Quarterly Report (10-q)

Date : 11/27/2019 @ 6:00PM
Source : Edgar (US Regulatory)
Stock : Target Corp (TGT)
Quote : 117.83  0.0 (0.00%) @ 9:05AM

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-6049
 
BULLSEYE10Q19Q3.JPG
TARGET CORPORATION
(Exact name of registrant as specified in its charter)

Minnesota
(State or other jurisdiction of incorporation or organization)

1000 Nicollet Mall, Minneapolis, Minnesota
(Address of principal executive offices)

 

41-0215170
(I.R.S. Employer Identification No.)

55403
(Zip Code)
Registrant’s telephone number, including area code: 612/304-6073
Former name, former address and former fiscal year, if changed since last report: N/A
 
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock, par value $0.0833 per share
 
TGT
 
New York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer
  Accelerated filer
 Non-accelerated filer
Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.       
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                 Yes  No 
Indicate the number of shares outstanding of each of registrant’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $0.0833, outstanding at November 22, 2019 were 506,737,121.
 




TARGET CORPORATION
 
TABLE OF CONTENTS
 
 
 
1
 
2
 
3
 
4
 
5
 
7
11
22
22
 
 
 
 
23
23
23
23
23
23
24
 
 
 
 
25





PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Operations
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
(millions, except per share data) (unaudited)
November 2,
2019

 
November 3,
2018

 
November 2,
2019

 
November 3,
2018

Sales
$
18,414

 
$
17,590

 
$
53,997

 
$
51,699

Other revenue
251

 
231

 
716

 
680

Total revenue
18,665

 
17,821

 
54,713

 
52,379

Cost of sales
12,935

 
12,535

 
37,808

 
36,400

Selling, general and administrative expenses
4,153

 
3,937

 
11,728

 
11,347

Depreciation and amortization (exclusive of depreciation included in cost of sales)
575

 
530

 
1,717

 
1,639

Operating income
1,002

 
819

 
3,460

 
2,993

Net interest expense
113

 
115

 
359

 
352

Net other (income) / expense
(12
)
 
(9
)
 
(38
)
 
(21
)
Earnings from continuing operations before income taxes
901

 
713

 
3,139

 
2,662

Provision for income taxes
195

 
97

 
703

 
530

Net earnings from continuing operations
706

 
616

 
2,436

 
2,132

Discontinued operations, net of tax
8

 
6

 
11

 
7

Net earnings
$
714

 
$
622

 
$
2,447

 
$
2,139

Basic earnings per share
 
 
 
 
 
 
 
Continuing operations
$
1.38

 
$
1.17

 
$
4.75

 
$
4.01

Discontinued operations
0.02

 
0.01

 
0.02

 
0.01

Net earnings per share
$
1.40

 
$
1.18

 
$
4.77

 
$
4.02

Diluted earnings per share
 
 
 
 
 
 
 
Continuing operations
$
1.37

 
$
1.16

 
$
4.71

 
$
3.98

Discontinued operations
0.02

 
0.01

 
0.02

 
0.01

Net earnings per share
$
1.39

 
$
1.17

 
$
4.74

 
$
3.99

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
509.7

 
525.9

 
512.5

 
531.5

Diluted
514.8

 
531.2

 
516.8

 
536.2

Antidilutive shares

 

 

 


Note: Per share amounts may not foot due to rounding. 

See accompanying Notes to Consolidated Financial Statements.



1




Consolidated Statements of Comprehensive Income
 
 
 
 
Three Months Ended
 
Nine Months Ended
(millions) (unaudited)
November 2,
2019

 
November 3,
2018

 
November 2,
2019

 
November 3,
2018

Net earnings
$
714

 
$
622

 
$
2,447

 
$
2,139

Other comprehensive income
 

 
 

 
 

 
 

Pension, net of tax
10

 
13

 
30

 
42

Currency translation adjustment and cash flow hedges, net of tax
(1
)
 
(4
)
 
2

 
(9
)
Other comprehensive income
9

 
9

 
32

 
33

Comprehensive income
$
723

 
$
631

 
$
2,479

 
$
2,172

 
See accompanying Notes to Consolidated Financial Statements.




2




Consolidated Statements of Financial Position
 

 
 

 
 

(millions, except footnotes) (unaudited)
November 2,
2019

 
February 2,
2019

 
November 3,
2018

Assets
 
 
 

 
 
Cash and cash equivalents
$
969

 
$
1,556

 
$
825

Inventory
11,396

 
9,497

 
12,393

Other current assets
1,440

 
1,466

 
1,421

Total current assets
13,805

 
12,519

 
14,639

Property and equipment
 

 
 

 
 

Land
6,040

 
6,064

 
6,069

Buildings and improvements
30,467

 
29,240

 
29,090

Fixtures and equipment
6,032

 
5,912

 
5,784

Computer hardware and software
2,636

 
2,544

 
2,660

Construction-in-progress
298

 
460

 
384

Accumulated depreciation
(19,089
)
 
(18,687
)
 
(18,380
)
Property and equipment, net
26,384

 
25,533

 
25,607

Operating lease assets
2,151

 
1,965

 
1,997

Other noncurrent assets
1,401

 
1,273

 
1,329

Total assets
$
43,741

 
$
41,290

 
$
43,572

Liabilities and shareholders’ investment
 

 
 

 
 

Accounts payable
$
11,258

 
$
9,761

 
$
11,959

Accrued and other current liabilities
4,191

 
4,201

 
4,096

Current portion of long-term debt and other borrowings
1,159

 
1,052

 
1,535

Total current liabilities
16,608

 
15,014

 
17,590

Long-term debt and other borrowings
10,513

 
10,223

 
10,104

Noncurrent operating lease liabilities
2,208

 
2,004

 
2,046

Deferred income taxes
1,215

 
972

 
970

Other noncurrent liabilities
1,652

 
1,780

 
1,782

Total noncurrent liabilities
15,588

 
14,979

 
14,902

Shareholders’ investment
 

 
 

 
 

Common stock
42

 
43

 
43

Additional paid-in capital
6,006

 
6,042

 
5,867

Retained earnings
6,270

 
6,017

 
5,884

Accumulated other comprehensive loss
(773
)
 
(805
)
 
(714
)
Total shareholders’ investment
11,545

 
11,297

 
11,080

Total liabilities and shareholders’ investment
$
43,741

 
$
41,290

 
$
43,572

Common Stock Authorized 6,000,000,000 shares, $0.0833 par value; 506,677,740, 517,761,600 and 521,810,597 shares issued and outstanding at November 2, 2019, February 2, 2019, and November 3, 2018, respectively.
 
Preferred Stock Authorized 5,000,000 shares, $0.01 par value; no shares were issued or outstanding during any period presented.
 
See accompanying Notes to Consolidated Financial Statements.



3




Consolidated Statements of Cash Flows
 
 
 
 
Nine Months Ended
(millions) (unaudited)
November 2,
2019

 
November 3,
2018

Operating activities
 

 
 

Net earnings
$
2,447

 
$
2,139

Earnings from discontinued operations, net of tax
11

 
7

Net earnings from continuing operations
2,436

 
2,132

Adjustments to reconcile net earnings to cash provided by operations
 

 
 

Depreciation and amortization
1,905

 
1,826

Share-based compensation expense
116

 
106

Deferred income taxes
235

 
261

Noncash losses / (gains) and other, net
6

 
85

Changes in operating accounts
 

 
 
Inventory
(1,899
)
 
(3,796
)
Other assets
(10
)
 
(140
)
Accounts payable
1,473

 
3,298

Accrued and other liabilities
(121
)
 
(158
)
Cash provided by operating activities—continuing operations
4,141

 
3,614

Cash provided by operating activities—discontinued operations
18

 
10

Cash provided by operations
4,159

 
3,624

Investing activities
 

 
 

Expenditures for property and equipment
(2,403
)
 
(2,873
)
Proceeds from disposal of property and equipment
29

 
39

Other investments
14

 
15

Cash required for investing activities
(2,360
)
 
(2,819
)
Financing activities
 

 
 

Change in commercial paper, net

 
490

Additions to long-term debt
994

 

Reductions of long-term debt
(1,041
)
 
(268
)
Dividends paid
(995
)
 
(1,001
)
Repurchase of stock
(959
)
 
(1,485
)
Accelerated share repurchase pending final settlement
(450
)
 
(450
)
Stock option exercises
65

 
91

Cash required for financing activities
(2,386
)
 
(2,623
)
Net decrease in cash and cash equivalents
(587
)
 
(1,818
)
Cash and cash equivalents at beginning of period
1,556

 
2,643

Cash and cash equivalents at end of period
$
969

 
$
825

Supplemental information
 
 
 
Leased assets obtained in exchange for new finance lease liabilities
$
301

 
$
29

Leased assets obtained in exchange for new operating lease liabilities
334

 
228

 

See accompanying Notes to Consolidated Financial Statements.



4




Consolidated Statements of Shareholders’ Investment
 
Common

 
Stock

 
Additional

 
 

 
Accumulated Other

 
 

 
Stock

 
Par

 
Paid-in

 
Retained

 
Comprehensive

 
 

(millions) (unaudited)
Shares

 
Value

 
Capital

 
Earnings

 
(Loss) / Income

 
Total

February 3, 2018
541.7

 
$
45

 
$
5,858

 
$
6,495

 
$
(747
)
 
$
11,651

Net earnings

 

 

 
718

 

 
718

Other comprehensive income

 

 

 

 
10

 
10

Dividends declared

 

 

 
(333
)
 

 
(333
)
Repurchase of stock
(6.9
)
 
(1
)
 

 
(493
)
 

 
(494
)
Accelerated share repurchase pending final settlement
(2.9
)
 

 
(225
)
 
(200
)
 

 
(425
)
Stock options and awards
1.0

 

 
31

 

 

 
31

May 5, 2018
532.9

 
$
44

 
$
5,664

 
$
6,187

 
$
(737
)
 
$
11,158

Net earnings

 

 

 
799

 

 
799

Other comprehensive income

 

 

 

 
14

 
14

Dividends declared

 

 

 
(341
)
 

 
(341
)
Repurchase of stock
(2.9
)
 

 
225

 
(232
)
 

 
(7
)
Accelerated share repurchase pending final settlement
(4.6
)
 

 
(170
)
 
(355
)
 

 
(525
)
Stock options and awards
0.7

 

 
69

 

 

 
69

August 4, 2018
526.1

 
$
44

 
$
5,788

 
$
6,058

 
$
(723
)
 
$
11,167

Net earnings

 

 

 
622

 

 
622

Other comprehensive income

 

 

 

 
9

 
9

Dividends declared

 

 

 
(338
)
 

 
(338
)
Repurchase of stock
(1.7
)
 
(1
)
 
170

 
(171
)
 

 
(2
)
Accelerated share repurchase pending final settlement
(3.5
)
 

 
(163
)
 
(287
)
 

 
(450
)
Stock options and awards
0.9

 

 
72

 

 

 
72

November 3, 2018
521.8

 
$
43

 
$
5,867

 
$
5,884

 
$
(714
)
 
$
11,080

Net earnings

 

 

 
799

 

 
799

Other comprehensive loss

 

 

 

 
(91
)
 
(91
)
Dividends declared

 

 

 
(336
)
 

 
(336
)
Repurchase of stock
(4.7
)
 

 
163

 
(330
)
 

 
(167
)
Stock options and awards
0.7

 

 
12

 

 

 
12

February 2, 2019
517.8

 
$
43

 
$
6,042

 
$
6,017

 
$
(805
)
 
$
11,297





5




Consolidated Statements of Shareholders’ Investment
 
Common

 
Stock

 
Additional

 
 

 
Accumulated Other

 
 

 
Stock

 
Par

 
Paid-in

 
Retained

 
Comprehensive

 
 

(millions) (unaudited)
Shares

 
Value

 
Capital

 
Earnings

 
(Loss) / Income

 
Total

February 2, 2019
517.8

 
$
43

 
$
6,042

 
$
6,017

 
$
(805
)
 
$
11,297

Net earnings

 

 

 
795

 

 
795

Other comprehensive income

 

 

 

 
13

 
13

Dividends declared

 

 

 
(330
)
 

 
(330
)
Repurchase of stock
(3.6
)
 

 

 
(277
)
 

 
(277
)
Accelerated share repurchase pending final settlement
(3.0
)
 

 
(153
)
 
(247
)
 

 
(400
)
Stock options and awards
1.1

 

 
19

 

 

 
19

May 4, 2019
512.3

 
$
43

 
$
5,908

 
$
5,958

 
$
(792
)
 
$
11,117

Net earnings

 

 

 
938

 

 
938

Other comprehensive income

 

 

 

 
10

 
10

Dividends declared

 

 

 
(341
)
 

 
(341
)
Repurchase of stock
(1.3
)
 

 
153

 
(94
)
 

 
59

Stock options and awards
0.3

 

 
53

 

 

 
53

August 3, 2019
511.3

 
$
43

 
$
6,114

 
$
6,461

 
$
(782
)
 
$
11,836

Net earnings

 

 

 
714

 

 
714

Other comprehensive income

 

 

 

 
9

 
9

Dividends declared

 

 

 
(338
)
 

 
(338
)
Repurchase of stock
(3.0
)
 
(1
)
 

 
(295
)
 

 
(296
)
Accelerated share repurchase pending final settlement
(2.5
)
 

 
(178
)
 
(272
)
 

 
(450
)
Stock options and awards
0.9

 

 
70

 

 

 
70

November 2, 2019
506.7

 
$
42

 
$
6,006

 
$
6,270

 
$
(773
)
 
$
11,545


We declared $0.66 and $0.64 dividends per share for the three months ended November 2, 2019, and November 3, 2018, respectively, and $2.54 per share for the fiscal year ended February 2, 2019.
 
See accompanying Notes to Consolidated Financial Statements.



6




Notes to Consolidated Financial Statements (unaudited)
 
1. Accounting Policies
 
These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by United States (U.S.) generally accepted accounting principles (U.S. GAAP) for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statement disclosures in our 2018 Form 10-K.

We use the same accounting policies in preparing quarterly and annual financial statements. Unless otherwise noted, amounts presented within the Notes to Consolidated Financial Statements refer to our continuing operations.
 
We operate as a single segment that includes all of our continuing operations, which are designed to enable guests to purchase products seamlessly in stores or through our digital channels. Nearly all of our revenues are generated in the U.S. The vast majority of our long-lived assets are located within the U.S.

Due to the seasonal nature of our business, quarterly revenues, expenses, earnings, and cash flows are not necessarily indicative of the results that may be expected for the full year.

2. Revenues

General merchandise sales represent the vast majority of our revenues. We also earn revenues from a variety of other sources, most notably credit card profit sharing income from our arrangement with TD Bank Group (TD).

Revenues
Three Months Ended
 
Nine Months Ended
(millions)
November 2,
2019

 
November 3,
2018

 
November 2,
2019

 
November 3,
2018

Apparel and accessories (a)
$
3,564

 
$
3,219

 
$
10,510

 
$
9,803

Beauty and household essentials (a)
5,125

 
4,788

 
15,172

 
14,189

Food and beverage
3,717

 
3,611

 
10,899

 
10,570

Hardlines
2,460

 
2,478

 
7,348

 
7,292

Home furnishings and décor
3,527

 
3,476

 
9,985

 
9,781

Other
21

 
18

 
83

 
64

Sales
18,414

 
17,590

 
53,997

 
51,699

 
 
 
 
 
 
 
 
Credit card profit sharing
177

 
169

 
505

 
503

Other
74

 
62

 
211

 
177

Other revenue
251

 
231

 
716

 
680

 
 
 
 
 
 
 
 
Total revenue
$
18,665

 
$
17,821

 
$
54,713

 
$
52,379

(a) 
We reclassified certain non-apparel baby merchandise sales totaling $406 million and $1,260 million for the three and nine months ended November 2, 2019, respectively, and $403 million and $1,166 million for the three and nine months ended November 3, 2018, respectively, from Apparel and Accessories to Beauty and Household Essentials.

We record almost all retail store revenues at the point of sale. Digitally originated sales may include shipping revenue and are recorded upon delivery to the guest or upon guest pickup at the store. Sales are recognized net of expected returns, which we estimate using historical return patterns and our expectation of future returns. As of November 2, 2019, February 2, 2019, and November 3, 2018, the accrual for estimated returns was $137 million, $116 million, and $125 million, respectively. We have not historically had material adjustments to our returns estimates.

Revenue from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance.

7




Gift Card Liability Activity
February 2,
2019

 
Gift Cards Issued During Current Period But Not Redeemed (a)

 
Revenue Recognized From Beginning Liability

 
November 2,
2019

(millions)
 
 
 
Gift card liability
$
840

 
$
386

 
$
(543
)
 
$
683

(a) 
Net of estimated breakage.

Credit card profit sharing – We receive payments under a credit card program agreement with TD. Under the agreement, we receive a percentage of the profits generated by the Target Credit Card and Target MasterCard receivables in exchange for performing account servicing and primary marketing functions. TD underwrites, funds, and owns Target Credit Card and Target MasterCard receivables, controls risk management policies, and oversees regulatory compliance.

3. Fair Value Measurements
 
Fair value measurements are reported in one of three levels reflecting the valuation techniques used to determine fair value.
 
 
Fair Value Measurements - Recurring Basis
 
Fair Value at
(millions)
Classification
Pricing Category
November 2,
2019

 
February 2,
2019

 
November 3,
2018

Assets
 
 
 

 
 

 
 

Short-term investments
Cash and Cash Equivalents
Level 1
$
163

 
$
769

 
$
42

Prepaid forward contracts
Other Current Assets
Level 1
24

 
19

 
23

Interest rate swaps
Other Noncurrent Assets
Level 2
122

 
10

 

Liabilities
 
 
 

 
 

 
 

Interest rate swaps
Other Current Liabilities
Level 2

 
3

 
6

Interest rate swaps
Other Noncurrent Liabilities
Level 2

 

 
7


 
Significant Financial Instruments Not Measured at Fair Value (a)

(millions)
November 2, 2019
 
February 2, 2019
 
November 3, 2018
Carrying
Amount

Fair
Value

 
Carrying
Amount

Fair
Value

 
Carrying
Amount

Fair
Value

Long-term debt, including current portion (b)
$
10,246

$
11,870

 
$
10,247

$
10,808

 
$
10,245

$
10,396

(a) 
The carrying amounts of certain other current assets, commercial paper, accounts payable, and certain accrued and other current liabilities approximate fair value due to their short-term nature.
(b) 
The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for the same or similar types of financial instruments and would be classified as Level 2. These amounts exclude commercial paper, unamortized swap valuation adjustments, and lease liabilities.

4. Property and Equipment

We review long-lived assets for impairment when store performance expectations, events, or changes in circumstances—such as a decision to relocate or close a store or distribution center, discontinue projects, or make significant software changes—indicate that the asset’s carrying value may not be recoverable. We recognized impairment charges of $7 million and $21 million during the three and nine months ended November 2, 2019, respectively, primarily resulting from store impairments. We recognized no impairment charges during the three months ended November 3, 2018, and $85 million of impairment charges during the nine months ended November 3, 2018, primarily resulting from planned store closures. The impairment charges are recorded in Selling, General and Administrative Expenses.

5. Commercial Paper and Long-Term Debt

In March 2019, we issued $1,000 million of 10-year unsecured fixed rate debt at 3.375 percent, and in June 2019, we repaid $1,000 million of unsecured 2.3 percent fixed rate debt at maturity.


8




Our commercial paper program provides a source of short-term financing. For the nine months ended November 2, 2019, the maximum amount outstanding was $744 million, and the average daily amount outstanding was $55 million at a weighted average annual interest rate of 2.4 percent. For the nine months ended November 3, 2018, the maximum amount outstanding was $658 million, and the average daily amount outstanding was $54 million at a weighted average annual interest rate of 1.9 percent. As of November 2, 2019, no balances were outstanding. As of November 3, 2018, $490 million was outstanding and is classified within Current Portion of Long-Term Debt and Other Borrowings on our Consolidated Statement of Financial Position.

6. Derivative Financial Instruments
 
Our derivative instruments consist of interest rate swaps used to mitigate interest rate risk. As a result, we have counterparty credit exposure to large global financial institutions, which we monitor on an ongoing basis. Note 3 provides the fair value and classification of these instruments.
 
In March 2019, we entered into interest rate swaps with a total notional amount of $1,000 million, and in June 2019, interest rate swaps with a total notional amount of $1,000 million matured. As of November 2, 2019, and November 3, 2018, we were party to interest rate swaps with notional amounts totaling $1,500 million. We pay a variable rate and receive a fixed rate under each of these agreements. All of the agreements are designated as fair value hedges, and all were perfectly effective during the three and nine months ended November 2, 2019, and November 3, 2018.

Effect of Hedges on Debt
(millions)
 
November 2,
2019

 
February 2,
2019

 
November 3,
2018

Current portion of long-term debt and other borrowings
 
 
 
 
 
 
Carrying amount of hedged debt
 
$

 
$
996

 
$
993

Cumulative hedging adjustments, included in carrying amount
 

 
(3
)
 
(6
)
Long-term debt and other borrowings
 
 
 
 
 
 
Carrying amount of hedged debt
 
1,614

 
508

 
491

Cumulative hedging adjustments, included in carrying amount
 
122

 
10

 
(7
)

Effect of Hedges on Net Interest Expense
Three Months Ended
 
Nine Months Ended
(millions)
November 2,
2019

 
November 3,
2018

 
November 2,
2019

 
November 3,
2018

Gain (loss) on fair value hedges recognized in Net Interest Expense
 
 
 
 
 
 
 
Interest rate swap designated as fair value hedges
$
14

 
$
(4
)
 
$
115

 
$
(7
)
Hedged debt
(14
)
 
4

 
(115
)
 
7

Total
$

 
$

 
$

 
$



7. Share Repurchase

We periodically repurchase shares of our common stock under a board-authorized repurchase program through a combination of open market transactions, accelerated share repurchase (ASR) arrangements, and other privately negotiated transactions with financial institutions.
Share Repurchase Activity
Three Months Ended
Nine Months Ended
(millions, except per share data)
November 2,
2019

 
November 3,
2018

November 2,
2019

 
November 3,
2018

Number of shares purchased
3.0

 
6.3

10.8

 
19.0

Average price paid per share
$
99.25

 
$
84.00

$
84.28

 
$
76.38

Total investment
$
294

 
$
526

$
912

 
$
1,451


Note: This table excludes activity related to the ASR arrangements described below because final settlement had not occurred as of November 2, 2019, and November 3, 2018, respectively.


9




During the third quarter of 2019, we entered into an ASR arrangement to repurchase $300 to $450 million of our common stock. Under the agreement, we paid $450 million and received an initial delivery of 2.5 million shares, which were retired, resulting in a $272 million reduction to Retained Earnings. As of November 2, 2019, $178 million is included in the Consolidated Statement of Financial Position as a reduction to Additional Paid-in Capital.

During the third quarter of 2018, we entered into an ASR arrangement to repurchase $325 to $450 million of our common stock. Under the agreement, we paid $450 million and received an initial delivery of 3.5 million shares, which were retired, resulting in a $287 million reduction to Retained Earnings. As of November 3, 2018, $163 million was included as a reduction to Additional Paid-in Capital. Upon final settlement in the fourth quarter of 2018, we received an additional 2.2 million shares, which were retired, and $3.6 million for the remaining amount not settled in shares. In total, we repurchased 5.7 million shares under the ASR arrangement for a total cash investment of $446 million ($77.98 per share).

8. Pension Benefits
 
We provide pension plan benefits to eligible team members.

Net Pension Benefits Expense
 
Three Months Ended
 
Nine Months Ended
(millions)
Classification
November 2,
2019

 
November 3,
2018

 
November 2,
2019

 
November 3,
2018

Service cost benefits earned
SG&A Expenses
$
23

 
$
24

 
$
69

 
$
72

Interest cost on projected benefit obligation
Net Other (Income) / Expense
37

 
37

 
111

 
110

Expected return on assets
Net Other (Income) / Expense
(62
)
 
(62
)
 
(186
)
 
(185
)
Amortization of losses
Net Other (Income) / Expense
16

 
20

 
47

 
61

Amortization of prior service cost
Net Other (Income) / Expense
(3
)
 
(3
)
 
(8
)
 
(8
)
Settlement charges
Net Other (Income) / Expense

 
1

 

 
4

Total
 
$
11

 
$
17

 
$
33

 
$
54


 
9. Accumulated Other Comprehensive (Loss) / Income
 
 
Change in Accumulated Other Comprehensive Income
Cash Flow
Hedges

 
Currency Translation Adjustment

 
Pension

 
Total

(millions)
 
 
 
February 2, 2019
$
(13
)
 
$
(20
)
 
$
(772
)
 
$
(805
)
Other comprehensive income before reclassifications, net of tax

 
2

 

 
2

Amounts reclassified from AOCI, net of tax

 

 
30

 
30

November 2, 2019
$
(13
)
 
$
(18
)
 
$
(742
)
 
$
(773
)



10




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Executive Summary
 
Third quarter 2019 includes the following notable items:

GAAP earnings per share from continuing operations were $1.37.
Adjusted earnings per share from continuing operations were $1.36.
Total revenue increased 4.7 percent, driven by a comparable sales increase and sales from new stores.
Comparable sales increased 4.5 percent, driven by a 3.1 percent increase in traffic.
Comparable store sales grew 2.8 percent.
Digital channel sales increased 31 percent, contributing 1.7 percentage points to comparable sales growth.
Operating income of $1,002 million was 22.3 percent higher than the comparable prior-year period.

Sales were $18,414 million for the three months ended November 2, 2019, an increase of $824 million, or 4.7 percent, from the same period in the prior year. Operating cash flow provided by continuing operations was $4,141 million for the nine months ended November 2, 2019, an increase of $527 million, or 14.6 percent, from $3,614 million for the nine months ended November 3, 2018
 
Earnings Per Share from Continuing Operations
Three Months Ended
 
 

 
Nine Months Ended
 
 

November 2,
2019

 
November 3,
2018

 
Change

 
November 2,
2019

 
November 3,
2018

 
Change

GAAP diluted earnings per share
$
1.37

 
$
1.16

 
18.2
%
 
$
4.71

 
$
3.98

 
18.5
%
Adjustments
(0.01
)
 
(0.07
)
 
 
 
(0.01
)
 
(0.11
)
 
 

Adjusted diluted earnings per share
$
1.36

 
$
1.09

 
24.9
%
 
$
4.70

 
$
3.87

 
21.4
%
Note: Amounts may not foot due to rounding. Adjusted diluted earnings per share from continuing operations (Adjusted EPS), a non-GAAP metric, excludes the impact of certain items. Management believes that Adjusted EPS is useful in providing period-to-period comparisons of the results of our continuing operations. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 17.

For the trailing twelve months ended November 2, 2019, after-tax return on invested capital from continuing operations (ROIC) was 15.0 percent, compared with 15.8 percent for the trailing twelve months ended November 3, 2018. Excluding the discrete impacts of the Tax Cuts and Jobs Act of 2017 (Tax Act), ROIC was 15.1 percent and 13.9 percent for the trailing twelve months ended November 2, 2019, and November 3, 2018, respectively. The calculation of ROIC is provided on page 19.


11




Analysis of Results of Operations

Summary of Operating Income
Three Months Ended
 
 

 
Nine Months Ended
 
 

(dollars in millions)
November 2,
2019

 
November 3,
2018

 
Change

 
November 2,
2019

 
November 3,
2018

 
Change

Sales
$
18,414

 
$
17,590

 
4.7
%
 
$
53,997

 
$
51,699

 
4.4
%
Other revenue
251

 
231

 
8.8

 
716

 
680

 
5.3

Total revenue
18,665

 
17,821

 
4.7

 
54,713

 
52,379

 
4.5

Cost of sales
12,935

 
12,535

 
3.2

 
37,808

 
36,400

 
3.9

Selling, general and administrative expenses
4,153

 
3,937

 
5.5

 
11,728

 
11,347

 
3.4

Depreciation and amortization (exclusive of depreciation included in cost of sales)
575

 
530

 
8.5

 
1,717

 
1,639

 
4.8

Operating income
$
1,002

 
$
819

 
22.3
%
 
$
3,460

 
$
2,993

 
15.6
%

Rate Analysis
Three Months Ended
 
Nine Months Ended
 
November 2,
2019

 
November 3,
2018

 
November 2,
2019

 
November 3,
2018

Gross margin rate
29.8
%
 
28.7
%
 
30.0
%
 
29.6
%
SG&A expense rate
22.3

 
22.1

 
21.4

 
21.7

Depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate
3.1

 
3.0

 
3.1

 
3.1

Operating income margin rate
5.4

 
4.6

 
6.3

 
5.7

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 gift card breakage. Comparable sales is a measure that highlights the performance of our stores and digital channels 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 pick-up or drive-up, and delivery via our wholly-owned subsidiary, Shipt. Digitally originated sales may also be fulfilled through our distribution centers, our vendors, or other third parties.

The increase in sales during the three and nine months ended November 2, 2019, is due to a comparable sales increase of 4.5 percent and 4.2 percent, respectively, and the contribution from new stores.
 
Comparable Sales
Three Months Ended
 
Nine Months Ended
 
November 2,
2019

 
November 3,
2018

 
November 2,
2019

 
November 3,
2018

Comparable sales change
4.5
%
 
5.1
 %
 
4.2
%
 
4.9
 %
Drivers of change in comparable sales
 

 
 

 
 

 
 

Number of transactions
3.1

 
5.3

 
3.3

 
5.1

Average transaction amount
1.4

 
(0.2
)
 
0.9

 
(0.2
)
Note: Amounts may not foot due to rounding.


12




Contribution to Comparable Sales Change
Three Months Ended
 
Nine Months Ended
 
November 2,
2019

 
November 3,
2018

 
November 2,
2019

 
November 3,
2018

Stores channel comparable sales change
2.8
%
 
3.2
%
 
2.3
%
 
3.4
%
Digital channel contribution to comparable sales change
1.7

 
1.9

 
1.9

 
1.5

Total comparable sales change
4.5
%
 
5.1
%
 
4.2
%
 
4.9
%
Note: Amounts may not foot due to rounding.

Sales by Channel
Three Months Ended
 
Nine Months Ended
 
November 2,
2019

 
November 3,
2018

 
November 2,
2019

 
November 3,
2018

Stores originated
92.5
%
 
94.0
%
 
92.7
%
 
94.4
%
Digitally originated
7.5

 
6.0

 
7.3

 
5.6

Total
100
%
 
100
%
 
100
%
 
100
%

Note 2 to the Consolidated Financial Statements provides sales by product category. The collective interaction of a broad array of macroeconomic, competitive, and consumer behavioral factors, as well as sales mix, and transfer of sales to new stores makes further analysis of sales metrics infeasible.

We monitor the percentage of purchases that are paid for using RedCards (RedCard Penetration) because our internal analysis has indicated that a meaningful portion of the incremental purchases on RedCards are also incremental sales for Target. Guests receive a 5 percent discount on virtually all purchases when they use a RedCard at Target.
 
RedCard Penetration
Three Months Ended
 
Nine Months Ended
 
November 2,
2019

 
November 3,
2018

 
November 2,
2019

 
November 3,
2018

Target Debit Card
12.5
%
 
12.9
%
 
12.7
%
 
13.1
%
Target Credit Cards
10.7

 
10.8

 
10.6

 
10.8

Total RedCard Penetration
23.1
%
 
23.7
%
 
23.3
%
 
23.9
%
Note: Amounts may not foot due to rounding.


13




Gross Margin Rate
CHART-FE2B1D4E8913DCB3BBA.JPG
For the three months ended November 2, 2019, our gross margin rate was 29.8 percent compared with 28.7 percent in the comparable period last year. The increase was due to merchandising efforts to optimize costs, pricing, promotions, and assortment, combined with favorable category sales mix. For the three months ended November 2, 2019, aggregate supply chain and digital fulfillment costs had an insignificant impact on our gross margin rate relative to the comparable prior-year period.
CHART-F3989C2A483F5DE29DE.JPG
For the nine months ended November 2, 2019, our gross margin rate was 30.0 percent compared with 29.6 percent in the comparable period last year. The increase was due to merchandising efforts to optimize costs, pricing, promotions, and assortment, and favorable category sales mix, partially offset by increased supply chain and digital fulfillment costs.



14




Selling, General, and Administrative Expense Rate

CHART-8684F1C76DF7563BA3D.JPG
For the three months ended November 2, 2019, our SG&A expense rate was 22.3 percent compared with 22.1 percent in the comparable period last year. The increase was primarily driven by higher compensation costs, including store wages, and marketing expenses, partially offset by broad-based cost savings.

CHART-DE48D4C0BDE8523386F.JPG
For the nine months ended November 2, 2019, our SG&A expense rate was 21.4 percent compared with 21.7 percent in the comparable period last year. The decrease reflects lower impairment charges in 2019 and broad-based cost savings.

Store Data
 
Change in Number of Stores
Three Months Ended
 
Nine Months Ended
 
November 2,
2019

 
November 3,
2018

 
November 2,
2019

 
November 3,
2018

Beginning store count
1,853

 
1,835

 
1,844

 
1,822

Opened
9

 
12

 
20

 
25

Closed

 
(1
)
 
(2
)
 
(1
)
Ending store count
1,862

 
1,846

 
1,862

 
1,846



15




Number of Stores and
Retail Square Feet
Number of Stores
 
Retail Square Feet (a)
November 2,
2019

February 2,
2019

November 3,
2018

 
November 2,
2019

February 2,
2019

November 3,
2018

170,000 or more sq. ft.
272

272

273

 
48,619

48,604

48,778

50,000 to 169,999 sq. ft.
1,504

1,501

1,505

 
189,164

188,900

189,496

49,999 or less sq. ft.
86

71

68

 
2,475

2,077

1,984

Total
1,862

1,844

1,846

 
240,258

239,581

240,258

(a)  In thousands, reflects total square feet less office, distribution center, and vacant space.
 
Other Performance Factors

Net Interest Expense
 
Net interest expense was $113 million and $359 million for the three and nine months ended November 2, 2019, respectively, and $115 million and $352 million for the three and nine months ended November 3, 2018, respectively.

Provision for Income Taxes
 
Our effective income tax rate from continuing operations for the three and nine months ended November 2, 2019, was 21.7 percent and 22.4 percent, respectively, compared with 13.6 percent and 19.9 percent, respectively, for the comparable periods last year. The effective income tax rates for the three and nine months ended November 3, 2018, included $39 million of discrete benefits of the Tax Act and, to a lesser extent, rate benefits from our global sourcing operations.

16




Reconciliation of Non-GAAP Financial Measures to GAAP Measures

To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share from continuing operations (Adjusted EPS). This metric excludes certain items presented below. We believe this information is useful in providing period-to-period comparisons of the results of our continuing operations. This measure is not in accordance with, or an alternative to, generally accepted accounting principles in the U.S. (GAAP). The most comparable GAAP measure is diluted earnings per share from continuing operations. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported under 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
 
 
November 2, 2019
 
November 3, 2018
(millions, except per share data)
 
Pretax

 
Net of Tax

 
Per Share Amounts

 
Pretax

 
Net of Tax

 
Per Share Amounts

GAAP diluted earnings per share from continuing operations
 
 
 
 
 
$
1.37

 
 
 
 
 
$
1.16

Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
Tax Act (a)
 
$

 
$

 
$

 
$

 
$
(39
)
 
$
(0.07
)
Other (c)
 
(9