Fitch Affirms Target's IDR at 'A-'; Outlook Stable

Tue Jun 18, 2013 2:59pm EDT

(The following statement was released by the rating agency) CHICAGO, June 18 (Fitch) Fitch Ratings has affirmed its long-term Issuer Default Rating (IDR) on Target Corporation (Target) at 'A-', and its short-term IDR at 'F2'. The Rating Outlook is Stable. Target had $12.3 billion of senior notes outstanding as of May 4, 2013. A full rating list is shown below. Key Rating Drivers: The affirmation reflects Target's strong competitive position in the discount retail sector and steady operating performance. The ratings further reflect the debt repayment with the proceeds from the sale of the company's credit card receivables, and a relatively steady financial profile on a retail-only basis. Target completed the sale of its credit business to TD Bank in March 2013. The sale price was the gross value of the receivables of $5.7 billion, of which 90% is targeted for debt repayment and the balance for share repurchases. This level of debt repayment is consistent with the amount of debt that Fitch had assigned to the credit business, as it was assumed that the receivables portfolio was 90% debt-financed. The sale of the credit card receivables eliminates a more cyclical business while preserving the customer loyalty benefit for TGT's retail business, and permits TGT to share in the profits of the credit business going forward. Target's core U.S. retail business generated comparable store (comp) sales growth in 2010-2012, ranging from 2.1% to 3.0%. Comp sales turned negative in first quarter 2013 (1Q'13), coming in at (0.6%), most likely reflecting the payroll tax hike, continued weak employment growth, and cool spring weather. The challenging environment facing low- and middle-income consumers will likely continue to constrain sales growth in the near term. This pressure will be offset in part by the incremental volume driven by the addition of fresh food to more stores and the 5% rewards program for users of the Target credit and debit cards. Fitch expects positive comp sales of around 2% for the full year. These two programs are expected to be relatively neutral to EBIT margin rates as sales growth improves, and as the cost of the 5% discounts and the impact on margin rates from selling lower-margin food is offset by the effect of leveraging fixed costs against expected higher sales, lowering the operating expense ratio. However, Target's U.S. retail segment will benefit going forward from credit card profit sharing, which should drive the segment EBIT margin to around 7.3% from 7.0% historically. The company plans to open 124 stores in Canada in 2013 in former Zellers sites. Fitch expects operating cash flow in 2013 (excluding proceeds from the credit card receivables sale) will cover the incremental capex to build out these stores, as well as most of the current year's dividend, and free cash flow (FCF) is expected to be relatively neutral. FCF is expected to accelerate to more than $2 billion in 2014 and beyond as Canada is expected to move from a net use of cash flow to a source of cash flow. Adjusted leverage was 2.2x at May 2013, compared with 2.5x at end-2012 (Feb. 2, 2013) on a consolidated basis (including credit card receivables), and 2.0x at year-end on a retail-only basis. Fitch assumes that TGT will use share repurchases to manage its adjusted debt/EBITDAR at or around its current level, and that these repurchases will be partly debt-financed beginning in 2014. Rating Sensitivities: A positive rating action could be triggered by strong operating momentum in the domestic business, a successful expansion into Canada, and a policy to maintain leverage at or below 2.0x. A negative rating action could be triggered by operating shortfalls and/or more aggressive share repurchase activity that drove leverage to over 2.5x. Fitch affirms the following: Target Corporation --Long-term IDR at 'A-'; --Senior unsecured debt at 'A-'; --Bank credit facility at 'A-'; --Short-term IDR at 'F2'; --Commercial paper at 'F2'. The Rating Outlook is Stable. Contact: Primary Analyst Philip M. Zahn, CFA Senior Director +1-312-606-2336 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Monica Aggarwal, CFA Senior Director +1-212-908-0282 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Short-Term Ratings Criteria for Corp. Finance'(Aug. 8, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology here Short-Term Ratings Criteria for Non-Financial Corporates here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article