目標百貨 (TGT) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Target Corporation's third quarter 2007 earnings release conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, you will be invited to participate in the question and answer session.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded, Tuesday, November 20, 2007.

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.

Welcome to our 2007 third quarter earnings conference call.

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

This morning, I will provide a brief update on a view of the current retail environment, and Doug will review our third quarter and year-to-date 2007 financial results and describe our outlook for the remainder of the year.

Next Gregg will provide an update on key strategic and merchandising initiatives for this year's holiday season as well as 2008 and finally I will wrap up our remarks and we'll open the phone lines for a question and answer session.

This morning we announced our financial results for the third quarter of 2007.

Our performance for the period included soft sales in our higher margin apparel and home categories, combined with continued solid increases in our lower margin rate consumable and commodity businesses.

This adverse sales mix produced lower than expected gross margin dollars in our core retail operation, leading to disappointing overall earnings.

In contrast, our credit card operations produced yet another quarter of strong results.

During the third quarter, we continued to expand our store base, opening a total of 61 new stores in 23 states, including 43 general merchandise stores and 18 Super Target locations.

Net of closing and relocations, these openings bring our total store count at quarter-end to 1591 stores in 47 states.

As evidenced by the volatility of our sales performance and that of other retailers during the past few months, the current consumer environment and economic climate is somewhat more challenging than earlier in the year.

However, in contrast to the perception created by media reports, we have not observed any meaningful change in the frequency, timing, or level of promotional intensity within the industry compared with prior years.

We remain confident in our Expect More, Pay Less strategy, our ability to stay relevant over time by delighting our guests with unique merchandise designs and exceptional value, and our ability to maintain appropriate and sufficient discipline as we execute our strategy and plan for 2008.

We believe that we are well-positioned to continue to gain profitable market share in the fourth quarter and throughout the coming year.

Now, Doug will review our results for the third quarter, 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.

Following our prepared remarks, we'll conduct a Q&A session and Susan Kahn, John Hulbert, and I will be available throughout the remainder of the day to answer any follow-up questions you may have.

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

In my comments this morning, I will discuss three topics, each of which has important implications for our financial performance in the fourth quarter and beyond.

First, I will review key aspects of our third quarter performance and our core retail operations.

Second, I will describe recent performance and metrics in our credit card operations, and, third, I will provide more detail on the newly authorized share repurchase program which we announced this morning, and provide an update on our review of ownership alternatives for our accounts receivable.

Of course, in conclusion I will share our outlook for the remainder of the year.

This morning Target announced financial results for the third quarter of 2007.

Overall, our results were disappointing, as performance within our core retail operations fell short of our expectations, primarily due to the effect on our gross margin resulting from softer sales of our higher margin merchandise.

Our credit card operations continued to deliver strong growth and contribution to our profits.

Let's review some of the key elements of our third quarter performance.

Total revenues grew 9.3% to $14.8 billion, fueled by the contribution from new stores, a 3.7% increase in comparable store sales, and the growth in revenue from our credit card operations.

In our retail operations, we experienced weaker than expected sales performance in our higher margin categories, especially apparel.

Even the sales of consumables and commodities remained strong.

Our third quarter gross margin rate was 31.9% of sales, 54 basis points lower than last year.

All of this net decrease resulted from a soft sales of our higher margin merchandise.

While our expense rate increased by 14 basis points, remember that our rate analysis continues to be affected by a couple of small financial reporting refinements that have have benefited gross margin rate and have had a parallel inverse effect on our expense rate over the past four quarters.

In other words, analytically, the magnitude of our gross margin rate decrease was slightly greater than reported, and our expense rate was essentially unchanged from last year.

Thankfully, this is the final quarter in which these refinements will have any year-over-year impact on the analysis of these rates.

Our credit card operations continued to deliver strong third quarter profit performance.

Average receivables grew 19.6% over last yea, faster than our pace of sales primarily due to changing the product features for yet another group of our higher credit quality Target card accounts to become higher limit Target Visa accounts.

This most recent wave of activity resulted in higher receivables balances due to increased charge activity both within and outside of our stores.

As a result of both our increase in receivables and a modest increase in the core risk metrics in our portfolio, we increased our reserve in the quarter by $23 million.

At this level, we continue to believe we're adequately reserved for expected losses in the portfolio, consistent with our past practice.

On an annualized basis, our credit card contribution to earnings before taxes as a percent of average receivable was 8.6% this year compared to 8.8% a year ago.

Turning to other factors on the P&L, net interest expense in the third quarter increased $28 million from $149 million a year ago to $177 million this year, primarily due to higher average funded balances, including the debt to fund our substantial receivables growth.

Our effective income tax rate for the quarter was 38.1% compared with 37.4% in last year's third quarter.

This increase was driven by an unusually low rate in this quarter last year.

For the full year, we continue to expect our effective tax rate will increase modestly from our 2006 rate of 38.0%.

Bringing all of these elements together, our third quarter earnings fell short of last year's performance, specifically, net earnings decreased 4.4% to $483 million, compared with $506 million last year and diluted earnings per share fell 3.5% to $0.56 from $0.59 a year ago.

Beyond the P&L, our balance sheet inventory position grew 12.2% from a year ago, faster than our 9.0% sales increase in the quarter.

However, the relationship between these two growth rates was significantly influenced by the shift in our fiscal calendar which moved our third quarter end one week closer to the holiday season compared with last year, capturing a greater portion of our typical seasonal inventory build.

Turning to share repurchase, during the quarter, we invested $172 million to buy approximately 3 million shares of our common stock at a weighted average price of $57.29 per share.

Through the first nine months of 2007, we have repurchased $1.2 billion of our common stock, acquiring 19.7 million shares at an average price of $60.72 per share.

Since the program's inception in June 2004, we have repurchased 90.7 million shares of common stock, representing over 10% of our current shares outstanding, at an average price of $51.20 per share, for a total investment of approximately $4.6 billion.

Weighted average diluted shares outstanding in the most recent quarter were more than 13 million shares lower than the corresponding figure last year, a reduction of more than 1.5%.

As you know on September 12th we announced we had we would conduct a review of use of debt in our capital structure and the pace of our share repurchase activity.

This morning we announced the results of that review.

Our board has approved a new $10 billion share repurchase program that replaces the remaining authorization under our previous program.

Based on this morning's share price, execution of our new program would represent a gross reduction of more than 20% of our current outstanding shares.

We expect to complete this new share repurchase program within approximately three years, and under the right combination of business results, liquidity, and share price, I would expect to complete half or more of the program by the end of 2008.

Part of the funding for this program is expected to come from an increase in the use of debt in our capital structure, yet we believe our execution of this program which is independent of any specific outcome from the review of ownership of our credit card receivables, will allow us to maintain a credit profile consistent with the ratings objectives we outlined in September.

Specifically, we said then that we expect to maintain the necessary credit profile to preserve our long-term debt ratings within the A category.

We are confident this plan achieves that.

Our September announcement also indicated that we intended to explore alternative ownership structures for our credit card receivables.

At this point we're still engaged in a vigorous review, and it is premature it speculate on any possible decision coming out of the review.

We continue to expect that we will be able to announce a decision before the end of December, and explain our rationale, either to sell or maintain ownership of some or all of the receivables in the portfolio.

On the subject of what would happen to share repurchase in the event of a potential receivable sale, I would expect this possible transaction to have only a small impact, if any, on the pace of our share repurchase execution, depending on how much risk is transferred to a new owner.

In summary, let me combine all of these elements and share some additional perspective on our expectations for the full year.

Year-to-date through nine months, our comparable store sales have increased 4.3%, and total sales have increased over 9%.

Our fourth quarter outlook envisions a similar comparable store sales increase, in the range of 3 to 5%, and a total sales increase sharply lower than our year-to-date growth, as we annualized the extra week in 2006.

In addition, so far this year, our gross margin and expense rates are each largely unchanged from prior year levels.

Looking forward, while we expect some continued adverse sales mix effect on our gross margin rate in the fourth quarter and in 2008, it should be a less important factor than in the quarter we just completed.

Separately, we're working very intently on an array of initiatives designed to control the growth rate of our expenses to be equal to or lower than our overall growth in sales.

We expect these efforts to bear fruit in the fourth quarter and into 2008.

In our credit card operations, we expect to continue to enjoy strong growth in receivables, driving revenue growth, and strong contributions to earnings reflecting disciplined management of our portfolio.

With the delinquency rates and net write off rates most likely to remain within the range implicit in our current balance sheet reserve.

As a result, we expect to continue to enjoy substantial strategic and financial benefits of our credit card operations, regardless of who actually owns our receivables.

As you know, a variety of factors have contributed to our beliefs since the beginning of this year that our EPS growth opportunities would be greater in the first half than the second half.

While we believe that our year-over-year prospects are better in the fourth quarter than the third quarter, our EPS growth will likely be quite modest compared to last year's results.

We remain confident in our underlying strategy and in our continued ability to generate outstanding financial performance over the long-term.

We are confident that our proven record of growth, innovation, and disciplined execution will continue to benefit our shareholders on average with double-digit percentage increases in EPS for many years to come.

Now, Gregg will provide a brief summary of current business trends and describe several of our current merchandising initiatives.

Thanks, Doug.

As Bob and Doug have just described, our third quarter financial performance did not meet our expectations.

While we are disappointed with these results, we remain confident in Target's underlying strategy and our ability to generate profitable market share growth in the current economic and competitive environment.

Our focus remains firmly centered on delivering our Expect More, Pay Less brand promise to our guests by providing a continuous flow of trend right and affordable merchandise in convenient, easy to shop stores, and we believe we are well-positioned to execute this strategy in the fourth quarter and beyond.

As we head into the holiday season, we're particularly excited about our well-balanced assortment of must have and differentiated items, all at an exceptional value.

For example, we continue to feature exclusive collections and gift items by emerging designers in our apparel and accessories categories.

Just last month, Target introduced an assortment of limited edition shoes and handbags by Holly Dunlap under the celebrated Hollywood label, which will only be in stores for 60 days.

In late December, we'll further reinforce our reputation for affordable style and accessories with our introduction of [Lochler-Randall] for Target, a limited time assortment of shoes and handbags by designer Jesse Randall, and earlier this week we debuted our newest Go International collection by Erin Fetherstone which will be available through December.

The line includes women's fashion, jewelry and accessories, and is characterized by feminine details such as ruffles, velvet, and heart-shaped motifs.

Target is keenly focused on being the destination for all our guest's holiday entertaining needs including food, dinnerware, home decor and holiday trim.

In September, Target was honored by Bon Appetit Magazine with the Tastemaker award at its tenth annual award ceremony in New York.

The award recognized Target's commitment to offering unique and differentiated home and entertaining solutions four our guests.

Again this year we have a broad assortment of everything our guests need to create special holiday meals and memorable occasions.

In stationery, the Isabelle de Borchgrave holiday collection features elegant paper products including tablecloths and serving bowls that make holiday entertaining both stylish and easy.

In food, Target has introduced delicious new Archer Farms frozen hors d'oeuvres which all bake at the same oven temperature, making preparation simple and stress free.

For the perfect mealtime ambience, Target's assortment includes elegant tableware in holiday colors and winter designs and a variety of festive linens to complement the table decor.

Target is also the destination for this year's most-wanted gifts including electronics, videogames, toys, and small appliances.

Digital cameras, LCD TVs, video game hardware and software and MP3 players and accessories continue to dominate the list of hottest items in electronics.

While in toys, the safety of our guests remain our highest priority.

We continue to work closely with vendors to ensure the best product in terms of both safety and quality is on our shelves, and we are keenly focused on being in-stock on trusted games and toys.

We are also delighting our guests with a totally innovative holiday campaign called Wow Or Never.

With this campaign we're offering an assortment of 20 exclusive items available for seven days only while supplies last, beginning on the Sunday after Thanksgiving.

When guests purchase one of these qualifying gifts with their Target Red Card, they are automatically entered to win incredible prizes ranging from a new Maserati to an African safari.

Just in time for the holidays, Target is also introducing a unique assortment of new gift cards, including twelve designs of eco friendly cards made from a biodegradable substance called PHA.

In addition, we continue to introduce innovative technology to our gift card assortment, including Mr.

Magorium's Wonder Emporium design with a piano that plays music, a card featuring functional holiday lights and a card showcasing the first ever full motion lenticular video.

As in past years, gift card sales and redemptions are expected to drive significant traffic and transaction volume throughout December and January.

Our continued emphasis on delivering excitement in our own brand presentations and introducing new highly respected national brand assortments will also drive post holiday traffic and sales at Target.

Our announcements yesterday which described our new exclusive partnership with Converse is an example of our unwaivering commitment to delight our guests and deliver on our Expect More, Pay Less promise.

At Converse One Star assortment which launches in February, includes vintage-inspired sports lifestyle apparel for men and women and footwear for men, women and children.

We are thrilled to be partnering with Nike and bringing this iconic brand to Target and are confident that it will excite our guests and drive incremental sales and profit.

In addition to driving traffic and sales through our dedication to innovative merchandising and distinctive marketing, we are also intently focused on managing our inventories and being in stock.

At the end of the third quarter, despite softer sales in apparel and home, inventories were in very good condition, and we are carefully managing our flow of goods in the holiday season and as we plan our business for early 2008.

To ensure that we're prepared to react quickly and efficiently in a variety of sales environments, we remain focused on finding additional opportunities to leverage our sourcing, technology, and supply chain sophistication.

For example, we continue to improve our product design and development process to enhance quality and fit and increase speed to market.

We continue to develop our distribution network by adding regional and import capacity to support our growth, and we are pursuing opportunities to reduce inventory while improving in-stock levels, improving transit times, and eliminating costs throughout our supply chain, both domestically and internationally.

We have always been disciplined and intentional in managing our business, even as we remain focused on creating and exploiting opportunities to grow our sales and gain market share profitably.

As we look to the remainder of 2007, and into 2008, we continue to embrace our culture of continuous innovation and disciplined execution.

By consistently delivering on our Expect More, Pay Less promise, we are confident Target will deliver solid results this holiday season and remain relevant to our guests over time.

Now Bob has a few concluding remarks.

As you just heard in detail, we continue to find new ways to delight our guests through distinctive marketing, exciting merchandise and exceptional value, and we remain optimistic about our fourth quarter performance.

We believe that Target is well positioned to grow profitably in this economic and competitive environment.

We feel confident that Target will continue to deliver substantial value for our shareholders over time.

That concludes our prepared remarks.

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

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Jeff Klinefelter with Piper Jaffray.

I have a couple questions for Gregg.

Can you provide any more details on the comp or margin trends of apparel and home as it relates to the average sort of comp trends of your store right now and what sort of impact it had on the margins in Q3 and expected to have in Q4 recognizing the mix is a pressuring comps?

Are the margins trends themselves down in the categories as well because of promotional activity?

No.

The gross margin rates in all of our business segments performed well in the third quarter, and our gross margin shortfall is exclusively related to the mix impact of both apparel and to a lesser extent home growing at a slower rate than our higher growth lower margin categories in hard lines and food.

In terms of the comp trends, Gregg, is it something where it is tracking well below the chain average?

Are you still seeing any stabilization in the home and what are your expectations for Q4 and into the spring season in those two categories?

We still expect some sales mix deterioration in the fourth quarter, but not to the extent that we experienced in the third quarter.

In apparel specifically, weather patterns are now more normalized than they were in September/October.

As you know, we had record high temperatures throughout the nation at that time, and they're reasonably normal, so we expect some slight deterioration but not to the same magnitude in apparel.

Our home business actually had been performing pretty well, softened up a little bit in the third quarter, and we expect that to remain somewhat soft until some of the housing issues go away or at least diminish in terms of magnitude.

Let me put a little color around that.

As you know, on average across the last decade, our lower margin businesses have grown faster than our higher margin businesses.

In an average year, that puts give or take 20 basis points of mix-related adverse effect into our gross margin rate.

We were running higher than that through the first two quarters, but as I mentioned in my remarks, all of the gross margin rate deterioration in Q3 was mix-related, so this mix issue Q3 this year was clearly the most significant mix-effected quarter that we've had in many, many, many years running about triple the adverse mix effect of an average quarter.

Thank you.

One other question.

In terms of the sourcing and inflationary pressures, there is some concern coming particularly out of China with inflation on costs.

Can you comment on how you see that affecting your margin trends the rest of this year and into next year on apparel in the discretionary categories but also overall?

I think you're looking at opportunities in hard lines for sourcing benefits as we move forward?

We're experiencing cost pressures right now that will manifest in the first and second quarter of this year, and it is both domestic and international.

We've got a very balanced sourcing portfolio, and our apparel exposure in China is rather modest to be honest with you, and we have apparel sourcing that is dispersed throughout the world, so we really don't expect much impact in the apparel world.

We're experiencing it more in the hard lines categories, in raw materials, steel, wood, energy-related categories like plastic, storage, and in food.

In the past year or two, we have been able to pass along these cost increases in the form of higher prices, the marketplace had been receptive to that, and we hope that that type of receptivity continues into '08.

Thank you.

Your next question comes from the line of Robert Drbul with Lehman Brothers.

Good morning.

Two questions that I have.

The first one, Doug, can you put more detail into the receivables portfolio growth, the 19.6, and especially can you just give us a little bit -- a few statistics around like the credit worthiness of the changes in the increased credit balances that you're seeing and have given?

As always, there are a lot of dynamics in the portfolio.

The single biggest driver of the acceleration and the growth of receivable is that our most recent wave of executed product changes, product changes is the terminology that we use to describe when we take a look into our Target card profile and convert an offer to convert to the guests those cards to having the features of our Visa card sharply higher available to buy and typically lower rates and so forth.

This has been a most -- has been a more efficient conversion than prior conversions.

The credit quality is the same.

The guests are responding by using the card both in the store and outside the store in a typical mix of purchases.

It means that, for example, our penetration rates, the percentage of our Target store sales reflected on any one of our array of cards is actually flat to up ever so slightly in contrast to a more typical trend of being down.

The increase in the balances is in a higher weighted average band of FICO scores than the weighted average in the portfolio.

Having said all of that, clearly there are some unrelated to this conversion issues developing in our portfolio and candidly in the portfolios of everyone else we follow that are somewhat adverse, and therefore we felt that it was appropriate in light of all of that activity to increase our reserve this quarter both as a reflection of the higher size of the portfolio and also as a reflection of some of these modest upticks in risk metrics.

Okay.

And then -- thank you.

A question for Gregg.

On the inventory, are there any pockets of inventory that you are concerned about as you head into the fourth quarter?

In all honesty, we have managed our inventories very, very well in the second and third quarter.

We had anticipated somewhat of a slowdown in the sales environment and reduced our receipts in the third quarter when we were in Q1 and Q2, so aside from being a little heavy here or there, in pockets it is even hard to describe what pockets are.

I mean, there are certain businesses we're a little over and certain regions where we might be a little over, but overall it is relatively immaterial in the scheme of things.

Thank you.

Good luck.

Your next question comes from the line of Teresa Donahue with Neuberger Berman.

Good morning, everyone.

Just a quick question on the expense line, which was very impressive.

Could you give a couple of examples of areas that you're looking for opportunities in, especially since we hadn't seen much progress prior at higher comp levels?

I will start and maybe Doug wants to add some.

This is a companywide initiative.

We're looking at our expense opportunities in our headquarters, supply chain, property development, marketing, and in stores both expense and productivity, so we're really taking a comprehensive view to better managing our expenses and productivity centers going forward.

Okay.

Thanks.

There is no one issue in expenses that dominated or characterized the key driver of our ability to control this quarter.

As usual, some issues up, some issues down in basis points, but we're entering a period where we are paying much more intense -- putting much more intense focus on making sure our operating expenses grow at no faster than the pace of sales.

Thank you.

Your next question is from the line of Dan Binder with Jefferies.

Good morning.

Just a couple of questions on credit.

Last quarter I think you had cited that some of the excess receivables growth -- I should say some of the receivables growth in excess of sales was driven from purchases outside the store.

it sounded like that continued a bit this quarter, but you had this other issue you talked about in terms of the product change.

I was wondering, is there a way to quantify of the receivables growth how much of that did come from growth outside the store and then secondly in terms of thinking about reserves going forward, is there a rule of thumb we should be thinking about in terms of targeting bad debt reserves?

Is it going to be 25% higher than write offs or maybe some metric that we could use on that front?

Answer to your first question, actually lies on our cash flow statement every quarter because we split the growth in balances created by use of the cards inside our store onto a separate line from the growth in balances attributable to use outside the store.

There is some seasonality to that mix, but generally speaking, that's a fairly constant relationship with give or take 25 or 30% of the charge activity on the cards taking place in our stores and the balance taking place outside our stores, nothing new here this quarter.

Separately on your question regarding relationships -- I will focus on the allowance as a percent of quarter end receivables.

Today we lie at about 7%.

That metric has some statistical -- pardon me, has seasonal influence, so that metric typically is lower in our fourth quarter than in any of the prior three quarters.

That relationship will likely remain intact this year as well.

We constantly monitor the risk metrics underpinning the portfolio and will adjust that reserve as appropriate, ongoing to maintain a very consistent reserve relative to the risks that under pin the receivables.

As I look forward, I don't think this will create any kind of meaningful problem, but yet I would observe there is no doubt that there are some flashing yellow lights on the horizon much more broadly than just our portfolio.

I think we're fully adequately reserved today.

Okay.

Then just a follow-up to Terry's question on expenses.

Obviously the biggest opportunity I guess when sales slow would be, or at least judging from what I've seen in the past, would be to manage the labor in the stores to those levels, and during periods of very healthy comps, the stores look absolutely fantastic.

I am curious what kind of challenges, if any, you face in keeping the store standards up as comps slow and perhaps it is necessary to cut back on some of that labor?

Is there any way you can manage that and still keep the stores in as good a shape as they were, let's say a year ago?

Yes.

Clearly we are -- we remain absolutely committed to delighting our guests with a superior shopping experience and have no intention at all in lowering our standards, whether it is our brand standards, our in-stock levels, our wait times, our friendly help within our stores.

We remain highly committed to delivering a superior experience.

Having said that, as sales soften, we have opportunity to reduce the number of seasonal hires and just more carefully manage the expense line as it relates to reduced traffic levels and sales around this time of year, so we're going through a very thoughtful process, making sure that we balance our short-term and long-term needs of the business and the guests with the expense opportunities that we identify.

As Doug said, there is a combination of things that we're going to look at.

There is no one thing in our stores we can point to to say this is where we're going to singularly focus our efforts.

It is a combination of many, many work centers that we're going to be looking at in terms of shaving expense out of our stores.

Very specifically, lower rates of sales drive lower need for work in the areas of receiving, replenishment, cashiering, and so we can maintain the same standards that are so important to our brand, while incurring fewer hours worked in the stores when fewer units are flowing through the supply chain inside the store.

I would also pointed out we made major investments in logistics and technology in our stores over the last several years, and that those are enabling us to become ig sigh more productive going forward, so we remain committed 100% to a great guest experience, and we're confident we can deliver that at the same time while reducing expenses.

Great.

Thanks.

Your next question comes from the line of Charles Grom with JPMorgan Chase.

Thanks.

Good morning.

Doug, I was wondering if you could comment on what your inventory was growth was in the quarter if you can exclude the calendar shift and if you can quantify the actual mix of home and apparel in this quarter versus a year ago as a percentage of sales?

About two-thirds of that growth differential is due to the calendar shift, so there really isn't anything significant about the relationship between growth in inventory and sales absent that shift.

I am afraid you'll have to repeat the second question.

The overall mix in the quarter as a percentage of sales, if you were to combine home and apparel, how much did it increase year-over-year?

In terms of inventories?

Just in terms of sales, the actual sales mix.

In terms of our sales mix, those two categories represented a lower portion of our sales this year than last year.

As I mentioned, slower growth in those categories was responsible for all of, on a net basis -- all of the decline in gross margin rate.

I got you.

And switching to the balance sheet, in order to fund the buyback program, could you speak to how high you're willing to take up some of your leverage ratios, maybe adjusted debt to EBITDA or your overall debt to cap?

I always marvel when people translate what is a very complex set of discussions across three ratings agencies into handy metrics like that.

We're not specifically focused on any one individual credit metric.

I believe the pace of this program, the size of this program, has been specifically designed after discussions with all three agencies to maintain the credit profile that we seek to maintain, but it is not as straight forward as focusing on one key metric.

If we did so, and blindly ran our business to that metric, I don't think any of us would be very happy with the outcome.

All right.

Fair enough.

And then one more for Gregg.

Yesterday you announced that November was on plan.

I am wondering if the recent improvement, it sounds like November is giving you any more confidence and if you could speak directly to trends in some of those areas that were weak in October, home, apparel and toys?

Well, even though they're on plan, they're still somewhat more modest in terms of sales expectations compared to our original plan three and six months ago.

We're seeing balanced sales across the chain.

We've seen apparel strengthen as weather patterns normalized.

Our home businesses are performing about where they have in the past and the balance of the businesses have been performing well.

We expect the electronics business to continue to outpace the Company.

That has been strong all year and continues to be very to be very strong, so we expect it to be a bellwether season there.

Our toy business is somewhat volatile.

There is a lot of retail activity that caused the consumer to be somewhat cautious in this particular category, so we're seeing strength in other categories as they migrate to less traditional toys, but having said that, the toy business started to strengthen this month as well, so we're cautiously optimistic that overall we're going to have a decent holiday season.

Thanks.

Good luck.

Your next question comes from the line of Christine Augustine with Bear Stearns.

Thank you.

Doug, can you talk about overall expense trends, benefits, utilities, maybe real estate costs, what you might be seeing so far this year, versus sort of the average of the last few, and then if possible, could you give us your preliminary thoughts on where those expense trends might go in '08?

The great news year-to-date this year, not only are our expenses well controlled as a percentage of sales, there really isn't any significant category that's moving the needle meaningfully in either direction.

We're down to single-digit basis point movements across the board, and one of the reasons that I am quite encouraged about that, is that of course we're operating in an environment where sales have slowed to a pace below what we had forecasted at the beginning of the year.

Said differently, that is sometimes the recipe for hitting our dollar budgets and missing the mark in terms of a basis point analysis.

Having said all of that, back up.

Certainly there are some inflationary drivers in the expense base, utilities, and property taxes, and to a lesser extent, medical expenses would be among the more onerous drivers.

The single biggest variable of course always remains the amount of hourly -- the number of hours of labor that we choose to employ with our teams in our stores.

There are a couple of things that are beneficial as well.

Marketing expense for example, on a year-to-date basis, is actually slightly favorable despite the fact that it was unfavorable in the quarter due to timing issues.

And would you be willing to give any preliminary thoughts on '08 as you look to your planning process, is anything -- do you think there will be any material changes in these line items?

No, I don't.

I think that, as Gregg indicated we're taking our time to perform an intensive review across the board, and there are no fundamental changes that we're intending to dial in here.

We're just carefully focusing on making sure one line item at a time, that we're dialing in the right expenses relative to the pace of our business, while paying particular attention to maintaining the brand standards that are so important to us.

How about your views with regard to new store openings?

As the environment softens, would you maybe try to take advantage of that and perhaps accelerate, or in this kind of environment do you look to maybe scale back a bit?

I am just wondering how you view it this time around versus prior downturns in the economy?

We have a very, very steady hand on the throttle at the real estate helm.

Obviously if there were substantial bargains to be had in the kind of real estate that we seek, we would be delighted to accelerate our store opening program.

There are lead times that need to be respected, so that certainly wouldn't affect '08 or hypothetically '09, but I think that's a false premise.

There is no discernible reduction in commercial real estate prices for the kinds of land we seek to develop.

Quite the contrary has been the case for some period of time.

We're very unlikely to materially or even meaningfully change the pace of capital reinvestment that we think is the right pace for our business.

It would take a very sustained period of softer performance to have us rethink the value of those kinds of strategically important investments.

Thank you.

Your next question comes from the line of Mark Husson with HSBC.

Back to procurement a little bit.

You had said that individual categories had quite good gross margin performances.

Can you tell us what you did to get them?

From our metrics, it looks like you've spread your sourcing out to other countries away from China, more India, other-Asia, and perhaps you've gone direct more.

Can you update us on the direct percentage and other sourcing, including USA by the way?

Our direct import percentage remains around 30 to 31%.

We have ramped that up aggressively over the last four or five years, and we have now reached a point where it is going to grow at a much slower rate, probably in the neighborhood of 50 to 100 basis points a year, so I would not expect large changes in our direct import percentage, and as we've said, we've got a balanced portfolio of sourcing, both domestic and internationally, and we shift and make adjustments based on a variety of conditions.

Our gross margin rates were well balanced across all of our categories, so we made our gross margin rate expectations and home, apparel, food and hard lines, so that's a combination of a lot of different things that we do to manage the margin rates, whether it is saving markdowns or focusing on cost reductions or investment in our promotional markdowns.

It is a combination of things that enabled us to make our gross margin rates by business segment.

It sounds like food price inflation and also the generic environment has not been damaging in the quarter as far as gross margin rates are concerned?

It was not.

We've seen inflationary pressures kind of ebbing and flowing throughout the year.

We faced more pressure early in the year.

It somewhat abated in the second, third and fourth quarter, but we are expecting that to accelerate again in the first and second quarter of next year.

It is only a slight over simply fiscal for you to think about for all of us to think about our gross margin right in the lower middle 30s as simply being the algebraic blend of give or take 40% of our sales with gross margin rates, category by category, that are in excess of 40% and about 60% of our sales, category by category with gross margin rates of 25% or less.

The entire gross margin rate issue year-over-year in this quarter is the algebra behind that blend across the board.

We enjoy give or take reasonably similar gross margin rates to last year's gross margin rate category by category.

This is all a sales mix issue in the quarter.

Given the quite different from each other, those two gross margin groups, are you doing something over time that is going to meaningfully accelerate the amount of gross margin you'll get from the 25% category and does that have any implication for the return on invested capital over time?

Well, I think this mix issue is actually misleading more than it is helpful because this chain remains very healthy financially over time, to the extent that we can maintain 3 or 4% same-store sales growth in the higher margin categories, but of course, the lower margin categories enable us to be able to do that, and so I would be thrilled with the horrible mix problem of 10 comps in the lower margin businesses and 5 comps in the higher margin businesses because even though those that follow rates would be disgusted, the the bottom line would be gushing profitability.

That's helpful.

Thank you.

Your next question comes from the line of Mark Miller with William Blair.

Hi.

Good morning.

I just wanted to clarify the inventory on a same calendar businesses.

Are you saying that inventory would be up 4% were it not for the calendar shift, and I know sometimes there is other anomalies with inventory on the boats coming across.

What would be the calendar same store inventory growth?

First half of your question, yes, our inventories would have grown slower than sales if it were not for the calendar shift.

That's how important a week is in our inventory picture at this time of the year.

Your question about the boats was not clear to me.

Try me again?

Just on a same-store basis, I know in the past, as you had timing of receipts, product coming across from outside this country, that it impacted the inventory levels.

What's the same store inventory growth, if you have that?

Our picture of inventory to any point in time includes inventory that's in transit on the ocean by and large because we already own substantially all of that inventory, so the balance sheet includes all inventory that we own regardless of where it is in the globe, so it is straight forward I think to answer your question by correlating the 4% increase in inventories to the slightly higher increase in our store count to observe that inventories on a per store were slightly down, flat to down.

Great.

Thanks.

Could you talk about the trends across the good, better, best spectrum, particularly in home and apparel, and as you've seen the slowing, is that slower rate of unit off take or are you seeing any change in the rate at which the consumer is willing to trade up?

It is somewhat of a mixed bag.

We're seeing actually the consumer trading up slightly in apparel, the same dynamics are true in the hard lines and food side of our business, and there is somewhat of a slight trade down, in the home area, for example, we see stronger performance in our basic bedding area rather than our collection bedding area, so there is more of the trade down is happening in the home, but the balance of the business we don't see any trade down whatsoever.

And then final question, Gregg, can you talk about how that recent experience would impact the way you think about assortment for 2008 and are you making changes at this point?

We're not making material changes to our assortment.

We worked really hard in getting the appropriate balance of good, better, best.

We think this is more temporary in nature, and that over the long-term, our current mix of assortments are about appropriate for what the business potential is, so we're going to make some adjustments, but overall, we're pretty confident that we have the right mix.

Okay.

Thank you.

Your next question comes from the line of Adrianne Shapira with Goldman Sachs.

Thank you.

First off, talking about the more challenging environment, can you share with us any regional differences you're seeing in performance?

Really there are just a few parts of the country that are a little slower.

Florida has been a little slower, a little bit of the sort of inland southern part of California has been a little slower, and a touch in the Ohio, Michigan, Indiana area, but overall, the rest of the country is pretty well balanced.

And, Doug, you mentioned obviously the initiatives focusing on expenses.

Could you remind us the level of comps you needed to begin leveraging expenses, what that was, and perhaps going forward what the opportunity in terms of that number coming down?

Well, this is a very crude shorthand, but with that spirit in mind, the answer to your question is I think we have historically operated with the need for about a 4 to 5% same-store sales performance to neutralize SG&A as a percent of sales, and clearly we're working very hard to bring that range down by 1 to 200 basis points.

Okay.

Great.

Just the last question, I know you described qualitatively, direction of the segments were heading into the fourth quarter, but in light of the third quarter performance and perhaps the buyback activity, could you just update perhaps your view on the year?

I think the last we had heard is lower than 360, but perhaps any update on guidance for the year?

As you know, we have not provided specific guidance for any quarter this year, and the fourth quarter is no different.

The the best I can do to answer that question is to have you take our year-to-date performance and add to it the outlook for the fourth quarter that I gave earlier, specifically, that we expect a very modest EPS increase in the quarter.

Let's not lose sight of the fact we have talked many times in the past about the $0.02 to $0.04 per share that we earned in the extra week last year.

That missing week means that our year-over-year sales growth in total, not comp, in total during the fourth quarter will be a low to mid-single digit figure, so that's a very important feature in understanding what's going on with our EPS growth this quarter in our core retail operations and the credit card operations.

That extra week created profitability last year.

Thank you.

Your next question comes from the line of Uta Werner with Sanford Bernstein.

Good morning.

I wonder if you can please comment on how new stores have done over the past few months and specifically, the productivity ramp up you observed?

Typically our experience in last couple of months is no different from our experience in the past.

Our new stores typically are an exaggerated example of what's happening in the rest of the chain.

When the rest of the chain is healthy, our new stores typically open much more strongly, and when sales are weak, our new stores open even weaker.

This is not a new issue nor at all disturbing.

These new stores are terrific investments that will pay splendid dividends moving forward.

Could you also maybe remind us on how remodeled stores are comping relative to unremodeled stores?

Well, we really look at our remodels in a couple of different ways.

In the remodels where we expand the footprint of the building itself, we are seeing dramatic increases, double-digit consistent double-digit increases in our comp store sales before and after the remodel.

In remodels that occur within the shell of the building, and we're not dramatically expanding the sales floor, we see modest but still the kinds of sales growth necessary to support the investment in that remodel.

We're pleased with both the in the box and expansion remodel program.

Thank you.

How about a different question related to gross margin, specifically on consumer electronics?

I wonder if you can update us on what's the the current level of service contract attachments, what have your levels of returns been, and how do you recover on the returns?

The attachment rates, we've now had our ESP program in place for about a year, and we continue to see gains in our attachment rates on average when you look across the board all categories, we're seeing attachment rates in the low double-digit area, and when you specifically zero in on categories like LCD or more expensive LCD televisions, we're seeing very healthy attachment rates of over 30%.

In terms of returns?

We're not seeing any appreciable change in our return rates in any product categories.

Great.

On the same line of question here, to what extent do you expect significant revenue to come from selling preowned electronics on the internet?

That is a test program for it, and it is very, very, very tiny and totally insignificant as it relates to the sales impact on either the dot-com business or the Corporation's business.

I will add two more verys to that answer.

Is that pre-owned merchandise fundamentally returned merchandise?

It is returned and refurbished, and it is a test that was initiated I think approximately 30 days ago, and we have not made a decision whether or not we're going to continue this or not.

Early indications are it has been very positive, but again it is very, very, very insignificant.

Borne out of the fact a substantial portion of returned merchandise is in perfect working order.

Very small test and really only an iPod thing, so it is just not relevant.

That's my last question, the same spirit.

To what extent can you comment on how the internet has been doing?

Our internet and dot-com business has been having a very, very good year.

We're very pleased with the business but like the stores business, we have seen it slow down and in our sales rates have increased have moderated somewhat compared to the very robust increases we were seeing, in the early parts of the year.

We have time for questions from two more people.

Your next question comes from the line of Gregory Melich with Morgan Stanley.

Thanks.

Gregg, earlier in the year, you mentioned that you got pretty conservative on the buy into the second half.

That seems to have at least helped control the inventories.

How do you see the buy into early next year?

I know it is hard to look past Christmas right now, but what's your plan there?

We're looking well past Christmas at this particular point in time based on the lead times in our business, so we're expecting that at least I would say for first quarter for sure and probably into the second quarter we expect the soft sales environment to continue, and that the discretionary categories like apparel and home will be under more pressure than the hard lines and food categories, so we've pulled back our receipts in those businesses to reflect rates of sale that are going to be more modest than what we've experienced in the past.

And so I guess the follow-onto that, if gross margin is meant to improve from the shift, as it was all mix in this quarter, how does that happen if we expect home and apparel to continue to just stay comp zero for example?

This is where we're planning the business.

We have ample inventory as part of our base inventory that can support sales growth into the mid-comp range, so we're very confident we can be in stock and can support an increased sales activity.

Secondly, we will experience greater sell through levels in our apparel and home areas as we -- if we perform better, so rather than selling through three quarters of our store, maybe before markdown, we'll see greater sell through rates which yield higher profitability rates if that should happen.

In addition as you know, Greg we're never satisfied with simply maintaining gross margin rates other than mix, so we will continue to have significant focus on all of the core drivers of margin rate within categories ranging from benefits to markup associated with global sourcing penetration increases to programs designed to control markdowns and inventory shrink and so forth.

The fact that we're net even on all of the rest of that activity in this quarter doesn't mean that we are satisfied with being net even excluding mix.

That's great.

Just to make sure I am clear on that, when you say the softness will continue, that means you expect comps to continue to run 3 to 4 into the first and second quarter or would it be another downtick?

We haven't issued specific guidance for that timeframe, so I think that's a little premature to get that specific, but we expect continued pressure in categories like apparel and home.

Great.

Thanks.

Last question, please.

Your final question comes from the line of Wayne Hood with BMO Capital.

Good morning, Doug.

I guess what I wanted to come back to credit a second.

If everyone can't agree on economics or control in this transaction, would you be willing to let Goldman just do a big securitization in that portfolio or would you just keep it as is?

I missed the front half of your question.

I understood the back half.

I was just wondering if you can't -- everybody can't come to an agreement on shared economics and control and things like that, would you be willing to let Goldman just do a large securitization of those receivables and you continue to manage it through that structure?

In the hypothetical event that we do not find the economics to be attractive while shifting a substantial amount of the risk of ownership of this portfolio to a third party, in that event, we would of course pay careful attention to what is the most effective way to fund this portfolio moving forward, given that in that event, we would continue to own all of the risks, I would expect to continue to own all of the profitability out of the portfolio as well, but we would of course look at an array of financing alternatives relative to the status quo, but the status quo has proved to be a very effective method of funding that portfolio in the past.

Second question kind of related to this.

If you look at the aging of the portfolio in the current quarter, looked relatively flat, yet as you talked about the reserve up, write-offs are up, are you seeing I guess, the current file, the ones that are not falling past due, filing for bankruptcy or charging off that's kind of unexpected, because that's one thing that kind of surprise you those current accounts going past or were you having to charge them off or no?

No.

There is nothing surprising going on there.

I am afraid we're into double overtime.

Would be more than happy to follow up with anyone on the line with more detail on that issue or any other issue as the day progresses.

I think Bob has a few closing remarks.

That concludes our third quarter 2007 earnings conference call as Doug mentioned, he, Susan and John are available at any time during the day to answer any additional questions, and I would like to thank you all for your participation.

Thank you for participating in today's conference call.

You may now disconnect.