TARGET CORP 10-Q

Item 1. Financial Statements Consolidated Statements of Operations Three Months Ended Nine Months Ended (millions, except per share data) (unaudited) October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Sales $ 22,336 $ 18,414 $ 64,403 $ 53,997 Other revenue 296 251 819 716 Total revenue 22,632 18,665 65,222 54,713 Cost of sales 15,509 12,935 45,692 37,808 Selling, general and administrative expenses 4,647 4,153 13,167 11,728 Depreciation and amortization (exclusive of depreciation included in cost of sales) 541 575 1,660 1,717 Operating income 1,935 1,002 4,703 3,460 Net interest expense 632 113 871 359 Net other (income) / expense 5 ( 12 ) 16 ( 38 ) Earnings from continuing operations before income taxes 1,298 901 3,816 3,139 Provision for income taxes 284 195 828 703 Net earnings from continuing operations 1,014 706 2,988 2,436 Discontinued operations, net of tax — 8 — 11 Net earnings $ 1,014 $ 714 $ 2,988 $ 2,447 Basic earnings per share Continuing operations $ 2.02 $ 1.38 $ 5.97 $ 4.75 Discontinued operations — 0.02 — 0.02 Net earnings per share $ 2.02 $ 1.40 $ 5.97 $ 4.77 Diluted earnings per share Continuing operations $ 2.01 $ 1.37 $ 5.91 $ 4.71 Discontinued operations — 0.02 — 0.02 Net earnings per share $ 2.01 $ 1.39 $ 5.91 $ 4.74 Weighted average common shares outstanding Basic 500.6 509.7 500.6 512.5 Diluted 505.4 514.8 505.2 516.8 Antidilutive shares — — — — Note: Per share amounts may not foot due to rounding. See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q3 2020 Form 10-Q 1 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Comprehensive Income Three Months Ended Nine Months Ended (millions) (unaudited) October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Net earnings $ 1,014 $ 714 $ 2,988 $ 2,447 Other comprehensive income Pension, net of tax 22 10 66 30 Currency translation adjustment and cash flow hedges, net of tax 14 ( 1 ) 5 2 Other comprehensive income 36 9 71 32 Comprehensive income $ 1,050 $ 723 $ 3,059 $ 2,479 See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q3 2020 Form 10-Q 2 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Financial Position (millions, except footnotes) (unaudited) October 31, 2020 February 1, 2020 November 2, 2019 Assets Cash and cash equivalents $ 5,996 $ 2,577 $ 969 Inventory 12,712 8,992 11,396 Other current assets 1,601 1,333 1,440 Total current assets 20,309 12,902 13,805 Property and equipment Land 6,063 6,036 6,040 Buildings and improvements 31,398 30,603 30,467 Fixtures and equipment 5,843 6,083 6,032 Computer hardware and software 2,706 2,692 2,636 Construction-in-progress 518 533 298 Accumulated depreciation ( 19,755 ) ( 19,664 ) ( 19,089 ) Property and equipment, net 26,773 26,283 26,384 Operating lease assets 2,208 2,236 2,151 Other noncurrent assets 1,371 1,358 1,401 Total assets $ 50,661 $ 42,779 $ 43,741 Liabilities and shareholders’ investment Accounts payable $ 14,203 $ 9,920 $ 11,258 Accrued and other current liabilities 5,023 4,406 4,191 Current portion of long-term debt and other borrowings 131 161 1,159 Total current liabilities 19,357 14,487 16,608 Long-term debt and other borrowings 12,490 11,338 10,513 Noncurrent operating lease liabilities 2,196 2,275 2,208 Deferred income taxes 1,171 1,122 1,215 Other noncurrent liabilities 2,128 1,724 1,652 Total noncurrent liabilities 17,985 16,459 15,588 Shareholders’ investment Common stock 42 42 42 Additional paid-in capital 6,285 6,226 6,006 Retained earnings 7,789 6,433 6,270 Accumulated other comprehensive loss ( 797 ) ( 868 ) ( 773 ) Total shareholders’ investment 13,319 11,833 11,545 Total liabilities and shareholders’ investment $ 50,661 $ 42,779 $ 43,741 Common Stock Authorized 6,000,000,000 shares, $ 0.0833 par value; 500,754,729 , 504,198,962 and 506,677,740 shares issued and outstanding as of October 31, 2020, February 1, 2020, and November 2, 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 Q3 2020 Form 10-Q 3 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Cash Flows Nine Months Ended (millions) (unaudited) October 31, 2020 November 2, 2019 Operating activities Net earnings $ 2,988 $ 2,447 Earnings from discontinued operations, net of tax — 11 Net earnings from continuing operations 2,988 2,436 Adjustments to reconcile net earnings to cash provided by operations Depreciation and amortization 1,848 1,905 Share-based compensation expense 161 116 Deferred income taxes 26 235 Loss on debt extinguishment 512 — Noncash losses / (gains) and other, net 124 6 Changes in operating accounts Inventory ( 3,720 ) ( 1,899 ) Other assets ( 174 ) ( 10 ) Accounts payable 4,287 1,473 Accrued and other liabilities 992 ( 121 ) Cash provided by operating activities—continuing operations 7,044 4,141 Cash provided by operating activities—discontinued operations — 18 Cash provided by operations 7,044 4,159 Investing activities Expenditures for property and equipment ( 2,009 ) ( 2,403 ) Proceeds from disposal of property and equipment 27 29 Other investments ( 3 ) 14 Cash required for investing activities ( 1,985 ) ( 2,360 ) Financing activities Additions to long-term debt 2,480 994 Reductions of long-term debt ( 2,395 ) ( 1,041 ) Dividends paid ( 1,002 ) ( 995 ) Repurchase of stock ( 741 ) ( 959 ) Accelerated share repurchase pending final settlement — ( 450 ) Stock option exercises 18 65 Cash required for financing activities ( 1,640 ) ( 2,386 ) Net increase in cash and cash equivalents 3,419 ( 587 ) Cash and cash equivalents at beginning of period 2,577 1,556 Cash and cash equivalents at end of period $ 5,996 $ 969 Supplemental information Leased assets obtained in exchange for new finance lease liabilities $ 344 $ 301 Leased assets obtained in exchange for new operating lease liabilities 186 334 See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q3 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 Q3 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 Net earnings — — — 1,690 — 1,690 Other comprehensive income — — — — 21 21 Dividends declared — — — ( 344 ) — ( 344 ) Stock options and awards 0.4 — 42 — — 42 August 1, 2020 500.3 $ 42 $ 6,248 $ 7,121 $ ( 833 ) $ 12,578 Net earnings — — — 1,014 — 1,014 Other comprehensive income — — — — 36 36 Dividends declared — — — ( 346 ) — ( 346 ) Stock options and awards 0.5 — 37 — — 37 October 31, 2020 500.8 $ 42 $ 6,285 $ 7,789 $ ( 797 ) $ 13,319 We declared $ 0.68 and $ 0.66 dividends per share for the three months ended October 31, 2020, and November 2, 2019, respectively, and $ 2.62 per share for the fiscal year ended February 1, 2020. See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q3 2020 Form 10-Q 6 FINANCIAL STATEMENTS Table of Contents INDEX Index to Notes INDEX TO NOTES Notes to Consolidated Financial Statements 7 Note 1 Accounting Policies 8 Note 2 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 11 Note 8 Share Repurchase 11 Note 9 Pension Benefits 12 Note 10 Accumulated Other Comprehensive Loss 12 TARGET CORPORATION Q3 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. 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, virtually all of our stores, digital channels, and distribution centers have remained open. Throughout the nine months ended October 31, 2020, guest shopping patterns changed significantly and unpredictably in reaction to the COVID-19 pandemic. Four of our five core merchandise categories have experienced significant sales growth throughout the year; however, sales of Apparel and Accessories declined significantly in the first quarter before rebounding in the second and third quarters. Note 3 pr ovides 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 first quarter of 2020, we recorded $ 216 million of purchase order cancellation fees in Cost of Sales. TARGET CORPORATION Q3 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 Nine Months Ended (millions) October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Apparel and accessories (a) $ 3,927 $ 3,564 $ 10,630 $ 10,510 Beauty and household essentials (b) 6,103 5,125 18,172 15,172 Food and beverage (c) 4,397 3,717 13,158 10,899 Hardlines (d) 3,377 2,460 9,959 7,348 Home furnishings and décor (e) 4,506 3,527 12,395 9,985 Other 26 21 89 83 Sales 22,336 18,414 64,403 53,997 Credit card profit sharing 164 177 488 505 Other 132 74 331 211 Other revenue 296 251 819 716 Total revenue $ 22,632 $ 18,665 $ 65,222 $ 54,713 (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 October 31, 2020, February 1, 2020, and November 2, 2019, the accrual for estimated returns was $ 182 million, $ 117 million, and $ 137 million, respectively. 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 October 31, 2020 (millions) Gift card liability (a) $ 935 $ 372 $ ( 549 ) $ 758 (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 Q3 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 October 31, 2020 February 1, 2020 November 2, 2019 Assets Short-term investments Cash and Cash Equivalents Level 1 $ 5,089 $ 1,810 $ 163 Prepaid forward contracts Other Current Assets Level 1 32 23 24 Equity securities (a) Other Current Assets Level 1 19 39 80 Interest rate swaps Other Noncurrent Assets Level 2 205 137 122 Liabilities Interest rate swaps Other Noncurrent Liabilities Level 2 3 — — (a) Represents our investment in Casper Sleep Inc. common stock . Significant Financial Instruments Not Measured at Fair Value (a) (millions) October 31, 2020 February 1, 2020 November 2, 2019 Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt, including current portion (b) $ 10,641 $ 12,787 $ 9,992 $ 11,864 $ 10,246 $ 11,870 (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 $ 2 million and $ 62 million during the three and nine months ended October 31, 2020, respectively. We recognized impairment charges of $ 7 million and $ 21 million during the three and nine months ended November 2, 2019, respectively. These impairment charges are included 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. In October 2020, we repurchased $ 1.77 billion of debt before its maturity at a market value of $ 2.25 billion. We recognized a loss on early retirement of $ 512 million, which was recorded in Net Interest Expense. We obtain short-term financing from time to time under our commercial paper program. No balances were outstanding at any time during the nine months ended October 31, 2020. For the nine months ended November 2, 2019, the maximum amount outstanding was $ 744 million, and the average daily amount outstanding was $ 55 million at a weighted average annual interest rate of 2.4 percent, with no balance outstanding as of November 2, 2019. In April 2020, we obtained a committed $ 900 million 364 -day unsecured revolving credit facility. This new facility was in addition to our $ 2.5 billion unsecured revolving credit facility that expires in October 2023. We terminated the 364 -day facility in November 2020. No balances were outstanding under either credit facility at any time during 2020 or 2019. TARGET CORPORATION Q3 2020 Form 10-Q 10 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes 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. As of October 31, 2020, and November 2, 2019, we were party to interest rate swaps with notional amounts totaling $ 1.5 billion. 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 and nine months ended October 31, 2020, and November 2, 2019. As of October 31, 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 October 31, 2020, a $ 1 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) October 31, 2020 February 1, 2020 November 2, 2019 Long-term debt and other borrowings Carrying amount of hedged debt $ 1,696 $ 1,630 $ 1,614 Cumulative hedging adjustments, included in carrying amount 203 137 122 Effect of Hedges on Net Interest Expense Three Months Ended Nine Months Ended (millions) October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Gain (loss) on fair value hedges recognized in Net Interest Expense Interest rate swap designated as fair value hedges $ ( 36 ) $ 14 $ 66 $ 115 Hedged debt 36 ( 14 ) ( 66 ) ( 115 ) Total $ — $ — $ — $ — 8. 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 Nine Months Ended (millions, except per share data) October 31, 2020 November 2, 2019 (a) October 31, 2020 November 2, 2019 (a) Number of shares purchased — 3.0 5.7 10.8 Average price paid per share $ — $ 99.25 $ 107.58 $ 84.28 Total investment $ — $ 294 $ 609 $ 912 (a) This table excludes activity related to the ASR arrangement described below because final settlement had not occurred as of November 2, 2019. During the third quarter of 2019, we entered into an ASR arrangement to repurchase $ 300 to $ 450 million of our common stock. Under the agreement, we paid $ 450 million and received an initial delivery of 2.5 million shares, which were retired, resulting in a $ 272 million reduction to Retained Earnings. As of November 2, 2019, $ 178 million was included as a reduction to Additional Paid-in Capital. Upon final settlement in the fourth quarter of 2019, we received an additional 0.2 million shares, which were retired, and $ 127 million for the remaining amount not settled in shares. In total, we repurchased 2.7 million shares under the ASR arrangement for a total cash investment of $ 323 million ($ 117.64 per share). TARGET CORPORATION Q3 2020 Form 10-Q 11 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes 9. Pension Benefits We provide pension plan benefits to eligible team members. Net Pension Benefits Expense Three Months Ended Nine Months Ended (millions) Classification October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Service cost benefits earned SG&A Expenses $ 25 $ 23 $ 76 $ 69 Interest cost on projected benefit obligation Net Other (Income) / Expense 30 37 89 111 Expected return on assets Net Other (Income) / Expense ( 61 ) ( 62 ) ( 182 ) ( 186 ) Amortization of losses Net Other (Income) / Expense 32 16 96 47 Amortization of prior service cost Net Other (Income) / Expense ( 3 ) ( 3 ) ( 9 ) ( 8 ) Settlement charges Net Other (Income) / Expense 1 — 1 — Total $ 24 $ 11 $ 71 $ 33 10. 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 loss before reclassifications, net of tax ( 1 ) — — ( 1 ) Amounts reclassified from AOCI, net of tax 6 — 66 72 October 31, 2020 $ ( 7 ) $ ( 19 ) $ ( 771 ) $ ( 797 ) TARGET CORPORATION Q3 2020 Form 10-Q 12 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents FINANCIAL SUMMARY Index to Notes