OREANDA-NEWS. Fitch Ratings does not expect any rating implications from Target Corporation's (Target) announcement that it has signed a definitive agreement to sell its pharmacy and clinic businesses to CVS Health (CVS) for pretax proceeds of \$1.9 billion. Target's long-term Issuer Default Rating (IDR) is 'A-' and short-term IDR is 'F2'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

Target expects to deploy the after-tax net proceeds of approximately \$1.2 billion to support its long-term capital priorities, including share repurchases. The transaction is subject to customary closing conditions, including regulatory clearance, with timing of closing currently uncertain.

Fitch does not expect Target's financial leverage to increase. The transaction should benefit operating margins, enhance the customer experience around healthcare, strengthen Target's focus on wellness as a signature category, and potentially help drive traffic and sales at its stores. Target could also benefit over time by co-developing its smaller Target Express stores in conjunction with CVS, potentially creating a stronger convenience format.

Target's ratings reflect its strong competitive position in the discount retail sector, improving performance in its U.S. business, and exit from Canada, closing its remaining stores during April 2015. Cash costs associated with exiting Canada are expected to total \$500 million-\$600 million. However, the disposition results in the elimination of significant operating losses and capital lease obligations.

Target's U.S. comparable store sales (comps) were up 2.3% in the first quarter of 2015 (1Q15) following a modest 1.3% increase in 2014 and a 0.4% decline in 2013. The improvement underscores progress Target is making as the company focuses on merchandise offerings in the apparel, home, baby, kids and wellness categories. Transactions rose 0.9% during1Q15, after declining 0.2% in 2014, and 2.7% in 2013. Fitch expects comp sales growth can improve to the 2% range in 2015 from 1.3% in 2014. This includes the effect of digital sales, which Fitch estimates at 2%-3% of total sales and expects to grow at 30% or more annually.

For the continuing U.S. segment, the EBITDA margin increased 110 basis points (bps) to 10.5% for the 1Q15 versus 9.4% in the comparable period last year. The expansion was due to primarily to lower promotional activity and cost savings initiatives. Target's margin had declined by 30 bps in 2014 due to heavier promotional and clearance activity.

Fitch believes there is upside to Target's consolidated margin to above 10% from 9.3% at the fiscal year ended Jan. 31, 2015 and 9.7% for the latest 12 months (LTM) period ended May 2, 2015. Expansion will be driven by comp sales growth and \$2 billion of targeted cost reductions over the next two years, offset in part by investments to drive growth. Margins should also benefit from the sale of its pharmacy and clinics business to CVS as Target expects the transaction to be immediately accretive to earnings following deal close.

Adjusted leverage was 2.0x at May 2, 2015, compared with 2.4x at Feb. 1, 2014. Fitch expects leverage is expected to track at or modestly above 2.0x over the next few years as EBITDA grows and debt is used to partially finance share repurchases. Fitch currently expects free cash flow (FCF) excluding restructuring costs to range from \$1.5 billion to \$2 billion annually, and along with incremental borrowings, be directed to share repurchases.

RATING SENSITIVITIES

The following factors, individually or collectively, could lead to a positive rating action: improved operating momentum in the domestic business, including consistent comp sales growth of 2%-3%; an improvement in EBITDA margin toward its historical level of 10% or greater; and adjusted financial leverage of around 2.0x.

The following factors, individually or collectively, could lead to a negative rating action: operating shortfalls and more aggressive share repurchase activity that drive adjusted leverage above the mid-2x range for an extended period.

Fitch currently rates Target as follows:

--Long-term IDR 'A-';
--Senior unsecured debt 'A-';
--Bank credit facility 'A-';
--Short-term IDR 'F2';
--Commercial paper 'F2'.

The Rating Outlook is Stable.