TARGET CORP 10-Q

Item 1. Financial Statements Consolidated Statements of Operations Three Months Ended Six Months Ended (millions, except per share data) (unaudited) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Sales $ 25,653 $ 24,826 $ 50,483 $ 48,705 Other revenue 384 334 724 652 Total revenue 26,037 25,160 51,207 49,357 Cost of sales 20,142 17,280 38,603 33,996 Selling, general and administrative expenses 5,002 4,849 9,764 9,358 Depreciation and amortization (exclusive of depreciation included in cost of sales) 572 564 1,173 1,162 Operating income 321 2,467 1,667 4,841 Net interest expense 112 104 224 212 Net other (income) / expense ( 8 ) ( 7 ) ( 23 ) ( 350 ) Earnings before income taxes 217 2,370 1,466 4,979 Provision for income taxes 34 553 274 1,065 Net earnings $ 183 $ 1,817 $ 1,192 $ 3,914 Basic earnings per share $ 0.40 $ 3.68 $ 2.57 $ 7.89 Diluted earnings per share $ 0.39 $ 3.65 $ 2.55 $ 7.82 Weighted average common shares outstanding Basic 461.5 493.1 463.8 495.8 Diluted 463.6 497.5 466.8 500.4 Antidilutive shares 1.3 — 1.0 — See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q2 2022 Form 10-Q 1 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Comprehensive Income Three Months Ended Six Months Ended (millions) (unaudited) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Net earnings $ 183 $ 1,817 $ 1,192 $ 3,914 Other comprehensive income, net of tax Pension benefit liabilities 11 20 22 42 Cash flow hedges and currency translation adjustment ( 28 ) ( 8 ) 162 1 Other comprehensive income ( 17 ) 12 184 43 Comprehensive income $ 166 $ 1,829 $ 1,376 $ 3,957 See accompanying Notes to Consolidated Financial State ments . TARGET CORPORATION Q2 2022 Form 10-Q 2 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Financial Position (millions, except footnotes) (unaudited) July 30, 2022 January 29, 2022 July 31, 2021 Assets Cash and cash equivalents $ 1,117 $ 5,911 $ 7,368 Inventory 15,320 13,902 11,259 Other current assets 2,016 1,760 1,604 Total current assets 18,453 21,573 20,231 Property and equipment Land 6,161 6,164 6,148 Buildings and improvements 33,694 32,985 32,133 Fixtures and equipment 6,744 6,407 5,892 Computer hardware and software 2,684 2,505 2,260 Construction-in-progress 2,245 1,257 944 Accumulated depreciation ( 21,708 ) ( 21,137 ) ( 20,133 ) Property and equipment, net 29,820 28,181 27,244 Operating lease assets 2,542 2,556 2,503 Other noncurrent assets 1,655 1,501 1,407 Total assets $ 52,470 $ 53,811 $ 51,385 Liabilities and shareholders’ investment Accounts payable $ 14,891 $ 15,478 $ 12,632 Accrued and other current liabilities 5,905 6,098 5,600 Current portion of long-term debt and other borrowings 1,649 171 1,190 Total current liabilities 22,445 21,747 19,422 Long-term debt and other borrowings 13,453 13,549 11,589 Noncurrent operating lease liabilities 2,543 2,493 2,462 Deferred income taxes 1,862 1,566 1,146 Other noncurrent liabilities 1,575 1,629 1,906 Total noncurrent liabilities 19,433 19,237 17,103 Shareholders’ investment Common stock 38 39 41 Additional paid-in capital 6,502 6,421 6,332 Retained earnings 4,421 6,920 9,200 Accumulated other comprehensive loss ( 369 ) ( 553 ) ( 713 ) Total shareholders’ investment 10,592 12,827 14,860 Total liabilities and shareholders’ investment $ 52,470 $ 53,811 $ 51,385 Common Stock Authorized 6,000,000,000 shares, $ 0.0833 par value; 460,236,393 , 471,274,073 and 489,651,196 shares issued and outstanding as of July 30, 2022, January 29, 2022, and July 31, 2021, respectively. Preferred Stock Authorized 5,000,000 shares, $ 0.01 par value; no shares were issued or outstanding during any period presented. See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q2 2022 Form 10-Q 3 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Cash Flows Six Months Ended (millions) (unaudited) July 30, 2022 July 31, 2021 Operating activities Net earnings $ 1,192 $ 3,914 Adjustments to reconcile net earnings to cash (required for) provided by operating activities: Depreciation and amortization 1,329 1,300 Share-based compensation expense 122 138 Deferred income taxes 227 143 Gain on Dermstore sale — ( 335 ) Noncash losses / (gains) and other, net 108 7 Changes in operating accounts: Inventory ( 1,418 ) ( 606 ) Other assets ( 179 ) 3 Accounts payable ( 784 ) ( 311 ) Accrued and other liabilities ( 644 ) ( 831 ) Cash (required for) provided by operating activities ( 47 ) 3,422 Investing activities Expenditures for property and equipment ( 2,523 ) ( 1,338 ) Proceeds from disposal of property and equipment 4 15 Proceeds from Dermstore sale — 356 Other investments 1 ( 5 ) Cash required for investing activities ( 2,518 ) ( 972 ) Financing activities Change in commercial paper, net 1,545 — Reductions of long-term debt ( 113 ) ( 72 ) Dividends paid ( 842 ) ( 676 ) Repurchase of stock ( 2,821 ) ( 2,850 ) Stock option exercises 2 5 Cash required for financing activities ( 2,229 ) ( 3,593 ) Net decrease in cash and cash equivalents ( 4,794 ) ( 1,143 ) Cash and cash equivalents at beginning of period 5,911 8,511 Cash and cash equivalents at end of period $ 1,117 $ 7,368 Supplemental information Leased assets obtained in exchange for new finance lease liabilities $ 107 $ 182 Leased assets obtained in exchange for new operating lease liabilities 97 386 See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q2 2022 Form 10-Q 4 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Shareholders’ Investment Common Stock Additional Accumulated Other Stock Par Paid-in Retained Comprehensive (millions) (unaudited) Shares Value Capital Earnings (Loss) / Income Total January 30, 2021 500.9 $ 42 $ 6,329 $ 8,825 $ ( 756 ) $ 14,440 Net earnings — — — 2,097 — 2,097 Other comprehensive income — — — — 31 31 Dividends declared — — — ( 343 ) — ( 343 ) Repurchase of stock ( 6.1 ) ( 1 ) — ( 1,207 ) — ( 1,208 ) Stock options and awards 1.3 — ( 58 ) — — ( 58 ) May 1, 2021 496.1 $ 41 $ 6,271 $ 9,372 $ ( 725 ) $ 14,959 Net earnings — — — 1,817 — 1,817 Other comprehensive income — — — — 12 12 Dividends declared — — — ( 445 ) — ( 445 ) Repurchase of stock ( 6.6 ) — — ( 1,544 ) — ( 1,544 ) Stock options and awards 0.2 — 61 — — 61 July 31, 2021 489.7 $ 41 $ 6,332 $ 9,200 $ ( 713 ) $ 14,860 Net earnings — — — 1,488 — 1,488 Other comprehensive income — — — — 26 26 Dividends declared — — — ( 439 ) — ( 439 ) Repurchase of stock ( 8.8 ) ( 1 ) — ( 2,180 ) — ( 2,181 ) Stock options and awards — — 49 — — 49 October 30, 2021 480.9 $ 40 $ 6,381 $ 8,069 $ ( 687 ) $ 13,803 Net earnings — — — 1,544 — 1,544 Other comprehensive income — — — — 134 134 Dividends declared — — — ( 428 ) — ( 428 ) Repurchase of stock ( 9.8 ) ( 1 ) — ( 2,265 ) — ( 2,266 ) Stock options and awards 0.2 — 40 — — 40 January 29, 2022 471.3 $ 39 $ 6,421 $ 6,920 $ ( 553 ) $ 12,827 TARGET CORPORATION Q2 2022 Form 10-Q 5 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Shareholders’ Investment Common Stock Additional Accumulated Other Stock Par Paid-in Retained Comprehensive (millions) (unaudited) Shares Value Capital Earnings (Loss) / Income Total January 29, 2022 471.3 $ 39 $ 6,421 $ 6,920 $ ( 553 ) $ 12,827 Net earnings — — — 1,009 — 1,009 Other comprehensive income — — — — 201 201 Dividends declared — — — ( 426 ) — ( 426 ) Repurchase of stock ( 0.1 ) — — ( 10 ) — ( 10 ) Accelerated share repurchase pending final settlement ( 8.9 ) ( 1 ) ( 751 ) ( 1,998 ) — ( 2,750 ) Stock options and awards 1.4 1 ( 78 ) — — ( 77 ) April 30, 2022 463.7 $ 39 $ 5,592 $ 5,495 $ ( 352 ) $ 10,774 Net earnings — — — 183 — 183 Other comprehensive income — — — — ( 17 ) ( 17 ) Dividends declared — — — ( 502 ) — ( 502 ) Repurchase of stock ( 3.6 ) ( 1 ) 870 ( 755 ) — 114 Stock options and awards 0.1 — 40 — — 40 July 31, 2022 460.2 $ 38 $ 6,502 $ 4,421 $ ( 369 ) $ 10,592 We declared $ 1.08 and $ 0.90 dividends per share for the three months ended July 30, 2022, and July 31, 2021, and $ 3.38 per share for the fiscal year ended January 29, 2022. See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q2 2022 Form 10-Q 6 FINANCIAL STATEMENTS Table of Contents INDEX Index to Notes INDEX TO NOTES Notes to Consolidated Financial Statements 8 Note 1 Accounting Policies 8 Note 2 Dermstore Sale 8 Note 3 Revenues 9 Note 4 Fair Value Measurements 10 Note 5 Property and Equipment 10 Note 6 Commercial Paper and Long-Term Debt 10 Note 7 Derivative Financial Instruments 10 Note 8 Income Taxes 11 Note 9 Share Repurchase 11 Note 10 Pension Benefits 12 Note 11 Accumulated Other Comprehensive Income (Loss) 12 TARGET CORPORATION Q2 2022 Form 10-Q 7 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes Notes to Consolidated Financial Statements (unaudited) 1. Accounting Policies These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations of the Securities and Exchange Commission applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by United States generally accepted accounting principles (U.S. GAAP) for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statement disclosures in our 2021 Form 10-K. We use the same accounting policies in preparing quarterly and annual financial statements. We operate as a single segment that is designed to enable guests to purchase products seamlessly in stores or through our digital channels. Nearly all of our revenues are generated in the U.S. The vast majority of our long-lived assets are located within the U.S. Due to the seasonal nature of our business, quarterly revenues, expenses, earnings, and cash flows are not necessarily indicative of the results that may be expected for the full year. 2. 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 Q2 2022 Form 10-Q 8 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes 3. Revenues General merchandise sales represent the vast majority of our revenues. We also earn revenues from a variety of other sources, most notably credit card profit-sharing income from our arrangement with TD Bank Group (TD). Revenues Three Months Ended Six Months Ended (millions) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Apparel and accessories (a) $ 4,617 $ 4,751 $ 8,856 $ 9,020 Beauty and household essentials (b) 7,208 6,726 14,261 13,090 Food and beverage (c) 5,268 4,687 10,773 9,543 Hardlines (d) 3,866 3,867 7,579 7,813 Home furnishings and décor (e) 4,647 4,748 8,918 9,158 Other 47 47 96 81 Sales 25,653 24,826 50,483 48,705 Credit card profit sharing 181 172 366 343 Other 203 162 358 309 Other revenue 384 334 724 652 Total revenue $ 26,037 $ 25,160 $ 51,207 $ 49,357 (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. Sales are recognized net of expected returns, which we estimate using historical return patterns and our expectation of future returns. As of July 30, 2022, January 29, 2022, and July 31, 2021, the accrual for estimated returns was $ 175 million, $ 165 million, and $ 176 million, respectively. Revenue from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance. Gift Card Liability Activity January 29, 2022 Gift Cards Issued During Current Period But Not Redeemed (b) Revenue Recognized From Beginning Liability July 30, 2022 (millions) Gift card liability (a) $ 1,202 $ 423 $ ( 660 ) $ 965 (a) Included in Accrued and Other Current Liabilities. (b) Net of estimated breakage. Credit card profit sharing — We receive payments under a credit card program agreement with TD. Under the agreement, we receive a percentage of the profits generated by the Target Credit Card and Target MasterCard receivables in exchange for performing account servicing and primary marketing functions. TD underwrites, funds, and owns Target Credit Card and Target MasterCard receivables, controls risk management policies, and oversees regulatory compliance. TARGET CORPORATION Q2 2022 Form 10-Q 9 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes Other — Includes advertising, Shipt membership and service revenues, commissions earned on third-party sales through Target.com, rental income, and other miscellaneous revenues. 4. Fair Value Measurements Fair value measurements are reported in one of three levels reflecting the significant inputs used to determine fair value. Financial Instruments Measured On a Recurring Basis Fair Value (millions) Classification Measurement Level July 30, 2022 January 29, 2022 July 31, 2021 Assets Short-term investments Cash and Cash Equivalents Level 1 $ 189 $ 4,985 $ 6,439 Prepaid forward contracts Other Current Assets Level 1 26 35 44 Interest rate swaps Other Current Assets Level 2 34 17 — Interest rate swaps Other Noncurrent Assets Level 2 290 135 160 Liabilities Interest rate swaps Other Noncurrent Liabilities Level 2 6 — — Significant Financial Instruments Not Measured at Fair Value (a) (millions) July 30, 2022 January 29, 2022 July 31, 2021 Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt, including current portion (b) $ 11,511 $ 11,529 $ 11,568 $ 12,808 $ 10,620 $ 12,594 (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. 5. Property and Equipment We review long-lived assets for impairment when store performance expectations, events, or changes in circumstances—such as a decision to relocate or close a store, office, or distribution center, discontinue a project, or make significant software changes—indicate that the asset’s carrying value may not be recoverable. We recognized impairment charges of $ 27 million and $ 50 million for the three and six months ended July 30, 2022, respectively. We recognized impairment charges of $ 39 million and $ 81 million for the three and six months ended July 31, 2021, respectively. These impairment charges are included in Selling, General and Administrative Expenses (SG&A). 6. Commercial Paper and Long-Term Debt We obtain short-term financing from time to time under our commercial paper program. For the six months ended July 30, 2022, the maximum amount outstanding was $ 1.5 billion, and the average daily amount outstanding was $ 538 million, at a weighted average annual interest rate of 1.1 percent. As of July 30, 2022, $ 1.5 billion was outstanding and is classified within Current Portion of Long-Term Debt and Other Borrowings on our Consolidated Statement of Financial Position. No balances were outstanding at any time during 2021. 7. 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 4 to the Consolidated Financial Statements provides the fair value and classification of these instruments. TARGET CORPORATION Q2 2022 Form 10-Q 10 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes We were party to interest rate swaps with notional amounts totaling $ 2.25 billion as of July 30, 2022, and $ 1.5 billion as of January 29, 2022, and July 31, 2021. We pay a floating rate and receive a fixed rate under each of these agreements. All of the agreements are designated as fair value hedges, and all were considered to be perfectly effective under the shortcut method during the three and six months ended July 30, 2022, and July 31, 2021. We were party to forward-starting interest rate swaps with notional amounts totaling $ 2.15 billion as of July 30, 2022, and January 29, 2022, and $ 250 million as of July 31, 2021. We use these derivative financial instruments, which have been designated as cash flow hedges, to hedge the interest rate exposure of anticipated future debt issuances during the next three years. Based on the fair value of these swaps as of July 30, 2022, Accumulated Other Comprehensive Loss (AOCI) included an unrealized gain of $ 296 million. Any unrealized gain or loss at the time of debt issuance will be reclassified and impact Net Interest Expense as we record interest expense on the associated debt. Effect of Hedges on Debt (millions) July 30, 2022 January 29, 2022 July 31, 2021 Long-term debt and other borrowings Carrying amount of hedged debt $ 2,263 $ 1,572 $ 1,649 Cumulative hedging adjustments, included in carrying amount 22 77 154 Effect of Hedges on Net Interest Expense Three Months Ended Six Months Ended (millions) July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Gain (loss) on fair value hedges recognized in Net Interest Expense Interest rate swap designated as fair value hedges $ 49 $ 22 $ ( 55 ) $ ( 29 ) Hedged debt ( 49 ) ( 22 ) 55 29 Total $ — $ — $ — $ — 8. Income Taxes For the three and six months ended July 30, 2022 , our effective tax rate was 15.8 percent and 18.7 percent, respectively, compared with 23.4 percent and 21.4 percent for the three and six months ended July 31, 2021, respectively. For the three month period, the decrease reflects lower pretax earnings during the three months ended July 30, 2022, resulting in a larger tax rate benefit from ongoing and discrete tax items, compared with the prior year. For the six month period, the decrease reflects lower pretax earnings during the six months ended July 30, 2022, compared with the prior year, partially offset by the impacts of discrete tax benefits during the six months ended July 31, 2021, including the resolution of certain income tax matters. 9. Share Repurchase We periodically repurchase shares of our common stock under a board-authorized repurchase program through a combination of open market transactions, accelerated share repurchase (ASR) arrangements, and other privately negotiated transactions with financial institutions. Share Repurchase Activity Three Months Ended Six Months Ended (millions, except per share data) July 31, 2022 (a) July 31, 2021 July 31, 2022 (a) July 31, 2021 Number of shares purchased 12.5 6.6 12.5 12.7 Average price paid per share $ 211.58 $ 233.81 $ 211.57 $ 213.06 Total investment $ 2,636 $ 1,535 $ 2,646 $ 2,700 (a) Includes activity related to the ASR arrangement entered in first quarter 2022 because final settlement occurred in second quarter 2022. Under the ASR arrangement, we repurchased 12.5 million shares for a total cash investment of $ 2.6 billion. We did not enter into any other ASR arrangements during the periods presented. TARGET CORPORATION Q2 2022 Form 10-Q 11 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes 10. Pension Benefits We provide pension plan benefits to eligible team members. Net Pension Benefits Expense Three Months Ended Six Months Ended (millions) Classification July 30, 2022 July 31, 2021 July 30, 2022 July 31, 2021 Service cost benefits earned SG&A $ 23 $ 24 $ 46 $ 48 Interest cost on projected benefit obligation Net Other (Income) / Expense 30 24 59 48 Expected return on assets Net Other (Income) / Expense ( 58 ) ( 59 ) ( 117 ) ( 118 ) Amortization of losses Net Other (Income) / Expense 15 28 30 57 Amortization of prior service cost Net Other (Income) / Expense 10 ( 1 ) 10 ( 1 ) Total $ 20 $ 16 $ 28 $ 34 11. Accumulated Other Comprehensive Income (Loss) Change in Accumulated Other Comprehensive Income (Loss) Cash Flow Hedges Currency Translation Adjustment Pension Total (millions) January 29, 2022 $ 49 $ ( 19 ) $ ( 583 ) $ ( 553 ) Other comprehensive income (loss) before reclassifications, net of tax 163 ( 1 ) — 162 Amounts reclassified from AOCI, net of tax — — 22 22 July 30, 2022 $ 212 $ ( 20 ) $ ( 561 ) $ ( 369 ) TARGET CORPORATION Q2 2022 Form 10-Q 12 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents FINANCIAL SUMMARY Index to Notes