EX-99 2 a2017q3ex-99.htm EXHIBIT 99 Exhibit
Exhibit 99


 releasebullseyea09.jpg

FOR IMMEDIATE RELEASE
Contacts:
John Hulbert, Investors, (612) 761-6627
 
Erin Conroy, Media, (612) 761-5928
 
Target Media Hotline, (612) 696-3400

Target Reports Third Quarter 2017 Earnings
Comparable sales and EPS near the high end of expectations

Third quarter comparable traffic grew 1.4 percent. Comparable sales increased 0.9 percent.
Third quarter GAAP EPS from continuing operations of $0.87 and Adjusted EPS1 of $0.91 were near the upper-end of the guidance range of $0.75 to $0.95.
Comparable digital channel sales increased 24 percent, on top of 26 percent growth in third quarter 2016.
In the third quarter, Target devoted $847 million to capital investment, paid dividends of $339 million, and returned $171 million through share repurchases.
For additional media materials, please visit:
https://corporate.target.com/article/2017/11/q3-2017-earnings

MINNEAPOLIS (Nov. 15, 2017) - 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.


– more –
 
1Adjusted 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.

 


Target Corporation Announces Third Quarter 2017 Earnings - Page 2 of 6
“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.


– more –



Target Corporation Announces Third Quarter 2017 Earnings - Page 3 of 6
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.


– more –
 
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 prior thirteen quarters have been posted on our Investor Relations website at investors.target.com.



 




Target Corporation Announces Third Quarter 2017 Earnings - Page 4 of 6
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.

– more –



Target Corporation Announces Third Quarter 2017 Earnings - Page 5 of 6
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

– more –



Target Corporation Announces Third Quarter 2017 Earnings - Page 6 of 6

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) (unaudited)
 
October 28,
2017
 
October 29,
2016
 
Change
 
October 28,
2017
 
October 29,
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
(millions) (unaudited)
 
October 28,
2017
 
January 28,
2017
 
October 29,
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
(millions) (unaudited)
 
October 28,
2017
 
October 29,
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
 
 

(millions) (unaudited)
 
October 28,
2017
 
October 29,
2016
 
Change
 
October 28,
2017
 
October 29,
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
(unaudited)
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
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
(unaudited)
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
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
(unaudited)
October 28,
2017
 
October 29,
2016
 
October 28,
2017
 
October 29,
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,
2017
 
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
(unaudited)
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
(unaudited)
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
 
 
(millions, except per share data) (unaudited)
 
Pretax

 
Net of Tax

 
Per Share Amounts

 
Pretax

 
Net of Tax

 
Per Share 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
 
 
(millions, except per share data) (unaudited)
 
Pretax

 
Net of Tax

 
Per Share Amounts

 
Pretax

 
Net of Tax

 
Per Share 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
 
 

(millions) (unaudited)
 
October 28,
2017
 
October 29,
2016
 
Change
 
October 28,
2017
 
October 29,
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
 
 
(dollars in millions) (unaudited)
 
October 28,
2017
 
October 29,
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
(dollars in millions) (unaudited)
 
October 28,
2017
 
October 29,
2016
 
October 31,
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
(dollars in millions) (unaudited)
 
October 28,
2017
 
October 29,
2016
 
October 31,
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