目標百貨 (TGT) 2007 Q4 法說會逐字稿

Ladies and Gentlemen, thank you for standing by.

Welcome to the Target Corporation's Fourth Quarter Conference Call.

(OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mr.

Bob Ulrich, Chairman and Chief Executive Officer.

Please go ahead, sir.

Good morning.

Welcome to our 2007 Fourth Quarter and year-end earnings conference call.

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

This morning I will provide a brief overview of our results and the current retail environment.

Then Doug will review our 2007 fourth quarter and full year financial results in greater depth and describe out outlook for the remainder of the year.

Next Gregg will provide an update on key strategic, operational and merchandising initiatives for 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 fourth quarter and full year of 2007.

These results fell short of our expectations as a more difficult economic environment and hesitant consumer constrained our sales growth.

Especially in discretionary categories and adversely affected our overall profitability.

As we enter 2008 it seems likely that we will continue to face a challenging economic climate at least through the first half of the year.

As a result, we are keenly focused on the disciplined execution of our core business operations, continued thoughtful management of our expenses and an unwavering devotion to deliver the excitement, innovation, design, and value that consistently delight our guests.

Target is fortunate to have a powerful brand, a seasoned leadership team, and a proven strategy that has successfully navigated economic downturns in the past.

We are committed to improving our recent performance without sacrificing any aspect of our brand and without compromising our overall guest experience.

Our remaining relevant to our guests and consistently delivering on our Expect More, Pay Less brand promise we are confident that Target will continue to enjoy profitable market share growth in 2008 and beyond in a variety of economic conditions.

Now, Doug will review our results for the fourth quarter and full year, 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'll discuss three topics, each of which has important implications for our future results.

First, I'll review key aspects of our fourth quarter performance in our core retail and credit card operations.

Next, I'll detail our fourth quarter activity under our share repurchase authorization, and finally, I'll share our outlook for our business in 2008.

This morning Target Corporation announced financial results for the fourth quarter and full year, 2007.

As Bob mentioned, we experienced disappointing financial results for the quarter and the year, as we face the challenge of a sharply softer sales trend in the quarter, while comparing against an extra week in last year's fourth quarter and fiscal year.

Some key elements of our fourth quarter performance were total revenue growth of 0.8%, due to the contribution from new stores, a 0.2% increase in same-store sales, growth in revenue from our credit card operations, and cycling the impact of an extra week in last year's fourth quarter.

On an equal 13 week over 13 week basis, our revenues increased 6.3% in the quarter.

Our fourth quarter gross margin rate declined 53 basis points from last year, approximately 60% of this decline was due to the impact of faster sales growth in our lower margin consumable and commodity categories.

The magnitude of this mix impact is about half of our experience in the third quarter, and more in line with our experience in the first and second quarters of the year.

The remaining gross margin rate on favorability in the fourth quarter was driven by clearance related markdown activity resulting from slower than expected sales.

In our third quarter conference call, I commented that the we had undertaken an array of initiatives to control the growth of expenses in the fourth quarter and 2008.

I'm pleased with the progress evident in our fourth quarter performance.

Our expense rate in the quarter remained essentially flat to last year.

This is particularly remarkable in light of our soft same-store sales and the de-leveraging impact of a shorter fiscal period this year.

The single biggest driver of this performance was very effective control of hourly payroll expense in our stores.

Our year-over-year improvement in this metric for the quarter was the best that we had have achieved in the past five years.

Results in our credit card operations during the fourth quarter remain strong with performance in line with the expectations we outlined at the end of the third quarter.

Receivables at the end of the quarter were 29% higher than year-end 2007.

This growth reflects many factors, including the impact of last summer's actions in which we offered higher limit Target Visa cards to another group of our better and best credit quality Target card guests.

In addition, our current receivables balance reflects the impact of an industry wide decline in payment rates that began in the third quarter.

Our write-off and delinquency metrics in the fourth quarter were somewhat higher than a year ago but were consistent with the expectations we have previously discussed.

At the bottom line for the fourth quarter the contribution to earnings before taxes from our credit card operations grew 12% from $122 million in 2006 to $137 million this year.

This profit growth is particularly satisfying in light of overall card industry dynamics and our shorter fiscal period in 2007.

Now let's turn our attention to our fourth quarter share repurchase activity.

Just 90 days ago we announced a new, $10 billion share repurchase authorization which replaced our prior program.

At the time we said that under the right combination of of business results, liquidity, and share price, that we would expect to complete half or more of this new program by the end of 2008.

We took two large steps toward this objective during the fourth quarter.

First, we purchased 26.5 million shares in the open market investing just under $1.5 billion.

This equates to a weighted average price of $54.64 per share.

Next, we executed a series of derivatives transactions which are highly likely to lead to significant share repurchase activity in 2008.

I think it's useful to describe our motivation to execute in this fashion and the range of potential outcomes that will follow as well.

In December and early January, our shares fell to about $50, which represented a compelling repurchase opportunity in our eyes.

Yet, we recognized that it would not the be fiscally responsible to aggressively pursue significant share repurchase activity until we had the proceeds in hand from our planned January bond offering.

The solution we devised was to enter into a series of derivative transactions, allowing us to control the repurchase of an incremental 30 million shares representing just under 4% of our total shares outstanding, while investing a small fraction of the cash required for an open market purchase of this size.

We executed this by buying well in the money call options, and we significantly reduced our cash investment by selling a like number of out of the money call options.

The result is that we paid a net option premium averaging $ 11 per share, and will likely exercise these options in April through June to acquire 30 million shares for additional payments averaging $39.68 per share.

The effect, if any, of the options we sold would be to increase our aggregate investment to an amount $6.40 per share below the then current stock price, but only if our share price exceeds about $57 at the respective exercise dates.

As we look forward to 2008, in our core retail operations , we're planning for sales growth to increase in the 8-9% range, reflecting continued contribution from new stores and an expected comparable store sales increase in the range of 2-3%.

This outlook explicitly assumes our sales growth will be much better in the second half of the year as we begin to cycle our softer sales results of the second half of 2007.

In light of this sales outlook, we think it's prudent to plan for a slight to modest operating margin rate decline in our core retail operations.

Driven by a similar degree of gross margin rate deterioration.

We're working very hard to mitigate or even eliminate this outcome, but we think it's more realistic in this environment to assume that we would experience continuing gross margin rate pressure as opposed to enjoying expanding gross margin rates.

However, very importantly, we have plans in place that should allow us to hold our growth in SG&A expenses to a high single digit percentage increase, similar to or slightly lower than our expected growth in sales.

Finally, given our assumed pace of sales growth, we expect to experience slight deleveraging in depreciation expense, which will naturally grow at low double digit percentage pace.

In our credit card operations in 2008, we expect to enjoy continued growth in contribution to our overall earnings before taxes.

Certainly, a more harsh scenario could develop, many of you have outlined that case for us in detail, we just don't believe that case is very likely.

As you know, our receivables balances grew at a very strong pace in the second half 2007 and, while the sequential growth is behind us, we will continue to enjoy the benefit of this growth on a year-over-year basis in the first half of 2008.

Our EBT yields will likely remain at industry leading levels , although not likely fully achieving the record levels we set in 2007, especially in the first half of the year.

We expect delinquency rates to remain stable throughout 2008 at recent levels, in the range of 4% and our net write-off as a percentage of average receivables are not likely to rise much above 7%.

In summary, both of these core risk metrics are highly likely to remain well within acceptable ranges for our profits and investment formulas to work well.

Finally, we expect to continue to create significant long term value by executing share repurchase under the program announced last November, and as stated at that time, I continue to expect that under the right combination of operating results, liquidity, and share price, we will have executed half or more of the $10 billion program by the end of 2008.

Today, I would only add the comment that in order to execute more than half of the program by year-end 2008, we would need to enjoy reasonably good operating results during the year.

At this time, the current median first call EPS estimates for Target envision $0.73 in the first quarter and $3.56 for the full year 2008.

These estimates lie within a reasonable range of potential outcomes in our view.

If achieved, these projections would represent a slight decline in the first quarter, as we cycle the strong start we achieved in the first quarter of 2007 and would represent about a 7% increase for the full year.

In summary, while we have clearly felt the impact of the economic slowdown in 2007, and we continue to expect a soft sales environment going into 2008, we remain confident in the strength of our underlying strategy and in our ability to get back to double digit percentage increases in EPS in a more typical economic environment.

Until that time, we remain focused on flawless execution, prudent control of expenses, thoughtful investment in our stores and systems, opportunistic share repurchase, and an unwillingness to make short-term decisions that would hamper our potential for success in the longer term.

Now, Gregg will provide a brief summary of current business trends and initiatives we're planning in

Thanks, Doug.

As Bob and Doug have just described, our 2007 financial performance did not meet our expectations and solid sales and earnings results in the first half of the year weakened considerably in the third and fourth quarters.

From a merchandise perspective, our sales in 2007 reflected a typical spectrum of relative performance.

We experienced strong comparable store sales growth in our food, health and wellness and other commodity categories as well as in both electronics and sporting goods.

In addition, we were pleased with the sales growth in 2007 in both our ladies apparel and newborn, infant, and toddler categories.

In contrast, toys had a particularly challenging year, especially in the second half of the year, as recall related activity affected the entire industry and sales of pre- recorded music and movies continued to decline in 2007.

Other weak categories for the year included jewelry and accessories, shoes, men's apparel, domestics and Christmas seasonal.

Throughout the year, we intensified our focus on driving more frequent guest visits, delivering great value and increasing are reliability across the chain.

We also continued to deliver on the Expect More half of our brand promise by providing a constant flow of new designs and innovation throughout the store.

We continue to improve our operational performance and speed to markets through innovation and investments in our infrastructure, supply chain, and technology.

In particular, we continue to strengthen our global sourcing capabilities, enabling us to shorten lead times and reduce costs while delivering trend right, quality merchandise.

We remained focused on product safety, launching new technology to improve the process of analyzing the testing and inspection results, for factories making our own brand products.

We also expanded our multi-stage testing process to more categories across the store, allowing testing of our own brand products earlier and throughout the product life cycle.

And, we remain dedicated to delivering a superior guest experience by delivering strong in stocks, effectively managing inventory and receipts, maintaining our highly competitive position in the marketplace, and by opening new stores and investing in our existing stores through remodel projects.

In 2008, we are diligently working to drive stronger top line growth by remaining focused on superior execution combined with continuous innovation in support of our brand.

As always, we will continue to make tactical adjustments in our content and pricing to address the significant near term challenges presented by the current economic environment, particularly in discretionary home and apparel categories.

However, we will not compromise our long term commitments to delight our guests, to deliver on our Expect More, Pay Less brand promise, and to continue to generate profitable market share growth and shareholder value.

In support of these goals, we recently launched Converse One Star apparel in men's and women's as well as a full footwear assortment.

This new brand delivers an elevated level of quality and detail at exceptional value with original and authentic styles.

We partnered with leading modern home company, Dwell Studio, to introduce Dwell Studio for Target.

Our exclusive infant and home assortments feature modern bedding, table top and infant furnishings.

We are reinventing our Fieldcrest assortment by increasing the value proposition through upgraded quality, fabric and exceptional prices.

Next month, we will expand our beauty offerings to include more natural and organic brands with nine lines from premier brands ranging from Dr.

Bonner's Magic Soaps to Giovanni Organic Cosmetics.

We will continue to develop partnerships with emerging designers and introduce fresh and unique design throughout the store such as our next Go International collection called Yogovich Hawk for Target by designers [Mela Yogovich] and Carmen Hawk , and accessories we will launch [Subversiv] for Target, an eclectic array of bracelets, earrings and necklaces at an exception value but renowned jewelry designer [Justin Gunta] We launched three styles of reusable shopping bags across the chain providing an eco-friendly option that our guests can feel good about using on their future visits to our stores.

And, we will continue to be our guests destination for seasonal businesses by offering a balance of unique trend right offerings and must have basics for every occasion and change of season.

To insure we are consistently and efficiently executing our business strategies, we remain focused on finding additional opportunities to leverage our world class sourcing, technology, and supply chain capabilities.

Our continued focus on improving our product design and development process is allowing us to enhance quality and reduce cycle times, while maintaining our committment to value.

In addition we are pursuing opportunities to reduce inventory while improving in stock levels, improving transit time and eliminating cost throughout our supply chain, both domestically and internationally.

In addition, we will continue to invest strategically in new stores and our distribution infrastructure.

In 2008, we expect to build approximately 116 new stores adding about 95 new locations net of relocations and closings.

Included in those store openings, in October we will open our first two general merchandise stores in Anchorage, Alaska, allowing us to serve more guests and expand our reach to this new market.

Our initial cycle of 2008 store openings scheduled in March includes 18 general merchandise stores and eight Super Target locations, and later in the year, we will open our first Target owned semi-automated food distribution center in Lake City, Florida.

By asserting greater control over-- of the perishable food component of our supply chain, we will improve our food margins, better manage freshness and enable continued rapid growth of Target's own brands in our food assortment.

Also, as Doug discussed earlier, we are keenly focused on controlling the growth of our expenses, particularly in light of our current slow pace of comparable store sales.

We are pleased with the progress we have made so far, but the evaluation of potential opportunities is far from complete.

We remain keenly focused on making smart decisions that eliminate unnecessary expense without compromising anything that makes Target a great place to shop and a great place to work.

While the current environment creates obvious challenges, our seasoned team, winning strategy, and culture of disciplined execution position us to emerge from the economic downturn even stronger than before.

Our experience shapes our decision as we maneuver through the every day challenges, but just as importantly, it gives us a perspective to remember who we need to be in the long run.

By continuing to deliver a consistent Target Brand shopping experience that fulfills our Expect More, Pay Less brand promise every day we are confident Target will deliver solid results in the year ahead had and remain relevant to our guests over time.

Now, Bob has a few concluding

As Gregg just explained we continue to find more ways to delight our guests and we're intently focused on elements of our business that will drive stronger financial performance in 2008, while maintaining our committment to provide continued long term profitable growth.

We believe that Target is well positioned to grow profitably in this economic environment and we feel confident that Target will continue to deliver substantial value for our shareholders over time.

That concludes our prepared remarks and 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 Jaffrey.

Yes, first question is for Doug.

In terms of the guidance that was helpful in terms of the bottom line outlook and several of the other metrics.

Could we get anymore specific on how you're thinking about that balance of comp gains between the first half and the second half.

You said two to three for the year.

Curious on how that will build through the year and what would be the drivers, is it going to be more of a transaction size versus number of transactions at this point ?

Couple comments to put some color around that.

I think you can quite usefully model this by taking a careful look at our sales pace in '07.

The sales strength will build throughout the year and will likely be much stronger particularly in the fourth quarter, as we cycle against a much weaker numbers in the fourth quarter of 2007, so the base of performance is what's behind our comments, not some kind of macro-economic judgment call.

As to the makeup of our same-store sales performance between same-store traffic and growth in average ticket, I think that 2008 will continue a string of many many years, where the bulk of our improvement in same-store sales will likely be made up from growth in average ticket as opposed to same-store transaction counts or traffic.

Okay, so Doug, you're not making any assumptions in your plan for a rebound of traffic in the second half of the year like we've heard from some other retailers?

Well, again, traffic was quite weak in the fourth quarter , so I would expect traffic to be much improved in Q4, '08 than the trends going into Q4, again having everything to do with the 2007

Okay, thank you, and then just one for Gregg.

In terms of your sourcing initiatives, I know you've discussed recently your efforts in hard lines, you've done a great job in soft lines, you're going to move to hard lines and look for opportunities for margin expansion there through TSS.

Can you give us an update on that and what the margin implication may be for '08?

Well we're not expecting any margin expansion in '08.

as you know, we're fairly fully penetrated in apparel and we're reasonably penetrated now in the bulk of hard lines categories particularly in home, so the margin expansion gains in those categories, we benefited from over the last two or three years I would say.

Okay, so any other sourcing initiatives on the horizon that you would highlight?

Well, just it will be a continuation of our efforts to improve our cycle times and get greater control of raw materials and the sourcing process, and do what we can to mitigate costs, due to raw material inputs, currency issues, elimination of subsides and things like that.

We are looking for margin expansion there but that will be offset by adverse mix as we continue to expect the lower margin commodities to continue to grow at a higher rate.

Okay, great.

Thank you.

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

Thanks, good morning.

Could you, Doug or Gregg, could you speak to the composition of inventory levels are a bit higher than we had expected and how long do you expect it will take to align your receipts with the comp trends you spoke to?

Well our square footage is up 8% year-over-year.

Our revenues on a constant period basis are up about 8%, and our inventories are up 8%, so I'm a little confused by the question.

Just on the aging, I mean, what's the composition?

Is it more-- is it some of the home products, is it the apparel product?

Can you give us a little bit of sense for the composition?

I understand the numbers.

Yeah, our composition is excellent right now.

We turn the corner into '08 in very good shape and we have been transitioning to all fresh and current assortments in both apparel, home and other hard lines categories so we feel really good about where we are today and the first month of the new fiscal year.

Okay, great.

And then Doug, just to clarify on the call options.

We received a few calls this morning.

The call options that you did purchase are not included in your fully diluted share count, correct, because that would be anti-dilutive (sound interruption) that's the case.

It isn't they're anti-dilutive, it's that they haven't been exercised.

So there's no impact on our current share count or on the weighted average share count for the periods just ended of this activity.

It will lead to-- in a highly likely case, it will lead to significant share repurchase in April, May, and June, and that's the point in time where these transactions would reduce our share count.

Gotcha, and then last question when you look at '08 could you speak to your assumptions for inflation that are embedded in the outlook that you just provided, particularly in the home area?

We don't have a precise and explicit inflation assumption, but I would observe that in the year just ended, we actually experienced modest amount of net deflation in our top line.

About 2%.

Certainly there are some categories that are inflating, food products come to mind in particular, but as you know, we don't sell a lot of food compared to some of our competitors and that food inflation was more than amply offset by deflation in hard lines categories, I think electronics in particular.

Looking into '08, I believe that this equation is reasonably neutral where we continue to have some significant inflation in some categories, but on an overall basis, I don't think it will be meaningful to our aggregate sales picture.

Okay, and Gregg, would zero to 4% inflation rate in apparel seem about right?

Relative to a year ago?

I would say that sounds about right.

We have-- we're seeing some pressure there, but our best estimates at this point in time would say you're probably in the right range with more of the pressure coming in the second half of the year than in the first half of the year.

Sounds right.

Thanks.

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

All right, thanks.

Just a quick one, Doug, what should we expect CapEx to be this year and then a follow-up on the SG&A improvements.

We expect CapEx to increase modestly from the year just ended, perhaps in the range of of $4.5 billion plus or minus, and could you be more particular on your SG&A question?

Sure, the follow-up on that the is given the sharpness of the decline, in the sales and in the traffic in the fourth quarter, you're able to keep SG&A pretty flat.

How did you actually do that and was there anything else there that really helped SG&A because I guess going forward that will be a key issue to how your margins progress so just describe how that was done?

Well the single biggest factor, of course, is store hourly payroll and I think our stores leadership teams deserve at the least two or three gold stars for this kind of performance, was particularly exciting to me, in light of the fact that the cycling the extra week naturally de-leveraged this rate, and in addition, much harder to accomplish in a softer sales environment as you know, but we saw this one coming.

We've been talking about this and planning for this for quite some time, and I think the performance in our store hourly labor productivity in Q4 is a great leading indicator of what's likely to happen in 2008 as well.

Certainly, there were other factors in the expense picture but this is the single biggest factor.

In terms of other factors, we have a pay for performance system here, and it responded as you would expect it should, and there for, we benefited year-over-year in incentive compensation as a percent of sales and in stock based compensation as a percent of sales.

I'd like to point out in store productivity we've been making major investments over a period of time in both logistics and systems technology, and so we were able to do this without impacting the guest experience and still able to get people through the check lanes and so we project that this will continue the same way as we move throughout 2008.

Great, thanks.

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

Thank you.

Could you give us an give us an update on target.com and what the growth rate was for that business in '07?

And then my second question is with regard to home and maybe Global Bizarre, specifically or just anything generally that you might be doing that's new in that area or perhaps, I don't know if you might be taking a look at pricing across some of the home categories for 08, thank you.

Our target.com business was very strong last year and to a certain extent followed the same patterns of the store based business.

It was stronger in the first half of the year and as we got into the later half of Q3 and certainly into Q4, we saw the sales in dot-com soften like it did in the store in total but overall they had an exceptionally strong year and delivered higher than expected level of profitability.

With regards to your question in the Home categories, Global Bizarre, which just finished up, did very well for us.

We were pleased with the performance this year.

We met our sales goals and our profit goals and our sell-throughs were excellent.

Other changes that we've been making have been to adjust to the macro-economic environment so we've been more focused on our good and our better categories and strengthening our assortment there and insuring that we're communicating our values more prominently on end caps and in our marketing vehicles.

We've been updating our own brands in those areas.

We've focused on new initiatives like the Fieldcrest reinvention where we lowered some price points, added quality, and some style and some better fabrications in those area so it's an ongoing evolution of trying to deliver great quality, superior value, and terrific in stocks.

Thank you.

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

Hi, good morning.

Gregg, following up on your last comment there, could you address the trends you're seeing across that good, better, best spectrum, and can I infer from your comment that you've seen perhaps a little more weakness in the best categories?

Thanks.

Yeah, actually, we're seeing very strong results in the good category and surprisingly strong results in the best category and there's some parts of the middle where we're seeing weakness, so where we are very clear on what the value proposition is, we're seeing good sales results.

So we're slightly surprised that the best is doing as well as it is and that some of the better parts of our assertment are showing the weaknesses.

Okay, I joined the call a little bit late.

I don't know if you addressed it at the outset but could you , Doug or anyone else, talk about the credit card strategic review, either that process or the feedback.

And then also, any thoughts you could share about your real estate portfolio?

Are there opportunities as you look at ownership and alternative potential value creating transactions?

First on the credit card front, as you know, we disclosed in December that this review was taking a bit longer than we had initially planned, and that we expect to be able to have something to say here in the first calendar quarter of 2008.

We have not disclosed anything at this point and from that, you can clearly infer that we remain actively engaged in trying to put together a transaction that the would make sense for us and for a new owner of some, or all, of our receivables.

So clearly, this is a very live issue today and one where there clearly is no assurance of an outcome of the sale of some or all of the receivables, but one in which I remain personally keenly interested in trying to engineer something that the makes sense for both parties.

With respect to your real estate question.

As you know, we entertain a variety of proposals on all kinds of ideas designed around the theme of generating shareholder value.

At the moment, I do not know of any transaction related to our real estate that would accomplish that objective, but we would certainly take a look at something if you have anything in mind, by all means you should contact us.

Thank you.

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

Hi, good morning.

Two questions, first for Gregg.

Can you maybe comment a little bit on the current trends in the competitive environment that you're seeing out there.

And the second question for Doug on the credit side.

When you talked about delinquencies and the allowances in charge-offs can you maybe just give us a little bit more flavor for what your expectation is for the bad debt provisions throughout 2008?

With regards to the competitive environment we have not seen a material change in the environment.

It remains highly competitive with Wal-Mart being a price leader and we maintain our position of being competitively priced with them on like and identical items in local markets so that position hasn't changed.

So overall, I would just describe it as pretty much rational and consistent to where it's been in the past.

Now, we are facing more price, more cost inputs and so we are trying to pass along those price increases in the marketplace so we will wait to see how those shake out over the next 60 or 90 days, but overall, we think the environment is fairly consistent to what it's been in the past.

Bob, I'll faithfully answer your question regarding trends and bad debt expense, but I feel compelled to put a little color around it before we talk about that.

I mentioned earlier in my remarks that we expect continued growth in contribution to profit to earnings before taxes after financing costs and all costs including bad debt expense for the year in 2008, singling out bad debt expense, of course, it's on the rise.

It rose in the fourth quarter and I would expect for it to remain relatively high on a year-over-year basis, at least through the front half of 2008.

Nonetheless, we believe we can accommodate that increase in that one cost element through a combination of balance growth and yield management.

Great, thank you very much.

Your next question comes from the line of Neil Currie with UBS.

Good morning, thank you for taking my question.

The first question is about your assumptions on the economy for this year.

Have you made any assumptions about what type of slowdown this is, how long it will last, and whether we will get back to the quite high sales environment or quite robust sales environment we've had over the past couple of years.

And then secondly, I'd like to ask a question on rising costs on aggregates and steel, whether that is impacting your cost to build stores or whether that's being offset by factors like lower land prices, lower labor costs, and what the net impact might be.

First, regarding the general economy as Doug mentioned earlier, we are not making any major assumptions.

We're primarily basing our plans on the fact that our business slowed down somewhat in the third quarter of this last year and slowed down more in the fourth quarter, and so if there is an economic resurgence, that the would be an upside that we are not anticipating but obviously that would be very welcome.

As far as rising costs in aggregate and steel, there are some increases there, most of those we are offsetting with other efficiencies as we build our new stores so we are not seeing a major overall impact on our costs, it could be a little bit of increase but it's not hugely significant.

In particular to your question about land costs we have not seen any decrease in the values of the kinds of real estate that would be suitable to build new Target stores.

Thank you.

Your next question comes from the line of Virginia Genereux with Merrill Lynch.

Thank you, and good morning.

Doug, if I can ask you about the margin outlook a little bit , I think you said slight to modest operating margin rate decline and most of that gross margin driven.

So then I guess-- can I ask, the mix shift pressure and the --- any possible sort of clearance, I guess you feel that the mix shift pressure sort of moderated this quarter, was 60 bips in October, 30 bips this quarter, is your assumption it sort of stays at the 30 bips and do you think you can fully offset that in the back half?

Like your comp guidance, do you assume that margins sort of are up year-over-year in the second

Well first of all, as you know, Virginia, we have averaged 20 or 25 basis points of pressure on gross margin rate each year for the last decade, so the fourth quarter experience is a little bit higher than average but by no means an outlier as a data point.

It was the third quarter and only the third quarter of 2007 that was an outlier data point on this particular metric.

So as we look forward, we expect throughout the year, continued pressure on gross margin rates due to the faster growth of our lower margin commodity and consumable categories.

That's business as usual at Target.

As usual, we also have a wide variety of initiatives designed to try to offset some of that pressure.

What I intended to convey in my earlier comments was that we don't think it's prudent to plan for those offsets to get us back to neutral or positive.

We think it's appropriate in our thinking to plan for some slight or modest gross margin rate deterioration while we continue to work like dogs to try to mitigate it or eliminate it.

And Doug, again, can you just remind us today, given the input sort of cost environment, the contributors, the key levers of improving or maintaining the gross margins are what these days?

Gregg, do you want to tackle that the one?

Well it would be a rational competitive marketplace, that accepts the price increases that we're experiencing and it's managing our business appropriately so that we have our sales expectations set appropriately in our apparel and our seasonal categories so we don't take excess markdowns as we go through a tougher Spring season.

We believe we've got our business appropriately planned at the right level, so we really don't expect to see deteriorating gross margin rates due to higher markdown levels in the Spring.

Great and then just secondly, Doug if I may, on share re-purchase and the option contract, you bought back 25 million shares in the fourth quarter.

Is it fair to say consistent with your communication that you could utilize more than half the $10 billion authorization that you're going to augment now that you've raised this $4 billion that you'll augment the likely option exercise with additional share re-purchase?

Yes, to be precise, the options that we currently hold give us the right to purchase 30 million shares, exactly 30 million shares, and in addition to the likelihood of exercising those options, it is highly likely, virtually certain, that we will execute yet more share re-purchase activity in the open market during 2008.

That's great, thank you, all.

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

Good morning.

I have two questions, actually.

I wonder if you could comment specifically about the massive price action we've seen at Wal-Mart, where it seems their implementation on price leadership has changed a little bit and I wonder how your business is doing during those times of massive price action, for example, during Back to School, Holidays and Super Bowl time.

And also, I was wondering if you could comment on what might be the replacement from (inaudible) going forward?

Sure, with regards to-- to use your term, massive price actions, we wouldn't characterize Wal-Mart's marketing campaign of lower prices as a massive price action, or really any change to their normal cadence or rhythm of going to market.

They fairly typically have reduced prices and initiated roll backs to the tunes of a billion dollars per year as they enter seasonal time frames like Easter and back-to-school, back to college and fourth quarter as we get into the holiday season.

So perhaps they're doing a better job of marketing that message, but in all practicality what the we're observing in marketplace, is no real change in terms of the number of items they're marking down or rolling back, or the depth of those discounts.

As it relates to [Isaac Miserahe], we've enjoyed a terrific five year relationship with Isaac, and I think that you all are over representing what it means at Target.

It's approximately 3% of our apparel and accessories business, and we really view his strength as a niche contemporary collection, and any efforts that we have had to move beyond that work unsuccessful, at best and so when the contract became renewable, we had the opportunity to-- he had the opportunity to either broaden his involvement with an apparel company and we looked-- we took this as an opportunity to move beyond this partnership because we did not want to pass on higher royalty rates to a small, collection business within the stores.

So, we believe it's best for both parties and we're focused on our Go International and our emerging designer strategy and we very easily can replace these four or five racks on our apparel floor, in the small section that we had had in accessories and footwear, with these new, emerging designers which frankly have been very, very successful and we've got a terrific portfolio of new, emerging designers coming on stream this year which we will share with you as the year progress.

Uta, I would add to Gregg's comments regarding Wal-Mart that several of you on this call reached out to me last week after Wal-Mart's fourth quarter and full year release, seeking my comments on some facts that ,if I have them straight,, were passed along by Wal-Mart.

I believe I was told that Wal-Mart's gross margin rate actually increased meaningfully it in the fourth quarter and separately, was told that it's a fact that Wal-Mart's advertising in the fourth quarter-- advertising and marketing expense increased faster than sales.

If those are facts, they clearly are not consistent with the notion of some kind of massive price action.

Thank you.

Your next question comes from the line of Dan Binder with Jeffries.

Hi, good morning.

Two questions.

I was just wondering if you can describe to us a little bit about the control that you're putting in place to maintain the consistency and the store experience while you're cutting the payroll to adjust to the environment.

And then secondly, on the credit card, maybe to address an earlier question, I was wondering, Doug, if you could give us an idea of what the reserve as a percentage of period and receivables should look like as we trend through the next year.

In terms of consistency of store experience, as I mentioned, and we have made major investments in logistics and distribution, we have better flow of merchandise to our stores, we have better technology in terms of scheduling our people, there are a wide array of things that allow us to pull-down those hours and still deliver a branded experience for our guests and get them through the check lanes.

In terms of your question about looking forward on the allowances as a percentage of receivables, here at year-end of course it's 6.6%.

There is some seasonality to that figure, but I would not expect it to change meaningfully as we move through 2008, with the sole exception of normal seasonality that makes some quarters naturally higher and lower than others.

Would you-- would you place a range of let's say 6.5 to 7%, does that seem reasonable?

Well, part of what you're asking to predict is what will the credit quality of the portfolio look like 12 months out.

And clearly, looking across the credit card industry, a lot of people misjudged that one when viewed from 12 months ago, so I think the range needs to be somewhat wider than what you've just talked about, but generally centered around our current experience.

Okay, and then finally on the receivables growth, how should we think about that receivables growth, and when we move beyond the first half of this year.

Does it go back to perhaps a rate that's more in line with sales and what are you doing to change that behavior, if anything?

Well, I mentioned in my earlier remarks that the significant growth in a sequential manner is behind us, that means that as we move through the front half of 2008, the portfolio is not going to be growing even in line with sales on a sequential basis, but year-over-year, at least for the front half of the year, is virtually certain to exhibit growth in average receivables sharply ahead of our pace of sales growth, becomes a bit more speculative as to what might happen in the back half of the year because, as you know, one of the key drivers this year is that we converted, or offered to our guests the option to convert, a very substantial number of our Target guest cards to having the higher credit limits and greater utility of Visa cards.

We'll make the judgment call later in 2008 as to whether we'll have a similar set of accounts or not, and if we do not, then year-over-year, period end, receivables growth would likely be slower than sales.

Meaning that year-end 2008 receivables might not even increase as much as the 8 or 9% sales growth that I predicted earlier.

So it all hangs in the balance of what we elect to do in 2008 in terms of making that offer to existing Target card guests.

How much of that receivables growth in recent quarters has been driven by the product offering versus, let's say, existing card holders just accessing greater levels of credit or not paying down the receivables as quickly?

Meaningful contribution from both and there's also a cross product because the behavior of the accounts that were newly converted was to run out their open to buy to a greater extent much more quickly than similar cohorts of converted accounts in the past.

So there's a macro-economic factor at play here that effected the balance growth in both of those categories.

Great, thanks for the color.

Uh-huh.

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

Thank you.

I was just hoping could you provide comments of the owned food DC in Florida.

Could you just update your thoughts in terms of self-distribution and food and the time frame, margin implications and perhaps the pace of private label penetration there?

Yeah, we are evolving our supply chain network in food and as we've discussed, we are in the process right now of converting our first super value food facility to a Target dedicated facility, we'll open up Lake City in the balance of the year.

We will convert another super value facility in the early part of '09 and then open a second Target owned facility in the later half of '09.

So we will have a hybrid network for the foreseeable future where we have both a dependence on our own facilities and a reliance on both super value and our other wholesaler CNS.

So I would expect that over the next three or four years this would continue to evolve and it's unlikely that we would handle all of our own perishable food distribution within a time frame earlier than four or five years.

We believe that there is some gross margin upside in this type of conversion and so far, we are experiencing the levels of gross margin upside that we anticipated and expected when we made this investment in additional capital in our own facilities, so we're seeing the right kinds of offset to make the economics work.

We talked about adding about 2-300 basis points of owned brand food penetration on a per annual basis and that's exactly what we experienced in '07 where we moved from about 15 or so percent to just over 18% with the year-ended and we will be into the 21% -ish range by the end of '08 so we remain committed to adding 2 to 300 basis points per annum.

Great, Gregg, and this hybrid network shouldn't accelerate the pace of that penetration?

No.

It won't accelerate the pace of our penetration at all.

It's, we think 2 to 300% is the appropriate level, and it's more dependent on how fast we initiate our own network versus using an outside third party facility.

The outside third party facilities are also very capable of carrying our owned brand products so that really isn't going to be different.

Thank you.

Your next question comes from the line of Michael Exstein with Credit Suisse.

Good morning, everyone.

Two quick questions for you.

One is, you have begun to emphasize, it appears, large screen TV's and so fourth and how much is that impacting your margins so what are your plans for that category.

And secondly, traditionally it's been a very tough balance for you all to balance between the fashion image and the price image, and sort of wondering what your surveys are telling you about your pricing image with the customer whether you're getting more traction with it this go around in the slowdown or not.

Thank you so much.

Our research says that our pricing image is pretty much the same and you have to recognize that there are some differences in certain categories, commodities, consumables obviously the guests are looking for prices that are right on Wal-Mart's like or similar items, as Gregg had said, but in other categories because we offer more fashion and more quality, the costs are higher, so guests feel that yes, we are higher priced in categories like ready-to-wear but they strongly prefer to shop there because they recognize the improved fashion and quality.

With regards to your question on LCD or flat-panel television.

We're really not expecting a change in our gross margin rates because what essentially this is, is a conversion from analog to digital technology, and the gross margin differential in both the analog and flat-panel LCD, plasma technology is about the same when you fully allocate all of the expenses and the competitive position of the marketplace.

So there isn't going to be a material change there.

Thanks a lot.

Your next question comes from the line of [Joe Feldman, with Telsey Advisory].

Hi, guys, just a couple of quick ones.

Can you comment on the regional trends through the quarter and any changes that you've seen throughout the quarter and we've been hearing more obviously Florida, California have been weak but we've heard it's really spread throughout the country and wondering if you're seeing that as well?

Well obviously the fourth quarter was softer than the third quarter so on a macro basis that's true.

But there's certain parts of California sort of Central and Southern, and Florida that would stand out at our minds as generally the weakest in the overall country.

Got it, and then also, with regard to the call option that you guys are doing, or options, are there any tax benefits to doing that versus just simple open market purchases?

No.

These are transactions in our own equity and therefore, there are no income tax implications to these transactions.

This was simply a method to be able to capture the terrific benefits of share re-purchase at a moment in time where we thought it would be imprudent to devote a $1.5 billion of capital because of liquidity considerations.

We had the ability to access the capital, but it would have re-balanced our risks in a way that we think it would be inappropriate for an issuer with the kinds of credit ratings and profile that we have.

Got it, and then one last one.

We had heard that you guys are going to start maybe testing some new prototypes, maybe later this year or even in '09 and we're just wondering if you could make any comment on that and what might be different about the stores that the you're looking towards?

We update our existing prototypes on an ongoing basis.

We have evolutionary change in virtually every cycle of new stores.

And then about every fifth year, we have a more substantive change in the last major prototype initiative was in 2004, so we've been focused on our prototype evolution for end of this year and early '09 as we're just essentially calling it our '09 format.

So it will be more evolutionary in nature compared to our '04 format change and essentially, the difference is, again in slightly enhanced food presentation, we're making some architectural element changes, some visual element changes, but overall, I would just basically tell you it will be a better version of the existing formats that you see today.

And we have a chance for one more question from other Analyst before we conclude the conference call.

Your final question comes from the line of Todd Slater with Lazard Capital Markets.

As to what thoughts you might have or be giving to the concept of any international penetration, thanks.

As we've mentioned in the past, we still have an outstanding ability to well over double our sales in the U.S.

and potentially virtually double our square footage, so we have very, very strong growth available here.

We continue to monitor in international situations, and we feel we will be there at some point.

One could also look at the international situation and say that as Target is more focused on better educated and more affluent higher demographic level guests that it would serve us well to be into some of these major emerging markets as they develop a stronger middle and upper middle class.

So, foreseeable future, still here but monitoring externally eventually will be there.

Thank you.

That concludes Target's fourth quarter and year-end 2007 earnings conference call and thank you all for your participation.

Ladies and Gentlemen, this concludes today's conference call.

You may now disconnect.