目標百貨 (TGT) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Target Corporation's third quarter 2008 earnings release conference call.

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

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

(OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded Monday, November 17, 2008.

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

Gregg Steinhafel, President and Chief Executive Officer.

Please go ahead, sir.

Good morning and welcome to our 2008 third quarter earnings conference call.

This morning I will briefly discuss our strategy and performance in the context of an increasingly challenging economic environment, then Doug Scovanner, Executive Vice President and Chief Financial Officer will share important aspects of our 2008 third quarter financial results and describe our outlook for the remainder of the year.

Next Kathy Tesija, our Executive Vice President , Merchandising, will discuss key merchandising initiatives for the upcoming holiday season.

And finally we will open the phone lines for a question and answer session.

The increasing financial challenges and economic uncertainties facing American households continue to pressure our performance during the third quarter.

Our slower pace of topline growth in our retail segment and subsequently higher write offs and related reserve activity in our credit card, segment resulted in disappointing earnings in the quarter.

However, despite our soft sales we were pleased with the operating profit performance in our retail segment as we continued to take a very disciplined approach to the management of our inventory and expenses.

While we are not pleased with our overall financial performance and we are keenly focused on improving our near term results, we remain committed to our fundamental strategy and to managing our business for the intermediate and long-term.

As the environment continues to deteriorate and consumer spending, especially in discretionary categories, continues to contract, we are adjusting tactics to ensure that Target remains a price leader in the market and aggressively pursue marketshare gain opportunities.

Our dedicated team is working hard to deliver compelling reasons for our guests to shop at Target in these difficult times.

We are keenly focused on offering exceptional value, presenting a bold assortment of holiday gifts, most wanted items and well-designed basic and fashion merchandise and ensuring that our guests receive a superior experience in every store, every day.

We recognize that it is essential for us to effectively communicate our unique value proposition more than ever before.

Target's ability to deliver newness, great design and quality is only half of the story.

Our great prices on every day basics and fashion items are the critical other half and we are working to ensure consumers understand that the two are not mutually exclusive.

Their synergy is what makes us Target and unlike any other retailer.

To deliver profitable performance in this environment we have carefully reviewed and edited our merchandise assortments to ensure that our content is relevant for our guests, reinforced our focus on in-stock reliability and superior guest service, thoughtfully controlled the growth of our expenses, repositioned our in-store signing and holiday marketing campaign to clearly convey our commitment to value, reasserting our commitment to being a low price leader in the market and strategically invested our capital including suspension of our -- of substantially all of our share repurchase to retain our strong investment grade credit rating.

With a strong emphasis on delivering exceptional value, we believe that Target, Wal-Mart and Costco will be the big winners this holiday season.

In addition, we recognize that some of our other retail competitors may not emerge intact from the current economic turmoil.

While we do not celebrate the misfortune of others in our industry, we believe that a smaller competitive set would be to our benefit when the economy improves.

In addition, we remain confident in our strategy and financial strength and we believe that our dedicated team, disciplined execution, unique blend of differentiation and value and our strategic deployment of capital respectively positions us for long-term profitable growth.

Now, Doug will describe our third quarter results and outlook for the remainder of

Thanks, Gregg.

As a reminder we are joined on this conference call by investors and others who are listening to our comments today live via webcast.

Following our prepared remarks we will conduct a question a Q&A session and [John Holbert] 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 plan to cover three topics.

First, I'll review key aspects of or third quarter performance in our retail and credit card segments.

Next, I'll discuss the proactive steps we're taking to ensure thoughtful deployment of our capital in this environment including reductions in our pace of capital investment and our decision to temporarily suspend substantially all of our share repurchase activity, and finally, I'll share an updated outlook for our business through the remainder of the year.

In our second quarter conference call, I stated that the primary challenge to our near term earnings performance was the pace of sales in our retail segment and that our second largest challenge was the write-off rate on our receivables portfolio.

Not only does that statement remain true today, our results in the third quarter also reflect the fact that both of these metrics were more challenging than we expected as we entered the quarter.

In our retail segment, our comparable store sales fell 3.3% in the quarter.

This decline, combined with the contribution from new stores, led to total sales growth of only 1.7%.

This performance is meaningfully slower than the already soft sales performance we had experienced through the first two quarters of the year and below the expectation that we laid out 90 days ago.

Against the backdrop of this weaker sales performance our retail segment EBIT margin rate was stronger than expected driven by strong gross margin rate performance.

Specifically our third quarter gross margin rate improved 52 basis points over last year.

This result was driven by rate improvements within categories which were only partially offset by the mix impact of faster sales in our lower margin consumable and commodity categories.

In isolation, this mix impact was between 40 and 50 basis points in the quarter.

As is typically the case, category gross margin rate improvement was driven partly by the array of long-term initiatives that Kathy and her team have in place to drive margin performance and was in part the result of a variety of timing issues that lead to variability and in this case favorability, in our quarterly results.

For example, in the quarter, we enjoyed a 10 basis point favorable gross margin impact related to Workers' Compensation expense in our supply chain.

Our retail SG&A expense rate was even with last year's rate while high performance in this metric is not as strong as we experienced in the first six months of the year, it continues to reflect very disciplined control of the growth in expenses only 1.7% higher than a year ago against the backdrop of unexpectedly soft sales performance.

We continue to see strong productivity improvements in our stores which are being partially offset by challenges in other store expenses such as utilities.

Measured against last year we had a number of generally offsetting timing issues recorded in SG&A expense in the quarter.

Examples are as varied as losses from hurricane damage, and the P&L benefits of performance based incentive compensation reversals.

Just as the pace of our sales continues to be the number one challenge in our retail segment, write-offs and the related needs to build appropriate reserves, continues the number one challenge in our credit card segment.

Consistent with other issuers of credit cards, we saw continued deterioration in delinquency and write off performance during the quarter.

This led to higher than expected bad debt expense both due to write offs within the period as well as in addition to our reserve of over $100 million in the quarter to accommodate anticipated write-offs in future periods.

As ,our year-over-year receivables growth continues to moderate from prior quarters as we annualize the impact of last year's product change, with average gross receivables growing just under 20% and period end gross receivables growing less than 15% in the quarter.

On a sequential basis our quarter end gross receivables were only 1.4% higher than our position 90 days ago.

In part, this is the result of very tight risk management controls and represents the net impact of both lower new charge activity and lower payments.

We continue to tighten all aspects of portfolio underwriting, granting fewer new accounts with lower average credit lines, aggressively reducing open credit lines on many existing accounts and pursuing more proactive collections activities.

We know that these tightening activities will have a meaningful impact on future portfolio risk metrics and write off rates but this impact will take place overtime.

With write off rates likely continuing to increase modestly across the next few quarters.

Next, let's turn our attention to our deployment of capital resources.

Focusing on both our reinvestment of capital within our business and the execution of our share repurchase program.

We believe it makes sense to continue to more carefully scrutinize each decision we make whether related to new stores or to any other capital we invest in our business in light of macro economic condition.

Additionally as we have previously discussed, the pace of execution of our share repurchase program continues to be governed by the same factors we have previously outlined, specifically our liquidity, our share price and our business results.

In context this means that we intend to continue to pursue thoughtful ways to reduce and refine our future capital investment program.

It also means that we've decided it's prudent to curtail substantially all of our share repurchase activity for now.

Importantly, these actions are likely to the reduce our applications of cash even more than the potential reductions in cash generated by our two business segments.

This remains a fluid equation but to give you some sense of magnitude, I think our outlook for capital investment in 2009 is now more likely to be closer to $3 billion, plus or minus, than to our previous estimate of nearly $4 billion.

A substantial portion of this change is our reduced estimate of investment in 2009 in support of stores that would have opened in 2010 and beyond.

In addition, we continue to carefully review and will likely reduce the number of new stores we expect to open in our October cycle next year.

Now, let's turn to our expectations for the holiday season and the remainder of the year.

As we stated previously, we continue to plan our business very conservatively in light of the unprecedented economic challenges in the current environment.

Recent comparable store sales performance has been volatile.

For the third quarter it was in the minus three range.

October, about minus five.

And our outlook for November was a range from minus 6% to minus 9%.

Combine these results with our meaningfully different third and fourth quarter performance in 2007, add to that a different holiday calendar this year and it becomes clear that it's difficult to create a credible single point estimate.

What is clear is that our fourth quarter sales performance, consistent with any of these trends above, would put pressure on our gross margin and expense rates leading to a moderate decline in our operating margin rates from the fourth quarter of 2007.

In the credit card segment we expect a typical seasonal build in receivables during the fourth quarter and we expect year-over-year growth to continue to moderate ending the year with receivables about 10% higher than the end of 2007.

We expect our quarterly write off rate to increase modestly from our most recent experience.

Perhaps into the annualized range of 10% to 11%.

This would result in a write-off rate for the full year slightly above 9% consistent with the outlook we shared with you last month.

In contrast to write off expectations, our key overall measure of portfolio performance spread to LIBOR and our key measure at the segment level pretax ROIC, should stabilize around or slightly above their third quarter levels.

This expectation reflects the anticipated beneficial impact of our recent terms changes.

Pulling these two segment discussions together, the largest variable remains the question of same store sales.

For example, if we were to experience a negative mid single-digit decline in comparable store sales in the fourth quarter, that would likely reduce fourth quarter EPS in the range of $0.90 to $1.00.

While we are working in ernest to drive stronger performance, it doesn't seem prudent to reflect stronger assumptions in an outlook at this time.

Obviously given the volatility of recent trends, it's possible that sales and operating performance could lead to results that would fall short of these figures.

Before I turn the call over to Kathy, I want to provide a brief update on our analysis related to the real estate actions advocated by Pershing Square.

Together with our outside advisors, we continue to review the assumptions underlying Pershing Squares ideas.

This analysis is still in process and no decision has been made.

And we'll share our conclusions once the analysis is complete.

In this spirit, we're focused in this call today on our results and outlook.

There will be plenty of time to discuss our views on real estate in the near future.

Now, Kathy will share some of the key merchandising initiatives for the holiday season.

Kathy?

Thanks, Doug.

As we head into our most important season in the year, our sales performance and the current economic climate continues to be our number one challenge.

We know that many of our guests are facing significant economic difficulties and are curtailing their spending especially on more discretionary items.

As always, our goal is to respond to what our guests tell us they want and need and to maintain our relevance in this tough environment.

To meet this challenge, we remain keenly focused on providing differentiated assortments that offer quality design at great prices, exceptionally low prices on national brands and an even better value on our own brands.

Our every day "in-ad" prices are extremely competitive with Wal-Mart and other specialty retailers who lead their categories.

We have gained market share in every quarter this year and we are confident we will gain market share again in the fourth quarter.

This holiday, season we're focused on giving our guests compelling reasons to visit our stores and presenting exceptional value with bold price points on ends caps and market leading value offering in our circular.

In toys, electronics and entertainment ,three categories which account for roughly one-third of our total holiday sales, we are focused on having the right mix of must have items and differentiated assortments at exceptional values.

We will have great gift giving items such as BlueRay DVD players and movies, digital photo frames and an array of Apple products including the iPod Touch, Nano and Shuffle.

Our social and active gaming offerings like Rock Band II, Guitar Hero four and Wii Fit, also make great gifts.

We are maximizing this rapidly growing trend that is being driven by women and kids , a core guest segment of ours.

And in toys we have all of the must have items like Elmo Live, (Fox Gun) and a wide assortment of Legos including the Lego Star Wars and Indiana Jones collection.

We carry toys at aggressively low price points that fit every budget whether our guests need stocking stuffers or gifts for friends and family.

Our grocery offering drives traffic to our store and allows us to be our guests one stop shop for holiday entertaining and gift giving.

Whether its the distinctive seasonal flavors of our Archer Farms brand, the value and reliability of our market pantry assortment or the innovative offering within our Choxie brand chocolates, our own brand foods deliver exceptional freshness and quality at surprisingly affordable prices.

Gift cards are an important part of our holiday offering and this year we will feature new holiday gift cards including a holiday jukebox that plays three songs, a digital camera gift card and a gift card filled with M&M's, which we will promote as fun and convenient gift options for guests.

And at Target.com, our new "deal of the day" offering features six value items every day at incredible prices for only 24 hours while quantities last.

Most items cannot be found in our stores and the promotional pricing can only be found at Target.com.

While we are confident that guests will be attracted to do our merchandise content and value proposition during the holiday season, we are carefully managing our merchandise inventories to simultaneously drive sales, reduce mark-down risk and maintain reliable in-stocks for our guests.

We will achieve these priorities by ensuring frequency category items like food and commodities are always in stock and by signing receipts more conservatively for fashion and seasonal merchandise.

To ensure reliable in-stocks and drive profitability we are continuing to expand our merchandise segmentation strategy.

This strategy customizes the assortments in each category, the timing, space and how its merchandised in each store based on volume, demographics and local preferences.

The flexibility of our "expect more, pay less" strategic positioning, will continue to drive our competitive advantage overtime.

By bringing constant units into our stores, leading the market on prices and managing our inventory with discipline, we will continue to gain market share in this economic environment and drive sales and profit during the holiday season.

Now, Gregg will provide some final comments.

The challenges facing the US and global economies are unprecedented and the impact on American consumers is clearly evident.

As I said at the outset Target is aggressively pursuing market share gain and thoughtfully managing our business to emerge even stronger when the economy improves.

We believe that Target remains well-positioned to grow profitably and deliver substantial value for our shareholders over time.

That concludes our prepared remarks.

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

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Robby [Olm] with Merrill Lynch.

Oh, thank you, how are you, guys?

A couple of quick questions.

The first was, can we get -- I was hoping we could get maybe a little bit more of an update on the expanded food test and how that's going for you all?

And then maybe partially related to that if you could talk a little bit about food inflation and the roll that that's been playing in your same store sales more recently and if there is an outlook for food inflation in your same store sales heading into next year?

And I'll stop there, thanks.

Regarding our expanded food test, food continues to be a focus and a priority of ours both in our Super Target and our general merchandise formats and we will continue to test and evolve expanding that footprint as time goes on.

The small test I think you're referring to has just recently set in some Minneapolis stores and its too early to the conclude anything at this point in time.

Regarding food inflation we continue to see volatility in food price and commodity prices and it's been up and down and we still expect some food inflation for the foreseeable future although clearly the growth in inflation has moderated somewhat compared to earlier times this year.

Great.

Thank you very much.

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

Good morning, thank you for taking the question.

I just wonder if you could go into a little bit more detail on the gross margin improvement, particularly with regards to the mix enhancements, I didn't quite get -- I wasn't quite able to hear the answer fully.

But I wonder if given fact that one would imagine that you are seeing greater strength in consumables were where you got those mix enhancements?

I'll address the numbers side of that and I'll look to Kathy to provide a little color.

What I had said in my prepared remarks is that against the backdrop of a 52 basis point improvement in gross margin rate for the quarter there was a negative impact in isolation due to sales mix in the range of 40 to 50 basis points.

So, turning that around the other way, we enjoyed net/net a benefit of 90 to 100 basis points from factors other than mix, some of them are category specific and some of them are timing issues I cited as an example of the timing issue a ten basis point improvement in gross margin rates in the quarter due to Workers' Compensation expense improvements year-over-year in our supply chain.

Kathy?

So, as you know we've been working on gross margin for a long period of time and we're continuing on many key strategies.

I think probably the biggest has been our disciplined approach to inventory control this year, making sure that we are in stock supporting our guests but yet minimizing the amount of markdowns that we're taking.

We've continued to expand our segmentation strategy which is really about customizing assortments in each of our categories across all of our stores, so we do this in many ways.

Some of it is timing related whether it's weather or holidays, some is assortment related, high volume or low volume, indexing items or brands, we've done a lot of SKU reduction this year.

In addition, we're growing national brands which are on higher gross margin.

So, a number of different initiatives that have driven our gross margin expansion.

Are you doing more zonal pricing, so, you are managing to raise some prices in some markets while being keener in others and manage the overall pricing level a little higher?

We are raising retails where the market will bear it but we remain absolutely committed to being priced with Wal-Mart on all identical items in local markets.

Thank you, and you said that -- or Doug said in the fourth quarter, that the gross margin performance may not be repeated so what would be the major differences between the third and fourth quarter and the ability to get that underlying improvement in the gross?

Major difference is our concerns about the pace of same store sales.

While we've been very tight in our supply chain we certainly didn't anticipate the kind of sales slow down that we've experienced where we're coming out of the third quarter at a sharply lower pace of sales than we entered the third quarter sharply lower than the year-to-date actual.

Net/net that means that we have some concerns about clearance mark-down exposure given what might happen here in fourth quarter sales.

Thanks and just finally you mentioned obviously food as a priority.

In terms of the cutting Capex for next year, will that impact your remodeling activity and trying to get more food ranges into the stores?

It really won't.

The primary reduction in capital will be in non-remodel expenditures like new store reductions, reductions in our supply chain.

But, we're going to continue to push and test aggressively a multitude of food expansions in remodels in other test stores to make sure that we thoroughly understand where it's works, where it doesn't work.

The lion's share of this most recent change in our view on '09 Capex is the effect in '09 of capital investment in support of new stores to open in 2010 and beyond.

So, we're clearly in a mode right now of adjusting our thinking about new store openers, 2010, '11, '12, and that has a beneficial impact on 2009 Capex.

Thank you.

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

Thanks, good morning.

When you look at 2009 assuming unemployment continues to move above where it is today, I was just wonder what you anticipate your write off picture to look like?

And Doug, for the fourth quarter you suggested a modest increase.

Could you quantify a potential range for us that you guys are thinking?

Yes.

I had said in my remarks that the definition of modest would be an expectation that annualized write-off rates would increase into the range of perhaps 10% to 11% in Q4.

As I mentioned last month, we expect that our write off rate will peak plus or minus Q2 '09 and then begin to tale off.

And importantly we have accommodated through the P&L and on the BS appropriate reserves to anticipate that modest increase in write-offs for the next couple of quarters.

So, famous last words, I would expect that our GAAP reported financials for our credit card segment in 2009 would show substantial improvement from 2008 in which we've experienced not only the direct impact of substantially higher write-offs, but also through the P&L and on to the balance sheet, the impact of accommodating expectations of heighten write-off levels in the future as well.

Okay.

That's helpful.

Thank you.

And then second question , a couple of weeks back you guys outlined a negative six, nine comp for November and I realize a lot of that's the shift from a year ago as well as the shift this year.

Are you guys still comfortable with that rate and I guess, if we're to do a -- down mid-single digit comp for the fourth quarter what would that imply for your December

Well, negative six to negative nine, you have correctly observed, accommodated all of our outlook as of the beginning of the month for calendar shifts and so forth.

As you know we don't typically provide mid-month updates on sales these days.

But I will observe that our sales in the front end of the month have started out much lower than we might have expected.

Whether that's a good leading indicator or whether it's a function of the calendar, is difficult to no at this point.

Clear if we ended up at mid-singles for the quarter the answer to your other question is we would end up with a negative same store sales performance in the month of December.

Thank you.

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

Hi, this is Sean (inaudible) for Jeff.

Briefly you talked about food inflation earlier but can you expand that and talk about some of the other inflationary pressures within HBA and apparel, as some of the demand has clearly slowed down domestically for some of these products and have you seen any sort of relief in that aspect?

You know, so far this year we've seen mid to upper single-digit increases in food, CPG and home.

And starting this fall season we've seen increases in the low single-digit range in apparel.

I think it's a little too early to the determine where this is going to be headed but obviously we've seen some differences in commodity prices lately and fuel which will effect transportation.

So, at this point I would say it is more stable than it's been in the past.

We are seeing some decreases but -- yet to be determined where that will head.

Okay.

Just -- and then just in terms of the online business, have the trends in the online business, the sales there, have they been similar to what you've been seeing in the stores?

Clearly credit has become a little bit tighter, just wondering if the trends are any different online.

Well, in the past our online business was growing very, very rapidly and was in the double-digit growth range consistently for many years.

They have and we have experienced the same kinds of softness in the number of transactions and sessions as we have in the retail business.

So, it's still positive but it is growing at a much slower rate than it was growing last year first quarter and middle of the year.

Okay.

Thanks .

Your next question comes from the line of Robert Drbul with Barclays Capital.

The questions I have is, when you look at the run rate and the expectations heading into this fourth quarter, would it be possible to quantify the run-rate of the discretionary sales trends versus non-discretionary sales trends and how they've actually changed from Q3 into October and really what you've seen so far.

Well, I think of that in total not in same store terms because that's what is captured in our mix commentary.

And generally speaking if we look at food and health and beauty as one set of numbers, and home and apparel as another set, the gap between those two is about the same now as it was earlier in the year.

All of those figures are growing at a slower pace.

Put some dimensions around that, we just reported a quarter in which total sales grew a little under 2%.

Food and health and beauty combined were up a range 10%.

Clearly gaining market share in those categories.

And for the quarter apparel and home products down low single -- low to mid-singles, clearly as bad as that sounds that is a pace that is considerably better than the US market as we see estimates of the US market.

And so we continue to gain share in those categories as well.

Okay.

And then just a question on the credit business.

When you look at the relationship between past-due rate and late fees, how should we expect that to trend into the fourth quarter and into 2009?

I would expect that past dues, as you call it, will continue to increase moderately.

I don't expect a substantial deterioration in those figures.

And similarly I think that the trend in recording late fee income improved slightly -- improved is a very strange word in that context.

I'd just as soon never collect a dollar of that kind of income but I think we'll see flat to up somewhat.

Thanks, good luck, thank you very much.

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

Hello, good morning.

In the context of sharply lower comps that we've been seeing, can you describe the movement of merchandise across the good, better and best price points, where have you seeing the greatest slowing?

And then given the current customer off take that you are seeing, where, at the margin, do you expect making the greatest changes?

In other words are we going to see a little more product at the opening price point given the circumstances?

You know, we have seen some trade down but it is still very mixed.

So, we've seen things, I think we talked about this last quarter, people trading stake for chicken, not buying all pieces of the bed but buying parts of it, maybe the come comforter versus the duvet all the accessories that go with it.

We're also seeing strength in our own brands which is probably a trade from some national brands.

However, at the same time I will tell you that best brands are still performing very, very well.

So, things like C-9 by champion, our converse one star, Smith and Hawkin's, Bose, I could go on, on, many high-end brands still performing very well.

So, the key for us is really the balance within our assortments between good, better and best so that we're fitting all budgets at this time.

So, I don't think that you are going to see a huge change in our assortment.

We are making sure that our end caps are focused on great values, single price points, more so than in the past so you'll see a slight change there.

Yes, I would just add that our strategy is essentially "expect more, pay less." We are not going to dumb-down our assortment in this economy.

We have continue to stay focused on innovation and fresh new exciting merchandise and our value proposition is such that the majority of what we sell in our store is very, very affordable.

So, we are going to maintain our commitment to new product introduction, emerging designers and having what our guests what want overall and in some cases we are going to be strengthening our commitment to the best price points -- best price points but in all reality most of these new introductions are going to be under $20 that's very affordable for our guest segment.

Thank you.

That's helpful.

My other question, Doug, regarding the reduced Capex and the implications for square footage growth should we think of this as being approximately proportional impact on footage growth in 2010 and is there a point where we start to anticipate more bang for the buck, at what point do you think we start to see some favorability there in terms of development costs and just approximate range, I know it's early, for potential square footage growth 2010 through '12, are we down in the 2% to 4% range or any comment you might have on that would be helpful, too?

Certainly.

First of all you because of the lead times involved in developing the kinds of projects that we pursue, the reductions will be bigger in 2010 than in 2009.

We have a lot of high quality stores in the pipeline already for 2009 and most of those are well underway right now in terms of construction and we're not about to stop construction on great new stores that are in that current stage.

Alternatively or in contrast this would be the time that we would be developing a lot of new stores for potential opening in our March and July 2010 opening cycles and we clearly are taking a much, much, much more cautious approach to underwriting those stores at the current time.

So, I think that 2010 particularly in those first two opening cycles at this point will be much, much thinner new store program.

I think the rest of the timing, the answers to the October cycle in 2010 and all of the answer for 2011 and '12, hangs in the balance of seeing just how sharp this recession turns out to be and just how long it lasts.

If -- in the happy case that we came out of this current period of unpleasantness rather rapidly then we could be back in more typical kinds of new store opening cycles as early as late 2010.

In contrast, if this period lasts considerably longer than 2010 in total would be quite thin and we're in complete control at this 2011 and 2012.

The other part of the question is just on what you anticipate for development costs, do you foresee a point where we get more footage per Capex dollar or is it just too early to the say yet?

I don't think that's like to the happen.

Okay.

Thanks.

Good luck.

Your next question comes from the line of Deborah Weinswig with Citi.

Hello, this is actually Nathan Rich filling in for Deb.

My first question was in the past you had utilized disruptions in the competitive environment and other retailers closing their doors to be opportunistic about square footage growth.

In light of the CapEx cuts that you guys just announced how should we think about the -- how you're thinking about the competitive landscape going forward?

Well, let me be crystal clear.

If a block of stores came along at a price that allowed us to enjoy robust returns we would pursue that block of stores regardless of any guidance we've given today.

The guidance that we've given today is the guidance that's appropriate thinking about our new store program one store at a time in the classic sense.

But clearly we have maintained ample access to liquidity and have maintained -- "open to buy," if you will to be able to pursue those if in fact they developed in a way that met our strict underwriting criteria.

Obviously not an unlimited size but you're hearing from us what is our best guess about CapEx moving forward.

We don't start with strict aggregate tops down targets and then fill out a program.

We underwrite our new stores one store at a time and we're trying to tell you what we think that will add up to become.

If the facts change and opportunities develop that we don't see today, of course we'd consider pursuing them in light of our then current business results liquidity and underwriting model.

Great.

Thank you.

And then my next question is -- you guys have obviously done a very good job controlling expenses in this environment.

Can you talk about some of the further opportunities that you see to reduce expenses in 2009?

Yes, I would say that we're going to continue on the path that we have been on and that is centered around enterprise wide initiatives.

So, we will continue to look for ways to increase productivity in our stores without compromising the guest experience and that will center around really labor and scheduling and supply chain and improving productivity where we've made technology investments in the past particularly around mobile technology.

We will look at all aspects of our headquarters and other work centers to find ways to reduce travel and other kinds of expenses.

So, all areas of Target are very, very focused on that and we are being very careful, thought full but very aggressive and we believe that we can continue to make some progress on expense reduction efforts but a lot will depend upon what the sales environment is next year to determine whether we are able to leverage that to our advantage or whether the sales environment is so challenging that even with strong expense management we will be deleveraging.

So, that will be determined as we move through the fourth quarter and into first quarter of next year.

Great.

Thank you and good luck.

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

Thanks, good morning, two questions, one on payables and then one on traffic.

First, Doug, on the payables they were down 3% year-over-year.

Could you try and split that into any changes in terms versus your buy-in for the fourth quarter?

No, it really isn't a change in terms.

But rather a slowing down the pace of goods flowing into our supply chain.

And paying on our normal terms has produced the results you see, inventory up very little versus the same point last year.

And given the calculus, given the rate of change and the flow of goods into our supply chain, the payables result just comes out of normal application of payment terms.

Okay, great.

And then on traffic, if you look at the -- second quarter comps were a negative 0.4, if I remember correctly traffic was a slight negative and ticket at a slight positive.

Is it fair to say that the comp we just did, the negative 3.3, that all the shift of that was traffic and if so anything you can do to address it?

Yes, I would as a that those same trends exist today and the majority of our sales shortfall is very much due to the traffic trends and the transaction amount is slightly higher than last year due to a slightly better mix but slightly fewer items per basket.

We have been very focused on all aspects of our frequency strategy and we've been working very hard at trying to draw consumers into our stores in a very, very challenging environment.

And I think Kathy outlined many of the initiatives that we've been focused on in order to do that but right now the consumer is more than hesitant.

They are very stressed right now and we, like other retailers, are all struggling from the inability to get to motivate and inspire people to come into our stores.

Okay, great.

Thanks, Gregg.

Your next question comes from the line of [Ouda] Warner with Bernstein.

Good morning.

I wonder if you could good us an update on the geographic performance in retail as well as the credit card, I remember four states stuck out last time.

I wonder if you can update us on what's happening there now?

Yes, you're certainly referring to -- the fact is as we've observed before that our sales shortfall and out credit card risks have been more heavily concentrated in Florida, Arizona, Nevada and parts of California, than in the rest of the country.

That remains true today although I'd probably add a few to that list.

Certainly Georgia and the Carolinas, Tennessee, are much less healthy than they once were, and Michigan, Ohio is another area that is very unhealthy from both a sales standpoint and a credit card risk metric standpoint.

Thank you.

Your next question comes from the line of Peter Benedict with Wachovia.

Thanks, Doug, given the changes in credit card terms and the outlook for consumer spending how likely is it that we could see year-over-year growth in credit card receivables turn negative next year?

That is certainly plausible.

It would not be a base line forecast that I would generate as of today but clearly plausible.

Okay.

Thanks.

And then over to the mix impact which was 40 to 50 basis points.

That was on top of the first real big drop you saw a year ago.

I know there had been some underlying mix for a long time with you guys.

Is it safe to say that you are thinking maybe 40 to 50 on an ongoing basis now until the macro environment changes or is there anything that you are doing specificly that could help change that over the next few quarters?

Well, Kathy and her team work diligently every quarter to produce results that offset the adverse mix impact but there's no debt that this kind of adverse mix impact will be with us until the economy improves.

It is simply the result through our picture of sharply lower apparel and home sales in this country, in stark contrast to the growth that we're experiencing in food and health and beauty categories in line with macro trends in US retailing.

Okay, fair enough.

Thanks, Doug.

I'll add one more comment to help put some of that in perspective.

If you add together food and health and beauty in our case in the aggregate, those categories as large as they are, remain smaller than the aggregate of apparel and home products.

That's why our -- thats why the algebra works against us in the current environment in reporting sales.

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

Thank you.

Doug, on the buy back, it seems -- you know, haunting the buyback seems prudent in the current environment.

Perhaps share with us what you would you need to see to reinstate the program?

Our haste of execution in our share repurchase program remains squarely focused on the same three variables it always has.

Our liquidity, our share price and our business results.

And we keep a keen eye on our credit ratings.

We have said before that we would intend to take no intentional actions that would threaten or jeopardize in particular our short term credit ratings.

It's our judgment that if we continued to execute our share repurchase plan at the pace that we once envisioned, that would constitute doing something that's within our control that might well have an adverse impact on those short term credit ratings and so it seems only intelligent for us to pause and be very careful until we see some improvement in our underlying business results to be able to once again fire up the share repurchase program.

I continue to fully expect that we will complete that program within the next several years, but clearly our original timetable that we outlined isn't the fall of '07 when we launched the program, is no longer the correct outlook.

Okay.

Thank you.

And then just some follow-up questions other gross margin commentary, the approximate 90 basis point improvement you've saw ex the mix impact, could you perhaps more specifically quantify how much was related to the timing benefits?

You had alluded to about 10 basis points, if you can share with us how much was timing versus how much was category improvements.

Yes, it gets to be a bit gray in the middle.

The world isn't quite as crisp as timing versus category specific activities but as a rule of thumb I would tell you that of that 90 to 100 basis points perhaps 0.3 is timing and 0.6 is due to the direct activities of Kathy and her time team.

Okay.

And then, just following up on the gross margin, am I correct -- it sounds as if in the past we had talked about gross margin pressure had been predominantly mix related but now it seems as if some more mark down vulnerability.

How does this make you think about placing inventory plans going forward?

Well, the market down vulnerability is clearly the result of the differential between our fresh, current, near term outlook and the outlook that we had for Q4 when we made these inventory commitments.

Clearly we are taking a much more conservative view of the front half of 2009 as we make commitments to be able to continue to preserve our margin rate equation to the extent that it's possible to preserve it.

The number one challenge remains retail sales.

Okay and then just lastly a question for Greg.

You had alluded to in your opening remarks about being very sharp on pricing.

If you could perhaps talk about the competitive environment, where you want to be priced versus Wal-Mart, what you are seeing, how aggressive it is out there?

Thank you.

Well, we expect this holiday to be equally, if not more, aggressive than prior holiday seasons.

I think there is and will be perhaps a slightly heightened sense of desperation by some of the other retailers.

So, our approach typically has been and will continue to be that we will meet Wal-Mart on all like and identical items in local markets.

That commitment has not changed.

And so as you know there's ups and downs and some volatility and that marketplace is somewhat fluid but we remain very, very committed to ensuring that our prices are rock solid day in and day out.

From a promotional standpoint we have taken a very aggressive point of view this year in terms of our promotional pricing, so we expect to be price leaders on selected items in our circular.

This is not unlike what we've done in the past.

But given the current environment and recognizing how challenging it is we will be even sharper than we have in prior years.

So, we expect, as Kathy said, to gain market share throughout this fourth quarter and we are investing more of our markdowns into promotional pricing and we look to offset that in other ways by reducing either the number of items or other ways within our P&L so that that marked down investments is really net neutral.

So, we expect it to be aggressive.

We're going to be right with the best of them on promotional standpoint and we're going to be with Wal-Mart on and everyday basis.

Thank you, best of luck.

Your next question comes from the line of Dan Bender with Jefferies.

A few questions.

First, on the expectation that the write offs will peak in Q2 next year.

Just curious, are you assuming that unemployment gets modestly worse from here or stays about the same?

That's the first question.

The second question is on credit.

Recognizing you have to protect the profitability of the credit card business I would imagine that all this tightening will have some sort of impact on your ability to generate comparable store sales, just curious if you've put any math behind that?

First of all the comment about the likelihood of our write off rate peaking somewhere around Q2 and I don't mean to imply with some precision that I had -- fundamentally Q2 plus or minus a quarter is the right way to interpret that forward-looking statement, the major assumption behind it is the product change dynamics from 2007.

Certainly we've talked about geography but the impact is especially profound in those geographies in the accounts that -- where product changed in 2007 and from a timing standpoint it is pretty clear that most of that or the bulk of that problem will be behind us by Q2 '09.

Certainly if unemployment were to rise hundreds and hundreds of basis points, then of course despite this seasoning of those accounts, then the unemployment change would become a dominant feature and that would defer the point in time that we turn the corner in write-off rates.

Understood.

And then with regard to the tightening of credit and the potential impact on sales?

Well, as I mentioned in this very call 90 days ago, tightening of credit across all US credit card issuers has already had a very important adverse effect on our sales and I'm sure it will continue to do so.

This is not -- this will not be a new phenomenon looking forward.

After years and years of fairly steady growth in penetration of our overall sales the percentage of our sales charged on anyone's card, one that we issue together with all other cards from Visa, Master Card, discover and AMEX, fell for the first time in many, many years in Q2 this year and I expect that trend to continue for awhile.

Okay, and then one last question.

If, recognizing that every quarter is different, we're in fourth quarter about to lap I guess some more aggressive cost management activities on your part and at the same time we're seeing comps go a bit more negative is there any sort of broad guidelines you can give us on how much you deleverage on SG&A per negative point of comp?

I think that every quarter is different and I wouldn't begin to predict today what some of the unique timing issues might be to our fourth quarter this year.

But in light of the "if then" statement that I made in my prepared remarks, if negative mid single-digit comps, then likely $0.90 cents to $1.00, at that kind of level, I would expect some modest deterioration in gross margin rate due to clearance markdowns and likewise I would expect some modest deleveraging, I think 10, 20, 30 basis points, not 50 to 100, in SG&A rate as well.

Great, thanks .

Your next question comes from the line of Joe Feldman with Telsey Advisor Group.

Hi, guys, thanks for taking the question.

Also wanted to do follow up a bit on credit.

Two questions, one is given the -- what seems to be a greater usage of credit these days, is that in fact the case?

I mean I know your credit revenues are up but is it because more people are paying late fees or is it really that people are using the credit more?

No, credit revenue is up because the portfolio is up.

As you know we have a variable rate card portfolio so revenue is not up nearly to the same extent as receivables.

Because our APRs are lower today than they were a year ago.

Actually, if you look to the schedules of our press release, you'll see that credit usage, both inside our stores and outside our stores, is down in total and down quite significantly when correlated with the receivables phase.

Alright, thanks.

And then the other part of the question then is, also, on the way you guys have been provisioning for the write-offs you know, it seems like the provision is keeping a pretty wide margin above where the write-off is lately and I guess I'm wondering is that because you're still playing a little bit of catch-up or is it because you're anticipating things to get precipitously worse in the next couple of months?

I don't think we are playing catch up at all but let's take the current quarter as an example.

Clearly our risk metrics deteriorated during the quarter.

We've already seen all of the major banks report their credit card results for their calendar third quarter.

Their risk metrics deteriorated as well.

They, like we, added meaningfully to reserves in the quarter in order to properly account in the current period for the risks of the period end portfolio.

So, quite specifically to your question, yes, we have anticipated that write-off rates will continue to deteriorate modestly and we have correctly and, in our view appropriately, booked the amount of additional expense, booked the bill to the reserve, if you will, to an appropriate level for our quarter end position.

In our case that added $104 million during the quarter to expense over and above what our write-off amounts were during the quarter.

And at this point we probably have time for one more question to stay within our time slot.

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

Good morning.

Thank you, my question is on the sourcing side.

Over the past year there's been a lot of pressure on sourcing costs but now it appears that raw material costs are coming down significantly and a lot of excess factory capacity that seems to be increasing quiet ability.

And I'm wondering if you can talk about how you are taking advantage, if at all, of the changing sourcing environment and when you might realize some beneficial impact?

Thanks.

Well, I would tell you that there are a lot of ups and downs in that sourcing equation and for every raw material piece good that is going down and energy costs going down there are other factors that come into play whether it's currency or whether it's labor rates and things like that.

So, we look at this category by category.

We maintain a balanced sourcing network throughout the globe and we will continue to pursue the opportunities country by country and we are pushing very hard to make sure that our manufacturing base is supporting us but still profitable.

So, it's an equation that's very, very fluid and we saw a lot of pressure on cost increases this year, as Kathy said they're starting to moderate and go the other way right now.

Now how fast and how far down they will go is anybody's guess but at least it's stabilized and it is -- costs are going in the proper direction right now, so.

Net -- net of all the variables can you quantify a little bit the order of magnitude?

It's really too difficult to quantify that because it really is a business by business and while we have some going up, some are stable, some going down, and it changes on a month-to-month basis.

So, it really is difficult to give you a precise estimate in terms of what's happening from a pricing standpoint.

Doug?

As important as these issues are they are very small relative to the question of sales.

The pace of sales on a retail business remains our dominant variable, our margin rates have been quite resilient in spite of all kinds of challenges this year.

Okay.

That concludes Target's third quarter 2008 earnings conference call.

Thank you all for your participation.

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