What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-26 compared with 2022-05-27 · 101 added, 78 removed, 221 unchanged (45% of the section changed)

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Financial Summary

First quarter 2022 included the following notable items:

Second quarter 2022 included the following notable items:

• GAAP diluted earnings per share were $0.39.

• Adjusted diluted earnings per share were $0.39.

• Total revenue increased 4.0 percent, driven by an increase in comparable sales.

• Comparable sales increased 3.3 percent, driven primarily by a 3.9 percent increase in traffic.

• Total revenue increased 3.5 percent, reflecting total sales growth of 3.3 percent and a 14.8 percent increase in other revenue.

• Comparable sales increased 2.6 percent, driven by a 2.7 percent increase in traffic.

◦ Comparable stores originated sales grew 1.3 percent.

◦ Comparable digitally originated sales increased 9.0 percent.

• 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.

• Operating income of $321 million was 87.0 percent lower than 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.

See Business Environment below for additional information.

Sales were $25.7 billion for the three months ended July 30, 2022, an increase of $0.8 billion , or 3.3 percent, from the comparable prior-year period.

Cash flow required for operating activities was $47 million for the six months ended July 30, 2022, compared with $3.4 billion cash flow provided by operating activities for the six months ended July 31, 2021.

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

Earnings Per Share Three Months Ended

April 30, 2022 May 1, 2021 Change

Earnings Per Share Three Months Ended Six Months Ended

July 30, 2022 July 31, 2021 Change July 30, 2022 July 31, 2021 Change

GAAP diluted earnings per share $ 0.39 $ 3.65 (89.2) % $ 2.55 $ 7.82 (67.4) %

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

For the trailing twelve months ended July 30, 2022, after-tax ROIC was 18.4 percent , compared with 31.7 percent for the trailing twelve months ended July 31, 2021.

The calculation of ROIC is provided on page 19 .

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 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.

Business Environment

During the first two quarters of 2022, we have seen a shift in consumer demand away from discretionary categories (Apparel and Accessories, Hardlines, and Home Furnishings and Décor), resulting in lower-than-expected sales and higher-than-expected inventories in these areas.

In response to this shift in demand, we took several actions to address our inventory position and create additional flexibility in a rapidly changing environment, including increasing promotional and clearance markdowns, removing excess inventory, and cancelling purchase orders.

These factors, net of pricing actions we have taken to address the impact of merchandise and freight cost inflation, have resulted in decreased profitability in the first half of 2022 compared to the prior-year period.

Additionally, in response to continued disruption in our supply chain, we have ordered and are receiving merchandise earlier, and added incremental holding capacity near U.S.

ports to add flexibility in the portions of the supply chain most affected by external volatility.

We believe that the actions we have taken, including the reduction of orders for Fall merchandise in our discretionary categories, reduce our risks and provide additional flexibility to focus on serving guests in a rapidly changing environment.

The Gros s Margin Rate analysis on page 16 and the Inventory section on page 20 provide additional information.

TARGET CORPORATION

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Analysis of Results of Operations

Summary of Operating Income Three Months Ended

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

Summary of Operating Income Three Months Ended Six Months Ended

(dollars in millions) July 30, 2022 July 31, 2021 Change July 30, 2022 July 31, 2021 Change

Sales $ 25,653 $ 24,826 3.3 % $ 50,483 $ 48,705 3.7 %

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Operating income $ 321 $ 2,467 (87.0) % $ 1,667 $ 4,841 (65.6) %

Rate Analysis Three Months Ended

April 30, 2022 May 1, 2021

Rate Analysis Three Months Ended Six Months Ended

July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021

Gross margin rate 21.5 % 30.4 % 23.5 % 30.2 %

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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

April 30, 2022 May 1, 2021

Comparable Sales Three Months Ended Six Months Ended

July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021

Comparable sales change 2.6 % 8.9 % 3.0 % 15.3 %

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ANALYSIS OF RESULTS OF OPERATIONS

Comparable Sales by Channel Three Months Ended

April 30, 2022 May 1, 2021

Comparable Sales by Channel Three Months Ended Six Months Ended

July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021

Stores originated comparable sales change 1.3 % 8.7 % 2.3 % 13.0 %

Digitally originated comparable sales change 9.0 9.9 6.1 27.3

Sales by Channel Three Months Ended

April 30, 2022 May 1, 2021

Sales by Channel Three Months Ended Six Months Ended

July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021

Stores originated 82.1 % 83.0 % 81.9 % 82.3 %

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Total 100 % 100 % 100 % 100 %

Sales by Fulfillment Channel Three Months Ended

April 30, 2022 May 1, 2021

Sales by Fulfillment Channel Three Months Ended Six Months Ended

July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021

Stores 96.6 % 96.6 % 96.6 % 96.4 %

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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

April 30, 2022 May 1, 2021

Sales by Product Category Three Months Ended Six Months Ended

July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021

Apparel and accessories 18 % 19 % 18 % 18 %

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

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

RedCard sales increased for the three and six months ended July 30, 2022, and July 31, 2021;

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

RedCard Penetration Three Months Ended

April 30, 2022 May 1, 2021

RedCard Penetration Three Months Ended Six Months Ended

July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021

Target Debit Card 11.2 % 11.6 % 11.4 % 11.9 %

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Gross Margin Rate

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

• 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;

Quarter-to-Date

For the three months ended July 30, 2022, our gross margin rate was 21.5 percent compared with 30.4 percent in the comparable prior-year period.

For the six months ended July 30, 2022, our gross margin rate was 23.5 percent compared with 30.2 percent in the comparable prior-year period.

For both the three and six months ended July 30, 2022, the decrease reflected the net impact of

• merchandising pressure, including

◦ higher clearance and promotional markdown rates, which were largely the result of inventory impairments and other actions taken in our discretionary categories;

◦ higher merchandise and freight costs and higher inventory shrink, partially offset by the benefit of retail price increases;

• supply chain pressure related to increased compensation and headcount in our distribution centers, costs of managing excess inventory, and higher last-mile shipping cost;

• 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.

Business Environment on page 13 provides additional information.

Selling, General, and Administrative Expense Rate

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

For the three months ended July 30, 2022, our SG&A expense rate was 19.2 percent compared with 19.3 percent for the comparable prior-year period.

For the six months ended July 30, 2022, our SG&A expense rate was 19.1 percent compared with 19.0 percent for the comparable prior-year end.

For both the three and six months ended July 30, 2022, the rates reflected lower incentive compensation, and the net impact of cost increases across our business, including investments in hourly team member wages, compared to the comparable prior-year periods.

TARGET CORPORATION

Q2 2022 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 Six Months Ended

July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021

Beginning store count 1,933 1,909 1,926 1,897

Opened 5 2 12 14

Closed (1) (2) (1) (2)

Ending store count 1,937 1,909 1,937 1,909

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

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

July 30, 2022 January 29, 2022 July 31, 2021 July 30, 2022 January 29, 2022 July 31, 2021

170,000 or more sq.

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

Net interest expense was $112 million and $224 million for the three and six months ended July 30, 2022, respectively, compared with $104 million and $212 million in the comparable prior-year period s.

The increase in net interest expense was primarily due to higher average debt and commercial paper levels for the three and six months ended July 30, 2022, compared with the prior-year periods.

Net Other (Income) / Expense

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.

Net Other (Income) / Expense was $(8) million and $(23) million for the three and six months ended July 30, 2022, respectively, compared with $(7) million and $(350) million in the comparable prior-year periods.

The six months ended July 31, 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 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.

Our effective income tax rate for the three and six months ended July 30, 2022, was 15.8 percent and 18.7 percent, respectively, compared with 23.4 percent and 21.4 percent in the respective comparable prior-year periods.

For the three month period, the decrease reflects lower pretax earnings in the current year resulting in a larger tax rate benefit from ongoing and discrete tax items.

For the six month period, the decrease reflects lower pretax earnings in the current period, partially offset by the impacts of discrete tax benefits in the prior-year period, including the resolution of certain income tax matters.

Our effective tax rate is generally more volatile at lower amounts of pretax income because the impact of discrete, deductible, and nondeductible tax items and credits is greater.

TARGET CORPORATION

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Reconciliation of Non-GAAP Adjusted EPS Three Months Ended

April 30, 2022 May 1, 2021

July 30, 2022 July 31, 2021

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

GAAP diluted earnings per share $ 0.39 $ 3.65

$ — $ — $ — $ (5) $ (4) $ (0.01)

Adjusted diluted earnings per share $ 0.39 $ 3.64

Reconciliation of Non-GAAP Adjusted EPS Six Months Ended

July 30, 2022 July 31, 2021

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

GAAP diluted earnings per share $ 2.55 $ 7.82

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

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

EBIT and EBITDA Three Months Ended

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

EBIT and EBITDA Three Months Ended Six Months Ended

(dollars in millions) July 30, 2022 July 31, 2021 Change July 30, 2022 July 31, 2021 Change

Net earnings $ 183 $ 1,817 (89.9) % $ 1,192 $ 3,914 (69.6) %

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+ Total depreciation and amortization (a)

650 633 2.8 1,329 1,300 2.3

EBITDA $ 979 $ 3,107 (68.5) % $ 3,019 $ 6,491 (53.5) %

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Trailing Twelve Months

Numerator April 30, 2022 May 1, 2021

Numerator July 30, 2022 July 31, 2021

Operating income $ 5,773 $ 8,611

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Net operating profit after taxes $ 4,633 $ 7,123

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

Denominator July 30, 2022 July 31, 2021 August 1, 2020

Current portion of long-term debt and other borrowings $ 1,649 $ 1,190 $ 109

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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 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.

(b) Calculated using the effective tax rates, which were 21.7 percent and 21.2 percent for the trailing twelve months ended July 30, 2022, and July 31, 2021, respectively.

For the trailing twelve months ended July 30, 2022, and July 31, 2021, includes tax effect of $1.3 billion and $1.9 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 $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 cash and cash equivalents balance was $1.1 billion, $5.9 billion, and $7.4 billion as of July 30, 2022, January 29, 2022, and July 31, 2021, respectively.

Our cash and cash equivalents balance includes short-term investments of $189 million, $5.0 billion, and $6.4 billion as of July 30, 2022, January 29, 2022, and July 31, 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 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 .

Cash flows required for operating activities were $47 million for the six months ended July 30, 2022, compared with $3.4 billion of cash flows provided by operating activities for the six months ended July 31, 2021.

For the six months ended July 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 six months ended July 31, 2021.

Inventory was $15.3 billion as of July 30, 2022, compared with $13.9 billion and $11.3 billion at January 29, 2022, and July 31, 2021, respectively.

The increase over the balance as of July 31, 2021, primarily reflects the following:

• our decision to move merchandise receipt timing earlier due to expected supply chain volatility,

• investments in our inventory position in our frequency categories (Food and Beverage and Beauty and Household Essentials),

• lower-than-expected sales in our discretionary categories, partially offset by actions taken during the current year to reduce excess inventory in these categories, and

• increases in unit costs across all of our categories.

The increase was amplified by unintentionally low inventory levels last year resulting from supply chain disruptions, and demand shifts, described within the Business En vironmen t section on page 13 .

Investing Cash Flows

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.

Investing cash flows included capital investments of $2.5 billion and $1.3 billion for the six months ended July 30, 2022, and July 31, 2021, respectively.

The increase primarily reflects an increase in store remodel activity, investment in supply chain, and the impact of inflation on these projects.

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

We paid dividends totaling $417 million ($0.90 per share) and $841 million ($1.80 per share) for the three and six months ended July 30, 2022, respectively, and $336 million ($0.68 per share) and $676 million ($1.36 per share) for the three and six months ended July 31, 2021, respectively, a per share increase of 32.4 percent.

We declared dividends totaling $502 million ($1.08 per share) during the second quarter of 2022 and $445 million ($0.90 per share) during the second quarter of 2021, a per share increase of 20.0 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

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.

TARGET CORPORATION

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ANALYSIS OF FINANCIAL CONDITION Index to Notes

Share Repurchase

We returned $2.6 billion to shareholders through share repurchase during the six months ended July 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 9 to the Financial Statements for more information.

Our financing strategy is to ensure liquidity and access to capital markets, to maintain a balanced spectrum of debt maturities, and to manage our net exposure to floating interest rate volatility.

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

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

Credit Ratings Moody’s Standard and Poor’s Fitch

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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.

As of July 30, 2022, we had $1.5 billion outstanding under our commercial paper program.

We did not have any balances outstanding under our commercial paper program as of July 31, 2021.

Note 6 to the Financial Statements provides additional information.

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

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.

Additionally, as of July 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.

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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