What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-25 compared with 2023-05-26 · 84 added, 72 removed, 217 unchanged (42% of the section changed)

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Financial Summary

First quarter 2023 included the following notable items:

Second quarter 2023 included the following notable items:

• GAAP and Adjusted diluted earnings per share were $1.80.

• Total revenue was $25.3 billion, an increase of 0.6 percent, reflecting total sales growth of 0.5 percent and a 10.2 percent increase in other revenue.

• Comparable sales were flat, reflecting a 0.9 percent increase in traffic and a (0.9) percent decrease in average transaction amount.

◦ Comparable stores originated sales grew 0.7 percent.

• Total revenue was $24.8 billion, a decrease of (4.9) percent, reflecting a total sales decrease of (4.9) percent and a 1.3 percent increase in other revenue.

• Comparable sales decreased (5.4) percent, reflecting a (4.8) percent decrease in traffic and a (0.7) percent decrease in average transaction amount.

◦ Comparable stores-originated sales declined (4.3) percent.

◦ Comparable digitally-originated sales declined (10.5) percent.

• Operating income of $1.3 billion was (1.4) percent lower than the comparable prior-year period.

• Operating income of $1.2 billion was 273.0 percent higher than the comparable prior-year period.

See Business Environment below for additional information.

Cash flow provided by operating activities was $1.3 billion for the three months ended April 29, 2023, compared with $(1.4) billion cash flow required for operating activities for the three months ended April 30, 2022.

Cash flow provided by operating activities was $3.4 billion for the six months ended July 29, 2023, compared with $47 million cash flow required for operating activities for the six months ended July 30, 2022.

The drivers of the operating cash flow increase are described on page 21 .

Earnings Per Share Three Months Ended

April 29, 2023 April 30, 2022 Change

Earnings Per Share Three Months Ended Six Months Ended

July 29, 2023 July 30, 2022 Change July 29, 2023 July 30, 2022 Change

GAAP diluted earnings per share $ 1.80 $ 0.39 357.6 % $ 3.86 $ 2.55 51.1 %

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Adjusted diluted earnings per share $ 1.80 $ 0.39 357.6 % $ 3.86 $ 2.59 49.2 %

Amounts may not foot due to rounding.

Adjusted diluted earnings per share (Adjusted EPS), a non-GAAP metric, excludes the impact of certain items.

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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 29, 2023, after-tax ROIC was 11.4 percent , compared with 25.3 percent for the trailing twelve months ended April 30, 2022.

For the trailing twelve months ended July 29, 2023, after-tax ROIC was 13.7 percent , compared with 18.4 percent for the trailing twelve months ended July 30, 2022.

The calculation of ROIC is provided on page 20 .

Business Environment

During the first quarter of 2023, sales growth in our Frequency categories (Beauty & Household Essentials and Food & Beverage) was offset by decreases in our Discretionary categories (Apparel & Accessories, Hardlines, and Home Furnishings & Decor).

Inventory as of April 29, 2023 decreased compared with January 28, 2023 and April 30, 2022.

This decrease was driven by actions we took during 2022 and strategies we employed to align inventories with sales trends, as well as improvements in the supply chain that reduced in-transit inventory.

These improvements have resulted in a reduction in costs related to managing elevated inventory levels and reduced our working capital investment.

In addition, we experienced a significant decrease in freight costs due to a decline in freight rates compared to 2022.

During the first two quarters of 2023, sales growth in our Frequency categories (Beauty & Household Essentials and Food & Beverage) was more than offset by accelerating decreases in our Discretionary categories (Apparel & Accessories, Hardlines, and Home Furnishings & Décor).

This trend of decreased Discretionary category sales began in 2022.

In response to this trend, during 2022 we took actions and employed strategies to align inventories with sales trends.

These actions, as well as improvements in the supply chain, have resulted in decreased inventory as of July 29, 2023 compared with January 28, 2023 and July 30, 2022.

These actions and improvements have also resulted in a reduction in costs related to managing elevated inventory levels and reduced our working capital investment.

Along with supply chain improvements, we have experienced a significant decrease in freight costs due to a decline in freight rates compared to 2022.

We have also experienced lower digital fulfillment costs due to a decrease in digital sales and a continued shift by our guests to lower-cost same-day fulfillment options.

We continue to experience higher inventory shrink, as a percentage of sales, relative to historical levels — including significantly higher shrink rates at certain stores.

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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF RESULTS OF OPERATIONS

FINANCIAL SUMMARY Index to Notes

Analysis of Results of Operations

Summary of Operating Income Three Months Ended

(dollars in millions) April 29, 2023 April 30, 2022 Change

Summary of Operating Income Three Months Ended Six Months Ended

(dollars in millions) July 29, 2023 July 30, 2022 Change July 29, 2023 July 30, 2022 Change

Sales $ 24,384 $ 25,653 (4.9) % $ 49,332 $ 50,483 (2.3) %

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Operating income $ 1,197 $ 321 273.0 % $ 2,525 $ 1,667 51.5 %

Rate Analysis Three Months Ended

April 29, 2023 April 30, 2022

Rate Analysis Three Months Ended Six Months Ended

July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022

Gross margin rate 27.0 % 21.5 % 26.7 % 23.5 %

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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 (number of transactions, or "traffic") and the amount spent each visit (average transaction amount).

Comparable Sales Three Months Ended

April 29, 2023 April 30, 2022

Comparable sales change 0.0 % 3.3 %

Drivers of change in comparable sales

Number of transactions (traffic) 0.9 3.9

Average transaction amount (0.9) (0.6)

TARGET CORPORATION

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ANALYSIS OF RESULTS OF OPERATIONS

Comparable Sales by Channel Three Months Ended

April 29, 2023 April 30, 2022

Comparable Sales Three Months Ended Six Months Ended

July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022

Comparable sales change (5.4) % 2.6 % (2.8) % 3.0 %

Drivers of change in comparable sales

Number of transactions (traffic) (4.8) 2.7 (2.0) 3.3

Average transaction amount (0.7) 0.0 (0.8) (0.3)

Comparable Sales by Channel Three Months Ended Six Months Ended

July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022

Stores originated comparable sales change (4.3) % 1.3 % (1.8) % 2.3 %

Digitally originated comparable sales change (10.5) 9.0 (7.0) 6.1

Sales by Channel Three Months Ended

April 29, 2023 April 30, 2022

Sales by Channel Three Months Ended Six Months Ended

July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022

Stores originated 83.1 % 82.1 % 82.8 % 81.9 %

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Total 100 % 100 % 100 % 100 %

Sales by Fulfillment Channel Three Months Ended

April 29, 2023 April 30, 2022

Sales by Fulfillment Channel Three Months Ended Six Months Ended

July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022

Stores 97.6 % 96.6 % 97.4 % 96.6 %

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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 29, 2023 April 30, 2022

Sales by Product Category Three Months Ended Six Months Ended

July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022

Apparel & accessories 17 % 18 % 16 % 18 %

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

For the three months ended April 29, 2023 and April 30, 2022, total RedCard Penetration was 19.0 percent and 20.3 percent, respectively.

For the three months ended July 29, 2023 and July 30, 2022, total RedCard Penetration was 18.6 percent and 20.1 percent, respectively.

For the six months ended July 29, 2023 and July 30, 2022, total RedCard Penetration was 18.8 percent and 20.2 percent, respectively.

TARGET CORPORATION

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Gross Margin Rate

For the three months ended April 29, 2023, our gross margin rate was 26.3 percent compared with 25.7 percent in the comparable prior-year period.

The increase reflected the net impact of

Quarter-to-Date

For the three months ended July 29, 2023, our gross margin rate was 27.0 percent compared with 21.5 percent in the comparable prior-year period.

For the six months ended July 29, 2023, our gross margin rate was 26.7 percent compared with 23.5 percent in the comparable prior-year period.

For both the three and six months ended July 29, 2023, the increase reflected the net impact of

• merchandising benefit, including

◦ lower clearance and promotional markdown rates and other costs compared with the prior-year, which included the impact of inventory impairments and other actions;

◦ lower freight costs;

◦ retail price increases;

◦ lower clearance markdown rates compared with the prior-year, which included the impact of inventory impairments and other actions;

• lower digital fulfillment costs due to a decrease in digital volume and a beneficial mix of sales fulfilled through lower-cost same-day fulfillment options;

• lower digital fulfillment costs due to a decrease in digital volume and a shift by our guests to lower-cost same-day fulfillment options;

• higher inventory shrink.

Business Environment on page 14 provides additional information.

TARGET CORPORATION

Q2 2023 Form 10-Q 17

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF RESULTS OF OPERATIONS

Selling, General, and Administrative Expense Rate

For the three months ended April 29, 2023, our SG&A expense rate was 19.8 percent compared with 18.9 percent for the comparable prior-year period.

The increase reflected the net impact of cost increases across our business, including investments in team member pay and benefits.

Change in Number of Stores Three Months Ended

April 29, 2023 April 30, 2022

For the three months ended July 29, 2023, our SG&A expense rate was 20.9 percent compared with 19.2 percent for the comparable prior-year period.

For the six months ended July 29, 2023, our SG&A expense rate was 20.4 percent compared with 19.1 percent for the comparable prior-year period.

The increase reflected the deleveraging impact of lower sales and the net impact of cost increases across our business, including investments in team member pay and benefits.

Change in Number of Stores Three Months Ended Six Months Ended

July 29, 2023 July 30, 2022 July 29, 2023 July 30, 2022

Beginning store count 1,954 1,933 1,948 1,926

Opened 5 5 11 12

Closed (4) (1) (4) (1)

Ending store count 1,955 1,937 1,955 1,937

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

Retail Square Feet April 29, 2023 January 28, 2023 April 30, 2022 April 29, 2023 January 28, 2023 April 30, 2022

Retail Square Feet July 29, 2023 January 28, 2023 July 30, 2022 July 29, 2023 January 28, 2023 July 30, 2022

170,000 or more sq.

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reflects total square feet less office, supply chain facilities, and vacant space.

TARGET CORPORATION

Q1 2023 Form 10-Q 16

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF RESULTS OF OPERATIONS

Other Performance Factors

Net Interest Expense

N et interest expense was $147 million for the three months ended April 29, 2023 and $112 million for the three months ended April 30, 2022.

The increase in net interest expense was primarily due to higher average debt levels in addition to higher floating interest rates for the three months ended April 29, 2023 compared with the prior-year period.

N et interest expense was $141 million and $288 million for the three and six months ended July 29, 2023, respectively, compared with $112 million and $224 million in the respective comparable prior-year periods.

The increase in net interest expense was primarily due to higher average debt levels in addition to higher floating interest rates for the three and six months ended July 29, 2023 compared with the prior-year periods.

Provision for Income Taxes

Our effective income tax rate for the three months ended April 29, 2023 was 21.1 percent, compared with 19.2 percent in the comparable prior-year period.

The increase reflects higher discrete tax benefits in the prior-year, primarily related to share-based compensation.

Our effective income tax rate for the three and six months ended July 29, 2023 was 22.2 percent and 21.6 percent, respectively, compared with 15.8 percent and 18.7 percent in the respective comparable prior-year periods.The increase reflects higher pretax earnings in the current year, resulting in a smaller tax rate benefit from ongoing and discrete tax items.

TARGET CORPORATION

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Reconciliation of Non-GAAP Adjusted EPS Three Months Ended

April 29, 2023 April 30, 2022

July 29, 2023 July 30, 2022

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

GAAP and adjusted diluted earnings per share $ 1.80 $ 0.39

Reconciliation of Non-GAAP Adjusted EPS Six Months Ended

July 29, 2023 July 30, 2022

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

GAAP diluted earnings per share $ 3.86 $ 2.55

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Adjusted diluted earnings per share $ 3.86 $ 2.59

Amounts may not foot due to rounding.

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

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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 29, 2023 April 30, 2022 Change

EBIT and EBITDA Three Months Ended Six Months Ended

(dollars in millions) July 29, 2023 July 30, 2022 Change July 29, 2023 July 30, 2022 Change

Net earnings $ 835 $ 183 356.5 % $ 1,785 $ 1,192 49.8 %

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Trailing Twelve Months

Numerator April 29, 2023 April 30, 2022

Numerator July 29, 2023 July 30, 2022

Operating income $ 4,706 $ 5,773

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Net operating profit after taxes $ 3,887 $ 4,633

Denominator April 29, 2023 April 30, 2022 May 1, 2021

Denominator July 29, 2023 July 30, 2022 July 31, 2021

Current portion of long-term debt and other borrowings $ 1,106 $ 1,649 $ 1,190

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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 19.3 percent and 22.4 percent for the trailing twelve months ended April 29, 2023 and April 30, 2022, respectively.

For the trailing twelve months ended April 29, 2023 and April 30, 2022, includes tax effect of $0.8 billion and $1.8 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 20.2 percent and 21.7 percent for the trailing twelve months ended July 29, 2023 and July 30, 2022, respectively.

For the trailing twelve months ended July 29, 2023 and July 30, 2022, includes tax effect of $1.0 billion and $1.3 billion, respectively, related to EBIT and $20 million and $19 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 $1.3 billion, $2.2 billion, and $1.1 billion as of April 29, 2023, January 28, 2023, and April 30, 2022, respectively.

Our cash and cash equivalents balance included short-term investments of $408 million, $1.3 billion, and $182 million as of April 29, 2023, January 28, 2023, and April 30, 2022, respectively.

Our cash and cash equivalents balance was $1.6 billion, $2.2 billion, and $1.1 billion as of July 29, 2023, January 28, 2023, and July 30, 2022, respectively.

Our cash and cash equivalents balance included short-term investments of $739 million, $1.3 billion, and $189 million as of July 29, 2023, January 28, 2023, and July 30, 2022, 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 $1.3 billion for the three months ended April 29, 2023, compared with $(1.4) billion of cash flows required for operating activities for the three months ended April 30, 2022.

For the three months ended April 29, 2023, operating cash flows increased as a result of an improvement in working capital, including lower inventory levels, compared with the three months ended April 30, 2022.

Inventory was $12.6 billion as of April 29, 2023, compared with $13.5 billion and $15.1 billion at January 28, 2023 and April 30, 2022, respectively.

The decrease over the balance as of April 30, 2022 primarily reflects actions taken to align inventory levels with sales trends, as well as improvements in the supply chain that reduced in-transit inventory.

Cash flows provided by operating activities were $3.4 billion for the six months ended July 29, 2023, compared with $47 million of cash flows required for operating activities for the six months ended July 30, 2022.

For the six months ended July 29, 2023, operating cash flows increased as a result of higher net earnings and an improvement in working capital, including lower inventory levels, compared with the six months ended July 30, 2022.

Inventory was $12.7 billion as of July 29, 2023, compared with $13.5 billion and $15.3 billion at January 28, 2023 and July 30, 2022, respectively.

The decrease from the balance as of July 30, 2022 primarily reflects actions taken to align inventory levels with sales trends and improvements in the supply chain, including reduced in-transit inventory.

The Business Environment section on page 14 provides additional information.

Investing Cash Flows

Investing cash flows included capital investments of $1.6 billion and $1.0 billion for the three months ended April 29, 2023 and April 30, 2022, respectively.

The increase primarily reflects real estate acquisitions for new store and supply chain sites and timing of remodel activity.

We paid dividends totaling $497 million ($1.08 per share) for the three months ended April 29, 2023, and $424 million ($0.90 per share) for the three months ended April 30, 2022, a per share increase of 20.0 percent.

We declared dividends totaling $507 million ($1.08 per share) during the first quarter of 2023 and $426 million ($0.90 per share) during the first quarter of 2022, a per share increase of 20.0 percent.

Cash required for investing activities increased to $2.8 billion for the six months ended July 29, 2023, compared to $2.5 billion for the six months ended July 30, 2022, due to capital investments.

We paid dividends totaling $499 million ($1.08 per share) and $996 million ($2.16 per share) for the three and six months ended July 29, 2023, respectively, and $417 million ($0.90 per share) and $841 million ($1.80 per share) for the three and six months ended July 30, 2022, respectively, a per share increase of 20.0 percent.

We declared dividends totaling $516 million ($1.10 per share) during the second quarter of 2023 and $502 million ($1.08 per share) during the second quarter of 2022, a per share increase of 1.9 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 did not repurchase any shares during the three months ended April 29, 2023.

We did not repurchase any shares during the six months ended July 29, 2023.

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 April 29, 2023, our credit ratings were as follows:

As of July 29, 2023, our credit ratings were as follows:

Credit Ratings Moody’s Standard and Poor’s Fitch

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No balances were outstanding under either credit facility at any time during 2023 or 2022.

We had $90 million and $945 million outstanding under our commercial paper program as of April 29, 2023 and April 30, 2022, respectively.

We did not have any balances outstanding under our commercial paper program as of July 29, 2023, and we had $1.5 billion outstanding as of July 30, 2022.

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 29, 2023, 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 29, 2023, 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