FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (TMF Debit)

Dayton Hudson Corporation
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777 Nicollet Mall
Minneapolis, MN 55402-2055
http://www.shop-at.com/

UNION CITY, CA (May 22, 1997)/FOOLWIRE/ --- Dayton Hudson Corporation released first quarter results for 1997 on May 20th. First quarter net earnings were $105 million or $0.44 per share including an extraordinary charge of $21 million or $0.09 per share related to the repurchase of approximately $250 million of high coupon debt. These results compare with net earnings of $41 million or $0.16 per share in the first quarter of 1996. Total revenues for the corporation increased 9% to $5.9 billion while comparable store revenues rose 4%. Operating profit in the quarter increased 68% to $337 million compared with $200 million in the same period a year ago. Importantly, all 3 divisions contributed to the year-over-year improvement for the first time in 9 quarters.

FINANCIAL ITEMS THAT AFFECTED Q1 RESULTS. Dayton Hudson repurchased approximately $250 million of debt during the first quarter resulting in an extraordinary after-tax charge of $21 million or $0.09 per share. This action was driven by favorable market conditions and strong cash flow from operations. The weighted average interest rate on the repurchased debt was 9.5% and the average maturity was 17 years. By refinancing at lower rates, they expect to reduce their interest expense on an annualized basis by approximately $7 million or $0.02 per share. Their interest expense in the first quarter was $107 million, a $2 million decline from the same period last year reflecting lower average debt balances. Given their expectation for portfolio rate favorability as they move forward, interest expense for the total year is expected to be equal to or somewhat below last year's level. Corporate and other expense during the quarter was $22 million, virtually equal to a year ago, though for the full year they expect this expense to increase slightly from 1996. Their effective tax rate for the quarter was 39.5%, consistent with last year. The LIFO provision was zero, both this year and last year.

BALANCE SHEET AND CASH FLOW TRENDS. Their accounts receivable balances are $164 million higher than this time last year, reflecting continued year-over-year growth in the Target guest card. At the end of the first quarter they had approximately 5.8 million Target account holders, up from 2.8 million a year ago. In addition, they continued to invest in the growth of their credit business, increasing accounts receivable balances across all 3 of their divisions through guest loyalty programs and other initiatives. Inventories are 5% or $155 million higher than a year ago, reflecting good controls at all 3 divisions partially offset by store growth at Target. Despite opening nearly 70 new stores in the past year and generating double-digit sales growth, Target's inventories increased only about 10% year-over-year. Mervyn's inventories were approximately equal to last year. Their store count is down 8% and inventories are flat, so this is not a substantially higher inventory level on a per-store basis. It mostly reflects inventory remaining after the Georgia and Florida store closings that they are working through. Inventory levels in their department store division declined more than 6%. From an investment perspective, this overall growth in inventory has been more than fully funded by the increase in accounts payable. Fixed assets have grown by $168 million net as investments in new stores and infrastructure were substantially offset by depreciation and amortization and their real estate repositioning of store properties in Florida, Georgia, and Texas. Their total shareholder investment, essentially net income less dividends, has increased nearly $450 million during the past year. During this same period they have reduced their debt by $150 million, reflecting the strength of their net cash flow. As a result, retail debt-to-capitalization at the end of the first quarter was 52%, down 4 full percentage points from 56% a year ago.

CREDIT BUSINESS. They continued to invest in their internal credit card business and to generate improved profitability. In the first quarter their yield improved as total credit revenues 30% while accounts receivable serviced rose about 10%. During the quarter they recorded an increase in their provision for bad debt expense, substantially offsetting the strong increase in credit revenues. Their charge off trends directly follow from delinquency trends because they have a formula for charge offs that is spelled out in the notes to their annual reports. So, they religiously follow that formula from a charge off perspective. They try to stay ahead of and actually do stay ahead of actual charge offs and delinquency trends by providing today for the possibility of accounts that go delinquent and are charged off tomorrow. In an order of magnitude sense, certainly you can see laid out in their annual report that most of the substantial increase in bad debt expense last year, in round numbers about $50 million at year end, was on their balance sheet in the form of an increased reserve. That same general trend continued intact in the first quarter where they added to the reserve in an amount that approximated the year-to-year growth in the reserve. At quarter end, the reserve certainly wasn't up $50 million as it was at year end but, for the quarter more or less a proportional amount to the full-year increase last year. Like all issuers of credit cards, they are also experiencing substantial increases in first-time bankruptcies that aren't reflected in delinquency trends. That remains a relatively small portion of their overall write offs and overall delinquencies and therefore, as a subtheme, that is very important for them as well. As an overall theme, it does not flow through their numbers in any material way. Their credit operation continues to contribute significantly to Dayton Hudson's overall profitability and to provide an attractive investment return while supporting their retail operations. Underlying delinquency trends remained relatively constant so their increased provision reflects a more conservative balance sheet than a year ago.

TARGET DIVISION

REVENUES. Target's total revenues increased 14% with same store revenues up 6%.

OPERATING PROFIT. Target's first quarter operating profit increased 88% to $251 million from $133 million last year as both gross margin rate and operating expense rate improved. The improvement in gross margin rate is primarily attributable to better mark-up due to better buying, mix improvements, and markdown control while the improvement in operating expense rate reflects strong sales leveraging and continued expense reduction initiatives.

NEW STORES AND COUNT. During the quarter, Target opened 16 net new stores including their first store in the metro New York market and two additional super-Target stores in Salt Lake City. On super-Target, they have 10 stores online now and 3 more opening this year. They are encouraged by sales and margin performance. They are still working hard on the expense side of the equation. They are still in the test phase and it is too soon to tell whether they will rollout or not. At the end of the quarter, Target operated 752 stores in 39 states.

OUTLOOK. At Target, their profitability comparisons become more difficult beginning in the second quarter, in particular their gross margin rate is expected to be flat to slightly down for the remainder of the year as they annualize the unusually strong improvement in gross margin rate achieved during the past four quarters. They do not see more aggressive pricing taking place in the retail sector at this point in time. It is not their intention to lead anything downward. They continue to benchmark Wal-Mart as the price leader and will certainly follow them, but it is their observation now that it looks fairly stable. They continue to expect comparable store sales growth in the mid-single digits and remain focused on their multi-year expense reduction efforts. Target is on a 3-year plan to reduce expenses roughly $60-70 million per year and that was on track last year, is on track this year, and everything looks good to lead them to believe that they will also be on track in 1998. While they expect Target will continue to enjoy strong profit improvement as the year progresses, they expect the rate of that improvement to be more modest than their experience in the past twelve months.

EXPANSION. Including the stores they opened in the first quarter, their 1997 expansion plans include approximately 65 net new stores. Key markets include Virginia, North Carolina, California, and New York/New Jersey. Later this year they plan to open 3 additional supercenters continuing their experiment with this concept. They are very pleased with their results in the Eastern market and will open 30 some stores there this year. They are particularly pleased with what they see in Washington DC and Richmond Virginia.

MERVYN'S DIVISION

REVENUES. Mervyn's total revenues decreased 2% while comparable store revenues were unchanged from a year ago.

OPERATING PROFIT. Mervyn's operating profit increased 30% to $51 million, up from $39 million in the first quarter of 1996. Gross margin rate increased due to favorable markdowns while operating expense rates increased despite the expense control due to poor sales leveraging.

NEW STORES AND COUNT. During the quarter, Mervyn's opened one new store in Minnesota and closed 25 stores including 24 of their stores in Florida and Georgia. Mervyn's ended the quarter with 276 stores in 15 states.

OUTLOOK. At Mervyn's their focus continues to be on producing profitable comparable store sales growth. They are encouraged by their year-to-date performance in women's ready-to-wear, accessories, and their home division. They are optimistic that they will begin to see similar improvements in their men's and children's categories in the second quarter. For the year they expect operating margins to expand modestly while operating income dollars are planned to grow only slightly from last year reflecting the impact of their previously announced 25 to 35 store closings.

DEPARTMENT STORE DIVISION

REVENUES. Total revenues at their department store division were essentially equal to last year while comparable store revenues declined 3%.

OPERATING PROFIT. Operating profit at their department stores improved 26% to $35 million in the first quarter from $28 million a year ago. Gross margin rate declined moderately due to increased clearance markdowns while operating expense rates significantly improved reflecting major expense reduction initiatives.

OUTLOOK. At their Department Store Division their plans also include positive comparable store sales. They continue to experience comparable store sales growth in their better businesses including bridge, sportswear, and men's collections. Their biggest opportunities for improvement include their moderate business, their home area, and children's apparel, all of which were heavily dependent on promotions to drive sales in the past. For the full year, gross margin rate is expected to expand modestly reflecting fewer clearance markdowns and operating expense rate will improve significantly as they implement programs to remove approximately $50 million in cost. For the full year, they continue to expect their operating margin to show substantial progress toward their longer term goal of 9%.

EXPANSION. This Summer, Marshall Fields will open one new store in Columbus Ohio and Hudson's will open a new store in Port Huron Michigan as they continue to pursue opportunities to preserve and enhance their marketshare in their core Midwest markets.

In summary they are pleased with their overall financial performance to-date and believe they will deliver another year of strong earnings growth in 1997.

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