TARGET CORP 10-Q

Item 1. Financial Statements Consolidated Statements of Operations Three Months Ended Nine Months Ended (millions, except per share data) (unaudited) October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Sales $ 25,290 $ 22,336 $ 73,995 $ 64,403 Other revenue 362 296 1,014 819 Total revenue 25,652 22,632 75,009 65,222 Cost of sales 18,206 15,509 52,202 45,692 Selling, general and administrative expenses 4,859 4,647 14,217 13,167 Depreciation and amortization (exclusive of depreciation included in cost of sales) 577 541 1,739 1,660 Operating income 2,010 1,935 6,851 4,703 Net interest expense 105 632 317 871 Net other (income) / expense ( 6 ) 5 ( 356 ) 16 Earnings before income taxes 1,911 1,298 6,890 3,816 Provision for income taxes 423 284 1,488 828 Net earnings $ 1,488 $ 1,014 $ 5,402 $ 2,988 Basic earnings per share $ 3.07 $ 2.02 $ 10.97 $ 5.97 Diluted earnings per share $ 3.04 $ 2.01 $ 10.87 $ 5.91 Weighted average common shares outstanding Basic 484.8 500.6 492.2 500.6 Diluted 489.4 505.4 496.8 505.2 Antidilutive shares — — — — See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q3 2021 Form 10-Q 1 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Comprehensive Income Three Months Ended Nine Months Ended (millions) (unaudited) October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Net earnings $ 1,488 $ 1,014 $ 5,402 $ 2,988 Other comprehensive income, net of tax Pension benefit liabilities 21 22 63 66 Currency translation adjustment and cash flow hedges 5 14 6 5 Other comprehensive income 26 36 69 71 Comprehensive income $ 1,514 $ 1,050 $ 5,471 $ 3,059 See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q3 2021 Form 10-Q 2 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Financial Position (millions, except footnotes) (unaudited) October 30, 2021 January 30, 2021 October 31, 2020 Assets Cash and cash equivalents $ 5,753 $ 8,511 $ 5,996 Inventory 14,958 10,653 12,712 Other current assets 1,865 1,592 1,601 Total current assets 22,576 20,756 20,309 Property and equipment Land 6,146 6,141 6,063 Buildings and improvements 32,478 31,557 31,398 Fixtures and equipment 6,144 5,914 5,843 Computer hardware and software 2,447 2,765 2,706 Construction-in-progress 1,302 780 518 Accumulated depreciation ( 20,602 ) ( 20,278 ) ( 19,755 ) Property and equipment, net 27,915 26,879 26,773 Operating lease assets 2,539 2,227 2,208 Other noncurrent assets 1,381 1,386 1,371 Total assets $ 54,411 $ 51,248 $ 50,661 Liabilities and shareholders’ investment Accounts payable $ 16,250 $ 12,859 $ 14,203 Accrued and other current liabilities 5,925 6,122 5,023 Current portion of long-term debt and other borrowings 1,176 1,144 131 Total current liabilities 23,351 20,125 19,357 Long-term debt and other borrowings 11,586 11,536 12,490 Noncurrent operating lease liabilities 2,494 2,218 2,196 Deferred income taxes 1,246 990 1,171 Other noncurrent liabilities 1,931 1,939 2,128 Total noncurrent liabilities 17,257 16,683 17,985 Shareholders’ investment Common stock 40 42 42 Additional paid-in capital 6,381 6,329 6,285 Retained earnings 8,069 8,825 7,789 Accumulated other comprehensive loss ( 687 ) ( 756 ) ( 797 ) Total shareholders’ investment 13,803 14,440 13,319 Total liabilities and shareholders’ investment $ 54,411 $ 51,248 $ 50,661 Common Stock Authorized 6,000,000,000 shares, $ 0.0833 par value; 480,905,493 , 500,877,129 and 500,754,729 shares issued and outstanding as of October 30, 2021, January 30, 2021, and October 31, 2020, respectively. Preferred Stock Authorized 5,000,000 shares, $ 0.01 par value; no shares were issued or outstanding during any period presented. See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q3 2021 Form 10-Q 3 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Cash Flows Nine Months Ended (millions) (unaudited) October 30, 2021 October 31, 2020 Operating activities Net earnings $ 5,402 $ 2,988 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization 1,952 1,848 Share-based compensation expense 187 161 Deferred income taxes 233 26 Gain on Dermstore sale ( 335 ) — Loss on extinguishment of debt — 512 Noncash losses / (gains) and other, net 18 124 Changes in operating accounts: Inventory ( 4,305 ) ( 3,720 ) Other assets ( 117 ) ( 174 ) Accounts payable 3,284 4,287 Accrued and other liabilities ( 722 ) 992 Cash provided by operating activities 5,597 7,044 Investing activities Expenditures for property and equipment ( 2,483 ) ( 2,009 ) Proceeds from disposal of property and equipment 23 27 Proceeds from Dermstore sale 356 — Other investments 14 ( 3 ) Cash required for investing activities ( 2,090 ) ( 1,985 ) Financing activities Additions to long-term debt — 2,480 Reductions of long-term debt ( 112 ) ( 2,395 ) Dividends paid ( 1,116 ) ( 1,002 ) Repurchase of stock ( 5,042 ) ( 741 ) Stock option exercises 5 18 Cash required for financing activities ( 6,265 ) ( 1,640 ) Net (decrease) / increase in cash and cash equivalents ( 2,758 ) 3,419 Cash and cash equivalents at beginning of period 8,511 2,577 Cash and cash equivalents at end of period $ 5,753 $ 5,996 Supplemental information Leased assets obtained in exchange for new finance lease liabilities $ 234 $ 344 Leased assets obtained in exchange for new operating lease liabilities 482 186 See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q3 2021 Form 10-Q 4 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Shareholders’ Investment Common Stock Additional Accumulated Other Stock Par Paid-in Retained Comprehensive (millions) (unaudited) Shares Value Capital Earnings (Loss) / Income Total February 1, 2020 504.2 $ 42 $ 6,226 $ 6,433 $ ( 868 ) $ 11,833 Net earnings — — — 284 — 284 Other comprehensive income — — — — 14 14 Dividends declared — — — ( 333 ) — ( 333 ) Repurchase of stock ( 5.7 ) — — ( 609 ) — ( 609 ) Stock options and awards 1.4 — ( 20 ) — — ( 20 ) May 2, 2020 499.9 $ 42 $ 6,206 $ 5,775 $ ( 854 ) $ 11,169 Net earnings — — — 1,690 — 1,690 Other comprehensive income — — — — 21 21 Dividends declared — — — ( 344 ) — ( 344 ) Stock options and awards 0.4 — 42 — — 42 August 1, 2020 500.3 $ 42 $ 6,248 $ 7,121 $ ( 833 ) $ 12,578 Net earnings — — — 1,014 — 1,014 Other comprehensive income — — — — 36 36 Dividends declared — — — ( 346 ) — ( 346 ) Stock options and awards 0.5 — 37 — — 37 October 31, 2020 500.8 $ 42 $ 6,285 $ 7,789 $ ( 797 ) $ 13,319 Net earnings — — — 1,380 — 1,380 Other comprehensive income — — — — 41 41 Dividends declared — — — ( 344 ) — ( 344 ) Stock options and awards 0.1 — 44 — — 44 January 30, 2021 500.9 $ 42 $ 6,329 $ 8,825 $ ( 756 ) $ 14,440 TARGET CORPORATION Q3 2021 Form 10-Q 5 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Shareholders’ Investment Common Stock Additional Accumulated Other Stock Par Paid-in Retained Comprehensive (millions) (unaudited) Shares Value Capital Earnings (Loss) / Income Total January 30, 2021 500.9 $ 42 $ 6,329 $ 8,825 $ ( 756 ) $ 14,440 Net earnings — — — 2,097 — 2,097 Other comprehensive income — — — — 31 31 Dividends declared — — — ( 343 ) — ( 343 ) Repurchase of stock ( 6.1 ) ( 1 ) — ( 1,207 ) — ( 1,208 ) Stock options and awards 1.3 — ( 58 ) — — ( 58 ) May 1, 2021 496.1 $ 41 $ 6,271 $ 9,372 $ ( 725 ) $ 14,959 Net earnings — — — 1,817 — 1,817 Other comprehensive income — — — — 12 12 Dividends declared — — — ( 445 ) — ( 445 ) Repurchase of stock ( 6.6 ) — — ( 1,544 ) — ( 1,544 ) Stock options and awards 0.2 — 61 — — 61 July 31, 2021 489.7 $ 41 $ 6,332 $ 9,200 $ ( 713 ) $ 14,860 Net earnings — — — 1,488 — 1,488 Other comprehensive income — — — — 26 26 Dividends declared — — — ( 439 ) — ( 439 ) Repurchase of stock ( 8.8 ) ( 1 ) — ( 2,180 ) — ( 2,181 ) Stock options and awards — — 49 — — 49 October 30, 2021 480.9 $ 40 $ 6,381 $ 8,069 $ ( 687 ) $ 13,803 We declared $ 0.90 and $ 0.68 dividends per share for the three months ended October 30, 2021, and October 31, 2020, respectively, and $ 2.70 per share for the fiscal year ended January 30, 2021. See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q3 2021 Form 10-Q 6 FINANCIAL STATEMENTS Table of Contents INDEX Index to Notes INDEX TO NOTES Notes to Consolidated Financial Statements 7 Note 1 Accounting Policies 8 Note 2 Coronavirus (COVID-19) 8 Note 3 Dermstore Sale 8 Note 4 Revenues 9 Note 5 Fair Value Measurements 10 Note 6 Property and Equipment 10 Note 7 Commercial Paper and Long-Term Debt 10 Note 8 Derivative Financial Instruments 10 Note 9 Share Repurchase 11 Note 10 Pension Benefits 11 Note 11 Accumulated Other Comprehensive Loss 12 TARGET CORPORATION Q3 2021 Form 10-Q 7 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes Notes to Consolidated Financial Statements (unaudited) 1. Accounting Policies These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations of the Securities and Exchange Commission applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by United States generally accepted accounting principles (U.S. GAAP) for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statement disclosures in our 2020 Form 10-K. We use the same accounting policies in preparing quarterly and annual financial statements. We operate as a single segment that is designed to enable guests to purchase products seamlessly in stores or through our digital channels. Nearly all of our revenues are generated in the U.S. The vast majority of our long-lived assets are located within the U.S. Due to the seasonal nature of our business, quarterly revenues, expenses, earnings, and cash flows are not necessarily indicative of the results that may be expected for the full year. 2. Coronavirus (COVID-19) The novel coronavirus (COVID-19) pandemic continues to evolve. In 2020, states and cities took various measures in response to COVID-19, including mandating the closure of certain businesses and encouraging or requiring citizens to avoid large gatherings. To date, virtually all of our stores, digital channels, and distribution centers have remained open. 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. Note 4 presents sales by category. We have taken various actions, including accelerating purchases of certain merchandise in our core categories and, early in the pandemic, slowing or canceling purchase orders, primarily for Apparel and Accessories. As a result, during the quarter ended May 2, 2020, we recorded $ 216 million of purchase order cancellation fees in Cost of Sales. 3. Dermstore Sale In February 2021, we sold our wholly owned subsidiary Dermstore LLC (Dermstore) for $ 356 million in cash and recognized a $ 335 million pretax gain, which is included in Net Other (Income) / Expense. Dermstore has historically represented less than 1 percent of our consolidated revenues, operating income, and net assets. TARGET CORPORATION Q3 2021 Form 10-Q 8 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes 4. Revenues General merchandise sales represent the vast majority of our revenues. We also earn revenues from a variety of other sources, most notably credit card profit-sharing income from our arrangement with TD Bank Group (TD). Revenues Three Months Ended Nine Months Ended (millions) October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Apparel and accessories (a) $ 4,364 $ 3,927 $ 13,384 $ 10,630 Beauty and household essentials (b) 6,980 6,103 20,070 18,172 Food and beverage (c) 5,074 4,397 14,617 13,158 Hardlines (d) 3,841 3,377 11,654 9,959 Home furnishings and décor (e) 4,989 4,506 14,147 12,395 Other 42 26 123 89 Sales 25,290 22,336 73,995 64,403 Credit card profit sharing 184 164 527 488 Other 178 132 487 331 Other revenue 362 296 1,014 819 Total revenue $ 25,652 $ 22,632 $ 75,009 $ 65,222 (a) Includes apparel for women, men, boys, girls, toddlers, infants and newborns, as well as jewelry, accessories, and shoes. (b) Includes beauty and personal care, baby gear, cleaning, paper products, and pet supplies. (c) Includes dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and food service in our stores. (d) Includes electronics (including video game hardware and software), toys, entertainment, sporting goods, and luggage. (e) Includes furniture, lighting, storage, kitchenware, small appliances, home décor, bed and bath, home improvement, school and office supplies, greeting cards and party supplies, and other seasonal merchandise. Merchandise sales — We record almost all retail store revenues at the point of sale. Digitally originated sales may include shipping revenue and are recorded upon delivery to the guest or upon guest pickup at the store. Sales are recognized net of expected returns, which we estimate using historical return patterns. As of October 30, 2021, January 30, 2021, and October 31, 2020, the accrual for estimated returns was $ 210 million, $ 139 million, and $ 182 million, respectively. Revenue from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance. Gift Card Liability Activity January 30, 2021 Gift Cards Issued During Current Period But Not Redeemed (b) Revenue Recognized From Beginning Liability October 30, 2021 (millions) Gift card liability (a) $ 1,035 $ 502 $ ( 631 ) $ 906 (a) Included in Accrued and Other Current Liabilities. (b) Net of estimated breakage. Credit card profit sharing — We receive payments under a credit card program agreement with TD. Under the agreement, we receive a percentage of the profits generated by the Target Credit Card and Target MasterCard receivables in exchange for performing account servicing and primary marketing functions. TD underwrites, funds, and owns Target Credit Card and Target MasterCard receivables, controls risk management policies, and oversees regulatory compliance. TARGET CORPORATION Q3 2021 Form 10-Q 9 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes 5. Fair Value Measurements Fair value measurements are reported in one of three levels reflecting the valuation techniques used to determine fair value. Financial Instruments Measured On a Recurring Basis Fair Value (millions) Classification Pricing Category October 30, 2021 January 30, 2021 October 31, 2020 Assets Short-term investments Cash and Cash Equivalents Level 1 $ 4,818 $ 7,644 $ 5,089 Prepaid forward contracts Other Current Assets Level 1 44 38 32 Equity securities Other Current Assets Level 1 — — 19 Interest rate swaps Other Current Assets Level 2 12 — — Interest rate swaps Other Noncurrent Assets Level 2 116 188 205 Liabilities Interest rate swaps Other Noncurrent Liabilities Level 2 — — 3 Significant Financial Instruments Not Measured at Fair Value (a) (millions) October 30, 2021 January 30, 2021 October 31, 2020 Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt, including current portion (b) $ 10,605 $ 12,300 $ 10,643 $ 12,787 $ 10,641 $ 12,787 (a) The carrying amounts of certain other current assets, commercial paper, accounts payable, and certain accrued and other current liabilities approximate fair value due to their short-term nature. (b) The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for the same or similar types of financial instruments and would be classified as Level 2. These amounts exclude commercial paper, unamortized swap valuation adjustments, and lease liabilities. 6. Property and Equipment We review long-lived assets for impairment when store performance expectations, events, or changes in circumstances—such as a decision to relocate or close a store, office, or distribution center, discontinue a project, or make significant software changes—indicate that the asset’s carrying value may not be recoverable. We recognized impairment charges of $ 3 million and $ 84 million during the three and nine months ended October 30, 2021, respectively. We recognized impairment charges of $ 2 million and $ 62 million during the three and nine months ended October 31, 2020, respectively. These impairment charges are included in Selling, General and Administrative Expenses (SG&A). 7. Commercial Paper and Long-Term Debt In October 2021, we obtained a committed $ 3.0 billion unsecured revolving credit facility that will expire in October 2026. This new facility replaced our $ 2.5 billion unsecured revolving credit facility that was set to expire in October 2023. No balances were outstanding under either credit facility at any time during 2021 or 2020. 8. Derivative Financial Instruments Our derivative instruments consist of interest rate swaps used to mitigate interest rate risk. As a result, we have counterparty credit exposure to large global financial institutions, which we monitor on an ongoing basis. Note 5 to the Consolidated Financial Statements provides the fair value and classification of these instruments. As of October 30, 2021, January 30, 2021, and October 31, 2020, we were party to interest rate swaps with notional amounts totaling $ 1.5 billion. We pay a floating rate and receive a fixed rate under each of these agreements. All of the agreements are designated as fair value hedges, and all were considered to be perfectly effective under the shortcut method during the three and nine months ended October 30, 2021, and October 31, 2020. TARGET CORPORATION Q3 2021 Form 10-Q 10 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes As of October 30, 2021, we were party to forward-starting interest rate swaps with notional amounts totaling $ 1.25 billion. As of January 30, 2021, and October 31, 2020, we were party to forward-starting interest rate swaps with notional amounts totaling $ 250 million. We use these derivative financial instruments, which have been designated as cash flow hedges, to hedge the interest rate exposure of anticipated future debt issuances during the next three years. As of October 30, 2021, Accumulated Other Comprehensive Loss (AOCI) included a gain of $ 15 million that will be reclassified and reduce Net Interest Expense as we record interest expense on the associated debt. Effect of Hedges on Debt (millions) October 30, 2021 January 30, 2021 October 31, 2020 Long-term debt and other borrowings Carrying amount of hedged debt $ 1,609 $ 1,677 $ 1,696 Cumulative hedging adjustments, included in carrying amount 114 183 203 Effect of Hedges on Net Interest Expense Three Months Ended Nine Months Ended (millions) October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Gain (loss) on fair value hedges recognized in Net Interest Expense Interest rate swap designated as fair value hedges $ ( 40 ) $ ( 36 ) $ ( 69 ) $ 66 Hedged debt 40 36 69 ( 66 ) Total $ — $ — $ — $ — 9. Share Repurchase We periodically repurchase shares of our common stock under a board-authorized repurchase program through a combination of open market transactions, accelerated share repurchase arrangements, and other privately negotiated transactions with financial institutions. Share Repurchase Activity Three Months Ended Nine Months Ended (millions, except per share data) October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Number of shares purchased 8.8 — 21.5 5.7 Average price paid per share $ 246.80 $ — $ 226.93 $ 107.58 Total investment $ 2,184 $ — $ 4,884 $ 609 10. Pension Benefits We provide pension plan benefits to eligible team members. Net Pension Benefits Expense Three Months Ended Nine Months Ended (millions) Classification October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020 Service cost benefits earned SG&A $ 25 $ 25 $ 73 $ 76 Interest cost on projected benefit obligation Net Other (Income) / Expense 24 30 72 89 Expected return on assets Net Other (Income) / Expense ( 60 ) ( 61 ) ( 178 ) ( 182 ) Amortization of losses Net Other (Income) / Expense 28 32 85 96 Amortization of prior service cost Net Other (Income) / Expense 2 ( 3 ) 1 ( 9 ) Settlement charges Net Other (Income) / Expense — 1 — 1 Total $ 19 $ 24 $ 53 $ 71 TARGET CORPORATION Q3 2021 Form 10-Q 11 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes 11. Accumulated Other Comprehensive Loss Change in Accumulated Other Comprehensive Loss Cash Flow Hedges Currency Translation Adjustment Pension Total (millions) January 30, 2021 $ ( 3 ) $ ( 18 ) $ ( 735 ) $ ( 756 ) Other comprehensive income (loss) before reclassifications, net of tax 7 ( 1 ) — 6 Amounts reclassified from AOCI, net of tax — — 63 63 October 30, 2021 $ 4 $ ( 19 ) $ ( 672 ) $ ( 687 ) TARGET CORPORATION Q3 2021 Form 10-Q 12 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents FINANCIAL SUMMARY Index to Notes