目標百貨 (TGT) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, Welcome to Target Corporation's first-quarter 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 Wednesday, May 19, 2010.

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

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

Please go ahead, sir.

Good morning and welcome to Target's 2010 first -quarter earnings conference call.

On the line with me today are Doug Scovanner, Executive Vice President and Chief Financial Officer, and Kathy Tesija, Executive Vice President of merchandising.

This morning I'll provide a high-level overview of our first-quarter results, then Kathy will discuss category results, share recent guest insights, and outline upcoming merchandising initiatives, and finally, Doug will provide detail on our first-quarter financial results and our outlook for upcoming quarters.

Following Doug's remarks we'll 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 risk and uncertainties, the most important of which are described in our SEC filings.

Earlier this morning we announced that our first-quarter earnings per share rose 30% from a year ago to $0.90, well above our expectations at the beginning of the quarter.

As we previously indicated, this performance is the highest quarterly EPS in our history other than a fourth quarter and we are extremely pleased with the effectiveness of our strategy and proud of the superb execution by our team.

Our comparable-store sales increased 2.8% in the quarter, reflecting the right combination of fashion and basic merchandise at outstanding prices, compelling presentation and in stocks, and outstanding service by stores' teams.

This is the largest comparable-store sales increase in ten quarters and represents a meaningful improvement from the fourth quarter of 2009.

Comparable-store transactions were up more than 2% for the quarter.

When guests visited our stores, stronger-than-expected demand for categories like apparel made their trips more profitable, as the items in their baskets represented a healthy gross margin mix.

Kathy will provide additional detail on our category performance in a few minutes.

In addition to strong gross margin performance, our teams turned in another fantastic quarter on the expense line.

Store productivity increased, even while guests satisfaction scores continued to improve.

In our Credit Card segment receivables balances continued to decline, while profit flowing to Target moved to almost three times last year's first-quarter performance, as risk indicators turned more favorable than expected in an improving economy.

Doug will provide more detail on both our Credit Card segment performance and our Retail segment results later in this call.

Clearly, the economy and consumer sentiment have improved since their weakest point in 2009, but we believe that both are still somewhat unstable and fragile and will likely continue to experience occasional setbacks as the year progresses.

Persistently high unemployment rates and large deficits at both the state and federal level will continue to create uncertainty and volatility.

As a result, we continue to be cautious regarding our sales outlook in order to prudently manage our expenses while controlling inventory on markdown-sensitive merchandise.

We take this approach to mitigate our downside risks, while at the same time we work to prepare our teams quickly if we see unexpected strength.

This is precisely what occurred in the first quarter.

Our 2010 [P-Fresh] remodel program is off to a great start.

During the first quarter we completed the renovation of 96 stores in 13 markets, with the greatest concentration in the Los Angeles, Chicago, and Washington, DC metro markets.

It's important to note that at this quarter alone we remodeled more stores than we typically complete in an entire year.

In contrast to P-Fresh remodels completed in 2009, which focused primarily on food, this year's remodels include transformations throughout the store; in home, beauty, electronics, video games, and in shoes starting in July.

We continuously refine our processes with each set of remodels, leading to reduced guest disruption, shorter construction times, and effective control of remodel expenditures.

And while many of these remodels have only just been completed recently, the results so far have exceeded our expectations.

Our guests tell us they love the convenience and experience of the new layout and expanded grocery selection, and total store sales lifts have been higher than in last-year's remodels.

In addition, we've seen some early indication that the changes outside of food are leading to more cross shopping.

As a result, we believe that this initiative will transform our general merchandise stores, insuring we remain relevant and deliver a superb shopping experience, while meeting or exceeding our return on investment expectations for capital investments in our stores.

Looking forward, we'll remodel more than 240 additional stores this year, with completion spread roughly equally between the second and third quarters.

By the end of the third quarter we expect to have more than 450 general merchandise locations with the P-Fresh assortment and presentation.

And in many of these locations, the changes outside of food are so extensive the completed renovations resemble a brand-new Target store.

As we've indicated previously, we are on track to open 13 new Target stores in 2010, all in the second and third quarters.

Net of closings and relocations, these openings will add about ten locations to the chain.

We're particularly excited about the planned opening of our first Manhattan location in Spanish Harlem this July.

In our marketing, we launched a new campaign this month, "Life's a Moving Target." Leveraging our infinitely flexible Expect More, Pay Less" brand promise this new campaign has two important facets; broadcast spots that use story telling to strengthen the emotional connection with our guests during every stage of their life and shorter punctuated humorous spots that suggest items from our roster of trusted brands as solutions for their everyday challenges.

All aspects of this new campaign celebrate the fact that Target is the right destination for all of our guests' wants and needs at a great value, appropriately balancing both sides of our brand promise.

This is an exciting time for Target.

Teams throughout the organization are focused on driving innovation, transforming our stores and our merchandise assortment, and enhancing our outstanding guest experience.

They are focused more than ever on delivering both sides of our "Expect More, Pay Less" brand promise, consistently delighting our guests with great prices and unique merchandise in safe, well-designed stores with fast, fun, and friendly service.

I continue to be proud of this team and the results they deliver every day.

Now Kathy will provide detail on our guest insights research, and additional merch -- information on our merchandising initiatives.

Kathy?

Thanks, Gregg.

As we look back at the first quarter we are proud that we stayed the course during the past couple of years.

While we remained flexible in our tactics, we never strayed from our "Expect More, Pay Less" strategy, our commitment to continuous innovation, and our goal of providing a superior shopping environment with great guest service.

The dedication and discipline of our teams helped us successfully navigate the depths of the recession and today we're more committed than ever to delivering a relevant and compelling assortment that surprises guests with its quality and value.

While the economic environment remains somewhat volatile, consumers have become much more confident in their ability to manage their spending, and carefully select those discretionary items that satisfy their wants at a value that doesn't break their budgets.

To be sure, there are many households that continue to feel the direct impact of job loss and other forms of financial stress resulting from the recession.

However, a much larger portion of our guests did not feel such a direct impact from the recession, but instead, became extremely cautious in their buying behavior.

Those guests paid off debt, created and stuck with budgets, and now they're feeling optimistic enough to begin putting well-considered discretionary items back into their baskets.

Many have begun to indulge in small ways, with our discretionary assortment provides the perfect opportunity for them to indulge while feeling smart about the decision.

We are seeing this trend, particularly in home and apparel.

Guests are starting to buy clothing and accessory items for themselves.

Both men and women are freshening up their casual wardrobes, replacing basic work pieces, and picking up new shoes and accessories for spring.

In our home category, segment real estate markets are driving homeowners to make small, affordable investments in their homes, such as updating their bath and bedding with new towels and sheets, or adding excitement and color to their living spaces with new decorative accessories.

Our guests are demonstrating that they're eager to purchase items when the style and price are right.

Across both apparel and home, our recent collaboration with Liberty of London was an undisputed success.

It launched in mid March with an offering of more than 300 items across several areas of the store that were the perfect mix of color, print, and spring time optimism.

Sales of the collection, both in store and online, were well above expectations and were strong in all categories, with the most popular items in women's tops and accessories, girls dresses, table top and storage.

Our own brands continue to resonate with guests, generating loyalty and delivering outstanding value.

In the 2009 relaunch of our household commodity brand as "Up & Up" has been highly successful and this year we plan to add another 100 items.

We're enjoying similar success with the relaunch of Circo, with sales in the infant toddler category up in double digits over last year.

In home guests have responded very favorably to the relaunch of both our Room Essentials and Home brand.

We've better clarified the assortments, providing more clear design aesthetic , developed new packaging that highlights the most important benefits and features, and improved the quality of both lines.

Results have been outstanding, with the two brands combining for a mid single-digit comparable-store sales increase in the first quarter.

We continue to pursue innovation at an unprecedented pace.

The recession had taught to us be even more creative, aggressive and disciplined in bringing new and profitable items to our guests.

One of the most exciting innovations is our electronics and video games reinvention, which will be in all stores by the end of June.

We are turning this area of the store into a cohesive electronics and gaming destination.

The new TV wall provides a compelling focal point for the department, with realistic viewing angles that showcase our high-quality assortment.

Our TV delivery and installation service continues to be enthusiastically received by our guests, both for its convenience and value.

Positioned right next to electronics, the video game category remains one of the highest productivity areas of the store.

Our new, more welcoming environment, easier game access, better organized assortment, and enhanced information tools are driving positive guest feedback and enhanced conversion.

Our guests are also excited that the Amazon Kindle will roll out to all Target stores nationwide on June 6th.

We're currently the exclusive bricks-and-mortar retailer for this popular eReader, which practically flew off the shelves during our 100-store test.

Guests love this product because it fits their busy lifestyles, allowing them to get all the news and books they want most in one incredibly light, portable, easy-to-read product.

We continue to pursue compelling cross-merchandising offerings, particularly when they tie into the hottest entertainment releases of the season.

In toys we've created a must-see in-store destination for guests interested in the latest and greatest theatrical releases, like Iron Man 2 and Toy Story 3.

This fresh approach to merchandising movie releases creates a store-within-a-store environment, with movie-related product, including toys, clothing, bedding, and video games centralized in a boutique-like experience.

Our commitment to differentiation is as strong as ever.

We are excited that Caldrea, the luxurious brand of household products, has developed a line that's now available at Target stores nationwide.

The Caldrea Essentials collection is affordably priced from $5.99 to $19.99 and offers our guest superior cleaning products and candles in luxurious scents for their entire home.

In fashion our collaboration with red carpet design favorite, Zac Posen, launched in late April with 44 pieces ranging from $16.99 to $200.

We worked with Zac to create a collection that is fresh and fun, reflecting his aesthetic lux fabrics, and modern pop culture.

Also currently in stores are the fantastic lines from Cynthia Vincent and Eugenia Kim.

Cynthia's limited-edition footwear collection launched mid April and will be available until July.

Eugenia Kim's collection of timeless hats is the first of its kind at Target and will be available mid April through the end of June.

And we're looking back -- ahead to the back-to-college and back-to-school season, when Target will be ready with the right assortments at the right price in a compelling and easy-to-shop environment.

This critical season is an opper -- important opportunity for us to win the loyalty of our newly-independent guests, and create life-long Target fans.

We experienced great success, even in last year's challenging environment, and anticipate more favorable results this year.

We'll drive this momentum by providing must-have items at affordable prices, keeping our college guests coming back to Target for all their wants and needs.

We're also -- we are also focused on further cross-channel innovation, including the development of new mobile features and intelligent shopping tools that allow our guests to easily manage their budgets and plan store trips.

We are extending our lead in mobile retail with an aggressive roadmap for innovation.

In March we announced that Target is the first retailer with the scanning technology at checkout to read gift card and coupon bar codes on mobile devices in all our stores nationwide.

And in April we introduced the ability for guests to create lists and manage registries using their mobile devices.

At the same time, we launched a new feature to the iPhone app that let's guests scan items and search for product availability at other Target locations, access rating reviews, view extended assortments, and add items to a gift registry or a list.

The changes we've made in response to the recession have positioned us to perform better in this, and any economic environment.

We remain focused on the most important factor driving our business, our guests.

By delivering the quality and value they crave, the products they want and need, in stores that are clean, well-organized and efficient to shop we will reinforce our standing as their trusted friend in both daily essentials and pleasant surprises.

Now, Doug will provide more detail on our financial performance and expectations for the second quarter.

Thanks, Kathy.

In my remarks today I plan to review our first-quarter results in both business segments and then I'll provide my perspective on our outlook for the upcoming quarter and the remainder of the year.

As Gregg outlined, our first-quarter financial performance was well ahead of our expectations, as both of our business segments well exceeded their respective profit plans.

Beyond a comparison to our own expectations, our consolidated performance was also remarkable in comparison to our past results, as our 2010 first-quarter EPS of $0.90 was $0.08 higher than our results from continuing operations in any other non-holiday quarter in our history.

In our Retail segment sales increased 5.5%, due to a 2.8% increase in comparable-store sales and a similar contribution from our new stores.

Year-over-year same-store traffic trends were up 2.2%, driving about three-quarters of our comparable-store sales increase.

By any historical standard, this is a very healthy traffic trend.

Our gross margin rate was 31.3% of sales, half a point above last-year's strong performance, and it reflected a new first-quarter record.

The year-over-year increase in gross margin was entirely the result of rate increases within categories.

In other words, the impact of sales mix on our gross margin rate was essentially neutral because the pace of sales in our higher-margin categories was in line with the pace in lower-margin consumable and commodity categories.

We've experienced this kind of sales mix dynamic occasionally in the past, yet it has never lasted for very long because of the essence of our long-term traffic-building growth strategy.

Retail segment SG&A expenses were 20.6% of sales in the first quarter, reflecting 30-basis points of favorable leverage.

This improvement was primarily the result of continued productivity improvements in our stores.

We also recorded all-time records in reported first-quarter retail segment EBITDA and EBIT margin rates, as gross margin and expense rates both improved and these improvements more than offset the deleveraging of depreciation and amortization expense.

In our Credit Card segment, we enjoyed a sharp increase in all of our measures of profitability and returns on capital, as a direct result of a rapid improvement in several key risk metrics.

In particular, favorable trends in delinquencies give us confidence that the likely future write-off experience resulting from new credit extended in the quarter will be significantly improved from our current write-off experience.

As you know, a few weeks ago we announced that we've begun to offer only the Target credit card to qualified applicants, although we will continue to service the five million active Target Visa accounts outstanding today and these accounts will likely continue to make up the vast majority of our receivables portfolio for some time to come.

We made this decision after reviewing the results of a carefully drawn parallel test in which we learned that in the current environment, new credit card guests spend considerably more in our stores when issued a Target credit card as opposed to a Target Visa card.

Separately, we continue to measure the results from our Kansas City and San Antonio test markets, in which we're piloting a totally different and greatly simplified credit card rewards program.

Incremental sales results remain especially intriguing in Kansas City.

The Card Act, which became law last year, reduced a number of tools we and other card issuers formerly used to differentiate pricing to accommodate lending to different pools of borrowers with varying risk characteristics.

Of course this has had the direct risk of reducing the availability of credit to American households.

Yet another layer of new restrictions from this act take effect this August, which will reduce our late fee income from that point forward.

For reference, late fees contributed a little over three percentage points of annualized pretax yield in our portfolio in the quarter.

Turning briefly to generation and application of cash, in the first quarter we generated nearly $1.2 billion from our operating activities, up about 16% from last-year's first quarter.

Together with $1.6 billion of marketable securities on hand at the beginning of the period, we applied these combined resources during the quarter to retire about $1.2 billion of debt, to invest a little more than $400 million of capital to grow our core business, and to invest just under $400 million in our ongoing share repurchase program.

At the end of the quarter, we continued to have about $1 billion of immediate liquidity on hand.

Now let's discuss our prospects for the second quarter and the remainder of the year.

Our sales results so far in May are running somewhat behind our expectations for a low to mid single-digit increase.

Through two weeks, we're essentially flat to last year, yet we do not believe this two-week sales performance will hinder our ability to generate comparable store sales in the 2% to 4% range in the second quarter and in the fall season, as well.

On the gross margin line, we expect to return to some moderate rate pressures as the year progresses, as we expect to experience a more typical impact of sales mix than we enjoyed in the first quarter.

We expect to offset some or all of this gross margin rate issue with continued productivity improvements in our stores and through other means.

Of course, quarterly data will naturally reflect more volatility than annual data due to the relative impact of generally nonrecurring items and year-over-year timing differences.

Notably, in the second quarter, we expect a roughly neutral year-over-year SG&A expense rate due in part to a retiming of expense marketing in 2010.

As a reminder, our second quarter results will also reflect an increment of accelerated depreciation due to our 2010 remodel program.

In our Credit Card segment we expect many of our first-quarter trends to carry into future quarters.

Specifically, we expect to contin -- we expect a continued decline in our receivables portfolio, and we expect to sustain meaningful year-over-year improvement in bad debt expense throughout the remainder of 2010 followed by a declining net write-off experience as well.

This late fee issue I described earlier will offset some of this good news.

Final late fee regulations are, well, late.

I guess that's because no regulation currently governs the timing of issuance of regulations.

The bottom line here is that today we could only estimate the likely impact.

As a general rule we think that up to about half of our late fee income is likely to go away, and that compares to the $59 million we recorded in the first quarter.

I have one final comment on financial reporting in this segment before turning to our consolidated outlook.

We retired our last remaining publicly-traded receivables-backed securities in the quarter, and as a result we will no longer be filing monthly 8-K reports reflecting the performance of our receivables portfolio.

Since some of you seem to want more frequent than quarterly reporting of credit card risk metrics, we will begin posting on our website a monthly series of our credit card delinquency statistics.

Generally, we expect to provide this fresh data on the same day we release monthly sales statistics beginning next month.

Now let's spend a moment on our expectations for earnings per share in the upcoming quarter and for the remainder of the year.

The current First Call median estimates are $0.91 for the second quarter and $3.81 for the year.

Based on our outlook in each of our two business segments, these are both reasonable single-point estimates for our future performance as of today.

Now Gregg has a few brief closing remarks.

We're very pleased with our first-quarter performance and believe it validates our strategy.

We are 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 deliver strong results and to continue to create meaningful shareholder value over time.

That concludes our prepared remarks.

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

(Operator Instructions).

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

Good morning.

The first question I have is on the May results -- on the May sales trends that you talked about, can you just maybe elaborate a little bit more in terms of what you think is happening in the back half of April for you and then month to date from a broader perspective?

Well, I would just tell you that as we've said all year, it's going to be volatile.

There's going to be good months, bad months, and some ups and downs, and I think we're seeing an environment where that kind of volatility and unpredictability is just playing out in the consumer environment.

We've cited a number of consumer-facing issues that I think are weighing on the minds of consumers and I think that from our perspective we're going to continue to see this throughout the balance of the year.

We're going to find good weeks, bad weeks, and good weeks and bad months.

Separately, as you know, we don't like talking about the weather, but in a period of time as short as the period you're focused on the weather can never be ignored and the weather wasn't very good during the first two weeks of May.

Now, I'll quickly observe, as I have many times before, that over time on average the weather is average, so you shouldn't hear us talking much about the weather, except when questions are asked about such a short period of time.

Great.

And, Doug, on the credit card business, when you look at spread of the charge-off rate versus the bad debt expense, do you think that that spread is sustainable for the next several quarters?

I hope not, because I expect and hope that the net write-off dollars will come down to approximate our quarterly provisioning within the next several quarters.

So in short, the provision in the quarter -- the expense in the quarter, give or take $200 million, is well below the charge-offs in the quarter, but I expect that our net write-offs per quarter will be closer to $200 million than $300 million beginning in the second quarter, beginning right now.

Okay, thank you very much.

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

Thanks.

Let me ask Bob's question a little bit differently, Doug.

If receivables are going to be, say, $7 billion at the end of the year and presumably going potentially meaningfully lower in 2011, what do you think the appropriate balance would be for allowance for doubtful accounts at the end of the year?

Well, our allowance for doubtful accounts was 12.7% of receivables at year end one quarter ago, and 12.8% of receivables right now, so essentially the allowance in the quarter moved directly in line with the reduction in receivables.

If risks unfold during the year consistent with the significant improvement that we've seen here in Q1, then, of course, that percentage will fall perhaps by a couple of percentage points at the outside.

I still expect, even under the most rosey outlook, that the allowance as a percentage of gross receivables, will still be a double-digit percentage by year end.

Now, having said that, last year we saw pretty significant improvement in risks early and then the improvement in risks slowed down measurably, so I think it's a bit premature to be thinking about much of a significant change in our allowance as a percent of gross receivables from the current 12.8% figure.

Okay.

Great, thanks.

And then, Gregg, when we last spoke to you noted that Wal-Mart, their rollback campaign and their price gap was in the low double digits and the number of items on rollback had increased modestly.

I was wondering if any of these figures have changed and if you could speak to the competitive environment, particularly given that Wal-Mart's taken another step down on their deep rollback campaign?

Well, nothing's really changed since we talked.

The rollbacks that Wal-Mart announced earlier were really for a period of 90 days, so we're in the early stages of that.

The competitive environment continues to be aggressive, but reasonable, like it always is.

It's generally very competitive and that continues to be so but we have not seen any meaningful change in what Wal-Mart has done over the last 30 or 60 days.

Okay, great.

Thanks very much.

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

Good morning, thanks for taking the question.

First of all, a number of retailers have been talking about increasing sourcing costs coming in the second half of the year.

Now, this may apply more to next year, as I'm sure your apparel sourcing is already under way for the rest of this year, but I wondered what your outlook was on sourcing costs coming out of Asia and also what your [actually] would be towards passing through price increases?

So you are correct.

There are costing pressures coming through and it's on a number of different categories from cotton to paper, copper, synthetic fabrics, even transportation, but what we have booked for the fall -- or coming for this fall is we don't have cost increases coming.

So perhaps late fall or if we start chasing products there might be some increases to that.

But certainly in the spring, I think we will start to see some of the cost increases coming through.

And we'll have to look at each product category independently, how large the increase is and then whether or not we will pass it along or try to reengineer the product to keep the retail and the margin where it is.

But we will start to see some cost increases in receipts that will hit in spring 2011.

Thanks.

and second quarter about employee expenses.

You did a great job last year, the last 18 months really, of reducing employee expenses, I wonder as sales recover -- or continue to recover whether you still feel that service levels are good, or whether you might have to start increasing some labor hours in the stores?

Well, the labor hours in the stores are going to be reflective of the performance in the sales within the stores, so we're focused on expense management, productivity management, improving efficiencies within our supply chain.

But as the recovery -- assuming the recovery continues to proceed and sales continue to improve, we'll have to add some variable labor within our stores to accommodate increases in sales.

But it's our intentions to still manage our expenses tightly and make sure that we are leveraging the sales performance that we do get.

We're not seeing any labor rate inflation at this particular point in time, nor do we expect to see that for the foreseeable future.

We are enjoying the double benefits of wonderful improvements in productivity inside our stores and experiencing record high guest service levels, and we intensively measure those service levels through the eyes of our guests.

Thank you for taking the questions.

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

Doug, I had a question for you related to the credit business.

What impact, if at all, will be the changes in the credit card offer that you have now as exclusively as Target card on the third-party merchant fees, which has been about $100 million, if at all, anything?

Well, as you know, we earn those third-party merchant fees when our Target Visa cards are used anywhere else Visa is accepted.

At Wal-Mart, for example, and elsewhere we profit from that merchant fee when the Target Visa card is used.

Over time that certainly will reduce -- that line item will reduce in line with Target Visa balances, but at the moment I would not expect that the yield impact, the impact on profitability and return on capital is likely to change.

Okay, and my second question related to credit is the late fee impact.

You talked about, I think if I heard you correctly, maybe 50% and I'm wondering as you roll that into 2011 and you get a full year of that could we be looking at late fee income that might approximate $150 million or how do you think about that as you roll that into full-year 2011 and your ability to offset some of that erosion?

Well, in isolation, of course, the late fee income impact is just in line with what you're laying out, if your math is good.

But of course the reaction of all card issuers, not just Target, is to reduce the amount of credit available to the lower end of the file -- to the lower end of the portfolio where we can no longer recover sufficient late fee income to make sense out of lending.

So the quite direct impact of the card act is to significantly reduce the availability of credit to American households.

So we'll essentially offset that through underwriting and risk management by enjoying a better write-off and expense -- bad debt expense experience by no longer lending to pools of households with those kinds of risks.

All right, and just my final question, I guess is to Kathy.

Kathy, in some of the success you're seeing right now are there -- especially in the apparel area, are you thinking about that rather than having these swing through a particular season maybe adding them to the assortment on a more sustainable basis because demand is so strong?

You've done that with some things in the past, I'm just wondering if there are things that we should be thinking about that you could bring in that's more sustainable?

I think the beauty of the programs that we've brought in have been the fact that they are limited time and that we're able to fit them to the season with the right aesthetic, as well as the right color pallet, and apply them to the right merchandise.

So if we talk about Liberty, it was a perfect scenario.

In the spring, it was very optimistic, the colors were really bright and cheerful, which lended themselves well to Liberty's print and pattern.

So we like the ability to be able to move through different designers or partnerships that really help us to keep our content fresh.

And so certainly when there are successes we analyze what worked and what didn't and try to apply those to the future.

But in terms of keeping any of those on a long-term basis we're committed to having some designers that are long term, which you're well aware of, in our portfolio, but to keep that freshness going as we roll through some of the limited time offers.

All right, thank you.

Your next question comes from the line of Robbie Ohmes with Banc of America.

Thank you, actually just two quick questions.

Kathy, I just wanted to clarify, given what your guests are doing, are you seeing within categories -- I think you guys said they're reaching more or opening up their wallets or whatever, are they upscaling their purchases?

Are they trading back up in price points within categories?

And then the second question I had is just on the remodels you guys have been doing, even through the first quarter here, is there any negative impact on comps as the remodels are being done?

And also, you commented on the performance being above plan.

Is the food list exceeding expectations, as well, the P-Fresh component, or is it really home, beauty, electronics, video games, et cetera, that's really doing stronger post remodel than you guys thought?

Thanks.

Sure.

So the first question on whether or not we're seeing trade up.

All along we have had higher-end product that has done well and an example would be C9, which is our highest quality in apparel and it has done well throughout the recession.

But in general I would say there's not a resurgence to trading up to more products like that.

I would say that it's more about guests feeling a little bit more comfortable putting an extra discretionary item in their basket.

So we're seeing those mix trips, where they are buying needs and wants starting to increase.

Your second question about remodels and is there any negative to sales, there -- when we start the remodel there is a negative impact to sales as we disrupt the stores but that's being offset by the sales that we're experiencing once they are set so there isn't a negative.

And in total all areas are up at our expectation or above, which would include food, as well as the others you mentioned, like home and beauty.

We've previously disclosed that we expect the net impact of this remodel activity for the year to add about one full point to our reported same-store sales performance.

During the first quarter that net figure was between 0.02 and 0.03 of a percentage point because the mix, of course, of stores that are under duress being remodeled is a much larger factor relative to the number of stores that have been remodeled and are producing the strong results we've described.

The last comment I would make this is in aggregation and really these remodels going store-by-store situation in some cases we see very little disruption because of the fact that the store happens to be newer and there's less reconstruction within the stores.

In other cases, in older stores or where we might have an older format or multiple entrances or multiple levels, the extensive nature of that reconstruction is more disruptive and we'll see a fairly significant dip in the short term as we really transform that store.

But in aggregate, we've seen in the neighborhood of about 5% disruption in 2009, and as we go into 2010, we're getting better and better at this remodel process and have already seen our ability to reduce that aggregate disruption below what we experienced last year.

But you might see some varying levels -- you will see varying levels of disruption depending upon what store you go in and at what point of that remodel.

Thank you.

Actually those were all really helpful.

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

Thank you.

First question for Kathy.

Looks like the units per transaction were up about 1.3%, but the AUR was off about 0.7% in the quarter and I just thought with the mix and some of the increase indiscretionary categories that you would have been seeing maybe a little bit more positive.

So can you help me understand the decline in average unit retail and what's driving that?

It's really in a variety of categories and I think some of that is just lower retailer -- lower retails where we have invested our cost savings into products.

For example, in kids we have lowered our retails in kids, making it more affordable for our guests.

There's other categories like in our decorative home area or seasonal, less patio full sets and more casual seating, which would lower the price point.

And then there's areas like stationery where we've added, say, $0.99 cards to our assortment just to offer a better price point, as well as the high-end Papyrus cards.

So there's some shifting between good, better, and best that we're seeing and it varies -- the reasons vary by category.

The other thing that I would add is there is starting to be a little bit of a mix impact due to P-Fresh.

Now that we have 200 stores we are going to continue to see in those particular stores a greater unit sale and a less price per item.

And that particular impact in the first quarter, it wasn't significant, but it would have shifted the overall numbers to be more closely aligned to being up slightly in terms of the units per transaction and essentially flat in terms of dollars per -- or amount of dollars per unit.

Okay, that's helpful.

That makes a lot of sense.

Second question for Doug, I know there's some advertising mix shift going on here 1Q to 2Q, but if we look at 1Q looks like your leverage per point of comp was about eight-basis points of SG&A leverage per point of comp, is that something you think is a reasonable rate to think about?

And I guess another way of asking that would be where's the break-even leverage given just run rate cost increases and what's leverage look like above that?

Well, there's a lot -- there are a lot of factors that go into any quarter so I don't like making the generalization out of any individual quarter's results, but looking across the year, give or take, our point of SG&A leverage is in the range of a two comp, perhaps a little lower, so maybe we call that a one-to-two comp as the point of neutrality.

And generally speaking this is a shorthand; all shorthands ultimately break down at a detailed level, but generally speaking half of our expenses vary with sales, up or down from that point, and half are fixed and so you can calculate the basis points from those figures.

Okay, great.

Thank you.

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

Good morning.

Just a question on the -- your comments around P-Fresh and starting to see some cross shopping.

I was just curious, is that only in the stores that you remodeled this year, or are you seeing it in the stores that you remodeled last year, as well?

The primary increase is in the stores that we remodeled this year.

Just to refresh your memory, of the stores that -- the 108 stores that we remodeled last year, virtually all of them, the reconstruction in those stores were focused on expanding the food side of the business.

As we rolled into 2010 we are focusing more completely on the entire store.

So the first two cycles of remodels that we just completed as the destination beauty, has home, has electronics, has video games, and some new visual elements throughout the stores and it's in those stores that we're seeing the improvement in cross shopping.

Ultimately, we'll go back to those stores in -- that we remodeled last year and we will be adding those elements, as well, and we would expect to see improvements in the cross shopping in those discretionary categories once we complete those elements, as well.

But we're very encouraged.

Now, again, it's a little early, we've only got 96 stores that we've completed in our first two cycle this year, but we've seen a nice bump in those categories as we've really focused on improving the experience and the visual impact and presentation of the stores.

Okay.

And then -- so I assume its too early to say it might have a greater impact on sales than you were originally expecting?

No, within our modeling we've assumed all along that there was going to be a slight uptick in our -- in the discretionary spending.

We laid that out for you in January.

Okay.

But it was a very modest.

We were not expecting an uptick and what we have seen so far this year has been very consistent, what our expectations were.

And this is also -- the context here is everything.

This is a quarter in which our overall chain-wide sales of higher-margin merchandise moved in line with the chain-wide sales of lower-margin merchant merchandise.

Just as our experience over time in new stores has shown us, when the chain is doing well newer stores end up reflecting an exaggerated version of what's happening in the chain.

I think that our experience in P-Fresh should be interpreted in that same context.

Okay, and then just a follow-up question, if I could.

On -- there's some legislation, I guess, that got passed in the senate last week regarding debit fee cuts.

I know it's early, but is there any sense of how that might help you?

Well, early is certainly the right word.

That legislation has not passed the senate, what you're referring to, I believe, is an amendment that passed that is attached to some proposed legislation that has not yet passed the senate and the bill that passed the house has no parallel feature in it.

Obviously we and all other retailers would benefit if that legislation were to pass, given the hotly competitive nature of retailing in the United States.

It is a virtual certainty in my mind that the vast majority of that benefit would be passed along to consumers, to our guests, and customers of all other retailers.

But it's a long way from being law at this point, even though it's a law that makes good sense to me from a public policy standpoint.

Great, thanks.

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

Good morning and congratulations on a fantastic quarter.

In terms of the Kansas City test are you seeing a greater frequency of visit from those cardholders, in addition, I would assume to a greater ticket and at what time would you decide to roll out the test further?

Most of the increase -- substantially all of the increase is due to a higher frequency as opposed to a higher average ticket, but nonetheless, the increase is substantial enough to make it quite intriguing to consider relative to the fact that we are discounting sales that otherwise would have occurred in -- many sales that otherwise would have occurred at full price.

It's also comforting from an analytical standpoint to see that the pace of sales increase seems to be sustained, so we're not seeing any kind of drop off at all in year-over-year trends, and now we're, of course, beyond six months into the test in both Kansas City and San Antonio.

Certainly we'll be carefully looking at these results here in the short term and we will need to decide very soon whether we would want to do something on a much broader scale or alternatively other test markets because of the lead times involved to get something like that launched in time for the holiday season.

And would you say that your surprised in the difference and experience between the San Antonio and Kansas City markets?

Well, reasonable minds can differ on that one, that's, after all, why we've produced two very different tests.

But in hindsight perhaps it sounds like common sense that 5% off every item every day at point of sale seems to be quite sufficient to ultimately overcome any perceptions about purchase price as it relates to behavior of guests in our stores, and 3% for whatever reason does not move the needle nearly to the extent that 5% does.

All right, thanks.

And then, Kathy, you mentioned within a fairly short timeframe that all stores will have both the video games and TV wall, how should we think about the pace of rollout of destination beauty, home and shoes in terms of reinvention, and why are the paces of rollout -- why do they differ between the different reinvention?

So you're correct, the video game and TV wall will all be installed by the end of June and the simplicity with that is that it's all contained within one area of the store, so as that area is transitioning we will put that in.

Home and beauty are a little bit more disruptive.

There are larger changes and more gondola movement and things like that, and so that will happen with the P-Fresh remodels so that the store is only disrupted once as they go to that remodel they'll do all the rest of it together.

And that would include the shoe reinvention, Deb, which comes in -- starts in July and all remodels going forward.

Okay.

And then, Gregg, I don't know if this question is necessarily the appropriate one for your way, but I was in a lot of stores recently and during the tours the store managers and district team leaders have talked about store segmentation opportunities, which I haven't heard in the past, is that just a new terminology or a new opportunity?

Maybe you can elaborate on that.

Yes, I think it's more a terminology change than anything.

We've been micro marketing and trying to customize our assortments for many, many years, and we have.

Think as broadly as apparel and as narrowly as making sure that shovels are in northern climate stores and not in Florida or Texas.

As we have applied new technology and become more sophisticated we have really evolved into a segmentation model where we're thinking more broadly about demographic, psychographics, brands, and what is sell -- urban markets, rural markets and things like that so it's a more holistic approach.

This is a journey, not a sprint.

This is something that is going to take many, many years for us to really continue to refine and refine and refine, but we're committed to it.

We've seen good results from our efforts thus far and we believe it's the appropriate thing to do.

As you know, you go into -- food is very localized, so as you go into P-Fresh remodels you'll see a food assortment that varies differently from Texas to San Antonio to Boston and that's part of that segmentation effort.

Great.

Well, thanks so much and best of luck.

Thank you.

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

Yes, thank you.

Two quick things, Doug.

On new store growth, just thinking ahead 2011 and beyond, any movement at all yet in the commercial development activities and/or anything else -- any other visibility in terms of going into some urban markets that might change your growth trajectory?

And then Doug and/or Gregg, just international any updated thoughts on your plans and timing on that front?

Thank you.

I'll start with the store growth expectations and let Gregg address the international aspect of the question.

We've just -- no, our outlook has not changed and that means that this year we expect to open 13 gross, ten net stores, and we expect that this year, 2010, will be the low point in our development activity.

But it will be a long, long time before we approach the kinds of development pace that was firmly in place here several years ago, so that translates to, who knows, 20 or more stores next year perhaps, maybe some more in 2012.

But generally speaking, the large-scale retail development in this country remains at very near absolute zero, and so we are left to self develop individual store sites that make economic sense.

And regarding the question on international, no news -- no new news to report there.

Really, we're doing the research and at some point in time we feel that we will be international, but clearly in the near term, in the zero-to-three, zero-to-five years we're focused on really trans -- the most core priority we have is really transforming our existing large base of general merchandise stores and making sure that P-Fresh and all the related reinventions and the visual elements gets implemented through the 1,300 stores that aren't Super Targets and so that is our highest priority right now.

And then as Doug mentioned, we're going to continue to open new stores, as we have, in the trade areas that make sense with the formats that we currently have.

And then three, we're looking at really trying to be more flexible with our prototype and take advantage of opportunities where there's great demographics and trade areas where our current formats simply just don't work because they're too large and we're looking at downsizing Target to fit the environment where there are guests that have lots of money and love Target.

So we're focused on that as our third priority and then international would come well beyond that.

We have the capital to be able to grow much, much faster.

We have the capabilities, team, otherwise to be able to grow much, much faster.

There are hundreds and hundreds and hundreds of trade areas in the US, maybe even more than 1,000, that are suitable for a Target store that don't have one yet.

This is all a matter of finding the right development opportunities that end up making economic sense to us and end up making sense on an overall basis in the communities we aspire to serve.

Nicole, we have time for one more question, please.

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

Hey, guys, thanks.

Thinking about the improved sales and profits you've seen lately across both Retail and Credit, how has it looked on a regional basis across the country?

Specifically I'm interested in maybe how places like Florida, California have behaved on this recovery versus the rest of the country.

Well, as you know, in both of our segments those two states in particular declined a lot more than others.

Our sales in Florida, for example, went soft well before our sales went soft in rest of the country.

California, I would put an asterisk.

It is certainly a state, but it behaves in large part like three different states, where the economy and our sales and our credit card experience in the Bay area is remarkably different from the economy and our sales and our credit card experience in the Inland Empire and Central Valley, the latter geography far more challenging than any other part of the state of California and as challenging as some of the most challenging geography that we've operated in the country, such as Las Vegas.

At the moment trends in those areas are mixed, candidly.

Florida certainly has shown signs of stability and the beginnings of -- potentially of a recovery.

The best I can say about some of those geographies is they're not nearly as challenged as they were and aren't deteriorating, but by no means reflecting strength at this point.

Gregg?

That concludes Target's first-quarter earnings conference call.

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