What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-27 compared with 2021-05-28 · 97 added, 73 removed, 227 unchanged (43% of the section changed)

1 unchanged sentence

Financial Summary

First quarter 2021 included the following notable items:

Second quarter 2021 included the following notable items:

• GAAP diluted earnings per share was $3.65.

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• Operating income of $2.5 billion was 7.2 percent higher than the comparable prior-year period.

• 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

Sales were $24.8 billion for the three months ended July 31, 2021, an increase of $2.1 billion, or 9.4 percent, from the comparable prior-year period.

Cash flow provided by operating activities was $3.4 billion for the six months ended July 31, 2021, a decrease of $1.7 billion, or (33.1) percent, from $5.1 billion for the six months ended August 1, 2020.

The drivers of the operating cash flow decrease are described on page 22 .

Earnings Per Share Three Months Ended Six Months Ended

July 31, 2021 August 1, 2020 Change July 31, 2021 August 1, 2020 Change

GAAP diluted earnings per share $ 3.65 $ 3.35 8.9 % $ 7.82 $ 3.91 100.1 %

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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 .

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.

For the trailing twelve months ended July 31, 2021, after-tax ROIC was 31.7 percent , compared with 17.2 percent for the trailing twelve months ended August 1, 2020.

The calculation of ROIC is provided on page 21 .

Since the onset of the COVID-19 pandemic, we have experienced strong comparable sales growth and significant volatility in our sales category and channel mix, including same-day fulfillment options.

TARGET CORPORATION

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Analysis of Results of Operations

Summary of Operating Income Three Months Ended

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

Summary of Operating Income Three Months Ended Six Months Ended

(dollars in millions) July 31, 2021 August 1, 2020 Change July 31, 2021 August 1, 2020 Change

Sales $ 24,826 $ 22,696 9.4 % $ 48,705 $ 42,067 15.8 %

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Operating income $ 2,467 $ 2,300 7.2 % $ 4,841 $ 2,768 74.9 %

Rate Analysis Three Months Ended

May 1, 2021 May 2, 2020

Rate Analysis Three Months Ended Six Months Ended

July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020

Gross margin rate 30.4 % 30.9 % 30.2 % 28.3 %

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ANALYSIS OF OPERATIONS Index to Notes

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 increase in sales during the three and six months ended July 31, 2021, is due to a comparable sales increase of 8.9 percent and 15.3 percent, respectively, 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 Three Months Ended Six Months Ended

July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020

Comparable sales change 8.9 % 24.3 % 15.3 % 17.7 %

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Average transaction amount (3.4) 18.8 0.5 15.8

Comparable Sales by Channel Three Months Ended

May 1, 2021 May 2, 2020

Comparable Sales by Channel Three Months Ended Six Months Ended

July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020

Stores originated comparable sales change 8.7 % 10.9 % 13.0 % 6.0 %

Digitally originated comparable sales change 9.9 195.4 27.3 168.9

Sales by Channel Three Months Ended

May 1, 2021 May 2, 2020

Sales by Channel Three Months Ended Six Months Ended

July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020

Stores originated 83.0 % 82.8 % 82.3 % 83.7 %

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Total 100 % 100 % 100 % 100 %

Sales by Fulfillment Channel Three Months Ended

Sales by Fulfillment Channel Three Months Ended Six Months Ended

July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020

Stores 96.6 % 96.0 % 96.4 % 96.3 %

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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

Sales by Product Category Three Months Ended Six Months Ended

July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020

Apparel and accessories 19 % 18 % 18 % 16 %

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

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

RedCard sales increased for the three and six months ended July 31, 2021, and August 1, 2020;

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

RedCard Penetration Three Months Ended

May 1, 2021 May 2, 2020

RedCard Penetration Three Months Ended Six Months Ended

July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020

Target Debit Card 11.6 % 11.8 % 11.9 % 12.2 %

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Total RedCard Penetration 20.3 % 20.5 % 20.4 % 21.4 %

Amounts may not foot due to rounding.

TARGET CORPORATION

Q2 2021 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 May 1, 2021, our gross margin rate was 30.0 percent compared with 25.1 percent in the comparable prior-year pe riod.

For the three months ended July 31, 2021, our gross margin rate was 30.4 percent compared with 30.9 percent in the comparable prior-year pe riod.

This decrease reflected the net impact of

• pressure from higher merchandise and freight costs, partially offset by the benefit of low promotional and clearance markdown rates;

• the prior-year rate benefit from a second quarter 2020 change in our returns estimate for sales during the temporary returns suspension period;

• favorable category mix, reflecting strength in our higher-margin categories relative to our lower-margin categories;

• the benefit of a higher percentage of digital sales fulfilled through our lower-cost same-day fulfillment options.

For the six months ended July 31, 2021, our gross margin rate was 30.2 percent compared with 28.3 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 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.

• merchandising benefits, including exceptionally low promotional and clearance markdown rates, partially offset by higher merchandise and freight costs;

• favorable category mix, reflecting strength in our higher-margin categories relative to our lower-margin categories;

• the benefit of a higher percentage of digital sales fulfilled through our lower-cost same-day fulfillment options.

TARGET CORPORATION

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ANALYSIS OF OPERATIONS Index to Notes

Change in Number of Stores Three Months Ended

May 1, 2021 May 2, 2020

Selling, General, and Administrative Expense Rate

For the three months ended July 31, 2021, our SG&A expense rate was 19.3 percent compared with 19.4 percent for the three months ended August 1, 2020.

For the six months ended July 31, 2021, our SG&A expense rate was 19.0 percent compared with 20.0 percent for the six months ended August 1, 2020.

The decreases reflect the continued leverage benefit from strong revenue growth, offset by pressure from increases in some expense categories—such as marketing—from lower-than-normal levels in 2020.

Change in Number of Stores Three Months Ended Six Months Ended

July 31, 2021 August 1, 2020 July 31, 2021 August 1, 2020

Beginning store count 1,909 1,871 1,897 1,868

Opened 2 — 14 3

Closed (2) — (2) —

Ending store count 1,909 1,871 1,909 1,871

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

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

July 31, 2021 January 30, 2021 August 1, 2020 July 31, 2021 January 30, 2021 August 1, 2020

170,000 or more sq.

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Net Interest Expense

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 interest expense was $104 million and $212 million for the three and six months ended July 31, 2021, respectively, compared with $122 million and $239 million, respectively, in the comparable prior-year period.

The decrease in net interest expense was primarily due to lower average debt balances for the three and six months ended July 31, 2021, compared with the prior-year periods.

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.

Net Other (Income) / Expense was $(7) million and $(350) million for the three and six months ended July 31, 2021, respectively, compared with $(11) million and $11 million, respectively, in the comparable prior-year periods.

The increase for the six months ended July 31, 2021, 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 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.

Our effective income tax rate for the three and six months ended July 31, 2021, was 23.4 percent and 21.4 percent, respectively, compared w ith 22.8 percent and 21.6 percent, respectively, in the comparable prior-year periods, reflecting significantly higher earnings during the current-year periods which diluted the tax rate impact of fixed deductions and discrete items.

The effective tax rate impact of higher earnings for the six months ended July 31, 2021, was offset by the resolution of certain income tax matters during the first quarter.

TARGET CORPORATION

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Reconciliation of Non-GAAP Adjusted EPS Three Months Ended

May 1, 2021 May 2, 2020

July 31, 2021 August 1, 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 $ 3.65 $ 3.35

Gain on investment (a)

$ — $ — $ — $ (9) $ (6) $ (0.01)

(5) (4) (0.01) 25 18 0.04

Adjusted diluted earnings per share $ 3.64 $ 3.38

Reconciliation of Non-GAAP Adjusted EPS Six Months Ended

July 31, 2021 August 1, 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 $ 7.82 $ 3.91

Gain on Dermstore sale $ (335) $ (269) $ (0.54) $ — $ — $ —

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Amounts may not foot due to rounding.

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

(a) Represented a (gain) / 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.

(b) Includes civil unrest-related losses, net of associated insurance recoveries, and headquarters office space impairments, none of which were individually significant.

TARGET CORPORATION

Q2 2021 Form 10-Q 19

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Notes

Earnings before interest expense and income taxes (EBIT) and earnings before interest expense, income taxes, depreciation, and amortization (EBITDA) are non-GAAP financial measures.

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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

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

EBIT and EBITDA Three Months Ended Six Months Ended

(dollars in millions) July 31, 2021 August 1, 2020 Change July 31, 2021 August 1, 2020 Change

Net earnings $ 1,817 $ 1,690 7.4 % $ 3,914 $ 1,974 98.2 %

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+ Total depreciation and amortization (a)

633 604 4.9 1,300 1,245 4.5

EBITDA $ 3,107 $ 2,915 6.6 % $ 6,491 $ 4,002 62.2 %

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Trailing Twelve Months

Numerator May 1, 2021 May 2, 2020

Numerator July 31, 2021 August 1, 2020

Operating income $ 8,611 $ 4,968

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Net operating profit after taxes $ 7,123 $ 3,951

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

Denominator July 31, 2021 August 1, 2020 August 3, 2019

Current portion of long-term debt and other borrowings $ 1,190 $ 109 $ 1,153

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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, 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.

(b) Calculated using the effective tax rates, which were 21.2 percent and 21.4 percent for the trailing twelve months ended July 31, 2021, and August 1, 2020, respectively.

For the trailing twelve months ended July 31, 2021, and August 1, 2020, includes tax effect of $1.9 billion and $1.1 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.

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

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 cash and cash equivalents balance was $7.4 billion, $8.5 billion, and $7.3 billion as of July 31, 2021, January 30, 2021, and August 1, 2020, respectively.

Our cash and cash equivalents balance includes short-term investments of $6.4 billion, $7.6 billion, and $6.4 billion as of July 31, 2021, January 30, 2021, and August 1, 2020, respectively.

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

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Operating Cash Flows

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.

Cash flows provided by operating activities were $3.4 billion for the six months ended July 31, 2021, compared with $5.1 billion for the six months ended August 1, 2020 .

For the six months ended July 31, 2021, operating cash flows reflect stronger operating results, offset by increased inventory investment and higher net settlement of accounts payable, compared with the six months ended August 1, 2020.

Additionally, operating cash flows for 2021 reflect a $1.2 billion increase in income tax payments.

Inventory was $11.3 billion as of July 31, 2021, compared with $10.7 billion and $8.9 billion at January 30, 2021, and August 1, 2020, respectively.

The increase over the balance as of August 1, 2020, reflects efforts to align inventory with sales trends.

Additionally, the lower inventory balance as of August 1, 2020, reflected the impact of elevated sell-through rates in longer lead-time merchandise categories.

Investing Cash Flows

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.

Investing cash flows included capital investments of $1.3 billion and $1.4 billion for the six months ended July 31, 2021, and August 1, 2020, respectively.

We now expect full-year capital investments of approximately $3.5 billion compared with our previous expectation of $4 billion, reflecting the re-timing of some projects into next year.

F or the six months ended July 31, 2021, investing cash flows includes $356 million of proceeds from the sale of Dermstore.

We paid dividends totaling $336 million ($0.68 per share) and $676 million ($1.36 per share) for the three and six months ended July 31, 2021, respectively, and $330 million ($0.66 per share) and $662 million ($1.32 per share) for the three and six months ended August 1, 2020, respectively, a per share increase of 3.0 percent.

We declared dividends totaling $445 million ($0.90 per share) during the second quarter of 2021 and $344 million ($0.68 per share) during the second quarter of 2020, a per share increase of 32.4 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.

We returned $2.7 billion to shareholders through share repurchase during the six months ended July 31, 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.

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

As of July 31, 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.

Fitch raised our long-term debt rating from A- to A during the three months ended July 31, 2021.

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.

No balances were outstanding at any time during the six months ended July 31, 2021, an d August 1, 2020.

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

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

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.

Additionally, as of July 31, 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.

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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-Q

Item 2. Management’s Discussion and Analysis