What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-27 compared with 2021-11-24 · 84 added, 109 removed, 215 unchanged (47% of the section changed)

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Financial Summary

Third quarter 2021 included the following notable items:

First quarter 2022 included the following notable items:

• GAAP diluted earnings per share were $2.16.

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◦ Comparable digitally originated sales increased 3.2 percent.

• Operating income of $2.0 billion was 3.9 percent higher than for the comparable prior-year period.

Sales were $25.3 billion for the three months ended October 30, 2021, an increase of $3.0 billion , or 13.2 percent, from the comparable prior-year period.

Cash flow provided by operating activities was $5.6 billion for the nine months ended October 30, 2021, a decrease of $1.4 billion , or (20.5) percent, from $7.0 billion for the nine months ended October 31, 2020.

• Operating income of $1.3 billion was 43.3 percent lower than for the comparable prior-year period, driven primarily by a decrease in gross margin, reflecting inventory actions taken as a result of lower-than-expected sales in our discretionary categories (Apparel and Accessories, Hardlines, and Home Furnishings and Décor) and supply chain disruptions, as well as increased freight and merchandise costs.

Sales were $24.8 billion for the three months ended April 30, 2022, an increase of $1.0 billion , or 4.0 percent, from the comparable prior-year period.

Cash flow required for operating activities was $1.4 billion for the three months ended April 30, 2022, a decrease of $2.5 billion, or 222.4 percent, from $1.1 billion cash flow provided by operating activities for the three months ended May 1, 2021.

The drivers of the operating cash flow decrease are described on page 20 .

Earnings Per Share Three Months Ended Nine Months Ended

October 30, 2021 October 31, 2020 Change October 30, 2021 October 31, 2020 Change

Earnings Per Share Three Months Ended

April 30, 2022 May 1, 2021 Change

GAAP diluted earnings per share $ 2.16 $ 4.17 (48.2) %

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

For the trailing twelve months ended October 30, 2021, after-tax ROIC was 31.3 percent, compared with 19.9 percent for the trailing twelve months ended October 31, 2020.

For the trailing twelve months ended April 30, 2022, after-tax ROIC was 25.3 percent , compared with 30.7 percent for the trailing twelve months ended May 1, 2021.

The calculation of ROIC is provided on page 19 .

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, including country of origin production and port delays.

Additionally, trucker and dockworker shortages, a broad-based surge in consumer demand, and other factors have led to industry-wide U.S.

Supply Chain Disruptions and Demand Shifts

We have seen continued supply chain disruptions.

In addition to country of origin production delays, trucker and dockworker shortages, volatile 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.

While our inventory position is over $2 billion higher than a year ago, if we are unable to continue to source enough inventory and move it through our supply chain to our stores on a timely basis, we may experience increased out-of-stocks and lost sales.

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

In response, we have taken various actions, including ordering and receiving merchandise earlier, securing incremental freight and storage capacity, and maintaining elevated levels of staffing.

In addition, we have recently seen a significant shift in consumer demand away from longer lead time discretionary categories, resulting in lower-than-expected sales and higher-than-expected inventories in these areas.

These factors have resulted in increased costs, as well as increased clearance and promotional markdowns, which contributed to decreased profitability in the first quarter of 2022 compared to the prior-year period.

These factors will result in increased costs and decreased profitability in future periods, the impact of which could be material.

The Gross Margin Rate analysis on page 16 provides additional information.

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Analysis of Results of Operations

Summary of Operating Income Three Months Ended Nine Months Ended

(dollars in millions) October 30, 2021 October 31, 2020 Change October 30, 2021 October 31, 2020 Change

Summary of Operating Income Three Months Ended

(dollars in millions) April 30, 2022 May 1, 2021 Change

Sales $ 24,830 $ 23,879 4.0 %

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Operating income $ 1,346 $ 2,374 (43.3) %

Rate Analysis Three Months Ended Nine Months Ended

October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020

Rate Analysis Three Months Ended

April 30, 2022 May 1, 2021

Gross margin rate 25.7 % 30.0 %

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

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

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

Digitally originated sales may also be fulfilled through our distribution centers, our vendors, or other third parties.

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We believe that our ability to successfully differentiate our guests’ shopping experience through a careful combination of merchandise assortment, price, convenience, guest experience, and other factors will, over the long-term, drive both increasing shopping frequency (traffic) and the amount spent each visit (average transaction amount).

Comparable Sales Three Months Ended Nine Months Ended

October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020

Comparable Sales Three Months Ended

April 30, 2022 May 1, 2021

Comparable sales change 3.3 % 22.9 %

Drivers of change in comparable sales

Number of transactions 12.9 4.5 14.0 2.6

Number of transactions (traffic) 3.9 17.1

Average transaction amount (0.6) 5.0

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ANALYSIS OF RESULTS OF OPERATIONS

Comparable Sales by Channel Three Months Ended Nine Months Ended

October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020

Comparable Sales by Channel Three Months Ended

April 30, 2022 May 1, 2021

Stores originated comparable sales change 3.4 % 18.0 %

Digitally originated comparable sales change 3.2 50.2

Sales by Channel Three Months Ended Nine Months Ended

October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020

Sales by Channel Three Months Ended

April 30, 2022 May 1, 2021

Stores originated 81.8 % 81.7 %

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Total 100 % 100 %

Sales by Fulfillment Channel Three Months Ended Nine Months Ended

October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020

Sales by Fulfillment Channel Three Months Ended

April 30, 2022 May 1, 2021

Stores 96.5 % 96.3 %

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

Sales by Product Category Three Months Ended Nine Months Ended

October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020

Sales by Product Category Three Months Ended

April 30, 2022 May 1, 2021

Apparel and accessories 17 % 18 %

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Total 100 % 100 %

Note 3 to the Financial Statements provides additional product category sales information.

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

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

RedCard sales increased for the three and nine months ended October 30, 2021, and October 31, 2020;

RedCard sales increased for the three months ended April 30, 2022, and May 1, 2021;

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

RedCard Penetration Three Months Ended Nine Months Ended

October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020

RedCard Penetration Three Months Ended

April 30, 2022 May 1, 2021

Target Debit Card 11.6 % 12.1 %

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Gross Margin Rate

For the three months ended October 30, 2021, our gross margin rate was 28.0 percent compared with 30.6 percent in the comparable prior-year pe riod.

For the three months ended April 30, 2022, our gross margin rate was 25.7 percent compared with 30.0 percent in the comparable prior-year period.

This decrease reflected the net impact of

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

• higher clearance and promotional markdown rates, which were largely the result of inventory impairments and other actions taken in our longer lead time discretionary categories, as well as supply chain disruptions, and higher merchandise and freight costs, partially offset by the benefit of retail price increases;

• supply chain pressure related to increased compensation and headcount in our distribution centers;

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

For the nine months ended October 30, 2021, our gross margin rate was 29.5 percent compared with 29.1 percent in the comparable prior-year pe riod.

This increase reflected the net impact of

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

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

• 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.

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

Supply Chain Disruptions and Demand Shifts on page 13 provides additional information.

Selling, General, and Administrative Expense Rate

For the three months ended October 30, 2021, our SG&A expense rate was 18.9 percent compared with 20.5 percent for the three months ended October 31, 2020.

For the nine months ended October 30, 2021, our SG&A expense rate was 19.0 percent compared with 20.2 percent for the nine months ended October 31, 2020.

The decreases reflect the net leverage benefit from strong revenue growth.

TARGET CORPORATION

Q3 2021 Form 10-Q 16

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF RESULTS OF OPERATIONS

Change in Number of Stores Three Months Ended Nine Months Ended

October 30, 2021 October 31, 2020 October 30, 2021 October 31, 2020

For the three months ended April 30, 2022, our SG&A expense rate was 18.9 percent compared with 18.6 percent for the comparable prior-year period.

The increase reflected the net impact of cost increases across our business, including investments in hourly team member wages, partially offset by lower incentive compensation expense.

Change in Number of Stores Three Months Ended

April 30, 2022 May 1, 2021

Beginning store count 1,926 1,897

Opened 15 27 29 30

Closed — (1) (2) (1)

Ending store count 1,933 1,909

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

October 30, 2021 January 30, 2021 October 31, 2020 October 30, 2021 January 30, 2021 October 31, 2020

April 30, 2022 January 29, 2022 May 1, 2021 April 30, 2022 January 29, 2022 May 1, 2021

170,000 or more sq.

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Total 1,933 1,926 1,909 243,679 243,284 242,106

(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.

TARGET CORPORATION

Q1 2022 Form 10-Q 16

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF RESULTS OF OPERATIONS

Other Performance Factors

Net Interest Expense

Net interest expense was $105 million and $317 million for the three and nine months ended October 30, 2021, respectively, compared with $632 million and $871 million, respectively, in the comparable prior-year period.

The decrease in net interest expense was primarily due to a loss on early retirement of debt of $512 million for the three and nine months ended October 31, 2020, compared with the current-year periods.

Net interest expense was $112 million for the three months ended April 30, 2022, compared with $108 million in the comparable prior-year period.

Net Other (Income) / Expense

Net Other (Income) / Expense was $(6) million and $(356) million for the three and nine months ended October 30, 2021, respectively, compared with $5 million and $16 million, respectively, in the comparable prior-year periods.

The nine months ended October 30, 2021, included the $335 million gain on the February 2021 sale of Dermstore.

Net Other (Income) / Expense was $(15) million for the three months ended April 30, 2022, compared with $(343) million in the comparable prior-year period.

The three months ended May 1, 2021, included the $335 million pretax gain on the February 2021 sale of Dermstore.

Note 2 to the Financial Statements provides additional information.

Provision for Income Taxes

Our effective income tax rate for the three and nine months ended October 30, 2021, was 22.1 percent and 21.6 percent, respectively, compared w ith 21.9 percent and 21.7 percent, respectively, in the comparable prior-year periods.

Our effective income tax rate for the three months ended April 30, 2022, was 19.2 percent, compared with 19.6 percent in the comparable prior-year period.

The decrease reflects lower pretax earnings in the current period resulting in a larger tax rate benefit from fixed and discrete items, partially offset by the impacts of discrete tax benefits in the prior-year quarter, including the resolution of certain income tax matters.

TARGET CORPORATION

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Reconciliation of Non-GAAP Adjusted EPS Three Months Ended

October 30, 2021 October 31, 2020

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

GAAP diluted earnings per share $ 3.04 $ 2.01

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

Loss on investment (a)

— — — 8 9 0.02

(9) (7) (0.01) 8 6 0.01

Adjusted diluted earnings per share $ 3.03 $ 2.79

Reconciliation of Non-GAAP Adjusted EPS Nine Months Ended

October 30, 2021 October 31, 2020

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

April 30, 2022 May 1, 2021

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

GAAP diluted earnings per share $ 2.16 $ 4.17

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

Loss on debt extinguishment — — — 512 379 0.75

Loss on investment (a)

20 15 0.03 41 30 0.06

27 20 0.04 33 24 0.05

Adjusted diluted earnings per share $ 2.19 $ 3.69

Amounts may not foot due to rounding.

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

We sold this investment during the fourth quarter of 2020.

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

TARGET CORPORATION

Q3 2021 Form 10-Q 18

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Notes

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

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

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Other companies may calculate EBIT and EBITDA differently, limiting the usefulness of the measures for comparisons with other companies.

EBIT and EBITDA Three Months Ended Nine Months Ended

(dollars in millions) October 30, 2021 October 31, 2020 Change October 30, 2021 October 31, 2020 Change

EBIT and EBITDA Three Months Ended

(dollars in millions) April 30, 2022 May 1, 2021 Change

Net earnings $ 1,009 $ 2,097 (51.9) %

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+ Total depreciation and amortization (a)

652 603 7.9 1,952 1,848 5.6

EBITDA $ 2,040 $ 3,384 (39.7) %

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Trailing Twelve Months

Numerator October 30, 2021 October 31, 2020

Numerator April 30, 2022 May 1, 2021

Operating income $ 7,918 $ 8,444

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Net operating profit after taxes $ 6,256 $ 7,015

Denominator October 30, 2021 October 31, 2020 November 2, 2019

Denominator April 30, 2022 May 1, 2021 May 2, 2020

Current portion of long-term debt and other borrowings $ 1,089 $ 1,173 $ 168

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Operating lease interest is added back to operating income in the ROIC calculation to control for differences in capital structure between us and our competitors.

(b) Calculated using the effective tax rates, which were 21.3 percent and 21.5 percent for the trailing twelve months ended October 30, 2021, and October 31, 2020, respectively.

For the trailing twelve months ended October 30, 2021, and October 31, 2020, includes tax effect of $1.9 billion and $1.3 billion, respectively, related to EBIT, and $18 million and $19 million, respectively, related to operating lease interest.

(b) Calculated using the effective tax rates, which were 22.4 percent and 21.0 percent for the trailing twelve months ended April 30, 2022, and May 1, 2021, respectively.

For the trailing twelve months ended April 30, 2022, and May 1, 2021, includes tax effect of $1.8 billion 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.

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

Our cash and cash equivalents balance was $5.8 billion, $8.5 billion, and $6.0 billion as of October 30, 2021, January 30, 2021, and October 31, 2020, respectively.

Our cash and cash equivalents balance includes short-term investments of $4.8 billion, $7.6 billion, and $5.1 billion as of October 30, 2021, January 30, 2021, and October 31, 2020, respectively.

Our cash and cash equivalents balance was $1.1 billion, $5.9 billion, and $7.8 billion as of April 30, 2022, January 29, 2022, and May 1, 2021, respectively.

Our cash and cash equivalents balance includes short-term investments of $182 million, $5.0 billion, and $6.9 billion as of April 30, 2022, January 29, 2022, and May 1, 2021, respectively.

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

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Operating Cash Flows

Cash flows provided by operating activities were $5.6 billion for the nine months ended October 30, 2021, compared with $7.0 billion for the nine months ended October 31, 2020 .

For the nine months ended October 30, 2021, operating cash flows reflect stronger operating results, offset by increased inventory investment and lower accounts payable leverage, compared with the nine months ended October 31, 2020.

Additionally, operating cash flows for 2021 reflect a $1.1 billion increase in income tax payments.

Inventory was $15.0 billion as of October 30, 2021, compared with $10.7 billion and $12.7 billion at January 30, 2021, and October 31, 2020, respecti vely.

The increase over the balance as of October 31, 2020, reflects efforts to align inventory with sales trends.

Cash flows required for operating activities were $1.4 billion for the three months ended April 30, 2022, compared with $1.1 billion of cash flows provided by operating activities for the three months ended May 1, 2021.

For the three months ended April 30, 2022, operating cash flows decreased as a result of lower earnings, increased inventory levels and lower accounts payable leverage due to decreased inventory turnover, compared with the three months ended May 1, 2021.

Inventory was $15.1 billion as of April 30, 2022, compared with $13.9 billion and $10.5 billion at January 29, 2022, and May 1, 2021, respectively.

The increase over the balance as of May 1, 2021, primarily reflects lower-than-expected sales in our discretionary categories, as well as the impact of supply chain disruptions and demand shifts described on p age 13 .

Investing Cash Flows

Investing cash flows included capital investments of $2.5 billion and $2.0 billion for the nine months ended October 30, 2021, and October 31, 2020, respectively.

For the nine months ended October 31, 2021, investing cash flows includes $356 million of proceeds from the sale of Dermstore.

We paid dividends totaling $440 million ($0.90 per share) and $1.1 billion ($2.26 per share) for the three and nine months ended October 30, 2021, respectively, and $340 million ($0.68 per share) and $1.0 billion ($2.00 per share) for the three and nine months ended October 31, 2020, respectively, a per share increase of 32.4 percent and 13.0 percent, respectively.

We declared dividends totaling $439 million ($0.90 per share) during the third quarter of 2021 and $346 million ($0.68 per share) during the third quarter of 2020, a per share increase of 32.4 percent.

Investing cash flows included capital investments of $952 million and $540 million for the three months ended April 30, 2022, and May 1, 2021, respectively.

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

We paid dividends totaling $424 million ($0.90 per share) for the three months ended April 30, 2022, and $340 million ($0.68 per share) for the three months ended May 1, 2021, a per share increase of 32.4 percent.

We declared dividends totaling $426 million ($0.90 per share) during the first quarter of 2022 and $343 million ($0.68 per share) during the first quarter of 2021, a per share increase of 32.4 percent.

We have paid dividends every quarter since our 1967 initial public offering, and it is our intent to continue to do so in the future.

Share Repurchase

We returned $4.9 billion to shareholders through share repurchase during the nine months ended October 30, 2021.

Excluding the unsettled March 2022 ASR, we returned $10 million to shareholders through share repurchase during the three months ended April 30, 2022.

See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds of this Quarterly Report on Form 10-Q and Note 8 to the Financial Statements for more information.

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

As of October 30, 2021, our credit ratings were as follows:

As of April 30, 2022, our credit ratings were as follows:

Credit Ratings Moody’s Standard and Poor’s Fitch

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Each of the credit rating agencies reviews its rating periodically, and there is no guarantee our current credit ratings will remain the same as described above.

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

No balances were outstanding at any time during the nine months ended October 30, 2021, an d October 31, 2020.

In October 2021, we obtained a committed $3.0 billion unsecured revolving credit facility that will expire in October 2026.

This new facility replaced our $2.5 billion unsecured revolving credit facility that was set to expire in October 2023.

No balances were outstanding under either credit facility at any time during 2021 or 2020.

We have the ability to obtain short-term financing from time to time under our commercial paper program and credit facility.

Our committed $3.0 billion unsecured revolving credit facility expires in October 2026 and backstops our commercial paper program.

No balances were outstanding under our credit facility at any time during 2022 or 2021.

As of April 30, 2022, we had $0.9 billion outstanding under our commercial paper program.

We did not have any balances outstanding under our commercial paper program as of May 1, 2021.

Note 6 to the Financial Statements provides additional information.

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

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

Additionally, as of October 30, 2021, no notes or debentures contained provisions requiring acceleration of payment upon a credit rating downgrade, except that certain outstanding notes allow the note holders to put the notes to us if within a matter of months of each other we experience both (i) a change in control and (ii) our long-term credit ratings are either reduced and the resulting rating is non-investment grade, or our long-term credit ratings are placed on watch for possible reduction and those ratings are subsequently reduced and the resulting rating is non-investment grade.

We believe our sources of liquidity will continue to be adequate to maintain operations, finance anticipated expansion and strategic initiatives, fund debt maturities, pay dividends, and execute purchases under our share repurchase program for the foreseeable future.

We continue to anticipate ample access to commercial paper and long-term financing.

Additionally, as of April 30, 2022, no notes or debentures contained provisions requiring acceleration of payment upon a credit rating downgrade, except that certain outstanding notes allow the note holders to put the notes to us if within a matter of months of each other we experience both (i) a change in control and (ii) our long-term credit ratings are either reduced and the resulting rating is non-investment grade, or our long-term credit ratings are placed on watch for possible reduction and those ratings are subsequently reduced and the resulting rating is non-investment grade.

We believe our sources of liquidity, 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 planned capital expenditures, finance anticipated expansion and strategic initiatives, fund debt maturities, pay dividends, and execute purchases under our share repurchase program for the foreseeable future.

New Accounting Pronouncements

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The principal forward-looking statements in this report include:

our financial performance, statements regarding the adequacy of and costs associated with our sources of liquidity, the funding of debt maturities, the continued execution of our share repurchase program, our expected capital expenditures and new lease commitments, the expected compliance with debt covenants, the expected impact of new accounting pronouncements, our intentions regarding future dividends, the expected return on plan assets, the expected outcome of, and adequacy of our reserves for, claims, litigation and the resolution of tax matters, the expected impact of changes in information technology systems, future responses to and effects of the COVID-19 pandemic, and changes in our assumptions and expectations.

All such forward-looking statements are intended to enjoy the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis