What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-05-29 compared with 2019-11-27 · 204 added, 132 removed, 123 unchanged (73% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

Third quarter 2019 includes the following notable items:

Financial Summary

First quarter 2020 includes the following notable items:

• GAAP earnings per share from continuing operations were $0.56.

• Adjusted earnings per share from continuing operations were $0.59.

Adjusted earnings per share reflects the impact of COVID-19 on our business.

• Total revenue increased 11.3 percent, driven by a comparable sales increase and sales from new stores.

Comparable sales increased 4.5 percent, driven by a 3.1 percent increase in traffic.

• Comparable sales increased 10.8 percent, driven by a 12.5 percent increase in average transaction amount.

◦ Comparable store sales grew 0.9 percent.

◦ Digital channel sales increased 141 percent, contributing 9.9 percentage points to comparable sales growth.

Operating income of $1,002 million was 22.3 percent higher than the comparable prior-year period.

Sales were $18,414 million for the three months ended November 2, 2019 , an increase of $824 million , or 4.7 percent, from the same period in the prior year.

Operating cash flow provided by continuing operations was $4,141 million for the nine months ended November 2, 2019 , an increase of $527 million , or 14.6 percent , from $3,614 million for the nine months ended November 3, 2018 .

Earnings Per Share from Continuing Operations

Three Months Ended

Nine Months Ended

• Operating income of $468 million was 58.7 percent lower than the comparable prior-year period.

Sales were $19.4 billion for the three months ended May 2, 2020, an increase of $2.0 billion, or 11.3 percent, from the same period in the prior year.

Operating cash flow provided by continuing operations was $1.3 billion for the three months ended May 2, 2020, an increase of $961 million, or 297.5 percent, from $323 million for the three months ended May 4, 2019.

Earnings Per Share from Continuing Operations Three Months Ended

GAAP diluted earnings per share $ 0.56 $ 1.53 (63.3) %

Adjustments 0.03 —

Adjusted diluted earnings per share $ 0.59 $ 1.53 (61.3) %

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A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 19.

For the trailing twelve months ended November 2, 2019 , after-tax return on invested capital from continuing operations (ROIC) was 15.0 percent, compared with 15.8 percent for the trailing twelve months ended November 3, 2018 .

Excluding the discrete impacts of the Tax Cuts and Jobs Act of 2017 (Tax Act), ROIC was 15.1 percent and 13.9 percent for the trailing twelve months ended November 2, 2019 , and November 3, 2018 , respectively.

We report after-tax return on invested capital (ROIC) from continuing operations because we believe ROIC provides a meaningful measure of our capital-allocation effectiveness over time.

For the trailing twelve months ended May 2, 2020, after-tax ROIC was 13.4 percent, compared with 14.3 percent for the trailing twelve months ended May 4, 2019.

The calculation of ROIC is provided on page 20.

Impact of COVID-19

On March 11, 2020 the World Health Organization declared the novel coronavirus disease (COVID-19) a pandemic, and on March 13, 2020 the United States declared a national emergency.

The rapid development and fluidity of this situation limits our ability to predict the ultimate impact of COVID-19 on our business, financial condition and financial performance, which could be material.

States and cities have taken various measures in response to COVID-19, including mandating the closure of certain businesses and encouraging or requiring citizens to avoid large gatherings.

We have implemented numerous safety measures to protect our guests and team members — such as more rigorous cleaning processes, providing disposable face masks, gloves and thermometers for team members, installing distancing markers, limiting guest levels within our stores, and installing partitions at all stores .

We have also reduced store hours to support increased cleaning and replenishment efforts and implemented quantity limits on certain high-demand merchandise.

In ad dition, we have reserved certain store hours for guests with increased vulnerability to COVID-19.

To date all of our stores, digital channels, and distribution centers remain open.

As the crisis has evolved, we have experienced unusually strong sales, as guests rely on Target for essential items like food, medicine, cleaning products, and household stock-up items.

Underlying this trend, we saw significant volatility in our sales mix, including both category sales mix and the mix of sales in our stores and digital channels, including same-day fulfillment options, and these trends changed within the quarter.

• February 2020 comparable sales increased 3.8 percent with strength across our entire multi-category portfolio, largely reflecting a continuation of 2019 sales trends.

Late in the month, we saw an increase in traffic and comparable sales in both our stores and digital channels as well as increased sales in our Food and Beverage and Beauty and Household Essential categories as consumers began stock-up shopping.

TARGET CORPORATION

Q1 2020 Form 10-Q 13

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

FINANCIAL SUMMARY Index to Notes

• March 2020 comparable sales increased 11.7 percent, including an increase of 4.9 percent in stores originated comparable sales and approximately 100 percent in digitally originated comparable sales.

Across our core merchandise categories, March comparable sales increased significantly in Beauty and Household Essentials, Food and Beverage, and Hardlines.

The increases were partially offset by a significant comparable sales declines in Apparel and Accessories and, to a lesser ext ent, Home Furnishings and Décor.

• April 2020 comparable sales increased 16.5 percent.

A 4.8 percent decline in stores originated sales was more than offset by a 282 percent increase in digitally originated sales, including those fulfilled by our stores.

Comparable sales increased significantly in Beauty and Household Essentials, Food and Beverage, Hardlines, as well as Home Furnishings and Décor.

Comparable sales in Apparel and Accessories continued to decline, although at a lower rate than in March.

Store originated and Apparel and Accessories sales trends increased notably beginning mid-April.

From March 26, 2020 to April 26, 2020, we did not accept in-store merchandise returns and exchanges.

We lengthened the return period for merchandise affected by this change.

As a result of this temporary suspension, the accrual for estimated returns was $398 million as of May 2, 2020, compared with $117 million and $124 million as of February 1, 2020, and May 4, 2019, respectively.

Our returns estimate for sales during the suspension period includes significant assumptions that, if actual results are substantially different, could result in material adjustments in future periods.

Gross margin has been negatively impacted by changes in both our category and channel sales mix, as well as actions that we have taken to allow us to better fulfill guest demand for essentials.

Additionally, gross margin reflects COVID-19-related investments in pay and benefits for our supply chain team members.

Our SG&A expenses have also been significantly impacted by incremental costs related to investments in pay and benefits for store team members, the spikes in merchandise volume in stores and the supply chain, incremental safety and cleaning supplies, and the impact of additional team member hours dedicated to more rigorous cleaning routines in our facilities.

To support our team and minimize potential disruptions in their work to serve our guests, we have modified our plans for some of our strategic initiatives, including our previously announced remodel program.

We now anticipate approximately 130 remodels in 2020, down from the previous expectation of approximately 300.

Similarly, we now expect to open 15 to 20 new small format stores in 2020, rather than the 36 previously announced.

During the first quarter of 2020, we issued $2.5 billion of 5-year and 10-year notes in an effort to increase our cash on hand.

Additionally, we entered into a $900 million 364-day credit facility, increasing our total undrawn committed credit facilities to $3.4 billion.

Our dividend policy remains unchanged;

however, we have temporarily suspended share repurchase activity in the current environment.

The Liquidity and Cap ital Resources section provides additional information.

TARGET CORPORATION

Q1 2020 Form 10-Q 14

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF OPERATIONS Index to Notes

Analysis of Results of Operations

Summary of Operating Income

Three Months Ended

Nine Months Ended

(dollars in millions)

Summary of Operating Income Three Months Ended

(dollars in millions) May 2,

Sales $ 19,371 $ 17,401 11.3 %

Other revenue 244 226 7.7

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Selling, general and administrative expenses

4,060 3,663 10.9

Depreciation and amortization (exclusive of depreciation included in cost of sales)

577 581 (0.8)

Operating income $ 468 $ 1,135 (58.7) %

Rate Analysis

Three Months Ended

Nine Months Ended

Rate Analysis Three Months Ended

Gross margin rate 25.1 % 29.6 %

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All other rates are calculated by dividing the applicable amount by total revenue.

Sales include all merchandise sales, net of expected returns, and gift card breakage.

Comparable sales is a measure that highlights the performance of our stores and digital channels by measuring the change in sales for a period over the comparable, prior-year period of equivalent length.

Sales include all merchandise sales, net of expected returns, and our estimate of gift card breakage.

We use comparable sales to evaluate the performance of our stores and digital channel sales by measuring the change in sales for a period over the comparable, prior-year period of equivalent length.

Comparable sales include all sales, except sales from stores open less than 13 months, digital acquisitions we have owned less than 13 months, stores that have been closed, and digital acquisitions that we no longer operate.

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Digitally originated sales include all sales initiated through mobile applications and our websites.

Our stores fulfill the majority of digitally originated sales, including shipment from stores to guests, store pick-up or drive-up, and delivery via our wholly-owned subsidiary, Shipt.

Our stores fulfill the majority of digitally originated sales, including shipment from stores to guests, store Order Pick Up or Drive Up, and delivery via our wholly owned subsidiary, Shipt.

Digitally originated sales may also be fulfilled through our distribution centers, our vendors, or other third parties.

The increase in sales during the three and nine months ended November 2, 2019 , is due to a comparable sales increase of 4.5 percent and 4.2 percent , respectively, and the contribution from new stores.

Comparable Sales

Three Months Ended

Nine Months Ended

Sales growth – from both comparable sales and new stores – represents an important driver of our long-term profitability.

We expect that comparable sales growth will drive the majority of our total sales growth.

We believe that our ability to successfully differentiate our guests’ shopping experience through a careful combination of merchandise assortment, price, convenience, guest experience, and other factors will over the long-term drive both increasing shopping frequency (traffic) and the amount spent each visit (average transaction amount).

The increase in sales during the three months ended May 2, 2020, is due to a comparable sales increase of 10.8 percent and the contribution from new stores.

Comparable Sales Three Months Ended

Comparable sales change 10.8 % 4.8 %

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Amounts may not foot due to rounding.

Contribution to Comparable Sales Change

Three Months Ended

Nine Months Ended

Stores channel comparable sales change

Digital channel contribution to comparable sales change

TARGET CORPORATION

Q1 2020 Form 10-Q 15

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF OPERATIONS Index to Notes

Contribution to Comparable Sales Change Three Months Ended

Stores originated channel comparable sales change

Contribution from digitally originated sales to comparable sales change 9.9 2.1

Total comparable sales change 10.8 % 4.8 %

Amounts may not foot due to rounding.

Sales by Channel

Three Months Ended

Nine Months Ended

Sales by Channel Three Months Ended

Stores originated 84.7 % 92.9 %

Digitally originated 15.3 7.1

Note 2 to the Consolidated Financial Statements provides sales by product category.

Total 100 % 100 %

Sales by Product Category Three Months Ended

Apparel and accessories 14 % 19 %

Beauty and household essentials 30 29

Food and beverage 24 21

Hardlines 15 14

Home furnishings and décor 17 17

Total 100 % 100 %

The collective interaction of a broad array of macroeconomic, competitive, and consumer behavioral factors, as well as sales mix, and transfer of sales to new stores makes further analysis of sales metrics infeasible.

As previously discussed, we believe that COVID-19 has had a significant impact on the mix of sales amongst our sales channels and categories.

We monitor the percentage of purchases that are paid for using RedCards (RedCard Penetration) because our internal analysis has indicated that a meaningful portion of the incremental purchases on RedCards are also incremental sales for Target.

Guests receive a 5 percent discount on virtually all purchases when they use a RedCard at Target.

RedCard Penetration

Three Months Ended

Nine Months Ended

RedCard Penetration Three Months Ended

Target Debit Card 12.7 % 13.1 %

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Amounts may not foot due to rounding.

TARGET CORPORATION

Q1 2020 Form 10-Q 16

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF OPERATIONS Index to Notes

Gross Margin Rate

For the three months ended November 2, 2019 , our gross margin rate was 29.8 percent compared with 28.7 percent in the comparable period last year.

The increase was due to merchandising efforts to optimize costs, pricing, promotions, and assortment, combined with favorable category sales mix.

For the three months ended November 2, 2019, aggregate supply chain and digital fulfillment costs had an insignificant impact on our gross margin rate relative to the comparable prior-year period.

For the nine months ended November 2, 2019 , our gross margin rate was 30.0 percent compared with 29.6 percent in the comparable period last year.

The increase was due to merchandising efforts to optimize costs, pricing, promotions, and assortment, and favorable category sales mix, partially offset by increased supply chain and digital fulfillment costs.

For the three months ended May 2, 2020, our gross margin rate was 25.1 percent compared with 29.6 percent in the comparable period last year.

This decrease reflected:

• The net impact of merchandising actions, including purchase order cancellation fees and inventory impairments related to a rapid slowdown in Apparel and Accessories sales, partially offset by favorability in clearance and promotional markdowns;

• Unfavorable category sales mix, as sales growth was strongest in lower-margin categories;

• Digital fulfillment and supply chain costs, driven by unusually strong growth in digital volume combined with the impact of higher pay and benefit costs classified within Cost of Sales, including incremental team member pay and benefits investments due to COVID-19.

Selling, General, and Administrative Expense Rate

For the three months ended November 2, 2019 , our SG&A expense rate was 22.3 percent compared with 22.1 percent in the comparable period last year.

The increase was primarily driven by higher compensation costs, including store wages, and marketing expenses, partially offset by broad-based cost savings.

For the nine months ended November 2, 2019 , our SG&A expense rate was 21.4 percent compared with 21.7 percent in the comparable period last year.

The decrease reflects lower impairment charges in 2019 and broad-based cost savings.

Change in Number of Stores

Three Months Ended

Nine Months Ended

For the three months ended May 2, 2020, our SG&A expense rate was 20.7 percent compared with 20.8 percent in the comparable period last year.

For the current quarter, SG&A expenses increased $397 million, including approximately $200 million of incremental team member pay and benefits classified within SG&A Expenses, and investments to protect the health and safety of guests.

From a rate perspective, these increased costs were more than offset by leverage resulting from strong revenue growth.

Change in Number of Stores Three Months Ended

Beginning store count 1,868 1,844

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Number of Stores and

Retail Square Feet

Number of Stores

Retail Square Feet (a)

Retail Square Feet Number of Stores Retail Square Feet (a)

2020 February 1,

170,000 or more sq.

272 272 272 48,613 48,619 48,603

50,000 to 169,999 sq.

1,505 1,505 1,501 189,226 189,227 188,918

49,999 or less sq.

94 91 78 2,745 2,670 2,276

Total 1,871 1,868 1,851 240,584 240,516 239,797

(a) In thousands, reflects total square feet less office, distribution center, and vacant space.

TARGET CORPORATION

Q1 2020 Form 10-Q 17

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

OTHER PERFORMANCE FACTORS Index to Notes

Other Performance Factors

Net Interest Expense

Net interest expense was $113 million and $359 million for the three and nine months ended November 2, 2019 , respectively, and $115 million and $352 million for the three and nine months ended November 3, 2018 , respectively.

Net interest expense was $117 million and $126 million for the three months ended May 2, 2020 and May 4, 2019, respectively.

The decrease is primarily due to the lower floating benchmark interest rate associated with our interest rate swaps during the three months ended May 2, 2020.

Provision for Income Taxes

Our effective income tax rate from continuing operations for the three and nine months ended November 2, 2019 , was 21.7 percent and 22.4 percent , respectively, compared with 13.6 percent and 19.9 percent , respectively, for the comparable periods last year.

The effective income tax rates for the three and nine months ended November 3, 2018 , included $39 million of discrete benefits of the Tax Act and, to a lesser extent, rate benefits from our global sourcing operations.

Our effective income tax rate from continuing operations for the three months ended May 2, 2020, was 13.9 percent compared with 22.4 percent for the comparable periods last year.

For the three months ended May 2, 2020, lower pretax earnings resulted in a larger rate benefit from discrete items, primarily related to share-based payments, compared with the prior year.

Our effective tax rate is generally more volatile at lower amounts of pretax income because the impact of discrete and nondeductible items is greater.

TARGET CORPORATION

Q1 2020 Form 10-Q 18

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Notes

Reconciliation of Non-GAAP Financial Measures to GAAP Measures

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The most comparable GAAP measure is diluted earnings per share from continuing operations.

Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP.

Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP.

Other companies may calculate Adjusted EPS differently, limiting the usefulness of the measure for comparisons with other companies.

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Three Months Ended

November 2, 2019

November 3, 2018

(millions, except per share data)

Per Share Amounts

GAAP diluted earnings per share from continuing operations

Adjusted diluted earnings per share from continuing operations

Reconciliation of Non-GAAP Adjusted EPS

Nine Months Ended

November 2, 2019

November 3, 2018

May 2, 2020 May 4, 2019

(millions, except per share data)

Per Share Amounts

Pretax Net of Tax Per Share Amounts Pretax Net of Tax Per Share Amounts

GAAP diluted earnings per share from continuing operations

Income tax matters (b)

$ 0.56 $ 1.53

Loss on investment (a)

$ 21 $ 15 $ 0.03 $ — $ — $ —

Adjusted diluted earnings per share from continuing operations

$ 0.59 $ 1.53

Amounts may not foot due to rounding.

Represents discrete items related to the Tax Act.

Represents benefits from the resolution of certain income tax matters unrelated to current period operations.

Represents an insurance recovery related to the 2013 data breach.

Earnings from continuing operations before interest expense and income taxes (EBIT) and earnings before interest expense, income taxes, depreciation and amortization (EBITDA) are non-GAAP financial measures which we believe provide meaningful information about our operational efficiency compared with our competitors by excluding the impact of differences in tax jurisdictions and structures, debt levels, and for EBITDA, capital investment.

(a) Includes an unrealized loss on our investment in Casper Sleep Inc., which is not core to our continuing operations.

Earnings from continuing operations before interest expense and income taxes (EBIT) and earnings from continuing operations before interest expense, income taxes, depreciation, and amortization (EBITDA) are non-GAAP financial measures.

We believe these measures provide meaningful information about our operational efficiency compared with our competitors by excluding the impact of differences in tax jurisdictions and structures, debt levels, and for EBITDA, capital investment.

These measures are not in accordance with, or an alternative to, GAAP.

The most comparable GAAP measure is net earnings from continuing operations.

EBIT and EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP.

Other companies may calculate EBIT and EBITDA differently, limiting the usefulness of the measure for comparisons with other companies.

EBIT and EBITDA

Three Months Ended

Nine Months Ended

(dollars in millions) (unaudited)

EBIT and EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP.

Other companies may calculate EBIT and EBITDA differently, limiting the usefulness of the measures for comparisons with other companies.

EBIT and EBITDA Three Months Ended

(dollars in millions) (unaudited) May 2,

Net earnings from continuing operations $ 284 $ 792 (64.2) %

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+ Net interest expense 117 126 (6.8)

$ 446 $ 1,147 (61.1) %

+ Total depreciation and amortization (a)

Represents total depreciation and amortization, including amounts classified within Depreciation and Amortization and within Cost of Sales.

We have also disclosed after-tax ROIC, which is a ratio based on GAAP information.

641 644 (0.6)

EBITDA $ 1,087 $ 1,791 (39.3) %

(a) Represents total depreciation and amortization, including amounts classified within Depreciation and Amortization and within Cost of Sales.

TARGET CORPORATION

Q1 2020 Form 10-Q 19

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Notes

We have also disclosed after-tax ROIC, which is a ratio based on GAAP information, with the exception of the add-back of operating lease interest to operating income.

We believe this metric is useful in assessing the effectiveness of our capital allocation over time.

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Trailing Twelve Months

Numerator May 2,

Operating income $ 3,992 $ 4,204

+ Net other income / (expense) (26) 33

+ Operating lease interest (b)

- Income taxes (c)(d)

EBIT 3,966 4,237

+ Operating lease interest (a)

- Income taxes (b)

Net operating profit after taxes $ 3,198 $ 3,443

Denominator May 2,

Current portion of long-term debt and other borrowings $ 168 $ 1,056 $ 283

+ Noncurrent portion of long-term debt 14,073 11,357 11,107

+ Shareholders' equity

+ Operating lease liabilities (e)

+ Shareholders' investment 11,169 11,117 11,158

+ Operating lease liabilities (c)

2,448 2,231 2,157

- Cash and cash equivalents 4,566 1,173 1,060

- Net assets of discontinued operations (f)

Invested capital $ 23,292 $ 24,588 $ 23,645

Average invested capital (g)

After-tax return on invested capital (d)

After-tax return on invested capital excluding discrete impacts of Tax Act (d)

Consisted of 53 weeks.

Represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as finance leases.

Average invested capital (d)

$ 23,940 $ 24,116

After-tax return on invested capital 13.4 % 14.3 %

(a) Represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as finance leases.

Calculated using the discount rate for each lease and recorded as a component of rent expense within SG&A Expenses.

Operating lease interest is added back to operating income in the ROIC calculation to control for differences in capital structure between us and our competitors.

Calculated using the effective tax rates for continuing operations, which were 22.1 percent and 12.3 percent for the trailing twelve months ended November 2, 2019 , and November 3, 2018 , respectively.

For the trailing twelve months ended November 2, 2019 , and November 3, 2018 , includes tax effect of $1,024 million and $514 million , respectively, related to EBIT, and $19 million and $10 million , respectively, related to operating lease interest.

The effective tax rate for the trailing twelve months ended November 2, 2019 , and November 3, 2018 , includes discrete tax items of $(3) million and $382 million, respectively, related to the Tax Act.

Total short-term and long-term operating lease liabilities included within Accrued and Other Current Liabilities and Noncurrent Operating Lease Liabilities.

Included in Other Assets and Liabilities.

Average based on the invested capital at the end of the current period and the invested capital at the end of the comparable prior period.

(b) Calculated using the effective tax rates for continuing operations, which were 21.1 percent and 20.3 percent for the trailing twelve months ended May 2, 2020, and May 4, 2019, respectively.

For the trailing twelve months ended May 2, 2020, and May 4, 2019, includes tax effect of $837 million and $861 million, respectively, related to EBIT, and $18 million and $17 million, respectively, related to operating lease interest.

(c) Total short-term and long-term operating lease liabilities included within Accrued and Other Current Liabilities and Noncurrent Operating Lease Liabilities.

(d) Average based on the invested capital at the end of the current period and the invested capital at the end of the comparable prior period.

TARGET CORPORATION

Q1 2020 Form 10-Q 20

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF FINANCIAL CONDITION Index to Notes

Analysis of Financial Condition

Liquidity and Capital Resources

Our cash and cash equivalents balance was $969 million , $1,556 million , and $825 million at November 2, 2019 , February 2, 2019 , and November 3, 2018 , respectively.

Our cash and cash equivalents balance includes short-term investments of $163 million , $769 million , and $42 million as of November 2, 2019 , February 2, 2019 , and November 3, 2018 , respectively.

Our investment policy is designed to preserve principal and liquidity of our short-term investments.

This policy allows investments in large money market funds or in highly rated direct short-term instruments that mature in 60 days or less.

We also place dollar limits on our investments in individual funds or instruments.

Capital Allocation

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and finally, we return any excess cash to shareholders by repurchasing shares within the limits of our credit rating goals.

We expect 2019 capital expenditures to total approximately $3.1 billion, compared with $3.5 billion in 2018.

We believe our sources of liquidity will continue to be adequate to maintain operations, finance anticipated expansion and strategic initiatives, fund debt maturities, and pay dividends.

In response to COVID-19, we have suspended our share repurchase program.

We continue to anticipate ample access to commercial paper and long-term financing.

Our cash and cash equivalents balance was $4.6 billion, $2.6 billion, and $1.2 billion at May 2, 2020, February 1, 2020, and May 4, 2019, respectively.

Our cash and cash equivalents balance includes short-term investments of $3.6 billion, $1.8 billion, and $419 million as of May 2, 2020, February 1, 2020, and May 4, 2019, respectively.

Our investment policy is designed to preserve principal and liquidity of our short-term investments.

This policy allows investments in large money market funds or in highly rated direct short-term instruments that mature in 60 days or less.

We also place dollar limits on our investments in individual funds or instruments.

Operating Cash Flows

Operating cash flow provided by continuing operations was $4,141 million for the nine months ended November 2, 2019 , compared with $3,614 million for the nine months ended November 3, 2018 .

The operating cash flow increase was primarily driven by higher net earnings during the nine months ended November 2, 2019 , compared with the same period in the prior year.

Inventory was $11,396 million as of November 2, 2019 , compared with $9,497 million and $12,393 million at February 2, 2019 , and November 3, 2018 , respectively.

The increase from February 2, 2019 , reflects the seasonal inventory build ahead of the November and December holiday sales period.

Inventory levels were lower as of November 2, 2019, compared with November 3, 2018, partially due to timing of receipts because the Thanksgiving holiday is later in the current year.

In addition, elevated inventory levels in the prior year reflected investments in toys and baby-related merchandise.

We paid dividends totaling $337 million ( $0.66 per share) and $995 million ( $1.94 per share) for the three and nine months ended November 2, 2019 , respectively, and $337 million ( $0.64 per share) and $1,001 million ( $1.88 per share) for the three and nine months ended November 3, 2018 , respectively, a per share increase of 3.1 percent and 3.2 percent, respectively.

We declared dividends totaling $338 million ( $0.66 per share) during the third quarter of 2019 , a per share increase of 3.1 percent over the $338 million ( $0.64 per share) of declared dividends during the third quarter of 2018 .

Operating cash flow provided by continuing operations was $1.3 billion for the three months ended May 2, 2020, compared with $323 million for the three months ended May 4, 2019.

The increase reflects higher payables leverage during the three months ended May 2, 2020, due to increased inventory turnover in high-demand categories, compared with higher net settlement of accounts payable during the three months ended May 4, 2019, driven by elevated inventory and accounts payable levels as of February 2, 2019.

The operating cash flow increase is also partially due to the year-over-year increase in the returns reserve resulting from the temporary suspension of in-store merchandise returns during the three months ended May 2, 2020.

Inventory was $8.6 billion as of May 2, 2020, compared with $9.0 billion and $9.1 billion at February 1, 2020, and May 4, 2019, respectively.

The decrease reflects elevated sell-through rates in high-demand merchandise categories and efforts to reduce inventory levels in certain discretionary categories to align with sales trends.

Investing Cash Flows

Cash flow for investing activities included capital expenditures of $751 million for the three months ended May 2, 2020, compared with $655 million for the three months ended May 4, 2019 .

Capital expenditures increased for the three months ended May 2, 2020, compared with the three months ended May 4, 2019 , as we completed new store and remodel projects that were in process as the COVID-19 crisis developed.

However, in response to COVID-19, we have modified plans for some of our strategic initiatives including store remodels and new store openings.

We expect full year 2020 capital expenditures to be at a lower level than in 20 19 .

We paid dividends totaling $332 million ($0.66 per share) and $330 million ($0.64 per share) for the three months ended May 2, 2020, and May 4, 2019, respectively, a per share increase of 3.1 percent.

We declared dividends totaling $333 million ($0.66 per share) during the first quarter of 2020, a per share increase of 3.1 percent over the $330 million ($0.64 per share) of declared dividends during the first quarter of 2019.

We have paid dividends every quarter since our 1967 initial public offering, and it is our intent to continue to do so in the future.

Share Repurchase

We returned $294 million and $912 million to shareholders through share repurchase during the three and nine months ended November 2, 2019 , respectively.

See Part II, Item 2 of this Quarterly Report on Form 10-Q and Note 7 to the Consolidated Financial Statements for more information.

We returned $609 million to shareholders through share repurchase during the three months ended May 2, 2020.

See Part II , Item 2 , Unregistered Sales of Equity Securities and Use of Proceeds of this Quarterly Report on Form 10-Q and Note 9 to the Consolidated Financial Statements for more information.

TARGET CORPORATION

Q1 2020 Form 10-Q 21

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF FINANCIAL CONDITION Index to Notes

Our financing strategy is to ensure liquidity and access to capital markets, to maintain a balanced spectrum of debt maturities, and to manage our net exposure to floating interest rate volatility.

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Our continued access to these markets depends on multiple factors, including the condition of debt capital markets, our operating performance, and maintaining strong credit ratings.

As of November 2, 2019 , our credit ratings were as follows:

Credit Ratings

Standard and Poor’s

Long-term debt

Commercial paper

As of May 2, 2020, our credit ratings were as follows:

Credit Ratings Moody’s Standard and Poor’s Fitch

Long-term debt A2 A A-

Commercial paper P-1 A-1 F1

If our credit ratings were lowered, our ability to access the debt markets, our cost of funds, and other terms for new debt issuances could be adversely impacted.

Each of the credit rating agencies reviews its rating periodically and there is no guarantee our current credit ratings will remain the same as described above.

Fitch raised our commercial paper rating from F2 to F1 during the three months ended August 3, 2019.

In March 2019, we issued $1.0 billion of debt, and in June 2019, we repaid $1.0 billion of debt at maturity.

In March 2020, we issued $2.5 billion of debt.

Notes 6 and 7 to the Consolidated Financial Statements provide additional information.

We have additional liquidity through a committed $2.5 billion revolving credit facility obtained through a group of banks.

In October 2018, we extended this credit facility by one year to October 2023.

No balances were outstanding at any time during 2019 or 2018 .

We have additional liquidity through a committed $900 million 364-day revolving credit facility obtained through a group of banks in April 2020, which expires in April 2021, and an existing $2.5 billion revolving credit facility obtained through a group of banks, which expires in October 2023.

No balances were outstanding under either credit facility at any time during 2020 or 2019.

Most of our long-term debt obligations contain covenants related to secured debt levels.

In addition to a secured debt level covenant, our credit facility also contains a debt leverage covenant.

In addition to a secured debt level covenant, our credit facilities also contain a debt leverage covenant.

We are, and expect to remain, in compliance with these covenants.

Additionally, as of November 2, 2019 , no notes or debentures contained provisions requiring acceleration of payment upon a credit rating downgrade, except that certain outstanding notes allow the note holders to put the notes to us if within a matter of months of each other we experience both (i) a change in control;

and (ii) our long-term credit ratings are either reduced and the resulting rating is noninvestment grade, or our long-term credit ratings are placed on watch for possible reduction and those ratings are subsequently reduced and the resulting rating is noninvestment grade.

We believe our sources of liquidity will continue to be adequate to maintain operations, finance anticipated expansion and strategic initiatives, fund debt maturities, pay dividends, and execute purchases under our share repurchase program for the foreseeable future.

We continue to anticipate ample access to commercial paper and long-term financing.

Additionally, as of May 2, 2020, no notes or debentures contained provisions requiring acceleration of payment upon a credit rating downgrade, except that certain outstanding notes allow the note holders to put the notes to us if within a matter of months of each other we experience both (i) a change in control and (ii) our long-term credit ratings are either reduced and the resulting rating is non-investment grade, or our long-term credit ratings are placed on watch for possible reduction and those ratings are subsequently reduced and the resulting rating is non-investment grade.

Contractual Obligations and Commitments

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We do not expect any recently issued accounting pronouncements to have a material effect on our financial statements.

TARGET CORPORATION

Q1 2020 Form 10-Q 22

MANAGEMENT'S DISCUSSION AND ANALYSIS & SUPPLEMENTAL INFORMATION Table of Contents

FORWARD LOOKING STATEMENTS & CONTROLS AND PROCEDURES Index to Notes

Forward-Looking Statements

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The principal forward-looking statements in this report include:

our financial performance, statements regarding the adequacy of and costs associated with our sources of liquidity, the funding of debt maturities, the continued execution of our share repurchase program, our expected capital expenditures and new lease commitments, the expected compliance with debt covenants, the expected impact of new accounting pronouncements, our intentions regarding future dividends, the expected return on plan assets, the expected outcome of, and adequacy of our reserves for, claims, litigation and the resolution of tax matters, the expected impact of changes in information technology systems, and changes in our assumptions and expectations.

All such forward-looking statements are intended to enjoy the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended.

Although we believe there is a reasonable basis for the forward-looking statements, our actual results could be materially different.

The most important factors which could cause our actual results to differ from our forward-looking statements are set forth on our description of risk factors in Item 1A of our Form 10-K for the fiscal year ended February 2, 2019 , which should be read in conjunction with the forward-looking statements in this report.

The most important factors which could cause our actual results to differ from our forward-looking statements are set forth on our description of risk factors included in Part I, Item 1A, Risk Factors of our Form 10-K for the fiscal year ended February 1, 2020, as updated in Part II , Item 1A , Risk Factors , in this report, which should be read in conjunction with the forward-looking statements in this report.

Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our Form 10-K for the fiscal year ended February 2, 2019 .

There have been no material changes in our primary risk exposures or management of market risks from those disclosed in Part II , Item 7A , Quantitative and Qualitative Disclosures About Marke t Risk of our Form 10-K for the fiscal year ended February 1, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis