Target Earnings Call Nuggets: REDcard Rate and Transaction Trends

Target Corporation (NYSE:TGT) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

REDcard Rate

Peter Benedict – Robert Baird: Just a couple of questions, just on the U.S. gross margin performance. Can you give us a sense of maybe what that REDcard impact was in the quarter?

John J. Mulligan – EVP and CFO: The rate impact of the REDcard, Peter?

Peter Benedict – Robert Baird: Yeah, John.

John J. Mulligan – EVP and CFO: The combination of that with the store remodel program, very consistent with what we’ve seen over the past several quarters, somewhere between 25 to 30 basis points of impact.

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Peter Benedict – Robert Baird: Then just a longer term question I mean you kind of said for the year you’re now thinking 2 to 2.5 I assume that’s still has a pretty to modest view for comping in the fourth quarter, A, is that correct? Then secondly just when you think out beyond I mean do you guys think that maybe 2 to 3 is the longer-term comp profile for the business or do you think it could still be north of 3 just when you think of it in a more normalized environment on an annual basis?

John J. Mulligan – EVP and CFO: Yeah, I think your view of Q4 is right. I think in particular this Q4 will be particularly difficult giving 53rd week and the way the calendar shits this year, you’ll recall we’re going to lose six business days between Thanksgiving and Christmas this year, which will make the comp – feel much more difficult than it otherwise might. I think over the longer term, we just continue to think of 3 comp is about the right place to be. If you look again at our company over 15 years or 20 years if you net out the contribution of (renewed) store annualization we essentially ran pretty consistently a three comp over time through good times and tougher times so we think in an economic environment it might just be a little bit better than today doesn’t have to improve drastically but little better than today we think a three comp make sense…

Peter Benedict – Robert Baird: One last housekeeping. On the Canadian D&A what do you think the run rate is for that once you get out you’ve opened the bunch of the stores once you get towards the end of the year what kind of run rate were you thinking about for Canadian D&A?

John J. Mulligan – EVP and CFO: I think you will continue to see D&A grow throughout this year as we continue to put significant assets into service and we’ll provide a little bit more color I think as we get later into the year and have a little bit more clarity about sales margin in the entire P&L we’ll provide a little more clarity about the entire P&L for Canada.

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Transaction Trends

Sean Naughton – Piper Jaffray: In terms of just dissecting the comp in Q1 transaction trends as you mentioned were relatively stable on a two-year basis and did improve from Q4, but the units per transaction were down 60 basis points and I think that’s the first time since ’09. Just wondering what would explain that decline given the increase in the remodel program from Q1 last year?

John J. Mulligan – EVP and CFO: Sean, I am not quite clear on your question. Units per transaction in the first quarter were up year-over-year so help me with that again…

Sean Naughton – Piper Jaffray: I thought they were down 60 basis points maybe I’m missing something?

John J. Mulligan – EVP and CFO: No, selling price per unit was down 60 basis points.

Gregg W. Steinhafel – Chairman, President and CEO: That was mix related.

John J. Mulligan – EVP and CFO: Right. Entirely mix, but the units were up consistently for some of the reasons you described.

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Sean Naughton – Piper Jaffray: Then I guess, Gregg, you touched briefly on the price matching. Just curious if you are seeing the number of requests for the price match changed at all and has there been any competitive response to that in the marketplace?

Gregg W. Steinhafel – Chairman, President and CEO: Both the stores with the matching of competitors physical ads and the online match has been fairly stable and has not grown materially over the last quarter. So, it still represents a very small portion of our transaction and that’s because our everyday price and our promotional prices are so strong there is generally not much of a gap, if any. So, we continue to watch our competitive prices on a day-in and day-out basis and move where we have to be competitive in the marketplace and so we expect over time this not to change all that much.

Sean Naughton – Piper Jaffray: Then just lastly on digital, you’re obviously seeing some nice traction, nice growth outside of the seasonal categories. Can you talk about just the impact on margin for that sale today? Is it dilutive or is it accretive to the margin? What do you think that can — how are you are planning that over time?

John J. Mulligan – EVP and CFO: Yeah I think first I’ll start with how we think about this longer term and we think about from a longer term perspective sales through all of our channels regardless of the channel need to generate a return. I think and the return on investment that’s similar to what we see in our current U.S. store base. What we see today is honestly, we’re learning a lot about that channel and a lot of this depends on how we are going to ultimately settle on the supply chain that our guests wants to interact with us, how much is shift from store, how much is shift to store that will have a significant impact ultimately on the EBITDA margin rates of that particular channel. But I think once again depending on where those EBITDA margin rates land sales or capital will move around and we feel very confident that we’ll get back to return that makes sense. Having said all that I think as it relates to the rates embedded within that channel we feel very comfortable that ultimately we’ll get back and operate at that 10% EBITDA rate that we’ve said is part of our long-range plan.