What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-28 compared with 2020-11-25 · 127 added, 176 removed, 173 unchanged (64% of the section changed)

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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.

First quarter 2021 included the following notable items:

• GAAP diluted earnings per share was $4.17.

• Adjusted diluted earnings per share was $3.69.

• Total revenue increased 23.4 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.

• Comparable sales increased 22.9 percent, driven by a 17.1 percent increase in traffic.

◦ Comparable stores originated sales grew 18.0 percent.

◦ Comparable digitally originated sales increased 50.2 percent.

• Operating income of $2.4 billion was 407 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

• We recognized a $335 million pretax gain on the sale of Dermstore.

Sales were $23.9 billion for the three months ended May 1, 2021, an increase of $4.5 billion, or 23.3 percent, from the comparable prior-year period.

Cash flow provided by operating activities was $1.1 billion for the three months ended May 1, 2021, a decrease of $0.1 billion, or (11.3) percent, from $1.3 billion for the three months ended May 2, 2020.

Earnings Per Share Three Months Ended

May 1, 2021 May 2, 2020 Change

GAAP diluted earnings per share $ 4.17 $ 0.56 643.2 %

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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.

Adjusted diluted earnings per share (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 operations.

A reconciliation of non-GAAP financial measures to GAAP measures is provid ed on page 18 .

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

For the trailing twelve months ended May 1, 2021, after-tax ROIC was 30.7 percent, compared with 13.4 percent for the trailing twelve months ended May 2, 2020.

The calculation of ROIC is provided o n page 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.

As the COVID-19 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 have seen significant volatility in our sales category and channel mix, including same-day fulfillment options.

During the first quarter of 2021, strength in comparable sales growth continued across our multi-category portfolio, with significantly higher growth in our higher-margin Apparel & Accessories and Home Furnishings & Décor core merchandise categories.

Comparable sales growth was strongest in Apparel & Accessories, which experienced a significant decline during the first quarter of 2020, Additionally, strength above the chain average continued in Hardlines.

During the first quarter of 2020, comparable sales growth was strongest in our lower-margin Hardlines, Food & Beverage and Beauty & Household Essentials categories.

Note 4 to the Financial Statements presents sales by category.

TARGET CORPORATION

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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

Summary of Operating Income Three Months Ended

(dollars in millions) May 1, 2021 May 2, 2020 Change

Sales $ 23,879 $ 19,371 23.3 %

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Selling, general and administrative expenses 4,509 4,060 11.0

4,647 4,153 11.9 13,167 11,728 12.3

Depreciation and amortization (exclusive of depreciation included in cost of sales) 598 577 3.9

541 575 (5.8) 1,660 1,717 (3.3)

Operating income $ 2,374 $ 468 407.0 %

Rate Analysis Three Months Ended Nine Months Ended

October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019

Rate Analysis Three Months Ended

May 1, 2021 May 2, 2020

Gross margin rate 30.0 % 25.1 %

SG&A expense rate 18.6 20.7

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

2.4 3.1 2.5 3.1

Depreciation and amortization expense rate (exclusive of depreciation included in cost of sales) 2.5 2.9

Operating income margin rate 9.8 2.4

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

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

Our stores fulfill the majority of digitally originated sales, including shipment from stores to guests, store Order Pickup 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.

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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

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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 %

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

The increase in sales during the three months ended May 1, 2021, is due to a comparable sales increase of 22.9 percent and the contribution from new stores.

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

Comparable Sales Three Months Ended

May 1, 2021 May 2, 2020

Comparable sales change 22.9 % 10.8 %

Drivers of change in comparable sales

Number of transactions 17.1 (1.5)

Average transaction amount 5.0 12.5

Comparable Sales by Channel Three Months Ended

May 1, 2021 May 2, 2020

Stores originated comparable sales change 18.0 % 0.9 %

Digitally originated comparable sales change 50.2 140.6

Sales by Channel Three Months Ended

May 1, 2021 May 2, 2020

Stores originated 81.7 % 84.7 %

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Total 100 % 100 %

Sales by Product Category Three Months Ended Nine Months Ended

October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019

Sales by Fulfillment Channel Three Months Ended

Stores 96.3 % 96.7 %

Other 3.7 3.3

Total 100 % 100 %

Sales fulfilled by stores include in-store purchases and digitally originated sales fulfilled by shipping merchandise from stores to guests, Order Pickup, Drive Up, and Shipt.

Sales by Product Category Three Months Ended

May 1, 2021 May 2, 2020

Apparel and accessories 18 % 14 %

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Total 100 % 100 %

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

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

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

TARGET CORPORATION

Q1 2021 Form 10-Q 15

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF OPERATIONS Index to Notes

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

RedCard sales increased for the three months ended May 1, 2021 and May 2, 2020;

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

RedCard Penetration Three Months Ended

May 1, 2021 May 2, 2020

Target Debit Card 12.1 % 12.7 %

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Total RedCard Penetration 20.5 % 22.4 %

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.

For the three months ended May 1, 2021, our gross margin rate was 30.0 percent compared with 25.1 percent in the comparable prior-year pe riod.

This increase reflected:

• The benefit of merchandising actions, including exceptionally low promotional and clearance markdown rates, in this year’s results and purchase order cancellation fees and inventory impairments in last year’s results;

• Favorable category mix driven by strength in higher margin categories including Apparel & Accessories and Home Furnishings & Décor;

• The net impact of other factors, most notably the margin impact of our returns estimate for sales during the temporary returns suspension period in the first quarter of 2020.

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.

For the three months ended May 1, 2021, our SG&A expense rate was 18.6 percent compared with 20.7 percent in the comparable prior-year period.

Incremental team member pay and benefits, including higher wages and bonus expense, represented the vast majority of the $449 million increase in SG&A expenses compared with the prior-year period.

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

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ANALYSIS OF OPERATIONS Index to Notes

Change in Number of Stores Three Months Ended Nine Months Ended

October 31, 2020 November 2, 2019 October 31, 2020 November 2, 2019

Change in Number of Stores Three Months Ended

May 1, 2021 May 2, 2020

Beginning store count 1,897 1,868

Opened 27 9 30 20

Closed (1) — (1) (2)

Ending store count 1,909 1,871

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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

May 1, 2021 January 30, 2021 May 2, 2020 May 1, 2021 January 30, 2021 May 2, 2020

170,000 or more sq.

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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.

Net interest expense was $108 million for the three months ended May 1, 2021, and $117 million for the three months ended May 2, 2020.

The decrease in net interest expense was primarily due to a lower weighted-average interest rate on our long-term debt for the three months ended May 1, 2021, compared with the three months ended May 2, 2020.

Net Other (Income) / Expense

Net Other (Income) / Expense was $(343) million for the three months ended May 1, 2021, and $22 million for the three months ended May 2, 2020.

The increase was due to the $335 million gain on the February 2021 sale of Dermstore.

Note 3 to the Financial Statements provides additional information.

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.

Our effective income tax rate for the three months ended May 1, 2021, was 19.6 percent, compared w ith 13.9 percent in the comparable prior-year period.

The increase reflects significantly higher earnings, partially offset by the impact of discrete tax benefits in the quarter, including a $44 million benefit resulting from the resolution of certain income tax matters.

TARGET CORPORATION

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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).

To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share (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.

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

We believe this information is useful in providing period-to-period comparisons of the results of our operations.

This measure is not in accordance with, or an alternative to, U.S.

The most comparable GAAP measure is diluted earnings per share.

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

Loss on debt extinguishment $ 512 $ 379 $ 0.75 $ — $ — $ —

Loss on investment (a)

8 9 0.02 — — —

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

Loss on debt extinguishment $ 512 $ 379 $ 0.75 $ — $ — $ —

Reconciliation of Non-GAAP Adjusted EPS Three Months Ended

May 1, 2021 May 2, 2020

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

GAAP diluted earnings per share $ 4.17 $ 0.56

Gain on Dermstore sale $ (335) $ (269) $ (0.53) $ — $ — $ —

Loss on investment (a)

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41 30 0.06 — — —

Adjusted diluted earnings per share from continuing operations

$ 6.75 $ 4.70

Adjusted diluted earnings per share $ 3.69 $ 0.59

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.

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

We sold this investment during the fourth quarter of 2020.

(b) Represents asset impairment charges resulting from the consolidation of our headquarters office space.

Earnings before interest expense and income taxes (EBIT) and earnings 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.

The most comparable GAAP measure is net earnings.

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 %

EBIT and EBITDA Three Months Ended

(dollars in millions) May 1, 2021 May 2, 2020 Change

Net earnings $ 2,097 $ 284 639.8 %

+ Provision for income taxes 512 45 1,017.1

+ Net interest expense 108 117 (7.6)

$ 1,930 $ 1,014 90.2 % $ 4,687 $ 3,498 34.0 %

EBIT $ 2,717 $ 446 508.7 %

+ Total depreciation and amortization (a)

603 637 (5.1) 1,848 1,905 (2.9)

EBITDA $ 3,384 $ 1,087 211.3 %

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Trailing Twelve Months

Numerator October 31, 2020 November 2, 2019

Numerator May 1, 2021 May 2, 2020

Operating income $ 8,444 $ 3,992

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Net operating profit after taxes $ 7,015 $ 3,198

Denominator October 31, 2020 November 2, 2019 November 3, 2018

Denominator May 1, 2021 May 2, 2020 May 4, 2019

Current portion of long-term debt and other borrowings $ 1,173 $ 168 $ 1,056

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(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.

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

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.

(b) Calculated using the effective tax rates, which were 21.0 percent and 21.1 percent for the trailing twelve months ended May 1, 2021, and May 2, 2020, respectively.

For the trailing twelve months ended May 1, 2021, and May 2, 2020, includes tax effect of $1.8 billion and $837 million, respectively, related to EBIT, and $18 million 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.

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

We 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 cash and cash equivalents balance was $7.8 billion, $8.5 billion, and $4.6 billion as of May 1, 2021, January 30, 2021, and May 2, 2020, respectively.

Our cash and cash equivalents balance includes short-term investments of $6.9 billion, $7.6 billion, and $3.6 billion as of May 1, 2021, January 30, 2021, and May 2, 2020, respectively.

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

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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 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.

Cash flows provided by operating activities were $1.1 billion for the three months ended May 1, 2021, compared with $1.3 billion for the three months ended May 2, 2020.

For the three months ended May 1, 2021, operating cash flows reflect stronger operating results, offset by higher net settlement of accounts payable and incentive compensation payments, compared with the three months ended May 2, 2020.

Inventory was $10.5 billion as of May 1, 2021, compared with $10.7 billion and $8.6 billion at January 30, 2021, and May 2, 2020, respectively.

The increase over the balance as of May 2, 2020, reflects efforts to align inventory with sales trends.

Additionally, the lower inventory balance as of May 2, 2020, reflected the impact of elevated sell-through rates in high-demand merchandise categories and efforts to reduce inventory levels in certain discretionary categories to align with evolving sales trends early in the pandemic.

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 .

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.

Investing cash flows included capital investments of $540 million and $751 million for the three months ended May 1, 2021, and May 2, 2020, respectively.

We continue to expect full-year capital investments of approximately $4 billion, with the majority of those investments occurring in the second half of this year.

For the three months ended May 1, 2021, investing cash flows includes $356 million of proceeds from the sale of Dermstore.

We paid dividends totaling $340 million ($0.68 per share) for the three months ended May 1, 2021, and $332 million ($0.66 per share) for the three months ended May 2, 2020, a per share increase of 3.0 percent.

We declared dividends totaling $343 million ($0.68 per share) during the first quarter of 2021 and $333 million ($0.66 per share) during the first quarter of 2020, a per share increase of 3.0 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 Repurchase

We returned $1.2 billion to shareholders through share repurchase during the three months ended May 1, 2021.

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

TARGET CORPORATION

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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.

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

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

As of October 31, 2020, our credit ratings were as follows:

As of May 1, 2021, our credit ratings were as follows:

Credit Ratings Moody’s Standard and Poor’s Fitch

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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.

We obtain short-term financing from time to time under our commercial paper program.

No balances were outstanding at any time during the three months ended May 1, 2021, and May 2, 2020.

We have additional liquidity through a committed $2.5 billion revolving credit facility that expires in October 2023.

No balances were outstanding at any time during 2021 or 2020.

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.

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

Additionally, as of May 1, 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.

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.

New Accounting Pronouncements

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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.

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 January 30, 2021, which should be read in conjunction with the forward-looking statements in this report.

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

Quantitative and Qualitative Disclosures About Market Risk

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

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What changed 10-Q

Item 2. Management’s Discussion and Analysis