TARGET CORP 10-Q

Item 1. Financial Statements Consolidated Statements of Operations Three Months Ended Nine Months Ended (millions, except per share data) (unaudited) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Sales $ 26,122 $ 25,290 $ 76,605 $ 73,995 Other revenue 396 362 1,120 1,014 Total revenue 26,518 25,652 77,725 75,009 Cost of sales 19,680 18,206 58,283 52,202 Selling, general and administrative expenses 5,219 4,859 14,983 14,217 Depreciation and amortization (exclusive of depreciation included in cost of sales) 597 577 1,770 1,739 Operating income 1,022 2,010 2,689 6,851 Net interest expense 125 105 349 317 Net other (income) / expense ( 12 ) ( 6 ) ( 35 ) ( 356 ) Earnings before income taxes 909 1,911 2,375 6,890 Provision for income taxes 197 423 471 1,488 Net earnings $ 712 $ 1,488 $ 1,904 $ 5,402 Basic earnings per share $ 1.55 $ 3.07 $ 4.11 $ 10.97 Diluted earnings per share $ 1.54 $ 3.04 $ 4.09 $ 10.87 Weighted average common shares outstanding Basic 460.3 484.8 462.6 492.2 Diluted 462.5 489.4 465.3 496.8 Antidilutive shares 1.3 — 1.1 — See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q3 2022 Form 10-Q 1 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Comprehensive Income Three Months Ended Nine Months Ended (millions) (unaudited) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Net earnings $ 712 $ 1,488 $ 1,904 $ 5,402 Other comprehensive income, net of tax Pension benefit liabilities 11 21 33 63 Cash flow hedges and currency translation adjustment 150 5 312 6 Other comprehensive income 161 26 345 69 Comprehensive income $ 873 $ 1,514 $ 2,249 $ 5,471 See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q3 2022 Form 10-Q 2 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Financial Position (millions, except footnotes) (unaudited) October 29, 2022 January 29, 2022 October 30, 2021 Assets Cash and cash equivalents $ 954 $ 5,911 $ 5,753 Inventory 17,117 13,902 14,958 Other current assets 2,322 1,760 1,865 Total current assets 20,393 21,573 22,576 Property and equipment Land 6,214 6,164 6,146 Buildings and improvements 34,279 32,985 32,478 Fixtures and equipment 7,184 6,407 6,144 Computer hardware and software 2,899 2,505 2,447 Construction-in-progress 2,358 1,257 1,302 Accumulated depreciation ( 22,013 ) ( 21,137 ) ( 20,602 ) Property and equipment, net 30,921 28,181 27,915 Operating lease assets 2,596 2,556 2,539 Other noncurrent assets 1,705 1,501 1,381 Total assets $ 55,615 $ 53,811 $ 54,411 Liabilities and shareholders’ investment Accounts payable $ 15,438 $ 15,478 $ 16,250 Accrued and other current liabilities 6,138 6,098 5,925 Current portion of long-term debt and other borrowings 2,207 171 1,176 Total current liabilities 23,783 21,747 23,351 Long-term debt and other borrowings 14,237 13,549 11,586 Noncurrent operating lease liabilities 2,590 2,493 2,494 Deferred income taxes 2,240 1,566 1,246 Other noncurrent liabilities 1,746 1,629 1,931 Total noncurrent liabilities 20,813 19,237 17,257 Shareholders’ investment Common stock 38 39 40 Additional paid-in capital 6,558 6,421 6,381 Retained earnings 4,631 6,920 8,069 Accumulated other comprehensive loss ( 208 ) ( 553 ) ( 687 ) Total shareholders’ investment 11,019 12,827 13,803 Total liabilities and shareholders’ investment $ 55,615 $ 53,811 $ 54,411 Common Stock Authorized 6,000,000,000 shares, $ 0.0833 par value; 460,297,654 , 471,274,073 and 480,905,493 shares issued and outstanding as of October 29, 2022, January 29, 2022, and October 30, 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 Q3 2022 Form 10-Q 3 FINANCIAL STATEMENTS Table of Contents Index to Notes Consolidated Statements of Cash Flows Nine Months Ended (millions) (unaudited) October 29, 2022 October 30, 2021 Operating activities Net earnings $ 1,904 $ 5,402 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization 2,004 1,952 Share-based compensation expense 177 187 Deferred income taxes 548 233 Gain on Dermstore sale — ( 335 ) Noncash losses / (gains) and other, net 141 18 Changes in operating accounts: Inventory ( 3,215 ) ( 4,305 ) Other assets ( 205 ) ( 117 ) Accounts payable ( 224 ) 3,284 Accrued and other liabilities ( 578 ) ( 722 ) Cash provided by operating activities 552 5,597 Investing activities Expenditures for property and equipment ( 4,323 ) ( 2,483 ) Proceeds from disposal of property and equipment 4 23 Proceeds from Dermstore sale — 356 Other investments 16 14 Cash required for investing activities ( 4,303 ) ( 2,090 ) Financing activities Change in commercial paper, net 2,104 — Additions to long-term debt 991 — Reductions of long-term debt ( 139 ) ( 112 ) Dividends paid ( 1,339 ) ( 1,116 ) Repurchase of stock ( 2,825 ) ( 5,042 ) Stock option exercises 2 5 Cash required for financing activities ( 1,206 ) ( 6,265 ) Net decrease in cash and cash equivalents ( 4,957 ) ( 2,758 ) Cash and cash equivalents at beginning of period 5,911 8,511 Cash and cash equivalents at end of period $ 954 $ 5,753 Supplemental information Leased assets obtained in exchange for new finance lease liabilities $ 116 $ 234 Leased assets obtained in exchange for new operating lease liabilities 203 482 See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q3 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 Q3 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 Net earnings — — — 712 — 712 Other comprehensive income — — — — 161 161 Dividends declared — — — ( 502 ) — ( 502 ) Stock options and awards 0.1 — 56 — — 56 October 29, 2022 460.3 $ 38 $ 6,558 $ 4,631 $ ( 208 ) $ 11,019 We declared $ 1.08 and $ 0.90 dividends per share for the three months ended October 29, 2022, and October 30, 2021, and $ 3.38 per share for the fiscal year ended January 29, 2022. See accompanying Notes to Consolidated Financial Statements . TARGET CORPORATION Q3 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 11 Note 8 Share Repurchase 12 Note 9 Pension Benefits 12 Note 10 Accumulated Other Comprehensive Income (Loss) 12 TARGET CORPORATION Q3 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 Q3 2022 Form 10-Q 8 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes 3. Revenues 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 Nine Months Ended (millions) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Apparel and accessories (a) $ 4,367 $ 4,364 $ 13,223 $ 13,384 Beauty and household essentials (b) 7,465 6,980 21,726 20,070 Food and beverage (c) 5,748 5,074 16,521 14,617 Hardlines (d) 3,665 3,841 11,244 11,654 Home furnishings and décor (e) 4,832 4,989 13,750 14,147 Other 45 42 141 123 Sales 26,122 25,290 76,605 73,995 Credit card profit sharing 184 184 550 527 Other 212 178 570 487 Other revenue 396 362 1,120 1,014 Total revenue $ 26,518 $ 25,652 $ 77,725 $ 75,009 (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 October 29, 2022, January 29, 2022, and October 30, 2021, the accrual for estimated returns was $ 209 million, $ 165 million, and $ 210 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 October 29, 2022 (millions) Gift card liability (a) $ 1,202 $ 533 $ ( 772 ) $ 963 (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 Q3 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 October 29, 2022 January 29, 2022 October 30, 2021 Assets Short-term investments Cash and Cash Equivalents Level 1 $ — $ 4,985 $ 4,818 Prepaid forward contracts Other Current Assets Level 1 27 35 44 Interest rate swaps Other Current Assets Level 2 53 17 12 Interest rate swaps Other Noncurrent Assets Level 2 341 135 116 Liabilities Interest rate swaps Other Noncurrent Liabilities Level 2 147 — — Significant Financial Instruments Not Measured at Fair Value (a) (millions) October 29, 2022 January 29, 2022 October 30, 2021 Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt, including current portion (b) $ 12,505 $ 11,291 $ 11,568 $ 12,808 $ 10,605 $ 12,300 (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 $ 5 million and $ 55 million for the three and nine months ended October 29, 2022, respectively. We recognized impairment charges of $ 3 million and $ 84 million for the three and nine months ended October 30, 2021, respectively. These impairment charges are included in Selling, General and Administrative Expenses (SG&A). 6. Commercial Paper and Long-Term Debt In September 2022, we issued unsecured fixed rate debt of $ 1.0 billion at 4.5 percent that matures in September 2032. In connection with this issuance, we terminated certain of our forward-starting interest rate swaps. Note 7 provides additional information. We obtain short-term financing from time to time under our commercial paper program. For the nine months ended October 29, 2022, the maximum amount outstanding was $ 2.1 billion, and the average daily amount outstanding was $ 713 million, at a weighted average annual interest rate of 1.91 percent. As of October 29, 2022, $ 2.1 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. TARGET CORPORATION Q3 2022 Form 10-Q 10 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes In October 2022, we obtained a new committed $ 1.0 billion 364 -day unsecured revolving credit facility that will expire in October 2023. We also extended our existing committed $ 3.0 billion unsecured revolving credit facility, which now expires in October 2027. No balances were outstanding under either credit facility at any time during 2021 or 2022. 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. We were party to interest rate swaps with notional amounts totaling $ 2.45 billion as of October 29, 2022, and $ 1.50 billion as of January 29, 2022, and October 30, 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 nine months ended October 29, 2022, and October 30, 2021. We were party to forward-starting interest rate swaps with notional amounts totaling $ 1.45 billion as of October 29, 2022, $ 2.15 billion as of January 29, 2022, and $ 1.25 billion as of October 30, 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 two years . In September 2022, we terminated forward-starting interest rate swap agreements that hedged $ 700 million of the $ 1.0 billion debt issuance described in Note 6 . The resulting gain of $ 109 million was recorded in Accumulated Other Comprehensive Loss (AOCI) and will be recognized as a reduction to Net Interest Expense over the term of the debt. Based on the fair value of our remaining forward-starting interest rate swaps as of October 29, 2022, AOCI included an unrealized gain of $ 394 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) October 29, 2022 January 29, 2022 October 30, 2021 Long-term debt and other borrowings Carrying amount of hedged debt $ 2,294 $ 1,572 $ 1,609 Cumulative hedging adjustments, included in carrying amount ( 146 ) 77 114 Effect of Hedges on Net Interest Expense Three Months Ended Nine Months Ended (millions) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Gain (loss) on fair value hedges recognized in Net Interest Expense Interest rate swap designated as fair value hedges $ ( 168 ) $ ( 40 ) $ ( 223 ) $ ( 69 ) Hedged debt 168 40 223 69 Total $ — $ — $ — $ — TARGET CORPORATION Q3 2022 Form 10-Q 11 FINANCIAL STATEMENTS Table of Contents NOTES Index to Notes 8. 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. We did not repurchase any of our shares during the three months ended October 29, 2022. Share Repurchase Activity Three Months Ended Nine Months Ended (millions, except per share data) October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Number of shares purchased — 8.8 12.5 21.5 Average price paid per share $ — $ 246.80 $ 211.57 $ 226.93 Total investment $ — $ 2,184 $ 2,646 $ 4,884 During the first quarter of 2022, we entered into an ASR arrangement to repurchase up to $ 2.75 billion of our common stock. 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. 9. Pension Benefits We provide pension plan benefits to eligible team members. Net Pension Benefits Expense Three Months Ended Nine Months Ended (millions) Classification October 29, 2022 October 30, 2021 October 29, 2022 October 30, 2021 Service cost benefits earned SG&A $ 22 $ 25 $ 68 $ 73 Interest cost on projected benefit obligation Net Other (Income) / Expense 29 24 88 72 Expected return on assets Net Other (Income) / Expense ( 59 ) ( 60 ) ( 176 ) ( 178 ) Amortization of losses Net Other (Income) / Expense 16 28 46 85 Amortization of prior service cost Net Other (Income) / Expense — 2 10 1 Total $ 8 $ 19 $ 36 $ 53 10. 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 316 ( 3 ) — 313 Amounts reclassified from AOCI, net of tax ( 1 ) — 33 32 October 29, 2022 $ 364 $ ( 22 ) $ ( 550 ) $ ( 208 ) TARGET CORPORATION Q3 2022 Form 10-Q 12 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents FINANCIAL SUMMARY Index to Notes