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Target November-December 2018 comp sales rise 5.7% YOY; CFO to retire

Segment

IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

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Target November-December 2018 comp sales rise 5.7% YOY; CFO to retire

Target Corp. said Jan. 10 that sales grew 5.7% year over year in November-December 2018 as it announced the retirement of its CFO and rejiggered its senior management structure.

The U.S. general merchandise retailer said CFO Cathy Smith will retire and move to an advisory role until May 2020. Smith will remain CFO until a successor is found.

Minneapolis-based Target said comparable sales growth was helped primarily by increased store traffic and a small increase in average ticket size amid higher demand for toys, baby and seasonal gift items. Comparable November-December sales have grown more than 9% over the past two years.

The company's comparable digital sales for the period grew 29% year over year, marking the fifth straight year in which digital sales increased over 25%.

"This performance demonstrates the benefit of placing our stores at the center of every way we serve our guests, including both in-store shopping and digital fulfillment," Chairman and CEO Brian Cornell said in the release.

Moody's lead retail analyst Charlie O'Shea expects the retailer to be "one of the top performers" for the Christmas 2018 holiday season as Target's performance "continues to demonstrate the positive impact of the company's significant investments enhancing its stores and improving its online capability."

Target reiterated its fourth-quarter 2018 comparable sales growth of about 5% and an adjusted EPS outlook range of $5.30 to $5.50 for 2018.

In other personnel moves, Katie Boylan, senior vice president, communications, was appointed Target's chief communications officer. Mike McNamara, Target's chief information officer, will now lead the company's enterprise data analytics and business intelligence team in addition to leading its technology services unit. Rick Gomez, chief marketing officer, was named chief marketing and digital officer to lead Target's digital strategy.

Stephanie Lundquist, Target's chief human resources officer since 2016, was named president of its food and beverage division, while Melissa Kremer, senior vice president HR, was promoted to chief HR officer.

All will report to Cornell.

Target shares were down 3.5% at $67.80 in premarket trading.


Credit Analysis
IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

IFRS 9 is a reporting standard for financial instruments that replaces IAS39 (the previous incurred loss standard) with the introduction of provisions for expected credit losses (ECLs) on all financial assets, such as those held to collect contractual cash flows, or held with the possibility of being sold.

The date for adoption was January 1, 2018 and is mandatory for public non-financial corporations (and financial institutions) across a number of jurisdictions outside the United States, including many European countries.

The two key changes introduced by the IFRS 9 accounting standard are:

  • Calculation and provisions must be performed on all affected financial assets, not just the impaired ones, as per the standard it replaces
  • New expected credit loss calculations

Additional challenges will be presented when making assessments for low default asset classes, and companies may find it difficult to access models and sufficient data history.

Impact for non-financial corporations

Non-financial corporations will have some material exposure to many of the financial assets that are defined under IFRS 9. These include investment portfolios, intercompany loans, lease receivables, contract assets, and trade receivables, as illustrated below and further explained in our webinar on IFRS 9 for non-financial corporates.

This, together with the need to assess losses on performing and non-performing assets, might have a material impact on the profit and loss (P&L) of such companies.

ECL calculations under IFRS 9

The IFRS 9 accounting standard introduces new expected credit loss (ECL) calculations that require more data and new models. The key requirements are:

  • Significant increase in credit risk (SICR): Expected loss needs to be assessed at each reporting period to identify a SICR since initial recognition
  • Explicit macro-economic forecasts need to be considered using factors such as the relevant GDP growth, unemployment rate, and stock market index growth figures
  • Credit risk metrics such as probability of default (PD), credit rating, credit score, and loss given default (LGD) need to be adjusted to point in time (PiT), versus through the cycle (TTC)
  • Calculations need to be extended over the lifetime of the assets for underperforming exposures, or in standardized calculations

General versus simplified approach

When performing ECL calculations for trade receivables, the company can choose to take a general or simplified approach (the company is presented with a choice between the two depending on the type of exposure).

  • The general approach uses the 12-month ECL calculation for performing assets (Stage 1 assets) and lifetime calculation for the assets whose creditworthiness has deteriorated since recognition (Stage 2 assets)
  • The simplified approach uses the lifetime ECL calculation for all performing and non-performing assets

The simplified approach can have a bigger impact on P&L expense, as all losses are calculated over the lifetime of the asset, while the general approach can have more impact on P&L volatility, as assets might move between stages incurring 12-month and lifetime calculations.

How S&P Global Market Intelligence can help

A best practice approach used by many financial institutions, which non-financial corporations can also use to comply with the new provision, is to use the existing TTC metrics and convert them into PiT metrics to reflect the current credit cycle, as well as include the required future macroeconomic considerations.

S&P Global Market Intelligence has developed models and tools to help your business undertake the relevant ECL calculations. These models can also be used to assess the creditworthiness of your counterparties and recovery of your exposure in the context of your core business process such as customer credit, supply chain risk, vendor management, and selection and transfer pricing.

The calculation method involves four steps:

  1. We calculate the TTC metric, i.e. the S&P Global Market Intelligence Fundamental PD, CreditModel™ score, for the concerned entity.
  2. We apply our macro-economic model, which weights user defined macro-economic scenarios to produce weighted average forecasted PDs.
  3. We apply a credit cycle adjustment, which converts the TTC risk metric into a PiT PD, leveraging the difference between observed default rates from S&P Global Ratings’ rated universe over last year versus over the past 30+ years.
  4. In addition, as a best practice, we also offer the option to incorporate market-based forward looking information. This is done by further adjusting the PD with the analysis of PD Market Signals country and industry benchmark trends over the past three months versus the past year.

In addition to this quantitative approach available on the Credit Analytics platform, we also offer scorecards that cover low default asset classes for PD, LGD, and point in time adjustments.

Learn More About Credit Analysis
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