What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-27 compared with 2024-08-30 · 67 added, 66 removed, 215 unchanged (38% of the section changed)

1 unchanged sentence

Financial Summary

Second quarter 2024 included the following notable items:

Third quarter 2024 included the following notable items:

• GAAP and adjusted diluted earnings per share (Adjusted EPS) were $1.85.

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• Comparable sales increased 0.3 percent, reflecting a 2.4 percent increase in traffic and a 2.0 percent decrease in average transaction amount.

◦ Comparable stores-originated sales grew 0.7 percent.

◦ Comparable stores-originated sales declined 1.9 percent.

◦ Comparable digitally-originated sales increased 10.8 percent.

• 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

• Operating income of $1.2 billion was 11.2 percent lower than the comparable prior-year period.

Earnings Per Share Three Months Ended Nine Months Ended

November 2, 2024 October 28, 2023 Change November 2, 2024 October 28, 2023 Change

GAAP and Adjusted EPS $ 1.85 $ 2.10 (11.9) % $ 6.45 $ 5.96 8.3 %

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

For the trailing twelve months ended November 2, 2024, after-tax ROIC was 15.9 percent , compared with 13.9 percent for the trailing twelve months ended October 28, 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 Six Months Ended

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

Summary of Operating Income Three Months Ended Nine Months Ended

(dollars in millions) November 2, 2024 October 28, 2023 Change November 2, 2024 October 28, 2023 Change

Sales $ 25,228 $ 25,004 0.9 % $ 74,392 $ 74,336 0.1 %

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Operating income $ 1,168 $ 1,317 (11.2) % $ 4,099 $ 3,842 6.7 %

Rate Analysis Three Months Ended Six Months Ended

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

Rate Analysis Three Months Ended Nine Months Ended

November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023

Gross margin rate 27.2 % 27.4 % 27.9 % 26.9 %

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ANALYSIS OF RESULTS OF OPERATIONS Index to Notes

Comparable Sales Three Months Ended Six Months Ended

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

Comparable Sales Three Months Ended Nine Months Ended

November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023

Comparable sales change 0.3 % (4.9) % (0.5) % (3.5) %

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Average transaction amount (2.0) (0.8) (1.6) (0.8)

Comparable Sales by Channel Three Months Ended Six Months Ended

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

Comparable Sales by Channel Three Months Ended Nine Months Ended

November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023

Stores originated comparable sales change (1.9) % (4.6) % (2.0) % (2.8) %

Digitally originated comparable sales change 10.8 (6.0) 6.9 (6.7)

Sales by Channel Three Months Ended Six Months Ended

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

Sales by Channel Three Months Ended Nine Months Ended

November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023

Stores originated 81.5 % 83.2 % 81.8 % 82.9 %

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Total 100 % 100 % 100 % 100 %

Sales by Fulfillment Channel Three Months Ended Six Months Ended

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

Sales by Fulfillment Channel Three Months Ended Nine Months Ended

November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023

Stores 97.7 % 97.7 % 97.8 % 97.5 %

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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

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

Sales by Product Category Three Months Ended Nine Months Ended

November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023

Apparel & accessories 16 % 16 % 16 % 16 %

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

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

Q2 2024 Form 10-Q 16

MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents

ANALYSIS OF RESULTS OF OPERATIONS Index to Notes

For the three months ended November 2, 2024 and October 28, 2023, total Target Circle Card Penetration was 17.7 percent and 18.3 percent, respectively.

For the nine months ended November 2, 2024 and October 28, 2023, total Target Circle Card Penetration was 17.8 percent and 18.6 percent, respectively.

Gross Margin Rate

Quarter-to-Date

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;

For the three months ended November 2, 2024, our gross margin rate was 27.2 percent compared with 27.4 percent in the comparable prior-year period.

For the nine months ended November 2, 2024, our gross margin rate was 27.9 percent compared with 26.9 percent in the comparable prior-year period.

For both the three and nine months ended November 2, 2024, the changes reflected the net impact of

• higher digital fulfillment & supply chain costs due to

• costs of managing elevated inventory levels during the third quarter, including the impact of receipt timing;

• an increase in digital volume;

• new supply chain facilities coming online;

Selling, General, and Administrative Expense Rate

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.

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

• merchandising activities, including cost improvements which more than offset higher promotional and clearance markdown rates.

TARGET CORPORATION

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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

Selling, General, and Administrative Expense Rate

For the three months ended November 2, 2024, our SG&A expense rate was 21.4 percent compared with 20.9 percent for the comparable prior-year period.

For the nine months ended November 2, 2024, our SG&A expense rate was 21.2 percent compared with 20.6 percent for the comparable prior-year period.

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

Change in Number of Stores Three Months Ended Nine Months Ended

November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023

Beginning store count 1,966 1,955 1,956 1,948

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

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

Retail Square Feet November 2, 2024 February 3, 2024 October 28, 2023 November 2, 2024 February 3, 2024 October 28, 2023

170,000 or more sq.

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Net Interest Expense

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.

N et interest expense was $105 million and $321 million for the three and nine months ended November 2, 2024, respectively, compared with $107 million and $395 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 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.

Our effective income tax rates for the three and nine months ended November 2, 2024, were 21.7 percent and 22.5 percent, respectively, compared with 21.3 percent and 21.5 percent in the comparable prior-year periods.

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

TARGET CORPORATION

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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 Six Months Ended

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

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

November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023

GAAP and Adjusted EPS $ 1.85 $ 2.10 $ 6.45 $ 5.96

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

EBIT and EBITDA Three Months Ended Nine Months Ended

(dollars in millions) November 2, 2024 October 28, 2023 Change November 2, 2024 October 28, 2023 Change

Net earnings $ 854 $ 971 (12.1) % $ 2,988 $ 2,756 8.4 %

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Trailing Twelve Months

Numerator August 3, 2024 (a)

July 29, 2023

Numerator November 2, 2024 (a)

October 28, 2023

Operating income $ 5,964 $ 5,001

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Net operating profit after taxes $ 4,823 $ 4,136

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

Denominator November 2, 2024 October 28, 2023 October 29, 2022

Current portion of long-term debt and other borrowings $ 1,635 $ 1,112 $ 2,207

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After-tax return on invested capital 15.9 % 13.9 %

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

(a) The trailing twelve months ended November 2, 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.

Calculated using the discount rate for each lease and recorded as a component of rent expense within SG&A Expenses.

Calculated using the discount rate for each lease and recorded as a component of rent expense within Operating Income.

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 22.4 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.

(c) Calculated using the effective tax rates, which were 22.5 percent and 20.3 percent for the trailing twelve months ended November 2, 2024 and October 28, 2023, respectively.

For the trailing twelve months ended November 2, 2024 and October 28, 2023, includes tax effect of $1.4 billion and $1.0 billion, respectively, related to EBIT and $35 million and $22 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 $3.5 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 cash and cash equivalents balance was $3.4 billion, $3.8 billion, and $1.9 billion as of November 2, 2024, February 3, 2024, and October 28, 2023, respectively.

Our cash and cash equivalents balance includes short-term investments of $2.5 billion, $2.9 billion, and $1.0 billion as of November 2, 2024, February 3, 2024, and October 28, 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 $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.

Cash flows provided by operating activities were $4.1 billion and $5.3 billion for the nine months ended November 2, 2024, and October 28, 2023, respectively.

The operating cash flow decrease is primarily due to increased inventory levels and slightly lower accounts payable leverage, in addition to higher income tax and incentive compensation payments.

Inventory was $15.2 billion as of November 2, 2024, compared with $11.9 billion and $14.7 billion as of February 3, 2024, and October 28, 2023, respectively.

The increase from February 3, 2024, primarily reflects the seasonal inventory build ahead of the November and December holiday sales period.

The increase from October 28, 2023, primarily reflects the impact of lower-than-expected sales in certain discretionary categories during the three months ended November 2, 2024, as well as an improved in-stock position.

Investing Cash Flows

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.

Cash required for investing activities decreased to $1.9 billion for the nine months ended November 2, 2024, compared to $3.9 billion for the nine months ended October 28, 2023, due to lower capital investments.

We paid dividends totaling $516 million ($1.12 per share) and $1.5 billion ($3.32 per share) for the three and nine months ended November 2, 2024, respectively, and $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, a per share increase of 1.8 percent.

We declared dividends totaling $521 million ($1.12 per share) during the third quarter of 2024 and $513 million ($1.10 per share) during the third 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 returned $155 million to shareholders through share repurchase during the six months ended August 3, 2024.

We deployed $509 million to repurchase shares during the nine months ended November 2, 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.

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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 August 3, 2024, our credit ratings were as follows:

As of November 2, 2024, our credit ratings were as follows:

Credit Ratings Moody’s Standard and Poor’s Fitch

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Each of the credit rating agencies reviews its rating periodically, and there is no guarantee our current credit ratings will remain the same as described above.

In September 2024, we issued $750 million of debt.

Note 6 to the Financial Statements provides additional information.

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 2024 and October 2028, respectively, backstop our commercial paper program.

In October 2024, we obtained a new committed $1.0 billion 364-day unsecured revolving credit facility that will expire in October 2025 and terminated our prior 364-day credit facility.

This credit facility and our $3.0 billion unsecured revolving credit facility that will expire in October 2028 backstop our commercial paper program.

No balances were outstanding under either credit facility at any time during 2024 or 2023.

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

There was no commercial paper outstanding as of either November 2, 2024 or October 28, 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 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.

Additionally, as of November 2, 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