目標百貨 (TGT) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

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

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

(Operator Instructions).

As a reminder, this conference is being recorded Tuesday, February 23rd, 2010.

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

Gregg Steinhafel, Chairman, President, and Chief Executive Officer.

Please go ahead, sir.

Thank you, and good morning, and welcome to our 2009 fourth 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 will provide a high level overview of our fourth quarter and full year 2009 results along with our priorities as we enter 2010.

Kathee will discuss category results, share recent insights into how our guests are thinking and behaving in this environment, and outline initiatives to drive our business forward in 2010.

Finally, Doug will provide detail on our 2009 financial results and our 2010 performance outlook.

Following Doug's remarks, we'll open the phone lines for a question and answer session.

As a reminder, we're joined on this call by investors and other who is 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 question 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 the fourth quarter financial results we announced earlier this morning.

Our fourth quarter's earnings per share of $1.24 are well above the expectations we had going into the quarter, and these very strong results clearly demonstrate the resilience of our strategy, the effectiveness of our operating model, and the power of continued strong execution by our team.

Our fourth quarter marketing and merchandising programs generated better than expected sales growth, particularly in the holiday season, which combined with continued disciplined inventory management to deliver outstanding gross margin and profit performance.

We also continued to deliver strong productivity in our stores and expense control across the Company.

When combined, the strength of these fourth quarter results contributed to the highest 2009 full year retail segment EBIT in our history, even with a 2.5% decline in comparable store sales for the year, and our credit card portfolio generated solid profits and return on investments for both the fourth quarter and fiscal year, a notable achievement in the light of the challenges faced by many other credit card issuers in 2009.

A year ago, we outlined the decisive actions we were taking to manage our business responsibly while staying true to our brand in a very uncertain and challenging environment.

I am pleased we were able to accomplish both of these objectives in 2009, and as a result we are entering 2010 in a very strong strategic and financial position.

In a year of unprecedented challenges, we turbo charged our commitment to innovation, positioning our business for the long-term and ensuring our continued relevance with consumers.

We completely reinvented our marketing approach, and initiated more merchandising innovation in a single year than I have seen in any of my 30 years with the Company.

We described a number of these innovations during our January meeting with many of you in Philadelphia, and Kathee will share some additional initiatives today.

We believe that collectively, this set of innovations will be a powerful catalyst for future market share growth.

In 2009, we set out to remove price as a perceived barrier to shopping at Target, and surveys indicate we've made meaningful progress.

Regardless of the economic environment going forward, we'll continue to address the gap between the perception and the reality of our pricing while maintaining our focus on fashion, design, and a superior store experience that combine to make Target a unique and valued shopping destination.

As we assess the state of both the economy and our business, it is clear that things are meaningfully improved from a year ago.

While economic conditions are far from being back to the normal of 2006 and 2007, employment appears to have stabilized, consumer confidence has recovered, and credit markets are no longer frozen.

Our fourth quarter results show that we are on our game and that we can generate great results in this economy.

Compared to a year ago, our sales trends are much stronger and volatility is much lower, giving us greater confidence in our outlook for 2010 sales and profitability.

We expect economic recovery to continue in 2010, but we expect progress to remain slow as consumers face historically high rates of unemployment and lack of access to consumer credit, particularly in light of anticipated effects of the Card Act.

Against the backdrop of the external environment, we're confident that Target is in a very strong position.

Our broad assortment of need-based food and commodity items helped us weather the downturn, and as the economy recovers, our unique combination of high quality affordably priced home and apparel merchandise is perfectly aligned with today's more frugal consumer mindset.

We have a world class brand, a strong pipeline in merchandising innovation, and we've implemented expense disciplines that we'll maintain going forward, even when the economy has fully recovered.

With this unique combination of discipline and innovation, we believe we will continue to profitably gain market share from a variety of competitors in 2010.

As we contemplate growth in our stores, we have identified four distinct opportunities.

In the near term we're focusing on refreshing our existing store base by incorporating merchandising reinvention across the sales floor, including food, home, beauty and electronics; and getting high return general merchandise in Super Target locations in trade areas across the United States.

In the longer term, we see potential opportunities to develop a smaller footprint that would allow us to operate in dense urban markets where our brand is strong but where real estate availability prevents us from opening larger stores, and expand beyond the United States -- potentially into Canada, Mexico or Latin America, in a timeframe that is likely three to five years out or even longer.

As we previously announced, our primary focus in 2010 is to remodel about 340 stores, far more than in past years.

We expect to complete just under 100 of these remodels in the first quarter, with the remaining remodels spread roughly equally across the second and third quarters.

In addition, we expect to open 13 new stores in 2010, adding about 10 new locations net of closings and relocations.

These stores will open in the July and October cycles with no new stores planned for our March cycle this year.

We also continue to invest in online and mobile tools to improve the guest experience and drive sales across channels by creating an anywhere, anytime shopping experience for Target guests.

As we explore opportunities to invest in our business, we apply the same financial discipline and returns based approach we have taken in the past.

Our prudent management of capital in the environment of the last 18 months provides ample evidence that we do not invest mechanically in growth for its own sake, but only when we identify a clear opportunity to strengthen our business, capture market share profitably, and create long-term value for our shareholders.

Going forward, we will invest without hesitation in initiatives we believe are appropriate from a strategic and financial standpoint.

Our ability to balance discipline and innovation is part of our D&A.

It allowed us to achieve great financial results in 2009 while positioning us for a stronger 2010.

We are confident that if we focus on our guests and stay true to our brand, we will continue to drive meaningful value for our shareholders over time.

Now Kathee will provide additional color on our guest insights research and additional detail on our merchandising and marketing initiatives.

Kathee.

Thanks, Gregg.

From the beginning of the economic downturn, we were determined to exceed our guests' evolving expectations while remaining firmly committed to our Expect More, Pay Less brand promise.

I believe our fourth quarter sales and traffic trends validate that we have achieved both of these objectives by delivering on a strategy that continues to resonate with our guests.

In addition, these results indicate that consumers are beginning to show signs of cautious optimism.

Guest traffic continues to improve in the fourth quarter, up about 2% compared to 2008.

Our improving traffic trend is very encouraging, confirming what our guest research has indicated over the last eighteen months.

As the recession began, guests told us they were still as loyal to Target as ever but they were cutting back on discretionary shopping trips and focusing more exclusively on needs based trips.

Today guests are telling us they're increasingly confident and are visiting more often and shopping more of the store.

Once hesitant and even fearful, they now are taking pride in their newfound financial discipline and their confidence is leading them to add a few more home and apparel items to their basket.

This subtle change in guest behavior has significantly narrowed the sales gap between our discretionary and nondiscretionary businesses.

In fact, the impact of sales mix on fourth quarter gross margin was a very slight 6 basis points of headwind, much smaller than we have seen over time and less than we expect over the longer term.

We're particularly pleased with our performance over the holiday season, which reflects our efforts to better align our marketing and merchandising strategies to drive the business.

We surprised our guests with new and enticing merchandise, provided a superior shopping environment, and punctuated the experience with fresh marketing.

Our breakthrough holiday marketing campaigns in print, TV, and online engaged our guests and drove a sense of urgency, generating a mid-single digit comp for our two-day sale.

Our redesigned circular clearly resonated with guests as we saw strong double-digit comps for featured items, and Target.com's Thanksgiving Day online only sale generated considerable site traffic and more than a 60% sales increase over 2008.

Beyond the holiday season, our Merona line continues to lead in women's apparel, with guests drawn to great quality, price, and design in core and must have items.

In home, we're seeing improvement in numerous businesses, with particular strength in core basic categories and the relaunch of room essentials is off to a great start.

In addition, some of our best lines, including the new Giada de Laurentiis kitchen collection and our reinvented and newly acquired Smith & Hawken line are off to very strong starts.

We're also pleased with the results from the Great Save, our warehouse club style event that replaced last year's home design event.

The guest's response has been extremely positive.

Sales for the event were in line with our expectations and much stronger than for the home design event last year.

We continue to manage inventories conservatively while ensuring we remain reliably in-stock on the commodity items our guests need every day.

Disciplined inventory control was a key factor in our strong fourth quarter gross margin and profitability.

In 2010, we'll continue to exercise discipline in our buying decisions while creating contingency plans that will allow us to chase stronger than expected sales trends in our discretionary categories when they emerge.

It is important to note that while the overall sales environment in 2009 was quite challenging, Target gained market share across the store, and we have plans in place to accelerate that trend in 2010.

As Gregg already mentioned, we have driven unprecedented innovation and merchandising over the last year, and we will see the results of that innovation throughout 2010.

In particular, we are excited about the transformational changes you will see in about 350 new and remodeled Target stores, innovations we covered in depth at last month's financial community meeting.

Much of the discussion at that meeting was about the P-fresh food layout and its ability to win the fill-in grocery trip within our general merchandise format, driving trips and sales.

But we are equally excited about innovations throughout the store, including beauty where we're creating an environment that is easier for guests to shop, provides opportunities to discover and test the latest products, and incorporates lighting and fixtures usually found at upscale beauty retailers.

Home, where we're making our own brands even more appealing and intuitive to shop by clarifying the assortments, better defining and aligning each style with guest segments, and where we're improving the shopping environment by creating a more open and visually compelling department that features dominant worlds, inspirational signage, and more opportunities to actually touch and feel the product.

Video games, where we're creating a one-of-a-kind experience that is more open, intuitive, and informative, with games positioned on tethers to provide easy access to game information on the back of the package.

Electronics, where we're providing our guests with added convenience through a variety of initiatives like TV delivery, installation, set up, and recycling.

And Bullseye Mobile Solutions, a full service cell phone program that's currently in about 100 stores now and set to expand to 800 stores by October.

And shoes, where we're providing a more engaging shopping experience with improved sight lines, better in-stock visibility, and greater convenience, accompanied by a simplified operational process that enhances both in-stocks and store product productivity.

As you know, our own brands drive sales, guest loyalty, and generate strong gross margins.

We continue to focus on strengthening our own brand portfolio, and in 2009 we saw great results for Circo in kids, Merona in women's apparel, and Up and Up in commodities.

In 2010, we'll continue to leverage our most powerful brands to tell a more cohesive story and deliver clear and compelling value for our guests.

In support of the Expect More side of our brand promise in 2010, we have a roster of designer partnerships that is second to none.

This spring we announced a comprehensive new cookware and food line from Giada de Laurentiis, exciting limited edition collections from fashion icons Jean-Paul Gautier and Zac Posen, vibrant spring floral prints from Liberty of London, and limited time only accessory collections from contemporary design stars Cynthia Vincent and Eugenia Kim.

Of course, because our guests don't just experience the Target brand in our stores, we need to make sure we're driving the best aspects of the brand across all environments and channels so it is clear what we stand for at every touchpoint.

Our multi-media approach to communicating with our guests is aimed as connecting with her during all of her discovery, exploration, research, and purchase moments.

We'll continue to position Target as the go-to resource for many things in her life, while evolving to deliver what she wants -- the element of surprise in newly relevant ways.

Like our guests, we're proud to have weathered the storm, having delivered one of our most profitable years on record.

We did this without compromising on our brand, our culture, our quality, or the guest experience.

We are excited about innovations in store for 2010 and confident that we're in an excellent position to continue to gain market share profitably.

If the last year taught us anything, it is that our ability to be in tune with the guests, nimble in our approach, and still disciplined in our execution will serve us well beyond 2009.

Now Doug will provide more detail on our financial performance and expectations for 2010.

Doug.

Thanks, Kathee.

In my remarks today I plan to review our fourth quarter and full year 2009 financial results, paying particular attention to trends within the year.

Then I will provide a few of our 2010 outlook for both business segments and earnings per share.

As you heard from Gregg, our fourth quarter financial performance was well ahead of our expectations, primarily due to stronger than expected results in our retail segment and secondarily due to favorability in our income tax provision.

Our fourth quarter earnings per share of $1.24 represent an increase of more than 50% compared to last year, and our full year 2009 EPS of $3.30 is only 1% below the all-time high that we posted in 2007.

This is truly remarkable profit performance in light of the economic challenges and top line pressure we faced over the last two years.

Specifically, our comparable store sales in 2009 compounded to a level about 5 percentage points below our 2007 results, and comparable store sales in our discretionary categories have declined even more.

The combined impact of these factors had the potential to genuinely corrode our profits and returns, but in EPS terms we were able to offset all but 1% of that pressure through a combination of gross margin rate improvement with categories, thoughtful expense control, and prudent investment decisions.

Fourth quarter sales exceeded our baseline expectations and were particularly strong during the holiday season.

As a result, we ended December with very little clearance inventory, leading to a sharp decline in January clearance sales compared to a year ago.

In other words, within the quarter, we substituted higher sales of full price merchandise for lower sales of much less profitable clearance inventory, particularly in January.

This form of sales mix experience, combined with the unusually small gross margin rate impact from the more traditional view of sales mix that Kathee described earlier, drove strong performance in the quarter.

In summary, on a sales gain of just under $700 million, our gross margin improved by more than $500 million.

Retail SG&A expenses were in line with our expectations for the quarter.

Store productivity remained strong, yet as expected, it improved only slightly over last year due to unusually strong store productivity gains we enjoyed in fourth quarter 2008.

Also notable in the fourth quarter was the beneficial impact of the previously disclosed Visa/MasterCard settlement and the adverse impact of higher than expected incentive compensation resulting from our equally higher than expected fourth quarter financial performance.

Fourth quarter credit card segment performance was in line with our expectations.

Net write-offs were $293 million, a little more than our bad debt expense.

Gross receivables ended the year at just under $8 billion, representing a reduction of $1.1 billion compared to a year ago.

On average during the year, we reduced Target's investment in the portfolio by about 32% or $1.3 billion.

Against this sharply lower base of invested capital, our credit card segment profit generated a 30% increase in its pretax profit.

These two trends combined to produce a near doubling of credit card segment pretax ROIC for the year.

Now let's turn to our balance sheet and our capital structure.

During this call last year, we said that we expected to generate cash flow from operations in excess of $4 billion in 2009, and I expressed the opinion that this would likely be sufficient to fund our capital investments and dividends and pay off our $1.3 billion of maturing debt all through internally generated funds.

Our actual results for the year reflect the generation of just under $6 billion in cash flow from operations, beating our previous record by more than $1 billion.

This cash flow result was driven primarily by beating the 2009 First Call EPS estimate of $2.38 in place a year ago by $0.92 per share.

Ultimately this robust cash flow allowed us to achieve all of our original Treasury objectives, and in addition it allowed us to fund the early payoff of a $550 million 2010 debt maturity to restart our share repurchase program much earlier than anticipated and to enjoy a $1.3 billion increase in marketable securities at year end.

Now let's turn our attention to earnings prospects in 2010.

I will do that by reviewing each segment and then touching on a couple of important consolidation matters.

In the retail segment we expect to generate increases in comparable store sales perhaps in the range of 2% to 4% for the year, including an expected 1 percentage point lift from our remodel program.

While our comparisons are easier in the spring than the fall, the remodel impact will grow as the year progresses.

We just achieved a 10% EBITDA margin rate in this segment in 2009, nearly a record high performance, driven by actual record high gross margin rate performance.

To me, this means that our recipe to grow retail segment EBIT in 2010 and beyond will more likely result from our ability to grow sales while generally preserving our healthy operating margins than from trying to engineer increases in operating margins from our current levels.

In other words, in 2010 we expect to be able to grow retail segment EBIT by a mid-single digit percentage in line with our total sales growth while generally preserving our strong EBIT margin rate experience of 2009.

To provide some color on prospects by quarter, we first look at the pattern in 2009 of generally nonrecurring matters such as benefits from the Visa/MasterCard settlement and adjustments to our workers' compensation accruals.

We then look at the year-over-year patterns by quarter of things like incentive compensation, marketing expense, and depreciation and start up expense for our new stores and remodel activity.

In 2010, the net of all of this will be a modest year-over-year headwind in each of the first two quarters and a modest tailwind in each of the third and fourth quarters.

For example, in the first quarter the impact of these issues will be between $0.03 and $0.04 per share, with the previously disclosed accelerated depreciation representing the largest driver.

In our credit card segment, we're entering the year with strong momentum, yet what may be the most adverse impact of the anti-stimulative Card Act will not hit until the fall.

At that time, we'll be subject to regulations that will establish limits on late fees, but as of today, we're waiting on the Fed to define those limits.

Overall, we expect to produce another year of improving ROIC in this segment, although segment profit may be flattish for the year considering the likelihood of continued low double-digit percentage reductions in receivables.

As we've previously discussed, we continue to test two separate ideas which could shape the future of this business segment.

In one test, we're exploring the idea of returning to issuing cards solely for use in our stores.

In another, we're testing a totally different reward structure in two markets, offering guests who use our cards in Kansas City, for example, 5% off on every item, every transaction, every day.

We expect to have more to say about each of these two tests as the year progresses.

Beyond our two segments, I will touch on two other key factors affecting earnings and EPS.

We expect our 2010 book effective tax rate to approximate our long-term structural rate, perhaps in range of 37% to 37.5%.

Please remember that about $0.07 of 2009 EPS resulted from fourth quarter discrete matters that temporarily drove this rate well below this range.

Separately, we expect to continue to execute against our share repurchase authorization, not just because we can easily afford to do so, but rather -- and most importantly -- because we believe it will prove to be a great investment of shareholder capital over time.

We expect our 2010 capital expenditures to be in the range of $2 billion to $2.5 billion, reflective of projects we'll complete in 2010 as well as initial spending for our 2011 and 2012 new store programs.

Our preliminary expectation is that our 2011 new store program will be in the range of 20 to 30 stores and lead times will require to us firm up that number over the next six to nine months.

We would love to invest more aggressively in new stores, but we think this is likely all the projects that will make sense to pursue in this environment.

Due to the early repayment of the August 2010 debt maturity, the only significant remaining 2010 maturity prior to our seasonal peak is the $900 million public series collateralized by our credit card receivables due in October.

We don't intend to continue to deleverage our consolidated balance sheet further, so it is likely that we would elect to refinance this amount at some point.

We continue to enjoy very efficient access to the debt capital markets in light of our strategies, our balance sheet, and our strong investment grade credit ratings.

As is our custom, I will close with some specific comments on EPS guidance.

I feel very good about our momentum and prospects as we enter 2010 with two healthy business segments and an overall balance sheet and cash flow picture that remains very strong.

The current First Call median EPS estimate for the year is $3.62.

While the outlook we have laid out today would produce results somewhat lower than $3.62 per share, this figure is clearly within a potential range of achievability.

Similarly, the current First Call median EPS estimate for the first quarter is $0.76, which would represent about a 10% increase from last year's result of $0.69.

Even with our current strong momentum, this growth expectation feel some stronger than the middle of the road outlook, especially in light of the $0.03 to $0.04 headwind in the quarter I discussed earlier.

Now Gregg has a few brief closing remarks.

Our 2009 performance demonstrates our ability to effectively manage our business in the near term while positioning ourselves for the longer term.

As we enter 2010, we are seeing positive momentum across our business segments, and we'll build on that momentum by introducing newness and innovation throughout the year.

We're confident that we have the right plans in place and the right team to implement them.

While the pace of the current economic recovery will continue to affect consumer spending behavior, we're optimistic about our ability to manage effectively regardless of the economic environment and to continue to create meaningful shareholder value over time.

That concludes our prepared remarks.

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

(Operator Instructions).

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

Thank you.

So, Gregg, if we could talk a little bit about the inventory planning, seems as if Kathee mentioned about seeing some cautious optimism as it relates to discretionary categories.

Could you help us think about how we're planning those discretionary categories as it relates to inventory as you have done such a good job?

We believe that we have clearly passed that environment where there is more downside than upside, and there is more upside than downside, so we plan our inventories in line with sales.

We think that they're currently slightly more upside in our planning assumptions than originally thought, and we're chasing some businesses, because our sales currently are exceeding prior expectations.

But overall we're in good shape.

We're in line, and we're going to continue to plan the discretionary categories conservatively, yet appropriately which means slightly more aggressive than last year.

Okay.

Looks as if the inventory is up about 7% overall, maybe give us a sense on a square footage basis how you ended?

It is just up slightly over last year, but it is down prior to the 2007 year, so we're right in the middle.

And if you just look at a one-year comparison, we probably ended last year a little bit too light, and we were in a recovery mode far too long last year.

We really didn't fully recover in our stores until about the March timeframe, and we really set about in year to do a much more -- a much better job of making sure that we're back in business and ready to go much earlier.

And that's really the result -- what you're seeing is that 7% increase over last year, which we think is very appropriate and very targeted to the specific categories that we want to increase.

Okay.

Helpful.

Doug, if I could ask you -- as it relates to the reserve drawdown, seems as if we have now seen the second consecutive quarter.

Could you help us think about what a reasonable set of expectations are for continued opportunities to draw down the reserve heading into 2010?

We don't think of it in the sense of a drawdown because the reserve has been established to cover the write off potential of our existing portfolio.

I think the question is at what replacement rate will our activity moving forward create bad debt expense, so it isn't really a drawdown.

That is the net of two very different activities.

The reserve is appropriately sized for the risks we have today.

Separately, the portfolio continues to decline at a double-digit percentage year-over-year, and therefore the bad debt expense moving forward will certainly have a component of reduction due to the fact that the portfolio shrinking.

Separately I think that the risks in the replacement receivables we're putting on the books are likely much lower.

Net net, yes, that does mean that the reserve is very likely to be reduced during the year, and we'll stay in touch quarter by quarter in terms of the outlook.

First quarter feel very, very good about the momentum in our credit card operations.

Great.

Last, if I could just ask on the P-Fresh, you shared with us at the analyst meeting -- we understand it is early days, but any update in terms of change to the trip behavior?

Sounds as if you're seeing cautious optimism in discretionary categories.

Are you seeing in the P-Fresh an improvement in crossover hadn't seen yet and are you starting to see improvement on the margin there?

Thanks.

We're not seeing a meaningful change from what we shared with you in when we were in Philadelphia.

We are seeing strength across the board in discretionary categories, and to what extent it is due to P-Fresh versus not P-Fresh, we're just excited so see the consumer has discretionary income.

And like we said in Philadelphia, we believe over time our ability to cross-sell to those guests coming in for food and other necessities will improve and develop the right kind of surgical marketing programs that gets conversion in other parts of the store, whether it is apparel or home.

Our outlook for P-Fresh is unchanged from what we laid out in detail in Philadelphia four or five weeks ago.

Thank you.

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

Thanks so much.

Kathee, you will be happy to know based on our conversation after the P-Fresh meeting that I wanted to see all the aspects of reinvention.

So I did go to Medina, to see (inaudible).

And how many of the stores will look like that by the end of 2010, because I was definitely very impressed?

We have about 350 stores between remodels and new stores this year, and so those innovations will be in most of those stores throughout the year.

There are some variations where we have gone back into Medina and done some upgrades, and we will come back and address that at a later time, but the ones you mentioned -- home, beauty, video games, will all be in the stores.

Shoes, which you saw in Medina we will start putting in stores in July.

Great.

And then, Doug, what was the penetration rate of Target Cards in your stores this quarter?

I will get that exact figure for you in a moment.

It was certainly in the range of 5% or 6%.

We'll come back with a precise figure.

Okay.

I know you said that you would come back to us in terms of update with regards to what you're seeing in KC and San Antonio, but are you seeing a higher penetration rate in those stores?

Sharply higher penetration, especially in Kansas City, the 5% market.

Sharply higher -- sharply higher credit quality of the guests asking for cards, sharply higher pace of guests asking for the cards.

The whole question in Kansas City is whether all of those benefits are sufficient to be able to afford the incremental markdowns associated with a 5% program on every transaction every item every day.

And then with regards to any update on inflation expectations, whether it's downward to date, and then also if you can update us on inflation expectations, whether it is general merchandise or food, and then also what percent of product is currently directly sourced and what's the additional opportunity as we think about gross margins for 2010?

Well, I will let Kathee address the penetration question.

Obviously the US economy has been through quite a roller coaster as it relates to inflation, especially in food products.

Certainly in 2008 with inflation rates so high, retailers with a much higher penetration of food than our own enjoyed very strong benefit to their top line.

In contrast, food as measured by the federal government is in a significant deflationary mode, has been for the last two quarters, and retailers with a very high penetration of food certainly have top lines that are under a lot more pressure than our own as a direct result of this deflationary factor.

Who knows where that is going to go 2011, 2012, but at the moment, the year-over-year trends in food are clearly deflationary.

Kathee?

Let me take a stab at that.

Our direct import percent reached a high water mark of about 30% at the end of 2007.

Because of the high penetration in discretionary categories as those businesses contracted in 2008 and 2009, we saw some reduction in that overall direct import percentage.

So we finished last year somewhere in the neighborhood of 26.5% to 27%, and we expect over time that will move back upwards as the discretionary category performance strengthens.

Last question, I want to throw it out to Gregg is that we talked about the analyst meeting in terms of the opportunities to improve price perception, you also mentioned today.

It seems like you have done an incredible amount of work and my hat's off to you with the low price promise, et cetera.

What else can be done and is it really a matter of time more than anything else?

We really view this as a marathon and not a Sprint, and so we're going to continue to strike the right balance between Expect More and Pay Less, and we're going to continue to work hard to be not only right in reality, but work on the perception aspect, and that's a series of marketing initiatives that goes from one end to the other -- broadcast, print, special events, direct receipt tape marketing, our in-store presentation and impact, the content we put on end caps.

It's really a holistic merchandising marketing effort we have to more clearly communicate and get credit for the great prices we already have in the store.

Following up on an earlier question, $1.1 billion of sales on our cards in the fourth quarter represented 5.6% of total sales, 5.6% penetration of our sales on our cards.

Obviously a lot of opportunity there.

Thanks so much.

Great luck in 2010.

Obviously off to a fantastic start.

Thank you.

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

Thanks.

Good morning.

In January the home category showed a little life, Kathee.

Wondering if your expectation is there for a positive comp in 2010, and wondering if you would share an update with us on February sales month to date?

Your tone, I would have to say is drastically better than it was three months ago.

We're definitely seeing home start to turn the corner.

As I mentioned, a lot of the basic categories, we're seeing a lot of strength there.

But in addition I would say some of our better and best product, also there is pockets of strength.

I mentioned the Giada de Laurentiis launch which is right on track on our forecast.

We're thrilled with those results.

Smith & Hawken, another high-end brand, is off to a great start this spring as well.

But in some of the our own brands like Room Essentials, which is in the opening price point level, a lot of strength and building a lot of momentum there in those basic categories.

So we do see homes starting to turn the corner, but I would say it will be a long, long road throughout the year to get to where we want to be, but we feel like we are making progress.

With respect to your February question, as you know at the beginning of the month, we said we expect to be flat to up slightly for the month.

And clearly we're on track to record our third consecutive month of positive same-store sales performance here in February.

Okay.

Thanks.

My second question with regards to the P-Fresh -- at the analyst day you said by year three, you thought gross profit margins in that category would be roughly 21%.

If you look at the grocers and let's exclude Whole Foods from the equation, most of the grocers have GPM significantly higher than that.

So I am wondering, one, you're just being conservative or, two, is there something structural that prohibits you from obtaining gross profit margins say in the 24% to 25% bucket longer term?

I wouldn't call it structural.

I would call it strategic.

We have a firm policy to be level priced with Wal-Mart locally on like items, and the grocers you're referring to absolutely do not have such a policy.

So in our zeal to execute that strategy, it drives a gross margin rate sharply lower than the average grocer, because the average grocer can't compete with Wal-Mart on price.

Okay.

Fair enough.

Last one for you Doug, in the Master trust yesterday there was a disclosure to eliminate about 19 million [doubtful] inactive accounts over the next couple of months.

Is there anything that is going to impact the first quarter in credit from that initiative?

Directly, no, but certainly indirectly we have been on a campaign for better than a year to eliminate risk in the portfolio from relatively inactive accounts springing forth, charging up, and writing off.

Great.

Makes a lot of sense.

Thank you.

Your next question comes from the line of Colin McGranahan with Bernstein.

Good morning, Doug.

I know the gross margin performance for the year was spectacular and you want to maintain this, but as you think about 6 basis points of negative mix in the fourth quarter and then the moving parts around structural growth of food, the stronger growth of P-Fresh, but then improving discretionary hopefully recovery in some of those categories that gains momentum through the year -- can you give us a little bit more help on your view of how those different impacts affect the gross margin and what you think the combined mix effect might be in 2010?

Well, certainly P-Fresh is a lead discussion point in this arena.

The mix of sales driven out of those stores alone in isolation will likely reduce our gross margin rate for the year something in the range of 20 to 30 basis points in consolidation.

Separately, the mix impact of a normalized set of growth rates ignoring those remodels in an average year in history has been another 20 or 30 basis points.

It's been a lot more than that for most of the last couple of years.

So I think we're starting from an adjusted base that could be down 20 to 40 to 60 basis points before we talk about margin rate improvements within categories that are opportunities.

Net net, we just don't think it is prudent to think that anyone should take last year's all time record high gross margin rate and believe that the net of these factors would increase in the middle of the road forecast.

Certainly nothing we do will inhibit that from occurring if we can do it while remaining price competitive with Wal-Mart and while continuing to produce spectacular values for our guests in these more discretionary categories.

Could happen, I just wouldn't predict it.

I will reiterate that I don't believe the path to prosperity is paved with the idea of enhancing operating margins in a retail segment.

I firmly believe we'll get there by rejuvenating our top line performance while preserving our very strong margin rate structure top to bottom.

Okay.

Just to follow-up -- likewise on expenses, again, a stunningly good performance in 2009, but with only 10 stores opening in 2010, it would seem a mid single-digit -- if your comps will be 3% to 4%, a mid single-digit 3% to 4% expense dollar growth would be pretty robust.

Could you do better than that?

Obviously we could do better than that.

There are a lot of puts and takes and expenses.

Actually one of the things that is a headwind, not a tailwind, is the combined impact of remodel start up, new store start up, and accelerated depreciation due to the remodels, so that's actually something that we'll hold back expense performance.

On the positive side we have a set of incentive plans that are deeply intertwined on a pay for performance philosophy, and it would require way over the top performance in 2010 compared to anything we're talking about today for incentive compensation expense in 2010 to approach what we recorded in 2009.

So there is some other pluses and minuses, but on the combined front of the P&L impact of remodeling, and new store activity, certainly new store activity in isolation will be a benefit.

But the remodeling activity is larger in its expense component than the benefit of backing off new store openings.

Fair enough.

I hope you get that incentive comp, Doug.

So do we.

I think everyone on this call other than the shorts would be delighted with that outcome.

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

Good morning.

Two questions, Doug -- on the credit piece, first, when you look at the credit performance overall versus maybe what you expected six to nine months ago, is it fair to say the credit business is getting more predictable every month?

The second question that I have is follow-up to Chuck's question about the 19 million accounts, when you cut off the 19 million accounts, do you expect that to hinder at all your comp store sales performance in the back half of the year.

Did JPMorgan have any influence on the decision on the 19 million accounts?

The 19 million accounts will have no impact on our same-store sales moving forward whatsoever, and even though I wasn't personally involved in any discussions with the Chase card services team, I feel very confident in predicting that they would concur that that was an intelligent risk-based decision.

More broadly our card segment went through a fairly scary period during the third and fourth quarters of 2008, and beginning with the first quarter of 2009, moved back into a more traditional era of stability and predictability, albeit at quite heightened levels of risk.

We have made a lot of predictions a year ago.

Some of them we ended up well exceeding the predictions we laid out -- the forward-looking statements we laid out for our card segment by and large turned out to be spot on.

We predicted $300 million plus or minus in write-offs in each of the first two quarters.

That's exactly what happened.

We predicted a little less than that in Q3.

Exactly what happened.

Due to a little bit of echo of expected write-offs from a terms change in May, we predicted we expected write-offs to tick up a bit in Q4.

That's again exactly what happened.

Looking forward, Q1 write-offs will look a lot like Q4 write-offs, and I expect Q2, Q3, Q4 to be lower as the portfolio shrinks.

Thank you very much.

Your next question comes from the line of Robby Ohmes with Bank of America Merrill Lynch.

Thanks.

Actually, Kathee, I think this is probably a question for you.

I was hoping you could maybe talk a little bit more about the guest surveys, the better -- I think the better guest behavior that you were commenting on at the beginning of the call that you have seen recently conflicts with the tumbling in consumer confidence we're seeing out this morning.

I was just curious if you could tell us is there something that Target might be seeing that's more unique to your customer demographics?

Or can we cross our fingers and hope this consumer confidence number is a head fake?

Any kind of further thoughts on what you're hearing from your customers would be great.

Thanks.

Sure.

Hard to predict if that was a head fake or not.

What I will tell you is we have been talking to our guests over the past eighteen months as I mentioned, and we have clearly seen her describe her feelings going from a place of fear, how am I going to manage, how am I going to retool my budget, how am I going to make it all work -- to a place of pride and confidence that she has weathered that storm and has been able to make her budget work, and is now selectively come in a bit more often and spend a bit more money in some of the discretionary categories.

Do I think that she is saying had she is completely optimistic, no.

But I think she has a good handle where her family is now and that Target has great value and the right products she is looking for, which is translated into a bit more -- a few more trips and a bit more spending in our discretionary sides.

I would add that whether it is a head fake or not nobody knows, but we expect the recovery to be slow and steady.

That doesn't mean it is not going to be without difficulties and speed bumps and setbacks.

I think we're going to be in the kind of environment where there is going to be a lot of mixed signals.

I think we're going to see two steps forward, one step back.

We're going to see results that we really like, and then I think that there may be a slight pullback.

So I think this year is going to be one of those years where there is a lot of arrows pointing in a lot of different directions and it is going to take time before we really sort through all of the complexities and the variety of dynamics operating in the marketplace.

Just a quick follow-up.

On your comp guidance at 2% to 4%, the sort of math to get from sort of a zero to 1% trend now to a let's say we were going to try to get to the top end of that guidance to the 4%, is it sort of 50% improvement in transactions, 50% -- sorry, transaction size and 50% ticket?

Or is there, sorry, number of transactions and ticket.

Can you just sort of tell me -- do they both improve the same or has traffic improved more or what is the thinking there overall?

We really don't know.

We would be elated if we got to the top end of that number.

Clearly where we remodel stores and do P-Fresh, we're going to see a greater percentage of sales being reflected in the traffic in those particular remodeled 350 stores, and the other stores we think will be more balanced between both traffic and ticket, but again it is pretty speculative.

We're really not sure, and it does move around from month to month.

Thanks so much.

You're welcome.

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

Thanks.

Gregg, you started to answer it there.

In the 2% to 4% comp plan this year what is the traffic versus ticket mix that's implicit in that and also the deflation part of it?

Again, we have seen some nice gains in traffic, so we think that that's going to be the primary driver of same-store sales, but not exclusively.

So it will be as it has been over many years a combination of both traffic and ticket.

And we really don't know what ultimately it is going to settle in at.

But our best guess today would be more from traffic than ticket, but a combination of both.

Historically, we have never gotten to a comp above 4% without contributions from both, and so I think that more likely than not it will be positive contributions from each if we get there.

Got it.

And second question, on the inflation you talked about how in food certainly a lot of well documented history there and we'll see when that turns.

If you go around the rest of the store, what are you seeing for your buy into this summer and into the third quarter in terms of inflation or lack thereof in some of the other direct import categories like apparel and home?

At this point we have not finished sourcing all of fall, but certainly through the third quarter.

And right now for that period we're essentially flat in apparel and up slightly in home.

And we think that will hold for our fourth quarter as well, so a lot of talk about the raw materials cost increases that is have been happening, and those today have not resulted in higher costs yet.

We think perhaps by spring of 2011 we'll start to see some cost increases but for the fall really apparel being flat and home just up slightly.

If anything, we'll continue to see some deflation in hard lines, particularly in electronics.

It is category that has traditionally been deflationary, moves around a little bit in terms of the level of deflation, but I would expect something in the 2% to 4% range there and other categories will be stable.

And then a follow-up on that.

You mentioned the Bullseye rolling out to 800 stores in your comments.

That's the Radio Shack kiosk.

Correct.

When was that buy?

October.

We have 100 stores now, and we will expand that throughout the year to 800 by October.

Great.

Thanks.

We have time for two more questions, please.

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

Doug, I had a credit question and then Kathee, I had a question on general merchandise side.

On the credit side, Gregg, I know it is a ways out from these changes and potential changes in regulation that impacts late fees.

But if you looked internally to take the most onerous set of legislations that would impact you and you look at that at 2011, could the income from late fees drop to $250 million a year or have you looked at it that way at all?

It certainly could.

If that were to occur, then I believe that we and virtually every other competitor in the industry would adjust other features of the economic model to be able to offset it.

I think that I am not sure this notion is understood inside the Beltway.

Yes.

You think you would be able to fully offset all of that?

If we didn't, you would see a shrinking industry, which is why I think that the legislation is perversely anti-stimulative.

And clearly there could be time delay from the time that something is impacted or the time that finally reaches their decision in a time that we can make those kind of adjustments, so there could be some implications.

But over the long-term we'll readjust.

To Gregg's very point, we'll need so see what the Fed's regulations have to say, but that could easily -- I can easily envision a scenario where that would adversely impact our credit card segment ROIC Q3, Q4 until we figured out competitively -- until we figured out how to continue to produce an offering that is viewed as quite valuable by our guests in the competitive environment.

That could happen, yes.

Okay.

And second question related to credit.

Is the test that you have going on in Kansas City with the 5% rebate if you will, are you finding that people are actually revolving on the card once they use it or are they paying it off?

And if they are paying it off, how does that impact the profit model of that initiative?

It is a great set of questions.

Certainly there is a different set of behaviors for existing card holders versus new card holders.

In each group there is sharply higher use and therefore sharply higher sales.

The new card holders by and large are of sufficiently high credit quality that they have a much, much lower propensity to revolve.

And therefore as we sort through the pieces of this equation, we need to pay careful attention to both the retail segment impacts and the credit card segment impacts, but net net, regardless of how we transfer price between the two segments, there is clearly a compelling equation that we continue to analyze to figure out whether this is something that is sufficiently profitable to consider a rolling out on a much larger scale.

Thanks.

Kathee, I just wanted to see on the Great Save event that you had, do you plan on replicating that in the coming years and how much, what did you learn that would roll back into the assortment now of key items that might have been selling you need to put in the assortment?

And the source we go now you're seeing clearance in those items.

I was surprised to see that for Kellogg's cereal, for example, why roll it in and clear it?

Just let it roll through.

Thank you.

A little early for us to determine if we will repeat the Great Save.

We were very happy with the performance.

As you know, we have value events and have had them couple times a year for many, many years, and so I think that what the Great Save brought was slightly larger sizes as well as all around the store we had a lot of home products in there and apparel products where historically our value events have been commodities and food.

So we are pleased with the event.

The markdowns, we filled that space with that special product.

Some of them went back to the home to end caps, but not all of them would fit in the home just given the size of those packages.

So we do consider it a seasonal event and clear it and move onto the next season, which is now our patio set.

Okay.

One more question.

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

E-commerce, what did that contribute to comp for the year?

How is it performing relative to total sales and what are your expectations for that in 2010?

On the total year basis, sales patterns were fairly what we experienced in the store where we're more challenged earlier in the year, and we saw strengthening at the end of the year.

And when you wash it all the way through, it was pretty close to the store in general in terms of a modest or slight same-store sales decrease over last year.

But just like in the store side of the business we're seeing starting to see a nice recovery there and some better signs than we have seen in some time.

So we're optimistic that's going to grow at or greater than the total store growth this year.

Just adding a little color to Gregg's comment, please remember our online business is much more heavily skewed towards discretionary product categories than many other online businesses.

Great.

Thank you very much.

That concludes Target's fourth quarter and year end 2009 earnings conference call.

Thank you all for your participation.

Thank you.

You may now disconnect.