目標百貨 (TGT) 2003 Q3 法說會逐字稿

Hello, and welcome to the Target Corporation's third quarter 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.

As a reminder, this conference is being recorded, Thursday, November 13th, 2003.

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

Sir, you may begin.

Good morning, everyone.

And welcome to our 2003 third quarter earnings conference call.

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

Doug Scovanner, our Executive Vice President and Chief Financial Officer;

Gregg Steinhafel, President of Target Stores;

Diane Neal, President of Mervyn's; and Linda Ahlers, President of Marshall Fields.

This morning, Doug will review our 3rd Quarter results, and provide updated near term financial guidance.

Then Greg will provide an update on Target's current business, and outlook for the holiday season.

Jerry will update you on the growth and performance of our credit card operations, and describe other initiatives and developments that are contributing to the corporation's overall results.

Then I will wrap up our remarks and we'll open the phone lines for a question and answer session.

Now Doug will review our 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 webcast.

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

In addition, any reproduction or rebroadcast of any portion of this call is prohibited.

This morning, Target Corporation announced third quarter and year-to-date results.

For the quarter, net earnings grew 8.7% to $302 million, producing 33 cents of diluted earnings per share, in line with the guidance we shared with you 90 days ago.

Year-to-date, net earnings were just over $1 billion, compared with $966 million through nine months of 2002.

Total revenues in the quarter grew 10.7% to 11.3 billion dollars, reflecting similar rates of growth in our consolidated merchandise sales and in our credit card operations.

As expected, the top line of our p & l in the third quarter grew somewhat faster than the bottom line, as we annualized against last year's strong profitability.

In a few minutes, I'll describe the recent trends in each of our three segments and provide our outlook for fourth quarter performance.

First, however, I'd like to comment on a few other financial reporting matters.

In the first quarter of this year, as required, we adopted EITF 02-16, titled accounting by a customer, including a reseller, for certain consideration received from a vendor.

In the third quarter, we refined our implementation of this account accounting standard, resulting in a financial statement reclassification of some of the payments we received or earned from vendors.

The effect of this reclassification was to reduce third quarter and year-to-date cost of goods sold by $36 million, and $98 million respectively, and to increase third quarter and year-to-date selling general and administrative expenses by like amounts.

These reclassifications had no impact on sales, net earnings, cash flows or financial position for any period.

Let me explain our thought process on this one.

EITF 02-16 seeks to clarify the timing of recognition of various forms of off-invoice consideration, and seeks to clarify which line in our p & l is the most logical place to record the related accounting benefits.

We remain confident that the timing of our recognition is consistent with this accounting standard; so the only issue at play here is the question of appropriate classification in our financial statements.

The essence of 02-16 is to mandate accounting treatment as an offset to cost of sales unless the consideration represents reimbursement of a specific incremental identifiable cost.

In the practical world this is not a black and white test, and we believe that our refined (ph) classification logic with the result described in today's release, is more appropriate.

Separately, we disclosed earlier today that we adjusted our expected income tax rate for the year to a 37.8% rate or 20 basis points lower than the rate we had used in the prior two quarters.

This adjustment added about $3 million to net income in the quarter, or well under a penny a share.

Our inventory at the end of the third quarter reflect a year-over-year growth of 11.7%, slightly faster than our pace of sales growth, compared to this time last year, about 85% of our net overall inventory growth has been funded by a parallel increase in accounts payable.

Over the past 12 months, we have continued to fund our overall growth in new stores and related infrastructure, through a balance between growth in net debt, which is up about $900 million over this time and growth in retained shareholder investment, up about $1.5 billion over the same period.

Turning to our credit card operations, we ended the quarter with net accounts receivable of about $5.4 billion.

In line with balances at the end of this year's second quarter, at about $500 million higher than this time last year.

Our annualized net portfolio yield in the quarter was 11.2%, slightly favorable to the range of 10% to 11% we have provided in our previous guidance.

And overall, quite row robust, especially given today's relatively low funding costs.

Annualized net write-offs for the quarter were 9.1%, slightly unfavorable to the 8.5% to 9% range we communicated to you previously.

Regardless, we still expect both our fourth quarter and full year net write-off experience to fall within this 8 1/2 to 9% range.

One final set of thoughts on our credit card performance and outlook.

Specifically to address a few questions asked by those of you who track our monthly securitization filings.

Next week, we will file the detail for October, the third month of the quarter we have just released today.

Please remember that there are significant differences in the way terms are defined in these monthly filings, compared with our quarterly financials.

Also, please be aware that the monthly data has sharply higher seasonal peaks and valleys than our quarterly financials.

As we leave our discussion of credit card operations, in summary, the performance of our receivables portfolio continues to be stable, predictable and appropriately profitable.

Jerry will provide a bit more insight to our credit card strategy in a few minutes.

Turning back to our core retail businesses, let me focus on our recent results to set the stage for understanding our current outlook for the fourth quarter.

At our Target stores division, the third quarter of 2003 was characterized by easing prior year sales and profit growth comparisons, relative to the first six months of the year.

Our prior year comparable stores sales hurdle in the third quarter was only a 1% increase, rather than the 5.6% benchmark for the first two quarters.

And our third quarter pretax segment profit hurdle reflected growth of over 21% last year, only modestly lower than the remarkable 35% growth we enjoyed in the first half of 2002.

On top of these prior year results, Target delivered an impressive $6.7% increase in same-store sales and a better than expected 12.5% increase in pretax segment profit.

Looking forward, we expect the benefit from much easier top line comparisons in the fourth quarter of 2003, because Target's same-store sales actually declined 1.1% in last year's fourth quarter.

Additionally this soft prior-year sales performance produced only a modest 8% increase in last year's fourth quarter segment profit.

Tying all this together, it means we expect much stronger top line growth at Target in this year's fourth quarter, and we expect to leverage those sales into strong profit growth as well.

This is particularly significant in light of our expectation of more modest year-over-year growth in receivables, in this segment than we have enjoyed in the past eight quarters.

At Mervyn's and Marshall Field's, both our sales and segment profit results were well below prior year levels in the third quarter.

The magnitude of these trends causes us to be more cautious in our near term outlook for these businesses than we were even 90 days ago, when we last provided updated forward-looking guidance.

Today we are cautiously optimistic that we'll produce segment profits in these businesses in the fourth quarter within a reasonable range around last year's results.

Overall, the fourth quarter performance picture I have outlined today would produce a significantly sharper rate of EPS growth for the fourth quarter than any of the first three quarters this year.

Yet, in consolidation, it is more likely to fall modestly short of the current first call consensus of 90 cents, than it is to meet or exceed it.

Now, Greg will review Target's results and current business trends, as well as our plans and outlook for the remainder of the year.

Gregg?

Thanks, Doug.

Overall, our third quarter financial results at Target stores fully met our expectations, and we are satisfied with our performance.

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Overall, our third quarter financial results at Target stores fully met our expectations, and we are satisfied with our performance.

Comparable store sales increased 6.7% during the quarter, against a modest 1% increase a year ago.

This same-store sales growth was driven more by strength and guest traffic during the quarter than by average transaction amount.

Our total revenues in the third quarter increased 13.9% to $9.6 billion, due to the contributions from new stores and our credit card operation.

We again managed our inventories well during the quarter and we are very comfortable, both with mixed and inventory levels, as we head into the fourth quarter.

Target's third quarter pretax profit grows 12.5% to $604 million, while pretax profit margins declined by 10 basis points to 6.3%.

Our gross margin rate in the quarter was unfavorable to last year, reflecting somewhat lower markups and somewhat higher markdowns.

Remember, that Target enjoyed very strong growth margin rate improvement in each of the first three quarters of last year.

Target's expense rate in the third quarter this year was favorable to the prior year, principally due to excellent sales leverage.

During the third quarter, Target opened 12 SuperTarget stores and 24 net new discount stores.

At quarter end we operated 1,227 stores in 47 states, including 118 SuperTarget locations.

As we move into the holiday season, Target's commitment to our 'expect more, pay less' strategy remains as strong as ever.

We fully recognize that our guests satisfy their wants through our offering of trend right merchandise, exclusive brands, and design partnership and/or just satisfy their needs with our reliable selection of consumables and commodities, our exceptional prices and our fast, convenient service.

Maintaining an appropriate balance in this equation is what helps Target sustain its competitive advantage, and deliver superior financial performance.

This holiday season Target will again differentiate or merchandising and marketing, to generate excitement and appeal to our guests' desires for newness and this season's must-have items.

The theme of this year's holiday campaign at Target is 'Some of Our Favorite Things', inspired by the song that Julie Andrews made famous.

It will place a spotlight on gift giving and underscore the fact that Target is our guests' one-stop shop for their wants and needs.

To reinforce this image, we have asked some of our favorite designers to create new and exclusive gifts for our guests.

Among the signature items that will be available are: a Kashmir blend sweater from [inaudible], a Michael [inaudible] scrabble game, a colorful makeup set from Sonja Kashek (ph), a, Isaak [inaudible] stripped turtleneck sweater, sleepwear designed by Cynthia Ralley (ph) and Eileen Rosenzweig, and an assorted of ornaments and home decor, including a festive tabletop decorative tree from Christopher Radco (ph).

Target's holiday assortment will also feature exclusive merchandise from Target's owned and licensed brands, including Morona and Cherokee, as well as unique and exciting products from trusted national brands, such as genuine kids from OshKosh, Woolrich, Virgin Electronics, and National Geographic.

Target is, of course, also focused on delivering value to our guests during the holiday season.

This time of year is always intensely competitive, and we do not expect this year to be any different.

As always, we remain vigilant in our long standing practice of matching Wal-Mart's prices in local markets on identical items.

Additionally, we continue to benchmark relevant big-box specialty stores to ensure that our similar merchandise represents a compelling value.

And to make sure that our guests are aware of Target's exceptional prices in the breadth of our holiday gifts and decorative assortments, we have planned an aggressive marketing campaign that is slightly greater in scope than our holiday 2002 marketing effort, and consists of weekly newspaper circulars, a toy catalog, magazine ads, outdoor signs and broadcast advertising.

Additionally this holiday, we plan to aggressively pursue market share gain in key holiday categories such as small appliances, toys and electronics, including video games, digital products and software.

We believe that we are well prepared and in stock, and fully expect to maximize these important traffic driving and gift giving categories.

As we look forward to 2004, Target will continue to focus on both the 'Expect More', and the 'Pay Less' components of our brand promise (ph).

For example, for the holidays, we emphasize value-oriented, bonus-buy merchandise, as well as storage and organization, and wellness merchandise.

Additionally, we'll be introducing two new apparel brands in January.

The women's launch, called 'Linden Hill' (ph), is inspired by benchmarks such as Eileen Fisher, Jay Jill and Chico's, while the men's brand, called 'Break Water', takes inspiration from Perry Ella (ph) and Tommy Bahama.

Both brands are targeted to a subset of the baby boomer generation that we call zoomers.

These guests are typically 40 to 60 years old, while project a more youthful attitude.

They are characterized by a fairly active lifestyle, and above the average household income, and a desire for multi-functional wardrobe.

Linden Hill represents an assortment of easy dressing, mix and match items, [inaudible] silk, linens and cotton.

Break Water offers comfortable casual slacks, sweaters and shirts, and Chic timeless design and flattering, easy care styles, and fabrication (ph).

Both brands will be affordably priced in the range of about $10 to $30 per item.

Other merchandising initiatives at Target in the coming months include, a domestic brand launch called 'simply shabby chic', which was developed by British home fashion designer and author, Rachel Ashwell.

With its flea market look, the brand is targeted to our best guest, with a preference for casual styling.

Our introductory assortment will include sheet sets, duvets, and decorative pillows.

We also plan to significantly increase our offering of home brand foods.

During 2004, we plan to add over 1,000 new Archer Farms (ph) and market pantry items and, thus, increase our own brand penetration from single digits to mid teens.

Our 'expect more, pay less' strategy also extends to our guests' in-store experience with the introduction of our new prototype store in March 2004.

These stores incorporate many fixturing, visual and merchandising improvements that will make shopping at Target stores more convenient and more appealing for our guests.

Three of the most significant innovations include: a consumables world that expands the space devoted to high frequency categories such as paper products, health and beauty aids and food, and realigns [inaudible] that conveys category dominance and value, and will result in more frequent guest visits.

A new entertainment world that brings electronics, entertainment, toys and sporting goods together to create a more impeccable destination for families with young children or teens, and a mom and baby world that combines essentials like diapers and formula with apparel and infant toddler furniture and accessories.

We are very excited about these changes and believe they reinforce and enhance Target's unique brand image.

We are confident that our guests will continue to enjoy our differentiated merchandising or experience, as well as our outstanding value, making Target the preferred shopping destination.

SuperTarget also continues to perform well, generating same-store sales increases in line with our similar age general merchandise stores.

This growth is in spite of the fact that over 90% of these SuperTarget stores are located in the same trade area as a Wal-Mart Super Center.

Now let me turn to our outlook for the fourth quarter.

As we have previously described, the weakness of last year's fourth quarter results provide a fairly easy comparison for this year's fourth quarter performance.

Specifically, as we compare against the 1.1% decline in comparable store sales a year ago, we expect Target comparable store sales in this year's fourth quarter to increase in the range of 5% to 7%, with total revenue growth for the period in the low to mid teens.

Pre-tax profit, including favorable impact of our credit card operation, is expected to modestly outpace revenue growth in the fourth quarter.

This outlook assumes that the U.S. economy continues to grow at a steady rate, albeit not at the same robust level of GDP growth and job creation we experienced in the third quarter.

Additionally, it incorporates our expectation that Target will continue to experience both the pressure of deflation on our top line, and the benefits of deflation in our cost of goods, although both to a lesser degree than in 2002.

We believe that Target is well positioned to deliver strong results in this year's fourth quarter and we remain confident that Target will continue to enjoy healthy growth as we move forward through 2004.

Now, Jerry Storch will give you an update on our credit card business, AMC, and our guest relationship initiative.

Jerry?

Thanks, Gregg.

As Doug mentioned, our credit card operations continue to strengthen our relationships with our best guests, while also producing strong growth in the third quarter.

Net credit revenues in the quarter grew 11% and pretax profits rose over 17%.

Net accounts receivable were approximately $5.4 billion at the end of the quarter, in line with our plans.

And we continue to expect average receivables for the full year 2003 to increase by approximately $1 billion.

The credit quality in each of our portfolios remains good.

Consistent with our expectations and the performance and profitability of our credit card operations, is in line with our plan.

In prior quarterly conference calls, I've discussed specific details of many of our supply chain and technology initiatives.

Today we remain intently focused on these efforts and continue to strengthen our competitive advantage as we make even further progress.

Today, I would like to provide additional insight into several initiatives that were also important contributors to our business.

These include AMC, our global sourcing organization, guest relationship management, an initiative to better understand our guests and more effectively market to them, and our e-commerce business.

I'll begin with AMC.

AMC is one of the world's largest sourcing organizations, with approximately 2,000 team members in over 50 countries.

Our objective is to capitalize on the opportunities presented by today's global economy, to consistently find and deliver the best merchandise at the best prices for our guests - with increasingly shorter lead times.

To achieve this goal, AMC's talented overseas professionals work closely with Target's design and product management team in Minneapolis.

And with a network of qualified vendors and factories throughout the world.

We are able to leverage our local presence and knowledge to identify manufacturers that are best suited to produce specific goods, train vendors to work efficiently within Target corporation, oversee and approve final design specifications, manage production to meet our quality and delivery standards, and collaborate with Target's transportation and distribution organizations to ensure that these goods move quickly, safely and legally through U.S. customs and our supply chain.

Consequently, AMC's expertise contributes meaningfully to reductions in our cost of goods, and to our abilities to offer greater value to our guests, and to do so faster than ever before through a shortened supply chain and speed sourcing.

Our long standing relationship with AMC, and our complete integration of AMC within Target's organization and processes provide a clear, competitive advantage for Target.

As other companies work diligently to create their own sourcing organizations, Target continues to enhance its sourcing power through a greater scale, increased flexibility and expanded capability at AMC.

We believe this organization plays a critical role in Target's continuing ability to delight our guests with unique fashion at exceptional prices; and we are confident that AMC will remain an important contributor to Target's future success.

Guest relationship management, or GRM, is another initiative we are pursuing to strengthen Target's competitive position.

Our goal is to better understand our guest preferences, shopping patterns and lifestyles, in order to drive more frequent visits to our stores and our web site, and deliver more of what our guests want and need on each visit.

Based on a synthesis of results from primary consumer research, competitive analysis and internal data, Target is developing and implementing strategies to reach specific guest segments.

Our insights are becoming institutionalized in the workflow of our organization, and they have clear actional implications for Target's merchandising and marketing direction.

Several key elements are contributing to the momentum of this effort.

We continue to identify more of our guests by name, address and transaction data.

By year end, we expect to have identified nearly 30 million of our guests who have shopped at our stores in the past 12 months.

This knowledge enables us to broaden our reach and improve the effectiveness of our personalized communications to individual guests and direct marketing campaigns.

Additionally, we are leveraging resources within our centralized consumer marketing research centers to identify emerging trends and themes, and address the businesses implications of the analysis.

This research, for example has led to our intensified focus on trip frequency, mom and baby guests, recent movers and zoomers,the affluent aging baby boomers.

On the internet, we continue to enhance our business model and enjoy considerable growth in our online sales.

These initiatives move Target corporation closer to achieving a cohesive, multichannel approach to sales and marketing that facilitates profitable market share growth.

Year-to-date, sales at Target Direct have increased nearly 80% from a year ag,o and traffic is up almost 45%.

Additionally, the target.com site now ranks fourth behind eBay, amazon and Wal-Mart in the number of unique visitors, up from a ranking of 45th three years ago.

Among the steps we are taking to sustain this momentum are significantly expanded online assortment and an approved online gift registry experience.

Our bridal baby and gift registries, at both Target stores and Marshall Field's, are strategically important because they provide another opportunity for us to develop a lasting relationship with our guests.

Within the past several weeks, we have more than tripled the number of items for sale on our web site.

This increase primarily due to the addition of 50,000 incremental Marshall Field's items, including approx. 25,000 home items, 18,000 women's apparel and accessory items, and 7,000 men's and children's apparel items.

We plan to utilize Marshall Field's existing store inventories to fulfill guest orders of these items.

This expanded online product assortments, as well as our recently introduced common web (ph) platform, are also expected to improve the registry experience for our guests.

Guests can now easily register at both Target and Fields, and can purchase gifts from both companies in the same transaction.

As evidenced by these initiatives at Amc, with guest relationship management, and on the internet, as well as others we have previously described, we are not standing still.

We continue to invest strategically in our business and are actively engaged in efforts to deliver more of what our guests need and want with greater speed and efficiency.

We are confident that these efforts will contribute to Target Corporation's financial strength and growth for many years.

Now, Bob has a few final comments.

As both Doug and Gregg indicated, we are pleased with our third quarter and year-to-date results at Target stores, and we remain confident that Target is on track to deliver another year of strong growth and outstanding performance in 2003.

For the corporation overall, we have tempered our outlook for the 4th quarter and total year, in light of recent sales and operating trends at both Mervyn's and Marshall Field's, and we are actively pursuing merchandising and marketing at both of these divisions, that are intended to drive increased guest traffic and improve sales and financial results.

At Marshall Fields, our recent reinvention of our state street store (ph) has received a strong favorable response from our guests, and we're focused on leveraging this energy and excitement in other key Marshall Field's stores.

Over the next six to twelve months we'll be introducing many of the most successful elements of state street, including new brands, partner businesses, in-store events, and improved guest service, into the next tier of stores in our chain.

I encourage each of you to visit the state street store the next time you are in the Chicago area.

At Mervyn's we are also intently focused on implementing programs that are designed to drive profitable sales growth.

Examples of these programs include greater prominence for differentiated national and exclusive brands.

Introduction of unique offerings targeted to specific guest segments, and development of compelling dominant merchandise presentations, such as surf or soccer shops.

To underscore the importance of these efforts, we are accelerating the their implementation, and plan to launch to launch most of these initiatives chain-wide at Mervyn's stores next month.

We believe the actions we are taking directly address the challenges being faced by Mervyn's and Marshall Field's, and we believe that the future performance at both divisions will reflect the benefit of our changes.

Importantly, our long-term outlook for Target Corporation remains bright.

We remain dedicated to generating average annual earnings per share growth of 15% or more over time.

And, we remain committed to delivering superior value to our shareholders.

That concludes our prepared remarks.

Now Doug, Gregg, Diane, Linda, Jerry and I will be happy to respond to your questions.

Jenna, we are ready for questions.

Thank you.

At this time, we will begin our question and answer session, using our polling feature.

If you have a question or comment, you may press star one on your telephone touch pad, and star two should you need to cancel.

If you are using speaker equipment, you may need to pick up your handset prior to pressing star one.

Once again, if you have a question, you may press star one and star two should you need to cancel.

One moment while the questions register in the order in which they were received.

And our first question comes from Deborah Weinswig from Smith Barney.

Good morning.

Quick question, you talked about the more aggressive ad campaign for holiday.

Can you specifically talk about the kids favorite things mailing, kind of the distribution of that, and is it to the entire kind of customer base, or is it more targeted in terms of some of the more aggressive moves?

That book that you are referring to is primarily a regular priced vehicle, though we did have some coupons in it.

And it is a fairly extensive mailing to all markets, and then we've also distributed them in stores as well.

And we're very pleased with the early reads on that as well.

The other portion of our marketing campaign that's different and stronger than last year, is that we have a traditional circular in the fourth week of December this year, versus not having that a year ago.

Okay.

And then a question for Doug.

Can you talk about the content of your inventories as they stand right now, and can you remind us in terms of as you are setting your goals for [inaudible] inventories, vs. sales or square footage, how you look at that.

And, what's the near impact of the direct import warehouses and, you know, what impact have they had in terms of the increase in inventories as well for the holiday?

I'll try to address that series of questions.

Generally, I'm very pleased with our current inventory position at Mervyn's and Field's.

I'm especially pleased in light of the soft sales performance.

So the good news here is, we're not carrying an inventory overhang into the fourth quarter of those businesses.

At Target, our inventories are up modestly faster than sales, but given our sales outlook, and given the fact that a good deal of that inventory increment is in commodity and consumable businesses, Target likewise does not have an inventory position that represents any meaningful risk.

Certainly, if you track the effect of our import warehouses across time in isolation, there is a modest increase in inventories associated with that activity.

The cost of the warehouses and of carrying that inventory is far more than offset by the beneficial impact in sales and gross margin dollars.

Okay, great.

And then, one last question for Bob.

Can you just give us an update in terms of, I know the Marshall Field's state street reinvention is still quite new, but what have you seen specifically that, kind of, makes you feel positive as you roll that out to your additional stores?

Do you see an increase in traffic and/or ticket?

I'll let Linda Ahlers answer that.

We've seen a number of successes at state street.

Obviously, we're watching that store very closely, and we'll roll out the successes as quickly as possible.

But, some of the things that we're seeing are the impact of some of the visual intensifications that we've done; in moderate sports wears as an example, we've had significant increases above what the chain experienced.

So we're going to be taking the visual concepts and trend intensification into all doors for spring.

We're also seeing some interesting things happen with some of our lease partners.

And while they may not all translate into an all doors strategy, I think the concept or the idea, as an example Thomas Pink (ph) has been very successful in the men's dress shirt area.

So we're looking at the big idea of colorful and fashionable dress shirt as a concept that we want to take to all doors.

Okay, great.

Linda, thanks so much.

Thank you.

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

Bancorp Piper Jaffray.

Yes, Doug, a question for you on, maybe a little more clarity on the guidance for Q4.

It sounds like, obviously, trends are very, very strong in the Target division, and have the opportunity to remain strong for the balance of the holidays.

And, considering the relatively small size of the other two divisions, should we assume then that the kind of comp trends and contribution trends from those two divisions in the third quarter, or year to date, would sort of continue into the fourth quarter?

Would that be the way to look at the negative impact they're having on the business?

You know, Jeff, what I tried to outline in my comments, was that our net expectation in those two businesses for profitability in the fourth quarter, is essentially in line with last year's actual results, and that would be quite a contrast with their year-to-date results which are sharply below last year's levels at the bottom line.

Okay, so you do expect improvements in those two businesses, but not nearly the pace of the Target division?

Certainly improvements to the trends we've seen.

Our previous expectations were set a bit higher than what we're now focusing on.

Okay, great.

Thank you.

Thank you.

Our next question comes from George Strachan with Goldman Sachs.

Thank you.

Two questions if I might.

I was just wondering, given that the charge offs are at 9.1%, and you are expressing confidence that we'll get into the 8 1/2 to 9% range in Q4, what specifically you can point to that gives you the confidence?

And then on the merchandising side, Gregg just outlined a number of tremendous new initiatives, but even already in the stores are wondering what you are seeing from Isaac, Blue from Lee, the licensed consumer electronics lines from Disney and Eddie Bauer, and any other comments you might have on how some of these new merchandising lines are doing?

Also, is Carters feeling any impact from Wal-Mart picking it up?

George, I'll pass on the first one since I am the one who boldly put that forward-looking statement out earlier about the 8.5 to 9% expectation.

Third quarter represents a seasonal high.

Natural seasonality alone with equivalent portfolio performance will drive that number back down into the 8 1/2 to 9% range in the fourth quarter, and also the map will -- of that outcome would drive an 8.5% to 9% outcome for the year.

Yes, I missed the range of my estimate by ten basis points.

On the other hand, the bottom line in the credit card business actually exceeded our prior expectations, or prior range that we had provided, because the combination of our gross yields and operating expense controls came through terrifically in the quarter.

In terms of looking out to the future, our delinquency trends, which are the best sort of forward-looking indicator of future write-off are favorable and, additionally, bankrupcies, although still at a high level, have begun to mitigate.

The merchandising references to some of the designers and brands that you mentioned, George, overall, we're very pleased with the portfolio of introductions this year.

Some have done better than others.

For example, Isaac has been, you know, a smashing success.

We're pleased with that.

We're very pleased with the Blue introduction by Lee, Eddie Bauer's been exceptional.

Virgin and Disney are about right on where we expected them.

And lastly, we have not seen any significant decline in our Carters business since the Wal-Mart introduction.

We keep that business fresh and current, and we continue to innovate with new styling and that business is very healthy.

Thank you very much.

Thank you.

Our next question comes from Emme Kozloff, from Sanford Bernstein.

Hi there, question on credit.

If you were to back out profits from the credit operations at Mervyn's and Marshall Field's, would either of those divisions have a pretax segment profit?

And then, I just got a follow-up.

Well as you know, we don't disclose those numbers specifically by quarter, but we have in the past said that all three of our proprietary portfolios have roughly the same yields, and the yields in the aggregate, as disclosed in our proprietary portfolios, annualize at about 15% before taxes and before funding costs.

That's the level at which profitability flows through our segment profits.

What that generally drives, and you might need a calculator for this one, would be modest profitability at Mervyn's and not at Marshall Fields in the quarter; excluding credit card operations.

Okay, and then just a question on gross margin, how should we be thinking about the gross margin opportunity in 2004, cause you had huge upside in '02 and then, you know, obviously backing out the accounting issues in '03 down.

Do you see much upside as you look into the future of '04.

And, would that be coming from more of a turn around at the department stores or just general improvements at the Target's division?

Thanks.

Lets take that one, one division at a time.

At Target, generally we plan our business -- or over the last several years, we have planned our business to be even in gross margin returns, excluding mix impacts.

Of course, there is an ongoing effect of having higher same-store sales performance in the lower margin businesses than the rest of the store.

So our plans at Target next year will reflect very modest gross margin rate compression due to mix, as we attempt diligently to hold the ground that we have gained in gross margin rate business by business by business over the last several years.

At Mervyn's and Field's, a little different answer in each of those two businesses.

I think we probably have a bit more room to expand gross margin rates at Field's than at Mervyn's.

But the key issue in both of those businesses is to turn around the top line performance that has deleveraged our operating expense base.

In both businesses, we have done a very good job of controlling expenses in dollars, but the top line performance has been soft enough that the expense rate is not appropriate.

Great, thanks.

Thank you.

And our next question comes from Shari Eberts from J.P. Morgan.

Good morning, everybody.

Doug, just to follow up on your comments regarding the gross margin.

As you look at '04, then, in terms of Target stores, what would you expect the margin outlook to look like?

I guess, on the SG&A side, what type of comp would you need to get leverage to offset the gross margin declines?

Generally speaking these days, all in across the year, you'll get a little different answer, quarter by quarter, because this is not a smooth progression, numerically, in every quarter.

Generally speaking, we need a 3% or 4%, same store sales performance at Target to achieve operating expense rate neutrality.

So comps in the 4% to 6% range would begin producing benefits from an expense rate standpoint.

The mix effect ebbs and flows, but in an average year, that mix effect, in isolation, is 10 or 20 basis points, adverse effect on gross margin rate.

Bear in mind that's a mix effect we have incurred annually for the last decade, yet our overall gross margin rate at Target has improved several hundred basis points, despite that mix effect.

So, while we plan our business for flat rates, generally speaking, business by business, often we're able to achieve rate improvement from a variety of sources.

Okay that's helpful.

And then, just another question for Gregg in terms of the private label increase, or own brand food increase, going from single digits to mid teens.

Can you just talk about the time frame for that, and what products that might be replacing on the shelf?

Well, the time frame is throughout the entire 2004 year.

I mean, this is one where we go through a natural migration, product by product, category to category.

So you will see new product introductions on on ongoing basis throughout 2004.

And the mid teen number, that should be our penetration by the time we get to the end of 2004.

And, really it's throughout the entire mix of food categories within our SuperTarget stores.

We don't displace any national brands.

This is just an additional service to our guests that gives them very strong price oriented quality product.

Okay.

So that you are expanding the floor space, then, within food?

Well, you know, actually, what we end up replacing is in any given category, some of the more marginal less popular national brands.

So if you are the number one or two in any given category, we're not going to displace you, and we're not going to change the number of pacings.

But as we get further into the assortment, there will be some of those, you know, brands that are not really strong national brands, that will lose shelf space or get edited out of our assortment.

Okay, thank you.

Thank you.

And our next question comes from Daniel Barry from Merrill Lynch.

Good morning.

Two questions for Doug on gross.

First, Wal-Mart just announced they had heavy markdowns in apparel in August.

I wonder if you had that experience, or was it significant in your gross margin reporting this morning?

And secondly, if I heard you correctly, you said you had lower markup.

Can you elaborate on that, what areas?

I'll let Gregg talk about some of the finer detail of your question.

I will tell you that, on balance, the gross margin decline at Target was not significant and it needs to be considered in light of the huge gross margin rate increase that we enjoyed last year.

Gregg, you want to comment on some of the markup trends?

No, that's pretty much it.

I mean, we had such a strong third quarter last year, that the decline is very minimal compared to that strong performance and that's primarily mix related.

I mean, it's by a landslide, the second best third quarter gross margin rate performance in the history of our chain.

A lot of retailers did have, though, heavy markdowns in the spring goods.

Did you have such markdowns in August.

We kept our inventories quite lean all year, at all three divisions, and so markdowns may have been up slightly, but nothing to what we've heard about other companies.

Than again, I heard you say a lower markup somewhere?

Was that a reason why the gross is lower?

Primarily related to mix.

Okay, thanks.

Thank you.

Our next question comes from Bob Drbul from Lehman Brothers.

Good morning.

Doug, question for you.

In terms of the cash flows, where would you expect cash flow from operations to really end up, year-over-year, after the fourth quarter?

Well, year-over-year, through the third quarter, of course, we are up sharply.

And the key difference is that, last year, sequentially through the year, we were still adding receivables at a very strong pace and sequentially through this year, that receivables growth is not there.

So very big change, year-over-year, through nine months.

I think the fourth quarter dynamics will look typical for a fourth quarter, which is to say, a very, very strong quarter for cash flow.

So, by the end of the year, I think we will likely hang on to the bulk of our improvement in cash flow so far this year if not well exceed it.

Great.

And then one follow-up.

Can you talk a little bit about the productivity levels in the Target stores division, both on the SuperTargets, as well as the Target stores on the new stores that you've rolled out?

Our new stores are generating the productivity that we expected when we made the decisions to invest.

Our new stores, though, often evolve, and ebb and flow, in terms of the actual productivity of the group that's new, because stores that we spend a lot of money on, not surprisingly, have very high productivity and stores that are less expensive to build have lower productivity.

Today, that productivity of new stores is lower, but not remarkably lower, than the average mature store.

But that figure evolves over time, up and down.

One cannot generalize from that set of numbers today.

Okay.

And one final question.

On Mervyn's, can you remind us where you are in terms of of the remodels and the plans that you have incorporated there for this year?

Diane, do you want to address that?

Sure.

The remodels are still on schedule from what we had said before.

Some of the things that Bob had mentioned in the initial, is some of the new merchandising strategies, which are actually a little bit more exciting, that we're introducing in December, to try to draw additional traffic.

Okay, thank you.

Thank you.

Our next question comes from Philip Cross (ph), from F.I.R,C.

Yes, good morning, Philip Gossen(ph), with Fixed Income Research.

I have one question each for Bob, Gregg and Doug with your permission.

Bob can you give us an order of magnitude for food retail sales, as a percentage of total sales, and also in those market where's you do offer food, where do you typically take market share away from, is it the smaller players or is it, perhaps, the regional chains?

This is Doug. eLt me try to tackle that one.

We don't break out food per se, out of our mix with precision, but we have said in the past, for example, at our SuperTarget stores, that the new sku's that we add beyond the huge amount of food that we sell in the rest of the chain, ends up representing about 20% of total SuperTarget sales.

Chain-wide, of course, that means that figure would be lower than 20, but it is a meaningful part of our mix.

We've gained a lot of market share over time, through a variety of means.

It's very difficult to trace the precise sources on a net basis, but certainly, Wal-Mart's been gaining a lot of share.

We've been gaining a lot of share.

If you broaden the mix that you are focused on to include the rest of the lines of our merchandise, certainly Kohl's has been gaining a lot of shares as well.

The list of losers is quite long.

Most of the food share would come from grocery stores.

The second question I had, Gregg or Doug, can you just drill down a little bit deeper on the comments you made with regard to the toy category?

Are you devoting more shelf space to the toy category?

Are you becoming a little bit more aggressive from a price point perspective?

Any additional color would be appreciated.

Sure.

We have not given any additional floor space to the toy business.

We added this additional vehicle this year, this regular priced vehicle to combat primarily the impact of the big Toys "R" Us catalog, that dropped this particular time of year.

And we've noticed that we, typically, drop a little in market share late October, early November.

So, this was our strategy to combat that.

And so far it's working quite well.

The other marketing plans that we typically engage in with toys throughout the balance of the year, that will be standard as usual.

We will still be very aggressive with the same amount of circular space devoted to toys, a very competitive category.

We'll be aggressive with that.

So this was a supplemental vehicle to help jump start the holiday season.

Okay, and then my final question for Doug.

Doug, can you give us a feel for your current mix of floating, versus fixed rate debt, and how you are positioned for a potential rise in interest rates next year.

Thank you.

Be happen happy to address that.

Today, our mix of floating and fixed rate debt is reasonably typical with our approach from the last self-years.

At a very fine level of detail, on average this year, we would be just a touch higher than the average, measured as a percentage of our overall debt.

We think that the mix that we have is highly appropriate.

I think that the range of outcomes for next year's weighted average portfolio interest rate compared to this year's, range on the low end from another modest benefit, if the fed remains as accommodating as they have, to the high end a very modest increase in the overall aggregate portfolio rate.

Remember this issue isn't just a fixed and floating rate mix issue.

But in addition, we are constantly refunding higher coupon fixed rate debt with lower coupon fixed rate debt in today's environment.

Year to date, our fixed rate, 5 and 10-year maturities, aggregate $1 billion of issuance, have fixed coupons for their life that average less than 4%.

Okay, thanks so much, Doug.

Thank you.

And our next question is from Aaron Rubenson (ph) from Bank of America Security.

Thanks.

Couple of quick things.

First, can you help us quantify deflation, if there's any way to talk about the third quarter, versus a prior year third quarter; and also to talk about the impact it has on the p & l on a broader basis?

Yes.

We only get a very precise read on deflation once a year.

We get a lot of anecdotal information during the year.

At this point, I can only give you observations based on anecdotal information.

I think it's likely that we are experiencing rates of deflation in our top line, that are much more moderate than the rate of deflation that we experienced in 2002, yet it is still deflationary, in all likelihood, not inflationary.

That's in sharp contrast, of course, to the rates of inflation that are affecting many of the elements of our sg & a equation.

A second question, just can you help us on interest expense looking at the fourth quarter?

Just give us a ball part there?

And also, is there any EITF adjustment that's not been made yet to the forward (ph) quarters?

Yes.

First of all, in terms of interest expense, you'll see the same trends in place that are reflected in our third quarter results, repeat themselves in the fourth quarter.

Specifically, we expect to enjoy a sharply higher rate benefit than the adverse effect of higher debt balances.

The net of those two is likely to lie in the range of $10 million of benefits.

Additionally, from time to time as you know, we repurchase higher coupon debt at a premium and record the losses in interest expense in last year's fourth quarter; that effect added about $10 million to interest expense.

So, excluding the impact of potential bond repurchase loss in the fourth quarter this year, I would expect that line item in our p & l to be roughly $20 million favorable to last year's actual performance.

Thanks.

And EITF were done with?

EITF, we're done with on a year-to-date basis.

But you will certainly see a fourth quarter impact that we expect to be in the same order of magnitude as the impact on the current quarter.

So that will be the end of this issue, year-over-year, and we'll have a clean 2003 base of comparison as we turn the corner in '04.

Thanks a lot.

Thank you.

Our next question comes from David Berman (ph) with Bermen Capital.

Hi, guys.

It's Steve [inaudible] at Berman Capital.

One question, most questions have been answered, but one in terms of how you are going to, you know, fix Marshall Field's or -- it seems you are doing a lot of things in the downtown location, but Macy's has always had difficulty propagating what they do on 34th Street in terms of their mall stores.

So, how much of what you are doing in downtown is going to be propagated to the mall stores?

And maybe kind of give us some sense of what portion of Marshall Field's' profits really come from the two downtown Chicago stores.

Let me answer the issue about your question on what we're going to do to roll this out.

Our focus right now is focused on the top 14 doors, which are the next stores, in terms of volume, next to state street.

And those stores represent about half of our total company volume.

As we implemented the state street strategy, about 50% of the our assortments are new.

It's our intent in the top 14 stores that we will convert 30% of their assortments to be new.

As I said before, not everything exactly will translate from that state street store to the rest of the chain, but we're focused on the successful idea generation, as well as some of the specific partner businesses that we'll roll out.

We're in the process right now.

It's still early.

We've only had that renaissance at state street up and running for about six weeks, seven weeks.

So we're still evaluating the most successful portions of that, and we are gonna work very, very quickly to roll it out to the top 14, first of all, and then to the rest of the chain as appropriate.

So the rollouts in the top 14 is happening now, so they should be impacting the stores all in '04?

You know, we expect most of the impact to be the fall season, because there is some construction that's required for some of the businesses; in some cases we're going to be re-adjacencing our women's area, because we've learned some things about convenience and business adjacencies that have been impacting the business positively.

So a lot of this requires some more effort, and most of it will impact fall season.

But we have significant pieces, also, that we have acted on and are implementing for spring.

And what portion is the flagship of the overall Marshall Field's profitability?

We don't reveal single-store volumes.

It's not our policy.

Okay, thanks a lot.

Thank you.

And our next question comes from Kiko Nagata, with N.L.I. International.

My question has been answered, thank you.

Thank you, once again, that's star one if you have a question or comment, and star two should you need to cancel.

And our next question comes from Christine Augustine from Bear Stearns.

Thank you.

What would a reasonable rate of growth be for the Target Visa portfolio, going forward?

Should it be more in line with the footage growth of that division?

And my second question is, can you tell us what percentage you're sourcing now through AMC, and if there's any type of long-term goal for where you'd like to get to?

I'll tackle the first question.

It is our plan to attempt to increase our penetration rate over time from our credit products at Target stores.

If we achieve that plan, you would see a modestly higher rate of growth in our receivables than in our top line at that division.

We have been very focused on increasing our direct imports in our global procurement process.

So overall, we have increased the percentage of business that we do direct.

And that has been going up a couple of percentage points per year.

And as it relates to what we're sourcing directly through AMC, it really varies by business, but we're anywhere from 30% to 50% penetrated through AMC right now.

And that number will modestly climb over the next couple of years.

Thank you.

Thank you.

And our next question comes from Theresa Donahue from Newburger Berman (ph).

Two quick questions.

Both on Target.

First of all, on the toy category, you indicated you are seeing positive results of the catalog.

I guess I'm trying to sort that out against what seems to be prices, perhaps, and Toys "R" Us, and secondly, I was a little unclear on your indications for the new departmental presentation in March of '04.

I think I missed where you said where that would be.

Is that new stores only, or is that a chain rollout at some point?

Well, let me answer your second question first.

That is, regarding those new initiative -- merchandising changes; those are for all new stores that we'll be opening in March, going forward, and all remodels that we institute at that same time going forward.

I'm not sure what your first question was.

I'd like to -- the catalog was mainly to get earlier awareness out there among all of our guests to make sure other retailers weren't ahead of us.

It was primarily a regular price vehicle.

We're being agressive about toys, in terms of marketing and our in-stocks, and the rest of it, but we don't sense any kind of big price war, if that's what you are sort of getting at.

Thank you.

Our next question comes from Bruce Missett, from Morgan Stanley.

Hi.

You emphasized, AMC (ph), I guess it was Jerry that did, do you give us any clue as to what kind of penetration it has in the Target stores; what their best categories or what they have the greatest skill in, where they go with new categories, and then the relative significance of that in the gross margin?

And if I could throw one last part in, I'm curious as to how you are going to address the upper end of the zoomers so I can sort of be ready for this?

Is that a personal question, Bruce?

Sort of, yeah.

Actually, I was asked by at analyst to ask the question, but that's okay.

The biggest penetration for AMC has been in our soft line business, where we do a lot of the design and development internally.

We have been growing rapidly in the hard-lines business, too.

Business with AMC over the last two years direct reporting has doubled, as Greg indicated.

It will continue to grow in the future, but at a more moderate pace.

Is there as much opportunity in the hard-lines from a gross margins point of view as there is in the soft lines?

Yes indeed there is.

There is and, as Jerry says, we have offices in 50 countries throughout the world.

So ,as we have worked to develop a very strong organization that supports our soft lines business, we are accelerating our efforts to replicate that same type of success in some of the hard-line categories that would be applicable to sourcing through AMC.

Okay.

Thank you.

Thank you.

And our next question comes from Dan Binder from Buckingham Research.

Hi, good morning.

A couple of quick questions.

Given that bankrupcies are still fairly high and your write-offs are trending around 9%, I guess I was surprised to see that the reserves were in line with the write-offs.

I mean, is that what we should expect going forward, or will we revisit higher reserves relative to write-offs; that's my fist question.

We are amply reserved in the event that the current write-off trends were to continue; and, therefore, given that we had no net increase in receivables during the quarter, it would have been inappropriate to add to our reserves.

Okay.

My second question has to do with gross margins.

In the fourth quarter, taking into consideration, the year ago comparison, should we be expecting Target's gross margin down in the fourth quarter or not?

Target stores.

I think the most likely way you'll see Target's numbers develop, assuming we hit the sales plan that we've outlined, is you'll see a modest benefit from favorable operating expense.

Leveraging, certainly it's possible to achieve gross margin rate expansion.

If that were to occur, with strong comps that would be the recipe for getting all the way to the current first call estimate.

I think that's a stretch in terms of its assumptions, and that's why I made the comments that I did earlier about a greater likelihood of falling modestly short, than of meeting or exceeding, particularly in light of the performance that we're experiencing at Mervyn's and Marshall Field's right now.

Okay.

Given the increased traffic and recent sales you've been getting it looks like from, you know, the more aggressive consumables business, are you getting the cross sale to general merchandising that you would like to see?

Generally, yes.

Sure.

Over a long period of time, of course, have enjoyed higher rates of sales growth in our lower margin businesses, but many of those businesses are in fact what drive guests to want to visit our stores more often, and our average ticket is holding up quite nicely, which is the best indirect indicator of that conversion process of having a full and appropriate market basket.

But, we would not be as profitable as we are, if it weren't for a continuation of those very favorable dynamics.

Okay, great.

Thanks.

Thank you.

Our next question comes from David Cumberland from Robert Baird.

Good morning.

One question on the new Target stores prototype being introduced next year.

What is the planned pace for remodeling existing stores to the latest format?

We're going to stay on our existing remodeling plan.

We have a plan that we've been working on for a number of years and basically, it varies by volume and so on, but normally, every eight to nine to ten years.

So this won't be significantly accelerated.

We're very happy with our remodeling.

We keep our stores very fresh.

Thank you.

Thank you.

Our next question comes from Mike Napolitino with J&P Securities.

Good morning, Jerry, looking through the California stores, I don't remember if wine is a test category for you.

Can you comment on how that's progressing, and is that going to be part of this new consumables world strategy, going forward?

Thanks.

I think Gregg will take that.

I'll take that.

We do have wine in a number of the California stores.

It started out as a test; we've expanded it.

And it's performing quite well.

And where we can, we will continue to expand it.

Jenna?

Thank you.

Our next question comes from Mark Miller from William Blair.

Hi, good morning.

How much was the traffic, the driver of the comps, versus average tickets this quarter?

And then, given some of the merchandising initiatives, would you expect that rough breakout to continue?

Traffic was the primary driver of our comps in the third quarter.

We have seen very -- we have seen increasing levels of same-store transaction comps throughout the year, and third quarter overall was very, very strong.

So -- so, more than the majority of our comps or increase were driven by foot traffic.

Okay, and the question was asked earlier about what level of comps you need to leverage expenses.

I guess the question then on your expenses here with comps being up very strong, 6.7%, is it the higher labor with that transaction that's leading to look like only a little bit of operating expense leverage or are there other expense items that are a challenge?

We achieved favorable operating expense leverage at Target during the quarter.

If you wash out the effect of the accounting reclassifications, the big issue driving expense rate is the lack of sales leverage, negative sales leverage, if you will, at Mervyn's and Marshall Field's.

But would you expect to see a higher rate of operating expense leverage, as you come around the horn on the frequency strategy next spring?

Possibly.

It's certainly one of the offsets to the lower gross margin rate associated with selling those goods.

Okay, great.

Thanks.

And, the state street store looks great.

Thank you.

Thank you.

Our next question comes from Lori Andrews with Federated Investors.

Hi.

A quick question;

I'm not sure if you mentioned it, but what was the square footage gross year-over-year?

You'll find all of those figures in the attachment to our press release today, but very specifically, in footage terms, quarter end, at Target versus the same point last year, we were up 8.9% in square footage.

That equates to 7.0 at the corporate consolidated level.

Those are two point in time figures.

Okay, thank you.

Thank you.

And our next question comes from Patrick McKeever from SunTrust Robinson.

Thank you.

Doug, you mentioned that SuperTarget same-store sales were more or less consistent with the discount stores in the quarter, and that 90% of those SuperTargets overlap or compete, I guess, with the Wal-Mart super center.

Have you seen any change in trend there over the past, say, 12 months or so?

Actually, those were Gregg's comments, so I'll let Greg agres the SuperTarget.

I'm not sure what you mean by changes in trends.

I mean, we're pleased with the performance of SuperTarget stores.

We have now 118 and we have opened a number of stores this year.

But we continue to have to offset the influx of Wal-Mart Super Centers, and once we cycle that impact, our stores perform quite well.

But, in the initial time frames when we're up against Wal-Marts' Super Center, we are hurt like we are in a GM store, when they put a store next to ours.

Okay, but when you take the SuperTargets collectively, they comped more or less in line with the discount store average?

They are comping in line with the discount store average of their same maturity; so they are higher than the chain as a whole, but they are comparable to other, newer, Target stores.

Okay.

And I was also just wondering if anyone might be interested in addressing your take -- overall take on RFID?

Sure.

RFID has the potential, over time, to be one of the most revolutionary technologies for retail productivity, much in the same way as bar coding did in its day.

There will be some initial use of RFID, you know, starting next year on a production basis.

But mostly, that will be on a case level and distribution level application.

It will be, probably, at least in my opinion, three to five years before RFID finds its way into the stores themselves as a mainstream driver of productivity or results, but when it does happen it will be quite significant, both in terms of payroll reduction and shrink reduction, and data integrity and, therefore, in-stocks.

Okay, but at this stage of the game, you don't have any plans to acquire, like Wal-Mart is, your -- a certain number of your vendors to adapt that next year, or anything like that?

We certainly believe that we're as progressive and active in this area as anyone.

We'll be ready for this when it comes; we're experimenting with it now, but I'm just answering a global question.

I don't believe it will have a material impact on the business for several years to come.

Thank you very much.

Thank you.

Our next question comes from Brad Leonard with E.T.G.

Hi.

I was wondering if you could just detail a little bit of the sales volume, or profitability of the online sales?

As far as, like, what are the profit margins versus me walking into a store and buying a TV versus online?

We price the same on the Internet as we do in the stores for items that are carried in both locations.

Our objective remains to offer a value consistent with the brand, on the internet as in the stores.

And, I think I'll leave it there.

We have not been specific in terms of the volume of our direct business at the top line.

We do have a break out in our segment revenue table; of revenue that's outside of Target, Mervyn's and Fields, that consists of our direct business, and in addition, the sales by AMC to third parties.

So in the aggregate, can you see that those two unrelated lines of business produced $189 million of revenue in the quarter, and 434 million of revenue, year to date.

And both of those figures are up sharply from last year actuals.

Okay, and one more question; where does most of the product ship from, -- from the online?

The same stuff that's offered in the store?

Most of the product ships from Amazon's distribution centers.

Great.

Thank you.

Thank you.

Our next question comes from Barbara [inaudible] with the Fairchild Publication.

Hi, can you talk a little bit more about the Schaapy chic (ph) line in terms of, is this different from what's being sold at Mervyn's?

In addition to your expansion of home online, did you say 20,000 additional home products or 20,000 total?

This phone call is designed to address financial community questions and answers.

You're welcome to list to this call.

You are welcome to follow up with anyone in our PR department, but this phone call is not designed to address questions from the press.

Okay.

Thank you.

Our next question comes from Phillip Gossen from CSFB.

Just a follow-up question with regard to cash flow.

Given the slowdown in the growth rate of the receivables portfolio next year, might we get closer to the break-even, in terms of cash flow, after dividends and Cap Ex?

By break even, I assume you mean a situation where our overall debt is not growing, in contrast to the sharp rate of growth that we would experience in retained shareholder equity.

Is that correct?

You may say so, yes sir.

I would expect that, by next year, we would be reasonably close to break even by your definition.

Thank you very much, Doug.

Once again, that's store one if you have a question or comment, and star two should you need to cancel.

Sounds like we've covered all of the questions.

Thank you all very much for joining us today.

And that concludes our third quarter earnings conference call.

Thank you very much for participating in today's conference call.

Have a great day and you may now disconnect.