目標百貨 (TGT) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Target Corporation's third quarter earnings release conference call. [OPERATOR INSTRUCTIONS].

As a reminder, this conference is being recorded Thursday, November 10th, 2005.

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

Please go ahead, sir.

Good morning, and welcome to our 2005 third quarter earnings conference call.

On the line with me today are Doug Scovanner , Executive Vice President and Chief Financial Officer;

Gregg Steinhafel , President; and Bart Butzer, Executive Vice President of Stores.

In light of our investor meeting in New York three weeks ago, we plan to keep our remarks today brief.

As usual, Doug will review our financial results for the quarter and describe our outlook for the remainder of the year.

Then Gregg will provide a short update on Target's recent business and holiday plans.

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.

Because our formal remarks today will be brief, as Bob mentioned, we plan to keep today's call to no more than 45 minutes, including our Q and A session, but as always, Susan Kahn and I are available throughout the remainder of the day to address any follow-up questions you may have.

Also, any forward looking statements that 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 another quarter of outstanding financial results.

For the third quarter of 2005 net earnings from continuing operations grew nearly 35% to $435 million, compared with $324 million last year, and on this same basis diluted earnings per share rose more than 37% to $0.49 from $0.36 a year ago.

We enjoyed same store sales growth of 5.9% with growth in average transaction amounts accounting for about three quarters of the increase and growth in number of transactions contributing the remainder.

And, as we had previously disclosed, we enjoyed exceptional gross margin rate expansion in the quarter totaling 121 basis points and reflecting substantial improvement in mark-up.

In addition, favorable mark-down and inventory shrink experience contributed to our strong gross margin rate performance.

Our credit card operations also continue to contribute meaningfully to our overall profitability.

In the third quarter the contribution to EBIT, or earnings before interest and taxes from our credit cards, was $158 million, reflecting an increase of $38 million or 31.3% compared to the same period a year ago.

Average receivables grew about 14%, and despite a significant increase in bankruptcy filings in the quarter in advance of the new federal legislation, our net write-offs as a percent of average receivables and our delinquency rates improved compared to last year, reflecting the excellent and improving credit quality of our portfolio.

Our expenses in the quarter increased at a faster pace than our sales resulting in a net increase as a percentage of sales of 43 basis points.

Several unusual or nonrecurring items affected this line of our P&L including the adverse impact from the uninsured portion of casualty losses resulting from three hurricanes, reduced transition services income from the new owners of Mervyn's and Marshall Field's which had a larger effect in this quarter than any other quarter, and some benefits reformatting we accomplished in the quarter.

Substantially offsetting this list were two favorable issues.

The previously disclosed Visa MasterCard litigation settlement, and the year over year benefit of cycling last year's lease accounting charge.

The net effects of these items added somewhat to the impact of the more typical expense drivers we've been discussing throughout this year such as utilities cost.

On balance we continue to believe our expenses as a percent of sales will increase at a slower pace in the fourth quarter than in any of the first three quarters this year.

In the quarter just ended, the combination of our exceptional sales performance, our significant gross margin rate expansion, and the enhanced contribution from our credit card operations overwhelmed our expense issues and produced third quarter EBIT of $831 million, an increase of more than 31% from the $633 million in the third quarter of 2004.

EBIT as a percent of total revenues expanded by 100 basis points to 6.8%.

Net interest expense increased $5 million in the quarter from $113 million a year ago to $118 million this year, driven by higher average funded balances, partially offset by a lower average portfolio interest rate.

Our year to date effective income tax rate rose about 30 basis points from the first six months of 2005 to 38.2% primarily as a result of higher state income taxes.

Two brief comments on the balance sheet.

First, net accounts receivable at the end of the quarter were $5.1 billion, 12.7% above our receivables levels at this time last year.

Over the same period we have increased our allowance for doubtful accounts at a slightly faster pace to $417 million or 7.5% of gross receivables at quarter end.

We believe this reserve will be ample to cover future write-offs on our current portfolio including any adverse effect on Target of the mandated increase in minimum monthly payments.

Next, our balance sheet inventory position grew 14.2% from a year ago, a bit faster than sales overall and driven in part by increases in direct imports.

Overall our current inventory content and level is in very good condition.

Now let's put our year to date results in perspective and use them to provide some guidance for the balance of the year.

As a reminder our results from continuing operations in the first and second quarters of this year included significant year over year benefits of application of last year's $4 billion plus of after tax transaction proceeds, while our third quarter results and future period performance are cycling prior year periods which already reflect this benefit.

Once again, in this year's third quarter our sales, gross margin rate and the profitability of our credit card operations exceeded our internal expectations, and in combination, these factors allowed to us exceed our EPS expectations.

For the first nine months our actual EPS results from continuing operations reflect a 40% increase over the same period a year ago and are $0.16 above the first call EPS consensus for this period when the year began.

We've clearly enjoyed exceptional growth in sales and earnings so far this year and our outlook for this year's fourth quarter envisions that Target will continue to achieve profitable market share gains.

We have believed for some time however, that beginning in fourth quarter our year over year growth in EPS was like to return to levels consistent with our long term strategy.

The strategy, as you know, envisions generating a 4 to 6% increase in same store sales and maintaining, not expanding, our operating margins.

This is our recipe for delivering the average annual mid-teens percentage growth in EPS over time, which we believe will likely result from continuing to implement our strategy, and we will be delighted to achieve this outcome in the fourth quarter of this year and beyond.

Before turning to Gregg, let's spend a moment on the topic of share repurchase.

We announced today that our board has increased the aggregate authorization in our current program to $5 billion.

Including the shares purchased in the third quarter, we have now repurchased just over 46 million shares of common stock at an average price of $47.18 per share, for a total investment of nearly $2.2 billion.

As a result, weighted average diluted shares outstanding in the quarter reflected a reduction of 18 million shares for about 2% from the corresponding figure last year.

With today's announcement we now have about $2.8 billion of remaining authorization, and at more or less our recent pace of execution, we would expect to complete the aggregate $5 billion program in two to three years from today.

Now Gregg will review Target's holiday strategy.

Gregg.

Thanks, Doug.

The market delivered another quarter of outstanding results with innovative and compelling merchandise at an exceptional value, superior in store execution and great guest service.

Total revenues in the third quarter increased 11.9% to $12.2 billion due to a 5.9% increase in comparable store sales and the contribution from new store growth.

As Doug mentioned, this same store sales growth was driven primarily by an increase in average transaction amount reflected better than average performance in both men's and women's apparel, food, and commodities.

We again managed our inventories well during the quarter and are very comfortable with both the mix and level of our inventories as we head into the holiday season.

During the third quarter, Target opened a total of 59 new stores, the largest cycle in our history.

Net of closings and relocations we opened 33 net new discount stores, 16 new Super Target Stores, at quarter end we operated 1,400 stores in 47 states, including 157 Super Target locations.

As always, we expect this holiday season to be highly promotional and very competitive.

We believe that Target is well positioned to capture meaningful market share gains.

We are optimistic that our compelling assortments, strong marketing and disciplined store execution will deliver exceptional value for our guests.

Our cohesive holiday strategy is built around a gather around theme focused on entertaining, decorating, and gift giving.

Because food is always an important component of holiday celebrations we are focused on delivering freshness and solutions for all our guests' entertaining and meal preparation needs.

Our offerings provide exceptional convenience and value for time constrained households, especially during the busy holiday season.

Super Target will once again offer a complete six serving turkey or ham dinner with all the trimmings and a choice of pies for desserts, providing a convenient solution for our guests.

We will also offer a broad assortment of custom and pre packaged gift baskets.

Guests can place orders for deli or food platters on line at Target.com.

To make sure these gatherings capture the warmth and festivity of the season, our holiday assortment includes a broad selection of exclusive table top items including dinner ware, glassware, decorative accessories, as well as an exceptional offering of holiday lights and trim at outstanding prices.

Our commitment to expect more pay less ensures that Target is the destination for great gift giving ideas.

At our analyst meeting last month, we told you about our introduction of new brands and design related partnerships including Thomas O'Brien and Home, [Eurochi] and our limited Lux Edition in apparel and accessories, and [Chocski] our assortment of premium chocolate.

We also recently introduced our new own brand in electronics called True Tech which features opening price point items in DVD players, personal CD players, television and boom boxes, and of course, we are offering the latest in nationally branded video game software, systems, and accessories, portable audio products, digital camera and video equipment and upgraded TV offerings.

Our assortment includes both outstanding value and selection.

Children and parents will be delighted by Target's collection of high-tech and educational toys, board games, boy's action figures and dolls all at compelling prices.

Finally, consistent with our experience in recent years, we expect gift cards to represent an important component of this year's fourth quarter results.

We continue to generate excitement with innovative card design and improved marketing and in-store presentation.

Year to date we have enjoyed strong double digit growth in both card issuance and redemption.

We expect these trends to continue throughout the fourth quarter.

To compliment the strength of our merchandise assortment and great pricing, we are firmly committed to giving our guests a consistent Target brand experience every time they visit our stores.

Specifically we are focused on delivering the service, transaction speed, convenience our guests expect by ensuring adequate check lane and express lane capacity, adding more call buttons and staffing in high-service areas and increasing the number of cart corrals in the parking lots.

We are also intently focused on inventory management, flowing our goods efficiently while maintaining sufficient flexibility to respond quickly to changing sales trends.

We continue to leverage our technology and supply chain sophistication to ensure that we have the newest and excitement our guests want at the location and moment they want it.

As I mentioned earlier, we envision continued strong growth in market share reflecting low double-digit increases in total sales and mature store sales gains in the range of 4 to 6% for the fourth quarter.

We are confident that our guests will respond to our innovative merchandising and marketing, our exceptional value, and our consistent execution, and that this favorable response will produce yet another quarter of outstanding financial results in 2005, help us sustain our competitive advantage as we move forward through 2006.

Now Bob has a few final comments.

As you've just heard in detail we are very pleased with our overall results in the third quarter.

Through our continued strategic investments and unwavering focus on delighting our guests we believe that Target remains on track to deliver another year of outstanding performance in 2005 and profitable growth for many years to come.

That concludes our prepared remarks.

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

[OPERATOR INSTRUCTIONS] Your first question comes from Todd Slater with Lazzard.

Great quarter, guys.

Relative to your fourth quarter forecast, your mid teens EPS growth, I mean, I understand how would you expect the growth rate to be lower than the third quarter trend and how you wouldn't expect that kind of 35% growth.

I'm not clear on why it's reasonable to expect no EBIT margin expansion in the quarter after 100 bips in the third quarter.

I'm also curious if your estimate or forecast includes guidance in terms of the buyback and also if you could give us some guidance on tax rate.

Thanks.

I'll deal with a couple of mechanical issues first, then we'll get into the heart of your question.

Tax rate, today we would project about 38.0 for the fourth quarter, which would leave with us a somewhat higher rate for the full year.

Certainly, we always have some buyback assumptions in our figures, but in the very short run, there's a trivial impact on EPS as we exchange debt for equity at the margin.

So that's not really a factor one way or the other in any meaningful amount in our fourth quarter outlook.

In terms of the heart of your question, I think that if you look at last year's experience, we described in our December sales press release that it was a somewhat -- that our mix of sales was somewhat more promotionally driven in the month of December than we had expected going into the holiday season.

And I think many of you asked us quite directly how would we plan our business for this coming year, and the answer then and now was we would plan it in light of every factor that we observed in the competitive environment including last year's experience.

So I do not expect any meaningful gross margin rate expansion here in the fourth quarter, if the competitive environment were to allow it we would be delighted with the favorable outcome, but I think from today's vantage point, I would say that we're planning on a very, very modest degree of gross margin rate expansion and an offsetting amount of expense rate deterioration that essentially preserves our retail EBIT margins for the quarter.

That's today's outlook.

Doug, just a follow-up, what was your initial gross margin projection or expectation for the third quarter, and how would you characterize the competitive environment and all the issues relating to gas prices and so on and so forth?

How would you qualify that -- the environment in the third quarter?

There's no doubt that our third quarter experience was remarkably favorable in gross margin rates terms compared to our outlook 90 days ago.

That factor is certainly the single largest contributing factor to the spectacular EPS performance we've just turned in.

If history repeats itself I would be delighted 90 days from now to tell that you we made a forecasting error and hypothetically earnings per share were off the charts as a result of good strong sales in combination with 100 basis points plus of gross margin rate expansion.

I don't think that's very likely to happen, is the message that we are trying quite candidly to deliver today.

Thank you.

Your next question comes from Deborah Weinswig with Citigroup.

Good morning.

Doug, I believe at the beginning of the year you had talked about around the range of 20 basis points increase in SG&A for the year.

In light of the hurricanes and other unexpected expenses how should we rethink that for the year 2005?

Well, I think that we began to rethink that as early as the first quarter.

And if you will circle back to our conference call remarks two quarters ago, what we said at that time was that we expected year over year expense rate deterioration in the range of 40 basis points in the second and third quarters in line with our first quarter experience, and falling to about half of that, give or take 20 basis points in the fourth quarter.

Our outlook today is directly in line with the outlook we've had over the last two quarters, and that is modestly deteriorated from the outlook at the very beginning of the year.

Okay.

Then with regard to the gross margin side of things, can you help us understand the percentage of the mark-up being driven by direct imports?

Certainly direct imports are a measurable factor, but we enjoyed gross margin rate expansion due to mark-up across many, many categories that aren't affected by direct imports.

It was a delightful outcome, and one that I'm not confident that we'll achieve in the fourth quarter.

Mix is an interesting issue as well.

Many of you have engaged with us in discussions over time that we typically have a slight deterioration in our gross margin rate due to mix.

This quarter was no exception.

The gross margin rate expansion we've reported is net of the adverse impact of mix and we certainly would expect that adverse mix impact to continue in the fourth quarter as well.

Okay.

Lastly, with regards to the number of bankruptcies that we saw, was that in line with your expectations?

In fairness, the bankruptcy experience in the macro environment -- I think my assessment would be that it exceeded everyone's expectations, including our own.

So the write-off associated with bankruptcy certainly exceeded our expectations.

The reserves that we had coming into the quarter reflected the risk in the portfolio and in many cases the write-offs related to bankruptcies simply accelerated write-offs that would likely otherwise have occurred due to aging with our policy of writing off accounts for which there's been no payment activity in the prior six months.

Okay.

Great.

Thanks so much.

Your next question comes from Mark Husson with HSBC.

Mr. Husson, your line is open.

Hello.

Hello, can you hear me?

Yes.

I'm sorry.

I was asking you a question about with the recent signing of quotas on China how that impacts on your planning for procurement over next year and what you might think about in terms of gross margin contribution to your expanding direct importing efforts.

Well, you know, the quota system is a system that we're fairly familiar with and had been dealing with the quota system for many, many years.

So it's not new to us.

The advantage of the quota system is that it will give us a far greater degree of predictability and certainty as it relates to our ability to plan our business.

Less than 50% of our internally designed and developed direct imports are from China today, and over 50% of our direct imports through importers are from our direct import partners.

We've got a balanced portfolio of sourcing alternatives so we really don't see a meaningful change to our strategy or to our gross margin rates, our costing, or our supply chain initiatives.

Could you update us on the percentage that's direct sourced all together now and where that's going in the coming year?

Again, we're between 25 and 30% of total purchases that are direct imported.

And one second question.

Just on the credit issue, obviously you've reserved adequately for personal bankruptcies, but what do you do with regard to increased minimum payments on credit card bills over the next few months?

What do you expect to happen there?

I think that is like to result, at least, in a retiming of future write-offs that might otherwise have occurred.

In other words, it might accelerate some net write-offs.

The open question is how much of that accelerated write-off activity we'll be able to recover post-write-off.

Net-net, I believe that our existing reserve will prove to be fully adequate to cover all future write-offs from the current portfolio including any net write-offs that are attributed to this increase in minimum monthly payments.

Does this have any impact on actual final consumer demand, do you think, the reigning in of credit?

I personally would doubt that it would have any measurable impact on consumer demand.

Your next question comes from Bob Buchanan with A.G. Edwards.

Good morning, and question for Gregg.

On your brand rotation strategy, see a lot of newness, not just in product, but also in terms of the different brands that are coming in.

Some names leave quickly, like Todd Oldham, some names stay and expand, like Mossimo.

If you could just share with us your thinking when it comes to brand rotation.

We look at brand rotation like product rotation.

Certainly every brand is part of our lifecycle management and there are going to be some brands that we look at and think of as opportunistic, and brands that we want to test and try for maybe a season or two, then there's other brands that have a lot longer staying power, and they may be more franchised in nature, and we want to develop a much longer term approach.

We continue to evaluate our branding portfolio on an ongoing basis and, as we've discussed in the past, some are going to be with us for a long time, and others are going to be the kinds of programs that might be with us for up to a couple of years.

Thank you.

Your next question comes from Wayne Hood with Prudential Securities.

Yes, Doug, I had a couple of questions.

One was back to the credit business.

The finance charge revenue growth sequentially is accelerating, and I'm wondering, can you talk a little bit about, are people revolving more as part of that yield?

And more importantly, what do you think that trend will be going forward given the sequential acceleration?

The sequential acceleration in finance charge revenue as a percent of receivable is driven mainly by the fact that the majority of our Visa Card receivables today are priced at a prime based floating rate, and as the fed has tightened interest rates, as the fed has increased the fed funds rate over the last 12 months, that has naturally flowed through the floating rate equation in our card base.

So is the dollar growth of 18% something that we should think about in the fourth quarter and the coming year given that rates are still going to accelerate, or will there be somewhat of an offset to some of that?

Viewing our receivables in isolation, that's a reasonable modeling assumption.

We do fund these receivables with floating rate debt, however, and so in essence what's happening is that we're behaving like a bank should in locking in, to the extent that we can, the spread between our earnings rate and our funding costs, and that spread today is approaching 800 basis points, which is a very enviable spread in the financial services industry.

So if you model it that way that's quite reasonable, please don't forget to model the interest expense in a parallel fashion.

The other thing I had a question about, can you quantify the uninsured losses for the hurricanes and the service income so that for modeling purposes for next year we have some idea what we're comparing against?

Yes.

The hurricane in the aggregate, uninsured casualty losses, here we're talking about damage to our facilities and inventory losses in the main, the portion that's uninsured ran in the range of $20 million approaching 20 basis points for the quarter.

It ran through SG&A expense.

We have an insurance receivable that didn't affect the P&L.

Separately, the real phenomenon going on here with Mervyn's and Fields is that last year's third quarter contained the highest amount of transition services fee income of any quarter, and we're now only earning any transition services revenue, if you will, its reflected as an offset to expenses, from the new owners of Mervyn's and at a greatly reduced rate.

Order of magnitude, that's also in the range of 20 basis points.

My final two questions, do you have a number for comp store inventory in the quarter, where it ended up?

Then on the gross margin side, the 120 basis points, was that kind of equally split between mark-up, shrink, and mark-downs, or was there a weighting that one would have weighed in at a bigger amount?

With respect to comp store inventories, inventories in the aggregate grew 14.2%, and I think a better way that -- or a more direct way that we would think about that is per square foot, because obviously our average store is larger now than it was a year ago.

Square footage was up nearly 8% year over year.

So clearly on a same store or per foot basis inventories rose, but that's not at all concerning to me personally.

In terms of your question about the split between mark-up, mark-down, and shrink, for both the quarter and year to date mark-up contributed about two-thirds of the gross margin rate expansion and the remaining one-third was split between -- in the quarter split about evenly between mark-down favorability and shrink favorability.

Thank you, Doug.

Your next question comes from Dan Binder with Buckingham Research.

Hi, good morning.

Just a few questions.

First, with regards to the inventory up 14.5% you had mentioned that direct sourcing was, in part, responsible for that.

I'm kind of curious, as you increase every -- as you get a penetration increase of 1% in the sales direct sourcing, what is the sort of like increase in inventory that we should typically expect?

Is it a 1 for 1, or is it half for one?

This is a gross oversimplification, but I'd say it's more like 1.5 or 2 for 1.

It's simply reflective of the fact that we take ownership of directly imported product at a much earlier point in the supply chain than we do products that we acquire through any other means.

Right.

So we own inventory in foreign ports and on the water, and it takes some time to get the inventory into our regional distribution network and into our stores.

So this is a gross oversimplification, and it varies a whole lot depending upon what part of the world we source the goods from, much longer supply chain from the Indian sub continent than from Central America, of course, but you can think of 1.5 or 2 to 1 as a reasonable planning horizon.

Okay, great.

And then the other question was related to credit.

Are we now seeing sort of a peak in the charge-off rate or would you actually expect it to move higher from here with minimum payment changes?

No, I think that in the short run, there will be a bit of increase in net write-offs in the very early part of the fourth quarter, as the clogged pipeline of personal bankruptcies are causing a little slower notices in the entire system, not just for us, but for the entire industry.

So there will be some net write-off increases in November, but I think it's highly likely that you will see a period of sharp, sharp reductions in bankruptcy related write-off because a lot of what just occurred was an acceleration of bankruptcies that otherwise would have been declared over next several months.

Regarding the effect on write-offs of the change in minimum payments, remember that our write-off policy, which is consistent with most others, does not create a write-off until six months of no payment activity.

So any actual write-offs associated with that change in minimum monthly payments wouldn't occur until the latter half of next year.

You certainly might see some deterioration in the aging that we report in delinquencies as we report them.

From what we can tell, just by surveying some of the larger banks, it appears that those accounts that actually pay only the minimum payment represent under 10% of total credit customers.

Is that something that something that is consistent with what you see at Target, or is it far less than that?

Ours is far less than 10%, for sure.

Our Target Visa portfolio is a high quality broad based portfolio of credits, and certainly in that portfolio there are some accounts that routinely revolve and revolve by making minimum payments, but that is a distinct minority of our guests when looking at the behavior patterns in our portfolio.

Great.

Thanks for the input.

Your next question comes from Bob Drbul with Lehman Brothers.

Good morning.

Couple of questions.

First, as we look at the Wal-Mart's holiday launch program that's underway, have you seen any surprises so far either in categories or in pricing?

Have not seen anything out of the ordinary so far, it's fairly predictable, and what we expected.

It's very promotional and aggressive time of the year.

This year has really been no different than any other year, but again, it's very early into the holiday season.

Okay.

Doug, when you look at the comparisons that you faced throughout the fourth quarter and we get to January and into the spring, could you maybe comment on a game plan to comp against such strong results from Global Bazaar and into the spring of next year and any outlook that you have for us on the spring business for next year?

Well, certainly in a generic sense it's harder to cycle strong comps than weak comps.

Having said that, January in particular has, for several years running, represented a slightly higher portion of Q4 sales, and therefore, while last year's very strong January performance gives us a little bit of pause to reflect analytically, my personal belief is that we'll cycle against that period very well as a result of the continuation of the same phenomenon that we've seen for years.

Certainly our business was very, very strong throughout the spring of this year, which is what propelled our EBIT growth and sales growth to the very strong numbers we've turned in this year.

We will not be planning our business any differently next year and hope to be able to cleanly cycle those very strong periods of performance.

Okay.

Great.

Thank you very much.

Your next question comes from Adrianne Shapira with Goldman Sachs.

Thank you.

Gregg, I had a few questions.

Your previous introduction, Global Bazaar early in January, you had mentioned you saw tremendous success at the higher end as customers had tremendous appetite for the more expensive price points.

Are you seeing that today with some of your recent launches?

Maybe you can help us understand today's health and appetite of your customer.

We've really seen no trading down by our shoppers so far this year, whether it's our introduction of Field Crest that is performing exceptionally well, we just introduced a 600 thread count sheet, that's performing very well.

Some of the larger scale items that we have introduced in our decorative home assortments, like [Fox] Framed Art and Mirror, they are doing exceptionally well.

So overall our mix is very healthy and is well balanced between good, better, best, we really haven't seen any significant shifts.

Okay.

Then just follow-on into the home, home has been slightly underperforming, can you just -- we're hearing that Thomas O'Brien, the launch has been slow, it takes time for that to ramp up.

Can you give a sense what will reverse the sluggishness in home, do you think?

Well, home continues to lag the total company performance, and it has been -- has all year.

We saw a slow -- when we launched Field Crest, and it was good out of the blocks, but has gained momentum as time has gone on and we fully expect the same thing to happen with the Thomas O'Brien line.

It's a little slow out of the blocks, but again, we expect in time the guest will come in, they evaluate it, they're learning about it, they are, just like they did with Field Crest, they are examining what the right timing is for them to reoutfit their bathroom or bedroom and we really believe in the line, it's fantastic quality, it's tremendously valued price, and we know that over time we'll continue to gain momentum and this will meet our expectations.

Great.

Just a question for Doug.

We understood that the previous sizing of the 3 billion buyback was sized to potentially capitalize on consolidation today.

Now with the incremental authorization should we just read into this that this is a more attractive use of cash?

No, I don't think that's the right way to read what's happening here.

Essentially with the resizing and the retiming, we are creating the ability to continue repurchasing shares more or less at the same pace we have, which is a pace that preserves the flexibility to be able to take advantage of any real-estate opportunities that might come our way, within reason.

Thank you.

Your next question comes from Christine Augustine with Bear Stearns.

Thank you.

My questions are on inventory, then some of the work you're doing on the supply chain side.

First on the inventory.

Given the increased focus on direct imports, as a percentage of your business, should we think about inventory growth being more in line with your sales over the next few years, or at some point do you think inventory growth will be slightly lower?

Then the question on supply chain is just, would you provide us with an update on some of the efforts with Smart Schematic, with the improving of seasonal transition, some of the Six Sigma work that you're doing throughout the Company.

I'm just interested in where you are with some of those programs, and is there an opportunity for to us see some improvement, perhaps on the SG&A from these efforts over the next year or two.

Thank you.

I'll try to address your inventory questions, then I'll let Gregg address some of your supply chain questions.

I'm a lot more focused on the relationship between inventory and payables than on inventory, per se.

Focusing on the asset side for a minute, certainly we strive to improve our inventory turns.

We have a pretty strong track record in that over a long period of time.

Nonetheless, in the short run I think this direct imports issue will likely cause our inventory to continue to grow for a while in line with or slightly ahead of sales instead of at a slower pace than sales.

Importantly, we remain focused on making sure that the portion of our inventory reflected in payables remains very, very high, as it is today.

You've seen a nearly parallel increase over time, not every quarter, but over time, in growth in our accounts payable in line with the growth in our inventories, our net paid inventory position is actually an excellent track record.

Gregg?

Yes, as it relates to supply chain, we've been very focused and continue to be focused on making supply chain improvements that will improve our overall in stock rates and improve our speed to market by lowering our lead time.

Some of the initiatives that you talked about, Smart Schematic, is very much in its early stages.

We really don't have anything to report on that.

But we believe over the long term being able to better customize our assortments by store, by four foot section, will yield positive results.

We've been focusing on other initiatives like transitions and rain checks all year.

We've seen great improvements in both of those areas using Six Sigma tools and methodologies to more carefully analyze and measure our business and make sure that we're making good sustainable process improvements.

So in total it's about speed to market, in stocks, and looking at all the aspects of our supply chain to try and become more efficient and deliver better in stocks on a consistent basis.

Thank you.

Your next question comes from Patrick McKeever with SunTrust Robinson Humphrey.

Thank you.

Just another question on gross margin, and that is, what drove the improvement in mark-downs and the improvement in inventory shrink in the third quarter and are you expecting continued improvement in those two areas in the fourth quarter?

Well, mark-downs -- mark-down experience varies across quarters depending on how strong our sell-through is, so the fourth quarter mark-down question is largely a question of whether or not we will achieve our mid single digit same store sales expectation. if sales are light, our mark-down experience will be adverse.

If sales are robust, it will be favorable, and in the middle of the road it's not likely to be meaningful.

In other words, if we meet mid single digit sales performance I don't expect mark-downs to be a huge explanatory factor in the fourth quarter.

Our shrink performance in contrast, has been consistently favorable in each of the first three quarters of this year, and therefore I would expect that our shrink performance will be favorable in the fourth quarter as well.

We probably have time for about two more questions.

We're approaching the 45 minute mark.

Your next question comes from Gregory Melich with Morgan Stanley.

Hi, thanks.

I have a question.

We've had some of the consumer product companies discussing more inflationary pressures and putting through some price increases.

Just want to see how that's impacting, one what you're seeing, and two, how that would impact your thought process for next year.

Well, as you point we have received numerous price increases throughout the year.

They continue to come our way in food and in packaged goods, and as we receive those price increases, we look to pass those on in the marketplace, and we probe our prices up to be reflective of what those increases are, and in -- oftentimes those price increases stick, and sometimes they don't.

And so it's an item by item, month by month basis that we go through and process that we go through to try and maintain our margin rates by passing along the price increases.

Again, we continue to get them fairly broadly in the CPG world and the food world and areas that have a lot of resin based products or cube due to high capacity freight transportation issues.

And would you say for the most part they're going through and the consumer is accepting them, your consumer?

Yes, overall most of what we pass through has stuck.

Every once in awhile you'll see something where we get a price increase and it doesn't go through.

So it really varies dramatically by type of item and category and time of year.

So it's really -- it's really diverse, it really varies, but on average, they have been -- they have been passed through, and the consumer has been responsive to them.

In some cases it's taken a little while because the magnitude of the price increases is bigger than what we would have hoped to have seen, so if it's a big price increase in the range of 10 or 12%, it might take the consumer a little longer to respond to it versus something that is in the 3 to 5% range, but over time the market does settle up and the guest does get comfortable with those new prices.

Another factor --

You mentioned at the analyst meeting on the real estate front you felt there could be more -- I think you mentioned the word distressed retailers in the coming months or quarters or years.

How has that changed, or has it changed at all over the past few weeks just given some of the deals we've seen?

I don't think there's any meaningful change in that macro picture that's occurred in the last couple of weeks.

Thanks.

One more, please.

Your final question comes from Michael Exstein with Credit Suisse First Boston.

Good morning everyone.

Two quick questions.

It looks like as a general trend many retailers are trying to pull business for --

Michael, it's a little hard to hear you.

I'll try again.

I had the receiver off.

Can you hear me now?

Yes.

It looks like as a general trend many retailers are trying to pull business forward into November.

And the combination of the Halloween timing this year and so forth.

What are you seeing in terms of those efforts?

Are you doing the same thing, and how are you reacting to it?

Our holidays plans are really no different than would we've done in prior season.

Christmas is day later this year.

We know that the majority of activity is post Thanksgiving.

That is when the majority of our holiday efforts are directed on.

We're not sure what -- how the competitors have changed their strategies, but we're very focused on driving results in the last five weeks of the holiday season.

Okay.

Thanks a lot.

Okay.

Thank you, everyone.

That concludes Target's third quarter 2005 earnings conference call.

Thanks again for your participation.

Ladies and gentlemen, you may now disconnect.