* Includes unusual items, resulting in a net after-tax charge in 1998 of $35 million, or 8 cents per share, and a net after-tax charge in 1997 of $24 million, or 5 cents per share.

At Dayton Hudson, our success — and our continued growth — are predicated on our ability to distinguish ourselves from other retailers — to be faster, better and different from the competition. In 1998, we once again focused our efforts on building unique store brands at each of our divisions, leveraging the resources of the total corporation and investing in businesses that will improve our overall results and increase shareholder value.

Indeed, 1998 was another year of solid growth and outstanding financial performance.

• Pre-tax segment profit grew 16 percent, reflecting double-digit increases at both Target and our Department Store Division.
• Net earnings rose 24 percent to $935 million and earnings per share increased 25 percent to $1.98.
• Our total return to shareholders of 79 percent— reflecting both stock price appreciation and dividends — significantly outperformed the S&P 500 for the third consecutive year.
• And finally, we announced a $1 billion share repurchase program that we expect to complete over the next two years.

We are pleased with our achievements in 1998 and remain confident that the strategies in place at each of our divisions position Dayton Hudson for continued profitable growth in the future.

Clearly, the primary driver of Dayton Hudson's growth is Target. In 1998, Target generated more than $23 billion in revenues and contributed nearly $1.6 billion of segment profit. During the year, we opened 55 net new Target stores, and significantly increased our penetration in Northeastern and mid-Atlantic markets, such as New York, Philadelphia, Baltimore and Washington, D.C. With nearly 40 percent of the U.S. population and less than 10 percent of our current store base, this region of the country will continue to be a major focus of our expansion efforts for years to come. In 1999, our plans include new store entries into the Boston and Pittsburgh markets.

Target's impressive growth — compound annual increases of 14 percent in revenues and 21 percent in profits over the past five years — reflects our success in differentiating our strategy, strengthening guest loyalty and creating a distinct competitive advantage. It also reflects a disciplined approach to investing capital and an uncompromising commitment to the unique brand identity represented by our merchandise, our stores and our marketing.

To date, our approach to SuperTarget® is indicative of this philosophy. For the past four years we have experimented with the supercenter format, combining grocery and general merchandise in 14 stores. Our efforts have been focused on achieving two objectives:

• to create a food offering and a store environment that is as attractive to our guests as the assortment and presentation in our general merchandise discount stores; and
• to design and operate a store that meets or exceeds our financial goals.

The Target Guest Card® is another important contributor to our growth in profit and market share, and an integral element of Target's brand character. In 1998, we again enjoyed a significant increase in guest credit contribution, reflecting the acquisition of new accounts, growth in our balances and a broader acceptance of our Take Charge of Education^SM guest loyalty program. Today, the Target Guest Card comprises the largest portion of our overall credit portfolio, with opportunity for substantial growth in the future.

We believe Target's strategy to differentiate itself in the discount segment — and our ability to consistently execute this strategy — is critical to our success and will continue to drive Target and Dayton Hudson's growth well into the next decade.

Together, Mervyn's and our Department Store Division comprise about 25 percent of Dayton Hudson's revenues and profits, and contribute meaningfully to the corporation's overall growth. These two divisions provide fashion leadership, management talent and expertise, and allow us to enjoy economies of scale in many areas, including credit, transportation and information systems.

In addition, during the past five years, Mervyn's and the Department Stores combined to generate approximately $1.3 billion of after-tax cash flow, allowing us to aggressively grow Target while controlling the growth of our debt. In other words, the financial contribution from Mervyn's and our Department Stores is a key factor in our ability to achieve 15 percent or more annual earnings per share growth over time.

In 1999, Mervyn's primary objective is to produce reasonable and consistent top-line growth and improve profitability. At our Department Stores, our goal is to continue to enhance the powerful brand identity of the Marshall Field's, Hudson's and Dayton's names and extend our recent favorable performance record. We remain committed to our middle-market and traditional department store strategies and are confident that they will continue to be valuable partners in our "Power of One" efforts and our future growth.

Guest credit strategically supports our core retail operations and is an integral component of each division's business and financial results. Through its generation of incremental sales and growth of credit contribution, guest credit contributes significantly to our overall earnings growth. During the past five years, contribution from guest credit has increased at a compound annual rate of 18 percent, and both return on investment and EVA have risen sharply.

In 1999, we will continue to invest in guest credit programs at all three divisions in order to sustain our profitable growth. Specifically, we will continue to expand the penetration of the Target Guest Card, build our guest loyalty programs and manage our credit expenses.

Longer term, our growth and financial success will reflect our continued ability to differentiate our strategies from our competitors. We must continue to anticipate new opportunities and act promptly when they are presented. We must be innovative and remain focused on reinforcing our distinct store brands. And, we must continue to invest prudently in our businesses and fully leverage our available resources.

Though we cannot rest on our laurels, the strength and momentum of our recent performance, combined with the solid leadership and strategies in place at each of our divisions, give us confidence that we can continue to deliver annual earnings per share growth of 15 percent or more over time and create substantial value for our shareholders.

March 24, 1999

Bob Ulrich
Chairman and Chief Executive Officer

 

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