2002, and potentially stronger growth in the 4th quarter of 2003, given the relatively soft sales performance of the recent holiday season.

Now, Gregg will review Target's 2002 results and outline our plans for 2003.

Thanks, Doug.

Target stores delivered another quarter and another year of excellent results, particularly in light of the challenging sales environment and the difficult comparison to our 2001 fourth quarter performance.

We continue to increase our overall market share, generated double-digit growth and pretaxed profits, and thoughtfully executed our expansion plans and our differentiated strategy.

Additionally, we intensified our efforts to deliver exceptional value and greater in-stock reliability to our guests.

For the full year, Target's comparable store sales grew at 2.2%-- below our expectations and our historical trend.

We believe this performance reflects the current macro environment as well as the impact of retail price reductions that have totalled more than a billion dollars over the past year.

Our total revenues in 2002 increased 13.3%, to $36.9 billion, driven by contributions from growth in our credit card operations and new square footage.

Pretax profits at Target stores rose 21.3% to $3.1 billion for the full year, while profit margin expanded by 55 basis points to 8.4%.

This increased profitability was attributable to strong gross margin rate improvement which we -- achieved by reducing our merchandising acquisition costs through better negotiating, more efficient sourcing and the benefit of our increased scale.

Additionally, as a result of continued inventory discipline, we enjoyed favorable Markdown performance in 2002.

Target's expense rate for the year was favorable to 2001, principally due to a lack of sales leverage.

During 2002, we opened a total of 114 new stores in 34 states.

Net of relocations and store closings, these openings included 94 new stores, consisting of 32 Super Target stores and 62 discount stores and resulted in a net gain of approximately 15 million square feet, or 12%.

In 2003, we expect to add net new square footage, more in line with our historical annual growth of 8 to 10%.

With Super Target accounting for approximately 30% of this growth, in terms of store counts, this means that we plan to open in the range of 100 total new stores this year, or approximately 80 stores, net of relocations and closings, of which 23 will be Super Target stores.

Consistent with our normal pre-opening pattern, our first cycle of 2003 stores comprised of 23 net new locations, is scheduled to open in the first week of March, with the remainder of our 2003 openings planned for July and October.

During 2002, we continued to leverage our brand in our merchandising expertise, further differentiating our assortment from our competitors.

We expanded our offering of exclusive brands, including Tupperware and Woolrich.

We introduced new design partnerships including the launch of Physical Science, which is developed in collaboration with Mark Echo, and we strengthened our presentation of our own brands and seasonal events to create in-store excitement.

Additionally, we reiterated our long-standing commitment to provide superior value, by offering compelling prices and in-stock reliability.

To achieve these objectives, we continued to match Wal-Mart's prices on all identical items.

These items account for about one quarter of our SKUs and 40% of sales.

We also continue to benchmark a large amount of similar items, lower our prices on these products appropriately.

We initiated price reductions on a meaningful portion of our assortment in keeping with our Expect More, Pay Less promise.

Furthermore, we integrated new vendor management and supply chain initiatives into our day to day operations resulting in a significant increase in our in-stock performance.

In 2003 we plan to build on these successes and deliver another year of strong financial results.

Our key merchandising initiatives in 2003 include the introduction of fashion maternity apparel from Liz Lange.

Sleepwear, fashion accessories, home textiles, tableware and stationery from Cynthia Rowley.

Women's apparel from Isaac Mizarahi and a line of children's apparel called Genuine Kids by Oshkosh.

In addition, we continued to build on our success of our own food brand at Super Target as we aggressively expand Market Pantry and Archer Farms into new categories and items, and roll out the top performance to all Target stores.

These, as well as our other merchandising initiatives will allow us to maintain our distinctive brand image and consistently delight our guests with fashion newness.

Equally important in 2003, we remain focused on opportunities to lower our acquisition costs so that we can continue to offer exceptional value to our guests and deliver superior profitability.

With more than 1300 team members in 42 countries, AMC, our internal sourcing organization is a vital partner in this effort.

Together, we are actively working to enhance our internal product design and product capability to substantially increase our volume of direct imports, to implement the more comprehensive approach to vendor negotiations and to accelerate our timetables for merchandise production in order to reduce expense and increase our speed to market.

Finally, as Gerry will explain shortly, we also remain keenly focused on maintaining our in-stock levels and reliability and reducing our supply chain costs.

We believe these initiatives will have a meaningful impact on Target in 2003, and will continue to provide an ongoing competitive advantage for us in the years ahead.

As Doug indicated, we are pleased with our performance in 2002, and we remain extremely comfortable with our overall strategy and potential for continued growth. 2003, we are again planning our business conservatively.

For the full year, we expect comparable store sales to increase approximately 3% to 4%, with total revenue growth in the low teens.

Pretax profits, including the favorable impact of our credit card operation is expected to rise essentially in line with our top line growth.

This outlook represents slower growth in the first three quarters, combined with an opportunity for somewhat stronger growth in the 4th quarter of 2003.

While we can certainly envision a scenario in which we exceed these plans as we have in prior years, we believe that this planning conservatism is appropriate and is the formula for achieving our long-term corporate earnings objective.

Now, Gerry Storch will describe our progress with supply chain initiatives and the Target Visa Smart Card.

Gerry?

Thanks, Gregg.

At Target, we view the supply chain as the physical backbone of our business.

And believe that continued investments in this area is imperative in order to sustain a long-term competitive advantage.

As a result, during 2002, we continued to focus on our three primary supply chain objectives.

First, to improve in-stock consistency and reliability.

Which is the key element of our guest satisfaction.

Second, to lower costs and reduce inventory.

Both important contributors to our improved profitability.

And third, to increase the speed of bringing new goods to market.

Which reinforces our position as a fashion leader, and allows us to be more responsive to changes in demand or trends.

In the past year, we have made important stride towards achieving these objectives.

For example, our in-stock levels have improved substantially, as a result of our efforts to segment products and flow them through our system, based on unique segment characteristics.

Our top 2500 program, which incorporated this approach for many of our fastest selling items has yielded notable results, including a measurable increase in sales and the highest level of in-stocks in our company's history.

Better vendor management, the implementation of efforts such as predistribution have allowed us to perform work where it is most efficient, [INAUDIBLE] strategic applications of technology have also been key factors in our progress.

Today, we are fully engaged with our top vendors, and many of our middle and lower volume suppliers in joint business planning and collaborative forecasting.

Additionally, we've implemented a new web-based performance tracking system that provides information and multiple points throughout the supply chain, from the time an order is created until the item arrives on the store shelf, giving us end-to-end supply chain visibility.

Both of these efforts create greater awareness of potential issues earlier in our supply chain process, improve our ability to plan rather than react, and give us a systematic way to identify and work the most critical areas first.

In the past year, we have demonstrated how quickly we can innovate and implement new approaches within our supply chain.

But our competition is among the best in the world.

And they are not remaining static.

For 2003, we have established aggressive plans to secure additional gains through our supply chain.

Some of our priorities for this year [INAUDIBLE] reducing the variability of in-stock across categories in stores, reducing the time necessary to transition from one season to the next.

Increasing our volume of direct imports through conversion of indirect imports.

Capturing additional benefits from our import warehouse strategy.

Leveraging new systems and technology for greater automation, greater information accuracy, and increased efficiency, and continued expansion of our distribution capacity.

By continuing to invest in programs that support our objectives of improving in-stocks, lowering our costs, reducing inventory in the pipeline, and increasing our speed-to-market, we believe that we will sustain our competitive advantage and maximize our long-term profitability.

This perspective is equally true for our financial services business.

And more specifically, our credit card operations.

Our competitive advantage in this arena lies in our guest demographic profiles and greater credit worthiness.

Our experienced management team and consistent decade-long track record of excellent performance, and our over arching strategy of supporting our core retail segments.

We are in this business of granting and underwriting credit to strengthen our relationships with our retail guests and generate increased merchandise sales by driving more frequent shopping trips and higher spending per visit.

As Doug mentioned, the largest and most important development at Target Financial Services in 2002 was the continued growth of issuance and usage of the Target Visa Smart Card.

At year end we had nearly $3.8 billion in Target Visa receivables and almost 9 million Target Visa cards outstanding.

Our performance in this portfolio to date is well within our range of expectations, and we are fully satisfied with our results.

Moreover we are comfortable that our Visa portfolio is maturing as planned and will contribute in many ways to our profitability in 2003.

To further leverage the opportunities inherent in this business, we began testing our smart chip technology by piloting the use of electronic coupons in several markets last quarter.

We expect to roll out the prototype to the entire chain later this year.

We believe this initiative will generate incremental sales and earnings for the company.

As our Target Visa guests enjoy both the benefits of the additional savings and convenience of electronic delivery.

For many years, we have maintained a dependable, disciplined approach to managing our credit card operations.

We have appropriately reserved for potential future write-offs as new receivables are created.

We have consistently produced superior financial results.

We have continued to invest in technologies and strengthen our organization.

We have been innovative and pursued opportunities that help us sustain our competitive advantage.

Our confidence that our financial services strategy is beneficial for the corporation and will contribute significantly through profitability and strategic positioning throughout 2003 and into the future.

Now, Bob has a few final comments.

Thanks, Gerry.

In light of the challenging economic environment and our modest sales growth, we're pleased with Target Corporation's full year results in fiscal 2002.

In 2003, we remain focused on creating additional value for our guests and achieving profitable market share growth.

Specifically, we will continue to invest in new square footage to deliver differentiated merchandising, and exceptional value, to improve in-stocks, reduce inventory, and increase operating efficiency through supply chain initiatives.

And manage the growth of our -- in our credit card operations with consistency and appropriate conservatism.

By employing this approach in the past, we have produced a compound annual growth rate in earnings per share of nearly 18% over the past five years.

We remain confident that this strategy also positions us well to generate an average annual earnings percent share growth of 15% or more over time and will create substantial value for our shareholders well into the future.

That concludes our prepared remarks, and, now, we're ready for questions.

Thank you, Mr. Ulrich.

At this time, if you have a question, you may press the star one on your telephone touch pad and star two if you need to cancel.

Please standby while our questions register.

Our first question comes from George Strachan with Goldman Sachs.

Thank you.

Gregg, I was wondering if you could give us an early read on the Cynthia Rowley, Amy Coe, and Liz Lange lines which are now in the stores, and then I have a follow up on that.

Cynthia Rowley is doing very well right now -- in fact, all three of the brands you mentioned are doing very close to what we expected.

Amy Coe is a bit ahead of plan.

The Cynthia Rowley is below a tad.

And Liz Lange is right on plan, gaining momentum as we get into the later part of February.

And, you know, related to that, I'm just wondering how you regard these lines.

Do you regard this kind of a gross margin ROI strategy, that you actually can replace some more commodity type merchandise with merchandise that produces a higher return on investment on a square footage basis, even if they're not any more productive on a sales basis?

No, not really.

I mean, this is really part of our differentiation strategy, and the uniqueness in the brands and the design relationships that we have will set us apart from our competitors.

With the back-end sourcing and the collaborative approach we take in the design area, we're able to deliver exceptional value and maintain our average and increase our margins just slightly in some of these businesses.

It's less about the profitability, it's more about the differentiation.

Certainly, our objective is to do both.

From a profit perspective, it appears that these lines can deliver from an ROI perspective, even in a tough sales environment where you may not be getting any major increased productivity out of them?

Oh, sure, because we're doing the sourcing on the back-end and we're able to lower acquisition costs, and we're leveraging the use of AMC, and we are able to get unbelievable design, trend and quality and deliver that at exceptional price value relationships.

So we're able to maintain our productivity, improve our productivity, deliver great value, and have a differentiated content on our sales floor.

Thanks a lot.

Our next question comes from Jeff Klinefelter with U.S. Bancorp.

Doug, could you give us a little more clarity on guidance if you could.

You have 3 to 5% at Target stores in comps for the year.

And 2.05 seems reasonable for the year.

Could you give a little more insight in where you see that flowing throughout.

Are we looking at a flat first quarter and then building gradually from that?

And then I have a follow-up on your credit.

For clarity, Gregg said Target sales, same store sales expectations, 3 to 4 for the year, not 3 to 5.

To me, the pattern that would be most reasonable from a forecast standpoint would envision modest growth in each of the first three quarters.

And more substantial growth for the full year.

At the $2.05 figure, that would reflect 13% or so EPS growth for the year, and so I'm suggesting that the growth rates in the first three quarters would likely be lower than that in the growth rate in the -- and the growth rate in the 4th quarter likely higher than that.

Okay.

On the credit, could you talk about -- one, if you see -- if you think kind of the bottom to your yield for the coming year in a very difficult environment could be 10%.

How would you see lowering your cost of funding to the point of being able to maintain that 500 basis point spread?

And secondly, could you talk a little bit more about the quality of the credit that you'll be adding in the next year going up to a billion?

Are those going to continue to be solicitations from within the stores?

And how do you anticipate building?

Well, first of all, the beneficial impact on cost of funds that I referenced earlier is a virtual certainty.

I mean, a number of the financings that give rise to the benefit are already in place, and, therefore, it's virtually certain that our year-over-year borrowing costs will fall as a percent of borrowings.

Yes, I mentioned that in a much harsher credit card environment that net portfolio yield, again, that's before taxes and funding costs, could fall 100 basis points or so from 11 today to 10.

We don't believe it's likely at all that it would fall below that, but again, our expectation, frankly, is to maintain something in the range of 11.

And, therefore, I think the most likely case would be maintenance of net portfolio yields at that 11% level.

And in the context of average receivables growth for the year of about $1 billion.

Higher growth in the early quarters well over $1 billion year-over-year, Q1, Q2, smaller in the later quarters, well under $1 billion expected in annual growth by the time we get to this point next year.

Have there been any changes at all in how you've been recording delinquencies, charge-offs, or missed payments, quarter-over-quarter, year-over-year.

No accounting changes whatsoever.

The one change that we have made in reporting what's happening in our portfolio, in response to a number of folks here on this line who have observed that our method of showing two-plus payments past due is not the most common method that's used.

We have moved with this release and put out a lot of historical data as well, showing a consistent data series of three-plus payments past due.

There's no year-over-year effect here, because we're disclosing last year's numbers on the same basis today.

But that's one of the many changes we've made to enhance the reporting of our credit card results.

Great.

Thank you.

Thank you.

And our next question comes from Emmy Kozloff from Sanford Bernstein.

Hi, thanks.

Questions for Doug or Gerry, I noticed that most credit performance metrics came in line with the guidelines you announced at the analysts meeting in October.

However, the ending receivables balance which you had forecasted at about 6.3 billion came in just under 6 billion -- what accounted for the difference -- were payments higher than expected or card usage lower, and then a follow-up on that is that we were expecting bad debt expense for the year at 9.1% of receivables.

It looks like it came in higher.

Is this greater conservatism on your part or are you seeing delinquency trends ahead of expectations?

First of all, we were envisioning higher credit card balances in October than we ended the year with.

Credit card balances here are not a financial objective.

Credit card balances are the outcome of everything that we do, and certainly in the last 90 to 120 days, we have observed changes in our own portfolio, and changes in the macro environment, and, of course, we're responding to those changes and so I think that the outlook for 2003 balances needs to be interpreted with a meaningful plus or minus type spread.

But we're not chasing any particular objective to grow balances.

I'd say we're a lot more focused on making sure that the portfolio that we have is of the optimum quality in balancing between the benefits of extending guest credit and the risks of extending it in the wrong places.

Did that address your question specifically?

Yeah, and then the other question was on the bad debt expense for the year.

Well, at all times we're trying to provide for the ultimate write-offs by running the expense through the P&L when the reserves -- when the receivables are created.

Certainly in the 4th quarter you see a very small kind of increase here.

I think that in today's environment, it's only prudent to be as conservative as we think is appropriate in providing today for what might go wrong tomorrow.

Tomorrow turns out to be a little favorable, then next year's bad debt expense would be a little bit lower as we continue to position the balance sheet to exactly where we think it needs to be to remain consistent and conservative.

Lastly, where do you think we should be modeling the bad debt provisions going into '03?

Let's start by talking about write-offs.

What I said earlier, was that you should see -- you will see one more quarter of sequential increase both in dollars and as a percentage of receivables in the concurrent net write-off statistic.

That's the result of having already reached ultimate equilibrium, we believe, in the six month lag statistic similarly calculated.

Certainly that statistic has a seasonal factor to it so it ebbs and flows throughout the year.

But generally speaking, we're saying the portfolio has achieved a sufficient degree of maturity that we're very confident in making those forward-looking forecasts.

As you roll forward throughout the rest of the year, you know, in '03.

It means we will not need to continue to run through the P&L, such a meaningfully higher bad debt expense than the current period write-offs.

We have already created just in the last 12 months, $138 million of incremental balance sheet reserves by expensing that much more than our write-off notice current year.

So moving forward throughout the year, I've attempted to give you the pattern of net write-offs and I'm suggesting that the bad debt expense differential will contract considerably across the next four quarters to whereby the time we get to year-end next year, I would expect bad debt expense to be trivially different from the net write-offs in the same period.

Great.

Thanks a lot.

Thank you.

And our next question comes from Blaine Marder (ph.) from Seminole Capital.

I was hoping you could tell us how you were going to fund both the receivables growth and the cap ex in '03?

That's a very easy answer.

I'm suggesting the receivables growth will be year-over-year well under a billion dollars and and our capital expenditure plan about the same in dollars as this year's plan on a base of business that's substantially bigger by virtually one more year of store growth.

I think you'll find in a modeling sense, and I think you'll find that year-over-year, we are essentially self-funding.

There may be a small increase in debt, but the substantial growth in our interest bearing debt is behind us.

Great.

And then finally, on the corporate consolidated P&L, it sounds like in '03 you're looking for operating income in line growth wise with revenues.

Is that correct?

The revenues would be a little bit higher according to your expectations but less leverage down to the operating line versus '02?

In '02 we certainly benefited from sharp expansion in gross margin rate at our Target stores unit.

I don't expect year-over-year to repeat that 100 basis point style increase.

On the other hand, credit card profitability is a percent of receivables.

Let me start that sentence again.

On the other hand, credit card profitability measured before funding costs will likely continue to rise faster than merchandise sales, and, therefore, there's a beneficial impact that we will enjoy from that dynamic.

Offsetting that, going back to Gregg's comment that year-over-year margin rate in the aggregate not changing much, we would expect some contraction in our margin rate from merchandising operations.

You'll see a terrific leverage on the interest expense line.

Our corporate and other expenses flat to down somewhat for the year as well.

In addition, somewhat of a benefit on the income tax line with the 20 basis point favorable change in our likely book effective tax rate.

Thank you.

Thank you.

And our next question comes from Sherry Ebert from J.P. Morgan.

Good morning, everybody.

Gregg, I was just hoping you could give us a little bit more detail on the same-store sales plan by quarter for Target to get to that 3% to 4% for the year?

Yes, Sherry, well, as you know, we're up against very tough comparisons in the first quarter of Q1, additionally the macro economic environment right now is very difficult, so we expect, you know, more difficult comp increases and smaller comp increases.

Probably in the range of one to three percent in Q1, we should see that grow slightly as we move throughout the year.

So it's still positive in Q1, though?

Our expectations are for it to be positive in Q1, yes.

Okay.

And then secondly, for Gregg, I was hoping you could talk about the performance of Super Target in the quarter, I know it's going to be about 30% of the square footage growth for next year.

Can you talk about your outlook for rolling that business out at this point?

We're pleased with the performance of Super Target. 30% is within our expectations in terms of what we talked about in terms of new real estate square footage.

We continue -- we had a very good year, we had nice progress on our top line sales growth.

We had slight margin expansion in Super Target.

We managed our expenses better than we have in the past.

And so from an EVA perspective, we saw nice increases in Super Target last year.

And how did the sales of both compare to the core business in terms of the same-store sales perspective?

They're actually very, very close to what we achieved in Target discount stores.

Okay.

Great.

And then last question for Doug, you mentioned that credit was about 15% of the pretax segment profit in '02.

I was wondering what your outlook for '03 will be?

I think that figure will likely rise, but, perhaps, a percentage point or two max.

I think that it would be years and years and years before our credit card contribution is a percent of segment profit would even approach 20%.

Okay.

Great.

Thank you.

Thank you.

Our next question comes from Debra Weinswig (ph.) from Salomon Smith Barney.

On the expanded food side that was rolled out in the Target stores, Gregg, what's your plan there for that rollout in 2003?

And what are you seeing in terms of differences?

Either in terms of shopping frequency or ticket size.

We are continuing to expand our emphasis in food, so our new stores and remodels will have a greater share of the store committed to the food business.

Where we have expanded food -- we are seeing greater trip frequency as a result of having a broader food assortment.

So it remains a priority of ours, and we're going to continue to aggressively pursue -- as I mentioned, add some more of the best-selling branded SKUs into Target discount stores as well as some of our better selling Market Pantry and Archer Farms products.

And kind of highlighting some of your opening comments on price deflation seen in the Target stores, can you quantify that for 2002?

And how should we think of that going-forward?

Is there anything in terms of AMC that can help you on that side?

Well, Gregg actually quantified more than $1 billion of retail price reductions during the year on Target's business base.

That translates to a rate of deflation in our top line in excess of 3 percentage points for the year.

I say this as an explanation, not an excuse.

But it means that our same store sales in real terms were in excess of 5% last year, despite the fact that they were nominally 2.2% at Target.

It's hard to predict with precision, where that goes, a part of it is driven by competitive dynamics.

And the dynamics of our essentially matching the key local competitor on like items.

Separately, a part of it continues to be driven by the dynamics that Gregg described.

Translated into financial terms.

I think we'll continue to enjoy year-over-year beneficial impact in cost of sales.

I think the open question is how much of that will flow to the bottom line, versus how much of it will manifest itself in future price deflation.

And last question, Doug.

Loyalty card programs often have a huge amount of data that's gathered.

Obviously, that's one of the benefits of having the Target Visa card.

Can you tell us what you've learned about how your Target Visa shoppers shop versus those shoppers that have a Target guest card -- and how you might be marketing to each of those groups differently going forward?

Let me take that one.

Target Visa guests routinely spend 50% to 60% more than our other Target guests.

So we have quite a bit of data on them.

Additionally it appears that our rewards program there is working quite well, as when the guest comes in and redeems the rewards certificate on the Target Visa card, which as you know, is usable obviously for 10% off only at Target.

That their ticket goes up significantly.

We see a high redemption on those cards.

It's very profitable for us on both the usage of the card and sales generated by the redemption of the card.

We like that.

Additionally, we obviously have a great deal of data on what they're buying in our store, and most interestingly, what other stores they're shopping.

We've begun to do a certain amount of marketing for the wayward shoppers searching in the wrong store, to get them to shop in our store for a higher percentage of their purchases.

Great.

Thank you.

Thank you.

Our next question comes from Steve Eiseman (ph.) from Chilton Incorporated

Two questions.

I'm just curious as to when you decided to change the way you're reporting your delinquencies, why you choose to do it on a 90-day basis as opposed to, let's say, a 30-day basis which is pretty standard for the credit card industry.

I was wondering if you would be willing to disclose the 60-days delinquencies are, since we don't have a lot of historical data.

We report all of this data in extreme detail in our monthly securitization filings.

I've learned nothing else from our credit card efforts in 2002, I've certainly learned there's no way to please all of the people all of the time.

We made this change because the lion's share of investors asking us to change, asked us to change to this statistic.

I appreciate the fact that other statistics for other purposes are quite valid.

So there's no defense on my part that this one is far more important than others, but I think that in concept, certainly looking at this statistic, there's a far more direct correlation to gross write-offs, to aged write-offs.

If we were to look at an earlier stage statistic, given the nature of our portfolio, the cure rate, if you will, for folks that go one or two payments past due and then cure, would be remarkably more for us than say bank card portfolios, that's why we chose this statistic, I believe.

What about the 60-day delinquency?

Well, I'm not sure what -- how to address the question, could you be more specific?

I'm just wondering if you're willing to disclose what it was since we have all this historical data.

We disclose it monthly in our securitization filings.

This is the data we're picking out of the monthly filings to use at earnings reportings.

I can honestly tell you, I don't have that information at our fingertips.

I would be happy to answer those questions, if anyone else has them, please follow-up directly with Susan Conner and myself.

We have an enormous amount of data.

There's no attempt here to shift this to something hard to understand -- we would be happy to give the statistics going backward in time, on any basis, any one of these statistics that we have released.

Okay.

Thank you.

And our next question comes from Bruce Masset from Morgan Stanley.

Bruce, are you there?

Please stand by, Mr. Masset, your line is about to be open.

Just one moment, please.

Sir, we apologize, please stand by.

Bruce may still be outside using the snow blower. [ Laughter ] Operator, can you tell us what's happened, please?

Yes, just one moment.

We did briefly lose connection.

My computer froze.

Just one moment.

Operator, have we lost everyone on the line?

They're still connected, my computer's completely frozen, I'm trying desperately to get back in.

Do you have an ability to speak to those on the line?

Yes, they can hear us, I just can't open their line for questions.

They're still people standing by in queue for questions.

Everyone hanging on, we obviously apologize for this.

Hopefully it will be resolved in a few seconds so we can continue to answer your questions.

Please stand by.

We do have a question from Elizabeth Armstrong from GIC.

Can anyone hear me?

Yes, we can.

Just a follow-up on a question a moment ago.

You talked about the secure rate on the 30 to 60-day delinquencies would be better for you than bank cards?

Would why would that be?

I said it would be different.

We're trying to provide consistent statistics across time in response to investor requests here.

In our securitization filings, they reported in all the various buckets, but -- I think my comment about comparing the bank cards should be viewed in a much more macro sense.

There are huge differences between our portfolios and bank card portfolios -- probably the most profound is average balances, sharply lower here that has a way of driving sharply higher gross yields, but it also plays through the P&L and through the rest of these dynamics in very different ways.

I'll be the first to acknowledge that it's difficult to compare any retailers card portfolio to that of many bank cards.

What we try to focus on is the performance of our card portfolio and leave that comparative analysis to others.

Okay.

Since obviously you have a proprietary card and a Target Visa card, would you expect the Target Visa card will have a similar trend rate, if you will to the bank cards and leaving out the proprietary cards?

Even our Target Visa card because of the households from which two thirds of those cards were generated, having had proprietary card relationships with us in the past, have some attributes that make it a blend between typical bank card and typical proprietary card attributes.

An example of that is even though the average balance on an active account in our Target Visa universe is sharply higher than our proprietary universe -- let's say $1100 or so on active Target Visa compared to $300 each at Mervyn's and Target, and maybe $600 at Marshall Field's, even though it's sharply higher than our proprietary cards, that $1100 figure is quite different from the bank card portfolios that many others operate, and in turn that has some quite meaningfully different ways that it plays through this whole equation..

I would also add that we're actually quite pleased with the trends we're seeing in our early stage delinquencies and it's one of the factors giving us a lot confidence about our optimistic outlook for the year.

Thank you.

At this time, Mr. Ulrich, we are not able to rectify the problem of not being able to open Mr. Masset's line, sir.

And I would like to turn the meeting over to you for closing remarks.

Bob, I would like to make a comment if I may, before we wrap this up, obviously we're stopping short of answering all the questions that are out here.

Susan and I remain at the ready to deal with those unanswered questions one at a time.

So we apologize for the technical side of this.

But Susan and I will be available throughout the rest of the day to resolve any unanswered questions.

Janet, are you saying that Bruce is the only one that can't get in?

There are no other questions.

There are other questions, sir, but we're not able to --

Well, again, everyone -- we apologize, but Doug and Susan will be available throughout the day.

Hopefully we can answer all of your questions, that concludes our 4th quarter and year-end conference call.

Thank you all for your participation.

Thank you for participating in today's conference call.

We do apologize for any inconvenience this may have caused, and you may now disconnect.