What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-22 compared with 2023-08-25 · 90 added, 69 removed, 232 unchanged (41% of the section changed)

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Financial Summary

Second quarter 2023 included the following notable items:

Third quarter 2023 included the following notable items:

• GAAP and Adjusted diluted earnings per share were $2.10.

• 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.

• Total revenue was $25.4 billion, a decrease of 4.2 percent, reflecting a total sales decrease of 4.3 percent and a 0.6 percent decrease in other revenue.

• Comparable sales decreased 4.9 percent, reflecting a 4.1 percent decrease in traffic and a 0.8 percent decrease in average transaction amount.

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See Business Environment below for additional information.

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.

Cash flow provided by operating activities was $5.3 billion for the nine months ended October 28, 2023, compared with $552 million for the nine months ended October 29, 2022.

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

Earnings Per Share Three Months Ended Six Months Ended

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

Earnings Per Share Three Months Ended Nine Months Ended

October 28, 2023 October 29, 2022 Change October 28, 2023 October 29, 2022 Change

GAAP diluted earnings per share $ 2.10 $ 1.54 36.3 % $ 5.96 $ 4.09 45.6 %

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Adjusted diluted earnings per share $ 2.10 $ 1.54 36.3 % $ 5.96 $ 4.12 44.4 %

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

For the trailing twelve months ended October 28, 2023, after-tax ROIC was 13.9 percent , compared with 14.6 percent for the trailing twelve months ended October 29, 2022.

The calculation of ROIC is provided on page 20 .

Business Environment

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.

During the third quarter of 2023, we experienced sales declines across our business, primarily in each of our Discretionary categories (Apparel & Accessories, Hardlines, and Home Furnishings & Décor), partially offset by net growth in Frequency categories (Beauty & Household Essentials and Food & Beverage).

The trend of decreased Discretionary category sales began in 2022.

In response, 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 October 28, 2023 compared with October 29, 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 have also experienced lower digital fulfillment costs due to a decrease in digital sales and an increased mix of digital sales fulfilled through lower-cost same-day services.

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

We believe that this trend is pervasive across the retail industry.

Increased shrink has had, and if current trends persist will continue to have, an adverse impact on our results of operations, including potential impairment of our long-lived assets.

Increased shrink has had, and if current trends persist will continue to have, an adverse impact on our results of operations, including impairment of our long-lived assets.

Note 5 to the Financial Statements provides more information on impairment charges, including those related to store closures.

The Gross Margin Rate analysis on page 17 and the Inventory section on page 21 provide additional information.

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Analysis of Results of Operations

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

Summary of Operating Income Three Months Ended Nine Months Ended

(dollars in millions) October 28, 2023 October 29, 2022 Change October 28, 2023 October 29, 2022 Change

Sales $ 25,004 $ 26,122 (4.3) % $ 74,336 $ 76,605 (3.0) %

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Operating income $ 1,317 $ 1,022 28.9 % $ 3,842 $ 2,689 42.9 %

Rate Analysis Three Months Ended Six Months Ended

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

Rate Analysis Three Months Ended Nine Months Ended

October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022

Gross margin rate 27.4 % 24.7 % 26.9 % 23.9 %

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ANALYSIS OF RESULTS OF OPERATIONS

Comparable Sales Three Months Ended Six Months Ended

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

Comparable Sales Three Months Ended Nine Months Ended

October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022

Comparable sales change (4.9) % 2.7 % (3.5) % 2.9 %

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Average transaction amount (0.8) 1.3 (0.8) 0.2

Comparable Sales by Channel Three Months Ended Six Months Ended

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

Comparable Sales by Channel Three Months Ended Nine Months Ended

October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022

Stores originated comparable sales change (4.6) % 3.2 % (2.8) % 2.6 %

Digitally originated comparable sales change (6.0) 0.3 (6.7) 4.1

Sales by Channel Three Months Ended Six Months Ended

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

Sales by Channel Three Months Ended Nine Months Ended

October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022

Stores originated 83.2 % 82.9 % 82.9 % 82.3 %

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Total 100 % 100 % 100 % 100 %

Sales by Fulfillment Channel Three Months Ended Six Months Ended

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

Sales by Fulfillment Channel Three Months Ended Nine Months Ended

October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022

Stores 97.7 % 96.8 % 97.5 % 96.7 %

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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 Six Months Ended

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

Sales by Product Category Three Months Ended Nine Months Ended

October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022

Apparel & accessories 16 % 17 % 16 % 17 %

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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 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.

For the three months ended October 28, 2023 and October 29, 2022, total RedCard Penetration was 18.3 percent and 19.6 percent, respectively.

For the nine months ended October 28, 2023 and October 29, 2022, total RedCard Penetration was 18.6 percent and 20.0 percent, respectively.

TARGET CORPORATION

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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

For the three months ended October 28, 2023, our gross margin rate was 27.4 percent compared with 24.7 percent in the comparable prior-year period.

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

◦ 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 digital fulfillment and supply chain costs due to

◦ a decrease in digital volume;

◦ an increased mix of digital sales fulfilled through lower-cost same-day services;

◦ lower inventory levels;

• favorable category mix;

• higher inventory shrink.

Business Environment on page 14 provides additional information.

For the nine months ended October 28, 2023, our gross margin rate was 26.9 percent compared with 23.9 percent in the comparable prior-year period.

The increase reflected the net impact of

• merchandising benefit, including

◦ lower freight costs;

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

TARGET CORPORATION

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ANALYSIS OF RESULTS OF OPERATIONS

◦ retail price increases;

• lower digital fulfillment and supply chain costs due to

◦ a decrease in digital volume;

◦ an increased mix of digital sales fulfilled through lower-cost same-day services;

◦ lower inventory levels;

• favorable category mix;

• higher inventory shrink.

Business Environment on page 14 provides additional information.

Selling, General, and Administrative Expense Rate

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

For the three months ended October 28, 2023, our SG&A expense rate was 20.9 percent compared with 19.7 percent for the comparable prior-year period.

For the nine months ended October 28, 2023, our SG&A expense rate was 20.6 percent compared with 19.3 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, and the deleveraging impact of lower sales.

Change in Number of Stores Three Months Ended Nine Months Ended

October 28, 2023 October 29, 2022 October 28, 2023 October 29, 2022

Beginning store count 1,955 1,937 1,948 1,926

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

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

Retail Square Feet October 28, 2023 January 28, 2023 October 29, 2022 October 28, 2023 January 28, 2023 October 29, 2022

170,000 or more sq.

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Net Interest Expense

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.

For the three months ended October 28, 2023 , n et interest expense was $107 million compared with $125 million in the comparable prior-year period.

The decrease in net interest expense was primarily due to an increase in interest income, partially offset by higher debt levels and the impact of higher floating interest rates on our interest rate swaps.

For the nine months ended October 28, 2023, net interest expense was $395 million compared with $349 million in the respective comparable prior-year period.

The increase in net interest expense was primarily due to higher average debt levels in addition to the net impact of higher floating interest rates.

Provision for Income Taxes

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.

Our effective income tax rate for the three months ended October 28, 2023 was 21.3 percent, consistent with 21.6 percent for the comparable prior-year period.

Our effective tax rate for the nine months ended October 28, 2023 was 21.5 percent, compared with 19.8 percent in the comparable prior-year period.

For the nine month period, 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

July 29, 2023 July 30, 2022

October 28, 2023 October 29, 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 $ 2.10 $ 1.54

Reconciliation of Non-GAAP Adjusted EPS Six Months Ended

July 29, 2023 July 30, 2022

Reconciliation of Non-GAAP Adjusted EPS Nine Months Ended

October 28, 2023 October 29, 2022

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

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Adjusted diluted earnings per share $ 5.96 $ 4.12

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 Six Months Ended

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

EBIT and EBITDA Three Months Ended Nine Months Ended

(dollars in millions) October 28, 2023 October 29, 2022 Change October 28, 2023 October 29, 2022 Change

Net earnings $ 971 $ 712 36.3 % $ 2,756 $ 1,904 44.7 %

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Trailing Twelve Months

Numerator July 29, 2023 July 30, 2022

Numerator October 28, 2023 October 29, 2022

Operating income $ 5,001 $ 4,784

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Net operating profit after taxes $ 4,136 $ 3,875

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

Denominator October 28, 2023 October 29, 2022 October 30, 2021

Current portion of long-term debt and other borrowings $ 1,112 $ 2,207 $ 1,176

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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 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.

(b) Calculated using the effective tax rates, which were 20.3 percent and 21.5 percent for the trailing twelve months ended October 28, 2023 and October 29, 2022, respectively.

For the trailing twelve months ended October 28, 2023 and October 29, 2022, includes tax effect of $1.0 billion related to EBIT and $22 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 $1.6 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 cash and cash equivalents balance was $1.9 billion, $2.2 billion, and $954 million as of October 28, 2023, January 28, 2023, and October 29, 2022, respectively.

Our cash and cash equivalents balance includes short-term investments of $1.0 billion and $1.3 billion as of October 28, 2023 and January 28, 2023, respectively.

We had no short-term investments as of October 29, 2022.

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 $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.

Cash flows provided by operating activities were $5.3 billion for the nine months ended October 28, 2023, compared with $552 million for the nine months ended October 29, 2022.

For the nine months ended October 28, 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 nine months ended October 29, 2022.

Inventory was $14.7 billion as of October 28, 2023, compared with $13.5 billion and $17.1 billion at January 28, 2023 and October 29, 2022, respectively.

The increase from January 28, 2023, reflects the seasonal inventory build ahead of the November and December holiday sales period.

The decrease from the balance as of October 29, 2022, primarily reflects actions taken to align inventory levels with sales trends and improvements in the supply chain, including reduced in-transit inventory, as well as cost decreases, primarily due to lower freight rates in 2023 compared to 2022.

The Business Environment section on page 14 provides additional information.

Investing Cash Flows

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.

Cash required for investing activities decreased to $3.9 billion for the nine months ended October 28, 2023, compared to $4.3 billion for the nine months ended October 29, 2022, due to capital investments.

We paid dividends totaling $507 million ($1.10 per share) and $1.5 billion ($3.26 per share) for the three and nine months ended October 28, 2023, respectively, and $497 million ($1.08 per share) and $1.3 billion ($2.88 per share) for the three and nine months ended October 29, 2022, respectively, a per share increase of 1.9 percent for the three month period and 13.2 percent for the nine month period.

We declared dividends totaling $513 million ($1.10 per share) during the third quarter of 2023 and $502 million ($1.08 per share) during the third 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 six months ended July 29, 2023.

We did not repurchase any shares during the nine months ended October 28, 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 July 29, 2023, our credit ratings were as follows:

As of October 28, 2023, our credit ratings were as follows:

Credit Ratings Moody’s Standard and Poor’s Fitch

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

Our committed $1.0 billion 364-day and $3.0 billion unsecured revolving credit facilities that will expire in October 2023 and October 2027, respectively, backstop our commercial paper program.

In October 2023, we obtained a new committed $1.0 billion 364-day unsecured revolving credit facility that will expire in October 2024 and terminated our prior 364-day credit facility.

We also exercised our option to extend our existing five-year unsecured revolving credit facility, which has a maximum committed capacity of $3.0 billion and now expires in October 2028.

Both credit facilities backstop our commercial paper program.

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

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.

We did not have any balances outstanding under our commercial paper program as of October 28, 2023, and we had $2.1 billion outstanding as of October 29, 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 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.

Additionally, as of October 28, 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