What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-03-09 compared with 2021-03-10 · 120 added, 133 removed, 308 unchanged (45% of the section changed)

1 unchanged sentence

Executive Overview

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

• 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 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 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:

We continue 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.

During 2021, in support of our enterprise strategy described in Item 1 on page 2 of this Form 10-K, we

• Expanded our digital fulfillment capabilities, including adding permanent storage capacity in more than 200 high-volume stores, adding thousands of new items to the list available for Order Pickup and Drive Up, and doubling the number of Drive Up parking stalls compared with last year.

During 2021, over 50 percent of our digital sales were fulfilled by our same-day fulfillment options:

Order Pickup, Drive Up, and delivery via Shipt.

• Continued the steady stream of newness across our assortment and continued to introduce new owned brands, including our arts and crafts owned brand, Mondo Llama TM , our sweet and savory food brand, Favorite Day TM , our pet food brand, Kindfull TM , and our first dedicated storage and home organization owned brand, Brightroom TM .

For the first time in history, 11 brands delivered $1 billion or more in sales, with 4 brands delivering over $2 billion in sales, driven by strength in Apparel, Home Furnishings & Decor and Food & Beverage.

• Launched Ulta Beauty at Target on Target.com and in about 100 Target locations, and expanded our Apple and Disney experiences.

• Remodeled 145 stores.

• Opened 32 new stores, including 28 additional small format stores in key urban markets and on college campuses.

• Invested significantly in our team, including recognition bonuses and launch of a new debt-free education assistance program.

Financial Summary

3 unchanged sentences

• Total revenue increased 13.3 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 sales increased 12.7 percent, driven by a 12.3 percent increase in traffic.

◦ Comparable store originated sales grew 11.0 percent.

◦ Comparable digital originated sales increased 145 percent.

◦ Comparable digitally originated sales increased 20.8 percent.

• Operating income of $8.9 billion was 36.8 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.

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

Sales were $104.6 billion for 2021, an increase of $12.2 billion, or 13.2 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

2020 Form 10-K 17

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

EXECUTIVE OVERVIEW & FINANCIAL SUMMARY Index to Financial Statements

Operating cash flow provided by continuing operations was $8.6 billion for 2021, a decrease of $(1.9) billion, or (18.1) percent, from $10.5 billion for 2020.

The drivers of the operating cash flow decrease are described on page 2 7 .

Earnings Per Share From

10 unchanged sentences

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

For the trailing twelve months ended January 29, 2022, after-tax ROIC was 33.1 percent, compared with 23.5 percent for the trailing twelve months ended January 30, 2021.

The calculation of ROIC is provided on page 26 .

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

2 unchanged sentences

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.

The COVID-19 pandemic continues to evolve.

In 2020 and 2021, governments took various measures in response to COVID-19, such as 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.

Supply Chain Disruptions

In recent months, we have seen increasing supply chain disruptions.

In addition to country of origin production delays, trucker and dockworker shortages, a broad-based surge in consumer demand, and other factors have led to industry-wide U.S.

port and ground transportation delays.

In response, we have taken various actions, including ordering merchandise earlier, securing ocean freight routes, and increased use of air transport for certain merchandise.

Some of these supply chain disruptions and resulting actions have resulted in increased costs.

The Gross Margin Rate analysis on page 22 provides 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.

In February 2021, we sold Dermstore LLC (Dermstore) for $356 million in cash and recognized a $335 million pretax gain, which is included in Net Other (Income) / Expense.

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

17 unchanged sentences

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

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.

A discussion regarding Results of Operations and Analysis of Financial Condition for 2020, as compared to 2019, is included in Part II , Item 7 , MD&A to our Annual Report on Form 10-K for the year ended January 30, 2021.

TARGET CORPORATION

12 unchanged sentences

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.

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 (number of transactions, or "traffic") and the amount spent each visit (average transaction amount).

Comparable Sales 2021 2020 2019

1 unchanged sentence

Drivers of change in comparable sales

Number of transactions 3.7 2.7 5.0

Number of transactions (traffic) 12.3 3.7 2.7

Average transaction amount 0.4 15.0 0.7

Contribution to Comparable Sales Change 2020 2019 2018

Stores originated channel comparable sales change

7.2 % 1.4 % 3.2 %

Contribution from digitally originated sales to comparable sales

Total comparable sales change 19.3 % 3.4 % 5.0 %

Amounts may not foot due to rounding.

Comparable Sales by Channel 2021 2020 2019

Stores originated comparable sales change 11.0 % 7.2 % 1.4 %

Digitally originated comparable sales change 20.8 144.7 28.6

Sales by Channel 2021 2020 2019

2 unchanged sentences

Total 100 % 100 % 100 %

TARGET CORPORATION

2020 Form 10-K 20

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF OPERATIONS Index to Financial Statements

Sales by Fulfillment Channel 2021 2020 2019

Stores 96.4 % 96.0 % 97.2 %

Other 3.6 4.0 2.8

Total 100 % 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 2021 2020 2019

5 unchanged sentences

Total 100 % 100 % 100 %

TARGET CORPORATION

2021 Form 10-K 21

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF OPERATIONS Index to Financial Statements

Note 4 to the Financial Statements provides additional product category sales information.

15 unchanged sentences

Our gross margin rate was 28.3 percent in 2021 and 28.4 percent in 2020.

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.

This decrease reflected the net impact of

• supply chain pressure related to increased compensation and headcount in our distribution centers, partially offset by the small net benefit of a higher percentage of digital sales fulfilled through our lower-cost same-day fulfillment options

• higher merchandise and freight costs partially offset by historically low promotional and clearance markdown rates;

• favorable mix in the relative growth rates of higher and lower margin categories.

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

Our SG&A expense rate was 18.6 percent in 2021, compared with 19.9 percent in 2020, reflecting the leverage benefit from strong revenue growth.

TARGET CORPORATION

2 unchanged sentences

ANALYSIS OF OPERATIONS Index to Financial Statements

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

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 2021 2020

4 unchanged sentences

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

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

January 29, 2022 January 30, 2021 January 29, 2022 January 30, 2021

170,000 or more sq.

5 unchanged sentences

Total 1,926 1,897 243,284 241,648

(a) In thousands, reflects total square feet less office, distribution center, and vacant space.

(a) In thousands;

reflects total square feet less office, distribution center, and vacant space.

Other Performance Factors

Net Interest Expense

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

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

Net interest expense was $421 million for 2021, compared with $977 million for 2020, which included a $512 million loss on early debt retirement.

Net Other (Income) / Expense

Net Other (Income) / Expense was $(382) million and $16 million for 2021 and 2020, respectively.

2021 included the $335 million gain on the February 2021 sale of Dermstore.

Provision for Income Taxes

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.

Our 2021 effective income tax rate was 22.0 percent compared with 21.2 percent in 2020.

The rate increase was driven by significantly higher pretax earnings, which diluted the tax-rate benefit of fixed and discrete tax items.

Note 19 to the Financial Statements provides additional information.

16 unchanged sentences

$ 14.10 $ 8.64 $ 6.34

Gain on Dermstore Sale $ (335) $ (269) $ (0.55) $ — $ — $ — $ — $ — $ —

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

2 unchanged sentences

9 7 0.01 28 20 0.04 (17) (13) (0.02)

28 20 0.04 (17) (13) (0.02) — — —

Other income tax matters (d)

Income tax matters (c)

— — — — (21) (0.04) — — —

2 unchanged sentences

Amounts may not foot due to rounding.

(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.

(a) Represents a loss on our investment in Casper Sleep Inc., which is not core to our continuing operations.

(b) Other items unrelated to current period operations, none of which were individually significant.

TARGET CORPORATION

2021 Form 10-K 24

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Financial Statements

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.

24 unchanged sentences

Trailing Twelve Months

January 30, 2021 February 1, 2020

January 29, 2022 January 30, 2021

Operating income

5 unchanged sentences

Net operating profit after taxes $ 7,342 $ 5,206

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

January 29, 2022 January 30, 2021 February 1, 2020

Current portion of long-term debt and other borrowings $ 171 $ 1,144 $ 161

11 unchanged sentences

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 21.2 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.

(b) Calculated using the effective tax rates for continuing operations, which were 22.0 percent and 21.2 percent for the trailing twelve months ended January 29, 2022, and January 30, 2021, respectively.

For the trailing twelve months ended January 29, 2022, and January 30, 2021, includes tax effect of $2.1 billion and $1.4 billion, respectively, related to EBIT, and $19 million and $18 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.

11 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 year-end cash and cash equivalents balance decreased to $5.9 billion from $8.5 billion in 2020.

Our cash and cash equivalents balance includes short-term investments of $5.0 billion and $7.6 billion as of January 29, 2022, and January 30, 2021, respectively.

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

2 unchanged sentences

Operating Cash Flows

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.

Cash flows provided by operating activities were $8.6 billion in 2021 compared with $10.5 billion in 2020.

For 2021, operating cash flows reflect stronger operating results, offset by increased inventory investment and lower accounts payable leverage, compared with 2020.

Additionally, operating cash flows for 2021 reflect a $1.0 billion increase in income tax payments.

Year-end inventory was $13.9 billion, compared with $10.7 billion in 2020.

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

The increase in inventory levels reflect our efforts to align inventory with sales trends, and elevated in-transit inventory related to import supply chain delays.

TARGET CORPORATION

3 unchanged sentences

Capital Expenditures

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.

Amounts may not foot due to rounding.

Capital expenditures increased in 2021 from the prior year as we invested in our strategic initiatives, including store remodels, some of which were delayed in 2020, new store openings, and supply chain projects.

Beyond full-store remodels, we invested in optimizing front-end space in high-volume locations to increase the efficiency of our Same-Day Services, and built-out about 100 Ulta Beauty shop-in-shops.

We have completed over 900 full-store remodels since the launch of the current program in 2017, including 145 in 2021.

In addition to these cash investments, we entered into leases related to new stores in 2021, 2020, and 2019 with total future minimum lease payments of $401 million, $764 million, and $669 million, respectively, and new leases related to our supply chain with total future minimum lease payments of $226 million, $442 million, and $185 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 expect capital expenditures in 2022 of approximately $4.0 billion to $5.0 billion to support remodels, new stores, and supply chain projects.

Supply chain projects will add replenishment capacity and modernize our network, including the use of sortation centers to enhance our last-mile delivery capabilities.

We expect to complete approximately 200 full-store remodels, open 25 to 30 new stores, and add more than 250 Ulta Beauty shop-in-shops during 2022.

Additionally, we will continue to invest in optimizing front-end space.

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

3 unchanged sentences

Share Repurchases

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

During 2021 and 2020 we returned $7.2 billion and $609 million, 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.

3 unchanged sentences

ANALYSIS OF FINANCIAL CONDITION Index to Financial Statements

Subsequent to year-end, we entered into an accelerated share repurchase arrangement to repurchase up to $2.75 billion of our common stock.

Under the agreement, we paid $2.75 billion and received an initial delivery of 8.9 million shares, subject to a final settlement of cash or additional shares in the second quarter of 2022.

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.

8 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.

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 2020 or 2019.

Fitch raised our long-term debt rating from A- to A during 2021.

In 2021, we issued $2.0 billion of debt, and we repaid $1.1 billion of debt at maturity.

In 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.

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

3 unchanged sentences

Note 16 to the Financial Statements provides additional information.

Future Cash Requirements

We enter into contractual obligations in the ordinary course of business that may require future cash payments.

Such obligations include, but are not limited to, purchase commitments, debt service, leasing arrangements, and liabilities related to deferred compensation and pensions.

The Notes to the Consolidated Financial Statements provide additional information.

We believe our sources of liquidity, namely operating cash flows, credit facility capacity, and access to capital markets, will continue to be adequate to meet our contractual obligations, working capital and capital expenditure requirements, finance anticipated expansion and strategic initiatives, fund debt maturities, pay dividends, and execute purchases under our share repurchase program for the foreseeable future.

TARGET CORPORATION

2021 Form 10-K 29

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF FINANCIAL CONDITION Index to Financial Statements

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and apply judgments that affect the reported amounts.

In the Notes to Consolidated Financial Statements , we describe the significant accounting policies used in preparing the consolidated financial statements.

Our management has discussed the development, selection, and disclosure of our critical accounting estimates with the Audit & Finance Committee of our Board of Directors.

In the Notes to the Consolidated Financial Statements , we describe the significant accounting policies used in preparing the consolidated financial statements.

Our management has discussed the development, selection, and disclosure of our critical accounting estimates with the Audit & Risk Committee of our Board of Directors.

The following items require significant estimation or judgment:

8 unchanged sentences

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

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.

Inventory was $13.9 billion and $10.7 billion as of January 29, 2022, and January 30, 2021, respectively, and is further described in Note 10 to the Financial Statements.

Vendor income:

2 unchanged sentences

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

Vendor income receivable was $518 million and $504 million as of January 29, 2022, and January 30, 2021, respectively.

Vendor income is described further in Note 6 to the Financial Statements.

2 unchanged sentences

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.

An impairment loss is 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.

We estimate fair value by obtaining market appraisals, obtaining valuations from third-party brokers, or using other valuation techniques.

7 unchanged sentences

other liabilities referred to above are not discounted.

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

Our workers' compensation and general liability accrual was $519 million and $510 million as of January 29, 2022, and January 30, 2021, respectively.

We believe that the amounts accrued are appropriate;

4 unchanged sentences

We maintain insurance coverage to limit our exposure to certain events, including network security matters.

TARGET CORPORATION

2021 Form 10-K 30

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

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

Income taxes:

3 unchanged sentences

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 $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.

Liabilities for uncertain tax positions, including interest and penalties, were $138 million and $193 million as of January 29, 2022, and January 30, 2021, respectively.

We believe the resolution of these matters will not materially affect our consolidated financial statements.

Income taxes are described further in Note 19 to the Financial Statements.

8 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.

A 1 percentage point decrease to the weighted average discount rate would increase annual expense by $59 million.

A 1 percentage point decrease in the weighted average discount rate would increase annual expense by $62 million.

Based on our experience, we use a graduated compensation growth schedule that assumes higher compensation growth for younger, shorter-service pension-eligible team members than it does for older, longer-service pension-eligible team members.

2 unchanged sentences

We believe the accruals recorded in our consolidated financial statements properly reflect loss exposures that are both probable and reasonably estimable.

We do not believe any of the currently identified claims or litigation may materially affect our results of operations, cash flows, or financial condition.

We do not believe any of the currently identified claims or litigation will materially affect our results of operations, cash flows, or financial condition.

However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur.

3 unchanged sentences

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

TARGET CORPORATION

2021 Form 10-K 31

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

FORWARD LOOKING STATEMENTS & QUANTITATIVE AND QUALITATIVE DISCLOSURES Index to Financial Statements

Forward-Looking Statements

7 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