TARGET CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Financial Summary Third quarter 2024 included the following notable items: • GAAP and adjusted diluted earnings per share (Adjusted EPS) were $1.85. • Total revenue was $25.7 billion, an increase of 1.1 percent from the comparable prior-year period, reflecting a total sales increase of 0.9 percent and a 11.5 percent increase in other revenue. • 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 declined 1.9 percent. ◦ Comparable digitally-originated sales increased 10.8 percent. • 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 % Note: 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. A reconciliation of non-GAAP financial measures to GAAP measures is provid ed on page 19 . 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 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 . TARGET CORPORATION Q3 2024 Form 10-Q 14 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents ANALYSIS OF RESULTS OF OPERATIONS Index to Notes Analysis of Results of Operations 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 % Other revenue 440 394 11.5 1,259 1,157 8.8 Total revenue 25,668 25,398 1.1 75,651 75,493 0.2 Cost of sales 18,375 18,149 1.2 53,623 54,333 (1.3) SG&A expenses 5,486 5,316 3.2 16,046 15,525 3.4 Depreciation and amortization (exclusive of depreciation included in cost of sales) 639 616 3.6 1,883 1,793 5.0 Operating income $ 1,168 $ 1,317 (11.2) % $ 4,099 $ 3,842 6.7 % 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 % SG&A expense rate 21.4 20.9 21.2 20.6 Depreciation and amortization expense rate (exclusive of depreciation included in cost of sales) 2.5 2.4 2.5 2.4 Operating income margin rate 4.6 5.2 5.4 5.1 Note: Gross margin rate is calculated as gross margin (sales less cost of sales) divided by sales. All other rates are calculated by dividing the applicable amount by total revenue. Sales Sales include all merchandise sales, net of expected returns, and our estimate of gift card breakage. We use comparable sales to evaluate the performance of our stores and digital channel sales by measuring the change in sales for a period over the comparable prior-year period of equivalent length. Comparable sales include all sales, except sales from stores open less than 13 months, digital acquisitions we have owned less than 13 months, stores that have been closed, and digital acquisitions that we no longer operate. Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies. Digitally originated sales include all sales initiated through mobile applications and our websites. Our stores fulfill the majority of digitally originated sales, including shipment from stores to guests, store Order Pickup or Drive Up, and delivery via Shipt. Digitally originated sales may also be fulfilled through our distribution centers, our vendors, or other third parties. Sales growth—from both comparable sales and new stores—represents an important driver of our long-term profitability. We expect that comparable sales growth will drive the majority of our total sales growth. 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). TARGET CORPORATION Q3 2024 Form 10-Q 15 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents ANALYSIS OF RESULTS OF OPERATIONS Index to Notes 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) % Drivers of change in comparable sales Number of transactions (traffic) 2.4 (4.1) 1.1 (2.7) Average transaction amount (2.0) (0.8) (1.6) (0.8) 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 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 % Digitally originated 18.5 16.8 18.2 17.1 Total 100 % 100 % 100 % 100 % 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 % Other 2.3 2.3 2.2 2.5 Total 100 % 100 % 100 % 100 % Note: 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 Nine Months Ended November 2, 2024 October 28, 2023 November 2, 2024 October 28, 2023 Apparel & accessories 16 % 16 % 16 % 16 % Beauty 13 12 13 12 Food & beverage 23 23 23 23 Hardlines 12 13 13 13 Home furnishings & décor 17 18 16 17 Household essentials 19 18 19 19 Total 100 % 100 % 100 % 100 % Note 2 to the Financial Statements provides additional product category sales information. 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 Q3 2024 Form 10-Q 16 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. Guests receive a 5 percent discount on virtually all purchases when they use a Target Circle Card at Target. 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 Year-to-Date 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; and • new supply chain facilities coming online; • lower book to physical inventory adjustments compared to the prior-year period; and • merchandising activities, including cost improvements which more than offset higher promotional and clearance markdown rates. TARGET CORPORATION Q3 2024 Form 10-Q 17 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents ANALYSIS OF RESULTS OF OPERATIONS Index to Notes 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. Store Data 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 Opened 13 10 23 21 Closed (1) (9) (1) (13) Ending store count 1,978 1,956 1,978 1,956 Number of Stores and Number of Stores Retail Square Feet (a) 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. ft. 273 273 273 48,824 48,824 48,824 50,000 to 169,999 sq. ft. 1,559 1,542 1,542 195,050 192,908 192,877 49,999 or less sq. ft. 146 141 141 4,404 4,207 4,207 Total 1,978 1,956 1,956 248,278 245,939 245,908 (a) In thousands; reflects total square feet less office, supply chain facilities, and vacant space. Other Performance Factors Net Interest Expense 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 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 Q3 2024 Form 10-Q 18 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Notes Reconciliation of Non-GAAP Financial Measures to GAAP Measures 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. This measure is not in accordance with, or an alternative to, U.S. GAAP. The most comparable GAAP measure is diluted earnings per share. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. 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 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 Earnings before interest expense and income taxes (EBIT) and earnings before interest expense, income taxes, depreciation, and amortization (EBITDA) are non-GAAP financial measures. We believe these measures provide meaningful information about our operational efficiency compared with our competitors by excluding the impact of differences in tax jurisdictions and structures, debt levels, and, for EBITDA, capital investment. These measures are not in accordance with, or an alternative to, GAAP. The most comparable GAAP measure is net earnings. EBIT and EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. 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 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 % + Provision for income taxes 237 264 (9.9) 867 755 14.9 + Net interest expense 105 107 (1.5) 321 395 (18.7) EBIT $ 1,196 $ 1,342 (10.8) % $ 4,176 $ 3,906 6.9 % + Total depreciation and amortization (a) 754 722 4.2 2,215 2,072 6.8 EBITDA $ 1,950 $ 2,064 (5.5) % $ 6,391 $ 5,978 6.9 % (a) Represents total depreciation and amortization, including amounts classified within Depreciation and Amortization and within Cost of Sales. TARGET CORPORATION Q3 2024 Form 10-Q 19 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Notes We have also disclosed after-tax ROIC, which is a ratio based on GAAP information, with the exception of the add-back of operating lease interest to operating income. We believe this metric is useful in assessing the effectiveness of our capital allocation over time. Other companies may calculate ROIC differently, limiting the usefulness of the measure for comparisons with other companies. After-Tax Return on Invested Capital (dollars in millions) Trailing Twelve Months Numerator November 2, 2024 (a) October 28, 2023 Operating income $ 5,964 $ 5,001 + Net other income 105 79 EBIT 6,069 5,080 + Operating lease interest (b) 157 106 - Income taxes (c) 1,403 1,050 Net operating profit after taxes $ 4,823 $ 4,136 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 + Noncurrent portion of long-term debt 14,346 14,883 14,237 + Shareholders' investment 14,489 12,514 11,019 + Operating lease liabilities (d) 3,765 3,351 2,879 - Cash and cash equivalents 3,433 1,910 954 Invested capital $ 30,802 $ 29,950 $ 29,388 Average invested capital (e) $ 30,376 $ 29,670 After-tax return on invested capital 15.9 % 13.9 % (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 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 22.5 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. (e) Average based on the invested capital at the end of the current period and the invested capital at the end of the comparable prior period. TARGET CORPORATION Q3 2024 Form 10-Q 20 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents ANALYSIS OF FINANCIAL CONDITION Index to Notes Analysis of Financial Condition Liquidity and Capital Resources Capital Allocation We follow a disciplined and balanced approach to capital allocation based on the following priorities, ranked in order of importance: first, we fully invest in opportunities to profitably grow our business, create sustainable long-term value, and maintain our current operations and assets; second, we maintain a competitive quarterly dividend and seek to grow it annually; 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 $3.4 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. This policy allows investments in large money market funds or in highly-rated direct short-term instruments that mature in 60 days or less. We also place dollar limits on our investments in individual funds or instruments. Operating Cash Flows 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 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 $1.9 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. Dividends 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 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. TARGET CORPORATION Q3 2024 Form 10-Q 21 MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents ANALYSIS OF FINANCIAL CONDITION Index to Notes Financing Our financing strategy is to ensure liquidity and access to capital markets, to maintain a balanced spectrum of debt maturities, and to manage our net exposure to floating interest rate volatility. Within these parameters, we seek to minimize our borrowing costs. Our ability to access the long-term debt and commercial paper markets has provided us with ample sources of liquidity. 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 November 2, 2024, our credit ratings were as follows: Credit Ratings Moody’s Standard and Poor’s Fitch Long-term debt A2 A A Commercial paper P-1 A-1 F1 If our credit ratings were lowered, our ability to access the debt markets, our cost of funds, and other terms for new debt issuances could be adversely impacted. 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. 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 November 2, 2024 or October 28, 2023. Note 6 to the Financial Statements provides additional information. Most of our long-term debt obligations contain covenants related to secured debt levels. In addition to a secured debt level covenant, our credit facilities also contain a debt leverage covenant. We are, and expect to remain, in compliance with these covenants. 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. New Accounting Pronouncements We do not expect any recently issued accounting pronouncements to have a material effect on our financial statements. TARGET CORPORATION Q3 2024 Form 10-Q 22 MANAGEMENT'S DISCUSSION AND ANALYSIS & SUPPLEMENTAL INFORMATION Table of Contents FORWARD LOOKING STATEMENTS & CONTROLS AND PROCEDURES Index to Notes Forward-Looking Statements This report contains forward-looking statements, which are based on our current assumptions and expectations. These statements are typically accompanied by the words "anticipate," "believe," "could," “expect,” “may,” “might,” “seek,” "will," “would,” or similar words. The principal forward-looking statements in this report include statements regarding: our future financial and operational performance, the adequacy of and costs associated with our sources of liquidity, the funding of debt maturities, the execution of our share repurchase program, our expected capital expenditures and new lease commitments, the expected compliance with debt covenants, the expected impact of new accounting pronouncements, our intentions regarding future dividends, the expected return on plan assets, the expected outcome of, and adequacy of our reserves for, claims, litigation, and the resolution of tax matters, and changes in our assumptions and expectations. All such forward-looking statements are intended to enjoy the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. Although we believe there is a reasonable basis for the forward-looking statements, our actual results could be materially different. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth in our description of risk factors included in Part I, Item 1A, Risk Factors of our Form 10-K for the fiscal year ended February 3, 2024, which should be read in conjunction with the forward-looking statements in this report. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in our primary risk exposures or management of market risks from those disclosed in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk of our Form 10-K for the fiscal year ended February 3, 2024.