Target Corporation (TGT) Q3 2006 Earnings Report, Transcript and Summary

Welcome to the Target Corporation's third quarter earnings release conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Bob Ulrich, Chairman and Chief Executive Officer. Please go ahead, sir. Bob Ulrich: Good morning. Welcome to our 2006 third quarter earnings conference call. On the line with me today are Gregg Steinhafel, President; and Doug Scovanner, Executive Vice President and Chief Financial Officer. This morning, I will provide a brief update on our perspective of the current competitive and consumer environment, and then Doug will review our third quarter 2006 financial results and describe our outlook for the remainder of the year, with specific guidance on key individual drivers of our performance. Next, Gregg will provide an update on the key strategic initiatives that continue to fuel Target's strong performance and consistent growth. Finally, I will wrap up our remarks and we will open the phone lines for a question-and-answer session. As Doug will describe in more detail shortly, we announced excellent financial results this morning for Target's third quarter and first nine months of 2006, particularly in light of the exceptional strength of last year's performance. In addition, we remain optimistic about our fourth quarter outlook, and believe that we are on-track to deliver strong, full year results. As always, we expect this year's holiday season to be intensely competitive and as a result, we have planned our business to drive traffic and generate profitable sales. We are sharply focused on having the quality, trend-right gifts that our guests want for this holiday season, at prices that represent great value. Our holiday marketing campaign reinforces all that is distinctive about Target in a manner and style that is consistent with our brand. Our stores and logistics teams are poised to ensure that Target delivers…

Thanks, Doug. Target delivered another quarter of strong financial performance, driven by growth in comparable store sales of 4.6% on top of a 5.9% increase a year ago. Growth in both traffic and average transaction amount contributed to our sales increase in the third quarter, and categories that enjoyed better than average performance included infant/toddler basics and apparel, men's apparel, toys, healthcare, and food. We continued to manage our inventories well during the quarter, and are very comfortable with both our merchandise mix and in-stock levels as we head into the holiday season. Our third quarter store opening cycle was the largest this year, with a total of 59 new stores. After closings and relocations, we opened 36 net new discount stores and 14 new SuperTarget stores, resulting in a quarter end store count of 1,494 stores in 47 states, including 176 SuperTarget locations. Target's “Expect More, Pay Less” brand products, and commitment to delighting our guests is at the core of these strong results, and our continued profitable growth. We remain sharply focused on offering affordable design, differentiated products, and compelling values to our guests every time they visit our stores. Several new initiatives during the third quarter included the introduction of contract cell phones by T-Mobile and Verizon Wireless, as well as convenient new extended service plans for other consumer electronics products; the launch of a home collection called Perfect Pieces by acclaimed interior designer Victoria Hagan, which combines both traditional and contemporary elements and assortments of accent furniture, lighting, wall decor, pillows and decorative accessories; the presentation of Paul & Joe from Sophie Albou for our third Flight of Fashion in our GO International program; the continued expansion of our premium-owned food brand, Archer Farms, to a broad array of additional items and categories such as imported…

(Operator Instructions) Your first question comes from Jeff Klinefelter - Piper Jaffray.

Hi, yes. Two questions for you today. One would be on the sourcing front. You have talked in the past, Gregg, about your direct sourcing initiative and your objective over time to increase that by about 100 basis points a year. Could you update us on where you currently are there? Does that remain your goal? Maybe highlight a few opportunities or categories where you think you can pursue that goal most effectively. On SuperTarget, Doug, in the past you have talked about the return on invested capital in that concept being very similar, when all-in is considered between the Target concept and SuperTarget. Any changes there, and is there a certain scale for SuperTarget that would change the return of that prototype?

Yes, first as it relates to global sourcing, we are very committed to our global sourcing strategy and our design development infrastructure. It has been a key initiative for us and continues to yield great results. This year we will direct import approximately 30% of our total purchases and we continue to expect that, over time, we will add approximately 100 basis points per year to our global sourcing initiative and our direct import percentage; so no real change in strategy, Jeff. Doug Scovanner: On your SuperTarget question, certainly it remains the case that our actual and expected returns on the new stores that we are constructing are of a very similar return profile. It also is true that we have been able to improve our returns on existing SuperTarget stores enough that we now have a larger portion of our new stores that are SuperTargets in the pipeline today than we had, say, 24 or 36 months ago.

Doug, is there anything in terms of scale going forward when you reach a certain number that would change, for example, the margins or the contribution from the food side of your store? Doug Scovanner: There is certainly no threshold, but in a general sense, of course the larger SuperTarget becomes as a base of stores, the more adept we become at food retailing, the better able we are to present freshness and variety to our guests and certainly it has a very beneficial impact on our supply chain capabilities as well.

Thank you.

Your next question is from Charles Grom - JP Morgan. Charles Grom - JP Morgan: When you look to '07 and beyond, what should we be thinking for the mix between direct and SuperTargets? Doug Scovanner: The mix between our general merchandise stores? Charles Grom - JP Morgan: I am sorry, the mix between the discount stores and the SuperTargets? I think historically you said about 25% to 30%, should we think of that for next year? Doug Scovanner: We haven't announced the exact numbers for next year, but we have generally grown SuperTarget square footage at about double the pace of our discount square footage growth and the blend of those has worked out to approximately 8% per year in the last several years. Those general dynamics remain intact today, and we will be more precise on exactly how they mix out in '07 90 days from now. Charles Grom - JP Morgan: Then just to go back to the third quarter, can you provide a little bit more granularity on the components of the gross margin improvement and the SG&A rise? Doug Scovanner: First of all, numerically, the gross margin rate improvement was 14 basis points, and the SG&A rate deterioration was 48 basis points. As usual, there are a couple of accounting issues that, dollar for dollar, cross over that barrier year-over-year. I would tell that analytically, a better way to think about this to me is gross margin rate up very slightly, and expense rate deterioration maybe 35 to 40 basis points. Of the 35 to 40 basis point SG&A rate deterioration on an analytical basis, two-thirds is due to last year's Visa/MasterCard antitrust litigation settlement. That is what I meant by my comment earlier that on an apples-to-apples basis, we actually had better expense rate performance in the quarter than we had in either of the first two quarters this year. Back to gross margin rate, flat to up very slightly means, of course, by definition we have about an equal number of issues working in both directions. The two biggest issues would be favorable mark-up and on the unfavorable side would be unfavorable markdowns. Charles Grom - JP Morgan: One last one for Gregg. Can you give us a peek into Global Bazaar in January, what's going to be different with the offering?

Yes, this January's Global Bazaar we are very excited about. We are going to focus differently than we have in the past where it's going to be, first of all, we're going to focus on having greater affordability than we have had in the past; we are going to focus on more category and item dominance; more color impact; and a little less about country of origin and artisan uniqueness. So we think that it is going to be slightly more affordable, more appealing and still have a great assortment for our consumer. Charles Grom - JP Morgan: Good luck. Thanks.

The next question is from Christine Augustine - Bear Stearns.

Doug, could you please address the trends that you are seeing in your credit card business? Some of the regional banks have noted some deterioration, and it sounds like you might be seeing something a little different, so if you could please discuss that? My second question is with regard to the home category, is that where you saw the unfavorable markdowns? How is the progress going there in terms of improving the assortment? Thank you. Doug Scovanner: Our credit card results remain robust. The one issue that is in the underlying portfolio that is flowing through in terms of sequential trends that are noticeable is the OCC-mandated increase in minimum payments that was effective at the beginning of this calendar year is beginning to have its inevitable and fully predicted effect of causing some sequential increase in delinquencies, and lead into some sequential increases in write-offs. In both cases, we are keying off of base periods that represent modern era record favorable performance in those two metrics. So those metrics, while migrating in the negative direction, are migrating back toward normalized levels, not migrating to some unforeseen territory. In both cases, we are actually settling out somewhat favorable compared to the forward-looking statements I made 90 days ago. Stepping back from all of this, the credit card contribution to our overall strategy and contribution, measured in financial terms, remain very strong. One commercial message, this Friday morning we will be webcasting a presentation that Terry Scully, our President of Target Financial Services and I will be delivering in New York, that will dive quite deeply into a lot of the aspects, both financial and strategic of our credit card operations.

As it relates to the home business, we are very pleased with the progress that we have made throughout this year. We have been focusing on getting our good, better, best balance more appropriately in line and better segmentation and lifestyle merchandising. We have seen continued strengthening of our home businesses throughout the year. So we are very bullish that we have turned the corner there and we will continue to see positive results in all of our home categories. The light overage in markdowns that we experienced in the third quarter was really not attributable to the specific home categories, but was really markdowns that were broadly spread throughout the company and really not attributed to any one particular division or business.

Thank you.

Your next question is from Bob Drbul - Lehman Brothers.

Hi, good morning. A couple questions for Gregg. First, can you talk a little bit about your overlap with Wal-Mart in the electronics and toy category? We have seen some of their aggressive pricing moves already, and your ability to really compete with those into the fourth quarter?

Fourth quarter is always a very competitive timeframe. This year we expect more of the same and so far this year it has unfolded pretty much as we expected. Wal-Mart takes a generally very aggressive stand in small appliances, toys, and electronics. We respond aggressively so that we are competitively priced on like items in like markets. As far as we are concerned, it's business as usual up until this point. As we get deeper in the holiday season, we expect to experience more price cutting and then we will respond as quickly as we possibly can, to make sure our prices are in line.

Just a follow-up question. On the electronics side, can you talk about the allocation levels that you got on the Wii and the PlayStation, and if you are satisfied with that and how successful you expect that to be for you?

We expect both gaming platforms to do very, very well this year. As it relates to Sony and PlayStation, we were disappointed in what the final allocations were. We were led to believe we were going to be getting limited but reasonable allocations, and those allocations have come in less than that. So we are more disappointed on the Sony side and the PlayStation side than we are on the Nintendo Wii side, where those allocations and quantities seem reasonably more healthy and appropriate for holiday season. It still will be in short supply, but we will have significantly more product in Nintendo than we will have on Sony PS3.

Okay, great. Thank you very much.

You are welcome.

Your next question is from Mark Rowan - Prudential. Mark Rowen - Prudential: You mentioned a couple of times that the holiday season will be very competitive. How quickly are you able to react to pricing trends from competitors that come out in the marketplace, given circulars and things that are out there, and are you seeing any impact yet in categories where Wal-Mart has rolled back prices pretty significantly?

A couple of things. First of all, we don't respond to competitors' circulars and limited time, limited quantity offerings. That has been a consistent approach on our part, and many competitors don't respond to our weekly prices. We have the capability to respond very quickly. We shop our primary competitor, Wal-Mart, very often. By the time that some of those rollbacks actually appear in their circulars or flyers, we have already witnessed those rollbacks and responded appropriately in our stores. Oftentimes we anticipate where Wal-Mart will move and in the past they will have rolled something back 30 days ago or 60 days ago and reiterate that position in a circular or a given print vehicle. So we have experienced this competitive landscape over the last couple of years, and really haven't seen any meaningful change to what we have experienced in the past. Wal-Mart will get very aggressive on a couple if items, and we very, very quickly will match them so that we're competitive on that item in that local market. Mark Rowen - Prudential: You mentioned you are a certified organic retailer now. Do you plan to expand that, particularly in groceries, pretty significantly, and are you finding issues with getting the supply given that there seems to be a problem on the farming side of producing that, and switching over to organic?

Yes, we are very committed to delivering healthy foods in our store, whether it's natural products, gluten-free, sugar-free, and organics. Our organics business has continued to grow over time. There is some supply availability issues, and it prevents us from expanding our private-branded Archer Farms organics product at the rate that we would like, but we seem to be getting a decent supply of organic products through the national brands. Mark Rowen - Prudential: Great, thank you.

Your next question comes from Greg Melich - Morgan Stanley.

Could you just give us an update on how you are matching the generic program that Wal-Mart is doing, and what you have seen in your stores, in terms of traffic and what that's done to profitability in pharmacy?

When Wal-Mart initiated their test markets in Tampa, we matched them there. We matched them when they rolled through Florida and we have subsequently matched them in 27 states. We are at $4 like they are on the 315 generic drugs and we have experienced script transfers to our stores, so we are getting the benefit, as Wal-Mart is, in terms of script transfers and traffic into our stores. We believe that while the price reduction on the generics themselves will be at least offset by the increased traffic that we will get through the prescription transfer and the sales of other OTC and products in our stores. So we are expecting at this time for it to be about a net margin neutral change; but again, it's just rolling out, and we will need a little bit more time to really understand the full quantification of the impact of that change.

When you describe that, you said other over the counter products, but you are not including additional traffic it might do to the rest of the store. Is that fair?

We will be looking at including that, but it's difficult to quantify specifically what we are getting from those guests. We can look at and we do see the overall changes in traffic patterns by store, but there are a lot of ins and outs and changing dynamics in each of those marketplaces and it's hard to specifically attribute the change in generic pricing to some of the other changes that we are seeing. But we are seeing positive changes in traffic levels and spending patterns.

On the SG&A outlook for the fourth quarter, could you quantify what the extra week actually does? How much of the SG&A extra leverage you get just from the extra week? Doug Scovanner: It's a handful of basis points.

The items that it would be, would be some of the overhead costs? I imagine labor and everything is still in there for the extra week? Doug Scovanner: Yes. Expenses that we can precisely measure and accrue for by day have no extra sales leverage, so payroll is a great example. We accrue payroll to the day, and therefore that's not an item here. But some more general overhead expenses are not accrued by the day outside of SG&A. Let's focus on depreciation to make the point vividly. We expense depreciation by month, and therefore we will get a favorable leveraging of depreciation expense due to the extra week. There are other elements inside SG&A of a similar character.

Great, thanks.

Your next question is from Mark Husson - HSBC.

The first thing is a number of retailers have talked about the increased cost of opening stores this year, in terms of pre-opening expenses. You opened quite a lot in this quarter. Is there any sort of significant quarter-on-quarter changes, or year-over-year changes we should be talking about? Doug Scovanner: That's actually a great question. Year-to-date it's one of the two key timing issues that will turn around in our favor in the fourth quarter. Year-to-date pre-opening expenses are a component of our expense rate deterioration, and we spoke earlier in the year about some of the timing issues surrounding pre-opening. For the year it's a non-issue. Year-to-date, it represents deterioration. Therefore it will turn around and be a favorable expense rate item year-over-year in the fourth quarter.

More than a handful of basis points, like 20 basis points or something? Doug Scovanner: Two hands.

Finally, Wal-Mart has now finished remodeling or just about finished remodeling a bunch of its stores, possibly to look a little bit more like yours. Have you seen any impact on those remodels since they have been relaunched?

We really haven't seen any impact on our stores whatsoever. We'll continue to watch it, but as you know, they are just finishing up the final rounds of their remodel program, and we really don't expect it to have any significant impact on our business.

Great. Thanks very much.

Your next question is from Deborah Weinswig - Citigroup. Deborah Weinswig - Citigroup: Can you please provide some color on the performance in the women's business in the quarter?

Our women's business was good over the quarter. We have had a number of years of explosive growth in women's and we had a good performance, but it was just not as strong as we experienced in the newborn, infant, toddler categories and men's; but it was still decent. Deborah Weinswig - Citigroup: Last question, with regard to comps, can you discuss traffic versus ticket in the quarter? Within ticket, can you also break it down between units per transaction and AUR?

Approximately 1% of the same-store sales was in increased traffic with the balance in ticket, and then within the ticket, it was basically equally split between the increase in the average amount per item, and the average number of items per transaction. Deborah Weinswig - Citigroup: Great. Thanks so much.

It varied by month, but in general, that's the way it shook out for the quarter. Deborah Weinswig - Citigroup: Okay. Thanks. Very helpful.

Your next question is from Virginia Genereux - Merrill Lynch.

Doug, maybe for you, to your point on credit, it looks like the difference between book expense and cash write-offs has been $100 million on a trailing four-quarter basis. Why wouldn't yields here continue to increase? As you said, I would have expected bad debt expense to be up a little more in the quarter. So why wouldn't yields continue to increase, given that you are so amply reserved? Doug Scovanner: Well, yields are at not only a record high level for us, but our yields are about the highest of anyone involved in issuing premium bank cards. I think that I would be absolutely thrilled to sustain yields at these levels, and continue growing our receivables in line with sales, providing the strategic support for our core retail operations. I don't think it's realistic to expect post funding cost yields to climb beyond the current 11% brackets in which they lie. If you look at the year-over-year performance increment, it's truly remarkable. A year ago we were focusing on EBIT as our core metric of performance to measure in our credit card operations. Our EBIT yield last year in the third quarter was about the same as our earnings before taxes yield this year. Loosely translated, that means that the performance increment has wiped out the economic drag of the $6 billion of funding costs that surround the balance sheet of our credit card operations, a remarkable performance.

I agree. That's another question, but mechanically, what is going to pick up? Is it that write-offs should dramatically increase? Because to your point, write-offs were down $30 million almost year-over-year. Is it the cash write-offs that are really going to start to increase because your past due as a percent of receivables is pushing four? Is that the mechanics? Doug Scovanner: We are going to get into this issue very deeply in our presentation on Friday morning, but the short answer to your question is yes, we do expect over time modest, not dramatic, increase in write-offs as a percent of average receivables, because even today we remain at a very low level of write-offs as a percent of receivables compared to several years of history. But we believe that write-offs will likely settle into a pace that should allow us to maintain, not enhance our current spectacular yields.

Okay. I won't take any more of that thunder. That will be great on Friday. As I look back over the past year, traffic -- and you guys deserve great credit for the traffic increases that you have driven -- but traffic has not been as big a contributor as it was historically to comps. I feel like traffic has really been up two months in the past year, November and April. As you guys look out, is that the macro at work, or is that a more competitive environment? What's your outlook on your ability to drive the traffic increase? Should we look for more of the comp to be ticket-driven? Doug Scovanner: Historically, our business model has generated about 5% same-store sales performance on average over a very long period of time. The make up of that 5 points of comp has been about 1 percentage point in average same-store positive traffic trends, with the remainder representing average annual growth in ticket. The statistics Gregg cited for the third quarter just ended are right in line with our long-term history.

September was a big contributor to that. So you, in prior quarters this year, I would say in your July quarter, Doug, that might not have been the case. The ticket was more the driver. Doug Scovanner: Certainly a statistical series like this one is more volatile by quarter than some others, but again, when our business is operating at premium levels of comp performance, traffic generally might rise into the 2% plus range, but very rarely for any extended period of time have we ever exceeded 2 percentage points of contribution to our comps from guest traffic. When our comps have been most challenging historically, traffic trends have fallen into the zero to minus 1 range, but positive 1 is a very healthy amount of traffic for us measured in any historical basis.

So you don't feel like there's a more competitive environment or whatever out there, that's going to be a little bit of a traffic headwind, it sounds like, Doug? Doug Scovanner: I think probably the best forward-looking statement I heard out of Wal-Mart this morning was that they intended to earn $0.88 to $0.92 in the fourth quarter, which is a very robust level of profitability. So clearly despite all of the rhetoric surrounding rollbacks, they do not intend to have some kind of fundamental profit delivery problem, and therefore neither will we.

Thank you.

Your next question is from Teresa Donahue - Neuberger Berman.

Good morning, Doug. Most of my questions have been answered, but I was just wondering as you look at SG&A, is there an update you can give us as to what a comp leverage point might be? I know there's been a lot of noise this year. Doug Scovanner: I don't think that the fundamental drivers of the answer to that question have changed very much over time, meaning generally speaking with today's inflation in our SG&A inputs, it requires all else being equal, something in the 4% to 5% comp range to neutralize the adverse impacts of those inflationary factors and neutralize SG&A as a percent of sales. The caveat is that all else is never equal, and this year we do have some drivers that have been larger than the scale that I have just described. I do not expect those to continue into '07 and beyond. We will obviously be much more precise in our '07 outlook a little more than 90 days from now, but I don't think we will be talking in '07, '08, '09 about adverse impacts of SG&A rates.

Thank you.

Your next question is from Dan Binder - Buckingham Research. Dan Binder - Buckingham Research Group: Hi, good morning. A couple questions for you, just looking at the credit business a little bit, you mentioned earlier some peak trends that you would expect in the write-offs. If you look at the delinquencies, what would you expect the peak trends to be there? And then if we look at the allowance for bad debt as a percentage of receivables, what do you expect that would gravitate to over time? Does this mean that you will start to reserve more in line with net write-offs versus well in excess, as you have in prior quarters? Doug Scovanner: First of all, on your delinquency question, I mentioned earlier that we now expect delinquencies to settle in more or less at the current level, with the peak representing 4% so I think we are probably there for the near term in delinquencies. Again, a lot of the short run action in that delinquency statistic has been driven by the small portion of our guests who revolve and pay the minimum every month. More broadly, I think it is reasonably likely that our write-offs and our bad debt expense will move more in line with each other. I do not expect continued sequential growth in the reserve, either on a relative or absolute basis, at nearly the same pace that it has grown, that we have caused it to grow in last 12 to 24 months. Dan Binder - Buckingham Research Group: Your comment regarding retail representing about 85% of the earnings, were you just talking about this year, or do you think that would be representative of what you would hope to do in future years as well? Doug Scovanner: Well, again, I don't…

Your next question is from Peter Benedict -Wachovia. Peter Benedict - Wachovia Securities: I was struck by the inventory management in the quarter. It looks like, if my numbers are right, your inventory was up only about 4% year over year. Doug, can you just talk to us about what's driving that and how we should be thinking about inventory over the next few quarters? Thanks. Doug Scovanner: Third quarter end represents a fascinating point in time to take a snapshot of our inventory, because there is an enormous amount of receipt activity just before or just after quarter end, related to our seasonal build. This year when that snapshot was taken, some of the receipts fell after quarter end, last year they fell before quarter end. We need to take a look at this one over a little longer period of time. Last year, year-over-year our inventory was up double-digits in percentage, if memory serves, about 14%. And so I think a little longer time period is required to interpret this one. I would add quickly that given that this is a 53-week year, we are taking a snapshot at the end of January, beginning of February, a week later and that can sometimes have meaningful differences. So that is a very heavy receipt period relative to sales, and in an average 53-week year, that means we will have more inventory on hand relative to sales than at the end of a 52-week year. Peter Benedict - Wachovia Securities: Fair enough. Thanks so much, Doug.

The next question is from Adrianne Shapira - Goldman Sachs. Adrianne Shapira - Goldman Sachs: Thank you. Gregg, a few questions. Can you just talk about what, if any, impact you think department store consolidation is having for you, especially as it seems as if mall traffic is seeing a resurgence?

Well, we can't specifically attribute our same-store sales gains to any one particular segment or channel of distribution. We believe over the long term, however, that as we get better at delivering on our Expect More, Pay Less brand promise and we deliver great quality at great value, we will continue to see migration down through the department store channel, mid market channel, to our channel of distribution, and it's just something that we believe will occur as we deliver on our brand promise. Adrianne Shapira - Goldman Sachs: Are you able to drill down, in terms of stores that were overlapping with former May doors or Federated doors that were closed for any disparity in terms of performance? Bob Ulrich: We really have not had any negative impact whatsoever from the department stores sector. Another thing you have to remember is there have been some good comps in that sector, but they are not counting the new acquisition and they are not counting the transfer effect of the competing stores often in the same mall that were closed. So I think you are seeing not necessarily an increase in that sector, and certainly nothing that's increasing that is hurting our competitiveness. Adrianne Shapira - Goldman Sachs: Bob, I meant, I just thought maybe you were seeing some pickup as some of the stores were closing. Doug Scovanner: Too small to measure. Adrianne Shapira - Goldman Sachs: Gregg, just moving on to GO International, you have had a few under your belt now, in terms of launches. Maybe give us a sense what's working there, what's worked better than others, and is it helping the entire category, and also, it sounds as if you are launching a new brand into accessories. Is this similar to GO International? Should we expect more of these types of brands in the accessories category as well?

Yes, the learnings from GO International are keep it fresh, keep it broad, not deep in any one style, and make sure that even over that 60 or 90-day timeframe, we deliver newness and uniqueness throughout that timeframe. We have evolved to that particular set of tactics and the performance has improved as we have gone throughout last year. We see the same type of opportunity in other categories throughout the store, the Reffi collection is a great way for us to take the GO concept and apply that to another category within the store. It's been very, very well received from our guests, and we anticipate doing more of that over 2007. Adrianne Shapira - Goldman Sachs: So apparel and accessories, more GO International. Any other categories beyond those two?

Well, right now we are prepared to talk about ongoing initiatives in accessories, and we are working on other things right now, but it's premature to share anything at this time. Adrianne Shapira - Goldman Sachs: Great, thank you.

Your final question is from Neil Currie - UBS. Neil Currie - UBS: Would you give an update on your food sales in your regular Target stores, and an update on how many stores have been remodeled to the P 2004, or the updated version of P 2004?

Sales continue to outpace the company growth rate, and we continued to gain knowledge and credibility in that business, in both SuperTargets and in our general merchandise stores. I can give you the approximate rundown. Today, about 75% of our 1,494 store network has some form of either right-sizing, of P 2004, or an expanded food assortment in a general merchandise store, or is a SuperTarget. So in rough numbers, we have approximately 176 SuperTargets. Approximately 190 stores that have an expanded grocery, which would be approximately 25 sides or more, or have more than 40 refrigerated or frozen cases within that store; and we have about 700 or so stores that were either right-sized or were part of our P 2004 format. So the combination of those three formats are about 1,090 stores out of the network. Neil Currie - UBS: The new products you mentioned earlier that you are going to be introducing before the holiday period in the food side or the Archer Farms side, will they go in all stores, or will they be skewed more towards the SuperTargets?

The Choxie collection will be in all stores. Neil Currie - UBS: Thank you. Just a final question if I may on the same topic. Given some of the tighter planning or zoning constraints around big boxes in metro markets, would you ever consider testing a smaller format, which was maybe more focused around food and fast fashion? Bob Ulrich: We have been very successful with our larger formats, and if one goes back into history, we occasionally tested some smaller formats and our guests, generally having a positive demographic in terms of education and profession, normally being a little bit higher in discretionary income, is also a little more demanding, and wants a broader assortment and better service, and that's why our whole “Expect More, Pay Less” philosophy fits so well, but we find we have to give them a full assortment in order to compete effectively. Neil Currie - UBS: Thank you.

Thank you. At this time, I would like to turn the conference back over to Mr. Ulrich for any closing remarks. Bob Ulrich: That concludes Target’s third quarter 2006 earnings conference call. Thank you all for your participation.