目標百貨 (TGT) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Target Corporation's fourth quarter and year-end earnings release conference call. [OPERATOR INSTRUCTIONS] .

As a reminder this conference is being recorded.

Thursday, February 16th, 2006.

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

Please go ahead, sir.

Thank you.

Good morning and welcome to our 2005 fourth quarter and year-end 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.

During this call, Doug will first review our financial results for the quarter and describe outlook for the coming year.

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

And finally, 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.

We plan to keep today's call to 60 minutes, including our Q-and-A session, but as always, Susan Kahn and I will be available 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 concluding a year in which our sales and profitability grew well in excess of both internal and external expectations.

For the fourth quarter of 2005, our total revenue grew 11.5%, EBIT grew 14.0%, net earnings from continuing operations grew 15.9%, and on the same basis diluted earnings per share rose 18.4% to $1.06 from $0.90 a year ago.

The key drivers of our EBIT growth in the quarter included a same-store sales increase of 4.2%, primarily attributable to growth in average transaction amount, a slight improvement in gross margin rate in line with our earlier guidance, a somewhat higher expense rate reflecting lower transition services income related to discontinued operations, and the effect of a planned shift in the timing of some advertising, which in conjunction with several additional factors, more than offset the year-over-year favorability resulting from last year's lease accounting adjustment, and a strong contribution to EBIT from our credit card operations, reflecting continued strong underlying portfolio performance and the beneficial effect of rising interest rates on our finance charge revenue.

The combination of these factors produced fourth quarter EBIT of $1.6 billion, an increase of 14% from $1.4 billion in the fourth quarter of 2004.

Net interest expense increased $17 million in the quarter from $107 million a year ago to $124 million this year, driven by higher average funded balances, partially offset by a lower average portfolio interest rate.

Earnings from continuing operations and EPS grew even faster than EBIT, due in part to the net effect of several nonrecurring favorable elements of our provision for income taxes.

In total, these elements added about $0.02 per share to fourth quarter and full-year EPS relative to our expectations for EPS and income tax rate at the end of the third quarter.

In the future, we are likely to continue to settle tax uncertainties or refine our provision to reflect nonrecurring tax events, and that will affect our underlying tax rate.

Separately, based on our analysis, our annual analysis of retail prices, which was completed during the fourth quarter, we experienced no inflation or deflation during 2005, and we expect no LIFO charge or credit for the foreseeable future.

A few comments on the balance sheet.

First, net accounts receivable at the end of the fourth quarter were $5.7 billion, 11.8% above our receivables levels at this time last year.

Over the same period, we've increased our allowance for doubtful accounts at a slightly faster pace to $451 million, or 7.4% of gross receivables at quarter end.

Next, our balance sheet inventory position grew 8.4% from a year ago, in line with accounts payable growth, and overall, our inventory content and level remains in very good condition.

Finally, we continued to repurchase shares of Target common stock during the fourth quarter under our aggregate $5 billion authorization.

Specifically, we repurchased 5.5 million shares of common stock at an average price of $54.41 per share for a total investment of $300 million in the quarter.

As a result, weighted average diluted shares outstanding in the quarter reflected a reduction of nearly 20 million shares, or a little over 2% from the corresponding figure last year.

For the full year, we repurchased just over 23 million shares of common stock, at an average price of $51.88 per share for a total investment of nearly $1.2 billion.

Under the current program, we now have about $2.5 billion of remaining authorization, and our recent pace of execution remains consistent with our expectation to complete the aggregate program over the next two to three years.

Looking at our overall balance sheet, we funded the growth in our balance sheet in 2005 through more or less equal parts debt and equity.

Specifically, about a $1 billion increase in shareholders' investment and about a $1 billion increase in debt net of marketable securities.

Now let's put our full-year 2005 operating results in perspective and use them to provide some guidance for 2006.

As a reminder, our accounting calendar in 2006 includes a 53rd week, but this is not meaningful to our outlook for annual EPS.

For the full year 2005, our merchandise sales, our gross margin rate, and the overall performance of our credit card operations exceeded our internal expectations, and in combination, these factors allowed us to exceed our EPS expectations.

Our actual EPS results from continuing operations for 2005 reflect a 31% increase over 2004 and are $0.16 above the First Call EPS consensus for this period when the year began.

As we plan our business for 2006, we expect that Target will continue to achieve profitable market share gain.

Specifically, again, we expect to invest in a group of new, high quality stores, which in total will add about 8% net to our square footage, and, yet again, we expect to generate a 4% to 6% increase in same-store sales.

Our outlook also reflects the expectation that we will be able to replicate our record 2005 retail EBIT margin rate without meaningful full-year changes in either our gross margin rate or expense rate.

In addition, our 2006 outlook for our credit card operations remains bright.

We again expect to grow our receivables at a low double-digit percentage rate while maintaining our underwriting disciplines.

And while our delinquencies and write-off rates will likely increase from today's artificially low levels, we believe we are already amply reserved for this expectation.

Finally, we'll continue to enjoy higher yields because the vast majority of our portfolio now earns finance charges on a variable rate basis.

In summary, we expect another great year at Target.

While we participate in a hotly competitive overall U.S. retail marketplace, which is likely to continue to grow at about a 4%to 5% aggregate rate, we again expect to grow our revenue at 2 to 3 times this rate of growth.

This would again result in a low double-digit percentage revenue growth and would reflect continued market share gain.

And again, we expect our EPS to grow somewhat faster than our revenue, at a rate likely consistent with our long-term average annual mid-teens percentage growth objective.

Now Gregg will provide a brief review and update on Target's merchandising initiatives.

Gregg.

Thanks, Doug.

Target delivered another year of outstanding performance in 2005, fueled by a 5.6% increase in comparable store sales, gross margin rate expansion of 71 basis points, and strong contribution from our credit card operations.

By focusing on great design, innovation, and disciplined execution of our strategy, we continue to offer differentiated merchandise and compelling value to delight our guests and profitably increase our overall market share.

Specifically, we provided newness and excitement with brand launches such as Fieldcrest, Dottie Loves, California Closet, and Fiorucci, new design collections from Isaac Mizrahi and Thomas O'Brien.

Introductions of new own-brand foods, including Choxie and Sutton & Dodge, and entirely new post-holiday presentation of Global Bazaar.

We launched, ClearRx, an innovative, new pharmacy system and bottle design.

We generated increases in guest traffic with expansion of our food offering in Target general merchandise stores and our continued SuperTarget store growth.

We continue to improve operational speed, reliability, and consistency through advances in our supply chain and new applications of technology, and we remain dedicated to preserving the integrity of our Target brand by continuing to invest in our existing stores through remodel and right projects.

During the past year, we opened 109 total new stores in 32 states.

Net of relocations and store closings, this expansion program included 67 general merchandise stores and 22 SuperTarget stores, and represented a net increase in square footage of 8% for the year.

In 2006. we plan to add approximately 110 total new stores and open three new distribution centers to support our continued growth.

Our first cycle of store openings, scheduled in March, includes 24 general merchandise stores and one SuperTarget.

In 2006 we also plan to continue striving to be best for our guests, our team, our shareholders, and our communities, by supporting programs that improve the health and safety of the local communities in which we operate, by creating a workplace that attracts and retains a team of talented and diverse individuals. by demanding integrity, discipline, speed, and innovation throughout our entire organization, and by reinforcing our commitment to our "expect more/pay less" brand promise.

Reflecting these principles, several of our current merchandise initiatives combine unique design with distinctly affordable prices, exciting our guests with fashion freshness and exceptional value that keeps them coming back to shop at Target.

For example, earlier this month we launched GO International, a series of limited engagement apparel collections from internationally renowned designers geared for our trend-conscious junior and contemporary guests.

The debut collection, which is available through April, features British designer Luella Bartly and, beginning in May, Target will introduce exclusive styles and accessories from Canadian-born, Paris-raised [Tara Gimon].

Two additional design collections, each available for 90 days, will be launched later this fall.

To complement our indoor home assortment our partnership with Smith and Hawkins provides exclusive line of garden accessories and decor.

The collection is now available in our garden centers, and next month will be in our stores nationwide.

We also recently introduced Time to Play!, an assortment of affordably priced, premium quality, European manufactured toys.

Our offering includes specialty brands such as Schleich, Educational Insight, and Only Hearts as well as our own brand of wooden toys called Play Wonder.

In addition we are undertaking significant reinventions in our intimate apparel and bath and body assortments.

Within our intimate apparel category, which includes sleepwear, foundations, hosiery, and performance apparel, we are intensifying our focus on quality, content, speed to market, and the overall shopping experience.

In particular, we are enhancing the quality and fit in foundations and sleepwear, delivering a more coherent, high quality hosiery selection with exclusive brands from industry leaders like Solutions by Hanes, and package shapewear by Spank, extending our offering of C9 performance apparel in uptrending categories such as performance swimwear, women's field sports, and rugged terrain sports, and leveraging our in-house design and sourcing capabilities to improve speed to market, order flexibility and newness.

Within bath and body, we are launching a new collection of over 500 items for both men and women.

The collection includes exclusive brands that are typically only available in U.S. and European specialty stores and a stylized line of matching accessories and cosmetic bags.

Finally we have significantly improved our soft lines presentation and signing with the introduction of enhanced fixtures in intimate, ladies apparel, men's, and kids.

These new fixtures allow to us more prominently display our designer brands and make it easier and faster for our guests to make their clothing selections.

We also continue to enhance our grocery assortment within our general merchandise and SuperTarget Stores to provide greater guest convenience and drive more frequent guest visits.

At the end of 2005, approximately half of our store base contain the expanded food assortment consistent with our P-2004 prototype format. and we expect to remodel or right-size a meaningful number of additional stores in the coming year.

In addition, at SuperTarget, we plan to add more self-service deli items and more offerings, including soups, side salads, value-added meats, and deserts that make meal preparation fast and easy.

We are proud of our achievements at Target, and we are dedicated to building on this performance in 2006.

Throughout our company, we are unwaivering in our commitment to delight our guests with great design, outstanding value, and superior reliability, and we remain focused on delivering fast, fun, and friendly guest service in every store, every day.

As Doug indicated, we expect to deliver strong financial results in 2006 and believe we will continue to enjoy substantial market share gains in 2006 and for many years to come.

Now Bob has a few concluding remarks.

As you've just heard in detail, we are very pleased with our overall results in the fourth quarter and for the full year of 2005.

Through our continued strategic investments and unwavering focus on delighting our guests, we have delivered another year of outstanding performance.

As we look to 2006 and beyond, we believe that we can continue to deliver an exceptional shopping experience for our guests, a workplace that is preferred by our team members, a supportive environment for the communities where we operate, and a superior return for our shareholders.

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 Deborah Weinswig with Citigroup.

Good morning.

With regards -- Doug, I just want to make sure I correctly understood guidance for 2006.

So basically you're looking at flat gross margin rate with 2005?

Is that correct?

Yes, that is the essence of our gross margin rate guidance, about an equal number of issues from our point of view that will affect gross margin rate in each direction.

Obviously we've -- you guys have been absolutely, I'd say, tremendous in terms of improvement in gross margins as a result of direct sourcing, et cetera.

What would be the kind of offsets to in that 2006?

Well, first of all, we do expect to continue to enjoy substantial benefits year-over-year from direct sourcing in 2006, although at an annual year-over-year pace that's probably not as large as we've enjoyed on average in the last several years.

The biggest issues moving in the other direction are sales mix related in one form or another, an example -- it's by no means the key issue, but it's been there for years and years, is that our pharmacy business continues to enjoy double-digit rates of same-store sales growth, and the pharmacy business is a sharply lower gross margin rate business than our averages.

Food, obviously, is a key element in this mix as well, as we continue to add SuperTarget stores at a much faster pace than we add general merchandise square footage, and separately as we continue to merchandise more food in our assortments in the general merchandise stores as well.

Okay.

That's very helpful.

And then, Gregg, you had talked about the fact that half of your store base now has the expanded food from the P-2004 prototype.

Can you talk about if there are any differences with regards to not only traffic or transaction size or anything else you're seeing that's different in those stores?

Well, overall we're not seeing anything materially different than our other stores other than we continue to gain loyalty over time by the increased emphasis we have placed on consumables and food.

Other time they're going to continue to generate strong returns, and as we continue to right-size and remodel other stores they, too, will benefit from the incremental traffic that those categories benefit.

But we do pick up a little bit in terms of frequency and a little in terms of size of ticket.

A very good financial return for those right-size remodelings.

Okay, great.

Thanks so much.

Your next question comes from Jeff Klinefelter with Piper Jaffray.

Yes, couple of questions.

Congratulations, first, on a great year.

In terms of the apparel business, Gregg, could you talk a little bit about capitalizing on the very strong performance this year in that category?

What do you anticipate learning or doing with the GO International program?

Are you using that to sort of test the boundaries of where you can go with your fashion offering?

Are you attempting to potentially drive in a different customer or transact apparel with a different customer?

What can we expect with that?

With the success of apparel, are there any changes that you need to make in terms of the floor pad itself?

Will there be a new and updated floor pad in apparel to sort further highlight that category?

Any differences in the service that you provide in that area?

Well, we're very pleased, as you know, with our apparel business and footwear business in 2005, and we still think there's plenty of upside in 2006 in both ladies, intimate apparel, kids and in footwear, so we're still very bullish.

GO International is focused on the junior and contemporary guest.

She's already shopping our stores but it's another way to add freshness, newness, and and excitement on a 90 day basis.

So we're excited about it.

We've just launched Luella.

She's off to a great start.

We're very pleased with her.

And we expect that subsequent brand or the subsequent designer launches will be equally successful.

At this point in time, we're not planning any major shifts in space or reengineering of the store to expand or contract any of the businesses on the apparel floor pad.

We're fairly comfortable with what that share of total store space represents, but we're continuing to work on things like our fixture package and through the enhancement fixtures that we have in the store, so that we can present our assortments clear and make the shopping experience even better than it is today.

Okay.

Then just a follow-up on Global Bazaar.

Can you talk a little bit about the performance year two of Global Bazaar, how it's performing versus your expectations, what you're learning from that, and again, how you might leverage that into the rest of your home assortment?

We had fairly modest expectations for year two of Global Bazaar.

We -- our intention was to increase the sell-through from year one and we focused on the authenticity of the product.

We upgraded the assortment, and we've slightly edited down the number of SKUs that we offered.

It is not meeting our planned projections this year.

We're slightly disappointed in that the regular-priced business has not been stronger than it is.

But overall it's been still very, very solid, and again, we expect it to -- what it's taught us is that higher-quality, good,value-priced products continue to sell in our home assortment.

Scale is important.

Bigger pieces are doing better, as we have reinvented and recategorized and remerchandised our existing assortments in home.

We continue to see that fewer, better items within those assortments continue to sell well.

So again it's a learning process.

We're going to continue to refine and tweak it.

Not everything that we do is going to work exceptionally well, and, overall, we're pretty pleased with the performance.

Okay, great.

One last com -- er, question.

In terms of your comp guidance anticipation for transaction value versus traffic in the upcoming year, is that similar to this last year?

I'll tackle that one.

Traffic for the full year 2005 was in the range of two percentage points of contribution to our overall comps, stronger earlier in the year, still quite positive, but not as positive in the fourth quarter.

And I think that our business on average over time has typically run between positive one and positive two.

Obviously there's some outlier years better and worse, but that remains our expectation for '06, somewhere between positive one and positive two in all likelihood.

Thank you.

Your next question comes from Virginia Genereux from Merrill Lynch.

Good morning.

Thank you.

Two questions if I may.

Maybe for Doug, on the negative merchandise mix, that's something you guys have been -- and the margin implications of that at flat margins on the retail side this year, you guys have been facing that for awhile, and sort of through October, your margins, you know, were up so big on the retail side.

Are you assuming in the flat margins in January and sort of your expectation in '06, are you assuming that maybe the apparel business, something else gets a little tougher for you guys, may I ask, or is it just that it's the rate of direct sourcing growth is slowing, and you've got the continued negative merchandise mix?

Are you assuming anything on the apparel soft line side?

We look forward to a strong apparel business in 2006.

Ultimately, trees do not grow to the sky, and we are delighted with our current mix and with our current gross margin rate performance, and I personally would be thrilled to be able to replicate our gross margin rate and our expense rate that we're currently enjoying, marry that to a mid-single-digit, same-store sales performance and enjoy another year of mid-teens EPS growth straight out of our long-term play book.

You guys have been knocking the cover off the ball.

I just am -- was there anything, Doug, sort of January versus the prior nine months of the year?

We couldn't figure out the math.

You've been well beating -- the margins have been well beating this kind of negative mix shift of merchandise offset by direct sourcing.

Was there anything in January, may I ask?

And I'm new to the story.

No, this is not a January phenomenon.

This is not a change in January.

We 90 days ago talked about our outlook for the fourth quarter in these very terms.

Through the full year, the two big contributors to gross margin rate expansion have been expanded markups and favorable inventory shrink, to a lesser extent there are some interesting GAAP accounting issues in the background that tend to increase year-over-year our gross margin rate and also increase our expense rate.

And I think what I meant by my earlier comment is that there's a pragmatic limit dictated by many things, especially the competitive environment that we wouldn't want to chase our mark-up to a point that's going to adversely affect our ability to deliver reliable mid-single-digit same-store sales performance.

Thank you.

Secondly, on the credit margins, my -- my -- listening to you all, you're benefiting from higher floating rates, and you're sort of amply reserved, and you've had such nice expansion there.

Would that not continue, given that you are even as bad debt expense kind of increases, given that you are pretty well reserved?

Would you not expect margins to continue a little bit?

We expect another very strong year in our credit card operations.

One clarifying comment on the effect of floating rates.

As we measure the contribution of our credit card business to EBIT, floating rates are a benefit, but, of course, EBIT is a very strange measure for a financial services business, because we do need to fund those receivables, and by and large, we fund our floating rate receivables with floating rate borrowings, so increases or decreases in floating rates really don't have much of an impact on Target Corporation's EPS, but certainly do affect EBIT.

As we move forward in '06, especially in light of what has happened to the fed funds rate over time, I think we'll attempt to be clearer, quarter by quarter, in terms of the differential between the EBIT impact of growth in our profitability of our credit card business and the actual impact on the bottom line.

Understood.

You'll see higher interest expense.

Thank you.

Your next question comes from Charles Grom from JP Morgan Chase.

Just to follow up on the credit card last quarter Gregg, or Doug, you commented the spread between your earnings rate and your funding was about 800 bips.

What was it in the fourth quarter and what are your expectations for '06?

In line with -- our fourth quarter performance was in line with that 800 bips.

Actually a little wider, but not materially so, and I think that differential will likely remain that wide next year as well.

Okay.

Then on SG&A, could you quantify the impact from the -- sorry, fourth quarter SG&A, could you quantify the impact from the lower servicing common advertising expense during the quarter?

I guess what I'm trying to get at is absent those factors, what would the SG&A picture would have looked like.

On an overall basis our SG&A rate deteriorated by 23 basis points.

On a net basis, that 23 basis points is fully explained by the combination of lower transition services income and from the expected -- the planned retiming of our advertising expense.

In fairness, we benefited in SG&A year-over-year from cycling the lease accounting entries from last year, and there's a rather lengthy list of relatively small items that, on a net basis, tended to offset that.

Okay.

Great.

One last one, Gregg.

Beyond Smith and Hawkins, could you provide some color on what else is in the pipeline, what other product areas you're going to be Targeting in '06?

I mentioned the beauty reinvention and what we've done in toys.

We're going to work on trying to get our home business back on track, and so we've got a lot of refinements and presentation and content and good/better/best rebalancing that we're doing there.

We're going to continue to focus on food as a strategic priority, and within that, our own brand penetration of food.

Like I said, we've got GO International, intimate apparel, and other things that are smaller in nature in every business that we operate, there will be innovations and reinventions along the way.

Thank you.

Good luck.

Your next question comes from [Bob Durbul] from Lehman Brothers.

Hi, good morning.

Two questions.

First, can you talk a little bit about how the electronics category's performed for you, specifically TruTech, and related to that, can you just give us an update on your hardline sourcing penetration on the direct sourcing side?

Our electronics business was very, very healthy.

TruTech, which is our own private brand of electronic products, performed very, very well, as well, we expect this year to be another very strong year in electronics with the continued advancement of digital technologies and the new gaming platforms that are coming out.

Hardlines penetration in direct imports continued to grow.

Not at the same rate that we have enjoyed in the past, but we still have opportunities to increase our own brand penetration and direct import penetration in hard lines.

Beyond our own brands, over time we will continue to work with our branded manufacturers to see if we can't move some of our domestic purchasing through them to a direct-sourced program with some of them.

So that would be the next phase of evolution of direct importing.

Okay, great.

And Gregg, can you maybe elaborate a little bit more in terms of any of the experience you're having as you probe the higher price points, if you're getting resistance in any category?

Well, it's really category by category.

Certainly we ran a flat panel television ad pre-Super Bowl just under $1,000, and it did exceptionally well.

So we saw absolutely no price resistance whatsoever there.

In Global Bazaar,,some of our best-selling items were some of the items that were between $300 and $400.

So we didn't really see a lot of price resistance there.

But there are other categories, especially when they're within a package, like in home textiles where, periodically, we do see some price resistance, because they can't touch or feel or see the product as well as they can when it's out of package, and so, we have to do a better job of communicating the value and the intrinsic benefits of those products that aren't as tactile as some of the other things that we have in the store, and so, our marketing message and our point of sale, -- there are point of sale opportunities for us to just better communicate those features and benefits, and why those product are priced where they are.

Great.

Thank you.

Your next question comes from Mark Miller from William Blair.

Hi, good morning.

Question on the P-2004 stores.

How many of those are now in the comp base, and how might that impact comps, do you think, as those roll in?

I think that's probably a question that's best for Susan Kahn to follow up on.

Okay.

The -- what's your current outlook for self-distribution in food?

Well, we are currently very satisfied with our relationship with Super Value.

They're doing a great job for us.

But as we gain scale in food, and we add more food in our general merchandise stores, and we expand the number of SuperTargets, we recognize that at some point in time, we will move toward a more direct model of distribution, and that point in time will -- will come in the future.

We haven't determined exactly when that will be, but it's still a couple of years off.

Okay.

Thanks.

Your next question comes from Adrianne Shapira from Goldman Sachs.

Thank you.

Gregg, you had just mentioned, earlier, about the home business getting back on track and perhaps the good/better/ and best rebalancing.

Is that the only category that needs to be addressed across the good/better/and best repositioning?

Well, and really it's only some selective categories within our home business.

Actually our stationery business is quite strong.

Our domestics business last year, we add very, very good first half of the year.

It softened up in the second half of the year.

We are pretty confident that when we transition in about ten days that that business will be back on track.

And then within the housewares and decorative home area, it's really been a mixed bag.

Our furniture business has been very, very strong, decorative accessories and lighting business has been very soft.

As we have -- as we've remerchandised some of these categories, we're starting to see some strength in those businesses.

So as we transition those categories throughout the year, we are very confident that those businesses will start to run same-store increases.

Okay.

And so the other -- so the soft lines category, you don't have any issues across good/better/and best?

You're pretty clearly defined and the customer gets it.

Yeah, we are pretty well defined there in good/better/best.

We're very dialed in on our style preferences, our internal design development, global sourcing organizations are working very, very well together, so the issues that we have in apparel are frankly chasing down in-stocks on some of our top performing categories like footwear, right now.

Okay.

And then, Doug, on the gross margin, last quarter we heard about two-thirds of the improvement in gross margin related to better markup.

Could you break down the components of the gross margin expansion we saw?

The gross margin expansion was 10 basis points, so there are certainly issues on both sides.

It would be easy for me to say that on a net basis that -- that kind of the benefit in the quarter from improved inventory shrink, but in fairness, many issues, not large ones, but many issues pulling gross margin rate in each direction, essentially 10 basis points is even with last year.

Okay.And then lastly, perhaps Gregg, a lot of introductions again planned for this year.

Any changes to marketing?

What should we expect this year in terms of how we're going to make a big splash about some of these new lines coming?

Well, first of all, we wouldn't comment in advance, but you know the innovation and creativity of our marketing staff, and while we don't have any mega- changes, and we still plan to spend relatively the same percentage of sales on marketing, we know that those people are so creative and talented, they will come up with some unique things, and I guess we'll just have to wait and see.

Your next question comes from Christine Augustine from Bear Stearns.

Thank you.

Doug, as for as the expectation for 4 to 6% comps for '06, do you anticipate any variation first half versus second half?

Just because the compares are a little bit tougher here in the first half, and I guess just even within the first and second quarter, there's a late Easter, Mother's Day is later.

Should we be looking for any variation?

Certainly month to month there will be quite a bit of variation, but there's no big picture comment here.

We do not expect meaningfully softer sales in the front half of the year than the back half of the year.

We do have to pay attention to what we're comparing against.

Obviously our guidance here in February is below a mid-single-digit kind of figure.

Bear in mind that we had an 8 comp two years in February and a 9 comp last year, so the cycles do matter, but big picture, perhaps it's a little softer in the front end of the year than the back end but that's a speculative comment at best.

Could you provide us an update on some of the more major initiatives that you're working on, on the supply chain side with Six Sigma, and then also could you let us know how Target.com ended the year ,and sort of what the outlook is for that division?

Thank you.

Supply chain enhancements are ongoing.

It's a lot of small refinements to technology and processes.

There isn't any major engineering that is going on, but we continue to look at ways to how to better service our stores, take unproductive inventory out of the network, how to shorten our lead times, how to increase our speed to market.

So there's just a host of initiatives directed at those kinds of activities.

Target.com had a very, very good year as it relates to sales and the number of unique visitors to the site.

We're very pleased with how that business is scaling up.

So it continues to attract many guests, and the performance is solid.

Was the growth rate better than the industry, which was kind of mid 20%?

It was significantly better than the mid-20%.

Thank you.

Your next question comes from Michael Exstein with Credit Suisse.

Thank you so much.

Couple of quick questions.

One, how much is the 53rd week the yo're going to have this year going to add to the earnings do you think roughly?

Secondly, you're very heavily represented overweighted in terms of the West Coast.

Tesco's announcement that they are going to enter that market, how do you think that will force to you do things differently going forward?

Finally, when we do pricing studies it appears you all are very aggressive on the consumables side.

Sort of wondering what is generating that and how far you're willing to take that going forward.

Thank you.

I'll take the first two comments. 53rd week does not have any meaningful impact on EPS.

It certainly does have interesting effects at different levels of the P&L.

For example that is a much lower gross margin rate week than average during the year.

That will become a much more important comment to quantify as we move toward the fourth quarter, but even across the full year, that's a 5- to-10 basis-point drag on the figures.

Bottom line, no real impact at all.

Tesco.

Tesco's announcement in terms of the West Coast is very interesting but I don't believe that it has any particular relevance from our standpoint, and actually, Michael, I would not agree that we're quite that heavily concentrated on the West Coast.

California is a very important state to us, but so are Texas, Florida, and lots and lots of states in the Midwest and the Northeast as well.

As it relates to pricing, we have a consistent pricing strategy across the entire U.S., and I'm not sure what you're really seeing in the Midwest, but we are very market based, very focused on maintaining the appropriate prices to our key competitors by store, and there's nothing unusual happening in the Midwest that you wouldn't expect to see somewhere else.

We are not the price leader.

We respond to what's happening in the marketplace and pay very chose attention to what's happening at Wal-Mart.

And if there's some unique things that you're seeing in the Midwest, it must be an anomaly in a particular store or market, but we're focused on maintaining a competitive price versus Wal-Mart.

How much - just following up on that -- how much of your guidance in terms of gross margin is because you're so on top of Wal-Mart now and some of the [inaudible] pricing expanded out [inaudible] assortment.

That strategy has not been changed.

We have been focused, and our pricing strategy has been very consistent for the last decade.

Thanks so much.

Your next question comes from Mark Husson with HSBC.

I have two questions.

Sorry to bang on about the gross margin, but one backward-looking and one forward-looking.

The backward-looking one, after Black ,your sales obviously seemed to get a shot of adrenalin.

Was gross margin investment part of the reason why sales then picked up?

The forward-looking one really is about sourcing from Asia.

Couple of things you said in the call.

One was that you wanted to emphasize speed to market, which is not something you normally associate necessarily with Asia.

And also you said you wanted to source some product from Europe, which is the first time I've heard that in an awful long time.

Is there any kind of slackening off from the pace of growth in sourcing from Asia?

Can we deduce that from what you said or not?

Let me take the first question.

And let me clarify what happened in the fourth quarter.

We had some sales softness in the front half of November, but the back half of November, including Thanksgiving weekend, our sales fully met our expectations, and for the rest of the quarter as well.

Our gross margin development in the fourth quarter laid out essentially in line with our expectations, line item by line item, and in the aggregate up 10 basis points is right where we expected it to be for the fourth quarter.

And we also executed our marketing and merchandising plan through the fourth quarter.

We did not change or react to the shortfall in a couple of weeks.

We executed our plan and came through with very strong results.

As it relates to the question on sourcing, we maintain a balanced strategy throughout the globe in terms of our international sourcing in the countries with which we are penetrated, and, we are very committed to the Far East, we're very committed to Central America, and there's speed opportunities throughout the globe, and when I'm referencing some of the speed to market things, we still have opportunities to take lead time out of the market from China, and clearly when we're doing business in Mexico or Central America, there's ample opportunity to shorten that supply chain, and those markets in particular are very responsive to -- for us and enhances our ability to improve our speed to market.

The time for shipping and so on from China is a little longer, but we're talking about a lot is taking time out of our development cycle, sampling cycle and design cycle to overall shorten the time from when we want the product until when it's delivered in our stores.

Is there anything on the dollar exchange rate now? [inaudible] or quota issues that are having an effect on the realized gross margin?

Not really.

No.

Okay, great.

Thank you.

Your next question comes from Greg Melich from Morgan Stanley.

Thanks, I have two questions.

One, Doug, it looks like CapEx finished up 10% last year.

Was there -- is that the normal run rate that we should expect, or were there any changes in terms of percentage of lease versus owned stores?

No meaningful change there.

CapEx, you're correct, was up about 10.4% in dollars year-over-year, and I would expect CapEx to again be in line with sales here in '06, maybe even a little faster than sales.

There's obviously a little different mix of unique kinds of projects every year, distribution centers and so forth, but we have, for the last couple of years, described our current relationships of CapEx to sales, CapEx to other kinds of metrics, as being a fairly typical, fairly normalized set of relationships.

And you're still finding that roughly 85% of the new sites you can own?

Typically, yes, that number obviously varies from quarter to quarter and year to year, but that's still a pretty good benchmark.

And we'll lay out all those statistics yet one more time in the 10-K in the back half of the annual report.

Okay great.

And then a second question, when you gave your guidance, you talked about credit -- being another good year for credit.

I know we've had a big change with the bankruptcy law that hurts you for a few months, in terms of charge-offs and provisions, but then could help you a lot going forward.

Do you think what you saw in January in terms of your charge-off rates, et cetera, is a new rate going forward, or was it unusually low?

First of all, let me clarify what happened, and then I'll comment object where we are and where we're going.

Long-term that bankruptcy change is certainly something we welcome.

We had been working together with others on that for a long time.

It didn't really affect our provision rate in the short run because very much at all, because we were amply reserved by and large for almost all of what occurred.

We're now in a period in the short run where we have artificially low rates of write-off and artificially low rates of delinquency because, in essence, anybody who remotely thought about filing any time in the future, rushed to the exit by mid-October.

And so right now, we're getting kind of an echo period of a terrific benefit.

As we move through '06, that will tend to normalize back to prebankruptcy reform law levels, or approaching those levels.

So there's a little different story for each period.

Bottom line, it doesn't affect our reported profit stream very much at all, because we've tried to very carefully build our reserves in anticipation of all of this information.

So the guidance is based on the growth of receivables and the spreads, not anything to do with charge-offs or provisions or anything?

Correct.

We expect receivables to grow yet one more time in line with sales, give or take, low-double-digit rates of growth, and we expect to be able to maintain the generally 800 basis point or so spread between what we earn in the credit card business, and what it costs us to fund it, and that is a terrific, terrific set of important metrics, to be able to grow a business at double-digit rates while enjoying that wide of a spread.

And there's one follow-up.

I think, Bob, you mentioned in answering a question before about shortening the supply chain and taking down the design cycle.

Could you just give us some more information on that, some examples.

For example, do you plan on increasing the number of flows of seasonal product in either apparel or soft lines as a result of this change?

Well, we have already made some of those changes where we have increased the number of sets in apparel but as Bob described, it's really the front end of the process.

It is from the time that we identify what is going to go into the store, to the time that, -- through the production cycle, it's having an integrated fabric strategy so that we can cut the lead time down from what it takes to develop fabric and do all the approvals that happen throughout that entire process, making sure that all of that design, approval, fit, fabric, process is much shorter and tighter than it has been in the past.

I mean, just to put some -- to somehow quantify that, if now you were flowing, say, eight different seasons, would it go to 12 in a certain category?

It's not really about increasing the -- the number of deliveries we're going to have.

I mean, we -- that is dependent upon the business requirement.

It's more about for that delivery period, what's the starting point, how long does that cycle take versus today or in the future, how do we collapse that entire cycle from transportation, production, and all the up-front.

It's collapsing that.

So it's about reducing mark-down risk, et cetera?

That's one of the benefits.

And more correct because we can wait longer before we can make that product determination, we'll have better market intelligence, so we're more apt to be quicker, because we have current reads, we know what's selling, and then we can get back into the right colors and silhouettes and styles, we can make more adjustments more timely.

So it benefits sales as much or more so as it affects gross margin rates.

Got you.

Thanks.

Your next question comes from Dan Binder from Buckingham Research.

Hi.

Good morning.

Just had a question.

With all the work that you've done with adding consumables to the stores, is there any chance that at some point in the future we'll start to see sort of what I would regard as maybe the missing link in the food offering, that you'd start to add maybe a little bit fresh food in the Target -- in the core Target Stores?

That's the first question.

The second question was, is there anything new that you're doing in the pet supply area this year, expanding, adding new products, anything like that?

I'll take your second question first.

We will transition pets in another month, and the majority of that nonfood assortment will be updated, fashion product, and it will be fun and unique, just like it was with last year's reinvention.

Food is an evolutionary process here at Target.

We're going to continue to focus on delivering in our stores what our guests want, and over time, we're going to continue to provide the kinds of assortments that they expect to find in our stores.

And then maybe just one follow-up.

What is your current cost of funding on credit?

Well, the lion's share of our credit cards are on a floating rate basis, and we fund ourselves at a handful of basis points in excess of LIBOR.

Great.

Thank you.

Your next question comes from [David Strasser] with Banc of America.

Quick question on SuperTarget.

Did you say one SuperTarget in March during the first opening?

Yeah.

That's just the way it happened to fall this year.

It was similar last year.

We opened a substantially larger number later in the year.

How many --do you have any -- or have you said publicly or will you, how many you're going to open?

Well, we can follow up on detailed comments, but I'll give you some color around that.

If you look at one of the schedules to our press release, we outlined kind of a year-over-year roll forward of store count and square footage as well.

Over the past year on a net basis our square footage grew 8%.

It grew over 16% in terms of SuperTarget square footage, and between 6% and 7% for our general merchandise stores.

It's a fairly typical set of relationships.

It will move around a little bit, but we continue to grow SuperTarget square footage at a sharply faster rate than our general merchandise square footage.

Thank you.

Your final question comes from Neil Currie from UBS.

Good morning.

Thank you.

If you take out the credit business and look at the retail EBIT, it grew about 11% in the quarter, which is half the rate of the first three-quarters of the year.

What were the significant factors behind that, and what gives you confidence for the next four quarters that you will be able to see a retail performance closer to your long-term guidance of sort of mid-teens growth?

At the EBIT level, this is very instructive question -- at the EBIT level we expect to grow our retail contribution in line with our revenues at a low double-digit percentage rate of growth.

So the fourth quarter looks rather typical in terms of what we're trying to accomplish in 2006 and over the long term.

The big difference, of course, is that during the first three-quarters, our retail business benefited from sharp increases in gross margin rate that drove retail EBIT growth at a sharply higher than 11% pace.

So what you just saw in the fourth quarter is what we would love to replicate quarter after quarter after quarter in '06 and beyond.

It's the beneficial leverage of marrying that performance together with our credit card business and across interest expense and share count to the bottom line, where we would expect to continue to enjoy several hundred basis points faster growth in EPS than the growth in retail EBIT.

That occurred in the fourth quarter.

It's in our plans for '06 and beyond as well.

Thanks.

Just a second question, if I may.

The -- how much of the store base now, of the general merchandise stores, have a consumable section that is consistent with the P-2004 format, and how quickly do you think you will get the rest of the chain up to -- up to that standard?

Well, there are about half of our chain at this point has elements of the P-2004 either through representing new stores that have been built since we adopted that prototype, or through complete remodels, or through some of the right-sizing projects that we've executed.

As we move forward in '06, each of those three categories will increase as well.

All of our new stores will incorporate those elements.

All of our major remodels will incorporate those elements, and we intend to execute another wave - another significant wave of right-sizings as well.

Thanks.

Are there any anecdotes in terms of what the remodels have done for traffic and sort of average visit to the store?

Well, the right-sizing obviously we continue to do because we do increase traffic, and we increase transaction size, and that's all been very financially justified, and remodels, when remodels include an expansion and addition of categories like food, we get a very good return on them as well.

Thank you.

Okay.

That concludes Target's fourth quarter and year-end 2005 earnings conference call, and thank you all for your participation.

Ladies and gentlemen, thank you for participating.

You may now disconnect.