目標百貨 (TGT) 2003 Q4 法說會逐字稿

Hello and welcome to the Target Corporation's fourth quarter and 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.

If you have a question, press star-one on your telephone.

As a reminder, this conference is being recorded, Thursday, February 19, 2004.

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

Sir, you may begin.

Good morning.

Welcome to our 2003 fourth quarter and year-end earnings conference call.

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

Doug Scovanner, 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 Field's.

This morning Doug will review our fourth quarter and total year results and describe our outlook for 2004, then Gregg will provide an update on Target's recent business and our plans for the coming year.

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 corporations's overall results.

Then I will wrap up our remarks and we will 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.

Separately, in response to requests to a number of you, we plan to keep today's call to no more than 60 minutes including our q-and-a session.

If any of you still have questions when the call has ended, please feel free to follow up with Susan Kahn or with me directly.

This morning, Target Corporation announced fourth quarter and total-year results.

For the quarter, net earnings grew 21% to $832 million.

Producing 91 cents of diluted earnings per share; above the guidance we shared with 90 days ago, primarily due to stronger than expected profit improvement at Target stores.

For the full year, net earnings rose 11% to $1.84 billion or $2.01 per share, compared with $1.65 billion or $1.81 per share in 2002.

Total revenues in the quarter grew 10.7% to $15.6 billion, reflecting an 11% growth in consolidated merchandise sales and a 2% increase in credit card revenues.

This slowing growth in credit card operations is consistent with our outlook and the guidance we have provided since the beginning of 2003.

More details on credit cards in a few minutes.

For the full year, consolidated revenues rose 9.7% to nearly $48.2 billion.

As we have previously discussed, our adoption earlier this year of EITF 02-16; accounting by a customer, including a reseller, for certain consideration received from a vendor.

Resulted in a financial statement reclassification of some of the payments we received or earned from our vendors.

This reclassification had the effect of reducing cost of goods sold, and increasing selling, general & administrative expenses by a similar amount.

For the full year, the impact is an accounting shift of approximately 50 basis points, between these two line items on the face of our financial statements.

This reclassification had no impact on sales, cash flows, or financial position for any period; and had a slight negative impact on net earnings due to timing considerations.

In the fourth quarter, consolidated gross margin rate improved, reflecting the effect of the adoption of EITF 02-16; and improvements at all three divisions.

While expense rate was unfavorable to the prior year, due to the effect of the adoption of EITF 02-16; combined with a lack of sales leverage at Mervyn's and Marshall Field's, and an increase in corporate level expenses.

For the full year, virtually all of the net year-over-year change in gross margin rate is attributable to EITF 02-16 while the year-over-year increase in expense rate resulted from the effect of the adoption of EITF 02-16, as well as a lack of sales leverage at Mervyn's and Marshall Field's.

The LIPO provision for both this year's fourth quarter and total year was a credit of $27 million, compared with a $12 million credit in the same periods a year ago.

Our effective income tax rate for the quarter and the full year was 37.8%, identical to our third quarter year-to-date rate; and 40 basis points lower than our rate in 2002.

Our inventory position at the end of the year reflected excellent planning and control at all three divisions, and year-over-year growth of 12.2%.

Compared to this time last year, more than 100% of our net overall inventory growth has been funded by a parallel increase in accounts payable.

The result is more payables than inventory at year end.

While we do not believe this degree of payables leveraging is sustainable, it does reflect the attention our merchants are devoting to this effort.

Over the past 12 months, we have invested approximately $3 billion in new stores, the related infrastructure to support our store expansion, and the maintenance and remodeling of existing assets to keep them fresh.

We have funded this overall growth primarily with our cashflow provided by operations, which totaled a record $3.16 billion.

As a result, our year-end debt level is about equal to prior year end levels; and and our retained shareholder investment has increased about $1.6 billion, reflecting significant improvements in interest coverage and debt leverage.

In total, our capital expenditures in 2003 were modestly below both last year's actual results, and our guidance for this year.

This modestly lower spending level is due, in part, to a larger than usual mix of leased stores; and in part to our ability to accomplish all of our plans with somewhat lower capital.

In 2004, we expect capital investment to be in the range of $3.2 billion to $3.4 billion.

Again, we expect to be able to fund substantially all of this investment with cashflow from operations.

Turning to our credit card operations, we ended the quarter with net accounts receivable of just under $5.8 billion.

In line with our expectations, about $400 million above the level at third quarter end, and $200 million higher than this time last year.

Our annualized net portfolio yield was 11% in the quarter, and 10.9% for the year; each at the high end of our previous guidance of 10% to 11%, and overall quite robust, especially given today's relatively low funding costs.

Annualized net write-offs were 8.6% in the quarter and 8.7% for the year.

Also within the 8.5% to 9% range we communicated to you previously.

In summary, we remain extremely pleased with the performance of our receivables portfolio.

From a financial perspective, these operations continue to be stable, predictable, and appropriately profitable.

It should now be clear to most observers that the views previously expressed by Baron's, thestreet.com, "Business week" and "The Wall Street Journal" regarding the risks inherent in the rapid growth we've enjoyed in our credit card operations were views that were just plain wrong.

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

Finally let me review the fourth quarter and total year 2003 results in each of our three segments, and provide some perspective on our outlook for 2004.

At Target stores, the fourth quarter of 2003 was characterized by easing prior-year sales and profit growth comparisons relative to the first nine months of the year.

As we indicated in our third quarter conference call, Target's plans for the fourth quarter envisioned strong, comparable store sales growth and strong profit growth, as well.

Target's actual fourth quarter financial results outpaced this expectation.

Comparable store sales grew 6.1% in the quarter contributing to total revenue growth 12.6%, and on this top-line growth, pretax segment profit rose 18.5%.

Reflecting a 51-basis-point improvement in quarterly profit margin to 10.3% this year from 9.8% a year ago.

The primary factor driving this profit margin expansion was significant gross margin rate expansion, while growth in credit card contribution grew slightly faster than revenues.

For the full year, Target delivered a 12.0% increase in total revenue to more than $41 billion.

Driven by new store expansion, contribution from credit card operations, and a 4.4% nominal or reported increase in comparable store sales.

Despite broad-based retail price deflation averaging approximately 4%, Target produced a 12.3% increase in 2003's pretax segment profit to nearly $3.5 billion.

At both Mervyn's and Marshall Field's, our fourth-quarter performance represents a significant improvement from the poor year-over-year comparisons of the first three quarters of 2003.

Mervyn's pretax profits were essentially equal to fourth quarter 2002, and in line with the guidance we provided 90 days ago, despite the fact that we have not yet achieved stability in Mervyn's top line.

At Marshall Field's, our fourth quarter results give us optimism that our initiatives to drive sales and improve profitability are beginning to produce some beneficial results.

For the quarter, Field's generated comparable store sales growth of 0.5%.

Our first quarterly increase in recent history.

Field's pretax profits in the quarter also improved, up 15.6% from $51 million a year ago to $59 million this year.

Outside of our three segments, we experienced an uncharacteristically high rate of growth in the fourth quarter in our expenses.

Two key issues drove this result.

First, we again took the opportunity to reformat certain nonqualified plan benefits for current and retired executives in the quarter, in transactions similar to those we executed and disclosed in 2002; and again, these transactions will result in lower future period expense.

Second, we recorded a disproportionate increase in the expense associated with our 5% giving program during the quarter.

While the timing of our giving program expense is influenced by a number of factors, ultimately it keys off of taxable income which was up sharply in the quarter.

Neither of these issues is likely to repeat to the same extent in the near future.

This fourth quarter performance at each of our three segments, and in total, combined with the pattern of quarterly results throughout 2003 offer perspective on our outlook for 2004.

Though it is still quite early in the year to be precise about full-year earnings, from today's viewpoint, the current first-call median EPS estimate of $2.27 appears to be a responsible single-point estimate.

Our plans envision continued growth and strong performance at Target, as well as some top-line improvement and modest profit margin rate expansion at both Mervyn's and Marshall Field's.

In my opinion, if we were to exceed this current first-call EPS estimate, our outperformance would most likely be due to stronger than expected results at Target stores.

Alternatively, if we were unable to achieve this current EPS estimate, I believe the shortfall would most likely be small; and result from poorer than expected performance at Mervyn's, Marshall Field's, or both.

Today, the risks and opportunities to this full year 2004 EPS estimate appear to be reasonably, equally balanced.

Regardless of the outcome, we expect our pattern of quarterly earnings to be the mirror image of 2003 quarterly results with somewhat stronger performance in the first three quarters of the year and more modest growth in the fourth quarter.

More specifically, the current first-call estimate for our first quarter is 45 cents per share, which reflects a high teens percentage growth rate.

As of today, that appears to be reasonable.

Our first quarter ends on May 1, and we currently expect to report our results on May 13.

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

Greg?

Thanks, Doug.

Target stores delivered strong results for both the fourth quarter and the total year 2003, and we are satisfied with our performance.

We continue to increase our overall market share by generating 13.2% growth in total retail sales in the fall season.

We strengthened our offering of differentiated, value-oriented merchandise and elevated the visibility of our assortment through our needs and wants marketing campaign.

We successfully executed our new store growth plans and we generated double-digit growth in pretax profit.

For the full year, Target's comparable store sales grew at 4.4%, reflecting more modest growth in the first six months of 2003, and a more robust 6.4% increase in the second half of the year.

This pattern of performance was impacted by our comparisons to the prior year, which eased as the year progressed.

Additionally, our comparable store sales growth was affected by retail price reductions that have totaled in the range of $1.5 billion over the past year.

Driven by contribution from both new stores and our credit card operations, total year revenues increased 12% to $41.3 billion.

Pretax profit for the year rose 12.3% to almost $3.5 billion, on the strength of a 19% increase in the fourth quarter.

Target's profit margin in 2003 remained essentially unchanged at 8.4%, reflecting insignificant year-over-year changes in gross margin rates and expense rates outside the impact of the accounting change that Doug described earlier.

During the year, we opened a total of 101 new stores in 35 states.

Net of relocations and store closings, these openings included 78 new stores, consisting of 24 Super Target stores and 54 discount stores.

Consistent with our historical annual growth rate of 8% to 10%, our net gain in square footage in 2003 was approximately 12.3 million square feet; or an 8.8% increase with Super Target accounting for approximately 30% of this growth.

Today, we operate 1,225 stores including 118 Super Target stores.

During 2003, we continued to offer our guests differentiated, trend-right merchandise at compelling prices.

We introduced new design partnerships including Isaac Mizrahi, Liz Lange, and Amy Cole; and added national brands such as Genuine Kids by Osh Kosh and Blue Jeans by Lee, and continued to increase our penetration of owned brands, especially in food as we expanded our assortment of Archer Farms and Market Pantry.

We also intensified our focus on items and categories that drive frequency and that reinforce our value image.

We increased the visibility of everyday essentials through a more prominent marketing and in-store presentation.

We improved our in-stock reliability to ensure that we deliver greater guest satisfaction on every shopping trip, and we maintained our position on offering competitive and compelling prices throughout the store.

In 2004, we plan to build on the excellence achieved during 2003 and deliver another year of solid financial results.

I am excited about the initiatives we have underway, and about our growth opportunities in the coming year.

Our efforts will continue to balance our expect more-pay less brand promise and deliver both what our guests need, consumables and commodities at exceptional prices, in a convenient, easy-to-shop environment; and what they want, trend-right apparel and home-related merchandise that is fresh and new and uniquely affordable.

Recently, we introduced two new private label apparel brands, Linden Hill for women and Breakwater for men; and launched the Levi Strauss signature line of jeans.

We have also introduced Disney's Classic Pooh line of licensed apparel for children and an exclusive line of apparel, cosmetics, accessories, bedding, and collectible charms called Stuff by Hilary Duff, that is designed to appeal to teens and young girls.

Later this month, we will be rolling out a collection of domestics and home decor merchandise called Simply Shabby Chic produced in collaboration with British designer Rachel Ashwell.

We also are excited about a new concept called One Spot that we are currently testing in 125 stores.

All merchandise is priced at $1, and represents a broad array of categories from across the store that includes toys, stationary, baby products, picture frames, batteries, and storage items among others.

This merchandise is located in a small space at the front of the store, and is remerchandised every six to eight weeks.

While it is premature to comment on results, we believe this concept is consistent with Target's focus on driving traffic and on creating energy and excitement in our stores.

Additionally, beginning next month, we will open stores that represent our newest prototype design which we have described for you previously.

These stores provide more guest friendly merchandise adjacencies, offer assortments in which key categories have been expanded or edited to incorporate our guest preferences, and more effectively convey value and category dominance.

We believe these changes enhance Target's brand image and give our guests more reasons to make Target their preferred shopping destination.

Our 2004 store-opening plans include approximately 95 total new locations, including 25 new stores in March.

A list of planned openings for our first two cycles, March and July, is available on our web site.

In addition to our new store growth, we expect to fully remodel more than 80 stores in the coming year, and we have also devised an economic approach to update existing stores that are not candidates for a full remodel.

This plan allows us to incorporate many, though not all, of the new proto-type features.

Results from the stores we updated in 2003 are very encouraging and, as a result, we will likely update more than 130 additional stores in 2004.

Now, let's now turn to our outlook for 2004.

For the full year, we expect comparable store sales to increase approximately 4% to 5%, with somewhat stronger growth possible earlier in the year, due to last year's more modest comparisons.

Total revenue growth for the year, reflecting contributions from store expansion and credit card operations is expected to be in the low teens.

Pretax profit is expected to rise essentially in line with our top-line growth.

We are excited about Target's plans and opportunities in 2004, and confident that our guests will continue to enjoy Target's differentiated merchandising, pleasant store experience, and outstanding value; making Target the preferred shopping destination.

We believe these attributes position Target to deliver continued strong results and enjoy healthy growth in the coming year, and well beyond.

Now, Jerry Storch will give you an update on our credit card operation, our current supply chain initiatives, and recent developments at Target Direct.

Jerry?

Thanks, Gregg.

As Doug mentioned, we are extremely pleased with the performance of our credit card operations in 2003; and more broadly, our financial services efforts, which delivered results fully in line with our expectations and with our public guidance throughout the year.

Specifically, credit card revenues in 2003 grew 14% to nearly $1.5 billion, and pretax profit rose nearly 21% to $641 million.

On 21% growth and in average receivables, reflecting substantial growth and profit contribution from the Target Visa portfolio.

We believe this success in our credit card operations is attributable to our steadfast commitment to two key objectives.

To build retail sales by deepening our relationships with our guests, and to sustain outstanding profitability and growth.

In 2003, each of our initiatives reinforced this strategy.

We remained focused on driving growth and performance with value-added programs, such as Take Charge of Education, and Target Rewards.

We maintained strong financial controls in managing our business, and applied discipline to our credit granting and underwriting standards.

We invested in state-of-art technology to increase efficiency, improve guest service, and reduce expense.

And we continued to strengthen our organization by hiring and promoting talented financial services experts.

In 2004, we're continuing to build on our success.

Leveraging our scale and technology, and pursuing initiatives that improve our guests' experience, even as we remain dedicated to achieving our two strategic objectives.

Sale and technology important to be important elements of our supply chain, as well.

In 2003 we made enormous progress in improving the productivity, accuracy, and speed within our supply chain.

We significantly increased our distribution capacity and added an important dimension to our strategy with the integration of import warehouses.

We continued to work collaboratively with an increasing number of vendors to improve our forecasting and replenishment process.

And we remained intently focused on sustaining our record-high level of in-stocks.

In 2004, our priorities remain unchanged.

Specifically, they are: reduce variability of in-stocks across categories and stores, reduce the lead time required to transition from one season to the next, increase our volume of direct imports by converting indirect imports to direct, capture additional benefits from our import warehouse strategy, and leverage technology to gain greater speed and accuracy through automation.

I'll describe briefly a few of the systems we are implementing in the coming year to achieve these objectives.

Automated receiving technology is an electronic labeling system that utilizes real-time information about where product is needed, and automatically labels each carton appropriately.

This system significantly accelerates the flow of goods directly to our stores, and eliminates what was a time-consuming, labor-intensive procedure.

It is expected to be rolled out to the entire distribution network this year.

Spart schematic will designed to benefit both our store team members and our guests by identifying the specific aisle and shelf location for incoming merchandise and, thereby, improving our stores speed of stocking new product.

Post receipt allocation, for imported products, incorporates timely sales and inventory information into the merchandise allocation decision, and helps us allocate imported product to our stores closer to the time of need.

Supply chain initiatives that increase productivity, improve in-stock reliability, and accelerate the availability of wanted merchandise in our stores remain among top priorities because we believe they're imperative in delivering superior guest satisfaction.

Furthermore, they allow us to maintain our competitive advantage and generate profitable long-term growth.

On the internet, we continue to improve our business model and enjoyed considerable growth in our on-line sales.

This initiative moves Target Corporation closer to achieving a cohesive, multi-channeled approach to sales and marketing that facilitates profitable market share growth.

For the full year, on-line sales at Target Direct have increased more than 60% from a year ago, and traffic is up about 50%.

Additionally, the Target.com site now ranks fourth among shopping sites behind Ebay, Amazon, and Wal-Mart; in the number of unique visitors.

To sustain the momentum, we are significantly expanding our online assortment and improving our 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.

In 2003, we enhanced our online functionality to allow guests to link their Club Wedd and Field's gift registries; and to purchase from the world's largest online gift assortment in a single transaction.

In 2004, we expect to again substantially increase the number of items for sale on our website, utilizing Marshall Field's existing store inventories to fulfill guest's orders on these items.

We are also expanding our application of guest relationship management tools to drive sales by tailoring direct mail to specific guest segments and households.

Target is not standing still.

We are a company that is moving forward with a clear vision.

We continue to invest strategically in our business and we are confident that our efforts will reward our guests with greater value and deliver consistent growth and strong financial performance for many years to come.

Now, Bob has a few final comments.

As you just heard in detail, we are pleased with our overall results in the fourth quarter, and for the total year of 2003.

In addition, we remain confident that Target is on track to deliver another year of strong growth and outstanding performance in 2004.

At both Mervyn's and Marshall Field's, we remain intently focused on merchandising and marketing initiatives that are intended to drive increased guest traffic, generate improved sales, and deliver stronger financial results.

We are encouraged by our recent improved performance at Marshall Field's, and our team there is working diligently to sustain this momentum.

Though we have not yet experienced sales stability at Mervyn's, we believe that the actions we are taking directly address the challenges they are facing, and we believe that these actions will benefit their future performance.

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

If you would like to ask a question, please press star one.

To withdraw your request, press star two.

One moment, please, for the first question.

Your first question comes from Emme Kozloff with Sanford Bernstein.

Thanks.

For the year EBITDA at Mervyn's fell 25%.

Can you tell us where the cashflow for that division ended up?

And did any of the below plan cap ex come from the department stores?

And on credit, when would you consider reducing your bad debt provision?

It was the same percentage of receivables as Q3, but your chargeup trends were quite a bit better.

And are you giving any targets for 2004 in terms of credit?

Thank you.

If I paid attention to that series of questions.

First of all, at Mervyn's, you can get a good sense for our pretax cashflow by starting with our GAAP-derived segment profit disclosure, adding back the depreciation and amortization that we have disclosed.

And the other major adjustment, the favorable item from a cashflow standpoint, would be to look at our disclosures that show you that Mervyn's year-over-year change in receivables was actually a decline.

As Mervyn's sales have declined, of course, at an equivalent to penetration in turnover, the receivables base declined, as well.

So the combination of those three gives you a good proxy for the contribution of Mervyn's on a pretax basis to our overall corporate cashflow and, obviously, by the time you do all that math, it's in the range of $300 million.

Our cap ex -- no, our cap ex at Marshall Field's was not meaningfully different from last year.

This simply is a reflection, more than anything else, of the fact that when we put together our capital plan, we assume a typical mix of owned versus leased new store sites at Target.

And in the year just ended, we had a disproportionately high portion, still not a very high figure in an absolute sense; but compared to history, a higher portion of leased sites and, therefore, if you were to add back analytically the present value of our new lease obligations to the cap ex figure; that would be an important reconciling item to our previous forward-looking statements.

Finally in the case of our credit card operations, we are seeing some potential signs of improving delinquencies and other improvements in the figures that we look at.

If those were to continue, they could lead, they would lead if they were to continue, to lower write-offs as a percentage of balances later in the year.

If that were to continue, of course, we would find ourselves in that hypothetical situation with higher accounts receivable allowance on the balance sheet than the situation would warrant.

Today, I feel that our allowance is perfectly, consistently derived across time from our current results and our outlook for write-offs associated with the then current portfolio.

Any targets on credit overall?

Our accounts receivable balance growth, of course, has slowed measurably as we've now fully cycled the substantial periods of growth in our past.

I would personally be delighted if we were able to keep pace in our accounts receivable balances with the overall revenue growth of the corporation.

That's averaged about 10% per year over time.

That's actually quite a hat trick for our credit card folks internally because, as Target's growth sat a sharply higher rate than the other two businesses, we're growing the business with an underdeveloped credit card situation compared to the other two.

So there's really a mix issue that our credit card team would have to overcome to be able to grow overall balances at that pace.

The more likely outcome would be a slower accounts receivable balance growth than the overall revenue growth of the corporation.

Thanks.

Thank you.

And your next question comes from Jeff Klinefelter with Piper Jaffray.

Yes, if we could get more detail on the Super Target performance, what your expectations going forward in terms of the relative performance and contribution to an average discount store, what you're seeing trend-wise between grocery and general merchandise; and then on your deflation comment, Doug, could you -- with 4%, could you give a little granularity in what categories you saw that in?

Was it average across the categories or more pronounced in others?

And what do you expect going forward next year in terms of deflationary environment?

On your first set of questions surrounding Super Target overall performance compared to our discount stores.

At the end of the day, those stores behave, in financial terms, in a virtually identical fashion.

Certainly elements of the formula that arrive at that conclusion are somewhat different.

At Super Target, for example, we enjoy the benefits of a higher sales-to-investment turnover ratio than we do in the rest of the chain in our discount stores.

Offsetting that somewhat is a modestly lower return on sales, principally due to mix in the stores.

Mix of product that we sell in the stores.

But at the end of the day, it's a very, very similar equation to our discount store equation.

And with respect to your deflation comment, again in 2003, that rate of deflation was quite broad based across the store.

Obviously some categories electronics comes to mind, continued to have a higher rate of deflation.

That's not a new issue, of course.

Some categories lower.

But there's virtually no meaningful category in the store that did not exhibit some rate of retail price deflation during the year.

Extremely broad based.

Okay.

And you expect that similar going forward in '04?

Well, in fairness, my bold forward-looking statement a year ago was that I expected deflation in '03 but not to the same extent as '02.

The reality is the deflation in '03 at Target Stores was every bit as significant as '02, even a little more significant.

Again, I will boldly predict that we'll continue to see retail price deflation in '04, and again I do not believe that it will be as significant as the year just ended.

Okay.

Thank you.

Thank you.

And your next question comes from Daniel Barry with Merrill Lynch.

Good morning.

Congratulations on a great quarter.

Could you give a little more elaboration on some of the actions you're taking at Mervyn's to improve that operation.

Certainly.

Currently we are-- as we continue to work on our own brand offering and upgrade those assortments at a -- so we can maintain our profits, we are also introducing -- we did in December anyway, three new business concepts.

A dollar shop with product ranges from $1 to $5, which has been successful and looks very promising for us.

Another shop called Diamond Star.

Which is celebrity costume jewelry knockoffs, which has also been-- a small business, but has been very successful.

Another concept called Pinky's Palace, which is--caters accessories and dress-up product for girls age 9 to 13.

That one very was successful.

We've had trouble getting inventory up to the level that we need.

So by March 1, we should be back there a very strong inventory position.

Also looks promising for the spring season.

Along with that, we have about 10 other concepts that we are testing-- that we started testing end of January, and will be testing and rolling out through July.

A lot of your weakness not last year was in apparel.

Any changes there in terms of the amount that you might be ordering or shifts within the store?

Mix changes?

Well, we have actually maintained our inventory levels very conservatively.

I think what we're focusing on is to upgrade and improve our own label assortments so that we can still remain as promotions, and remain profitable at the same time.

Thanks.

Thank you.

Your next question from Deborah Weinswig of Smith Barney.

Two questions.

One on your store opening plans for 2004.

Looks like we're at 95 versus 101 a year ago.

In this 95, I know that there were some Mervyn's stores that opened in 2003.

Are there any plans to open new stores in 2004, and also, should we expect to see about 30% of the square footage on the Target side be from the Super Targets?

We'll continue to have similar mix of net square footage growth at Target between discount stores and Super Target stores.

I'll caution you, though, that that -- please don't interpret 30% as 30.0.

That figure naturally evolves back and forth around quite a wide range, because we don't try to manage that.

It's more of an outcome, not an objective at the 30% figure.

Our overall store growth plans at Target continue to support our objective to grow square footage in the range of 8% to 10% per year, in rounded numbers.

That figure was closer to 9% in 2003.

It will more likely be in the 8% to 9% range here in 2004.

We don't, separately, have any plans to open any meaningful square footage at Mervyn's or Marshall Field's.

One other question I know has been a focus for the company has been driving frequencies through the value message and also an increased consumables offering.

Is there anything that you can give in terms of metrics, either at the Super Targets or at the discounts stores in terms of changes you've seen in terms of customer shopping patterns; as you've, you know, continued to focus on these initiatives?

Yeah, as we continue to focus on our frequency efforts throughout the -- the 2003 year, we saw same-store transaction counts increase as we progressed through the year.

And by the end of the year, we were seeing same-store transaction account increases in the 4% range, which is a big difference from where we were in the beginning part of the year.

We're very pleased with that.

And -- and expect that to continue into '04.

Quantitatively as our same-store sales performance has picked up, it has picked up as a direct result of increased guest traffic counts, transaction counts.

Great.

Thank you very much.

Thank you.

Your next question comes from Adrianne Shapira from Goldman Sachs.

Thank you.

My question follows the previous question.

Given that you're seeing increased traffic, could you perhaps talk about the new prototype 2004, have you figured out a way to be neutral on capital investment since you -- I would assume you're seeing even higher lifts in traffic in these stores, and -- as a result, are you seeing -- what are the implications for ROI of P 2004 versus your traditional discount format?

I'll start with the last piece of that and the let Gregg talk about attributes of the prototype itself.

We do not expect any discernible difference in the overall ROI, or the pattern of it's development in P 2004 compared existing chain assets.

As it relates to the merchandising features inside the store, as I've described earlier, it's an expanded commitment to food and consumables.

It's a combined entertainment area that combines music, movies, books, electronics, toys, and sporting goods.

We have an increased focus on our mom and baby guests.

And it's got increased ability for home decor.

We've added Starbucks and a Food Avenue combination.

It's got a much stronger visual package, so it's a very exciting store format that essentially the same size and investment as our prior prototype.

Could you talk to the different types of traffic patterns you're seeing in this format given the expanded consumables.

Actually only a few of them have been open so far, and a significant number will be in March.

We've had initially good experiences from those that are open.

But it's really preliminary to get really to quantify that.

I think the right context for this evolution of our prototype is this is the way we believe that we will best be able to continue to sustain in mid-single digit same store sales performance at Target as we have enjoyed over a long, long time.

Thank you.

Thank you.

You're next question comes from Bob Drbul from Lehman Brothers.

Good morning.

Two questions.

The first is on the gross margin line, if you -- can you give us an apples to apples, if you back out the EITF year-over-year for the fourth quarter, Doug?

The second question is-- around gross margin is can you talk about the penetration of the direct importing and sort of what benefits you would expect to the gross margin line and your expectation for 2004?

And the third question is, do you have plans for remodeling anymore stores in the Mervyn's division?

Can you update that?

Let me start with the gross margin discussion in the fourth quarter.

You can derive directly from the face of our financial statements that gross margin as reported improved 136 basis points in the fourth quarter.

I mentioned earlier in my conference call remarks that for the full year, the impact of the adoption of EITF 02-16 was about 50 basis points, it was actually higher than that in the fourth quarter.

So in very round numbers, I don't mean this literally to the basis point, more or less 75 basis points of improvement in gross margin rate was due to factors other than this accounting change.

Each of the three businesses enjoyed additional gross margin rate expansion in the fourth quarter, beyond this accounting change.

At both Target and Mervyn's, we enjoyed the benefit in the quarter of a substantial improvement in markdown experience.

And at Marshall Field's the issue was more driven by markup than markdowns.

Nonetheless, substantial improvement at each of the three businesses.

In terms of any remodeling at Mervyn's, really our initiatives now are to roll forward these things that Diane has described earlier, that are testing well such as Pinky's Palace and some other initiatives.

There are no major different plans.

Okay.

Thanks.

Thank you.

And your next question comes from Sherry Eberts from J.P. Morgan.

Good morning, everybody.

Just a question.

There's been a lot of talk in the press lately about Wal-Mart and it's pricing strategy.

I was hoping you could comment on anything you're seeing in terms of the pricing environment that's out there.

From our perspective, we still see the pricing environment as very stable.

Wal-Mart continues to lead in that dimension.

They are very, very competitive as they always have, and we have seen no change in their pricing strategy in the fourth quarter, and so far in the first quarter.

Great.

Then just looking at the pretax profit margin at Target stores for the year, you mention that it was flat, obviously, much improved in the fourth quarter.

I was wondering if you could break out what the performance of the retail business margin was because, obviously, credit was probably helping the pretax profit margin for the year.

As you know, we don't disclose those figures separately by segment because credit card results are an integral portion of each business' strategy and overall performance.

However, we do disclose, as you know, our credit card portfolio in the aggregate.

And that portfolio is close to being dominated by the performance of the Target portfolio because the Target portfolio is such a large portion of it.

You probably don't need a calculator to sort through the pieces to see that there's about a 1 percentage point contribution, give or take, to Target's profit margin rate from credit card operations.

And so in essence, Target's 8.4% segment profit as a percentage of revenues is more or less 7.4% from our retailing operations, which is a figure in line with Wal-Mart's performance.

Thank you very much.

Thank you.

And your next question comes from Teresa Donahue with Newberger Berman.

Good morning, everyone.

I have two questions.

First, my apologies.

In Jerry's discussion of distribution, he indicated a labor-saving initiative at the store level, I believe it was in receiving, but I couldn't hear the rest.

And secondly, I had a quick question on inventories.

Heard they were up slightly more than sales again.

I'm wondering if there's any anything special going on there.

At the store level, the initiative is Spart Schematic, where the cartons will come in off the truck and say specifically where to stock them.

So in the past, team members might have to open it up, look at the product, try to think about where it goes, try to find it on the shelf.

It is specifically numbered exactly where it goes.

It saves time in the shelf-stocking process.

Is this a net labor hour savings to -- saving to the store over time?

There are a lot of things going on, of course, in the store payroll.

This in and of itself is of course a time savings for the store payroll.

Okay, so this would not be something that you would reinvest elsewhere.

There's a lot going on in store payroll.

Lots of ins and outs over time.

This is just one component.

Okay.

With respect to your inventory question, obviously, as we continue to pursue-- aggressively pursue our efforts to increase the portion of our inventories that we directly source, that means that we take title to those goods earlier in the supply chain.

So one of the key factors driving inventory ownership is that continued effort across time, to move indirect imports to direct imports.

Is there any time in the foreseeable future when we might be apples to apples on that, would you say?

I hope not because the more that we can move to direct imports, the more benefits will flow through our financial equation and ultimately to our guests.

Thank you.

Thank you.

And your next question comes from Aram Rubensen with Bank of America.

Good morning.

It's Aram Rubensen.

I appreciate the guidance on cap ex for '04.

And I understand that--well the payables ratio, at least, for the year end that were just experienced might be a little heavy versus what you can achieve going forward.

Give us a sense if you don't mind on working capital.

If there's any kind of guidance you can give us on working capital use, and then I had a followup, as well.

I'm going to push credit card operations out of the classic working capital discussion because those are, of course, assets on which we earn handsome returns.

Generally speaking, I don't think that working capital dynamics will be a very meaningful piece of the development of our cashflow over time.

That means that as inventories increase, due to not just the sourcing but our overall growth, I believe we'll continue to enjoy parallel increases in accounts payable that, give or take, will generally fund those inventory increases.

The rest of the balance sheet, working capital dynamics, follow our growth.

So perhaps a modest use, but not over time out of line with our overall revenue growth as a corporation.

And then the followup question I had relates to guidance of $227.

On the one hand you talk about growing earnings 15% a year, on the other hand $227 is a little short of that.

Could you help us on that?

And then the final thing, if you don't mind, is if you can tell us are there ways to leverage the department store brands with Target?

Do you see increasing ways to leverage those two?

And that would be it for me.

Well, our 15% growth is, of course, an average growth objective over time.

We have never attempted to engineer 15% earnings growth in individual years.

We look out over the long term in trying to accomplish that.

Here in the short run, I would say that as is the case at any point in time, we have a group of issues that are slowing down our growth.

And a group of issues that are aiding our growth.

And right now, the balance of those two sets of issues leads us to believe that growth, a very solid, high-quality growth in the teens is probably doable.

But perhaps not to the full extent of 15%.

On the negative list, again, I wouldn't dwell too much on any one of these items.

Certainly workers compensation, general liability, and insurance matters, are significant issues for us.

We have a classic defined benefit plan and year-over-year pension expense will grow at a rate faster than revenues.

As you know, we announced a year ago that we have begun expensing stock options, moving forward, year-over-year.

That will certainly grow at a much faster rate than revenue.

And I would also observe that LIPO had a $27 million credit in 2003, is unlikely repeat to that extent in 2004.

We're not seeing any major migration of a Field's brands to Target.

The primary leverage comes in the learning that goes on with Field's because they have vastly larger stores and they have access to almost every line in the world.

So there's an amount of knowledge that gets transferred.

I only ask because I got an e-mail I thought from joint brands.

But I appreciate the thoughts.

Thank you.

Your next question comes from Mark Miller with William Blair.

Hi, good morning.

Given the strong rebound in comp sales, can you just discuss more broadly your view towards the frequency strategy implemented in the spring of '03, and I know that the new stores obviously have more food and consumables; but in the existing stores, what type of change would you anticipate in the promotional cadence from where we ended the year?

There really -- is no change anticipated in the promotional cadence.

Our primary promotional vehicle as you know is run circular every year.

Basically we run about the same amount of pages.

We have the same kind of reductions.

There's nothing different.

It's a matter of emphasis as Gregg mentioned.

Some of the consumables and commodities and expanding some of those assortments.

So is the -- is the -- if you're running I guess closer to a 7% comp right now, the 4% or 5% comp for the year, is that then just lapping basically the acceleration in the cadence moving through last year?

There was no real acceleration in our promotional cadence last year.

Whatsoever.

We're simply cycling a period of time from a year ago when our sales performance was quite weak.

And so at least for now, we're enjoying the benefits of good, strong underlying performance, compared against much weaker performance in the prior periods.

As we get deeper into 2004, we will begin to cycle against periods of much stronger growth, and that's precisely why I think that the development of our earnings growth will be much more front loaded perhaps this year than it was last year.

So the acceleration and transactions that you talked about, that was as much a function of the easy comparisons as it was to any change in your promotion?

Again, we haven't changed our promotional cadence.

So you're comparing something against zero.

Certainly our base of performance at any point in time is a very important feature in describing current period performance.

Right now, the base of performance that we're cycling against from the prior year is indeed soft, having said that, that is by no means the sole reason that our current performance is strong.

There's no God-granted right to strong performance against weak numbers.

We understand that.

Okay.

Thanks.

Thank you.

And your next question comes from Todd Slater with Lazard.

Thank you.

Question is on a 4% to 5% comp base, I'm wondering if you can fully leverage your -- the issues going on in the expense line that you talked about, workers comp, pension insurance, stock options, all that stuff.

And/or if you expect expenses to rise faster than sales and just, you know, secondarily, if you expect gross margin expansion to maybe counteract some of these expense pressures in 2004.

That's a great series of questions.

I think that in isolation, a 4% to 5% same-store sales performance should allow us to neutralize the effect of -- of these particular expense items by enjoying a benefit.

By favorably leveraging the rest of our expense bases.

And, therefore, achieve more or less expense neutrality somewhere in the range.

And again, as I often make these comments, I do not mean them to be interpreted quarter by quarter; but over a longer period of time, annualized perhaps, that's a good way to look at this.

Separately, on your gross margin rate question, let's not forget that one of the items driving SG&A expense, is the expenses that we are intentionally incurring to gear up and staff up to be able to engineer and execute our direct import strategy.

All else being equal, shifting an item from indirect imports to direct requires a lot of staff expense here, and part of that gross margin rate expansion is necessary in order to pay for that increment of expense.

That is a key reason why our figure to neutralize is as high as 4% to 5%.

But shouldn't that also lead to greater gross margins, if your direct import program is expanding?

Sure.

All else being equal, of course.

Okay.

So if you were able to achieve some gross margin expansion in '04, that would perhaps be some upside to your sort of reasonable $227, you know, guidance?

If we were able to achieve gross margin rate expansion at Target, yes, it would be on top of our outlook because our outlook does not envision gross margin rate expansion in 2004.

Let's not lose sight of the fact that this retail price deflation in 2003 aggregated in the range of $1.5 billion at Target.

So this whole effort of indirect to direct imports is a necessary effort to be able to afford the retail price deflation that the marketplace is driving us toward.

Great.

Thank you.

Thank you.

And your next question comes from Bill Dreher with Deutsche Bank.

Thanks a lot.

Great job, guys.

Very solid quarter.

Couple of questions.

First maybe for Doug about clearance.

Wal-Mart mentioned because of strength in their fourth quarter, they were able to move some of the clearance into the fourth quarter that otherwise might have been in the first quarter.

Thus starting the year cleaner than last year.

How does Target clearance position as started this year compare to last year?

Other thing I want to ask, asking Gregg about the new store prototype.

What's the overlap of food at the P 2004 prototype, how does that compare to the food at the Super Target?

Finally, question for Bob.

I'm intrigued about your comments in the press release of "Creating substantial value for our shareholders."

I was hoping you might be able to give color on, that possibly how that drive per shareholder value has changed since you were first named CEO.

I'll try to tackle the first one.

I've been in this role here for 10 years, across 20 seasons at Target.

And we have never crossed over from season to season with anything other than perfectly clean inventories.

It's in our corporate culture, it's in our corporate DNA to always clear out the current season's inventory and not carry it over.

This season is no different.

Yeah, I would just add to that, Doug, that we are entering '04 with slightly lower clearance levels than we had a year ago.

As it relates to the overlap, your question with -- regarding the P 2004 prototype and overlap of food with the Super Target, the new prototype has about 50% more space devoted to food in our current prototype, but compared to a Super Target store; which is the full grocery, it has significantly less grocery than what you'd expect in a full-line grocery.

So I mean, we essentially have the best of the best in dairy, dry, and frozen in a -- in our new prototype.

And we think that by having 24 sides committed to food, it's the appropriate level.

And regarding myself, I've been CEO for approximately 10 years, and we have had a very strong effort to drive shareholder value throughout that entire period.

And that will remain consistent into the foreseeable future.

Okay.

Thank you very much.

Thank you.

And your next question comes from Christine Augustine with Bear, Stearns.

Thank you.

I'm wondering if you would provide us with your outlook for the elimination of quotas at the end of this year, or the potential elimination.

And if you are planning your business any differently in terms of, you know, kind of close to the year end and your sourcing needs.

Well, let me just say that that picture is still not very clear at this particular point in time.

We're not -- you know, exactly sure what's going to happen at the end of the year.

But if that outlook or if that speculation happened and quotas are eliminated, certainly more business would naturally want to migrate to China; and China's a very important country to us.

Having said that, our sourcing strategy is one of balancing risk and making sure that we are well positioned throughout the world.

So we -- we remain very committed to developing our relationship in other parts of the world, as well where we can achieve our quality, cost, and speed to market objectives.

So central America continues to be an important priority for us; the Middle East, India, Pakistan, as well as China.

We are going to maintain a balance regardless of what happens, and -- and we'll just wait and see what happens.

And consistent with our commitment to hold this call in total to a 60-minute timeslot, I think we'll take one more question.

And then Susan Kahn and I will as always be available to handle any questions that haven't been answered today.

Thank you.

Your final question comes from Greg Melik with Morgan Stanley.

Hi.

Thanks, guys.

Just two questions.

We'll make it short.

On inventory, you want to grow it with sales, and it makes sense with direct imports.

Just wondering, is the -- are we thinking about it right, that if deflation was 4%, that unit inventory would have been up 16%, and that that's how you improved in-stocks, is that the right way to look at it?

And did EITF, the switch, have an impact on inventories year-over-year?

In terms of your first question, I think the logic that leads you to that conclusion.

When we talk about deflation, we're really comparing a point toward the end of the year to a point much, much earlier.

There are a lot of other issues that need to -- there's a lot of other algebra that segregates the deflation from a unit count.

For example, mix issues within categories and between categories have a huge impact on units of ownership.

More specifically on your direct imports aspect this question, as we move to closer to -- more deeply into a direct import model, we're taking titles to goods earlier in the supply chain.

And that, all else being equal, would cause inventories to grow faster than sales.

So it's not a specific objective of ours to grow inventories in line with sales.

On your EITF 02-16 question as it relates to inventories, there is an impact on our inventory valuation, but it's not a particularly large one.

Okay.

And the second on cap ex, just to make sure I got this right.

It's going to be around 10% this year, but your square footage growth is down a bit.

I'm wondering what's making that switch, is it investments in DC's, IT, the leasing mix, remodels, what?

Two things.

First of all, our percentage rate of growth in new square footage might be slightly smaller in '04 than in '03.

But it's on a bigger base.

Therefore, the number of square feet that we will be adding will be a larger figure in '04 than '03.

And that footage drives the dollars.

Separately, I tried to describe in my comments that our mix of leased footage and owned footage was a little more skewed toward leasing and away from ownership in our new store openings in '03.

I would expect that to return to a more normalized situation.

If that turns out to be an incorrect forward-looking statement, then it's certainly possible that the present value of new leases would be a higher figure this year and our cap ex a lower figure than what I've just described.

Okay.

So the proportion spent on remodels hasn't really changed?

No.

We continue to be very dedicated to a consistent remodeling program to keep our Target store base quite fresh.

And that's a remodeling program that we're religious about at Mervyn's and Field's, as well.

Again, I want to thank everyone for participating in today's conference call.

And to the extent that there are any further questions, please follow up with Susan Kahn and myself.

Thank you all for your participation that concludes our fourth quarter and year-end 2003 earnings conference call.

This concludes today's Target Corporation's conference call.

You may disconnect at this time.