目標百貨 (TGT) 2004 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.

Afterwards 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 1 on your telephone.

As a reminder, this conference is being recorded Thursday, February 17th, 2005.

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 2004 fourth quarter and year-end earnings conference call.

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

Greg Steinhafel, President;

Doug Scovanner, Executive Vice President and Chief Financial Officer; and Bart Butzer, Executive Vice President of Stores.

This morning Doug will review our four quarter and fiscal-year 2004 financial results and describe our outlook for 2005.

Then Gregg will provide an update on Target's recent business and current initiatives.

Gerry will update you on the growth and performance of our credit card operations and target.com, as well as developments in our supply chain.

Finally, I will wrap up our remarks and we will open the phones 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.

As usual, today's call will be limited to 60 minutes, including our Q&A session.

For any of you who may still have questions after the call, please follow up with Susan Kahn or me directly.

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.

This morning Target announced actual results for fourth quarter and total year 2004.

For the quarter, earnings from continuing operations rose 12 percent to $809 million compared with $722 million last year.

On this same basis, earnings per share rose to $0.90 from $0.79, an increase of 13.9 percent.

As previously disclosed, our earnings from continuing operations were reduced in the quarter by a pretax adjustment of $65 million or about $0.04 per share related to accounting for owned stores located on leased land.

In addition to earnings from continuing operations, our consolidated results of operations included a favorable adjustment of $16 million or about $0.01 per share related to our disposal of discontinued operations.

Let me discuss results from our continuing operations in a bit more detail.

Total revenue in the quarter grew 11.1 percent to $15.2 billion, reflecting an 11.1 percent increase in merchandise sales, and a 10.6 percent increase in net credit revenues.

Comparable store sales rose 5.4 percent in the quarter on top of a strong 6.1 percent increase a year ago.

Based on our annual analysis of retail price deflation, which was completed during the fourth quarter, we experienced deflation during 2004 of about 1 percent, considerably less than the 3 to 4 percent deflation rate we experienced in each of the past 2 years.

On a related note, we expect no LIFO charge or credit for the foreseeable future.

Gross margin rate improved 19 basis points from the fourth quarter of 2003 due to improved mark up, partially offset by higher promotional markdowns.

SG&A rate was unfavorable to the prior year by 23 basis points as the previously disclosed lease accrual adjustment more than offset rate favorability in other expenses.

Depreciation and amortization expense grew $58 million compared to the same period a year ago, and this growth was $11 million greater than our third quarter increase.

The primary reason for the larger increase is our closing of 5 stores in the current quarter to execute so-called "Phoenix Rebuilds."

This is a process under which we close and demolish our existing buildings and construct new buildings on our existing sites.

These 5 stores will reopen as new Target Stores in our October 2005 cycle.

One impact of this effort is accelerated depreciation in the quarter related to the decision to close and tear down the existing stores.

Interest expense declined $22 million in the quarter to $107 million from $129 million a year ago.

This decrease was primarily attributable to substantially lower average funded balances reflecting the application of proceeds from our Mervyn's and Marshall Field's transactions.

By coincidence, our effective income tax rate for both the fourth quarter and the full year was 37.8 percent in both years.

Weighted average diluted shares outstanding in the quarter were 903 million, a reduction of 15 million shares or about 1.6 percent from the corresponding figure of 918 million last year.

Under the $3 billion authorization provided by our Board of Directors in June, we continued to repurchase shares of Target common stock during the fourth quarter.

Specifically, we invested $300 million to buy approximately 6.1 million shares of our common stock at a weighted average price of $49.51 per share.

Cumulatively we have now repurchased 28.9 million shares of common stock at an average price of $44.68 per share for a total investment of $1.29 billion and we continue to believe that we will complete this repurchase program within 2 to 3 years of the program's inception.

Now let me turn to the balance sheet.

Once again, our fourth quarter balance sheet presentation segregates assets and liabilities for our discontinued operations from our presentation of continuing operations.

The prior-year presentation of assets and liabilities for discontinued operations includes both Mervyn's and Marshall Field's, while our balance sheet as of January 29, 2005, reflects both the receipt of cash proceeds and the disposition of assets and liabilities related to the Mervyn's and Marshall Field's transactions.

At quarter end, the remaining proceeds of approximately $1.7 billion were invested in short-term securities, shown on the cash and cash equivalents line.

Net accounts receivable at the end of the fourth quarter reflect balances for the Target Card and the Target Visa.

Net of the allowance of $387 million on these receivables balances at quarter end were $5.1 billion, 9.7 percent above our receivables levels at this time last year.

Our balance sheet inventory position grew 19 percent from a year ago, reflecting both the natural increase required to support additional square footage, same-store sales growth, and our strategic focus on increasing direct imports.

Additionally, as we have discussed previously, the refinement of our measurement of the point in our supply chain at which effective ownership occurs.

This refinement in methodology, which explains about 8 percentage points of the year-over-year growth, results in a parallel and ongoing increase in our inventory and payables accounts.

Our balance sheet will continue to reflect these effects for one more quarter.

On balance, our inventory as we enter 2005 is in typical excellent condition.

Finally let me turn to our outlook for 2005.

And explain why we believe that a growth rate of 20 percent or more in EPS from continuing operations from our 2004 base of $2.07 is a reasonable expectation.

We have just completed another great year, as reflected in our results of continuing operations.

Same-store sales increased 5.3 percent and EBIT grew by 14 percent reflecting modest gross margin rate expansion together with a low double-digit percentage increase in total revenue.

Our outlook for 2005 envisions another strong increase in same-store sales, likely in the range of 4 to 5 percent, reflecting the continuation of our current same-store sales momentum even as we cycle last year's significant growth.

Combining this growth with the contribution to revenue from new stores and our credit card operations, results in an expectation that total revenue in 2005 will grow by approximately 11 percent, in line with our actual 2004 experience of 11.5 percent growth.

We expect to achieve a similar low double-digit percentage increase in EBIT, or earnings from continuing operations before interest and taxes, as fluctuations in gross margin rate and expense rate throughout the year are generally expected to offset one another.

While we always strive to achieve improvements in EBIT margin, that is EBIT as a percent of revenues, and there may be opportunities as the year progresses, we believe this outlook for sustaining our EBIT margin at current record levels is appropriate from today's vantage point.

As we look beyond our core operating dynamics, we expect to leverage this double-digit percentage growth in EBIT to achieve EPS growth of 20 percent or more for the full year, driven by a significant reduction in projected interest expense and by a reduction in average shares outstanding as we continue to execute our share repurchase program.

Specifically, we expect interest expense in the first half of the year to benefit from 2 factors.

First, we'll be cycling periods which preceded our receipt of over $4 billion in after-tax transaction proceeds.

And secondly, we will be cycling the effective $89 million in loss on bond repurchases, which is reflected in interest expense in the first 2 quarters of 2004.

During the second half of 2004, following the Mervyn's and Marshall Field's transactions, our quarterly interest expense averaged $110 million.

We believe this is a reasonable quarterly benchmark to use in estimating our run rate for interest expense in 2005.

Although we may need to modify the guidance somewhat as the year progresses, depending on the timing of future Federal Reserve actions and timing of our share repurchase program, among many other factors.

Today, the median First Call 2005 projected EPS for us is $2.55, which represents a 23 percent increase from the $2.07 we just reported, and is consistent with the outlook I have described, but only when combined with a modest expansion of our EBIT margin.

While in our view this median First Call estimate falls within a reasonable range of expectations, I think it's important to recognize that we would be fully satisfied if we achieve performance in the range of $2.50 per share for the reasons I have outlined.

Focusing this same discussion on the first quarter, the current First Call median estimate of $0.52 seems like a reasonable midpoint in a range of likely outcomes.

Now Gregg will review Target's current business trends and discuss several key merchandising initiatives.

Gregg.

Thanks, Doug. 2004 represented another year of outstanding performance at Target, with increased emphasis on merchandising differentiation and value to delight our guests, continued gains in market share, bold changes in store design that meaningfully enhanced our guests' shopping environment, and double-digit growth in profitability.

Our strong fourth quarter momentum and our well-defined strategy give us confidence that we can continue to build upon this performance in 2005 and sustain our competitive advantage.

Specifically, we will continue to find ways to deliver great value and to remain relevant to our guests through continuous innovation, great design, and disciplined execution of our strategy.

In 2004, for example, we introduced new brands, such as Simply Shabby Chic in domestics, Build-a-Bear in toys, dorm room in home decor, boots and cosmetics, and apparel lines that included C9 by Champion, Breakwater and Linden Hill.

We created excitement and generated incremental sales with our roll out of One Spot, and our post-holiday launch of Global Bazaar.

And we made substantial improvement in managing our inventory transitions effectively and in maintaining record high in-stock levels.

In 2005, our plans to enhance our assortment and grow market share include our ongoing commitment to increase guest frequency through greater value and selection within our offering of consumables and commodities, particularly in new, remodeled, and right-sized stores.

Our continuous emphasis on internal design, development, and sourcing to deliver trend-right quality merchandise in all our fashion categories, and our consistent introduction of new brands and products that distinguish Target from competitors and delight our guests.

A few near-term examples are, Fieldcrest classics and luxury brands for bed and bath, and the Isaac Mizrahi home collection, both of which will be available in our stores next month.

California Closet, which provides a storage and organization solution for our guests' home and garage.

Lotta Luv's, a fun new brand for tweens, girls between the ages of 6 and 12 including apparel, jewelry, hair accessories, handbags, cosmetics, and room accessories, at price points ranging from $.99 to $19.99.

And an updated garden place assortment showcasing furniture, fountains, trellises and an exclusive collection of merchandise from Sean Conway.

We also remain dedicated to providing greater convenience and service to our guests with added pharmacy locations.

At year-end 2004, we operated more than 1,000 pharmacies, and our 2005 plans include the opening of nearly 150 more.

In addition, in April we plan to unveil an innovation in pharmacy that is a breakthrough in the industry and shows Target's commitment to making our guests' lives better.

It's called Clear RX, and is a new pharmacy bottle design and system that makes it easier for our guests to take their medications properly.

It features a flat panel for drug label with larger print for critical information.

A color-coded ring that allows family members to easily identify their own medicine, and an enhanced liquid dispensing system for ease in administering medicines to small children.

At SuperTarget we remain -- we remain focused on delighting our guests by embracing strategies that reinforce our "Eat Well, Pay Less" brand promise.

For example, we have intensified our focus on key food-related holidays like Easter, graduation, 4th of July, Thanksgiving and Christmas, giving our guests more reason to shop our stores for seasonal food items.

We are offering our guests more simple solutions for dining and entertaining with an increased selection of prepared foods, recipes for meals ready in less than 30 minutes, and wine in nearly 300 stores.

We are focused on delivering freshness in a broader assortment of healthy alternatives in all categories, such as whole grain breads and cereals, all natural chicken, low carb potatoes and transfat free baked goods.

We have expanded our offering of organic products and locally grown produce and soon will introduce a new line of USDA choice Angus beef called Sutton and Dodge [ph].

For our guests who buy in larger quantities, we are now offering club packs in every category including candy, lunch box, pizza, and appetizers.

And we continue to reinforce our value message through special purchases, single price point end caps, and increased penetration of our own brands, Archer Farms and Market Pantry.

Remaining relevant to our guests is at the heart of our store expansion program as well.

During 2004 we opened a total of 98 new stores in 29 states and remodeled 71 stores.

Net of relocations and store closings, we opened 83 new stores including 18 SuperTarget Stores and 65 discount stores, which resulted in a net increase in square footage of 8.2 percent for the year.

In 2005 our expansion plans include a total of about 110 new stores, 26 of which are scheduled to open next month.

Our net openings for the year are expected to be in the range of 90 to 95 stores.

A list of specific stores planned for our first 2 opening cycles this year, March and July, is available on our website.

All of these stores will continue to reflect our P-2004 store design.

Now, let's turn to our outlook.

We believe Target has the right strategy and the right plans in place to continue to delight our guests and deliver profitable growth.

As we head into 2005, our inventories are in excellent condition and our sales momentum remains strong.

Though last year's first quarter same-store sales pose a difficult hurdle, we are optimistic about our ability to grow from this base and capture additional market share gain.

We believe Target is well positioned to replicate the formula that has contributed to our success for many years and expect to produce another year of superior performance in 2005.

Now, Gerry Storch will give you an update on our credit card operations, our current supply chain initiatives and recent developments and Target.com.

Gerry?

Thanks, Gregg.

Our credit card operations remain an important contributor to Target's overall profitability and continue to reinforce our strategic objective to strengthen our relationships with guests.

In 2004 we sold the Mervyn's and Marshall Field's portfolios, effectively managed their transition to new owners, and continue to deliver strong consistent performance in our remaining credit card operations.

For the full year, our credit card operations generated pretax contribution of $485 million.

An increase of more than 14 percent.

Average receivables grew nearly 6 percent as the quality of our portfolio continued to improve during the year.

Resulting in significantly lower net write-offs and improved delinquency rates.

Specifically, our net write-off rate declined to 8.4 percent in 2004 from 9.5 percent in 2003.

And our delinquency rate which provides a strong leading indicator of future write-offs, was 3.5 percent at year-end 2004 compared to 4.2 percent a year ago.

In 2005, we remain committed to delivering financial products and services that drive sales, deepen guest relationships, and sustain our profitability.

To increase credit card awareness and give our guests more compelling reasons to use their Target credit cards, or Red Cards, for payment, we are strengthening our marketing, branding, and loyalty offerings and integrating our credit card operations with our retail business.

For example, to ensure that we deliver a Target brand experience each time our guests interact with Target financial services and improve guest satisfaction we have thoroughly evaluated our guest relations practices and updated our communications.

We are developing opportunities, such as our pharmacy rewards program, that aligns our credit card and merchandise strategies, provide attractive savings for our guests and generate incremental sales and profits for Target.

With more than 9 million guests enrolled and more than 110,000 schools participating, our Take Charge of Education program remains a key component of our loyalty offerings.

The strength in guest relationships and increased credit card penetration we are examining opportunities for new programs and new features to ensure that our loyalty programs remain meaningful to our guests.

And we are focused on integrating our Red Card marketing with our existing marketing strategies and channels.

We want our Red Cards to reflect the Target brand and reinforce what our guests love about Target, Ensuring that our Red Card marketing is consistent with our brand throughout all channels and offering other benefits, like exclusive access to fashion tips and information about products sold at Target allows us to build stronger relationships with our guests and promote greater use of Red Cards.

Beginning in 2005, Target will assess finance charges on a substantial portion of our Target Visa credit card receivables at a prime base floating rate consistent with the practice of many other credit card issuers.

We do not believe this change will have a significant impact on finance charge revenue, and we plan to maintain sufficient levels of floating rate debt so that changes in finance charge revenue due to future prime rate fluctuations will be substantially offset by changes in funding costs.

This change and other initiatives we are pursuing in our credit card operations demonstrate Target's commitment to continuous improvement, which we believe is critical to maintaining our competitive advantage and growing our market share profitably.

Within our supply chain, we are reaping the benefits of our innovation and investments in technology and capacity.

We've achieved record high in-stock levels in 2004 and these continue today, in particular, on our best selling top 2,500 items.

In-stocks in this segment have increased over 300 basis points from the start of the program.

And 2005 will expand our segmentation to include similar enhanced treatment for our top grocery items.

Additionally, add-in stocks improved 220 basis points over the past year.

In 2004 we implemented a new strategy to transition large product assortment changes and seasonal transitions.

The product has tracked through production, tracked in distribution centers and released to stores in a 2-day window.

We experienced the highest levels of in-stocks on transition in our history, reduced store handling expense and made a much more impactful statement.

The Global Bazaar initiative Gregg mentioned earlier is an example of a major transition program produced on 5 continents and tracked using this process.

We tracked 21 events in 2004 and will expand to 45 in 2005.

By leveraging our sourcing and logistical capabilities, we've increased direct penetration of imports to nearly 30 percent of total purchases.

Our investment in a bicoastal import warehouse network has allowed Target to emulate service provided by our best domestic vendors, resulting in higher margins and better in-stocks.

We'll increase our direct import penetration even more in 2005.

We continue to implement new technologies and programs to increase our overall speed and reliability.

In 2004, our first year of utilizing a process that automatically receives, labels, and inducts cartons into our GCs, our automated receiving technology increased our overall distribution network receiving productivity by 20 percent.

In 2005, we expect a further increase in productivity of about 10 to 15 percent.

Improvements in data integrity and a 1 to 2-day reduction in lead time.

We also will implement voice pick technology in our import warehouses, reducing expense and improving accuracy by moving to a label-less environment for product moving to our regional distribution centers.

In 2005, we will also be expanding our single-day arrival program, receiving product on a specific appointment date rather than in a multi-day cancel window.

This program reduces supply chain lead time and decreases investment in inventory and distribution assets.

And our RFID program continues to grow.

We are committed to leadership in this technology as it develops, with a prudent disciplined approach to investment and learning during this development phase.

We believe RFID technology will have significant supply chain benefits as the technology matures in coming years.

Finally, our results at Target.com continue to significantly outpace the on-line industry.

Sales in 2004 grew at a high double-digit rate and we expect to enjoy a similar growth rate in 2005.

Our assortment of products and services are expanding rapidly to deliver what our guests want and deserve.

Specifically, we have significantly expanded our furniture and soft tone collections, our apparel and shoe assortments which represent categories with large direct sales opportunity, offer differentiated design and great value.

And our deep selection of baby products supports our brand focus on this important guest segment.

We continue to support our store merchandise categories by offering broader assortments and extended sizes of collections we carry throughout the chain.

Examples include, small sizes in Isaac Mizrahi apparel, larger sizes in shoes, monogrammed Fieldcrest towels, and an expanded selection of Globe Bazaar products.

One of the most popular destinations on Target.com is our Red Shot Shop, which features new well-designed hip product.

In December, we ranked fourth among on-line retailers, and 18th among all website by Nielsen net ratings and we continue to grow at an accelerating pace as we capture market share from other websites.

Whether on our credit card operations, our supply chain, on the Internet, or in other areas of our business, Target remains focused on innovation and initiatives that increase the speed and efficiency of our operations, enhance our guest shopping experience and drive frequency and incremental sales.

We are confident these attributes will contribute to strong consistent growth in the years ahead and help us to sustain our competitive advantage.

Now, Bob has a few concluding remarks.

As you just heard in detail, we're pleased with our overall results for 2004 and excited about our prospects for 2005.

Our strategic direction at Target is clear.

We continue to delight our guests with differentiated merchandise and exceptional value.

We continue to invest in technology and leverage our resources across pyramids and departments throughout our organization to enhance our performance.

And we have ample opportunities for profitable growth in the United States in 2005 and beyond.

In light of these efforts and the strength of our team, we are confident that we will continue to capture market share gains and deliver superior value to our shareholders over time.

That concludes our prepared remarks.

Now Doug, Gregg, Gerry, Bart and I will be happy to respond to your questions.

(Operator Instructions).

Our first question comes from Emme Kozloff with Sanford Bernstein.

Hi.

This is for Doug.

In terms of full-year guidance, there were a lot of caveats in the comments so I want to get clarification.

I heard your backing 2.50, not 2.55 given your planning flat EBIT margins, but 2.55 given that it presupposes an EBIT margin that is above your plan could be doable?

Is that correct?

And I've got a follow-up on gross margin.

Yes, that's generally correct.

From my personal point of view, it is premature to be planning EPS for the year at such a precise level.

We believe that it's prudent for us to plan our business envisioning flat EBIT margins.

Flat EBIT margins, by the way, means flat at the record high levels we're currently enjoying, and if we were to achieve that together with everything else we talked about, it would drive EPS in the range of 2.50.

Bear in mind that a single percentage point increase in EBIT or decrease in EBIT is about $.02.5 per share so there really is a very small differential viewed from today's vantage point between $2.50 and $2.55 as an outlook.

Okay.

And on the December sales call you guided below consensus of $0.94 due to negative margin shift.

If you take the $0.05 of charges out this quarter you get to 89 on that number, so it seems like there must have been a margin pick up in January, not just a comp one given how small that month is.

Can you walk us through the margin trends interquarter, because it seems a little bit confusing.

Thanks.

I will validate your hunch, that is that we had a terrific January, both from a sales standpoint and from a delivery of gross margin rate standpoint.

The rate that we were able to enjoy in January essentially offset the clearance, pardon me, the promotional mark down issue that we identified in December.

On balance it was a terrific quarter from a sales standpoint, and we were able to expand gross margin rates slightly from last year's record high fourth quarter levels.

Great.

Thank you.

Our next question comes from the Adrianne Shapira of Goldman Sachs.

Thank you.

Doug, maybe you could address the expense issue, if we back out the lease accounting charge, it looks like you achieved some leverage on expenses.

Could you talk us through that and give us a sense in terms of what to look forward to?

Is it largely based on the strong sales that you achieved in the quarter?

Certainly.

First of all you're correct, if you back out the -- analytically back out the lease issue, we favorably leveraged operating expenses in the quarter.

Yes, a part of that is our strong sales.

In fairness here, those of you who pay careful attention to these calls, may recall that earlier in the year we talked about some of our expense deterioration year-over-year due to timing issues.

Well, timing issues turned around in the fourth quarter as we expected them to and on balance for the full year, which I think is a much more useful way to look at this picture analytically, about half of our expense rate deterioration of 28 basis points was due to these lease issues that we've disclosed.

And on a net basis, nearly all of the rest is the Workers' Compensation issue that we've talked about before as well.

So looking across the full year, our actual reported results reflect a bit of deterioration, and on a net basis, almost all of it is explained by those 2 factors.

My next question, perhaps Gregg could help out on this, as you mentioned January, an incredibly strong month, obviously partly due to the success of Global Bazaar.

Could you walk us through the process in terms of teaming up the sourcing and the merchandising teams and can we expect more of these types of team efforts?

Well, we're pleased with the results of Global Bazaar, and you're correct, it's one of the things that we do well.

We've got a strong internal design development department and through AMC we are able to source products globally.

And this was a total Target team effort where we secured great products at tremendous values and had identified a period of time in our stores which were more transitional in nature, and so we felt that we could take advantage of this opportunity at this particular time, and clearly we're pleased with the results.

And, yes, we will look for other times of year for us to introduce these types of events, although January is unique in that it's a down time, and we've got other merchandising events that occupy the calendar throughout the year.

But we're pleased with the results and we're going to take the learnings and apply those back in our general business.

Thank you.

Our next question comes from Deborah Weinswig of Smith Barney.

Good morning.

Gregg, you gave us an update in terms of store growth in 2005 of 110 stores.

Can you break out for us what percentage of those are SuperTarget?

And also update us on your thoughts on the returns at SuperTarget versus the regular discount stores?

Go ahead, Doug.

In the year just ended, about 25 percent of our net square footage growth was SuperTarget and that's a good working figure looking forward into 2005 as well.

And as has been the case for years on an age-adjusted basis, we have about the same actual and expected return on invested capital for new SuperTarget Stores as we do for our other new stores that we construct.

Okay.

And also in the past you've talked about increasing the private label food percentage at both Archer Farms and Market Pantry, I think changing the packaging, and like I said, adding product.

Can you give us an update of where we are there, and what the guest is -- what the response has been from the guest?

Sure.

We've fully converted our old packaging to new Archer Farms and Market Pantry throughout 2004.

Sales continue to be very, very strong in both brands, penetration in terms of its percent of total sales is now into the low double digits and we expect that number to continue as we go forward into '05.

Okay.

Great.

Thanks so much.

Our next question comes from Daniel Barry of Merrill Lynch.

Good morning.

Question about your comps.

They've actually accelerated in the third and fourth quarter compared to other areas in the discount world and retailing in general.

Could you identify just exactly what caused the sales to accelerate?

And if any narrowing in the price differential between yourself and Wal-Mart had any way influenced that acceleration?

Dan, we don't see any narrowing in the price difference between us and Wal-Mart we're consistently very close to them and that hasn't changed.

But our feeling is we just continue to execute our expect more, pay less strategy and do it in a disciplined manner.

Whether it's the content, trend right, and impactful merchandise, the tremendous presentation or the innovative marketing that it really resonates to our guests, or the strong supply chain and in-stock improvements we have made and the execution at store level, it's a combination of those elements together that have just come together to generate these strong comps, so it's the combination of every discipline within the Company that's coming together and working well.

So the Company had dilution of consumables, would that have been a big factor or small factor?

It is not an overriding factor.

We had strong business throughout the entire breadth of the store, and as I've stated in the past, we had a particularly strong apparel year as well.

So we saw very strong businesses, whether it was apparel, food, consumables, home stationary, it was just a good year overall.

Great.

Keep it up.

Our next question comes from Jeff Klinefelter of Piper Jaffray.

Couple questions for you Gregg.

On the Global Bazaar, based on the success with the program during January, is there anything that you will be able to translate at this point into the existing assortments that could help provide a catalyst for that category, which I guess was just okay but maybe didn't perform up to the level of some of your other categories this year?

Then in terms of pharmacy, what strategies are in place to generate market share gains?

I understand that that is an opportunity for you going forward to bring your overall share within your markets up to a higher level, and how might you -- what could be a catalyst to drive that higher?

The Global Bazaar, learnings from Global Bazaar that we will transcend in the balance of the assortment is that, we probed up larger items, higher price points, and we found that our guests connected with the better quality, higher priced products that we had throughout Global Bazaar.

So that's going to give us greater confidence to expand our assortment in our best classification, so whether it's in home textiles, home decor, decorative home, we'll just have a lot more confidence that our guest is ready for us to continue probing up where [ph].

So we'll be incorporating those assortment changes throughout the year.

In terms of pharmacy, I mentioned this Clear RX strategy which we are very excited about, it's going to be launching in our stores in the second quarter and we really believe it's a breakthrough, it's a new pharmacy system, and we really think that's going to resonate with our guests.

And it's going to be a reason for our guests to switch from their local pharmacy or some other competitor to us, and we believe it's going to be a strategic advantage.

And it's -- everything I describe, from the shape and the size of the bottle, to the clarity of the descriptions on that bottle, to the little pocket card that describes the medication and some of the -- some of the uses and side effects, to the ring that we are putting around this bottle, so every family member can have a different color coded ring so that would avoid confusion, to the liquid dispensing system for kids.

I mean that combination we're very, very excited about.

And then, in addition to that, we just continue to really try and pursue the pharmacy business by having very, very high quality pharmacists and deliver just outstanding guest service at great prices.

Thank you.

Doug, do you anticipate the same sort of deflationary levels this year?

Is that what you're assuming in your plans?

Generally speaking, yes.

Wouldn't surprise me personally if we saw a little more inflationary impact and moved to neutral plus or minus from negative 1 from slightly negative territory.

Certainly, we don't envision any return to the minus 3 to minus 4 world that we were in 1 and 2 years ago.

Thank you very much.

Our next question comes from the Gregory Mellich of Morgan Stanley.

Thanks. 2 questions.

Doug, if you could just give us a number for CapEx this year and if Phoenix rebuilds are going to have a meaningful impact there?

And the second was, and I guess probably for Gregg, with the increased assortments you described, are there any parts of the store where the assortments are actually being reduced?

And what sort of SKU counts should we ultimately expect in the average store this year?

Greg, in terms of CapEx, as you know, in the year just ended we invested about $3.1 billion, and I expect CapEx to likely increase in line with revenues, let's call that 3.4 billion, up plus or minus.

And as it relates to your question regarding SKU count, we're not planning on any major changes to our SKU count throughout the year.

We have on average about 65,000 active SKUs in our store at any given point in time in a general merchandise store, and that number does fluctuate, but we're not expecting to make significant changes.

Could you just give us a little insight, then, because you listed a bunch of areas where you're adding SKUs, some of the areas where you might be reducing square footage or SKUs?

Well, it's an ongoing process where we are adding and deleting and editing as we go throughout the year, so it's just part of our assortment planning process to make shifts in adjustments, and so if we're adding and expanding in a particular area we will be making commensurate adjustments downward in other categories.

Can we get some of those categories?

Basically we did our major editing with our 2004 prototype which has been out there for a year.

We are not looking at any major transferring.

Greg is talking about Global Bazaar that would work into existing home categories.

We don't, at this point in time, see any major shifts, as there would be major reductions in some categories and major expansions in others.

As I said, our new prototype we're very happy with continuing with that direction.

That's great.

Thanks.

Teresa Donahue of Neuberger Berman, you may ask your question.

Good morning, everyone.

I had 3e questions.

First of all, Doug, you indicated your expectations for flat EBIT margin in '05.

What am I missing given that you seem to have had some expense rate improvement lately, and why wouldn't you expect that to continue?

And then secondly, I had a question with respect to what happened in January -- in December, rather, as far as cherry picking is concerned, as to whether there's anything you're thinking about to correspond to that pattern internally?

And finally, I had a question on real estate opportunities.

We virtually always plan our business to try to hold the margin rate gains that we have generated, and find that it's not a balanced risk for us to try to engineer up-front increases in our margin rates.

Having said that, across our history we have been highly successful in engineering expansions in our margin rates, and I don't mean for any of my comments today to indicate that we think that there's some kind of meaningful impediment to potentially seeing margin rates expand in the future.

It just simply isn't the way we plan our business, yet as we go about executing our plans, we strive to capture whatever margin rate expansion opportunities are appropriate.

Okay.

But would I be right in thinking that the SG&A rate could be flat or down slightly, assuming comps continue at your planned rate?

Yes.

Okay.

And secondly, you had indicated at the December that there was a lot of cherry picking going on.

Was that a phenomenon that you feel is confined to this year, and if not, is there anything you can or would do to plan against that?

I'm not sure we'd characterize it as cherry picking, but what happened is the guests were very, very responsive to our sale offerings, and consequently we had a slightly higher percentage of purchases on sale as opposed to regular purchases.

It could stay that way, certainly see no reason for it to the get worse.

Things did bounce back to a normal pattern right after Christmas and as we got into January.

So we're not anticipating anything unusual or certainly worse than last year as we get into the coming fall.

Okay.

And finally, on real estate opportunities, you guys in the past have expressed interest in picking up packages, ala Montgomery Ward, should they become available, and I'm just wondering how your thinking is right now relative to number of stores and things could you manage given everything that's going on with Sears and K-Mart and is rumored elsewhere.

Well, I don't know what's going on with competitors, but I would reiterate we have historically had our normal opening pattern and when something opportune has come on the horizon, whether that be a Ward's or going back in our history, other acquisitions, we can step up and open additional stores.

And particularly when one is looking at mall real estate, which has been an object of speculation, we operate in approximately 100 malls now and do so very, very effectively.

We are very confident if good opportunities are out there that arise at prospects for good investment we will be able to step up our expansion plans significantly.

Thanks.

Robert Drbul of Lehman Brothers, you may ask your question.

2 questions, please.

The first one is, can you talk a little bit about how the P-2004 remodels did during the fourth quarter and December?

And the second one would be, can you talk a little bit about some of the frequency statistics around P-2004 versus SuperTarget versus discount stores and what you're experiencing there?

P-2004 remodel performance is, it's fine, it's very early.

We're just undergoing some of these remodels, so we haven't really even cycled from an annual basis, but early reads are positive just like the new stores are, and we'll have more to describe as time goes on, and we have better history in those stores.

Our frequency initiatives continue to perform well.

We have identified that in our new P-2004 format our guests do visit us more often.

They spend more time in our stores, they shop more categories, and the average spend is slightly higher than a prior prototype store.

So we're pleased with the performance, but again, it's relatively early.

Last year was the first full year that we opened up this format, so I don't want to project too far without more experience, but we're pleased with those initiatives in those stores, and SuperTarget continues to perform well as well.

And the frequency initiatives that we are undertaking in our GM stores are also in our SuperTarget Stores and traffic counts are healthy there and our average transactions are good there as well, and the performance is at or slightly above the chain-wide performance in comp store sales.

As a follow-up, Gregg, can you talk about how many stores did you actually remodel in the plan for '05 on the P-2004 format?

In 2004 remodeled approximately 70 stores and we are expecting to remodel a number in that same range as well for this year.

Great.

Thank you very much.

Christine Augustine of Bear Stearns you may ask your question.

Thank you.

Doug, I'm sorry if I missed this, but did you give comp guidance for 1Q?

And then my second question has to do with the electronics category, I guess for Gregg.

It was not one of the better categories for you in '04.

Are there any new initiatives there that you can discuss?

Thank you.

Our comp guidance for the quarter is the same as the guidance that I gave for the year, 4 to 5 percent same-store sales is our guidance, and, of course, we're cycling a very strong quarter from last year, so we're expecting a continuation into the first quarter of the very strong sales momentum that we generate in the fourth quarter.

The electronics business was a little soft in the fourth quarter, as primarily due to the lack of gaming hardware in the marketplace.

We had strong performance in the digital categories, strong performance in the audio categories, strong performance in telecommunications and accessories and gaming software was strong as well.

There was just a tremendous shortage in the market in the gaming platforms, and that had, I think, a lot to do with why the electronics category was a little softer than we expected.

How about on the private label side in electronics?

Are you pursuing anything new there?

We are looking at it.

We believe that it's important for us to have a value opening price point offering and we have in the past achieved that by securing opening price point brands, and those brands have varied by category, and we are looking at right now whether or not it makes sense for to us introduce our own private brand in this category, and when we've made that call and when we get to the point where we can announce something we will share that with you.

Thank you.

Jeff Stinson of Midwest Research, you may ask your question.

I was wondering if you could give us a little more color on the direct import program, as far as where penetration stands right now, where that may be going down the road, and kind of in particular what categories you see opportunities with direct imports?

And then what the financial benefits may be from this program?

Thanks.

Yes, we have continued to gain share of store with our direct imports.

They now represent over 25 percent of our total purchases, and this has been an evolutionary yet strategic direction that we've taken, and we fully expect to continue to slowly improve the amount of direct imports that we bring in as a share of total purchases.

And it is spread really broadly across the store, so whether it is in apparel, which is the obvious categories, or the home side of the store, we also are looking at importing food gifts, and there's pet supplies on the consumable side of the business, as well as toys, sporting goods, so it's really a broad effort that we're undertaking to increase our direct import penetration.

Jeff, I expect to continue increasing penetration by a point or 2 a year, and generally speaking, we incur some relatively fixed costs and some variable costs in SG&A expense, merchandising and supply chain related costs in exchange for typically meaningful increase in gross margin rate, and obviously we expect the net of that to be favorable.

Thank you.

Michael Exstein of CSFB, you may ask your question.

Thanks, everyone.

Real quickly you did a wonderful job on SG&A considering some of your competitors.

Just wondering how energy costs impacted that number?

Some retailers have actually broken out that component as a delta year-over-year, and did you see much in terms of that?

Thank you.

Year-over-year increase in energy costs for us was not particularly meaningful.

I think that's probably a bigger factor for retailers who have much higher penetration of refrigerated and frozen food products than we do.

How about in transportation costs?

Transportation costs certainly meaningful, it's in our numbers, but we were able to work around the adverse effect of fuel costs in our transportation and deliver strong results despite that.

There were other offsetting benefits?

Which were like what?

From our increased efficiency in our system plus some contractual negotiations that we've been working on for sometime.

Thanks a lot.

Dan Binder of Buckingham Research, you may ask your question.

Couple of questions.

As we think about the credit write-off rates for next year, you've been showing improvement through the year, what kind of a range should we expect in '05?

And then my second question is as it relates to SG&A, how should we be thinking about SG&A detriments next year with regard to Workers' Compensation and healthcare increases?

If at all.

Generally speaking, you're absolutely correct, in our credit card operations we have continued to enjoy the benefits of some favorability in various sources of net write-off, and clearly as a leading indicator, one doesn't need to go any farther than seeing that our total past-due at year end was 3.5 percent compared to 4.2 percent at the same point last year to see that we have likely some smooth sailing ahead of us.

If those favorable trends were to continue, they would flow quite naturally through a write-off in reserving practices and would manifest themselves in greater profitability in -- by that mechanism.

Okay.

Then with regard to Workers' Comp and healthcare increases for next year what are you planning on?

Looking first backward in order to step forward, in 2004, our healthcare costs was quite well controlled due to a number of steps that we had taken over time that we've described.

Workers' Compensation, by contrast, saw some deterioration, principally due to the adverse effects of medical inflation on some of our older and more significant outstanding claims.

As we look forward into 2005, I think that those 2 issues are likely to reverse.

I think that we are, from my vantage point, well positioned, from a Workers' Compensation standpoint.

We have a lot of activity internally showing some good strong results to decrease the incidents, decrease the frequency, if you will, of incurrence of these kinds of accidents.

Medical -- the medical outlook, by contrast, isn't quite as bright.

I do have some concerns that medical inflation rates will play through our numbers and increase our medical insurance costs, medical costs that are largely self-insured as a percent of sales.

A lot else going on inside SG&A expense, but isolating medical, I think it will be a continuing challenge for us to find ways to contain those costs responsibly.

Thank you.

Terry Eberts, of JP Morgan, you may ask your question.

Doug, I was wondering if you could just review for us your philosophy in terms of share repurchases, is there a certain price that you're looking at, or an accretion level, or just how you think about your repurchase activity.

Thank you.

Quick response on 2 different levels.

First of all, as you know we announced a $3 billion program mid-year '04 and said that we intended to execute that program fully over a likely a 2 to 3 year period that.

That guidance remains fully intact today, so none of the tactical discussion should cloud anyone in understanding that our clear intent is to finish the program fully in that time frame.

Tactically, we increase and decrease our purchases based on relative movements in the share price, not that we're trying to outguess or to be some kind of precise market timers, but just as a matter of logic.

In the short run we think it makes sense to step up to the plate in a much more meaningful fashion when the shares are under pressure in the very short run, and to back off a bit in the short run when the shares have shown strength.

Now to conclude the meeting on time at 10:30, we'll take 2 more questions.

Emme Kozloff of Sanford Bernstein, you may ask your question.

I just had a follow up on SG&A, can you remind us how long the agreement is for the buyers of Mervyn's and Marshall Field's to compensate you for transition services?

And what, if any, impact there will be on SG&A when the reimbursement goes away?

Yes, first of all, with respect to May Company, delighted that both they and we are on track, such that in the next couple of months we will no longer be required to support those transitions.

That execution has gone very, very well on both sides of the fence, and therefore the reimbursement will go away as well.

I'll circle back financially in just a moment.

In the case of Mervyn's, we will continue supporting the owners of Mervyn's for a substantially longer period of time, contractually we're obligated out as far as summer '07, perhaps some transitions sooner, depending upon how quickly some of those services can be replicated by the new owners.

Net-net, certainly in isolation there's a bit of a drag in terms of SG&A as a percent of sales.

Looking forward here in '05, because we certainly can't peel off expense as fast as the revenue goes away from May Company, the revenue goes away rather abruptly, that is implicit in all of the guidance that we have provided.

And as I've said many times before the capital side of this equation in terms of interest expense and share count is a much more robust equation as it relates to our earnings outlook than the SG&A aspects of these transactions.

Got it.

Thanks.

Tim Galley of Pioneer Investments, you may ask your question.

If you could just review for us briefly your latest thoughts on the apparel quota issue.

Apparel quota.

He asked about thoughts on apparel quotas.

Well, again, as it relates to apparel quotas, apparel quotas as we've said, we are taking a very cautious approach and we want to after balanced sourcing strategy that has strength throughout the world, and we aren't making any significant changes to our sourcing strategy this year until we see what transpires from a quota standpoint, from a currency standpoint, so we're just pretty much business as usual at this point in time.

And there have not been any major issues up to this point.

I'm sorry, so there hasn't been any real significant changes in sort of the cost side of the equation or the rivalry on the part of the suppliers?

No, not -- not significantly, no.

Because I've heard some rumors that non-Chinese suppliers were becoming a bit more aggressive in their own pricing.

Non-Chinese suppliers are always aggressive in their pricing, as far as we're concerned, but there hasn't been any significant change from our vantage point.

Thank you.

Like to thank everyone for your participation.

That concludes Target's fourth quarter and year-end 2004 earnings conference call.

Thank you.

Thank you.

This concludes today's conference.

You may disconnect at this time.