MINNEAPOLIS--(BUSINESS WIRE)--Target Corporation (NYSE: TGT) today reported a third quarter 2017 comparable sales increase of 0.9 percent and GAAP earnings per share (EPS) from continuing operations of $0.87, a decrease of 17.7 percent from third quarter 2016. Third quarter adjusted earnings per share from continuing operations (Adjusted EPS) were $0.91, a decrease of 13.1 percent from third quarter 2016. The attached tables provide a reconciliation of non-GAAP to GAAP measures. All earnings per share figures refer to diluted EPS.
|
1 Adjusted EPS, a non-GAAP financial measure, excludes the impact of certain discretely managed items. See the “Miscellaneous” section of this release, as well as the tables of this release, for additional information about the items that have been excluded from Adjusted EPS. |
“We’re very pleased with Target’s third quarter performance, including traffic and sales growth that demonstrate we’re building on the progress we saw in the first half of the year,” said Brian Cornell, chairman and chief executive officer of Target Corporation. “The investments we’re making in our business will help Target drive long-term success and ensure we’re well positioned to deliver for guests in the all-important holiday season. Our assortment now includes thousands of new items from the eight exclusive brands we’ve launched throughout 2017, including Hearth and Hand with Magnolia, our new home goods partnership with Chip and Joanna Gaines. Guests this holiday season will experience elevated in-store service reflecting our investments in wages, training and additional hours for our team, and they’ll find more value than ever before through a combination of being priced right daily and offering impressive deals. While we expect the fourth-quarter environment to be highly competitive, we are very confident in our holiday season plans.”
Fourth Quarter and Fiscal 2017 Guidance
Target expects
fourth quarter 2017 comparable sales growth of flat to two percent. That
performance would translate into full-year 2017 comparable sales growth
of flat to one percent.
For fourth quarter 2017, the Company expects GAAP EPS from continuing operations and Adjusted EPS of $1.05 to $1.25. For full-year 2017, the Company now expects GAAP EPS from continuing operations of $4.38 to $4.58 and Adjusted EPS of $4.40 to $4.60, compared with prior guidance of $4.35 to $4.55 for GAAP EPS from continuing operations and $4.34 to $4.54 for Adjusted EPS. The 2 cent difference between expected full-year GAAP EPS from continuing operations and Adjusted EPS is driven by the expected net impact of debt-retirement costs and tax benefits.
Fourth quarter and full-year 2017 GAAP EPS from continuing operations may include the impact of additional discrete items which will be excluded in calculating Adjusted EPS. The Company is not currently aware of any such discrete items.
The Company announced today that it plans to issue a post-holiday financial update on Tuesday, January 9, 2018.
Segment Results
Third quarter 2017 sales increased 1.4
percent to $16.7 billion from $16.4 billion last year, reflecting a 0.9
percent comparable sales increase combined with the benefit from sales
in non-mature stores. Comparable digital channel sales grew 24 percent
and contributed 0.8 percentage points to comparable sales growth.
Segment earnings before interest expense and income taxes (EBIT), which
is Target’s measure of segment profit, were $869 million in third
quarter 2017, a decrease of 17.8 percent from $1,057 million in third
quarter 2016.
Third quarter EBIT margin rate was 5.2 percent, compared with 6.4 percent in 2016. Third quarter gross margin rate2 was 29.7 percent, compared with 29.8 percent in 2016, reflecting pressure from digital fulfillment costs and the Company’s pricing and promotion efforts, partially offset by cost savings. Third quarter SG&A expense rate was 21.1 percent in 2017, compared with 20.3 percent in 2016, driven by higher compensation costs, reflecting a year-over-year increase in team member incentives combined with the impact of investments in store team member hours and wage rates. This was partially offset by the benefit from the timing of some expenses and our ongoing cost-savings efforts.
Interest Expense and Taxes from Continuing Operations
The
Company’s third quarter 2017 net interest expense was $254 million,
compared with $142 million last year. The increase was driven by a $123
million charge related to the early retirement of debt in third quarter
2017, partially offset by the benefit of lower average debt balances.
Third quarter 2017 effective income tax rate from continuing operations was 22.3 percent compared with 33.8 percent last year. The decrease was primarily due to the net tax effect of the Company’s global sourcing operations, the resolution of other income tax matters and the effect of lower pretax earnings.
|
2 Beginning in the second quarter of 2017, we reclassified supply chain-related depreciation expense into cost of sales and out of depreciation and amortization on our Consolidated Statements of Operations. Prior year amounts have been reclassified to reflect this change. Updated financials for the thirteen quarters prior to this change have been posted on our Investor Relations website at investors.target.com. |
Capital Returned to Shareholders
In third quarter 2017, the
Company returned $510 million to shareholders, which consisted of:
- Dividends of $339 million, compared with $345 million in third quarter 2016.
- Share repurchases totaling $171 million, including an accelerated share repurchase (ASR) agreement that retired 2.8 million shares of common stock at an average price of $57.78, for a total investment of $161 million. Final settlement of the ASR occurred in November, and 0.3 million of the 2.8 million shares repurchased through the ASR were delivered in November.
As of the end of third quarter 2017, including the $161 million repurchased under the ASR, the Company had approximately $4 billion of remaining capacity under its current $5 billion share repurchase program.
For the trailing twelve months through third quarter 2017, after-tax return on invested capital (ROIC) was 13.7 percent, compared with 16.3 percent for the twelve months through third quarter 2016. Excluding the net gain on the sale of the pharmacy and clinic businesses, ROIC for the trailing twelve months through third quarter 2016 was 14.3 percent. The year-over-year decline in third quarter 2017 primarily reflected the impact of lower profits, partially offset by the benefit of lower working capital. See the “Reconciliation of Non-GAAP Financial Measures” section of this release for additional information about the Company’s ROIC calculation.
Conference Call Details
Target will webcast its third
quarter earnings conference call at 7:00 a.m. CST today. Investors and
the media are invited to listen to the call at investors.target.com
(hover over “company” then click on “events & presentations” in the
“investors” column). A telephone replay of the call will be available
beginning at approximately 10:30 a.m. CST today through the end of
business on November 17, 2017. The replay number is 866-393-0868.
Miscellaneous
Statements in this release regarding fourth
quarter and full-year 2017 earnings per share and comparable sales
guidance are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are
subject to risks and uncertainties which could cause the Company’s
actual results to differ materially. The most important risks and
uncertainties are described in Item 1A of the Company’s Form 10-K for
the fiscal year ended Jan. 28, 2017. Forward-looking statements speak
only as of the date they are made, and the Company does not undertake
any obligation to update any forward-looking statement.
In addition to the GAAP results provided in this release, the Company provides Adjusted EPS, consolidated earnings from continuing operations before interest expense and income taxes (EBIT), and earnings from continuing operations before interest, taxes, depreciation and amortization (EBITDA) for the three and nine-month periods ended October 28, 2017 and October 29, 2016, respectively. The Company also provides ROIC for the twelve-month periods ended October 28, 2017 and October 29, 2016, which is a ratio based on GAAP information, with the exception of adjustments made to capitalize operating leases. Operating leases are capitalized as part of the ROIC calculation to control for differences in capital structure between the Company and its competitors. Adjusted EPS, capitalized operating lease obligations and operating lease interest are not in accordance with, or an alternative for, generally accepted accounting principles in the United States (GAAP). Management believes Adjusted EPS is useful in providing period-to-period comparisons of the results of the Company’s ongoing retail operations. Management believes consolidated EBIT and EBITDA are useful in providing meaningful information about our operational efficiency compared to our competitors by excluding the impact of differences in tax jurisdictions and structures, debt levels and, for EBITDA, capital investment. Management believes ROIC is useful in assessing the effectiveness of its capital allocation over time. The most comparable GAAP measure for adjusted diluted EPS is diluted EPS from continuing operations. The most comparable GAAP measure for consolidated EBIT and EBITDA is net earnings from continuing operations. The most comparable GAAP measure for capitalized operating lease obligations and operating lease interest is total rent expense. These non-GAAP numbers should not be considered in isolation or as a substitution for analysis of the Company’s results as reported under GAAP. Other companies may calculate Adjusted EPS, consolidated EBIT, EBITDA and ROIC differently than the Company does, limiting the usefulness of the measure for comparisons with other companies.
About Target
Minneapolis-based Target Corporation (NYSE:
TGT) serves guests at 1,834 stores and at Target.com. Since 1946, Target
has given 5 percent of its profit to communities, which today equals
millions of dollars a week. For more information, visit Target.com/Pressroom.
For a behind-the-scenes look at Target, visit Target.com/abullseyeview
or follow @TargetNews
on Twitter.
|
TARGET CORPORATION |
||||||||||||||||||||||
|
Consolidated Statements of Operations |
||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||
| (millions, except per share data) | October 28, | October 29, | October 28, | October 29, | ||||||||||||||||||
| (unaudited) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||||||
| Sales | $ | 16,667 | $ | 16,441 | 1.4 | % | $ | 49,113 | $ | 48,805 | 0.6 | % | ||||||||||
| Cost of sales (a) | 11,712 | 11,536 | 1.5 | 34,330 | 33,957 | 1.1 | ||||||||||||||||
| Gross margin | 4,955 | 4,905 | 1.0 | 14,783 | 14,848 | (0.4 | ) | |||||||||||||||
| Selling, general and administrative expenses | 3,512 | 3,339 | 5.2 | 10,027 | 9,741 | 2.9 | ||||||||||||||||
| Depreciation and amortization (exclusive of depreciation included in cost of sales) (a) | 574 | 505 | 13.7 | 1,596 | 1,486 | 7.4 | ||||||||||||||||
| Earnings from continuing operations before interest expense and income taxes | 869 | 1,061 | (18.1 | ) | 3,160 | 3,621 | (12.7 | ) | ||||||||||||||
| Net interest expense | 254 | 142 | 79.1 | 532 | 864 | (38.4 | ) | |||||||||||||||
| Earnings from continuing operations before income taxes | 615 | 919 | (33.1 | ) | 2,628 | 2,757 | (4.7 | ) | ||||||||||||||
| Provision for income taxes | 137 | 311 | (55.8 | ) | 802 | 910 | (11.9 | ) | ||||||||||||||
| Net earnings from continuing operations | 478 | 608 | (21.5 | ) | 1,826 | 1,847 | (1.1 | ) | ||||||||||||||
| Discontinued operations, net of tax | 2 | — | 7 | 73 | ||||||||||||||||||
| Net earnings | $ | 480 | $ | 608 | (21.0 | )% | $ | 1,833 | $ | 1,920 | (4.5 | )% | ||||||||||
| Basic earnings per share | ||||||||||||||||||||||
| Continuing operations | $ | 0.88 | $ | 1.07 | (17.8 | )% | $ | 3.33 | $ | 3.16 | 5.2 | % | ||||||||||
| Discontinued operations | — | — | 0.01 | 0.12 | ||||||||||||||||||
| Net earnings per share | $ | 0.88 | $ | 1.07 | (17.3 | )% | $ | 3.34 | $ | 3.29 | 1.6 | % | ||||||||||
| Diluted earnings per share | ||||||||||||||||||||||
| Continuing operations | $ | 0.87 | $ | 1.06 | (17.7 | )% | $ | 3.31 | $ | 3.14 | 5.4 | % | ||||||||||
| Discontinued operations | — | — | 0.01 | 0.12 | ||||||||||||||||||
| Net earnings per share | $ | 0.88 | $ | 1.06 | (17.1 | )% | $ | 3.32 | $ | 3.26 | 1.8 | % | ||||||||||
| Weighted average common shares outstanding | ||||||||||||||||||||||
| Basic | 544.5 | 570.1 | (4.5 | )% | 548.7 | 583.5 | (6.0 | )% | ||||||||||||||
| Dilutive impact of share-based awards | 3.4 | 4.7 | 0 | 3.1 | 5.0 | |||||||||||||||||
| Diluted | 547.9 | 574.8 | (4.7 | )% | 551.8 | 588.5 | (6.2 | )% | ||||||||||||||
| Antidilutive shares | 4.5 | 0.2 | 4.1 | 0.1 | ||||||||||||||||||
| Dividends declared per share | $ | 0.62 | $ | 0.60 | 3.3 | % | $ | 1.84 | $ | 1.76 | 4.5 | % | ||||||||||
Note: Per share amounts may not foot due to rounding.
(a)
Refer to the Segment Results section for information about a
reclassification of supply chain-related depreciation expense to cost of
sales.
Subject to reclassification
|
TARGET CORPORATION |
||||||||||||
|
Consolidated Statements of Financial Position |
||||||||||||
| October 28, | January 28, | October 29, | ||||||||||
| (millions) (unaudited) | 2017 | 2017 | 2016 | |||||||||
| Assets | ||||||||||||
| Cash and cash equivalents | $ | 2,725 | $ | 2,512 | $ | 1,231 | ||||||
| Inventory | 10,586 | 8,309 | 10,057 | |||||||||
| Assets of discontinued operations | 6 | 69 | 62 | |||||||||
| Other current assets | 1,392 | 1,100 | 1,492 | |||||||||
| Total current assets | 14,709 | 11,990 | 12,842 | |||||||||
| Property and equipment | ||||||||||||
| Land | 6,087 | 6,106 | 6,106 | |||||||||
| Buildings and improvements | 28,310 | 27,611 | 27,518 | |||||||||
| Fixtures and equipment | 5,548 | 5,503 | 5,467 | |||||||||
| Computer hardware and software | 2,658 | 2,651 | 2,538 | |||||||||
| Construction-in-progress | 389 | 200 | 219 | |||||||||
| Accumulated depreciation | (17,880 | ) | (17,413 | ) | (16,946 | ) | ||||||
| Property and equipment, net | 25,112 | 24,658 | 24,902 | |||||||||
| Noncurrent assets of discontinued operations | 9 | 12 | 17 | |||||||||
| Other noncurrent assets | 878 | 771 | 842 | |||||||||
| Total assets | $ | 40,708 | $ | 37,431 | $ | 38,603 | ||||||
| Liabilities and shareholders’ investment | ||||||||||||
| Accounts payable | $ | 9,986 | $ | 7,252 | $ | 8,250 | ||||||
| Accrued and other current liabilities | 4,036 | 3,737 | 3,662 | |||||||||
| Current portion of long-term debt and other borrowings | 1,354 | 1,718 | 729 | |||||||||
| Total current liabilities | 15,376 | 12,707 | 12,641 | |||||||||
| Long-term debt and other borrowings | 11,277 | 11,031 | 12,097 | |||||||||
| Deferred income taxes | 944 | 861 | 920 | |||||||||
| Liabilities of discontinued operations | 11 | 19 | 19 | |||||||||
| Other noncurrent liabilities | 1,963 | 1,860 | 1,857 | |||||||||
| Total noncurrent liabilities | 14,195 | 13,771 | 14,893 | |||||||||
| Shareholders’ investment | ||||||||||||
| Common stock | 45 | 46 | 47 | |||||||||
| Additional paid-in capital | 5,762 | 5,661 | 5,598 | |||||||||
| Retained earnings | 5,940 | 5,884 | 6,031 | |||||||||
| Accumulated other comprehensive loss | (610 | ) | (638 | ) | (607 | ) | ||||||
| Total shareholders’ investment | 11,137 | 10,953 | 11,069 | |||||||||
| Total liabilities and shareholders’ investment | $ | 40,708 | $ | 37,431 | $ | 38,603 | ||||||
Common Stock Authorized 6,000,000,000 shares, $.0833 par value; 543,913,318, 556,156,228 and 563,676,785 shares issued and outstanding at October 28, 2017, January 28, 2017 and October 29, 2016, respectively.
Preferred Stock Authorized 5,000,000 shares, $.01 par value; no shares were issued or outstanding during any period presented.
Subject to reclassification
|
TARGET CORPORATION |
||||||||
|
Consolidated Statements of Cash Flows |
||||||||
| Nine Months Ended | ||||||||
| October 28, | October 29, | |||||||
| (millions) (unaudited) | 2017 | 2016 | ||||||
| Operating activities | ||||||||
| Net earnings | $ | 1,833 | $ | 1,920 | ||||
| Earnings from discontinued operations, net of tax | 7 | 73 | ||||||
| Net earnings from continuing operations | 1,826 | 1,847 | ||||||
| Adjustments to reconcile net earnings to cash provided by operations | ||||||||
| Depreciation and amortization | 1,784 | 1,686 | ||||||
| Share-based compensation expense | 81 | 85 | ||||||
| Deferred income taxes | 37 | 83 | ||||||
| Loss on debt extinguishment | 123 | 422 | ||||||
| Noncash losses / (gains) and other, net | 189 | (5 | ) | |||||
| Changes in operating accounts | ||||||||
| Inventory | (2,277 | ) | (1,455 | ) | ||||
| Other assets | (89 | ) | (14 | ) | ||||
| Accounts payable | 2,738 | 832 | ||||||
| Accrued and other liabilities | 2 | (711 | ) | |||||
| Cash provided by operating activities—continuing operations | 4,414 | 2,770 | ||||||
| Cash provided by operating activities—discontinued operations | 75 | 111 | ||||||
| Cash provided by operations | 4,489 | 2,881 | ||||||
| Investing activities | ||||||||
| Expenditures for property and equipment | (2,049 | ) | (1,184 | ) | ||||
| Proceeds from disposal of property and equipment | 27 | 23 | ||||||
| Other investments | (62 | ) | 23 | |||||
| Cash required for investing activities | (2,084 | ) | (1,138 | ) | ||||
| Financing activities | ||||||||
| Change in commercial paper, net | — | 89 | ||||||
| Additions to long-term debt | 739 | 1,977 | ||||||
| Reductions of long-term debt | (1,087 | ) | (2,625 | ) | ||||
| Dividends paid | (1,001 | ) | (1,011 | ) | ||||
| Repurchase of stock | (757 | ) | (3,034 | ) | ||||
| Prepayment of accelerated share repurchase | (111 | ) | (120 | ) | ||||
| Stock option exercises | 25 | 166 | ||||||
| Cash required for financing activities | (2,192 | ) | (4,558 | ) | ||||
| Net increase / (decrease) in cash and cash equivalents | 213 | (2,815 | ) | |||||
| Cash and cash equivalents at beginning of period | 2,512 | 4,046 | ||||||
| Cash and cash equivalents at end of period | $ | 2,725 | $ | 1,231 | ||||
Subject to reclassification
|
TARGET CORPORATION |
||||||||||||||||||
|
Segment Results |
||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| October 28, | October 29, | October 28, | October 29, | |||||||||||||||
| (millions) (unaudited) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||
| Sales | $ | 16,667 | $ | 16,441 | 1.4 | % | $ | 49,113 | $ | 48,805 | 0.6 | % | ||||||
| Cost of sales (a) | 11,712 | 11,536 | 1.5 | 34,330 | 33,957 | 1.1 | ||||||||||||
| Gross margin | 4,955 | 4,905 | 1.0 | 14,783 | 14,848 | (0.4 | ) | |||||||||||
| SG&A expenses (b) | 3,512 | 3,343 | 5.1 | 10,027 | 9,741 | 2.9 | ||||||||||||
| Depreciation and amortization (exclusive of depreciation included in cost of sales) (a) | 574 | 505 | 13.7 | 1,596 | 1,486 | 7.4 | ||||||||||||
| EBIT | $ | 869 | $ | 1,057 | (17.8 | )% | $ | 3,160 | $ | 3,621 | (12.7 | )% | ||||||
(a) Beginning in the second quarter of 2017, we
reclassified supply chain-related depreciation expense to cost of sales
whereas it was previously included in depreciation and amortization on
our Consolidated Statements of Operations. We reclassified prior year
amounts to reflect this change. This reclassification increased cost of
sales by $60 million and $189 million for the three and nine months
ended October 28, 2017, respectively, and $65 million and $200 million
for the three and nine months ended October 29, 2016, respectively, with
equal and offsetting decreases to depreciation and amortization. This
reclassification had no impact on sales, EBIT, net earnings or earnings
per share.
(b) SG&A expenses include $170 million
and $512 million net profit-sharing income under our credit card program
agreement for the three and nine months ended October 28, 2017,
respectively, and $168 million and $489 million for the three and nine
months ended October 29, 2016, respectively.
| Three Months Ended | Nine Months Ended | |||||||||||
| Rate Analysis | October 28, | October 29, | October 28, | October 29, | ||||||||
| (unaudited) | 2017 | 2016 | 2017 | 2016 | ||||||||
| Gross margin rate (a) | 29.7 | % | 29.8 | % | 30.1 | % | 30.4 | % | ||||
| SG&A expense rate | 21.1 | 20.3 | 20.4 | 20.0 | ||||||||
| Depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate (a) | 3.4 | 3.1 | 3.2 | 3.0 | ||||||||
| EBIT margin rate | 5.2 | 6.4 | 6.4 | 7.4 | ||||||||
Note: Rate analysis metrics are computed by dividing the applicable
amount by sales.
(a) Reclassifying supply
chain-related depreciation expense to cost of sales reduced the gross
margin and depreciation and amortization rates by 0.4 percentage points
for all periods presented.
| Three Months Ended | Nine Months Ended | |||||||||||
| Sales by Channel | October 28, | October 29, | October 28, | October 29, | ||||||||
| (unaudited) | 2017 | 2016 | 2017 | 2016 | ||||||||
| Stores | 95.7 | % | 96.5 | % | 95.7 | % | 96.5 | % | ||||
| Digital | 4.3 | 3.5 | 4.3 | 3.5 | ||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||
| Three Months Ended | Nine Months Ended | |||||||||||
| Comparable Sales | October 28, | October 29, | October 28, | October 29, | ||||||||
| (unaudited) | 2017 | 2016 | 2017 | 2016 | ||||||||
| Comparable sales change | 0.9 | % | (0.2 | )% | 0.3 | % | — | % | ||||
| Drivers of change in comparable sales | ||||||||||||
| Number of transactions | 1.4 | (1.2 | ) | 0.9 | (1.0 | ) | ||||||
| Average transaction amount | (0.5 | ) | 1.0 | (0.6 | ) | 1.0 | ||||||
Note: Amounts may not foot due to rounding.
|
Contribution to Comparable Sales Change
(unaudited) |
Three Months Ended | Nine Months Ended | ||||||||||
|
October 28, |
October 29, 2016 |
October 28, 2017 |
October 29, 2016 |
|||||||||
| Stores channel comparable sales change | — | % | (1.0 | )% | (0.6 | )% | (0.7 | )% | ||||
| Digital channel contribution to comparable sales change | 0.8 | 0.7 | 0.9 | 0.6 | ||||||||
| Total comparable sales change | 0.9 | % | (0.2 | )% | 0.3 | % | — | % | ||||
Note: Amounts may not foot due to rounding.
| Three Months Ended | Nine Months Ended | |||||||||||
|
REDcard Penetration |
October 28, 2017 |
October 29, 2016 |
October 28, 2017 |
October 29, 2016 |
||||||||
| Target Debit Card | 12.9 | % | 12.9 | % | 13.1 | % | 12.9 | % | ||||
| Target Credit Cards | 11.4 | 11.4 | 11.3 | 11.0 | ||||||||
| Total REDcard Penetration | 24.2 | % | 24.3 | % | 24.4 | % | 23.9 | % | ||||
Note: Amounts may not foot due to rounding.
|
Number of Stores and Retail Square Feet |
Number of Stores | Retail Square Feet (a) | ||||||||||
|
October 28, 2017 |
January 28, 2017 |
October 29, 2016 |
October 28, 2017 |
January 28, 2017 |
October 29, 2016 |
|||||||
| 170,000 or more sq. ft. | 276 | 276 | 278 | 49,326 | 49,328 | 49,685 | ||||||
| 50,000 to 169,999 sq. ft. | 1,508 | 1,504 | 1,503 | 190,038 | 189,620 | 189,496 | ||||||
| 49,999 or less sq. ft. | 44 | 22 | 19 | 1,268 | 554 | 464 | ||||||
| Total | 1,828 | 1,802 | 1,800 | 240,632 | 239,502 | 239,645 | ||||||
(a) In thousands, reflects total square feet less office, distribution center, and vacant space.
Subject to reclassification
TARGET CORPORATION
Reconciliation of Non-GAAP Financial Measures
To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share from continuing operations (Adjusted EPS). This metric excludes certain items presented below. We believe this information is useful in providing period-to-period comparisons of the results of our continuing operations. This measure is not in accordance with, or an alternative for, generally accepted accounting principles in the United States (GAAP). The most comparable GAAP measure is diluted earnings per share from continuing operations. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP. Other companies may calculate Adjusted EPS differently, limiting the usefulness of the measure for comparisons with other companies.
| Three Months Ended | ||||||||||||||||||||||||||
| October 28, 2017 | October 29, 2016 | |||||||||||||||||||||||||
|
Net of |
Per Share | Net of | Per Share | |||||||||||||||||||||||
| (millions, except per share data) (unaudited) | Pretax |
Tax |
Amounts | Pretax | Tax | Amounts | Change | |||||||||||||||||||
| GAAP diluted earnings per share from continuing operations | $ | 0.87 | $ | 1.06 | (17.7 | )% | ||||||||||||||||||||
| Adjustments | ||||||||||||||||||||||||||
| Loss on early retirement of debt | $ | 123 | $ | 75 | $ | 0.14 | $ | — | $ | — | $ | — | ||||||||||||||
| Pharmacy Transaction-related costs (a) | — | — | — | (4 | ) | (3 | ) | — | ||||||||||||||||||
| Income tax matters (b) | — | (55 | ) | (0.10 | ) | — | (5 | ) | (0.01 | ) | ||||||||||||||||
| Adjusted diluted earnings per share from continuing operations | $ | 0.91 | $ | 1.04 | (13.1 | )% | ||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||
| October 28, 2017 | October 29, 2016 | |||||||||||||||||||||||||
| Net of | Per Share | Net of | Per Share | |||||||||||||||||||||||
| (millions, except per share data) (unaudited) | Pretax | Tax | Amounts | Pretax | Tax | Amounts | Change | |||||||||||||||||||
| GAAP diluted earnings per share from continuing operations | $ | 3.31 | $ | 3.14 | 5.4 | % | ||||||||||||||||||||
| Adjustments | ||||||||||||||||||||||||||
| Loss on early retirement of debt | $ | 123 | $ | 75 | $ | 0.14 | $ | 422 | $ | 257 | $ | 0.44 | ||||||||||||||
| Pharmacy Transaction-related costs (a) | — | — | — | — | — | — | ||||||||||||||||||||
| Income tax matters (b) | — | (56 | ) | (0.10 | ) | — | (8 | ) | (0.01 | ) | ||||||||||||||||
| Adjusted diluted earnings per share from continuing operations | $ | 3.34 | $ | 3.56 | (6.2 | )% | ||||||||||||||||||||
Note: Amounts may not foot due to rounding.
(a)
Represents items related to the December 2015 sale of our pharmacy and
clinic businesses to CVS (Pharmacy Transaction).
(b)
Represents income from income tax matters not related to current period
operations. For the three and nine months ended October 28, 2017,
primarily represents prior-period discrete tax benefits related to our
global sourcing operations.
We have presented consolidated earnings from continuing operations before interest expense and income taxes (EBIT) and earnings before interest, taxes, depreciation and amortization (EBITDA), non-GAAP financial measures, because we believe they provide investors with meaningful information about our operational efficiency compared to our competitors by excluding the impact of differences in tax jurisdictions and structures, debt levels, and for EBITDA, capital investment. These measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States (GAAP). The most comparable GAAP measure is net earnings from continuing operations. Consolidated EBIT and EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP. Other companies may calculate consolidated EBIT and EBITDA differently, limiting the usefulness of the measure for comparisons with other companies.
| EBIT and EBITDA | Three Months Ended | Nine Months Ended | ||||||||||||||||
| October 28, | October 29, | October 28, | October 29, | |||||||||||||||
| (millions) (unaudited) | 2017 | 2016 | Change | 2017 | 2016 | Change | ||||||||||||
| Net earnings from continuing operations | $ | 478 | $ | 608 | (21.5 | )% | $ | 1,826 | $ | 1,847 | (1.1 | )% | ||||||
| + Provision for income taxes | 137 | 311 | (55.8 | ) | 802 | 910 | (11.9 | ) | ||||||||||
| + Net interest expense | 254 | 142 | 79.1 | 532 | 864 | (38.4 | ) | |||||||||||
| EBIT | 869 | 1,061 | (18.1 | ) | 3,160 | 3,621 | (12.7 | ) | ||||||||||
| + Total depreciation and amortization (a) | 633 | 570 | 11.1 | 1,784 | 1,686 | 5.8 | ||||||||||||
| EBITDA | $ | 1,502 | $ | 1,631 | (7.9 | )% | $ | 4,944 | $ | 5,307 | (6.8 | )% | ||||||
(a) Represents total depreciation and amortization, including amounts classified within depreciation and amortization and within cost of sales on our Consolidated Statements of Operations.
We have also disclosed after-tax return on invested capital from continuing operations (ROIC), which is a ratio based on GAAP information, with the exception of adjustments made to capitalize operating leases. Operating leases are capitalized as part of the ROIC calculation to control for differences in capital structure between us and our competitors. We believe this metric provides a meaningful measure of the effectiveness of our capital allocation over time. Other companies may calculate ROIC differently, limiting the usefulness of the measure for comparisons with other companies.
| After-Tax Return on Invested Capital | |||||||
| Numerator | Trailing Twelve Months | ||||||
| October 28, | October 29, | ||||||
| (dollars in millions) (unaudited) | 2017 | 2016 | |||||
| Earnings from continuing operations before interest expense and income taxes | $ | 4,508 | $ | 5,790 | |||
| + Operating lease interest (a)(b) | 78 | 72 | |||||
| Adjusted earnings from continuing operations before interest expense and income taxes | 4,586 | 5,862 | |||||
| - Income taxes (c) | 1,420 | 1,849 | |||||
| Net operating profit after taxes | $ | 3,166 | $ | 4,013 | |||
| Denominator | October 28, | October 29, | October 31, | ||||||||
| (dollars in millions) (unaudited) | 2017 | 2016 | 2015 | ||||||||
| Current portion of long-term debt and other borrowings | $ | 1,354 | $ | 729 | $ | 825 | |||||
| + Noncurrent portion of long-term debt | 11,277 | 12,097 | 11,887 | ||||||||
| + Shareholders' equity | 11,137 | 11,069 | 13,256 | ||||||||
| + Capitalized operating lease obligations (b)(d) | 1,298 | 1,192 | 1,503 | ||||||||
| - Cash and cash equivalents | 2,725 | 1,231 | 1,977 | ||||||||
| - Net assets of discontinued operations | 4 | 60 | 197 | ||||||||
| Invested capital | $ | 22,337 | $ | 23,796 | $ | 25,298 | |||||
| Average invested capital (e) | $ | 23,067 | $ | 24,547 | |||||||
| After-tax return on invested capital (f) | 13.7 | % | 16.3 | % | |||||||
(a) Represents the add-back to operating income to
reflect the hypothetical interest expense we would incur if the property
under our operating leases were owned or accounted for as capital
leases, using eight times our trailing twelve months rent expense and an
estimated interest rate of six percent.
(b) See
the following Reconciliation of Capitalized Operating Leases table for
the adjustments to our GAAP total rent expense to obtain the
hypothetical capitalization of operating leases and related operating
lease interest.
(c) Calculated using the
effective tax rate for continuing operations, which was 31.0 percent and
31.5 percent for the trailing twelve months ended October 28, 2017 and
October 29, 2016, respectively. For the trailing twelve months ended
October 28, 2017 and October 29, 2016, includes tax effect of $1,396
million and $1,826 million, respectively, related to EBIT and $24
million and $23 million, respectively, related to operating lease
interest.
(d) Calculated as eight times our
trailing twelve months rent expense.
(e) Average
based on the invested capital at the end of the current period and the
invested capital at the end of the comparable prior period.
(f)
Excluding the net gain on the Pharmacy Transaction, ROIC was 14.3
percent for the trailing twelve months ended October 29, 2016.
Capitalized operating lease obligations and operating lease interest are not in accordance with, or an alternative for, GAAP. The most comparable GAAP measure is total rent expense. Capitalized operating lease obligations and operating lease interest should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP.
| Reconciliation of Capitalized Operating Leases | Trailing Twelve Months | ||||||||||
| October 28, | October 29, | October 31, | |||||||||
| (dollars in millions) (unaudited) | 2017 | 2016 | 2015 | ||||||||
| Total rent expense | $ | 162 | $ | 149 | $ | 188 | |||||
| Capitalized operating lease obligations (total rent expense x 8) | 1,298 | 1,192 | 1,503 | ||||||||
| Operating lease interest (capitalized operating lease obligations x 6%) | 78 | 72 | n/a | ||||||||
Subject to reclassification
