TARGET CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Financial Summary Third quarter 2020 includes the following notable items: • GAAP diluted earnings per share were $2.01. • Adjusted diluted earnings per share were $2.79. • Total revenue increased 21.3 percent, driven by an increase in comparable sales. • Comparable sales increased 20.7 percent, driven by a 15.6 percent increase in average transaction amount. ◦ Comparable store sales grew 9.9 percent. ◦ Digital channel sales increased 155 percent, contributing 10.9 percentage points to comparable sales growth. • Operating income of $1.9 billion was 93.1 percent higher than the comparable prior-year period. • We repurchased $1.77 billion of debt before its maturity at a market value of $2.25 billion, resulting in a loss of $512 million. Sales were $22.3 billion for the three months ended October 31, 2020, an increase of $3.9 billion, or 21.3 percent, from the same period in the prior year. Operating cash flow provided by continuing operations was $7.0 billion for the nine months ended October 31, 2020, an increase of $2.9 billion, or 70.1 percent, from $4.1 billion for the nine months ended November 2, 2019. Earnings Per Share from Continuing Operations Three Months Ended Nine Months Ended October 31, 2020 November 2, 2019 Change October 31, 2020 November 2, 2019 Change GAAP diluted earnings per share $ 2.01 $ 1.37 46.3 % $ 5.91 $ 4.71 25.5 % Adjustments 0.78 (0.01) 0.83 (0.01) Adjusted diluted earnings per share $ 2.79 $ 1.36 105.1 % $ 6.75 $ 4.70 43.5 % Note: Amounts may not foot due to rounding. Adjusted diluted earnings per share from continuing operations (Adjusted EPS), a non-GAAP metric, excludes the impact of certain items. Management believes that Adjusted EPS is useful in providing period-to-period comparisons of the results of our continuing operations. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 19. 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 October 31, 2020, after-tax ROIC was 19.9 percent, compared with 15.0 percent for the trailing twelve months ended November 2, 2019. The calculation of ROIC is provided o n page 21. 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 mandating face masks for all team members and guests in our stores, 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. To date, virtually all of our stores, digital channels, and distribution centers have remained open. As the pandemic 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, as well as merchandise associated with guests spending more time at home. 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. TARGET CORPORATION Q3 2020 Form 10-Q 13 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents FINANCIAL SUMMARY Index to Notes • During the first quarter, comparable sales increased 10.8 percent, reflecting a 0.9 percent increase in store originated comparable sales and a 141 percent increase in digitally originated comparable sales. The quarter began with strength across our multi-category portfolio, followed by a shift to strong comparable sales growth in our Food and Beverage and Beauty and Household Essentials core merchandising categories and significant comparable sales declines in Apparel and Accessories. Comparable sales in Apparel and Accessories recovered notably beginning mid-April. • During the second quarter, comparable sales increased 24.3 percent, reflecting a 10.9 percent increase in store originated comparable sales and a 195 percent increase in digitally originated comparable sales. Comparable sales growth was strong across our multi-category portfolio, with slightly higher growth in lower-margin categories. • During the third quarter, comparable sales increased 20.7 percent, reflecting a 9.9 percent increase in store originated comparable sales and a 155 percent increase in digitally originated comparable sales. Comparable sales growth strength continued across our multi-category portfolio, with slightly higher growth in lower-margin categories. For the nine months ended October 31, 2020, 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 the portion of investments in pay and benefits classified within Cost of Sales. Exceptionally low clearance and promotional markdown rates partially offset these pressures. Our SG&A expenses include significant 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. From an SG&A expense rate perspective, these incremental costs were more than offset by cost leverage resulting from exceptionally strong sales growth. 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 have completed approximately 130 remodels in 2020, down from the previous expectation of approximately 300. Similarly, we opened 29 new small format stores in 2020, rather than the 36 previously announced. During the first quarter 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 operating performance during the second and third quarters of 2020 and current financial position allowed us to repurchase $1.77 billion of debt before its maturity at a market value of $2.25 billion in October 2020 and terminate the 364-day credit facility in November 2020. Note 6 to the Consolidated Financial Statements and t he Liquidity and Capital Resources section provide additional information. TARGET CORPORATION Q3 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) October 31, 2020 November 2, 2019 Change October 31, 2020 November 2, 2019 Change Sales $ 22,336 $ 18,414 21.3 % $ 64,403 $ 53,997 19.3 % Other revenue 296 251 18.1 819 716 14.3 Total revenue 22,632 18,665 21.3 65,222 54,713 19.2 Cost of sales 15,509 12,935 19.9 45,692 37,808 20.9 Selling, general and administrative expenses 4,647 4,153 11.9 13,167 11,728 12.3 Depreciation and amortization (exclusive of depreciation included in cost of sales) 541 575 (5.8) 1,660 1,717 (3.3) Operating income $ 1,935 $ 1,002 93.1 % $ 4,703 $ 3,460 35.9 % Rate Analysis Three Months Ended Nine Months Ended October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Gross margin rate 30.6 % 29.8 % 29.1 % 30.0 % SG&A expense rate 20.5 22.3 20.2 21.4 Depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate 2.4 3.1 2.5 3.1 Operating income margin rate 8.5 5.4 7.2 6.3 Note: Gross margin rate is calculated as gross margin (sales less cost of sales) divided by sales. All other rates are calculated by dividing the applicable amount by total revenue. Sales 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. Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies. 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 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. 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 and nine months ended October 31, 2020, is due to a comparable sales increase of 20.7 percent and 18.7 percent, respectively, and the contribution from new stores. Comparable Sales Three Months Ended Nine Months Ended October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Comparable sales change 20.7 % 4.5 % 18.7 % 4.2 % Drivers of change in comparable sales Number of transactions 4.5 3.1 2.6 3.3 Average transaction amount 15.6 1.4 15.7 0.9 TARGET CORPORATION Q3 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 Nine Months Ended October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Stores originated channel comparable sales change 9.9 % 2.8 % 7.3 % 2.3 % Contribution from digitally originated sales 10.9 1.7 11.4 1.9 Total comparable sales change 20.7 % 4.5 % 18.7 % 4.2 % Note: Amounts may not foot due to rounding. Sales by Channel Three Months Ended Nine Months Ended October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Stores originated 84.3 % 92.5 % 83.9 % 92.7 % Digitally originated 15.7 7.5 16.1 7.3 Total 100 % 100 % 100 % 100 % Sales by Product Category Three Months Ended Nine Months Ended October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Apparel and accessories 18 % 20 % 17 % 19 % Beauty and household essentials 27 28 28 28 Food and beverage 20 20 20 20 Hardlines 15 13 16 14 Home furnishings and décor 20 19 19 19 Total 100 % 100 % 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 October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Target Debit Card 12.2 % 12.5 % 12.2 % 12.7 % Target Credit Cards 9.3 10.7 9.2 10.6 Total RedCard Penetration 21.5 % 23.1 % 21.4 % 23.3 % Note: Amounts may not foot due to rounding. TARGET CORPORATION Q3 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 October 31, 2020, our gross margin rate was 30.6 percent compared with 29.8 percent in the comparable period last ye ar. This increase reflected the net impact of merchandising actions, most notably the benefit of exceptionally low clearance and promotional markdown rates. The increase was partially offset by increased digital fulfillment and supply chain costs (stemming from unusually strong growth in digital volume and higher pay and benefit costs classified within Cost of Sales) and the impact of category sales mix, as sales growth was strongest in lower-margin categories. For the nine months ended October 31, 2020, our gross margin rate was 29.1 percent compared with 30.0 percent in the comparable period last year. This decrease reflected increased digital fulfillment and supply chain costs (stemming from unusually strong growth in digital volume combined with the impact of higher pay and benefit costs classified within Cost of Sales) and the impact of category sales mix, as sales growth was strongest in lower-margin categories. The decrease was partially offset by the net impact of merchandising actions, most notably the benefit of exceptionally low clearance and promotional markdown rates. Selling, General, and Administrative Expense Rate For the three and nine months ended October 31, 2020, our SG&A expense rate was 20.5 percent and 20.2 percent, respectively, compared with 22.3 percent and 21.4 percent, respectively, in the comparable periods last year. Incremental team member pay and benefits and investments to protect the health and safety of guests represented approximately $300 million of the $494 million increase in SG&A expenses for the three months ended October 31, 2020, and approximately $900 million of the $1.4 billion increase for the nine months ended October 31, 2020, compared with the prior year periods. From a rate perspective, these increased costs were more than offset by leverage resulting from strong revenue growth. TARGET CORPORATION Q3 2020 Form 10-Q 17 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents ANALYSIS OF OPERATIONS Index to Notes Store Data Change in Number of Stores Three Months Ended Nine Months Ended October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019 Beginning store count 1,871 1,853 1,868 1,844 Opened 27 9 30 20 Closed (1) — (1) (2) Ending store count 1,897 1,862 1,897 1,862 Number of Stores and Retail Square Feet Number of Stores Retail Square Feet (a) October 31, 2020 February 1, 2020 November 2, 2019 October 31, 2020 February 1, 2020 November 2, 2019 170,000 or more sq. ft. 273 272 272 48,798 48,619 48,619 50,000 to 169,999 sq. ft. 1,509 1,505 1,504 189,508 189,227 189,164 49,999 or less sq. ft. 115 91 86 3,342 2,670 2,475 Total 1,897 1,868 1,862 241,648 240,516 240,258 (a) In thousands, reflects total square feet less office, distribution center, and vacant space. Other Performance Factors Net Interest Expense Net interest expense was $632 million and $871 million for the three and nine months ended October 31, 2020, respectively, and $113 million and $359 million for the three and nine months ended November 2, 2019, respectively. Net interest expense for the three and nine months ended October 31, 2020, increased primarily due to a loss on early retirement of debt of $512 million. Provision for Income Taxes Our effective income tax rate from continuing operations for the three and nine months ended October 31, 2020, was 21.9 percent and 21.7 percent, respectively, compared with 21.7 percent and 22.4 percent, respectively, for the comparable periods last y ear. The effective tax rate for the nine months ended October 31, 2020, reflects a larger rate benefit from discrete items, primarily related to share-based payments, compared with the prior year. TARGET CORPORATION Q3 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 To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share from continuing operations (Adjusted EPS). This metric excludes certain items presented below. We believe this information is useful in providing period-to-period comparisons of the results of our continuing operations. This measure is not in accordance with, or an alternative to, generally accepted accounting principles in the U.S. (GAAP). 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 in accordance with GAAP. Other companies may calculate Adjusted EPS differently, limiting the usefulness of the measure for comparisons with other companies. Reconciliation of Non-GAAP Adjusted EPS Three Months Ended October 31, 2020 November 2, 2019 (millions, except per share data) Pretax Net of Tax Per Share Amounts Pretax Net of Tax Per Share Amounts GAAP diluted earnings per share from continuing operations $ 2.01 $ 1.37 Adjustments Loss on debt extinguishment $ 512 $ 379 $ 0.75 $ — $ — $ — Loss on investment (a) 8 9 0.02 — — — Other (b) 8 6 0.01 (9) (6) (0.01) Adjusted diluted earnings per share from continuing operations $ 2.79 $ 1.36 Reconciliation of Non-GAAP Adjusted EPS Nine Months Ended October 31, 2020 November 2, 2019 (millions, except per share data) Pretax Net of Tax Per Share Amounts Pretax Net of Tax Per Share Amounts GAAP diluted earnings per share from continuing operations $ 5.91 $ 4.71 Adjustments Loss on debt extinguishment $ 512 $ 379 $ 0.75 $ — $ — $ — Loss on investment (a) 19 18 0.03 — — — Other (b) 33 24 0.05 (9) (6) (0.01) Adjusted diluted earnings per share from continuing operations $ 6.75 $ 4.70 Note: Amounts may not foot due to rounding. (a) Includes an unrealized loss on our investment in Casper Sleep Inc., which is not core to our continuing operations. (b) For 2020, includes store damage and inventory losses related to civil unrest. For 2019, represents an insurance recovery related to the 2013 data breach. TARGET CORPORATION Q3 2020 Form 10-Q 19 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Notes 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 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 Nine Months Ended (dollars in millions) (unaudited) October 31, 2020 November 2, 2019 Change October 31, 2020 November 2, 2019 Change Net earnings from continuing operations $ 1,014 $ 706 43.6 % $ 2,988 $ 2,436 22.6 % + Provision for income taxes 284 195 45.7 828 703 17.8 + Net interest expense 632 113 457.7 871 359 142.6 EBIT $ 1,930 $ 1,014 90.2 % $ 4,687 $ 3,498 34.0 % + Total depreciation and amortization (a) 603 637 (5.1) 1,848 1,905 (2.9) EBITDA $ 2,533 $ 1,651 53.5 % $ 6,535 $ 5,403 21.0 % (a) Represents total depreciation and amortization, including amounts classified within Depreciation and Amortization and within Cost of Sales. TARGET CORPORATION Q3 2020 Form 10-Q 20 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. Other companies may calculate ROIC differently, limiting the usefulness of the measure for comparisons with other companies. After-Tax Return on Invested Capital (dollars in millions) Trailing Twelve Months Numerator October 31, 2020 November 2, 2019 Operating income $ 5,901 $ 4,577 + Net other income / (expense) (46) 45 EBIT 5,855 4,622 + Operating lease interest (a) 87 86 - Income taxes (b) 1,277 1,043 Net operating profit after taxes $ 4,665 $ 3,665 Denominator October 31, 2020 November 2, 2019 November 3, 2018 Current portion of long-term debt and other borrowings $ 131 $ 1,159 $ 1,535 + Noncurrent portion of long-term debt 12,490 10,513 10,104 + Shareholders' investment 13,319 11,545 11,080 + Operating lease liabilities (c) 2,400 2,390 2,208 - Cash and cash equivalents 5,996 969 825 Invested capital $ 22,344 $ 24,638 $ 24,102 Average invested capital (d) $ 23,491 $ 24,369 After-tax return on invested capital 19.9 % 15.0 % (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. (b) Calculated using the effective tax rates for continuing operations, which were 21.5 percent and 22.1 percent for the trailing twelve months ended October 31, 2020, and November 2, 2019, respectively. For the trailing twelve months ended October 31, 2020, and November 2, 2019, includes tax effect of $1.3 billion and $1.0 billion, respectively, related to EBIT, and $19 million and $19 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 Q3 2020 Form 10-Q 21 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents ANALYSIS OF FINANCIAL CONDITION Index to Notes Analysis of Financial Condition Liquidity and Capital Resources Capital Allocation We follow a disciplined and balanced approach to capital allocation based on the following priorities, ranked in order of importance: first, we fully invest in opportunities to profitably grow our business, create sustainable long-term value, and maintain our current operations and assets; second, we maintain a competitive quarterly dividend and seek to grow it annually; and finally, we return any excess cash to shareholders by repurchasing shares within the limits of our credit rating goals. 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 suspended our share repurchase program in March 2020. In November 2020, we lifted the share repurchase suspension and announced that we expect to resume share repurchases in 2021. We continue to anticipate ample access to commercial paper and long-term financing. Our cash and cash equivalents balance was $6.0 billion, $2.6 billion, and $1.0 billion as of October 31, 2020, February 1, 2020, and November 2, 2019, respectively. Our cash and cash equivalents balance includes short-term investments of $5.1 billion, $1.8 billion, and $163 million as of October 31, 2020, February 1, 2020, and November 2, 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 $7.0 billion for the nine months ended October 31, 2020, compared with $4.1 billion for the nine months ended November 2, 2019. The increase reflects stronger operating performance combined with higher payables leverage during the nine months ended October 31, 2020, due to increased inventory turnover driven by strong sales, compared with the nine months ended November 2, 2019. Additionally, operating cash flows for the nine months ended October 31, 2020, reflect increased payroll-related liabilities, including the deferral of employer social security tax payments. Inventory Inventory was $12.7 billion as of October 31, 2020, compared with $9.0 billion and $11.4 billion at February 1, 2020, and November 2, 2019, respectively . The increase reflects efforts to align inventory with sales trends. Investing Cash Flows Cash flow required for investing activities included capital expenditures of $2.0 billion and $2.4 billion for the nine months ended October 31, 2020, and November 2, 2019, respectively. During the nine months ended October 31, 2020, 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 $2.5 billion to $3.0 billion . Dividends We paid dividends totaling $340 million ($0.68 per share) and $1.0 billion ($2.00 per share) for the three and nine months ended October 31, 2020, respectively, and $337 million ($0.66 per share) and $995 million ($1.94 per share) for the three and nine months ended November 2, 2019, respectively, a per share increase of 3.0 percent and 3.1 percent, respectively. We declared dividends totaling $346 million ($0.68 per share) during the third quarter of 2020, a per share increase of 3.0 percent over the $338 million ($0.66 per share) of declared dividends during the third 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. TARGET CORPORATION Q3 2020 Form 10-Q 22 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents ANALYSIS OF FINANCIAL CONDITION Index to Notes Share Repurchase We returned $609 million to shareholders through share repurchase during the nine months ended October 31, 2020. We did not repurchase any shares during the three months ended October 31, 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 8 to the Consolidated Financial Statements for more information. Financing 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. Within these parameters, we seek to minimize our borrowing costs. Our ability to access the long-term debt and commercial paper markets has provided us with ample sources of liquidity. 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 October 31, 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. We have additional liquidity through a committed $2.5 billion revolving credit facility obtained through a group of banks, which expires in October 2023. No balances were outstanding under any 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 facilities also contain a debt leverage covenant. We are, and expect to remain, in compliance with these covenants. Additionally, as of October 31, 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 As of the date of this report, other than the new borrowings and payments discussed in Note 6 to the Consolidated Financial Statements, there were no material changes to our contractual obligations and commitments outside the ordinary course of business since February 1, 2020, as reported in our 2019 Form 10-K . New Accounting Pronouncements We do not expect any recently issued accounting pronouncements to have a material effect on our financial statements. TARGET CORPORATION Q3 2020 Form 10-Q 23 MANAGEMENT'S DISCUSSION AND ANALYSIS & SUPPLEMENTAL INFORMATION Table of Contents FORWARD LOOKING STATEMENTS & CONTROLS AND PROCEDURES Index to Notes Forward-Looking Statements This report contains forward-looking statements, which are based on our current assumptions and expectations. These statements are typically accompanied by the words “expect,” “may,” “could,” “believe,” “would,” “might,” “anticipates,” or similar words. 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, future responses to and effects of the COVID-19 pandemic, 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 in 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 and Part II , Item 1A , Risk Factors of our Form 10-Q for the quarter ended May 2, 2020, 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. Item 3. 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 Part II , Item 7A , Quantitative and Qualitative Disclosures About Market Risk of our Form 10-K for the fiscal year ended February 1, 2020.