TARGET CORP 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm 35 Consolidated Statements of Operations 38 Consolidated Statements of Comprehensive Income 39 Consolidated Statements of Financial Position 40 Consolidated Statements of Cash Flows 41 Consolidated Statements of Shareholders' Investment 42 Notes to Consolidated Financial Statements 43 Note 1 Summary of Accounting Policies 43 Note 2 Coronavirus (COVID-19) 43 Note 3 Dermstore Sale 43 Note 4 Revenues 44 Note 5 Cost of Sales and Selling, General and Administrative Expenses 45 Note 6 Consideration Received from Vendors 46 Note 7 Advertising Costs 46 Note 8 Fair Value Measurements 46 Note 9 Cash and Cash Equivalents 47 Note 10 Inventory 47 Note 11 Other Current Assets 47 Note 12 Property and Equipment 48 Note 13 Other Noncurrent Assets 48 Note 14 Accrued and Other Current Liabilities 49 Note 1 5 Commitments and Contingencies 49 Note 1 6 Commercial Paper and Long-Term Debt 50 Note 1 7 Derivative Financial Instruments 51 Note 18 Leases 51 Note 19 Incomes Taxes 54 Note 20 Other Noncurrent Liabilities 56 Note 21 Share Repurchase 56 Note 22 Share-Based Compensation 56 Note 23 Defined Contribution Plans 58 Note 2 4 Pension Plans 59 Note 2 5 Accumulated Other Comprehensive Income 63 TARGET CORPORATION 2021 Form 10-K 34 FINANCIAL STATEMENTS Table of Contents REPORTS Index to Financial Statements Report of Management on the Consolidated Financial Statements Management is responsible for the consistency, integrity, and presentation of the information in the Annual Report. The consolidated financial statements and other information presented in this Annual Report have been prepared in accordance with accounting principles generally accepted in the United States and include necessary judgments and estimates by management. To fulfill our responsibility, we maintain comprehensive systems of internal control designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with established procedures. The concept of reasonable assurance is based upon recognition that the cost of the controls should not exceed the benefit derived. We believe our systems of internal control provide this reasonable assurance. The Board of Directors exercised its oversight role with respect to the Corporation's systems of internal control primarily through its Audit & Risk Committee, which is comprised of independent directors. The Committee oversees the Corporation's systems of internal control, accounting practices, financial reporting and audits to assess whether their quality, integrity, and objectivity are sufficient to protect shareholders' investments. In addition, our consolidated financial statements have been audited by Ernst & Young LLP, independent registered public accounting firm, whose report also appears on this page. /s/ Brian C. Cornell /s/ Michael J. Fiddelke Brian C. Cornell Chairman and Chief Executive Officer March 9, 2022 Michael J. Fiddelke Executive Vice President and Chief Financial Officer Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Target Corporation Opinion on the Financial Statements We have audited the accompanying consolidated statements of financial position of Target Corporation (the Corporation) as of January 29, 2022 and January 30, 2021, the related consolidated statements of operations, comprehensive income, cash flows and shareholders' investment for each of the three years in the period ended January 29, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation at January 29, 2022 and January 30, 2021, and the results of its operations and its cash flows for each of the three years in the period ended January 29, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Corporation's internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 9, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the Corporation’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. TARGET CORPORATION 2021 Form 10-K 35 FINANCIAL STATEMENTS Table of Contents REPORTS Index to Financial Statements Valuation of Inventory and related Cost of Sales Description of the Matter At January 29, 2022, the Corporation’s inventory was $13,902 million. As described in Note 10 to the consolidated financial statements, the Corporation accounts for the vast majority of its inventory under the retail inventory accounting method (RIM) using the last-in, first-out (LIFO) method. RIM is an averaging method that has been widely used in the retail industry due to its practicality. Under RIM, inventory cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the inventory retail value. Auditing inventory requires extensive audit effort including significant involvement of more experienced audit team members, including the involvement of our information technology (IT) professionals, given the relatively higher level of automation impacting the inventory process including the involvement of multiple information systems used to capture the high volume of transactions processed by the Corporation. Further, the inventory process is supported by a number of automated and IT dependent controls that elevate the importance of the IT general controls that support the underlying information systems utilized to process transactions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Corporation’s inventory process, including the underlying IT general controls. For example, we tested automated controls performed by the Corporation’s information systems and controls over the completeness of data transfers between information systems used in performing the Corporation’s RIM calculation. Our audit procedures included, among others, testing the processing scenarios of the automated controls by evaluating configuration settings and performing a transaction walkthrough for each scenario. Our audit procedures also included, among others, testing the key inputs into the RIM calculation, including purchases, sales, shortage, and price changes (markdowns) by comparing the key inputs back to source information such as third-party vendor invoices, third-party inventory count information and cash receipts. We performed extensive analytical procedures. For example, we performed multiple linear regression analysis to predict ending inventory values at each store and distribution center location, as well as predictive markdown analytics based on inquiries held with members of the merchant organization to assess the level of price changes within a category. In addition, we tested the existence of inventories by observing physical inventory counts for a sample of stores and distribution centers. Valuation of Vendor Income Receivables Description of the Matter At January 29, 2022, the Corporation’s vendor income receivables totaled $518 million. As discussed in Note 6 of the consolidated financial statements, the Corporation receives consideration for a variety of vendor-sponsored programs, which are primarily recorded as a reduction of cost of sales when earned. The Corporation records a receivable for amounts earned but not yet received. Auditing the Corporation's vendor income receivables was complex due to the estimation required in measuring the receivables. The estimate was sensitive to significant assumptions, such as forecasted vendor income collections, and estimating the time period over which the collections have been earned, which is primarily based on historical trending and data. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Corporation’s vendor income receivable process, including controls over management’s review of the significant assumptions described above. To test the estimated vendor income receivables, we performed audit procedures that included, among others, assessing the estimation methodology used by management and evaluating the forecasted vendor income collections and the time period over which collections have been earned as used in the receivable estimation model. For a sample of the vendor rebates and concessions, we evaluated the nature and source of the inputs used and the terms of the contractual agreements. We recalculated the amount of the vendor income earned based on the inputs and the terms of the agreements. In addition, we recalculated the time period over which the vendor income collection had been earned to assess the accuracy of management’s estimates. We also performed sensitivity analyses of significant assumptions to evaluate the significance of changes in the receivables that would result from changes in assumptions. /s/ Ernst & Young LLP We have served as the Corporation's auditor since 1931. Minneapolis, Minnesota March 9, 2022 TARGET CORPORATION 2021 Form 10-K 36 FINANCIAL STATEMENTS Table of Contents REPORTS Index to Financial Statements Report of Management on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we assessed the effectiveness of our internal control over financial reporting as of January 29, 2022, based on the framework in Internal Control—Integrated Framework (2013) , issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our assessment, we conclude that the Corporation's internal control over financial reporting is effective based on those criteria. Our internal control over financial reporting as of January 29, 2022, has been audited by Ernst & Young LLP, the independent registered public accounting firm who has also audited our consolidated financial statements, as stated in their report which appears on this page. /s/ Brian C. Cornell /s/ Michael J. Fiddelke Brian C. Cornell Chairman and Chief Executive Officer March 9, 2022 Michael J. Fiddelke Executive Vice President and Chief Financial Officer Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Target Corporation Opinion on Internal Control over Financial Reporting We have audited Target Corporation’s internal control over financial reporting as of January 29, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Target Corporation (the Corporation) maintained, in all material respects, effective internal control over financial reporting as of January 29, 2022, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Corporation as of January 29, 2022 and January 30, 2021, the related consolidated statements of operations, comprehensive income, cash flows and shareholders' investment for each of the three years in the period ended January 29, 2022, and the related notes and our report dated March 9, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Minneapolis, Minnesota March 9, 2022 TARGET CORPORATION 2021 Form 10-K 37 FINANCIAL STATEMENTS Table of Contents Index to Financial Statements Consolidated Statements of Operations (millions, except per share data) 2021 2020 2019 Sales $ 104,611 $ 92,400 $ 77,130 Other revenue 1,394 1,161 982 Total revenue 106,005 93,561 78,112 Cost of sales 74,963 66,177 54,864 Selling, general and administrative expenses 19,752 18,615 16,233 Depreciation and amortization (exclusive of depreciation included in cost of sales) 2,344 2,230 2,357 Operating income 8,946 6,539 4,658 Net interest expense 421 977 477 Net other (income) / expense ( 382 ) 16 ( 9 ) Earnings from continuing operations before income taxes 8,907 5,546 4,190 Provision for income taxes 1,961 1,178 921 Net earnings from continuing operations 6,946 4,368 3,269 Discontinued operations, net of tax — — 12 Net earnings $ 6,946 $ 4,368 $ 3,281 Basic earnings per share Continuing operations $ 14.23 $ 8.72 $ 6.39 Discontinued operations — — 0.02 Net earnings per share $ 14.23 $ 8.72 $ 6.42 Diluted earnings per share Continuing operations $ 14.10 $ 8.64 $ 6.34 Discontinued operations — — 0.02 Net earnings per share $ 14.10 $ 8.64 $ 6.36 Weighted average common shares outstanding Basic 488.1 500.6 510.9 Diluted 492.7 505.4 515.6 Antidilutive shares — — — Note: Per share amounts may not foot due to rounding. See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION 2021 Form 10-K 38 FINANCIAL STATEMENTS Table of Contents Index to Financial Statements Consolidated Statements of Comprehensive Income (millions) 2021 2020 2019 Net earnings $ 6,946 $ 4,368 $ 3,281 Other comprehensive income / (loss), net of tax Pension benefit liabilities 152 102 ( 65 ) Currency translation adjustment and cash flow hedges 51 10 2 Other comprehensive income / (loss) 203 112 ( 63 ) Comprehensive income $ 7,149 $ 4,480 $ 3,218 See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION 2021 Form 10-K 39 FINANCIAL STATEMENTS Table of Contents Index to Financial Statements Consolidated Statements of Financial Position (millions, except footnotes) January 29, 2022 January 30, 2021 Assets Cash and cash equivalents $ 5,911 $ 8,511 Inventory 13,902 10,653 Other current assets 1,760 1,592 Total current assets 21,573 20,756 Property and equipment Land 6,164 6,141 Buildings and improvements 32,985 31,557 Fixtures and equipment 6,407 5,914 Computer hardware and software 2,505 2,765 Construction-in-progress 1,257 780 Accumulated depreciation ( 21,137 ) ( 20,278 ) Property and equipment, net 28,181 26,879 Operating lease assets 2,556 2,227 Other noncurrent assets 1,501 1,386 Total assets $ 53,811 $ 51,248 Liabilities and shareholders' investment Accounts payable $ 15,478 $ 12,859 Accrued and other current liabilities 6,098 6,122 Current portion of long-term debt and other borrowings 171 1,144 Total current liabilities 21,747 20,125 Long-term debt and other borrowings 13,549 11,536 Noncurrent operating lease liabilities 2,493 2,218 Deferred income taxes 1,566 990 Other noncurrent liabilities 1,629 1,939 Total noncurrent liabilities 19,237 16,683 Shareholders' investment Common stock 39 42 Additional paid-in capital 6,421 6,329 Retained earnings 6,920 8,825 Accumulated other comprehensive loss ( 553 ) ( 756 ) Total shareholders' investment 12,827 14,440 Total liabilities and shareholders' investment $ 53,811 $ 51,248 Common Stock Authorized 6,000,000,000 shares, $ 0.0833 par value; 471,274,073 shares issued and outstanding as of January 29, 2022; 500,877,129 shares issued and outstanding as of January 30, 2021. 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 2021 Form 10-K 40 FINANCIAL STATEMENTS Table of Contents Index to Financial Statements Consolidated Statements of Cash Flows (millions) 2021 2020 2019 Operating activities Net earnings $ 6,946 $ 4,368 $ 3,281 Earnings from discontinued operations, net of tax — — 12 Net earnings from continuing operations 6,946 4,368 3,269 Adjustments to reconcile net earnings to cash provided by operations: Depreciation and amortization 2,642 2,485 2,604 Share-based compensation expense 228 200 147 Deferred income taxes 522 ( 184 ) 178 Gain on Dermstore sale ( 335 ) — — Loss on debt extinguishment — 512 10 Noncash losses / (gains) and other, net 67 86 29 Changes in operating accounts: Inventory ( 3,249 ) ( 1,661 ) 505 Other assets ( 78 ) ( 137 ) 18 Accounts payable 2,628 2,925 140 Accrued and other liabilities ( 746 ) 1,931 199 Cash provided by operating activities—continuing operations 8,625 10,525 7,099 Cash provided by operating activities—discontinued operations — — 18 Cash provided by operating activities 8,625 10,525 7,117 Investing activities Expenditures for property and equipment ( 3,544 ) ( 2,649 ) ( 3,027 ) Proceeds from disposal of property and equipment 27 42 63 Proceeds from Dermstore sale 356 — — Other investments 7 16 20 Cash required for investing activities ( 3,154 ) ( 2,591 ) ( 2,944 ) Financing activities Additions to long-term debt 1,972 2,480 1,739 Reductions of long-term debt ( 1,147 ) ( 2,415 ) ( 2,069 ) Dividends paid ( 1,548 ) ( 1,343 ) ( 1,330 ) Repurchase of stock ( 7,356 ) ( 745 ) ( 1,565 ) Stock option exercises 8 23 73 Cash required for financing activities ( 8,071 ) ( 2,000 ) ( 3,152 ) Net (decrease) / increase in cash and cash equivalents ( 2,600 ) 5,934 1,021 Cash and cash equivalents at beginning of period 8,511 2,577 1,556 Cash and cash equivalents at end of period $ 5,911 $ 8,511 $ 2,577 Supplemental information Interest paid, net of capitalized interest $ 414 $ 939 $ 492 Income taxes paid 2,063 1,031 696 Leased assets obtained in exchange for new finance lease liabilities 288 428 379 Leased assets obtained in exchange for new operating lease liabilities 580 262 464 See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION 2021 Form 10-K 41 FINANCIAL STATEMENTS Table of Contents Index to Financial Statements Consolidated Statements of Shareholders' Investment (millions) Common Stock Shares Stock Par Value Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive (Loss) / Income Total February 2, 2019 517.8 $ 43 $ 6,042 $ 6,017 $ ( 805 ) $ 11,297 Net earnings — — — 3,281 — 3,281 Other comprehensive loss — — — — ( 63 ) ( 63 ) Dividends declared — — — ( 1,345 ) — ( 1,345 ) Repurchase of stock ( 16.0 ) ( 1 ) — ( 1,520 ) — ( 1,521 ) Stock options and awards 2.4 — 184 — — 184 February 1, 2020 504.2 $ 42 $ 6,226 $ 6,433 $ ( 868 ) $ 11,833 Net earnings — — — 4,368 — 4,368 Other comprehensive income — — — — 112 112 Dividends declared — — — ( 1,367 ) — ( 1,367 ) Repurchase of stock ( 5.7 ) — — ( 609 ) — ( 609 ) Stock options and awards 2.4 — 103 — — 103 January 30, 2021 500.9 $ 42 $ 6,329 $ 8,825 $ ( 756 ) $ 14,440 Net earnings — — — 6,946 — 6,946 Other comprehensive income — — — — 203 203 Dividends declared — — — ( 1,655 ) — ( 1,655 ) Repurchase of stock ( 31.3 ) ( 3 ) — ( 7,196 ) — ( 7,199 ) Stock options and awards 1.7 — 92 — — 92 January 29, 2022 471.3 $ 39 $ 6,421 $ 6,920 $ ( 553 ) $ 12,827 We declared $ 3.38 , $ 2.70 , and $ 2.62 dividends per share for the twelve months ended January 29, 2022, January 30, 2021, and February 1, 2020, respectively. See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION 2021 Form 10-K 42 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements Notes to Consolidated Financial Statements 1. Summary of Accounting Policies Organization We are a general merchandise retailer selling products to our guests through our stores and digital channels. We operate as a single segment that includes all of our continuing operations, which are designed to enable guests to purchase products seamlessly in stores or through our digital channels. Nearly all of our revenues are generated in the United States (U.S.). The vast majority of our long-lived assets are located within the U.S. Consolidation The consolidated financial statements include the balances of Target and its subsidiaries after elimination of intercompany balances and transactions. All material subsidiaries are wholly owned. Use of estimates The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions affecting reported amounts in the consolidated financial statements and accompanying notes. Actual results may differ significantly from those estimates. Fiscal year Our fiscal year ends on the Saturday nearest January 31. Unless otherwise stated, references to years in this report relate to fiscal years, rather than to calendar years. Fiscal 2021, 2020, and 2019 ended January 29, 2022, January 30, 2021, and February 1, 2020, respectively, and consisted of 52 weeks. Fiscal 2022 will end January 28, 2023, and will consist of 52 weeks. Accounting policies Our accounting policies are disclosed in the applicable Notes to the Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform to the current-year presentation. 2. Coronavirus (COVID-19) 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 at times 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 of these actions, we recorded $ 226 million of purchase order cancellation fees in Cost of Sales in 2020. 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 represented less than 1 percent of our consolidated revenues, operating income and net assets. TARGET CORPORATION 2021 Form 10-K 43 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements 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 (millions) 2021 2020 2019 Apparel and accessories (a) $ 17,931 $ 14,772 $ 14,304 Beauty and household essentials (b) 27,268 24,461 20,616 Food and beverage (c) 20,306 18,135 15,039 Hardlines (d) 18,614 16,626 12,595 Home furnishings and décor (e) 20,255 18,231 14,430 Other 237 175 146 Sales 104,611 92,400 77,130 Credit card profit sharing 710 666 680 Other 684 495 302 Other revenue 1,394 1,161 982 Total revenue $ 106,005 $ 93,561 $ 78,112 (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/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. Total revenues do not include sales tax because we are a pass-through conduit for collecting and remitting sales taxes. Generally, guests may return national brand merchandise within 90 days of purchase and owned and exclusive brands within one year of purchase. Sales are recognized net of expected returns, which we estimate using historical return patterns and our expectation of future returns. As of January 29, 2022, and January 30, 2021, the liability for estimated returns was $ 165 million and $ 139 million, respectively. We routinely enter into arrangements with vendors whereby we do not purchase or pay for merchandise until the merchandise is ultimately sold to a guest. Under the vast majority of these arrangements, which represent less than 5 percent of consolidated sales, we record revenue and related costs gross. We concluded that we are the principal in these transactions for a number of reasons, most notably because we 1) control the overall economics of the transactions, including setting the sales price and realizing the majority of cash flows from the sale, 2) control the relationship with the customer, and 3) are responsible for fulfilling the promise to provide goods to the customer. Merchandise received under these arrangements is not included in Inventory because the purchase and sale of this inventory are virtually simultaneous. Revenue from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance. Our gift cards do not expire. Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as "breakage." Estimated breakage revenue is recognized over time in proportion to actual gift card redemptions. TARGET CORPORATION 2021 Form 10-K 44 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements Gift Card Liability Activity (millions) January 30, 2021 Gift Cards Issued During Current Period But Not Redeemed (b) Revenue Recognized From Beginning Liability January 29, 2022 Gift card liability (a) $ 1,035 $ 903 $ ( 736 ) $ 1,202 (a) Included in Accrued and Other Current Liabilities. (b) Net of estimated breakage. Guests receive a 5 percent discount on nearly all purchases and receive free shipping at Target.com when they use their Target Debit Card, Target Credit Card, or Target MasterCard (RedCards). Target Circle program members earn 1 percent rewards on nearly all non-RedCard purchases. As of January 29, 2022, and January 30, 2021, deferred revenue of $ 89 million and $ 72 million, respectively, related to this loyalty program was included in Accrued and Other Current Liabilities. 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. Other – Includes advertising, Shipt membership and service revenues, commissions earned on third-party sales through Target.com, rental income, and other miscellaneous revenues. 5. Cost of Sales and Selling, General and Administrative Expenses The following table illustrates the primary items classified in each major expense category: Cost of Sales Selling, General and Administrative Expenses Total cost of products sold including • Freight expenses associated with moving merchandise from our vendors to and between our distribution centers and our retail stores • Vendor income that is not reimbursement of specific, incremental, and identifiable costs Inventory shrink Markdowns Outbound shipping and handling expenses associated with sales to our guests Payment term cash discounts Distribution center costs, including compensation and benefits costs and depreciation Compensation and benefit costs associated with shipment of merchandise from stores Import costs Compensation and benefit costs for stores and headquarters, except ship from store costs classified as cost of sales Occupancy and operating costs of retail and headquarters facilities Advertising, offset by vendor income that is a reimbursement of specific, incremental, and identifiable costs Pre-opening and exit costs of stores and other facilities Credit cards servicing expenses Costs associated with accepting third-party bank issued payment cards Litigation and defense costs and related insurance recoveries Other administrative costs Note: The classification of these expenses varies across the retail industry. TARGET CORPORATION 2021 Form 10-K 45 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements 6. Consideration Received from Vendors We receive consideration for a variety of vendor-sponsored programs such as volume rebates, markdown allowances, promotions, and advertising activities and for our compliance programs, referred to as "vendor income." Additionally, under our compliance programs, vendors are charged for merchandise shipments that do not meet our requirements (violations), such as late or incomplete shipments. Substantially all vendor income is recorded as a reduction of Cost of Sales. We establish a receivable for vendor income that is earned but not yet received. Based on historical trending and data, this receivable is computed by forecasting vendor income collections and estimating the amount earned. The majority of the year-end vendor income receivables are collected within the following fiscal quarter, and we do not believe there is a reasonable likelihood that the assumptions used in our estimate will change significantly. Note 11 provides additional information. 7. Advertising Costs Advertising costs, which primarily consist of digital advertisements and media broadcast, are generally expensed at first showing or distribution of the advertisement. Reimbursements from vendors that are for specific, incremental, and identifiable advertising costs are recognized as offsets of these advertising costs within Selling, General and Administrative Expenses (SG&A Expenses). Net advertising costs were $ 1.5 billion, $ 1.5 billion, and $ 1.6 billion in 2021, 2020, and 2019, respectively. 8. Fair Value Measurements Fair value measurements are reported in one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data). Fair Value Measurements - Recurring Basis Fair Value as of (millions) Classification Measurement Level January 29, 2022 January 30, 2021 Assets Short-term investments (a) Cash and Cash Equivalents Level 1 $ 4,985 $ 7,644 Prepaid forward contracts (b) Other Current Assets Level 1 35 38 Interest rate swaps (c) Other Current Assets Level 2 17 — Interest rate swaps (c) Other Noncurrent Assets Level 2 135 188 (a) Carrying value approximates fair value because maturities are less than three months. (b) Initially valued at transaction price. Subsequently valued by reference to the market price of Target common stock. (c) Valuations are based on observable inputs to the valuation model (e.g., interest rates and credit spreads). See Note 17 for additional information on interest rate swaps. Significant Financial Instruments Not Measured at Fair Value (a) As of January 29, 2022 As of January 30, 2021 (millions) Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt, including current portion (b) $ 11,568 $ 12,808 $ 10,643 $ 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. TARGET CORPORATION 2021 Form 10-K 46 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements 9. Cash and Cash Equivalents Cash equivalents include highly liquid investments with an original maturity of three months or less from the time of purchase. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions. These receivables typically settle in five days or less. Cash and Cash Equivalents (millions) January 29, 2022 January 30, 2021 Cash $ 349 $ 307 Receivables from third-party financial institutions for credit and debit card transactions 577 560 Short-term investments 4,985 7,644 Cash and Cash Equivalents (a) $ 5,911 $ 8,511 (a) We have access to these funds without any significant restrictions, taxes or penalties. As of January 29, 2022, and January 30, 2021, we reclassified book overdrafts of $ 366 million and $ 240 million, respectively, to Accounts Payable and $ 19 million and $ 24 million, respectively, to Accrued and Other Current Liabilities. 10. Inventory The vast majority of our inventory is accounted for under the retail inventory accounting method (RIM) using the last-in, first-out (LIFO) method. Inventory is stated at the lower of LIFO cost or market. Inventory cost includes the amount we pay to our suppliers to acquire inventory, freight costs incurred to deliver product to our distribution centers and stores, and import costs, reduced by vendor income and cash discounts. Distribution center operating costs, including compensation and benefits, are expensed in the period incurred. Inventory is also reduced for estimated losses related to shrink and markdowns. The LIFO provision is calculated based on inventory levels, markup rates, and internally measured retail price indices. Under RIM, inventory cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the inventory retail value. RIM is an averaging method that has been widely used in the retail industry due to its practicality. The use of RIM will result in inventory being valued at the lower of cost or market because permanent markdowns are taken as a reduction of the retail value of inventory. 11. Other Current Assets Other Current Assets (millions) January 29, 2022 January 30, 2021 Accounts and other receivables $ 835 $ 631 Vendor income receivable 518 504 Prepaid expenses 170 171 Other 237 286 Other Current Assets $ 1,760 $ 1,592 TARGET CORPORATION 2021 Form 10-K 47 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements 12. Property and Equipment Property and equipment, including assets acquired under finance leases, is depreciated using the straight-line method over estimated useful lives or lease terms if shorter. We amortize leasehold improvements purchased after the beginning of the initial lease term over the shorter of the assets' useful lives or a term that includes the original lease term, plus any renewals that are reasonably certain at the date the leasehold improvements are acquired. Total depreciation expense, including depreciation expense included in Cost of Sales, was $ 2.6 billion, $ 2.5 billion, and $ 2.6 billion for 2021, 2020, and 2019, respectively. For income tax purposes, accelerated depreciation methods are generally used. Repair and maintenance costs are expensed as incurred. Facility pre-opening costs, including supplies and payroll, are expensed as incurred. Estimated Useful Lives Life (Years) Buildings and improvements 8 - 39 Fixtures and equipment 2 - 15 Computer hardware and software 2 - 7 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 losses of $ 87 million, $ 62 million, and $ 23 million during 2021, 2020, and 2019, respectively. For asset groups classified as held for sale, measurement of an impairment loss is based on the excess of the carrying amount of the asset group over its fair value. We estimate fair value by obtaining market appraisals, obtaining valuations from third-party brokers, or using other valuation techniques. Impairments are recorded in SG&A Expenses. 13. Other Noncurrent Assets Other Noncurrent Assets (millions) January 29, 2022 January 30, 2021 Goodwill and intangible assets (a) $ 656 $ 668 Company-owned life insurance investments, net of loans (b) 470 450 Other 375 268 Other Noncurrent Assets $ 1,501 $ 1,386 (a) Goodwill totaled $ 631 million as of both January 29, 2022, and January 30, 2021. No impairments were recorded in 2021, 2020, or 2019 as a result of the annual goodwill impairment tests performed. (b) Note 23 provides more information on company-owned life insurance investments. TARGET CORPORATION 2021 Form 10-K 48 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements 14. Accrued and Other Current Liabilities Accrued and Other Current Liabilities (millions) January 29, 2022 January 30, 2021 Wages and benefits $ 1,620 $ 1,677 Gift card liability, net of estimated breakage 1,202 1,035 Real estate, sales, and other taxes payable 1,042 1,103 Dividends payable 424 341 Current portion of operating lease liabilities 254 211 Workers' compensation and general liability (a) 169 169 Interest payable 77 79 Other 1,310 1,507 Accrued and Other Current Liabilities $ 6,098 $ 6,122 (a) We retain a substantial portion of the risk related to general liability and workers' compensation claims. We estimate our ultimate cost based on analysis of historical data and actuarial estimates. General liability and workers' compensation liabilities are recorded at our estimate of their net present value. Note 20 provides the noncurrent balance of these liabilities. 15. Commitments and Contingencies Contingencies We are exposed to claims and litigation arising in the ordinary course of business and use various methods to resolve these matters in a manner that we believe serves the best interest of our shareholders and other constituents. When a loss is probable, we record an accrual based on the reasonably estimable loss or range of loss. When no point of loss is more likely than another, we record the lowest amount in the estimated range of loss and, if material, disclose the estimated range of loss. We do not record liabilities for reasonably possible loss contingencies, but do disclose a range of reasonably possible losses if they are material and we are able to estimate such a range. If we cannot provide a range of reasonably possible losses, we explain the factors that prevent us from determining such a range. Historically, adjustments to our estimates have not been material. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities. We do not believe that any of these identified claims or litigation will be material to our results of operations, cash flows, or financial condition. Commitments Purchase obligations, which include all legally binding contracts such as merchandise royalties, equipment purchases, marketing-related contracts, software acquisition/license commitments, firm minimum commitments for inventory purchases, and service contracts, were $ 944 million and $ 785 million as of January 29, 2022, and January 30, 2021, respectively. These purchase obligations are primarily due within three years and recorded as liabilities when goods are received or services are rendered. Real estate obligations, which include legally binding minimum lease payments for leases signed but not yet commenced, and commitments for the purchase, construction, or remodeling of real estate and facilities, were $ 2.5 billion and $ 2.1 billion as of January 29, 2022, and January 30, 2021, respectively. Over half of these real estate obligations are due within one year , a portion of which are recorded as liabilities. We issue inventory purchase orders in the ordinary course of business, which represent authorizations to purchase that are cancelable by their terms. We do not consider purchase orders to be firm inventory commitments. If we choose to cancel a purchase order, we may be obligated to reimburse the vendor for unrecoverable outlays incurred prior to cancellation. TARGET CORPORATION 2021 Form 10-K 49 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements We also issue letters of credit and surety bonds in the ordinary course of business. Trade letters of credit totaled $ 2.6 billion and $ 2.0 billion as of January 29, 2022, and January 30, 2021, respectively, a portion of which are reflected in Accounts Payable. Standby letters of credit and surety bonds, primarily related to insurance and regulatory requirements, totaled $ 517 million and $ 472 million as of January 29, 2022, and January 30, 2021, respectively. 16. Commercial Paper and Long-Term Debt As of January 29, 2022, the carrying value and maturities of our debt portfolio were as follows: Debt Maturities January 29, 2022 (dollars in millions) Rate (a) Balance Due 2022-2026 2.6 % $ 4,544 Due 2027-2031 3.5 2,603 Due 2032-2036 6.3 301 Due 2037-2041 6.8 936 Due 2042-2046 3.9 1,684 Due 2047-2051 3.3 1,500 Total notes and debentures 3.5 11,568 Swap valuation adjustments 77 Finance lease liabilities 2,075 Less: Amounts due within one year ( 171 ) Long-term debt and other borrowings $ 13,549 (a) Reflects the dollar weighted average stated interest rate as of year-end. Required Principal Payments (millions) 2022 2023 2024 2025 2026 Total required principal payments $ 63 $ — $ 1,000 $ 1,500 $ 2,000 In January 2022, we issued unsecured fixed rate debt of $ 1.0 billion at 1.950 percent that matures in January 2027 and $ 1.0 billion at 2.950 percent that matures in January 2052. Furthermore, we repaid $ 1.0 billion of 2.900 percent unsecured fixed rate debt at maturity. In October 2020, we repurchased $ 1.77 billion of unsecured fixed rate debt before its maturity at a market value of $ 2.25 billion. We recognized a loss on early retirement of $ 512 million, which was recorded in Net Interest Expense. In March 2020, we issued unsecured fixed rate debt of $ 1.5 billion at 2.250 percent that matures in April 2025 and $ 1.0 billion at 2.650 percent that matures in September 2030. In January 2020, we issued $ 750 million of 10 -year unsecured fixed rate debt at 2.350 percent, and separately, we repurchased $ 1.0 billion of 3.875 percent unsecured fixed rate debt before its maturity. We recognized a loss on early retirement of approximately $ 10 million, which was recorded in Net Interest Expense. We obtain short-term financing from time to time under our commercial paper program. No balances were outstanding under our commercial paper program at any time during 2021 or 2020. 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 October 2023. No balances were outstanding under either facility at any time during 2021, 2020, or 2019. TARGET CORPORATION 2021 Form 10-K 50 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements Substantially all of our outstanding borrowings are senior, unsecured obligations. Most of our long-term debt obligations contain covenants related to secured debt levels. 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, which have no practical effect on our ability to pay dividends. 17. 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 8 provides the fair value and classification of these instruments. Under our swap agreements, we pay a floating rate equal to 1-month LIBOR and receive a weighted average fixed rate of 2.6 percent. The agreements have a weighted average remaining maturity of 5.9 years. As of January 29, 2022, and January 30, 2021, interest rate swaps with notional amounts totaling $ 1.5 billion were designated as fair value hedges, and all were considered to be perfectly effective under the shortcut method during 2021 and 2020. As of January 29, 2022, we were party to forward-starting interest rate swaps with notional amounts totaling $ 2.15 billion to hedge the interest rate exposure of anticipated future debt issuances during the next three years. We designated these derivative financial instruments as cash flow hedges. As of January 29, 2022, a $ 75 million gain was recorded in Accumulated Other Comprehensive Loss and will be reclassified to Net Interest Expense as we record interest expense on the associated debt. Effect of Hedges on Debt (millions) January 29, 2022 January 30, 2021 Long-term debt and other borrowings Carrying amount of hedged debt $ 1,572 $ 1,677 Cumulative hedging adjustments, included in carrying amount 77 183 Effect of Hedges on Net Interest Expense (millions) 2021 2020 2019 Gain (loss) on fair value hedges recognized in Net Interest Expense Interest rate swap designated as fair value hedges $ ( 106 ) $ 46 $ 130 Hedged debt 106 ( 46 ) ( 130 ) Total $ — $ — $ — 18. Leases We lease certain retail stores, warehouses, distribution centers, office space, land, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. We combine lease and nonlease components for new and reassessed leases. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 50 years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of leased assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Certain of our lease agreements require reimbursement of real estate taxes, common area maintenance, and insurance, as well as rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We rent or sublease certain real estate to third parties. Our lease and sublease portfolio consists mainly of operating leases with CVS Pharmacy Inc. (CVS) for space within our stores. TARGET CORPORATION 2021 Form 10-K 51 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements Leases (millions) Classification January 29, 2022 January 30, 2021 Assets Operating Operating Lease Assets $ 2,556 $ 2,227 Finance Buildings and Improvements, net of Accumulated Depreciation (a) 1,652 1,504 Total leased assets $ 4,208 $ 3,731 Liabilities Current Operating Accrued and Other Current Liabilities $ 254 $ 211 Finance Current Portion of Long-term Debt and Other Borrowings 108 88 Noncurrent Operating Noncurrent Operating Lease Liabilities 2,493 2,218 Finance Long-term Debt and Other Borrowings 1,967 1,766 Total lease liabilities $ 4,822 $ 4,283 Note: We use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. (a) Finance lease assets are recorded net of accumulated amortization of $ 670 million and $ 550 million as of January 29, 2022, and January 30, 2021, respectively. Lease Cost (millions) Classification 2021 2020 2019 Operating lease cost (a) SG&A Expenses $ 387 $ 332 $ 287 Finance lease cost Amortization of leased assets Depreciation and Amortization (b) 127 105 82 Interest on lease liabilities Net Interest Expense 68 62 51 Sublease income (c) Other Revenue ( 18 ) ( 15 ) ( 13 ) Net lease cost $ 564 $ 484 $ 407 (a) 2021 and 2020 include $ 64 million and $ 44 million, respectively, of short-term and variable lease costs. Short-term and variable lease costs were insignificant for 2019. (b) Supply chain-related amounts are included in Cost of Sales. (c) Sublease income excludes rental income from owned properties of $ 48 million for each of 2021, 2020, and 2019, which is included in Other Revenue. TARGET CORPORATION 2021 Form 10-K 52 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements Maturity of Lease Liabilities Operating Finance (millions) Leases (a) Leases (b) Total 2022 $ 337 $ 176 $ 513 2023 334 179 513 2024 318 176 494 2025 300 176 476 2026 286 177 463 After 2026 1,828 1,800 3,628 Total lease payments $ 3,403 $ 2,684 $ 6,087 Less: Interest 656 609 Present value of lease liabilities $ 2,747 $ 2,075 (a) Operating lease payments include $ 942 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $ 290 million of legally binding minimum lease payments for leases signed but not yet commenced. (b) Finance lease payments include $ 126 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $ 840 million of legally binding minimum lease payments for leases signed but not yet commenced. Lease Term and Discount Rate January 29, 2022 January 30, 2021 Weighted average remaining lease term (years) Operating leases 12.2 12.6 Finance leases 15.2 15.8 Weighted average discount rate Operating leases 3.28 % 3.54 % Finance leases 3.49 % 3.68 % Other Information (millions) 2021 2020 2019 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 316 $ 284 $ 254 Operating cash flows from finance leases 64 59 49 Financing cash flows from finance leases 91 70 57 TARGET CORPORATION 2021 Form 10-K 53 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements 19. Income Taxes Earnings from continuing operations before income taxes were $ 8.9 billion, $ 5.5 billion, and $ 4.2 billion during 2021, 2020, and 2019, respectively, including $ 896 million, $ 764 million, and $ 653 million earned by our foreign entities subject to tax outside of the U.S. Tax Rate Reconciliation – Continuing Operations 2021 2020 2019 Federal statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of the federal tax benefit 3.9 3.3 3.7 International ( 1.3 ) ( 1.2 ) ( 1.4 ) Excess tax benefit related to share-based payments ( 0.8 ) ( 1.0 ) ( 0.4 ) Federal tax credits ( 0.5 ) ( 0.6 ) ( 0.8 ) Other ( 0.3 ) ( 0.3 ) ( 0.1 ) Effective tax rate 22.0 % 21.2 % 22.0 % Provision for Income Taxes (millions) 2021 2020 2019 Current: Federal $ 1,111 $ 1,013 $ 536 State 325 281 169 International 3 68 38 Total current 1,439 1,362 743 Deferred: Federal 423 ( 118 ) 150 State 98 ( 64 ) 29 International 1 ( 2 ) ( 1 ) Total deferred 522 ( 184 ) 178 Total provision $ 1,961 $ 1,178 $ 921 TARGET CORPORATION 2021 Form 10-K 54 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements Net Deferred Tax Asset / (Liability) (millions) January 29, 2022 January 30, 2021 Gross deferred tax assets: Accrued and deferred compensation $ 441 $ 623 Accruals and reserves not currently deductible 211 192 Self-insured benefits 141 138 Deferred occupancy income 133 141 Lease liabilities 1,245 1,108 Other 18 55 Total gross deferred tax assets 2,189 2,257 Gross deferred tax liabilities: Property and equipment ( 2,265 ) ( 2,003 ) Leased assets ( 1,089 ) ( 996 ) Inventory ( 266 ) ( 146 ) Other ( 130 ) ( 82 ) Total gross deferred tax liabilities ( 3,750 ) ( 3,227 ) Total net deferred tax liability (a) $ ( 1,561 ) $ ( 970 ) (a) $ 6 million and $ 20 million of the balance as of January 29, 2022, and January 30, 2021, respectively, is included in Other Noncurrent Assets. We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. The U.S. Internal Revenue Service (IRS) has completed exams on the U.S. federal income tax returns for years 2019 and prior. With few exceptions, we are no longer subject to state and local or non-U.S. income tax examinations by tax authorities for years before 2015. Reconciliation of Liability for Unrecognized Tax Benefits (millions) 2021 2020 2019 Balance at beginning of period $ 181 $ 160 $ 300 Additions based on tax positions related to the current year 32 35 28 Additions for tax positions of prior years 11 32 13 Reductions for tax positions of prior years ( 95 ) ( 36 ) ( 69 ) Settlements ( 4 ) ( 10 ) ( 112 ) Balance at end of period $ 125 $ 181 $ 160 If we were to prevail on all unrecognized tax benefits recorded, $ 67 million of the $ 125 million reserve would benefit the effective tax rate. In addition, the reversal of accrued interest and penalties would also benefit the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During 2021, 2020, and 2019, we recorded an expense / (benefit) from accrued interest and penalties of $ 1 million, $( 12 ) million, and $( 2 ) million, respectively. As of January 29, 2022, January 30, 2021, and February 1, 2020, total accrued interest and penalties were $ 13 million, $ 12 million, and $ 27 million, respectively. It is reasonably possible that the amount of the unrecognized tax benefits with respect to our other unrecognized tax positions will increase or decrease during the next twelve months; however, an estimate of the amount or range of the change cannot be made at this time. TARGET CORPORATION 2021 Form 10-K 55 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements 20. Other Noncurrent Liabilities Other Noncurrent Liabilities (millions) January 29, 2022 January 30, 2021 Deferred compensation $ 572 $ 549 Deferred occupancy income (a) 479 509 Workers' compensation and general liability 350 341 Income and other taxes payable 139 436 Pension benefits 45 57 Other 44 47 Other Noncurrent Liabilities $ 1,629 $ 1,939 (a) To be amortized evenly through 2038. 21. 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 (millions, except per share data) 2021 2020 2019 Total number of shares purchased 31.3 5.7 16.0 Average price paid per share $ 230.07 $ 107.58 $ 95.07 Total investment $ 7,190 $ 609 $ 1,518 22. Share-Based Compensation We maintain a long-term incentive plan (the Plan) for key team members and non-employee members of our Board of Directors. The Plan allows us to grant equity-based compensation awards, including stock options, stock appreciation rights, performance share units, restricted stock units, restricted stock awards, or a combination of awards (collectively, share-based awards). The number of unissued common shares reserved for future grants under the Plan was 34.3 million as of January 29, 2022. Compensation expense associated with share-based awards is recognized on a straight-line basis over the required service period and reflects estimated forfeitures. Share-based compensation expense recognized in SG&A Expenses was $ 238 million, $ 210 million, and $ 152 million, and the related income tax benefit was $ 45 million, $ 39 million, and $ 27 million, in 2021, 2020, and 2019, respectively. TARGET CORPORATION 2021 Form 10-K 56 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements Restricted Stock Units We issue restricted stock units and performance-based restricted stock units generally with 3 -year cliff or 4 -year graduated vesting from the grant date (collectively restricted stock units) to certain team members. The final number of shares issued under performance-based restricted stock units is based on our total shareholder return relative to a retail peer group over a 3-year performance period. We also regularly issue restricted stock units to our Board of Directors, which vest quarterly over a 1-year period and are settled in shares of Target common stock upon departure from the Board. The fair value for restricted stock units is calculated based on our stock price on the date of grant, incorporating an analysis of the total shareholder return performance measure where applicable. The weighted average grant date fair value for restricted stock units was $ 186.98 , $ 110.80 , and $ 80.01 in 2021, 2020, and 2019, respectively. Restricted Stock Unit Activity Total Nonvested Units Restricted Stock (a) Grant Date Fair Value (b) January 30, 2021 4,364 $ 88.99 Granted 1,273 186.98 Forfeited ( 322 ) 115.62 Vested ( 1,716 ) 82.31 January 29, 2022 3,599 $ 123.74 (a) Represents the number of shares of restricted stock units, in thousands. For performance-based restricted stock units, assumes attainment of maximum payout rates as set forth in the performance criteria. Applying actual or expected payout rates, the number of outstanding restricted stock units and performance-based restricted stock units as of January 29, 2022 was 3.58 million. (b) Weighted average per unit . The expense recognized each period is partially dependent upon our estimate of the number of shares that will ultimately be issued. As of January 29, 2022, there was $ 208 million of total unrecognized compensation expense related to restricted stock units, which is expected to be recognized over a weighted average period of 2.5 years. The fair value of restricted stock units vested and converted to shares of Target common stock was $ 323 million, $ 151 million, and $ 89 million in 2021, 2020, and 2019, respectively. Performance Share Units We issue performance share units to certain team members that represent shares potentially issuable in the future. Issuance is based upon our performance, generally relative to a retail peer group, over a 3-year or 4-year performance period on certain measures primarily including sales growth, after-tax return on invested capital, and earnings per share growth. The fair value of performance share units is calculated based on our stock price on the date of grant. The weighted average grant date fair value for performance share units was $ 179.58 , $ 106.00 , and $ 86.81 in 2021, 2020, and 2019, respectively. Performance Share Unit Activity Total Nonvested Units Performance Share Units (a) Grant Date Fair Value (b) January 30, 2021 2,788 $ 87.93 Granted 384 179.58 Forfeited ( 296 ) 107.99 Vested ( 619 ) 72.05 January 29, 2022 2,257 $ 111.82 (a) Represents the number of performance share units, in thousands. Assumes attainment of maximum payout rates as set forth in the performance criteria. Applying actual or expected payout rates, the number of outstanding performance share units as of January 29, 2022 was 2.05 million. (b) Weighted average per unit. TARGET CORPORATION 2021 Form 10-K 57 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements The expense recognized each period is partially dependent upon our estimate of the number of shares that will ultimately be issued. Future compensation expense for unvested awards could reach a maximum of $ 67 million assuming payout of all unvested awards. The unrecognized expense is expected to be recognized over a weighted average period of 1.2 years. The fair value of performance share units vested and converted to shares of Target common stock was $ 127 million, $ 82 million, and $ 50 million in 2021, 2020, and 2019, respectively. Stock Options In the past, we granted stock options to certain team members. All outstanding stock options are vested and currently exercisable. Stock Option Activity Stock Options Total Outstanding & Exercisable Number of Options (a) Exercise Price (b) Intrinsic Value (c) January 30, 2021 467 $ 55.81 $ 59 Granted — — Expired/forfeited — — Exercised/issued ( 257 ) 53.88 January 29, 2022 210 $ 58.17 $ 33 (a) In thousands. (b) Weighted average per share. (c) Represents stock price appreciation subsequent to the grant date, in millions. Stock Option Exercises (millions) 2021 2020 2019 Cash received for exercise price $ 8 $ 23 $ 73 Intrinsic value 45 161 59 Income tax benefit 11 41 15 As of January 29, 2022, there was no unrecognized compensation expense related to stock options. The weighted average remaining life of exercisable and outstanding options is 1.7 years. 23. Defined Contribution Plans Team members who meet eligibility requirements can participate in a defined contribution 401(k) plan by investing up to 80 percent of their eligible earnings, as limited by statute or regulation. We match 100 percent of each team member's contribution up to 5 percent of eligible earnings. Company match contributions are made to funds designated by the participant, none of which are based on Target common stock. In addition, we maintain an unfunded, nonqualified deferred compensation plan for a broad management group whose participation in our 401(k) plan is limited by statute or regulation. These team members choose from a menu of crediting rate alternatives that are generally the same as the investment choices in our 401(k) plan, but also includes a fund based on Target common stock. We credit an additional 2 percent per year to the accounts of all active participants, excluding executive officers, in part to recognize the risks inherent to their participation in this plan. We also maintain a frozen, unfunded, nonqualified deferred compensation plan covering less than 50 participants. Our total liability under these plans was $ 632 million and $ 602 million as of January 29, 2022, and January 30, 2021, respectively. We mitigate our risk of offering the nonqualified plans through investing in company-owned life insurance and prepaid forward contracts that substantially offset our economic exposure to the returns of these plans. These investments are general corporate assets and are marked to market with the related gains and losses recognized in the Consolidated Statements of Operations in the period they occur. TARGET CORPORATION 2021 Form 10-K 58 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements Plan Expenses (millions) 2021 2020 2019 401(k) plan matching contributions expense $ 307 $ 281 $ 237 Nonqualified deferred compensation plans Benefits expense $ 59 $ 86 $ 80 Related investment (income) / expense ( 27 ) ( 58 ) ( 53 ) Nonqualified plans net expense $ 32 $ 28 $ 27 24. Pension Plans We have a U.S. qualified defined benefit pension plan covering team members who meet eligibility requirements. This plan is closed to new participants. Active participants accrue benefits under a final average pay feature or a cash balance feature. We also have unfunded, nonqualified pension plans for team members with qualified plan compensation restrictions, as well as international plans. Eligibility and the level of benefits under all plans vary depending on each team member's full-time or part-time status, date of hire, age, length of service, and/or compensation. Funded Status Qualified Plan Nonqualified and International Plans (millions) 2021 2020 2021 2020 Projected benefit obligations $ 4,305 $ 4,594 $ 72 $ 74 Fair value of plan assets 4,433 4,588 16 11 Funded / (underfunded) status $ 128 $ ( 6 ) $ ( 56 ) $ ( 63 ) Contributions and Estimated Future Benefit Payments Our obligations to plan participants can be met over time through a combination of company contributions to these plans and earnings on plan assets. We are not required to make any contributions to our qualified defined benefit pension plan in 2022. However, depending on investment performance and plan funded status, we may elect to make a contribution. Estimated Future Benefit Payments (millions) Pension Benefits 2022 $ 305 2023 229 2024 237 2025 246 2026 250 2027 - 2031 1,322 TARGET CORPORATION 2021 Form 10-K 59 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements Cost of Plans Net Pension Benefits Expense (millions) Classification 2021 2020 2019 Service cost benefits earned SG&A Expenses $ 100 $ 103 $ 93 Interest cost on projected benefit obligation Net Other (Income) / Expense 96 118 149 Expected return on assets Net Other (Income) / Expense ( 238 ) ( 242 ) ( 248 ) Amortization of losses Net Other (Income) / Expense 113 127 62 Amortization of prior service cost Net Other (Income) / Expense — ( 11 ) ( 11 ) Settlement charges Net Other (Income) / Expense — 1 1 Total $ 71 $ 96 $ 46 Assumptions Benefit Obligation Weighted Average Assumptions 2021 2020 Discount rate 3.30 % 2.84 % Average assumed rate of compensation increase 3.00 3.00 Cash balance plan interest crediting rate 4.64 4.64 Net Periodic Benefit Expense Weighted Average Assumptions 2021 2020 2019 Discount rate 2.84 % 3.13 % 4.28 % Expected long-term rate of return on plan assets 5.80 6.10 6.30 Average assumed rate of compensation increase 3.00 3.00 3.00 Cash balance plan interest crediting rate 4.64 4.64 4.64 The weighted average assumptions used to measure net periodic benefit expense each year are the rates as of the beginning of the year (i.e., the prior measurement date). Our most recent compound annual rate of return on qualified plan assets was 9.3 percent, 8.2 percent, 6.8 percent, and 7.5 percent for the 5-year , 10-year , 15-year , and 20-year time periods, respectively. The market-related value of plan assets is used in calculating the expected return on assets. Historical differences between expected and actual returns are deferred and recognized in the market-related value over a 5-year period from the year in which they occur. We review the expected long-term rate of return annually and revise it as appropriate. Additionally, we monitor the mix of investments in our portfolio to ensure alignment with our long-term strategy to manage pension cost and reduce volatility in our assets. Our 2021 expected annualized long-term rate of return assumptions were 6.5 percent for domestic equity securities, 7.5 percent for international equity securities, 2.5 percent for long-duration debt securities, 7.0 percent for diversified funds, and 7.5 percent for other investments. These estimates are a judgmental matter in which we consider the composition of our asset portfolio, our historical long-term investment performance, and current market conditions. TARGET CORPORATION 2021 Form 10-K 60 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements Benefit Obligation Change in Projected Benefit Obligation Qualified Plan Nonqualified and International Plans (millions) 2021 2020 2021 2020 Benefit obligation at beginning of period $ 4,594 $ 4,492 $ 74 $ 66 Service cost 94 97 6 6 Interest cost 95 117 1 1 Actuarial (gain) / loss (a) ( 247 ) 144 ( 4 ) 7 Participant contributions 5 7 — — Benefits paid ( 236 ) ( 263 ) ( 5 ) ( 6 ) Benefit obligation at end of period (b) $ 4,305 $ 4,594 $ 72 $ 74 (a) The actuarial (gain) / loss was primarily driven by changes in the weighted average discount rate. (b) Accumulated benefit obligation—the present value of benefits earned to date assuming no future salary growth—is materially consistent with the projected benefit obligation in each period presented. Plan Assets Change in Plan Assets Qualified Plan Nonqualified and International Plans (millions) 2021 2020 2021 2020 Fair value of plan assets at beginning of period $ 4,588 $ 4,430 $ 11 $ 11 Actual return on plan assets 76 414 — 2 Employer contributions — — 10 4 Participant contributions 5 7 — — Benefits paid ( 236 ) ( 263 ) ( 5 ) ( 6 ) Fair value of plan assets at end of period $ 4,433 $ 4,588 $ 16 $ 11 Our asset allocation policy is designed to reduce the long-term cost of funding our pension obligations. The plan invests with both passive and active investment managers depending on the investment. The plan also seeks to reduce the risk associated with adverse movements in interest rates by employing an interest rate hedging program, which includes the use of derivative instruments. Asset Category Current Targeted Allocation Actual Allocation 2021 2020 Domestic equity securities (a) 12 % 12 % 16 % International equity securities 8 8 10 Debt securities 50 50 44 Diversified funds 25 25 25 Other (b) 5 5 5 Total 100 % 100 % 100 % (a) Equity securities include our common stock in amounts substantially less than 1 percent of total plan assets in both periods presented. (b) Other assets include private equity, mezzanine and high-yield debt, natural resources and timberland funds, derivative instruments, and real estate. TARGET CORPORATION 2021 Form 10-K 61 FINANCIAL STATEMENTS Table of Contents NOTES Index to Financial Statements Fair Value Measurements Fair Value at (millions) Measurement Level January 31, 2022 January 31, 2021 Cash and cash equivalents Level 1 $ 8 $ 19 Derivatives Level 2 ( 9 ) ( 5 ) Government securities (a) Level 2 740 516 Fixed income (b) Level 2 1,447 1,424 2,186 1,954 Investments valued using NAV per share (c) Fixed income 10 68 Private equity funds 68 73 Cash and cash equivalents 100 115 Common collective trusts 860 1,122 Diversified funds 1,105 1,165 Other 120 102 Total plan assets $ 4,449 $ 4,599 (a) Investments in government securities and long-term government bonds. (b) Investments in corporate and municipal bonds. (c) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. Position Valuation Technique Cash and cash equivalents Carrying value approximates fair value. Derivatives Swap derivatives - Valuations are based on observable inputs to the valuation model (e.g., interest rates and credit spreads). Model inputs are changed only when corroborated by market data. A credit risk adjustment is made on each swap using observable market credit spreads. Option derivatives - Initially valued at transaction price. Subsequent valuations are based on observable inputs to the valuation model (e.g., underlying investments). Government securities and fixed income Valued using matrix pricing models and quoted prices of securities with similar characteristics. Amounts Included in Shareholders' Investment Amounts in Accumulated Other Comprehensive Loss (millions) 2021 2020 Net actuarial loss $ 783 $ 987 Prior service credits — ( 2 ) Amounts in Accumulated Other Comprehensive Loss (a) $ 783 $ 985 (a) $ 583 million and $ 735 million, net of tax, at the end of 2021 and 2020, respectively. TARGET CORPORATION 2021 Form 10-K 62 FINANCIAL STATEMENTS & SUPPLEMENTAL INFORMATION Table of Contents NOTES Index to Financial Statements 25. Accumulated Other Comprehensive Loss Change in Accumulated Other Comprehensive Loss (millions) Cash Flow Hedges Currency Translation Adjustment Pension Total January 30, 2021 $ ( 3 ) $ ( 18 ) $ ( 735 ) $ ( 756 ) Other comprehensive income / (loss) before reclassifications, net of tax 52 ( 1 ) 69 120 Amounts reclassified from AOCI, net of tax — (a) — 83 (b) 83 January 29, 2022 $ 49 $ ( 19 ) $ ( 583 ) $ ( 553 ) (a) Represents amortization of gains and losses on cash flow hedges, net of taxes, which is recorded in Net Interest Expense. (b) Represents amortization of pension gains and losses, net of $ 29 million of taxes, which is recorded in Net Other (Income) / Expense. See Note 24 for additional information. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.