目標百貨 (TGT) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Target Corporation's third quarter 2009 earnings release conference call.

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

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

(Operator Instructions) As a reminder today's conference is being recorded today, Tuesday, November 17th, 2009.

I would now like to turn the conference over to Gregg Steinhafel, Chairman, President and Chief Executive Officer.

Please go ahead, sir.

Thank you and good morning and welcome to our 2009 third quarter earnings conference call.

On the line with me today are Doug Scovanner, Executive Vice President and Chief Financial Officer, and Kathee Tesija, Executive Vice President, Merchandising.

This morning I'll provide a brief overview of our third quarter performance and the retail environment as we enter the holiday season and Kathee will highlight recent merchandising trends and provide a preview of our fourth quarter and holiday initiatives.

And finally Doug will discuss our financial results and outlook in more detail.

Following Doug we will open the phone lines for a question and answer session.

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

Following this conference call John Hulbert and Doug will be available throughout the day to answer any follow up questions you may have.

Also as a reminder any forward-looking statements that we make this morning are subject to risks and uncertainties, the most important of which are described in our SEC filings.

We are very pleased with Target's performance in the third quarter which exceeded our expectations and was the result of responsible planning and consistent execution of our strategy by teams across the Company.

Reflecting a somewhat more stable environment and more compelling merchandise offerings, marketing campaigns and strong store execution, our sales and guest traffic during the quarter increased modestly, a notable improvement from our first half trend.

We were able to translate these sales into higher retail profits due to a combination of improved sales in discretionary categories, better margins within categories and continued strong productivity gains in our stores.

And in our credit card segment we delivered increased third quarter profitability while many other issuers in the industry continued to experience staggering losses.

These results demonstrate the ability of our teams to manage our business thoughtfully while preserving efficient flexibility to invest in opportunities that deliver value for our guests and our shareholders.

P-Fresh which offers a much deeper food assortment in our general merchandise stores including perishables and an expanded offering of dry, dairy, and frozen items, is one of these opportunities.

We currently operate 108 stores in this format including approximately 30 stores that opened in Philadelphia last month.

Because we firmly believe this concept is a low investment, high [pathway] to add convenience for our guest and drive greater trip frequency, we committed to this initial 100 store pilot last year, after a highly-successful two store test and when many retailers were retrenching.

By carefully evaluating the number of items in each category this enhanced assortment includes 90% of the food categories and approximately 60% of the SKUs available in a SuperTarget store and the concept incorporates unique fixturing and visual elements that clearly convey our commitment to a credible food offering in a general merchandise format.

While it is still relatively early to the make a definitive judgment on this format we continue to be very pleased with our initial results and feel content enough in its future potential to expand our roll-out to an additional 350 stores in 2010.

Doug will talk more about the impact of this decision in a few minutes.

Target's unique combination of discipline and agility is part of our DNA.

It's also the basis for our approach in this year's fourth quarter.

In light of continued economic and consumer spending challenges and given holiday shopping patterns that are increasingly concentrated in the two days after Thanksgiving and the week leading up to Christmas we have planned our inventory levels appropriately.

We are also focused on delivering a superior shopping experience with highly engaged team members, fast check out and strong brand standards while maintaining appropriate expense control and productivity growth in our stores and distribution centers.

Our early sales results for November provide additional justification for being cautious in this uncertain environment.

While store traffic continues to increase moderately over last year, lower average unit retails are leading to a smaller average transaction, creating pressure on our topline sales.

While these early November results might end up being a retiming of sales until later in the season, the good news is that our conservative planning, particularly in seasonal and discretionary categories, positions us well in case that doesn't happen.

And our third quarter experience demonstrates that we can accommodate the upside if it occurs.

Regardless of the environment we believe our plans for the fourth quarter are appropriately designed to capture profitable market share.

As Kathee will explain in more detail we are aggressively pursuing in-store and online sales beginning with a one-day only sale on Target.com on Thanksgiving day, our customary two-day sale in-store immediately following Thanksgiving and compelling cyber-Monday deals.

We have developed a strong marketing plan to support these events and drive traffic throughout December and we will be in-stock and priced right on most wanted item.

We also remain keenly focused on reinforcing our pay less message and building on the progress we've made this year in changing our guest's perception of Target pricing.

We'll continue to focus on pricing more boldly in our circular, in our broadcast ads and with improved signing throughout our stores.

And we continue to back up these messages with our commitment to match Wal-Mart's prices locally on identical items through our low price promise.

Beyond the fourth quarter we are focused on maintaining a superior experience for our guests and introducing newness and differentiation that will continue to excite our guests and grow our topline sales.

In addition to P-Fresh we are testing new ideas across all of our businesses, some of which we'll discuss today and some we'll be sharing in the coming months.

All of these initiatives are designed to improve our guest shopping experience and drive profitable market share.

Now Kathee will provide more detail on our third quarter merchandising results and our plans for the holiday season.

Kathee?

Thanks, Gregg.

Our third quarter results demonstrate the relevance of Target's strategy with our guests and provides evidence that our merchandising, marketing and store experience continue to resonate.

As Gregg mentioned we are pleased with our third quarter performance.

While overall sales are still not growing at our desired pace we are encouraged by the continued strength of sales in food, healthcare and beauty and by the improvement we experienced during the quarter in sales of discretionary categories, especially apparel.

Both our discretionary and nondiscretionary businesses benefited during the quarter from an increase in guest traffic.

In fact, the number of store visits per guests increased during the third quarter for the first time in nearly two years.

We believe that this increase in frequency and improvement in our results is attributable to both internal and external factors including a more stable, though still challenging retail climate, our efforts to assure our guests that they do not have to pay more to shop at Target, and our unwavering commitment to deliver the merchandising excitement and exceptional service our guests expect when shopping at Target.

Let me describe some of the ways we continue to reinforce our expect more, pay less brand promise in the current environment.

Even though we've always delivered exceptional value to our guests, we have not always gotten credit for our outstanding prices.

As a result in the past year we've taken steps to underscore the value in our merchandise assortment and strengthen our price messaging.

Specifically we have significantly enhanced our in-store signing to communicate price, expanded the number of items included in our competitive shop process -- which ensures that we are priced right on thousands of items across the store.

Instituted our low priced promise to match local competitors advertised prices, reinforced our weekly circular to feature more commodities and frequency driving merchandise to highlight bigger pictures and bolder price points and to showcase attention grabbing value headline.

Launched new, more authentic, but still brand-right broadcast campaigns that reinforce Target's exceptional prices, allocated more space to nondiscretionary categories in new and remodeled stores.

And merchandise great values more boldly with fewer, bigger items and stronger value message signing including main aisle ends cap, focusing on single price point items.

While we still have opportunity for further improvement we are very pleased with the progress we are making in changing our guest's perception to more closely match the reality of our affordable pricing.

Expect more has always been a Target hallmark and even in the face of the current economic challenges we remain committed to delivering newness and innovation throughout the store.

For example, during the third quarter we reinvented the way our jewelry assortment is presented.

The area now features merchandise displayed on tables rather than under glass, and all product is priced under $50.

The compelling assortment, more welcoming and convenient environment and lower prices are improving the experience for our guests and driving profitable sales.

Electronics is another categories where we continue to innovate and pilot new products and services.

Programs we are currently testing include a full service cell phone solution which is being tested in about 100 stores, a TV delivery and installation service which is being tested in approximately 180 stores, and an i-Pod trade in for Target gift card which is available on Target.com.

While its premature to speculate on the opportunities these test programs offer we are encouraged by early results and gaining value learnings from our efforts.

The roll-out of up & up which represents the rebranding of our core commodity assortment formerly known as Target brand, leverages both halves of our expect more, pay less brands promise.

The new brand encompasses 800 products across 40 categories, offering national brand quality at an average savings of 30%.

The brands unique design, high quality and low prices are resonating with guests and we are experiencing increases in both penetration and sales compared to last year.

In 2010 we plan to build on this success adding more than 100 new products to the line.

Now I'd like to turn our attention to holiday and the fourth quarter.

The official kickoff of holiday is our two-day sale on the Friday and Saturday after Thanksgiving.

Our intent this year is for Target to be the best place to shop for those wanting the best merchandise at the best prices.

We'll open our doors an hour earlier this year at 5AM and feature doorbusters in a broad set of categories.

The shopping experience will be easy for our guests as stores will merchandise and market the doorbusters and other fantastic deals in can't miss ways such as end caps, bulk locations and signings.

In addition each store will provide guests with a two-day sale map to help them navigate all the great deals.

We expect a strong holiday season in our online business as guests leverage Target.com as a destination to research and plan both their online and in-store shopping.

Guests who want to get an early start on some of the most aggressive prices of the season can shop Target.com's online only event on Thanksgiving day.

Or shop an array of offers on cyber Monday.

And to make online shopping even more convenient and more affordable for our guests, Target.com will offer more than 100,000 items that qualify for free shipping throughout the holiday season.

Electronics and toys including LCD TVs, netbooks, video games, transformers, Bakugan and Disney Princesses are expected to be among the most wanted gifts.

In addition we will offer incredible value and differentiation in trim-a-tree including many items with lower price points than last year.

To assist our guests with their planning, we mailed our toy catalog to five million homes and inserted it in 48 million newspapers on November 8.

And in coming weeks many of our guests will receive holiday gift catalogs or other direct mail from Target featuring great gift ideas at exceptional prices.

We also continue to partner with well known designers to offer guests high-end fashion at an everyday affordable price.

For example during the fourth quarter Target is launching a new limited edition handbag collection with acclaimed designer Carlos Falchi and introducing our next GO International line with Rodarte.

And, to help our guests get in the holiday spirit we are offering a dress collection that features a variety of versatile styles and dressier options designed to appeal to a broad range of guests all for the incredible price of $39.99.

Finally all of our holiday plans and processes are intended to make it easier than ever for guests to find what they want.

Our circular and in-store marketing tie more closely together so people can see what they want in our weekly ad and quickly find it in-store.

Our compelling and easy-to-spot signs call out great values and we are employing a truly cross multi-channel approach that includes the use of online shoppable videos, programs with partners like Google and Yahoo where guests can add the Target weekly ad application to their iGoogle or MyYahoo home page to be alerted when their favorite items go on sale and a relaunched iPhone application which was listed as a must-have by Fast Company.

Whether during the fourth quarter or as we look to 2010 we continue to leverage Target's culture of differentiation, innovation and collaboration to deliver products our guests want at prices that fit their budgets.

These attributes combined with our disciplined execution will allow us to continue to deliver a shopping experience that satisfies our loyal target guests, attracts new guests, drives incremental sales and generates profitable sales.

Now Doug will provide more detail on Target's third quarter financial results and our financial outlook for the fourth quarter.

Doug?

Thanks, Kathee.

In my remarks today I plan to discuss the performance drivers for both of our business segments in the third quarter and provide some insight into our expectations going into the fourth quarter and beyond.

As you've already heard this morning we are pleased with our third quarter performance.

Our third quarter diluted EPS of $0.58 represents an increase of more than 18% over last year's third quarter and is well above the expectation we had going into the quarter.

This performance was driven by much better than expected profitability in our retail segment combined with solid and improving profitability in our credit card segment.

Now let's take a more detailed look at our performance in the third quarter beginning with our retail segment.

Comparable store sales declined 1.6% for the quarter.

While still negative, this performance was somewhat less negative than we expected going into the quarter and much less so than the 6.2% decline we reported in the second quarter.

Among the key drivers of comparable store sales, traffic was up 0.6% in the quarter, while average transaction amount declined 2.2%, primarily due to a 1.6% decline in units per transaction.

Our third quarter gross margin rate expanded 28 basis points, a little less than the 39 basis points expansion we experienced during the first six months of the year, but pleasantly surprising in light of last year's strong third quarter performance on this metric.

Our performance during the quarter reflected continued improvement in rates across a broad range of merchandise categories, partially offset by an 18 basis points adverse impact of sales mix.

This was a much smaller sales mix impact than the 68 basis point headwind we experienced in the first half of the year.

In fact, it's the smallest quarterly mix impact that we've experienced in three years.

Third quarter retail segment SG&A expenses grew only 0.5% over last year, resulting in favoring expense leverage in light of our 1.4% growth in total retail sales.

The most important driver of our favorable SG&A performance continued to be strong year over year productivity growth in our stores, offsetting adverse performance on a few other expense lines including incentive compensation.

Depreciation and amortization expense grew about 15% in the third quarter -- much more quickly than the first two quarters of the year.

This change from the prior trend is the result of recognition of accelerated depreciation on assets that will be replaced as part of our comprehensive 350 store 2010 remodel program that Gregg touched on earlier.

Overall EBIT in our retail segment grew by 2.4% or $19 million in the quarter to $791 million this year, while EBITDA grew by 7.1% to over $1.3 billion in the period.

Turning next to our credit card segment this quarter we continued to experience results consistent with the expectations we've discussed with you throughout this year.

And again this quarter those trends translated into solid profitability delivered from a somewhat smaller portfolio.

Credit card segment profit grew to a very respectable $60 million in the quarter compared with $35 million last year.

Period end gross receivables decreased 8.2% or $717 million from a year ago.

Total card revenue as a percent of gross receivables was down only slightly from last year reflecting a meaningful year over year decrease in the prime rate almost completely offset by the yield enhancing terms changes we've implemented to compensate for enhanced risk in the current environment.

Net write offs were $280 million in the quarter, in line with the guidance we provided throughout the year, most recently in the second quarter conference call.

Now let's turn to our expectations for the remainder of the year.

There's no question that last year's fourth quarter sales results present an easier comparison than we have faced all year.

Working against this more favorable fourth quarter backdrop are the combined effects of the very weak macro environment and longer term trends around diminished holiday shopping lists.

On balance, while we continue to believe that it's possible for us to deliver positive same-store sales in the fourth quarter we think it's more prudent to plan for a modest negative result in this key metric and we've positioned our markdown sensitive inventory commitments with this in mind.

In turn, this approach should deliver a sharp and reliable increase in gross margin rate as we cycle over the corrosive clearance markdowns that we recorded in last year's fourth quarter.

Ultimately the magnitude of our net improvement in gross margin rate will depend on other factors including our sales mix by category and the intensity of the pricing environment.

On the SG&A expense line we continue to expect growth in the low single-digits for the overall year.

However, as we discussed last quarter the unexpected strength of the last minute shopping in December last year created a staffing environment that was leaner than we intended.

As we plan for this year's fourth quarter we expect great store productivity to continue but we do not believe it's responsible to deliver the same year over year productivity improvement we've seen through the first nine months of the year.

Combined with our current sales outlook this translates into an expectation of a mid single-digit increase in SG&A expense for the fourth quarter.

Accelerated depreciation will have a similar dollar impact in the fourth quarter to that we recorded in the third quarter.

But its impact on a rate basis will of course be somewhat lower because of the seasonality of our sales.

In the aggregate, all of these factor shows combine to drive strong increases in both retail segment EBITDA and EBIT in the fourth quarter.

In our credit card segment we'll continue to manage the portfolio very conservatively in light of the underlying risk environment and in preparation for the legislative and regulatory mandates imposed on the credit card industry, whose adverse impacts will begin to be measurable in our fourth quarter.

Despite these unwelcome effects, we expect that our approach will continue to generate modest rates of portfolio profitability in the fourth quarter and into 2010.

Seasonal factors will also contribute to somewhat lower profitability in this yea'rs fourth quarter when compared with the quarter just ended.

But even modest profitability this year would compare very favorably with last year's loss in this segment.

We continue to expect fourth quarter write offs in the range of $300 million -- above third quarter performance yet consistent with our first and second quarter experience and in line with our prior guidance as well.

We also continue to expect that year end receivables will be about $1 billion lower than at the same time last year.

Before we leave credit cards, I should in mention that we are looking at other possible innovations in our card program to drive future performance.

For instance, in October, we began a test in two markets to understand how our guests would respond to a rather fundamental change to our current rewards program inform.

In these test markets guests who use their Target card or Target Visa or Target Check Card at our stores receive a discount on every purchase rather than accumulating points toward a periodic 10% off certificate that guests earn in the current program.

It's early in the tests but we are encouraged with the response that we've seen to date.

We will continue to evaluate the results to determine whether to modify our overall program in the future.

Now let's turn to investments and cash flow.

In the second quarter call I outlined that we will have a lean new store program in 2010, with about 12 total new stores which will likely result in fewer than 10 additional locations net of closings and relocations.

Also as discussed in this call, we've commit to do remodel about 350 existing stores in 2010 at a total investment of just over $1 billion.

In concept, about half of this investment is to add key fresh features to these stores and the other half is devoted to other enhanced merchandising concepts and to a general freshening of these stores, consistent with the objectives and magnitude of our remodel program in each of the past several years.

Overall we might reinvest something like $2.5 billion of capital in our business in 2010, up from about $1.8 billion or so this year.

Taken in the context of the likely magnitude of cash flow generated from operations this means that we should be in a position sometime in 2010 to engage our Board in a discussion about lifting our temporary suspension of open market share repurchase activity.

If we were able to resume this activity next year we could continue to execute with a keen eye on maintaining our strong credit rating.

Finally let me summarize our earnings outlook for the fourth quarter.

As of today, the current median first call estimate for Target's fourth quarter earnings per share is $1.12.

I believe this figure lies within a range of potential outcomes.

Yet I also believe that many things would have to fall in place to meet or exceed this figure.

For important context I would observe the related comment that in our view sell-side analysts are somewhat more optimistic across most of our industry than we believe is warranted in light of the harsh realities of the current environment.

Now Gregg has a few brief closing remarks.

We remain confident in our strategy and our team and continue to make listening to our guests a top priority.

We also remain focused on offering affordable products for any budget and driving meaningful innovation across all of our businesses.

We are confident that Target will continue to deliver on our expect more, pay less brands promise in ways that resonate with our many diverse guest segments for months and years to come.

That concludes our prepared remarks.

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

(Operator Instructions) Your first question comes from the line of Colin McGranahan with Bernstein.

Good morning.

First question is really on the discretionary categories and if you can maybe parse down a little bit what you are seeing in terms of units per transaction or through the the third quarter and then into November -- have people been adding discretionary on the average trip or are they taking more trips with a more discretionary appeal to them?

Well, in the third quarter they actually there was a little bit of both of those dynamics.

We saw an increase in traffic flows and within that increased traffic we saw a greater propensity to buy discretionary items in the basket.

In particular we saw our apparel business strengthen in the third quarter vis-a-vis other quarters.

How has that behavior changed so far here in November?

Again, we are very early in the month.

But we have seen slightly softer sales in the first two weeks of the month and a little bit of give back in the discretionary categories.

Again we have a lot of season ahead of us and we think this may be as much of a case of retiming of sales than anything.

We've got a very strong plan for the fourth quarter in our discretionary categories and we think that we will continue to perform well on the discretionary side of the business.

We don't often like to talk about the weather here at Target but I think at this point we should make an exception to that practice.

The weather helped us in October and clearly in hindsight accelerated some apparel sales that might have otherwise occurred here in early November.

Lots of people love to complain about the weather.

I would remind everyone that on average the weather by definition is average and we should benefit as often as we suffer.

Fair enough.

Just a quick follow up.

Any learnings you can talk about so far in the Philadelphia P-Fresh roll-out and how that has influenced your thinking about the expansion next year.

There have been a lot of learnings so far.

And again it's very early so we hesitate to get into much detail as it relates to what's in the basket and the frequency and things like that.

I think it's just important to note that we are experiencing in Philadelphia the same kinds of strong performance characteristics that we have observed in our initial pilot stores and other new stores and remodel stores that we implemented throughout the earlier part of this year.

So the same shopping dynamics exist where very, very strong sales in grocery, slight increases in the cross-over categories and, because it's so early we are seeing basically flat or up slightly in the discretionary categories.

But we we are going to have an analyst meeting in mid to late January in Philadelphia and we will be able to share much more detail as it relates to guest insights in the shopping dynamics at that time.

That's great.

Thank you.

Good luck with the holidays.

Thank you.

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

Thank, good morning, just, Doug, on the accelerated depreciation you said a similar amount in the fourth quarter.

Should we think about it that we'll see a similar amount here in the first quarter and second quarter of next year as well?

Yes, we'll trail off pretty significantly and in round numbers in the aggregate, it's about $400,000 of assets per store.

So we are talking on the base of stores that we are remodeling next year about $140 million plus or minus in assets that will be retired that had book value at the beginning of the quarter -- at the beginning of our third quarter.

By the end of this year we will have recorded between $90 million and $100 million of that total then will leave $40 million or $50 million in 2010.

Obviously if we repeat this program in 2011, then we'll repeat the cycle of accelerated depreciation give or take in the last half of next year.

Okay.

Great.

Then on the P-Fresh, how much of the SKU increase is dry grocery versus perishables.

A majority of the SKU increase is in the dry grocery area.

I would say it's dry, dairy and frozen contribute the majority of the SKU increase.

Clearly we've added perishables but the perishable section is still relatively small in comparison to how deep we went in those other categories.

One last one for you, Doug, on credit, you gave us the write off of over $300 million.

Could you give us a bit of color for bad debt provision line what you're thinking.

I said write offers would approximate $300 million.

I hate to be so picky with words, but I didn't say over $300 million.

The provision is something that we won't be able to determine until we get at the end of the quarter.

A lot of variables go into that calculation every quarter as we assess the risks in the then current portfolio but as a working proposition I would expect that the provision will likely be lower than write offs in the fourth quarter by a fairly small amount.

Okay.

Thanks very much.

Your next question come from the line of Adrienne Shapira with Goldman Sachs.

Good morning, Adrienne?

Adrienne, your line is open.

There is no response from that line.

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

Thanks, could you get a little bit more into the gross margin?

It's nice to see it continue to grow and we had a nice mix improvement with apparel coming back.

How much of that mix improvement that was now only down 18 as opposed to down 60 was because of that apparel coming back or were there other factors that drove that improvement?

Most of that mix improvement was driven by collapse of the differential between our aggregate same-store sales and the apparel same-store sales performance.

So those were reasonably in line with each other in the quarter in sharp contrast to any of the quarters in the last year and a half.

Home was less negative than it had been but the big story in Q3 mix was apparel.

So from where we are today if we could keep it this difference of comp trend of the categories do you think this headwind of negative 20 basis points is a new ongoing run rate.

No, Greg, I think that that would require favorable weather as far as we can see.

So, again, I don't like to get too far into weather but there's no doubt that our adverse mix impact was less adverse as a result of the acceleration of sales due to favorable weather.

One thing that was interesting was on the ticket that the units seem to drive more of it than deflation.

Is there -- was there something behind that especially if discretionary started to pick up?

Was it items in the basket or how --.

I think that we are all going to need to adjust our thinking a bit moving forward.

After all, we are driving a lot more traffic to the stores with some fundamental and quite intentional changes in our strategy.

And some of those trips involve fewer units.

It's what we are trying to do.

Okay great.

Thanks.

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

Yes, thank you.

Kathee, maybe just a little bit more specifically on apparel, it's a pretty big part of the story here in terms of the discretionary recovery.

Can you talk more about areas in apparel or price points or how you would characterize this recovery in terms of it being part of your strategic initiative -- maybe a bit more detail around home in that same context?

Then just one for Doug, in terms of the comps that you talked about for the fourth quarter -- negative low single digits describing as being more likely or a more responsible view at this point, any flow through by month through the quarter?

And also any sensitivity you'd be willing to share with us if in fact you did start to see it go more toward a positive low single?

Starting out, Jeff, with apparel, I think our strength is predominantly in our core and must have and I think that would apply to home as well.

While we still have a healthy business on the fashion side, most of our improvement that came in the third quarter really came in the core and the must have side.

And as we mentioned earlier, a lot of that was in the seasonal businesses.

So as the weather turned, the guest clearly was updating her wardrobe to accommodate that.

On the same-store sales questions, we've already provided guidance for November to be essentially flat to last year and Gregg commented that we are starting out a bit softer that the face that we would have hoped but of course a huge portion of November is yet to come because of the concentration of sales around Thanksgiving.

In light of thinking about a quarter that might be down slightly -- down somewhat -- obviously December cannot be very different from that quarterly outcome -- if November turns out to be flat give or take.

So I don't expect anything remarkably different about December than what we end up reporting for the entire quarter.

In terms of sensitivity, a point of sales in our fourth quarter, of course, is a very large number because of seasonality.

Certainly something approaching $200 million, and the flow through on that could be quite substantial especially if it's concentrated in seasonal or higher margin items that otherwise might have been marked down.

Those categories, remember, are categories in which we already have a real good handle on our unit sales.

The question is what will the mix be of regular price, promotional price and clearance sales.

There is some extra expense associated with those sales so I don't mean to make it sound as if all of that would flow through to the bottomline.

But of course as in every fourth quarter, our bottomline is very sensitive to what happens in those seasonally important categories.

Thank you.

Doug, one other thing on your marketing expenses you talked about building that in the third quarter.

Your SG&A came in better, more favorably.

Have there been any changes in your -- the strategic initiatives along the lines of marketing dollars?

Certainly we have maintained the ability to keep the pace in the fourth quarter in the marketing wars and therefore on a proportional basis or a seasonal basis we will spend a little more in Q4 this year as compared to a little less that we have spent so far this year.

Thank you.

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

Hi, good morning.

I was hoping you could elaborate on your comments that you have expectations for a highly promotional holiday season.

Does that represent a change from what I think you've described as a rational competitive environment?

Are you seeing different competitive behavior thus far in the fourth quarter?

The way I would describe it is we typically expect a highly promotional fourth quarter.

The last number of years have been highly promotional and we don't believe that this year will be any different.

We are not expecting it to be any more promotional than prior years but when you get around Thanksgiving and early in December it gets very price oriented and there's a lot of doorbuster activity and limited time only sales and we just expect that activity to be there this year like it was last year.

We are hopeful that it will be -- that while it might be more promotional in nature from a marketing standpoint we believe that most retailers have done a better job of managing their inventory levels and we think that overall inventory within stores in the pipeline are going to be better synchronized compared to last year so there may not be as much intensity around the clearance side of the business for the marketing to clearance in those kinds of events that had to liquidate all the excess inventory that existed last year.

So there will probably be aggressive nature as it relates to being proactive in nature but hopefully there will be less activity as it relates to having to get rid of merchandise because retailers over bought.

I think most retailers have come into the fourth quarter in a relatively good inventory position.

So my impression the last time we spoke was that you described things I think as rational.

You had good mark up.

And I guess my take away is it might have even been a little bit -- slightly more favorable than normal.

Can you I guess comment on that and current trends, would you say it's average or is it similar to what we have seen during the summer?

I think you are putting too fine a micrometer on these comments.

The environment has been rational, the environment remains rational.

It's the fourth quarter.

We expect a highly promotional fourth quarter.

We always expect a highly promotional fourth quarter.

Okay.

Then looking ahead, Wal-Mart's been talking about the productivity loop coming back, I think it's perceived to be more of a forward comment as their expenses come down but would you offer any comment about how you think that might impact or not impact Target?

We've experienced the same productivity loop.

I think both of us have managed our expenses and driven up productivity.

Their gross margin rates are up as well.

So they are not reinvesting in only low prices.

They are to some extent reinvesting in more aggressive pricing but some of that is dropping to the bottomline.

So as long as that kind of environment maintains itself we should be able to do both --- support the productivity loop and hopefully preserve the levels of profitability that we have.

Or if we see some rebound on the discretionary side of the business or continued rebound we will be able to see some slight margin expansion but we are not counting on it at this time.

Okay.

Thanks.

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

Good morning, Gregg, what do you think has driven the pickup in traffic in recent months?

I think overall consumers are more confident.

I think their confidence level is more about the future than perhaps it is right now but I think like any adjustment that they go through they have a tendency to pull back and not go into stores and I think that they've adjusted their budgets.

They see more stability in the environment.

Unemployment rates -- they are at high levels but I don't think anybody is really expecting them to get worse, only better over time.

So I think the consumer is in a better place and more confident.

So I think they are back to more normalized patterns so we are getting some of those trips back that we have lost when times were more difficult but on the other hand you're seeing the consumer being more disciplined and that's why there are fewer items in the basket.

And they are buying private brands instead of the national brand and so while they are back to their typical shopping patterns in terms of frequency of business they are more disciplined in their spending habits.

They are coming in with lists and circulars.

They are focused on items that are on sale, they are coming in with coupons and rebates and things that can lower the price.

They are still very, very cautious in what they are spending but their basic routines are more normalized is the way I would describe it.

Kathee had also gone through a lot of new initiatives and there's also the low price promise.

How important do you think those initiatives being fully rolled out and communicated to customers are also having an impact on traffic.

I think it's very important Deb.

It's reassurance that our pricing is very competitive in the marketplace and that how we are communicating that, whether that's in-store with bold signing or within the circular having fewer items that are larger pictures, bigger price points, easier for her to see and sort through and I think all of those things contribute to traffic to Target, getting on her grocery list or her discretionary list every single week.

And I think it's a reassurance that Target can offer the great assortment as well as have great prices.

Yes, I would just add that we are -- we continue to profitably gain market share by doing everything we need to do well.

We have to have the right content.

We have to be in stock.

We have to communicate these values in inspiring and compelling ways.

We have to deliver a superior in-store experience which means highly engaged team members that are available on the floor that are knowledgeable and then ultimately providing the right low wait times at our registers whether it's in electronics or at the front end.

We have to get people in and out because they appreciate that and we are focused on improving all aspects of that.

And I think what you are seeing is Target operating well in all of those dimensions, the pipeline innovation that Kathee talked about is very, very high.

We've -- we are in the process of rolling out P-Fresh but there are a lot of other merchandising initiatives that we have in either a test or pilot phase that we'll continue to share with you as time goes on.

We think we are going to continue to make our shopping experience even better than it is today and we believe that the guests will understand it and appreciate it and we'll gain market share as a result of the innovations that we are going to be layering in the store over the next couple of years.

One of the other initiatives I actually want to do talk about was in jewelry with the reset there.

Kathee, can you talk about how that came about and if we look out where you are now versus where you were a year ago in jewelry maybe just some of the early wins and how that came about?

You bet.

We set out to make the environment much more guest friendly.

In the past we had locked up most of our jewelry under glass and so guests could view it but they needed assistance to be able to get it out of the case and try it on.

So we did a pilot for a period of time and have now expanded that to all stores but really bringing all the products out from under that glass up on the top of those cases and in new stores on tables.

So guests can try on the product, touch and feel it, see how it looks.

So that's been a big win in terms of accessibility.

The second piece of that is really changing the assortment, bringing down the price points.

So everything is under $50 which our guest has responded to incredibly well.

Great.

Then just last question on P-Fresh -- based on the success of the Philly roll-out should we think about the 350 new stores with the P-Fresh roll-outs in 2010 as being in entire markets like Philly or more as one off?

We are going to start with our high priority markets and we are going to be doing the majority of stores in those markets but we won't be able to complete all stores within a given market.

Over time we will come back to those markets in 2011 and '12 but sheer volume and capacity and the ability to manage the levels of complexity don't allow us to get 100% coverage in each of those markets.

But over time we really expect to get through the majority of the chains.

Thanks so much and best of luck this holiday season.

Thank you.

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

Doug, I had a question for you and then Kathee.

Back to the P-Fresh format could you give an idea of what your current thinking is -- what kind of sustained sales lift do you need to cover your cost of capital when you look at a $20 million store that you would convert versus a $40 million store and do you feel comfortable about the smaller volume stores now and being able to roll that back -- the P-Fresh format back into those smaller stores.

We are not yet in that stage.

There are a lot of questions that we are in the process of answering that it's premature to decide but all else being equal of course we need a much bigger percentage lift in your smaller store than your larger store if we spend the same amount of capital on which we are trying to earn a return.

The dollars of the lift in concept need to be the same and that represents a much higher percentage in a smaller store.

The other really important open question is whether we'll enjoy a year two lift in these stores over and above the baseline.

Separately, it's a bit premature to decide how much of the lift will occur outside the food and crossover related to food category.

That's after all what we are trying to learn here that will form our thinking as we move beyond 2010 with this program.

My second question Doug, was can you talk a little bit about your expectations at least preliminarily about 2010 for balanced growth in the credit operation or contraction and related to that do you get a sense that the appetite for the size portfolio that you have is more or less better or worse than it would have been say three or four months ago?

It's not a question of appetite.

It's far more a question of environment.

And the environment includes our view of the risks and it also includes the realities of the hugely anti-stimulative credit card act which will have the direct impact of shrinking our portfolio and shrinking portfolios of virtually everyone else in the industry.

As we look into 2010 I think you are very likely to see continued declines in the size of our portfolio, continued declines from an industry standpoint in the portfolios of others as well.

Would you care to put any numbers around it -- like high single-digit or it's too early to say.

The pace we are on right now as I mentioned earlier is to be down year over year about $1 billion at year end.

That's a low double-digit percentage year over year.

And as a working point, that currently by definition is our current pace of decline.

In essence charge activity has fallen off at a much faster pace than has payment activity and that is a set of dynamics that are very likely to continue into 2010.

Whether it continues at a high single-digit percentage or a low double-digit percentage is an open question but it's highly likely that our portfolio will continue to shrink in gross accounts receivable terms.

And, my final question, Kathee, if you could discuss with us the sustainability of the gross margin improvements that you've made so far, you look broadly across all of those classes and it does continue into 2010 particularly in the back half of 2010 and how you balance the impact of P-Fresh on mix, so thank you.

So for gross margin we have a lot of initiatives to help drive our gross margin and we have grown it in many categories across the board to help offset some of the mix impact that we've experienced.

So our intent is that we will continue to do that.

Some of those initiatives are making sure that we are growing our own brand portfolio which is more profitable.

Very good inventory control which has helped us throughout 2009.

We've done a lot of segmentation, both in volume, high and low volume but as well as assortment optimization which has helped us improve markdown rates in some of those stores.

And lastly really optimizing our SKU count.

So we are down about 5% this year in our SKUs which has helped our stores become more productive as well as reduced markdowns.

So we will continue on all of those fronts throughout 2010 to make sure we able to offset the headwinds from the mix .

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

Hi, good morning.

Two questions, first on the bad debt expense.

Sorry if you answered this one already but I was just curious what drove the decision to take the bad debt expense in excess of the net write offs given some of the improvements we've been seeing in the credit metrics?

And then secondly, with regard to store expansion next year, at this point is it -- the store openings pretty firm based on your prior guidance or is there still some chance that there could be some upside if business continues to improve.

No, the 2010 store opening program is essentially already baked.

We are working on 2011 and '12.

We can't construct stores fast enough to start thinking about building a store that would open in 2010 right now and actually make it so.

On the bad debt expense question, we take a very careful look at the end of every quarter to determine what our allowance for doubtful accounts should be and that indirectly determines of course bad debt expense for the quarter for the period just ended.

In the most recent analysis I would observation that the slight uptick that we expect in net write offs in the fourth quarter in sequence when compared to the third quarter is largely attributable to the impact of our May 2009 terms changes.

When we changed terms that of course has a net beneficial impact but focusing on this line only causes a subset of the affected guests to go to write off who otherwise would not have gone to write off.

So six months of no activity of course yields an aged write off and so the fourth quarter will represent the peak of aged write offs directly traceable to the May '09 terms change.

Okay.

Thanks.

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

Hi, good morning.

Two questions, first on the credit piece of it, Doug , with the master trust data that was out today the early stage delinquencies I believe have sequentially deteriorated.

So can you just talk a little bit about how you've incorporated that into your prior write off expectation and the one you talked around $300

Well, again, we are talking about the same issue.

We have seen some sequential deterioration since May and virtually all of it is directly attributable to the May '08 -- pardon me -- May '09 terms change.

So all of that's incorporated in our thinking and incorporated not simply in comments I've made about bad debt expense and write offs and balance sheet, but from my standpoint more importantly, incorporated in our thinking about our highly likely ability to continue to maintain modest and appropriate levels of profitability moving forward.

We continue to enjoy a very strong performance in 46 states and continue to suffer from lingering, nasty losses in California, Arizona, Nevada and Florida.

Then the other question I have is on the expectations for the SG&A mid single-digit increase for the fourth quarter how much of that increase is purely a function of higher staffing levels and can you put any numbers on how your staffing numbers were down last year during the fourth quarter?

I wouldn't think of it as higher staffing levels but rather the way that we have enjoyed the big SG&A benefit so far this year is by enjoying terrific gains in productivity.

So sharp increases in dollar sales per hours worked in our stores.

You turn the clock back to the fourth quarter last year we enjoyed a much bigger year over year performance benefit, a much bigger gain in productivity than we had even wanted to achieve.

And so if you think of this as a two-year analysis the way that a lot of you analyze same-store sales performance -- our two-year performance in the fourth quarter will look very similar to our two-year performance in other quarters.

But year over year it means that we won't enjoy a meaningful productivity gain in Q4 this year -- and in light of the likelihood of negative same-store sales performance and in context of increases in wages per hour and increases in benefits per hour, that produces an up side down equation for the quarter only.

Nicole, we have time for one more question.

Your final question comes from the line of John Zolidis with Buckingham Research.

Hi.

Just a question on the comp guidance and planning for the fourth quarter.

You indicated that you thought it is possible to achieve positive comps in the fourth quarter.

And I assume that you believe that even with the context of the slightly softer start to November.

So could you just elaborate a little bit on what you think might drive those positive comps?

And then secondly I assume that your comment on the street's fourth quarter EPS figure incorporates the current sales trends -- that is you're comfortable with the current street number in the language that you used -- even with the current slightly softer trend in November.

Is that accurate?

Thank you.

The reason we have put a range around the fourth quarter is because we are up against substantially weaker comps of a year ago.

So as we've watched our business strengthen from second quarter throughout the third quarter, we are now cycling more problematic sales environment of last year.

So with that in mind if there is some resilience to the consumer this year, it could be plus or minus.

So we are optimistic that it could be better than what our planning assumptions are but it might not be that way either.

Early November is a little softer as I've talked about.

We think that was more primarily related to warmer weather patterns throughout the United States.

But so much of this fourth quarter is going to be decided in the two days after Thanksgiving and the four weeks prior to Christmas and nobody really knows at this point in time how good it's going to be.

It's a wide range of estimates and right now we are expecting somewhere in the neighborhood of flat given everything that we see right now.

But if there's more business to be had, clearly we have the inventory to do mid or low single-digit comp increases in December.

I think it's more important to clarify my comments or repeat my comments on earnings earlier.

I did not say that I was comfortable with $1.12.

I didn't say I was uncomfortable with it either.

What I did say is I believe that figure was within a range of potential outcomes and I said I believe that many things would have to fall in place to achieve it.

Thanks.

And good luck with the holidays.

Thanks.

Thank you.

That concludes Target's third quarter 2009 earnings conference call.

Thank you all for your participation.