TARGET CORP 10-Q

Item 1. Financial Statements Consolidated Statements of Operations Three Months Ended (millions, except per share data) (unaudited) May 2, 2020 May 4, 2019 Sales $ 19,371 $ 17,401 Other revenue 244 226 Total revenue 19,615 17,627 Cost of sales 14,510 12,248 Selling, general and administrative expenses 4,060 3,663 Depreciation and amortization (exclusive of depreciation included in cost of sales) 577 581 Operating income 468 1,135 Net interest expense 117 126 Net other (income) / expense 22 ( 12 ) Earnings from continuing operations before income taxes 329 1,021 Provision for income taxes 45 229 Net earnings from continuing operations 284 792 Discontinued operations, net of tax — 3 Net earnings $ 284 $ 795 Basic earnings per share Continuing operations $ 0.57 $ 1.54 Discontinued operations — — Net earnings per share $ 0.57 $ 1.54 Diluted earnings per share Continuing operations $ 0.56 $ 1.53 Discontinued operations — — Net earnings per share $ 0.56 $ 1.53 Weighted average common shares outstanding Basic 501.0 515.7 Diluted 505.8 519.5 Antidilutive shares 0.2 0.1 Note: Per share amounts may not foot due to rounding. See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q1 2020 Form 10-Q 1 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Comprehensive Income Three Months Ended (millions) (unaudited) May 2, 2020 May 4, 2019 Net earnings $ 284 $ 795 Other comprehensive income Pension, net of tax 22 10 Currency translation adjustment and cash flow hedges, net of tax ( 8 ) 3 Other comprehensive income 14 13 Comprehensive income $ 298 $ 808 See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q1 2020 Form 10-Q 2 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Financial Position (millions, except footnotes) (unaudited) May 2, 2020 February 1, 2020 May 4, 2019 Assets Cash and cash equivalents $ 4,566 $ 2,577 $ 1,173 Inventory 8,584 8,992 9,060 Other current assets 1,465 1,333 1,374 Total current assets 14,615 12,902 11,607 Property and equipment Land 6,034 6,036 6,061 Buildings and improvements 30,756 30,603 29,573 Fixtures and equipment 5,486 6,083 5,401 Computer hardware and software 2,597 2,692 2,553 Construction-in-progress 803 533 574 Accumulated depreciation ( 19,087 ) ( 19,664 ) ( 18,456 ) Property and equipment, net 26,589 26,283 25,706 Operating lease assets 2,235 2,236 2,019 Other noncurrent assets 1,367 1,358 1,287 Total assets $ 44,806 $ 42,779 $ 40,619 Liabilities and shareholders’ investment Accounts payable $ 9,625 $ 9,920 $ 8,360 Accrued and other current liabilities 4,619 4,406 3,823 Current portion of long-term debt and other borrowings 168 161 1,056 Total current liabilities 14,412 14,487 13,239 Long-term debt and other borrowings 14,073 11,338 11,357 Noncurrent operating lease liabilities 2,249 2,275 2,064 Deferred income taxes 1,122 1,122 1,034 Other noncurrent liabilities 1,781 1,724 1,808 Total noncurrent liabilities 19,225 16,459 16,263 Shareholders’ investment Common stock 42 42 43 Additional paid-in capital 6,206 6,226 5,908 Retained earnings 5,775 6,433 5,958 Accumulated other comprehensive loss ( 854 ) ( 868 ) ( 792 ) Total shareholders’ investment 11,169 11,833 11,117 Total liabilities and shareholders’ investment $ 44,806 $ 42,779 $ 40,619 Common Stock Authorized 6,000,000,000 shares, $ 0.0833 par value; 499,919,691 , 504,198,962 and 512,312,434 shares issued and outstanding at May 2, 2020, February 1, 2020, and May 4, 2019, respectively. Preferred Stock Authorized 5,000,000 shares, $ 0.01 par value; no shares were issued or outstanding during any period presented. See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q1 2020 Form 10-Q 3 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Cash Flows Three Months Ended (millions) (unaudited) May 2, 2020 May 4, 2019 Operating activities Net earnings $ 284 $ 795 Earnings from discontinued operations, net of tax — 3 Net earnings from continuing operations 284 792 Adjustments to reconcile net earnings to cash provided by operations Depreciation and amortization 641 644 Share-based compensation expense 49 46 Deferred income taxes ( 4 ) 59 Noncash losses / (gains) and other, net 5 10 Changes in operating accounts Inventory 408 438 Other assets 11 17 Accounts payable ( 280 ) ( 1,402 ) Accrued and other liabilities 170 ( 281 ) Cash provided by operations 1,284 323 Investing activities Expenditures for property and equipment ( 751 ) ( 655 ) Proceeds from disposal of property and equipment 6 5 Other investments 1 1 Cash required for investing activities ( 744 ) ( 649 ) Financing activities Additions to long-term debt 2,480 994 Reductions of long-term debt ( 17 ) ( 13 ) Dividends paid ( 332 ) ( 330 ) Repurchase of stock ( 686 ) ( 320 ) Accelerated share repurchase pending final settlement — ( 400 ) Stock option exercises 4 12 Cash provided by / (required for) financing activities 1,449 ( 57 ) Net increase / (decrease) in cash and cash equivalents 1,989 ( 383 ) Cash and cash equivalents at beginning of period 2,577 1,556 Cash and cash equivalents at end of period $ 4,566 $ 1,173 Supplemental information Leased assets obtained in exchange for new finance lease liabilities 103 126 Leased assets obtained in exchange for new operating lease liabilities 97 107 See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q1 2020 Form 10-Q 4 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Shareholders’ Investment Common Stock Additional Accumulated Other Stock Par Paid-in Retained Comprehensive (millions) (unaudited) Shares Value Capital Earnings (Loss) / Income Total February 2, 2019 517.8 $ 43 $ 6,042 $ 6,017 $ ( 805 ) $ 11,297 Net earnings — — — 795 — 795 Other comprehensive income — — — — 13 13 Dividends declared — — — ( 330 ) — ( 330 ) Repurchase of stock ( 3.6 ) — — ( 277 ) — ( 277 ) Accelerated share repurchase pending final settlement ( 3.0 ) — ( 153 ) ( 247 ) — ( 400 ) Stock options and awards 1.1 — 19 — — 19 May 4, 2019 512.3 $ 43 $ 5,908 $ 5,958 $ ( 792 ) $ 11,117 Net earnings — — — 938 — 938 Other comprehensive income — — — — 10 10 Dividends declared — — — ( 341 ) — ( 341 ) Repurchase of stock ( 1.3 ) — 153 ( 94 ) — 59 Stock options and awards 0.3 — 53 — — 53 August 3, 2019 511.3 $ 43 $ 6,114 $ 6,461 $ ( 782 ) $ 11,836 Net earnings — — — 714 — 714 Other comprehensive income — — — — 9 9 Dividends declared — — — ( 338 ) — ( 338 ) Repurchase of stock ( 3.0 ) ( 1 ) — ( 295 ) — ( 296 ) Accelerated share repurchase pending final settlement ( 2.5 ) — ( 178 ) ( 272 ) — ( 450 ) Stock options and awards 0.9 — 70 — — 70 November 2, 2019 506.7 $ 42 $ 6,006 $ 6,270 $ ( 773 ) $ 11,545 Net earnings — — — 834 — 834 Other comprehensive loss — — — — ( 95 ) ( 95 ) Dividends declared — — — ( 336 ) — ( 336 ) Repurchase of stock ( 2.6 ) — 178 ( 335 ) — ( 157 ) Stock options and awards 0.1 — 42 — — 42 February 1, 2020 504.2 $ 42 $ 6,226 $ 6,433 $ ( 868 ) $ 11,833 TARGET CORPORATION Q1 2020 Form 10-Q 5 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Shareholders’ Investment Common Stock Additional Accumulated Other Stock Par Paid-in Retained Comprehensive (millions) (unaudited) Shares Value Capital Earnings (Loss) / Income Total February 1, 2020 504.2 $ 42 $ 6,226 $ 6,433 $ ( 868 ) $ 11,833 Net earnings — — — 284 — 284 Other comprehensive income — — — — 14 14 Dividends declared — — — ( 333 ) — ( 333 ) Repurchase of stock ( 5.7 ) — — ( 609 ) — ( 609 ) Stock options and awards 1.4 — ( 20 ) — — ( 20 ) May 2, 2020 499.9 $ 42 $ 6,206 $ 5,775 $ ( 854 ) $ 11,169 We declared $ 0.66 and $ 0.64 dividends per share for the three months ended May 2, 2020, and May 4, 2019, respectively, and $ 2.62 per share for the fiscal year ended February 1, 2020. See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q1 2020 Form 10-Q 6 FINANCIAL STATEMENTS Table of Contents INDEX Index to Notes INDEX TO NOTES Notes to Consolidated Financial Statements 8 Note 1 Accounting Policies 8 Note 2 Impact of Coronavirus (COVID-19) 8 Note 3 Revenues 9 Note 4 Fair Value Measurements 10 Note 5 Property and Equipment 10 Note 6 Commercial Paper and Long-Term Debt 10 Note 7 Derivative Financial Instruments 10 Note 8 Income Taxes 11 Note 9 Share Repurchase 11 Note 10 Pension Benefits 12 Note 11 Accumulated Other Comprehensive Loss 12 TARGET CORPORATION Q1 2020 Form 10-Q 7 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes Notes to Consolidated Financial Statements (unaudited) 1. Accounting Policies These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by United States (U.S.) generally accepted accounting principles (U.S. GAAP) for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statement disclosures in our 2019 Form 10-K. We use the same accounting policies in preparing quarterly and annual financial statements. Unless otherwise noted, amounts presented within the Notes to Consolidated Financial Statements refer to our continuing operations. We operate as a single segment that includes all of our continuing operations, which are designed to enable guests to purchase products seamlessly in stores or through our digital channels. Nearly all of our revenues are generated in the U.S. The vast majority of our long-lived assets are located within the U.S. Due to the seasonal nature of our business, quarterly revenues, expenses, earnings, and cash flows are not necessarily indicative of the results that may be expected for the full year. 2. Impact of Coronavirus (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. 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. To date all of our stores, digital channels, and distribution centers remain open. Throughout the quarter, guest shopping patterns changed significantly in reaction to the COVID-19 pandemic. Across our core merchandise categories, sales have grown significantly in Beauty and Household Essentials, Food and Beverage, Hardlines, and Home Furnishings and Décor, while declining significantly in Apparel and Accessories. Note 3 provides sales by category. In response to these changes, we have taken many actions, including accelerating purchases of certain merchandise in our core categories and slowing or canceling certain purchase orders, primarily for Apparel and Accessories. As a result of these actions, during the quarter ended May 2, 2020, we recorded $ 216 million of purchase order cancellation fees in Cost of Sales. From March 26, 2020, to April 26, 2020, we did not accept in-store merchandise returns and exchanges to protect our team members. We lengthened the return period for merchandise affected by this change. We continue to recognize sales net of expected returns. 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. TARGET CORPORATION Q1 2020 Form 10-Q 8 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes 3. Revenues General merchandise sales represent the vast majority of our revenues. We also earn revenues from a variety of other sources, most notably credit card profit sharing income from our arrangement with TD Bank Group (TD). Revenues Three Months Ended (millions) May 2, 2020 May 4, 2019 Apparel and accessories (a) $ 2,619 $ 3,290 Beauty and household essentials (b) 5,911 4,971 Food and beverage (c) 4,575 3,722 Hardlines (d) 2,974 2,385 Home furnishings and décor (e) 3,264 3,001 Other 28 32 Sales 19,371 17,401 Credit card profit sharing 166 160 Other 78 66 Other revenue 244 226 Total revenue $ 19,615 $ 17,627 (a) Includes apparel for women, men, boys, girls, toddlers, infants and newborns, as well as jewelry, accessories, and shoes. (b) Includes beauty and personal care, baby gear, cleaning, paper products, and pet supplies. (c) Includes dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and food service in our stores. (d) Includes electronics (including video game hardware and software), toys, entertainment, sporting goods, and luggage. (e) Includes furniture, lighting, storage, kitchenware, small appliances, home décor, bed and bath, home improvement, school/office supplies, greeting cards and party supplies, and other seasonal merchandise. Merchandise sales – We record almost all retail store revenues at the point of sale. Digitally originated sales may include shipping revenue and are recorded upon delivery to the guest or upon guest pickup at the store. Sales are recognized net of expected returns, which we estimate using historical return patterns and our expectation of future returns. As of May 2, 2020, February 1, 2020, and May 4, 2019, the accrual for estimated returns was $ 398 million, $ 117 million, and $ 124 million, respectively. We have not historically had material adjustments to our returns estimates. Revenue from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance. Gift Card Liability Activity February 1, 2020 Gift Cards Issued During Current Period But Not Redeemed (b) Revenue Recognized From Beginning Liability May 2, 2020 (millions) Gift card liability (a) $ 935 $ 180 $ ( 335 ) $ 780 (a) Included in Accrued and Other Current Liabilities. (b) Net of estimated breakage. Credit card profit sharing – We receive payments under a credit card program agreement with TD. Under the agreement, we receive a percentage of the profits generated by the Target Credit Card and Target MasterCard receivables in exchange for performing account servicing and primary marketing functions. TD underwrites, funds, and owns Target Credit Card and Target MasterCard receivables, controls risk management policies, and oversees regulatory compliance. TARGET CORPORATION Q1 2020 Form 10-Q 9 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes 4. Fair Value Measurements Fair value measurements are reported in one of three levels reflecting the valuation techniques used to determine fair value. Fair Value Measurements - Recurring Basis Fair Value at (millions) Classification Pricing Category May 2, 2020 February 1, 2020 May 4, 2019 Assets Short-term investments Cash and Cash Equivalents Level 1 $ 3,605 $ 1,810 $ 419 Prepaid forward contracts Other Current Assets Level 1 23 23 21 Equity securities (a) Other Current Assets Level 1 18 39 80 Interest rate swaps Other Noncurrent Assets Level 2 228 137 23 Liabilities Interest rate swaps Other Current Liabilities Level 2 — — 1 Interest rate swaps Other Noncurrent Liabilities Level 2 10 — — (a) Represents our investment in Casper Sleep Inc. common stock . Significant Financial Instruments Not Measured at Fair Value (a) (millions) May 2, 2020 February 1, 2020 May 4, 2019 Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt, including current portion (b) $ 12,474 $ 14,781 $ 9,992 $ 11,864 $ 11,243 $ 12,015 (a) The carrying amounts of certain other current assets, commercial paper, accounts payable, and certain accrued and other current liabilities approximate fair value due to their short-term nature. (b) The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for the same or similar types of financial instruments and would be classified as Level 2. These amounts exclude commercial paper, unamortized swap valuation adjustments, and lease liabilities. 5. Property and Equipment We review long-lived assets for impairment when store performance expectations, events, or changes in circumstances—such as a decision to relocate or close a store or distribution center, discontinue projects, or make significant software changes—indicate that the asset’s carrying value may not be recoverable. We recognized impairment charges of $ 35 million and $ 4 million during the three months ended May 2, 2020, and May 4, 2019, respectively. The impairment charges are recorded in Selling, General and Administrative Expenses (SG&A). 6. Commercial Paper and Long-Term Debt In March 2020, we issued unsecured fixed rate debt of $ 1.5 billion at 2.250 percent that matures in April 2025 and $ 1.0 billion at 2.650 percent that matures in September 2030. We obtain short-term financing from time to time under our commercial paper program. No balances were outstanding at any time during the three months ended May 2, 2020. For the three months ended May 4, 2019, the maximum amount outstanding was $ 744 million, and the average daily amount outstanding was $ 140 million at a weighted average annual interest rate of 2.4 percent, with no balance outstanding as of May 4, 2019. In April 2020, we obtained a committed $ 900 million 364 -day unsecured revolving credit facility that expires in April 2021. This new facility is in addition to our $ 2.5 billion unsecured revolving credit facility that expires in October 2023. No balances were outstanding under either credit facility at any time during 2020 or 2019. 7. Derivative Financial Instruments Our derivative instruments consist of interest rate swaps used to mitigate interest rate risk. As a result, we have counterparty credit exposure to large global financial institutions, which we monitor on an ongoing basis. Note 4 to the Consolidated Financial Statements provides the fair value and classification of these instruments. TARGET CORPORATION Q1 2020 Form 10-Q 10 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes As of May 2, 2020, and May 4, 2019, we were party to interest rate swaps with notional amounts totaling $ 1.5 billion and$ 2.5 billion, respectively. We pay a variable rate and receive a fixed rate under each of these agreements. All of the agreements are designated as fair value hedges, and all were perfectly effective during the three months ended May 2, 2020, and May 4, 2019. As of May 2, 2020, we were party to forward-starting interest rate swaps with notional amounts totaling $ 250 million to hedge the interest rate exposure of anticipated future debt issuances. We designated these derivative financial instruments as cash flow hedges. We assess, both at inception and on an ongoing basis, whether the derivative financial instrument is highly effective in offsetting changes in cash flows of the hedged item and whether it is probable that the hedged forecasted transaction will occur. As of May 2, 2020, a $ 10 million loss was recorded in Accumulated Other Comprehensive Loss and will be reclassified to Net Interest Expense when the forecasted transaction affects earnings. Effect of Hedges on Debt (millions) May 2, 2020 February 1, 2020 May 4, 2019 Current portion of long-term debt and other borrowings Carrying amount of hedged debt $ — $ — $ 999 Cumulative hedging adjustments, included in carrying amount — — ( 1 ) Long-term debt and other borrowings Carrying amount of hedged debt 1,721 1,630 1,515 Cumulative hedging adjustments, included in carrying amount 228 137 23 Effect of Hedges on Net Interest Expense Three Months Ended (millions) May 2, 2020 May 4, 2019 Gain (loss) on fair value hedges recognized in Net Interest Expense Interest rate swap designated as fair value hedges $ 91 $ 15 Hedged debt ( 91 ) ( 15 ) Total $ — $ — 8. Income Taxes For the three months ended May 2, 2020 , our effective tax rate was 13.9 percent compared with 22.4 percent for the three months ended May 4, 2019 , as lower pretax earnings in the current year period resulted in a larger tax-rate benefit from discrete items, primarily related to employee share-based compensation. 9. Share Repurchase We periodically repurchase shares of our common stock under a board-authorized repurchase program through a combination of open market transactions, accelerated share repurchase (ASR) arrangements, and other privately negotiated transactions with financial institutions. Share Repurchase Activity Three Months Ended (millions, except per share data) May 2, 2020 May 4, 2019 Number of shares purchased 5.7 3.6 Average price paid per share $ 107.58 $ 76.98 Total investment $ 609 $ 277 Note: This table excludes activity related to the first quarter 2019 ASR arrangement described below because final settlement had not occurred as of May 4, 2019. TARGET CORPORATION Q1 2020 Form 10-Q 11 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes During the first quarter of 2019, we entered into an ASR arrangement to repurchase $ 275 to $ 400 million of our common stock. Under the agreement, we paid $ 400 million and received an initial delivery of 3.0 million shares, which were retired, resulting in a $ 247 million reduction to Retained Earnings. As of May 4, 2019, $ 153 million was included as a reduction to Additional Paid-in Capital. Upon final settlement in the second quarter of 2019, we received an additional 1.2 million shares, which were retired, and $ 60 million for the remaining amount not settled in shares. In total, we repurchased 4.2 million shares under the ASR arrangement for a total cash investment of $ 340 million ($ 80.21 per share). In March 2020, we suspended share repurchase activity. 10. Pension Benefits We provide pension plan benefits to eligible team members. Net Pension Benefits Expense Three Months Ended (millions) Classification May 2, 2020 May 4, 2019 Service cost benefits earned SG&A Expenses $ 26 $ 23 Interest cost on projected benefit obligation Net Other (Income) / Expense 30 37 Expected return on assets Net Other (Income) / Expense ( 61 ) ( 62 ) Amortization of losses Net Other (Income) / Expense 32 16 Amortization of prior service cost Net Other (Income) / Expense ( 3 ) ( 3 ) Total $ 24 $ 11 11. Accumulated Other Comprehensive Loss Change in Accumulated Other Comprehensive Loss Cash Flow Hedges Currency Translation Adjustment Pension Total (millions) February 1, 2020 $ ( 12 ) $ ( 19 ) $ ( 837 ) $ ( 868 ) Other comprehensive income before reclassifications, net of tax ( 7 ) ( 1 ) — ( 8 ) Amounts reclassified from AOCI, net of tax — — 22 22 May 2, 2020 $ ( 19 ) $ ( 20 ) $ ( 815 ) $ ( 854 ) TARGET CORPORATION Q1 2020 Form 10-Q 12 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents FINANCIAL SUMMARY Index to Notes