What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-03-10 compared with 2020-03-11 · 162 added, 173 removed, 279 unchanged (55% of the section changed)

1 unchanged sentence

Executive Overview

Over the last several years, we have made strategic investments to build a durable operating and financial model that further differentiates Target and is designed to drive sustainable sales and profit growth.

While our business was materially affected by the COVID-19 pandemic, resulting in significantly higher sales and profits in 2020, the pandemic highlighted the importance of our multi-category portfolio and our decision to put our stores at the center of our strategy.

In 2020, we continued to make strategic investments to support our durable operating and financial model that further differentiates Target and is designed to drive sustainable sales and profit growth.

We have done this through an investment strategy focused on:

Elevating the Shopping Experiences and Winning with High-Touch Service

• During the past three years, we have remodeled more than 700 stores, including nearly 300 during 2019.

We plan to remodel approximately 300 in 2020.

• We have grown our stores network and now have over 100 small format stores in key urban markets and on college campuses.

• We have redesigned our store operating model – redefining roles for hundreds of thousands of team members to deliver better guest service.

• We have invested significantly in our team, including a $13 starting hourly wage with a commitment to $15 by the end of 2020.

• We remodeled 132 stores during 2020.

• We opened 30 new stores, including 29 additional small format stores in key urban markets and on college campuses.

• We invested significantly in our team, including a $15/hour minimum hourly wage for US team members, recognition bonuses, and certain other benefits in light of the COVID-19 pandemic.

• We made significant investments in the health and safety of team members and guests.

Curation at Scale

• We have delivered a steady stream of newness and exclusives across our assortment.

We have introduced over 25 new owned and exclusive brands, including the 2019 launch of our new food and beverage owned brand, Good & Gather, which we expect will become our largest owned brand .

• We continued the steady stream of newness and exclusives across our assortment and continued to introduce new owned brands.

We expanded the assortment of our Food & Beverage owned brand, Good & Gather TM , which launched in 2019 and has become our largest selling food brand.

• We announced a partnership with Ulta Beauty under which we will operate Ulta Beauty at Target , a shop-in-shop experience debuting on Target.com and in more than 100 Target locations beginning in 2021, with plans to scale to hundreds more over time.

Delivering Ease and Convenience through Same-Day Services

• We have expanded our digital fulfillment capabilities, which elevate the shopping experience and give our guests new reasons to choose Target.

During 2019, over 70% of our comparable digital sales growth was driven by same-day fulfillment options:

Order Pickup, Drive Up, and delivery via our wholly owned subsidiary, Shipt.

These investments are translating into tangible financial results summarized below.

• We expanded our digital fulfillment capabilities, including fresh and frozen Food & Beverage products added to Order Pickup and Drive Up.

During 2020, over 50 percent of our comparable digital sales growth was driven by same-day fulfillment options:

Order Pickup, Drive Up, and delivery via Shipt.

Financial Summary

Fiscal 2019 included the following notable items:

• GAAP earnings per share from continuing operations were $6.34.

• Adjusted earnings per share from continuing operations were $6.39.

• Total revenue increased 3.7 percent, driven by a comparable sales increase and sales from new stores.

• Comparable sales increased 3.4 percent, driven by a 2.7 percent increase in traffic.

◦ Comparable store sales grew 1.4 percent.

◦ Digital channel sales increased 29 percent, contributing 1.9 percentage points to comparable sales growth.

• Operating income of $ 4,658 million was 13.3 percent higher than the comparable prior-year period.

Sales were $ 77,130 million for 2019, an increase of $2,697 million or 3.6 percent from the prior year.

Operating cash flow provided by continuing operations was $ 7,099 million for 2019, an increase of $1,129 million, or 18.9 percent, from $ 5,970 million for 2018.

2020 included the following notable items:

• GAAP diluted earnings per share were $8.64.

• Adjusted diluted earnings per share were $9.42.

• Total revenue increased 19.8 percent, driven by an increase in comparable sales.

• Comparable sales increased 19.3 percent, driven by a 15.0 percent increase in average transaction amount.

◦ Comparable store originated sales grew 7.2 percent.

◦ Comparable digital originated sales increased 145 percent.

• Operating income of $6.5 billion was 40.4 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 $92.4 billion for 2020, an increase of $15.3 billion, or 19.8 percent, from the prior year.

Operating cash flow provided by continuing operations was $10.5 billion for 2020, an increase of $3.4 billion, or 48.3 percent, from $7.1 billion for 2019.

TARGET CORPORATION

1 unchanged sentence

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

EXECUTIVE SUMMARY & ANALYSIS OF OPERATIONS Index to Financial Statements

EXECUTIVE OVERVIEW & FINANCIAL SUMMARY Index to Financial Statements

Earnings Per Share From

1 unchanged sentence

Percent Change

2019 2018 2017 (a)

2020 2019 2018 2020/2019 2019/2018

6 unchanged sentences

A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 23 .

(a) Consisted of 53 weeks.

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 February 1, 2020, ROIC was 16.0 percent, compared with 14.7 percent for the trailing twelve months ended February 2, 2019.

For the trailing twelve months ended January 30, 2021, after-tax ROIC was 23.5 percent, compared with 16.0 percent for the trailing twelve months ended February 1, 2020.

The calculation of ROIC is provided on page 24 .

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 has been and could continue to be material.

States and local governments 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 at stores, 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 and channel sales mix and same-day fulfillment options.

• 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 & Beverage and Beauty & Household Essentials core merchandising categories and significant comparable sales declines in Apparel & Accessories.

Comparable sales in Apparel & Accessories recovered notably beginning mid-April.

• During the second through fourth quarters, comparable sales increased 21.7 percent, reflecting store originated comparable sales growth of 9.1 percent, and an increase in digitally originated comparable sales of 146 percent.

Comparable sales growth was strong across our multi-category portfolio, with slightly higher growth in lower-margin categories.

For the year ended January 30, 2021, gross margin was negatively impacted by changes in both our category and channel sales mix.

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 modified our plans for some of our strategic initiatives, including our previously announced remodel program.

We completed 132 remodels

TARGET CORPORATION

2020 Form 10-K 18

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

FINANCIAL SUMMARY & ANALYSIS OF OPERATIONS Index to Financial Statements

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 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 17 to the Consolidated Financial Statements and the Liquidity and Capital Resources section provide additional information.

Sale of Dermstore

In February 2021, we sold Dermstore LLC (Dermstore) for approximately $350 million, subject to working capital and other closing adjustments.

We expect to recognize a pre-tax gain in excess of $300 million in the first quarter of 2021.

Dermstore represented less than 1 percent of our consolidated revenues, operating income and net assets.

Analysis of Results of Operations

Summary of Operating Income Percent Change

(dollars in millions) 2019 2018 2017 (a)

2019/2018 2018/2017

(dollars in millions) 2020 2019 2018 2020/2019 2019/2018

Sales $ 92,400 $ 77,130 $ 74,433 19.8 % 3.6 %

6 unchanged sentences

Operating income $ 6,539 $ 4,658 $ 4,110 40.4 % 13.3 %

(a) Consisted of 53 weeks.

Rate Analysis 2019 2018 2017 (a)

Rate Analysis 2020 2019 2018

Gross margin rate 28.4 % 28.9 % 28.4 %

4 unchanged sentences

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

(a) Consisted of 53 weeks.

A discussion regarding Results of Operations and Analysis of Financial Condition for the year ended February 1, 2020, as compared to the year ended February 2, 2019, is included in Part II , Item 7 , MD&A to our Annual Report on Form 10-K for the fiscal year ended February 1, 2020.

9 unchanged sentences

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 Shipt.

Our stores fulfill the majority of digitally originated sales, including shipment from stores to guests, store Order Pickup or Drive Up, and delivery via 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 c omparable sales growth will drive the majority of our total sales growth.

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 2020 sales compared to 2019 is due to a 19.3 percent comparable sales increase and the contribution from new stores.

The COVID-19 pandemic has affected the amount and mix of sales across channels and categories.

Comparable Sales 2020 2019 2018

3 unchanged sentences

Average transaction amount 15.0 0.7 0.1

Amounts may not foot due to rounding.

Contribution to Comparable Sales Change 2020 2019 2018

Stores channel comparable sales change

Stores originated channel comparable sales change

7.2 % 1.4 % 3.2 %

Contribution from digitally originated sales to comparable sales change

Contribution from digitally originated sales to comparable sales

Total comparable sales change 19.3 % 3.4 % 5.0 %

4 unchanged sentences

Total 100 % 100 % 100 %

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

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.

TARGET CORPORATION

2 unchanged sentences

ANALYSIS OF OPERATIONS Index to Financial Statements

TD Bank Group (TD) offers credit to qualified guests through Target-branded credit cards:

Sales by Product Category 2020 2019 2018

Apparel and accessories 16 % 19 % 18 %

Beauty and household essentials 26 27 26

Food and beverage 20 19 20

Hardlines 18 16 17

Home furnishings and décor 20 19 19

Total 100 % 100 % 100 %

Note 3 to the Financial Statements provides additional product category sales information.

TD Bank Group offers credit to qualified guests through Target-branded credit cards:

the Target Credit Card and the Target MasterCard Credit Card (Target Credit Cards).

3 unchanged sentences

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

RedCard sales increased for all years presented below;

however, RedCard penetration declined as total Sales increased at a faster pace.

RedCard Penetration 2020 2019 2018

5 unchanged sentences

Our gross margin rate was 28.4 percent in 2020 and 28.9 percent in 2019.

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

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.

TARGET CORPORATION

2020 Form 10-K 21

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF OPERATIONS Index to Financial Statements

Selling, General and Administrative (SG&A) Expense Rate

Our SG&A expense rate was 20.8 percent in 2019, approximately flat to last year.

Store labor productivity and lower incentive compensation in 2019 offset pressure from wage growth.

Our SG&A expense rate was 19.9 percent in 2020 and 20.8 percent in 2019.

Incremental team member pay and benefits and investments to protect the health and safety of guests represented approximately $1.5 billion of the $2.4 billion increase in SG&A expenses for the year ended January 30, 2021, compared with the prior-year periods.

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

Change in Number of Stores 2020 2019

2 unchanged sentences

Ending store count 1,897 1,868

TARGET CORPORATION

2019 Form 10-K 19

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF OPERATIONS & RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Financial Statements

Number of Stores and

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

February 1, 2020 February 2, 2019 February 1, 2020 February 2, 2019

January 30, 2021 February 1, 2020 January 30, 2021 February 1, 2020

170,000 or more sq.

9 unchanged sentences

Net interest expense from continuing operations was $977 million and $477 million for 2020 and 2019, respectively.

The increase was primarily driven by a $10 million loss on early retirement of debt in 2019.

The increase was primarily due to a $512 million loss on early retirement of debt in 2020.

Provision for Income Taxes

Our 2019 effective income tax rate from continuing operations increased to 22.0 percent from 20.3 percent in 2018, which included discrete benefits related to the Tax Cuts and Jobs Act of 2017 (Tax Act) and the resolution of certain income tax matters unrelated to 2018 operations.

Our 2020 effective income tax rate from continuing operations was 21.2 percent compared with 22.0 percent in 2019.

The effective tax rate for 2020 reflects a larger rate benefit from discrete items, primarily related to share-based payments and resolution of certain income tax matters, partially offset by the rate impact of higher earnings, compared with the prior year.

Note 19 to the Financial Statements provides additional information.

12 unchanged sentences

Reconciliation of Non-GAAP

Adjusted EPS 2019 2018 2017 (a)

Adjusted EPS 2020 2019 2018

(millions, except per share data) Pretax Net of Tax Per Share Amounts Pretax Net of Tax Per Share Amounts Pretax Net of Tax Per Share Amounts

1 unchanged sentence

$ 8.64 $ 6.34 $ 5.50

Loss on investment (b)

Loss on debt extinguishment $ 512 $ 379 $ 0.75 $ 10 $ 8 $ 0.01 $ — $ — $ —

Loss on investment (a)

19 14 0.03 41 31 0.06 — — —

— — — — — — — (36) (0.07)

Loss on debt extinguishment 10 8 0.01 — — — 123 75 0.14

28 20 0.04 (17) (13) (0.02) — — —

Other income tax matters (e)

Other income tax matters (d)

— (21) (0.04) — — — — (18) (0.03)

2 unchanged sentences

Amounts may not foot due to rounding.

(a) Consisted of 53 weeks.

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

Refer to the Provision for Income Taxes discussion within MD&A and Note 18 to the Financial Statements.

(d) For 2019 and 2017, represents insurance recoveries related to the 2013 data breach.

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

(a) Represents a loss on our investment in Casper Sleep Inc.

(Casper), which is not core to our continuing operations.

(b) Represents discrete items related to the Tax Act.

Refer to Note 19 to the Financial Statements.

For 2019, represents insurance recoveries related to the 2013 data breach.

(d) Represents benefits from the resolution of certain income tax matters unrelated to current period 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.

5 unchanged sentences

EBIT and EBITDA Percent Change

(dollars in millions) 2019 2018 2017 (a)

2019/2018 2018/2017

(dollars in millions) 2020 2019 2018 2020/2019 2019/2018

Net earnings from continuing operations $ 4,368 $ 3,269 $ 2,930 33.6 % 11.6 %

2 unchanged sentences

$ 6,523 $ 4,667 $ 4,137 39.8 % 12.8 %

+ Total depreciation and amortization (b)

+ Total depreciation and amortization (a)

2,485 2,604 2,474 (4.6) 5.3

$ 9,008 $ 7,271 $ 6,611 23.9 % 10.0 %

(a) Consisted of 53 weeks.

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

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

TARGET CORPORATION

8 unchanged sentences

Trailing Twelve Months

2020 February 2,

January 30, 2021 February 1, 2020

Operating income

5 unchanged sentences

Net operating profit after taxes $ 5,206 $ 3,708

2020 February 2,

2019 February 3,

January 30, 2021 February 1, 2020 February 2, 2019

Current portion of long-term debt and other borrowings $ 1,144 $ 161 $ 1,052

8 unchanged sentences

After-tax return on invested capital 23.5 % 16.0 %

16.0 % 14.7 %

(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.

1 unchanged sentence

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 22.0 percent and 20.3 percent for the trailing twelve months ended February 1, 2020, and February 2, 2019, respectively.

For the trailing twelve months ended February 1, 2020, and February 2, 2019, includes tax effect of $1,026 million and $839 million, respectively, related to EBIT, and $19 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.

(b) Calculated using the effective tax rates for continuing operations, which were 21.2 percent and 22.0 percent for the trailing twelve months ended January 30, 2021, and February 1, 2020, respectively.

For the trailing twelve months ended January 30, 2021, and February 1, 2020, includes tax effect of $1.4 billion and $1.0 billion, respectively, related to EBIT, and $18 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, respectively.

(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.

2 unchanged sentences

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF FINANCIAL CONDITION & NEW ACCOUNTING PRONOUNCEMENTS Index to Financial Statements

ANALYSIS OF FINANCIAL CONDITION Index to Financial Statements

Analysis of Financial Condition

Liquidity and Capital Resources

Our period-end cash and cash equivalents balance increased to $ 2,577 million from $ 1,556 million in 2018.

Our cash and cash equivalents balance includes short-term investments of $1,810 million and $769 million as of February 1, 2020, and February 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.

Capital Allocation

3 unchanged sentences

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

In response to COVID-19, we suspended our share repurchase program in March 2020.

In November 2020, we lifted the share repurchase suspension and, in February 2021, began repurchasing shares.

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.

Our period-end cash and cash equivalents balance increased to $8.5 billion from $2.6 billion in 2019.

Our cash and cash equivalents balance includes short-term investments of $7.6 billion and $1.8 billion as of January 30, 2021, and February 1, 2020, 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 $ 7,099 million in 2019 compared with $ 5,970 million in 2018.

The 2019 operating cash flow increase was primarily driven by higher net earnings and a reduction in inventory during 2019.

Operating cash flow in 2019 also benefited from increased accounts payable due to timing of import inventory purchases, which have longer payment terms, compared with 2018.

Year-end inventory was $ 8,992 million, compared with $ 9,497 million in 2018.

Inventory levels were lower as of February 1, 2020, compared with February 2, 2019, partially due to focused efforts to reduce inventory across multiple categories where we optimized on-hand quantities and assortment.

Additionally, elevated inventory levels in the prior year reflected intentional investments in toys merchandise.

Operating cash flow provided by continuing operations was $10.5 billion in 2020 compared with $7.1 billion in 2019.

The increase reflects stronger operating performance combined with higher payables leverage during 2020 due to increased inventory turnover driven by strong sales, compared with 2019.

Additionally, operating cash flows for 2020 reflect increased payroll-related liabilities, including the deferral of employer social security tax payments and higher incentive compensation.

Year-end inventory was $10.7 billion, compared with $9.0 billion in 2019.

Inventory levels were higher as of January 30, 2021, compared with February 1, 2020, reflecting efforts to align inventory with sales trends.

TARGET CORPORATION

3 unchanged sentences

Capital Expenditures

Capital expenditures decreased i n 2019 from the prior year primarily due to project savings in our store remodel program and timing of certain planned expenditures.

We have completed over 700 remodels since the launch of the current program in 2017, and expect to maintain our pace of approximately 300 remodels in 2020.

Beginning in 2021, we expect to moderate the annual number of remodels to a range of 150 to 200.

In addition to these cash investments, we entered into leases related to new stores in 2019, 2018, and 2017 with total future minimum lease payments of $669 million, $473 million, and $438 million, respectively.

We expect capital expenditures in 2020 of approximately $3.5 billion as we continue the current store remodel program, open additional small-format stores, and accelerate investments in our supply chain.

We also expect to continue to invest in new store leases.

We paid dividends totaling $1,330 million ($2.60 per share) in 2019 and $1,335 million ($2.52 per share) in 2018, a per share increase of 3.2 percent.

We declared dividends totaling $1,345 million ($2.62 per share) in 2019 and $1,347 million ($ 2.54 per share) in 2018, a per share increase of 3.1 percent.

Capital expenditures decreased in 2020 from the prior year as we modified plans for some of our strategic initiatives, including store remodels and new store openings, as a result of COVID-19.

We have completed over 800 remodels since the launch of the current program in 2017, including 132 in 2020.

We expect to complete 150 full-store remodels and open 30 to 40 new stores during 2021.

In addition to these cash investments, we entered into leases related to new stores in 2020, 2019, and 2018 with total future minimum lease payments of $764 million, $669 million, and $473 million, respectively, and new leases related to our supply chain with total future minimum lease payments of $442 million, $185 million, and $11 million, respectively.

We expect capital expenditures in 2021 of approximately $4.0 billion to support remodels, new stores, and supply chain projects to add replenishment capacity and modernize the network, including sortation centers.

Beyond full-store remodels, we will invest in optimizing front-end space in our highest-volume locations, increasing the efficiency of our Pickup and Drive Up services, as well as the build-out of Ulta Beauty shop-in-shops.

We also expect to continue to invest in new store and supply chain leases.

We paid dividends totaling $1.3 billion ($2.68 per share) in 2020 and $1.3 billion ($2.60 per share) in 2019, a per share increase of 3.1 percent.

We declared dividends totaling $1.4 billion ($2.70 per share) in 2020 and $1.3 billion ($2.62 per share) in 2019, a per share increase of 3.1 percent.

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 Repurchases

During 2019 and 2018 we returned $ 1,518 million and $ 2,067 million, respectively, to shareholders through share repurchase.

During 2020 and 2019 we returned $609 million and $1.5 billion, respectively, to shareholders through share repurchase.

See Part II , Item 5 , Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Annual Report on Form 10-K and Note 21 to the Financial Statements for more information.

7 unchanged sentences

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 February 1, 2020, our credit ratings were as follows:

As of January 30, 2021, our credit ratings were as follows:

Credit Ratings Moody's Standard and Poor's Fitch

3 unchanged sentences

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 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 January 2020, we issued $750 million of debt and we redeemed $1.0 billion of debt before its maturity.

In both 2019 and 2018, we funded our holiday sales period working capital needs through internally generated funds and the issuance of commercial paper.

In 2020, we funded our holiday sales period working capital needs through internally generated funds.

In 2019, we funded our holiday sales period working capital needs through internally generated funds and the issuance of commercial paper.

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 at any time during 2019 and 2018.

No balances were outstanding at any time during 2020 or 2019.

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

1 unchanged sentence

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

Additionally, as of February 1, 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.

Notes 15 and 16 to the Financial Statements provide additional information.

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

TARGET CORPORATION

2019 Form 10-K 25

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF FINANCIAL CONDITION Index to Financial Statements

Commitments and Contingencies

Contractual Obligations as of Payments Due by Period

February 1, 2020 Less than 1-3 3-5 After 5

(millions) Total 1 Year Years Years Years

Recorded contractual obligations:

Long-term debt (a)

$ 10,085 $ 94 $ 1,119 $ 1,000 $ 7,872

Finance lease liabilities (b)

1,890 121 254 245 1,270

Operating lease liabilities (b)

3,205 284 552 531 1,838

Deferred compensation (c)

552 73 160 175 144

Real estate liabilities (d)

Tax contingencies (e)

Unrecorded contractual obligations:

Interest payments – long-term debt

5,964 399 766 707 4,092

Purchase obligations (f)

676 247 135 74 220

Real estate obligations (g)

1,313 588 66 88 571

Future contributions to retirement plans (h)

Contractual obligations $ 23,775 $ 1,896 $ 3,052 $ 2,820 $ 16,007

(a) Represents principal payments only.

See Note 15 to the Financial Statements for further information.

(b) Finance and operating lease payments include $ 118 million and $ 901 million, respectively, related to options to extend lease terms that are reasonably certain of being exercised.

See Note 17 to the Financial Statements for further information.

(c) The timing of deferred compensation payouts is estimated based on payments currently made to former employees and retirees and the projected timing of future retirements.

(d) Real estate liabilities include costs incurred but not paid related to the construction or remodeling of real estate and facilities.

(e) Estimated tax contingencies of $188 million, including interest and penalties, are not included in the table above because we are not able to make reasonably reliable estimates of the period of cash settlement.

See Note 18 to the Financial Statements for further information.

(f) Purchase obligations include all legally binding contracts such as firm minimum commitments for inventory purchases, merchandise royalties, equipment purchases, marketing-related contracts, software acquisition/license commitments, and service contracts.

We issue inventory purchase orders in the normal course of business, which represent authorizations to purchase that are cancelable by their terms.

We do not consider purchase orders to be firm inventory commitments;

therefore, they are excluded from the table above.

If we choose to cancel a purchase order, we may be obligated to reimburse the vendor for unrecoverable outlays incurred prior to cancellation.

We also issue trade letters of credit in the ordinary course of business, which are excluded from this table as these obligations are conditioned on terms of the letter of credit being met.

(g) Real estate obligations include legally binding minimum lease payments for leases signed but not yet commenced, and commitments for the purchase, construction, or remodeling of real estate and facilities.

(h) We have not included obligations under our pension plans in the contractual obligations table above because no additional amounts are required to be funded as of February 1, 2020.

Our historical practice regarding these plans has been to contribute amounts necessary to satisfy minimum pension funding requirements, plus periodic discretionary amounts determined to be appropriate.

Off Balance Sheet Arrangements:

Other than the unrecorded contractual obligations noted above, we do not have any arrangements or relationships with entities that are not consolidated into the financial statements.

TARGET CORPORATION

2019 Form 10-K 26

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF FINANCIAL CONDITION Index to Financial Statements

Additionally, as of January 30, 2021, 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.

Note 16 to the Financial Statements provides additional information.

Critical Accounting Estimates

10 unchanged sentences

Market adjustments for markdowns are recorded when the salability of the merchandise has diminished.

Salability can be impacted by consumer preferences and seasonality, among other factors.

We believe the risk of inventory obsolescence is largely mitigated because our inventory typically turns in less than three months.

Inventory was $ 8,992 million and $ 9,497 million as of February 1, 2020 and February 2, 2019, respectively, and is further described in Note 8 to the Financial Statements.

Inventory was $10.7 billion and $9.0 billion as of January 30, 2021, and February 1, 2020, respectively, and is further described in Note 9 to the Financial Statements.

Vendor income:

1 unchanged sentence

Substantially all vendor income is recorded as a reduction of cost of sales.

Vendor income earned can vary based on a number of factors, including purchase volumes, sales volumes, and our pricing and promotion strategies.

TARGET CORPORATION

2020 Form 10-K 27

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF FINANCIAL CONDITION Index to Financial Statements

We establish a receivable for vendor income that is earned but not yet received.

2 unchanged sentences

Historically, adjustments to our vendor income receivable have not been material.

Vendor income receivable was $ 464 million and $ 468 million as of February 1, 2020 and February 2, 2019, respectively.

Vendor income receivable was $504 million and $464 million as of January 30, 2021, and February 1, 2020, respectively.

Vendor income is described further in Note 5 to the Financial Statements.

1 unchanged sentence

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

The evaluation is performed at the lowest level of identifiable cash flows independent of other assets, which is primarily at the store level.

The evaluation is performed primarily at the store level.

An impairment loss would be recognized when estimated undiscounted future cash flows from the operation and/or eventual disposition of the asset or asset group is less than its carrying amount, and is measured as the excess of its carrying amount over fair value.

8 unchanged sentences

other liabilities referred to above are not discounted.

Our workers' compensation and general liability accrual was $465 million and $423 million as of February 1, 2020 and February 2, 2019, respectively.

Our workers' compensation and general liability accrual was $510 million and $465 million as of January 30, 2021, and February 1, 2020, respectively.

We believe that the amounts accrued are appropriate;

7 unchanged sentences

Significant judgment is required in determining the timing and amounts of deductible and taxable items, and in evaluating the ultimate resolution of tax matters in dispute with tax authorities.

TARGET CORPORATION

2019 Form 10-K 27

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF FINANCIAL CONDITION Index to Financial Statements

The benefits of uncertain tax positions are recorded in our financial statements only after determining it is likely the uncertain tax positions would withstand challenge by taxing authorities.

We periodically reassess these probabilities and record any changes in the financial statements as appropriate.

Liabilities for uncertain tax positions, including interest and penalties, were $188 million and $334 million as of February 1, 2020 and February 2, 2019, respectively, and primarily relate to continuing operations.

Liabilities for uncertain tax positions, including interest and penalties, were $193 million and $188 million as of January 30, 2021, and February 1, 2020, respectively.

We believe the resolution of these matters will not have a material adverse impact on our consolidated financial statements.

3 unchanged sentences

The costs for these plans are determined based on actuarial calculations using the assumptions described in the following paragraphs.

Eligibility and the level of benefits varies depending on team members' full-time or part-time status, date of hire, age, and/or length of service.

Eligibility and the level of benefits vary depending on each team member's full-time or part-time status, date of hire, age, length of service, and/or compensation.

The benefit obligation and related expense for these plans are determined based on actuarial calculations using assumptions about the expected long-term rate of return, the discount rate, compensation growth rates, mortality, and retirement age.

3 unchanged sentences

The discount rate used to determine benefit obligations is adjusted annually based on the interest rate for long-term high-quality corporate bonds, using yields for maturities that are in line with the duration of our pension liabilities.

TARGET CORPORATION

2020 Form 10-K 28

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

NEW ACCOUNTING PRONOUNCEMENTS & FORWARD-LOOKING STATEMENTS Index to Financial Statements

Our benefit obligation and related expense will fluctuate with changes in interest rates.

9 unchanged sentences

New Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (ASU) No.

2016-13 - Measurement of Credit Losses on Financial Instruments , which modifies the measurement of expected credit losses of certain financial instruments.

We will adopt the standard in the first quarter of 2020, as required.

We do not expect the standard to materially affect our consolidated net earnings, financial position, or cash flows.

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

TARGET CORPORATION

2019 Form 10-K 28

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

FORWARD LOOKING STATEMENTS Index to Financial Statements

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

Forward-Looking Statements

2 unchanged sentences

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, contributions and payments related to our pension plan, the expected return on plan assets, the expected timing and recognition of compensation expenses, the effects of macroeconomic conditions, the adequacy of our reserves for general liability, workers' compensation and property loss, the expected outcome of, and adequacy of our reserves for claims, litigation and the resolution of tax matters, our expectations regarding our contractual obligations, liabilities, and vendor income, the expected ability to recognize deferred tax assets and liabilities and the timing of such recognition, 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.

2 unchanged sentences

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.

TARGET CORPORATION

2020 Form 10-K 29

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

QUANTITATIVE AND QUALITATIVE DISCLOSURES Index to Financial Statements

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-K

Item 7. Management’s Discussion and Analysis