UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 8-K
 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Date of Report (Date of earliest event reported) May 20, 2015
 
Target Corporation
(Exact name of registrant as specified in its charter)
Minnesota
 
1-6049
 
41-0215170
(State or other jurisdiction of incorporation)
 
(Commission File Number)
 
(I.R.S. Employer Identification No.)
1000 Nicollet Mall, Minneapolis, Minnesota 55403
(Address of principal executive offices, including zip code)
(612) 304-6073
(Registrant’s telephone number, including area code)
 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
 
o            Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o            Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o            Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o            Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 




Item 2.02.             Results of Operations and Financial Condition.
 
On May 20, 2015, Target Corporation issued a News Release containing its financial results for the three months ended May 2, 2015.  The News Release is attached hereto as Exhibit 99.
 
Item 9.01.             Financial Statements and Exhibits.
 
(d)                                 Exhibits.
 
(99)                          Target Corporation’s News Release dated May 20, 2015 containing its financial results for the three months ended May 2, 2015.

2



SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
TARGET CORPORATION
 
 
Date: May 20, 2015
/s/ John J. Mulligan
 
John J. Mulligan
 
Executive Vice President and Chief Financial Officer

3



EXHIBIT INDEX
 
Exhibit
 
Description
 
Method
of Filing
 
 
 
 
 
(99)
 
Target Corporation’s News Release dated May 20, 2015 containing its financial results for the three months ended May 2, 2015.
 
Furnished Electronically


4


Exhibit 99


 

FOR IMMEDIATE RELEASE
Contacts:
John Hulbert, Investors, (612) 761-6627
 
Jenna Reck, Media, (612) 761-5829
 
Target Media Hotline, (612) 696-3400
 
Target Reports First Quarter 2015 Earnings
Adjusted EPS of $1.10, up 19.6 percent from last year; Comparable sales up 2.3 percent

First quarter Adjusted EPS of $1.10 was above the company’s expected range of $0.95 to $1.05. The Company now expects full-year 2015 Adjusted EPS of $4.50 to $4.65, compared with prior guidance of $4.45 to $4.65.
First quarter comparable sales increased a better-than-expected 2.3 percent, driven by growth in both transactions and basket size.
Digital channel sales increased 37.8 percent, contributing 0.8 percentage points to comparable sales growth.
Comparable sales in signature categories (Style, Baby, Kids and Wellness) grew more than double the company average.
Target returned cash through share repurchase for the first time since the second quarter of 2013, with purchases of $562 million in shares of common stock in the first quarter. Including dividends, the company returned $895 million to shareholders in the first quarter, more than 140% of net income.

MINNEAPOLIS (May 20, 2015) - Target Corporation (NYSE: TGT) today reported first quarter 2015 adjusted earnings per share from continuing operations1 (Adjusted EPS) of $1.10, up 19.6 percent from $0.92 in 2014. GAAP EPS from continuing operations were $1.01, compared with $0.89 in first quarter 2014. First quarter 2015 GAAP EPS from continuing operations reflect $103 million of restructuring costs that are excluded from Adjusted EPS. The tables attached to this press release provide a reconciliation of non-GAAP to GAAP measures. All earnings per share figures refer to diluted EPS.
 
1Adjusted EPS, a non-GAAP financial measure, excludes restructuring charges and the impact of certain matters not related to the Company’s single segment, such as discontinued operations, data breach expenses and certain other expenses that are discretely managed. See the “Discontinued Operations” and “Accounting Considerations” sections of this release for additional information about the items that have been excluded from Adjusted EPS.

 




Target Corporation Announces First Quarter 2015 Earnings - Page 2 of 6
“We’re pleased with our first quarter traffic and sales, particularly in our signature categories, which drove better-than-expected profitability through improved gross margin and continued expense management,” said Brian Cornell, chairman and CEO of Target. “We’re encouraged to see early progress on our strategic priorities, including strong sales growth in Apparel, Home and Beauty, nearly 40 percent growth in digital sales, and positive traffic in both our stores and digital channels. We continue to benefit from strong execution by our stores team, who overcame weather challenges and West Coast port delays to deliver outstanding guest service in the first quarter.”
Fiscal 2015 Earnings Guidance
In second quarter 2015, Target expects Adjusted EPS of $1.04 to $1.14, compared with $1.01 in second quarter 2014.
The Company now expects full-year 2015 Adjusted EPS of $4.50 to $4.65, compared with prior guidance of $4.45 to $4.65.
Segment Results
First quarter 2015 sales increased 2.8 percent to $17.1 billion from $16.7 billion last year, reflecting a 2.3 percent increase in comparable sales combined with sales from new stores. Digital channel sales grew 37.8 percent and contributed 0.8 percentage points to comparable sales growth. Segment earnings before interest expense and income taxes (EBIT) were $1,261 million in first quarter 2015, an increase of 19.7 percent from $1,053 million in 2014.
First quarter EBITDA and EBIT margin rates were 10.5 percent and 7.4 percent, respectively, compared with 9.4 percent and 6.3 percent in 2014. First quarter gross margin rate was 30.4 percent, compared with 29.5 percent in 2014, reflecting the benefit of annualizing heightened promotional markdowns in first quarter 2014 combined with favorable merchandise mix in first quarter 2015. First quarter SG&A expense rate was 19.9 percent in 2015, compared with 20.1 percent in 2014, as cost savings initiatives offset increased technology expense.
– more –





Target Corporation Announces First Quarter 2015 Earnings - Page 3 of 6
Interest Expense and Taxes from Continuing Operations
The Company’s first quarter 2015 net interest expense was $155 million, compared with $152 million last year. The Company’s first quarter 2015 effective income tax rate from continuing operations was 34.8 percent, compared with 34.4 percent last year.
Capital Returned to Shareholders
The Company returned $895 million to shareholders in first quarter 2015, representing more than 140 percent of net income.
Target returned cash through share repurchase for the first time since the second quarter of 2013, with purchases in the first quarter of $562 million in shares of common stock, including:
Open market transactions that retired 3.6 million shares of common stock at an average price of $81.74, for a total investment of $297 million.
An accelerated share repurchase (ASR) agreement that retired 3.3 million shares of common stock at an average price of $80.74, for a total investment of $265 million. Final settlement of the ASR occurred in May, and 1.1 million of the 3.3 million shares repurchased through the ASR were delivered in the second quarter.
In addition, through non-cash settlements of prepaid forward contracts related to non-qualified deferred compensation plans, the Company retired 0.1 million shares of common stock at an average price of $41.13, for a total investment of $3 million.
Target paid dividends of $333 million during first quarter 2015, compared with $272 million in first quarter 2014.
– more –





Target Corporation Announces First Quarter 2015 Earnings - Page 4 of 6
After-Tax Return on Invested Capital (ROIC)
Beginning this quarter, the Company is reporting after-tax return on invested capital1 (ROIC) for continuing operations. The Company believes ROIC provides a meaningful measure of the effectiveness of its capital allocation over time. In addition to results provided in this press release, a schedule showing the calculation for the last eight quarters will be provided on the Company’s website at Target.com/Investors (hover over “company” then click on “summary financials” in the investor column).
For the trailing twelve months through first quarter 2015, ROIC was 12.5 percent, compared with 11.9 percent for the twelve months through first quarter 2014.
Discontinued Operations Update
As of April 12, 2015, Target Canada Co. completed its inventory liquidation efforts and closed the last of its 133 Canadian retail stores. A court-approved real estate sales process is underway and expected to be complete by the end of June 2015.
Consistent with expectations, after-tax losses from discontinued operations were $16 million in first quarter 2015, compared with $153 million last year. Certain assets and liabilities of Target’s discontinued operations are based on estimates. The recorded assets include estimated receivables, and the remaining liabilities include accruals for estimated losses related to claims that may be asserted against Target Corporation, primarily under guarantees of certain leases. Given the early stage of its exit, these estimates involve significant judgment and are based on currently available information, an assessment of the validity of certain claims and estimated payments by the Canada Subsidiaries. The Company believes it is reasonably possible that future adjustments to these amounts could be material to its results of operations in future periods. Any such adjustments would be recorded in discontinued operations.

 
1ROIC is a ratio based on GAAP information, with the exception of adjustments made to capitalize operating leases. See the “Reconciliation of Non-GAAP Financial Measures” and “Accounting Considerations” sections of this release for important disclosures about the limits of non-GAAP financial measures and a schedule that includes the calculation of ROIC and a reconciliation of capitalized operating lease obligations and operating lease interest to GAAP financial measures.

 
– more –






Target Corporation Announces First Quarter 2015 Earnings - Page 5 of 6
Data Breach Update
The Company incurred breach-related expenses of $3 million in first quarter 2015, compared with $18 million of net pre-tax expense last year. Since fourth quarter 2013, Target has incurred net expense related to the data breach of $166 million, reflecting $256 million of gross expense, partially offset by the recognition of a $90 million insurance receivable.
Miscellaneous
Target Corporation will webcast its first quarter earnings conference call at 9:30 a.m. CDT today. Investors and the media are invited to listen to the call at Target.com/Investors (hover over “company” then click on “events & presentations” in the “investors” column). A telephone replay of the call will be available beginning at approximately 11:30 a.m. CDT today through the end of business on May 22, 2015. The replay number is (855) 859-2056 (passcode: 50779902).
Statements in this release regarding second quarter and full-year 2015 earnings per share guidance and future expenses related to discontinued operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements speak only as of the date they are made and 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. 31, 2015.
– more –





Target Corporation Announces First Quarter 2015 Earnings - Page 6 of 6
In addition to the GAAP results provided in this release, the Company provides Adjusted EPS for the three-month periods ended May 2, 2015, and May 3, 2014. The Company also provides ROIC for the twelve-month periods ended May 2, 2015, and May 3, 2014, respectively, 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. Management believes Adjusted EPS is useful in providing period-to-period comparisons of the results of the Company’s ongoing retail operations. 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 capitalized operating lease obligations and operating lease interest is total rent expense. Adjusted EPS, capitalized operating lease obligations and operating lease interest 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 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 1,795 stores and at Target.com. Since 1946, Target has given 5 percent of its profit to communities, that giving equals more than $4 million 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
 
 

(millions, except per share data) (unaudited)
 
May 2,
2015
 
May 3,
2014
 
Change
Sales
 
$
17,119

 
$
16,657

 
2.8
 %
Cost of sales
 
11,911

 
11,748

 
1.4

Selling, general and administrative expenses
 
3,514

 
3,376

 
4.1

Depreciation and amortization
 
540

 
511

 
5.5

Earnings before interest expense and income taxes
 
1,154

 
1,022

 
12.9

Net interest expense
 
155

 
152

 
2.5

Earnings before income taxes
 
999

 
870

 
14.8

Provision for income taxes
 
348

 
299

 
16.1

Net earnings from continuing operations
 
651

 
571

 
14.0

Discontinued operations, net of tax
 
(16
)
 
(153
)
 
(89.1
)
Net earnings
 
$
635

 
$
418

 
51.6
 %
Basic earnings/(loss) per share
 
 
 
 
 
 
Continuing operations
 
$
1.02

 
$
0.90

 
12.7
 %
Discontinued operations
 
(0.03
)
 
(0.24
)
 
(89.2
)%
Net earnings per share
 
$
0.99

 
$
0.66

 
49.8
 %
Diluted earnings/(loss) per share
 
 
 
 
 
 
Continuing operations
 
$
1.01

 
$
0.89

 
12.6
 %
Discontinued operations
 
(0.03
)
 
(0.24
)
 
(89.2
)%
Net earnings per share
 
$
0.98

 
$
0.66

 
49.7
 %
Weighted average common shares outstanding
 
 
 
 
 
 
Basic
 
640.9

 
633.3

 
1.2
 %
Dilutive impact of share-based awards
 
5.5

 
4.9

 
0

Diluted
 
646.4

 
638.2

 
1.3
 %
Antidilutive shares
 

 
5.3

 
 

Subject to reclassification




TARGET CORPORATION
 
Consolidated Statements of Financial Position
(millions)
 
May 2,
2015
 
January 31,
2015
 
May 3,
2014
 
 
(unaudited)
 
 

 
(unaudited)
Assets
 
 
 
 
 
 
Cash and cash equivalents, including short term investments of $2,073, $1,520 and $3
 
$
2,768

 
$
2,210

 
$
677

Inventory
 
8,610

 
8,790

 
7,905

Assets of discontinued operations
 
148

 
1,333

 
718

Other current assets
 
1,672

 
1,754

 
1,723

Total current assets
 
13,198

 
14,087

 
11,023

Property and equipment
 
 

 
 

 
 

Land
 
6,135

 
6,127

 
6,146

Buildings and improvements
 
26,636

 
26,614

 
25,991

Fixtures and equipment
 
5,011

 
5,346

 
4,909

Computer hardware and software
 
2,395

 
2,553

 
2,138

Construction-in-progress
 
576

 
424

 
906

Accumulated depreciation
 
(14,975
)
 
(15,106
)
 
(13,756
)
Property and equipment, net
 
25,778

 
25,958

 
26,334

Noncurrent assets of discontinued operations
 
458

 
442

 
5,605

Other noncurrent assets
 
1,012

 
917

 
1,080

Total assets
 
$
40,446

 
$
41,404

 
$
44,042

Liabilities and shareholders’ investment
 
 

 
 

 
 

Accounts payable
 
$
6,799

 
$
7,759

 
$
6,519

Accrued and other current liabilities
 
3,673

 
3,783

 
3,626

Current portion of long-term debt and other borrowings
 
112

 
91

 
1,466

Liabilities of discontinued operations
 
64

 
103

 
429

Total current liabilities
 
10,648

 
11,736

 
12,040

Long-term debt and other borrowings
 
12,654

 
12,705

 
11,391

Deferred income taxes
 
1,359

 
1,321

 
1,300

Noncurrent liabilities of discontinued operations
 
207

 
193

 
1,321

Other noncurrent liabilities
 
1,404

 
1,452

 
1,504

Total noncurrent liabilities
 
15,624

 
15,671

 
15,516

Shareholders’ investment
 
 

 
 

 
 

Common stock
 
53

 
53

 
53

Additional paid-in capital
 
5,170

 
4,899

 
4,512

Retained earnings
 
9,441

 
9,644

 
12,743

Accumulated other comprehensive loss
 
 
 
 

 
 
Pension and other benefit liabilities
 
(452
)
 
(561
)
 
(415
)
Currency translation adjustment and cash flow hedges
 
(38
)
 
(38
)
 
(407
)
Total shareholders’ investment
 
14,174

 
13,997

 
16,486

Total liabilities and shareholders’ investment
 
$
40,446

 
$
41,404

 
$
44,042

 Common Stock Authorized 6,000,000,000 shares, $.0833 par value; 638,408,643, 640,213,987 and 633,613,396 shares issued and outstanding at May 2, 2015, January 31, 2015 and May 3, 2014, respectively.
 
Preferred Stock Authorized 5,000,000 shares, $.01 par value; no shares were issued or outstanding at May 2, 2015, January 31, 2015 or May 3, 2014.

 Subject to reclassification



TARGET CORPORATION
 
Consolidated Statements of Cash Flows
 
 
Three Months Ended
(millions) (unaudited)
 
May 2,
2015
 
May 3,
2014
Operating activities
 
 

 
 

Net earnings
 
$
635

 
$
418

Losses from discontinued operations, net of tax
 
(16
)
 
(153
)
Net earnings from continuing operations
 
651

 
571

Adjustments to reconcile net earnings to cash provided by operations:
 
 

 
 

Depreciation and amortization
 
540

 
511

Share-based compensation expense
 
26

 
20

Deferred income taxes
 
18

 
(37
)
Noncash (gains)/losses and other, net
 
(70
)
 
(13
)
Changes in operating accounts:
 
 

 
 

Inventory
 
180

 
372

Other assets
 
138

 
127

Accounts payable and accrued liabilities
 
(766
)
 
(736
)
Cash provided by operating activities—continuing operations
 
717

 
815

Cash provided by/ (required for) operating activities—discontinued operations
 
834

 
(295
)
Cash provided by operations
 
1,551

 
520

Investing activities
 
 

 
 

Expenditures for property and equipment
 
(352
)
 
(471
)
Proceeds from disposal of property and equipment
 
6

 
5

Other investments
 
21

 
18

Cash required for investing activities—continuing operations
 
(325
)
 
(448
)
Cash provided by/ (required for) investing activities—discontinued operations
 
19

 
(90
)
Cash required for investing activities
 
(306
)
 
(538
)
Financing activities
 
 

 
 

Change in commercial paper, net
 

 
306

Reductions of long-term debt
 
(14
)
 
(31
)
Dividends paid
 
(333
)
 
(272
)
Repurchase of stock
 
(477
)
 

Prepayment of accelerated share repurchase (a)
 
(120
)
 

Stock option exercises and related tax benefit
 
257

 
26

Cash (required for)/ provided by financing activities
 
(687
)
 
29

Effect of exchange rate changes on cash and cash equivalents
 

 
9

Net increase in cash and cash equivalents
 
558

 
20

Cash and cash equivalents at beginning of period (b)
 
2,210

 
695

Cash and cash equivalents at end of period (c)
 
$
2,768

 
$
715

 
(a) $35 million of the prepayment was refunded and 1.1 million shares were delivered upon settlement of the accelerated share repurchase during the second quarter of 2015.
(b) Includes cash of our discontinued operations of $25 million for the three months ended May 3, 2014.
(c) Includes cash of our discontinued operations of $37 million for the three months ended May 3, 2014.

 Subject to reclassification




TARGET CORPORATION
 
Segment Results
 
 
Three Months Ended
 
 

(millions) (unaudited)
 
May 2,
2015
 
May 3,
2014
 
Change
Sales
 
$
17,119

 
$
16,657

 
2.8
%
Cost of sales
 
11,911

 
11,748

 
1.4

Gross margin
 
5,208

 
4,909

 
6.1

SG&A expenses(a)
 
3,407

 
3,345

 
1.9

EBITDA
 
1,801

 
1,564

 
15.1

Depreciation and amortization
 
540

 
511

 
5.5

EBIT
 
$
1,261

 
$
1,053

 
19.7
%
Note: We operate as a single segment which includes all of our continuing operations, excluding net interest expense, data breach related costs and certain other expenses which are discretely managed. Our segment operations are designed to enable guests to purchase products seamlessly in stores, online or through mobile devices. Beginning with the first quarter of 2015, segment EBIT includes the impact of the reduction of the beneficial interest asset. For comparison purposes, prior year segment EBIT has been revised.
(a) For the three months ended May 2, 2015 and May 3, 2014, SG&A includes $152 million and $149 million, respectively, of net profit-sharing income under our credit card program agreement.

 
Three Months Ended
Segment Rate Analysis
(unaudited)
May 2,
2015
 
May 3,
2014
Gross margin rate
30.4
%
 
29.5
%
SG&A expense rate
19.9

 
20.1

EBITDA margin rate
10.5

 
9.4

Depreciation and amortization expense rate
3.2

 
3.1

EBIT margin rate
7.4

 
6.3

Note: Rate analysis metrics are computed by dividing the applicable amount by sales.

 
Three Months Ended
Sales by Channel
(unaudited)
May 2,
2015
 
May 3,
2014
Stores
97.2
%
 
97.9
%
Digital
2.8

 
2.1

Total
100
%
 
100
%

 
Three Months Ended
Comparable Sales
(unaudited)
May 2,
2015
 
May 3,
2014
Comparable sales change
2.3
 %
 
(0.3
)%
Drivers of change in comparable sales
 

 
 

Number of transactions
0.9

 
(2.3
)
Average transaction amount
1.4

 
2.1

Selling price per unit
5.1

 
1.8

Units per transaction
(3.6
)
 
0.3






Contribution to Comparable Sales Change
(unaudited)
Three Months Ended
May 2,
2015

 
May 3,
2014

Stores channel comparable sales change
1.5
%
 
(0.7
)%
Digital channel contribution to comparable sales change
0.8

 
0.5

Total comparable sales change
2.3
%
 
(0.3
)%
Note: Amounts may not foot due to rounding.
 
 
Three Months Ended
REDcard Penetration
(unaudited)
May 2,
2015
 
May 3,
2014
Target Debit Card
12.0
%
 
11.3
%
Target Credit Cards
9.4

 
9.1

Total REDcard Penetration
21.5
%
 
20.4
%
Note: Amounts may not foot due to rounding.
 
 
Number of Stores
 
Retail Square Feet(a)
Number of Stores and Retail Square Feet
(unaudited)
May 2,
2015
 
January 31,
2015
 
May 3,
2014
 
May 2,
2015
 
January 31,
2015
 
May 3,
2014
Expanded food assortment stores
1,295

 
1,292

 
1,261

 
167,437

 
167,026

 
162,954

SuperTarget stores
249

 
249

 
249

 
44,151

 
44,151

 
44,152

General merchandise stores
240

 
240

 
271

 
27,945

 
27,945

 
31,618

CityTarget stores
8

 
8

 
8

 
820

 
820

 
820

TargetExpress stores
3

 
1

 

 
61

 
21

 

Total
1,795

 
1,790

 
1,789

 
240,414

 
239,963

 
239,544

(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 restructuring costs, net expenses related to the 2013 data breach and other matters 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. 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 than we do, limiting the usefulness of the measure for comparisons with other companies. Prior year amounts have been revised to present Adjusted EPS on a continuing operations basis.
Adjusted EPS
 
Three Months Ended
 
 
 
 
May 2, 2015
 
May 3, 2014
 
 
(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
 
 
 
 
 
$
1.01

 
 
 
 
 
$
0.89

 
12.6
%
Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring costs (a)
 
$
103

 
$
64

 
$
0.10

 
$

 
$

 
$

 
 
Data Breach related costs (b)
 
3

 
2

 

 
18

 
11

 
0.02

 
 
Card brand conversion costs (c)
 

 

 

 
13

 
8

 
0.01

 
 
Resolution of income tax matters
 

 
(3
)
 

 

 
(1
)
 

 
 
Adjusted diluted earnings per share from continuing operations
 
 
 
 
 
$
1.10

 
 
 
 
 
$
0.92

 
19.6
%
Note: Amounts may not foot due to rounding. Beginning with the first quarter 2015, we no longer adjust for the reduction of the beneficial interest asset because it is no longer meaningful. For comparison purposes, prior year Adjusted EPS has been revised.
(a) Costs related to our previously announced corporate restructuring activities.
(b) For the three months ended May 2, 2015, we recorded $3 million of pretax Data Breach-related expenses, primarily legal and other professional services. For the three months ended May 3, 2014, we recorded $26 million of pretax expenses and $8 million of expected insurance proceeds, for net pretax expenses of $18 million.
(c) Expense related to converting the co-branded REDcard program to MasterCard.





We have also disclosed after-tax return on invested capital for 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 than we do, 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)
 
May 2,
2015

 
May 3,
2014

 
 
Earnings from continuing operations before interest expense and income taxes
 
$
4,667

 
$
4,579

 
 
+ Operating lease interest (a)(b)
 
90

 
95

 
 
Adjusted earnings from continuing operations before interest expense and income taxes
 
4,756

 
4,674

 
 
- Income taxes (c)
 
1,575

 
1,604

 
 
Net operating profit after taxes
 
$
3,181

 
$
3,070

 
 

Denominator
(dollars in millions) (unaudited)
 
May 2,
2015

 
May 3,
2014

 
May 4,
2013

Current portion of long-term debt and other borrowings
 
$
112

 
$
1,466

 
$
522

+ Noncurrent portion of long-term debt
 
12,654

 
11,391

 
12,389

+ Shareholders' equity
 
14,174

 
16,486

 
16,520

+ Capitalized operating lease obligations (b)(d)
 
1,495

 
1,587

 
1,668

- Cash and cash equivalents
 
2,768

 
677

 
1,798

- Net assets of discontinued operations
 
335

 
4,573

 
3,412

Invested capital
 
$
25,332

 
$
25,680

 
$
25,890

Average invested capital (e)
 
$
25,506

 
$
25,785

 
 
After-tax return on invested capital
 
12.5
%
 
11.9
%
 
 
(a) Represents the hypothetical capitalization of our operating 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 33.1% and 34.3% for the trailing twelve months ended May 2, 2015 and May 3, 2014.
(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 prior period.

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. 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)
 
May 2,
2015

 
May 3,
2014

 
May 4,
2013

Total rent expense
 
$
187

 
$
199

 
$
209

Capitalized operating lease obligations (Total rent expense x 8)
 
1,495

 
1,587

 
1,668

Operating lease interest (Capitalized operating lease obligations x 6%)
 
90

 
95

 
n/a

Subject to reclassification

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