What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-30 compared with 2024-05-31 · 88 added, 79 removed, 193 unchanged (46% of the section changed)

1 unchanged sentence

Financial Summary

First quarter 2024 included the following notable items:

• GAAP and adjusted diluted earnings per share were $2.03.

• Total revenue was $24.5 billion, a decrease of 3.1 percent from the comparable prior-year period, reflecting a total sales decrease of 3.2 percent and a 3.9 percent increase in other revenue.

• Comparable sales decreased 3.7 percent, reflecting a 1.9 percent decrease in both traffic and average transaction amount.

◦ Comparable stores-originated sales declined 4.8 percent.

Second quarter 2024 included the following notable items:

• GAAP and adjusted diluted earnings per share (Adjusted EPS) were $2.57.

• Total revenue was $25.5 billion, an increase of 2.7 percent from the comparable prior-year period, reflecting a total sales increase of 2.6 percent and a 10.8 percent increase in other revenue.

• Comparable sales increased 2.0 percent, reflecting a 3.0 percent increase in traffic and a 0.9 percent decrease in average transaction amount.

◦ Comparable stores-originated sales grew 0.7 percent.

◦ Comparable digitally-originated sales increased 8.7 percent.

• Operating income of $1.3 billion was 2.4 percent lower than the comparable prior-year period.

Cash flow provided by operating activities was $1.1 billion for the three months ended May 4, 2024, compared with $1.3 billion for the three months ended April 29, 2023.

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

Earnings Per Share Three Months Ended

May 4, 2024 April 29, 2023 Change

GAAP and adjusted diluted earnings per share

$ 2.03 $ 2.05 (1.0) %

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

However, there are no adjustments in either period presented.

• Operating income of $1.6 billion was 36.6 percent higher than the comparable prior-year period.

Earnings Per Share Three Months Ended Six Months Ended

August 3, 2024 July 29, 2023 Change August 3, 2024 July 29, 2023 Change

GAAP and Adjusted EPS $ 2.57 $ 1.80 42.4 % $ 4.60 $ 3.86 19.3 %

Adjusted EPS, a non-GAAP metric, excludes the impact of certain items when applicable.

However, there are no adjustments in any period presented.

Management believes that Adjusted EPS is useful in providing period-to-period comparisons of the results of our operations.

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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 May 4, 2024, after-tax ROIC was 15.4 percent , compared with 11.4 percent for the trailing twelve months ended April 29, 2023.

For the trailing twelve months ended August 3, 2024, after-tax ROIC was 16.6 percent , compared with 13.7 percent for the trailing twelve months ended July 29, 2023.

The calculation of ROIC is provided on page 20 .

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Analysis of Results of Operations

Summary of Operating Income Three Months Ended

(dollars in millions) May 4, 2024 April 29, 2023 Change

Summary of Operating Income Three Months Ended Six Months Ended

(dollars in millions) August 3, 2024 July 29, 2023 Change August 3, 2024 July 29, 2023 Change

Sales $ 25,021 $ 24,384 2.6 % $ 49,164 $ 49,332 (0.3) %

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Operating income $ 1,635 $ 1,197 36.6 % $ 2,931 $ 2,525 16.1 %

Rate Analysis Three Months Ended

May 4, 2024 April 29, 2023

Rate Analysis Three Months Ended Six Months Ended

August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023

Gross margin rate 28.9 % 27.0 % 28.3 % 26.7 %

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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

May 4, 2024 April 29, 2023

Comparable sales change (3.7) % 0.0 %

Drivers of change in comparable sales

Number of transactions (traffic) (1.9) 0.9

Average transaction amount (1.9) (0.9)

TARGET CORPORATION

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ANALYSIS OF RESULTS OF OPERATIONS Index to Notes

Comparable Sales by Channel Three Months Ended

May 4, 2024 April 29, 2023

Comparable Sales Three Months Ended Six Months Ended

August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023

Comparable sales change 2.0 % (5.4) % (0.9) % (2.8) %

Drivers of change in comparable sales

Number of transactions (traffic) 3.0 (4.8) 0.6 (2.0)

Average transaction amount (0.9) (0.7) (1.4) (0.8)

Comparable Sales by Channel Three Months Ended Six Months Ended

August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023

Stores originated comparable sales change 0.7 % (4.3) % (2.1) % (1.8) %

Digitally originated comparable sales change 8.7 (10.5) 5.0 (7.0)

Sales by Channel Three Months Ended

May 4, 2024 April 29, 2023

Sales by Channel Three Months Ended Six Months Ended

August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023

Stores originated 82.1 % 83.1 % 81.9 % 82.8 %

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Total 100 % 100 % 100 % 100 %

Sales by Fulfillment Channel Three Months Ended

May 4, 2024 April 29, 2023

Sales by Fulfillment Channel Three Months Ended Six Months Ended

August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023

Stores 97.9 % 97.6 % 97.8 % 97.4 %

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Sales fulfilled by stores include in-store purchases and digitally originated sales fulfilled by shipping merchandise from stores to guests, Order Pickup, Drive Up, and Shipt.

Sales by Product Category Three Months Ended

May 4, 2024 April 29, 2023

Sales by Product Category Three Months Ended Six Months Ended

August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023

Apparel & accessories 17 % 17 % 17 % 16 %

Beauty 14 13 13 12

Food & beverage 22 22 23 23

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The collective interaction of a broad array of macroeconomic, competitive, and consumer behavioral factors, as well as sales mix and the transfer of sales to new stores, makes further analysis of sales metrics infeasible.

TARGET CORPORATION

Q2 2024 Form 10-Q 15

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF RESULTS OF OPERATIONS Index to Notes

We monitor the percentage of purchases that are paid for using Target Circle Cards™ (Target Circle Card Penetration) because our internal analysis has indicated that a meaningful portion of the incremental purchases on Target Circle Cards are also incremental sales for Target.

Target Circle Cards were formerly branded as RedCards and their sales penetration was referred to as RedCard Penetration.

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

For the three months ended May 4, 2024 and April 29, 2023, total Target Circle Card Penetration was 18.0 percent and 19.0 percent, respectively.

For the three months ended August 3, 2024 and July 29, 2023, total Target Circle Card Penetration was 17.7 percent and 18.6 percent, respectively.

For the six months ended August 3, 2024 and July 29, 2023, total Target Circle Card Penetration was 17.9 percent and 18.8 percent, respectively.

TARGET CORPORATION

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Quarter-to-Date

For the three months ended May 4, 2024, our gross margin rate was 27.7 percent compared with 26.3 percent in the comparable prior-year period.

The increase reflected the net impact of merchandising activities, including cost improvements which more than offset higher promotional markdown rates.

Our gross margin rate also benefited from favorable category mix and lower book to physical inventory adjustments compared to the prior-year period.

For the three months ended August 3, 2024, our gross margin rate was 28.9 percent compared with 27.0 percent in the comparable prior-year period.

For the six months ended August 3, 2024, our gross margin rate was 28.3 percent compared with 26.7 percent in the comparable prior-year period.

For both the three and six months ended August 3, 2024, the increase reflected the net impact of

• merchandising activities, including cost improvements which more than offset higher promotional markdown rates;

• favorable category mix;

• lower book to physical inventory adjustments compared to the prior-year period;

• higher digital fulfillment & supply chain costs due to

◦ an increase in digital volume;

◦ new supply chain facilities coming online.

Selling, General, and Administrative Expense Rate

For the three months ended May 4, 2024, our SG&A expense rate was 21.1 percent compared with 19.8 percent for the comparable prior-year period.

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

Change in Number of Stores Three Months Ended

May 4, 2024 April 29, 2023

For the three months ended August 3, 2024, our SG&A expense rate was 21.2 percent compared with 20.9 percent for the comparable prior-year period.

For the six months ended August 3, 2024, our SG&A expense rate was 21.1 percent compared with 20.4 percent for the comparable prior-year period.

The increases reflected the net impact of cost increases across our business, including investments in team member pay and benefits, partially offset by the benefit of lower store remodel-related expenses.

TARGET CORPORATION

Q2 2024 Form 10-Q 17

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF RESULTS OF OPERATIONS Index to Notes

Change in Number of Stores Three Months Ended Six Months Ended

August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023

Beginning store count 1,963 1,954 1,956 1,948

Opened 3 5 10 11

Closed — (4) — (4)

Ending store count 1,966 1,955 1,966 1,955

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

Retail Square Feet May 4, 2024 February 3, 2024 April 29, 2023 May 4, 2024 February 3, 2024 April 29, 2023

Retail Square Feet August 3, 2024 February 3, 2024 July 29, 2023 August 3, 2024 February 3, 2024 July 29, 2023

170,000 or more sq.

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

TARGET CORPORATION

Q1 2024 Form 10-Q 16

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

Other Performance Factors

Index to Notes

Other Performance Factors

Net Interest Expense

For the three months ended May 4, 2024 , n et interest expense was $106 million compared with $147 million in the comparable prior-year period.

N et interest expense was $110 million and $216 million for the three and six months ended August 3, 2024, respectively, compared with $141 million and $288 million in the comparable prior-year periods.

The decrease in net interest expense was primarily due to an increase in interest income.

Provision for Income Taxes

Our effective tax rate for the three months ended May 4, 2024 was 22.7 percent, compared with 21.1 percent in the comparable prior-year period.

The increase reflects higher discrete tax benefits in the prior-year period.

Our effective income tax rates for the three and six months ended August 3, 2024, were 22.9 percent and 22.8 percent, respectively, compared with 22.2 percent and 21.6 percent in the comparable prior-year periods.

The increase in both periods reflects the impact of higher pretax earnings and lower discrete tax benefits compared to the prior-year.

TARGET CORPORATION

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Reconciliation of Non-GAAP Financial Measures to GAAP Measures

To provide additional transparency, we disclose non-GAAP adjusted diluted earnings per share (Adjusted EPS).

To provide additional transparency, we disclose non-GAAP Adjusted EPS.

When applicable, this metric excludes certain discretely managed items.

However, there are no adjustments in any period presented.

We believe this information is useful in providing period-to-period comparisons of the results of our operations.

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Other companies may calculate Adjusted EPS differently, limiting the usefulness of the measure for comparisons with other companies.

Reconciliation of Non-GAAP Adjusted EPS Three Months Ended

May 4, 2024 April 29, 2023

GAAP and adjusted diluted earnings per share

$ 2.03 $ 2.05

Reconciliation of Non-GAAP Adjusted EPS Three Months Ended Six Months Ended

August 3, 2024 July 29, 2023 August 3, 2024 July 29, 2023

GAAP and Adjusted EPS $ 2.57 $ 1.80 $ 4.60 $ 3.86

Earnings before interest expense and income taxes (EBIT) and earnings before interest expense, income taxes, depreciation, and amortization (EBITDA) are non-GAAP financial measures.

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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) May 4, 2024 April 29, 2023 Change

EBIT and EBITDA Three Months Ended Six Months Ended

(dollars in millions) August 3, 2024 July 29, 2023 Change August 3, 2024 July 29, 2023 Change

Net earnings $ 1,192 $ 835 42.7 % $ 2,134 $ 1,785 19.6 %

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+ Total depreciation and amortization (a)

743 683 8.8 1,461 1,350 8.2

EBITDA $ 2,398 $ 1,896 26.4 % $ 4,441 $ 3,914 13.5 %

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Trailing Twelve Months

Numerator May 4, 2024 (a)

April 29, 2023

Numerator August 3, 2024 (a)

July 29, 2023

Operating income $ 6,113 $ 4,706

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Net operating profit after taxes $ 4,934 $ 3,887

Denominator May 4, 2024 April 29, 2023 April 30, 2022

Denominator August 3, 2024 July 29, 2023 July 30, 2022

Current portion of long-term debt and other borrowings $ 1,640 $ 1,106 $ 1,649

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After-tax return on invested capital 16.6 % 13.7 %

(a) The trailing twelve months ended May 4, 2024, consisted of 53 weeks compared with 52 weeks in the prior-year period.

(a) The trailing twelve months ended August 3, 2024, consisted of 53 weeks compared with 52 weeks in the prior-year period.

(b) Represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as finance leases.

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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.

(c) Calculated using the effective tax rates, which were 22.2 percent and 19.3 percent for the trailing twelve months ended May 4, 2024 and April 29, 2023, respectively.

For the trailing twelve months ended May 4, 2024 and April 29, 2023, includes tax effect of $1.3 billion and $0.8 billion, respectively, related to EBIT and $30 million and $18 million, respectively, related to operating lease interest.

(c) Calculated using the effective tax rates, which were 22.4 percent and 20.2 percent for the trailing twelve months ended August 3, 2024 and July 29, 2023, respectively.

For the trailing twelve months ended August 3, 2024 and July 29, 2023, includes tax effect of $1.4 billion and $1.0 billion, respectively, related to EBIT and $33 million and $20 million, respectively, related to operating lease interest.

(d) 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 $3.6 billion, $3.8 billion, and $1.3 billion as of May 4, 2024, February 3, 2024, and April 29, 2023, respectively.

Our cash and cash equivalents balance includes short-term investments of $2.7 billion, $2.9 billion, and $408 million as of May 4, 2024, February 3, 2024, and April 29, 2023, respectively.

Our cash and cash equivalents balance was $3.5 billion, $3.8 billion, and $1.6 billion as of August 3, 2024, February 3, 2024, and July 29, 2023, respectively.

Our cash and cash equivalents balance includes short-term investments of $2.5 billion, $2.9 billion, and $739 million as of August 3, 2024, February 3, 2024, and July 29, 2023, 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 $1.1 billion for the three months ended May 4, 2024, compared with $1.3 billion for the three months ended April 29, 2023.

The operating cash flow decrease is primarily due to higher incentive compensation and other payments, partially offset by the net impact of inventory and accounts payable activity.

Inventory was $11.7 billion as of May 4, 2024, compared with $11.9 billion and $12.6 billion at February 3, 2024 and April 29, 2023, respectively.

The balance as of May 4, 2024, reflects cost improvement, including lower freight rates, and the impact of changes in merchandise mix.

We have also increased our inventory turnover rate, allowing us to support sales with a lower inventory investment.

Cash flows provided by operating activities were $3.3 billion and $3.4 billion for the six months ended August 3, 2024, and July 29, 2023, respectively.

The operating cash flow decrease is primarily due to higher income tax and incentive compensation payments, offset by higher net earnings and the combined impact of inventory and accounts payable activity.

Inventory was $12.6 billion as of August 3, 2024, compared with $11.9 billion and $12.7 billion as of February 3, 2024, and July 29, 2023, respectively.

Investing Cash Flows

Cash required for investing activities decreased to $0.7 billion for the three months ended May 4, 2024, compared to $1.6 billion for the three months ended April 29, 2023, due to lower capital investments.

We paid dividends totaling $508 million ($1.10 per share) for the three months ended May 4, 2024, and $497 million ($1.08 per share) for the three months ended April 29, 2023, a per share increase of 1.9 percent.

We declared dividends totaling $516 million ($1.10 per share) during the first quarter of 2024 and $507 million ($1.08 per share) during the first quarter of 2023, a per share increase of 1.9 percent.

Cash required for investing activities decreased to $1.3 billion for the six months ended August 3, 2024, compared to $2.8 billion for the six months ended July 29, 2023, due to lower capital investments.

We paid dividends totaling $509 million ($1.10 per share) and $1,017 million ($2.20 per share) for the three and six months ended August 3, 2024, respectively, and $499 million ($1.08 per share) and $996 million ($2.16 per share) for the three and six months ended July 29, 2023, respectively, a per share increase of 1.9 percent.

We declared dividends totaling $527 million ($1.12 per share) during the second quarter of 2024 and $516 million ($1.10 per share) during the second quarter of 2023, a per share increase of 1.8 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 May 4, 2024.

See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds of this Quarterly Report on Form 10-Q for more information.

We returned $155 million to shareholders through share repurchase during the six months ended August 3, 2024.

See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds of this Quarterly Report on Form 10-Q and Note 8 to the Financial Statements for more information.

TARGET CORPORATION

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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 May 4, 2024, our credit ratings were as follows:

As of August 3, 2024, 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 2024 or 2023.

There was no commercial paper outstanding as of May 4, 2024, and we had $90 million outstanding as of April 29, 2023.

There was no commercial paper outstanding as of either August 3, 2024 or July 29, 2023.

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 May 4, 2024, 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 August 3, 2024, 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