Notes to Consolidated Financial Statements
1. Summary of Accounting Policies
Organization We are a general merchandise retailer selling products to our guests through our stores and digital channels.
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 United States (U.S.). The vast majority of our long-lived assets are located within the U.S.
Consolidation The consolidated financial statements include the balances of Target and its subsidiaries after elimination of intercompany balances and transactions. All material subsidiaries are wholly owned. We consolidate variable interest entities where it has been determined that Target is the primary beneficiary of those entities' operations.
Use of estimates The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions affecting reported amounts in the consolidated financial statements and accompanying notes. Actual results may differ significantly from those estimates.
Fiscal year Our fiscal year ends on the Saturday nearest January 31. Unless otherwise stated, references to years in this report relate to fiscal years, rather than to calendar years. Fiscal 2019 and 2018 ended February 1, 2020, and February 2, 2019, respectively, and consisted of 52 weeks. Fiscal 2017 ended February 3, 2018, and consisted of 53 weeks. Fiscal 2020 will end January 30, 2021, and will consist of 52 weeks.
Accounting policies Our accounting policies are disclosed in the applicable Notes to the Consolidated Financial Statements. Certain prior-year amounts have been reclassified to conform to the current year presentation.
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|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
39
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
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
(millions)
|
2019
|
|
2018
|
|
2017
|
|
Apparel and accessories (a)(f)
|
$
|
14,304
|
|
$
|
13,434
|
|
$
|
13,323
|
|
Beauty and household essentials (b)(f)
|
20,616
|
|
19,296
|
|
18,364
|
|
Food and beverage (c)
|
15,039
|
|
14,585
|
|
14,256
|
|
Hardlines (d)
|
12,595
|
|
12,709
|
|
12,062
|
|
Home furnishings and décor (e)
|
14,430
|
|
14,298
|
|
13,672
|
|
Other
|
146
|
|
111
|
|
109
|
|
Sales
|
77,130
|
|
74,433
|
|
71,786
|
|
|
|
|
|
Credit card profit sharing
|
680
|
|
673
|
|
694
|
|
|
|
|
|
|
|
|
|
Other
|
302
|
|
250
|
|
234
|
|
Other revenue
|
982
|
|
923
|
|
928
|
|
|
|
|
|
Total revenue
|
$
|
78,112
|
|
$
|
75,356
|
|
$
|
72,714
|
|
(a)Includes apparel for women, men, boys, girls, toddlers, infants and newborns, as well as jewelry, accessories, and shoes.
(b)Includes beauty and personal care, baby gear, cleaning, paper products, and pet supplies.
(c)Includes dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and food service in our stores.
(d)Includes electronics (including video game hardware and software), toys, entertainment, sporting goods, and luggage.
(e)Includes furniture, lighting, storage, kitchenware, small appliances, home décor, bed and bath, home improvement, school/office supplies, greeting cards and party supplies, and other seasonal merchandise.
(f)We reclassified certain baby gear sales totaling $1,570 million and $1,339 million for the fiscal years ended February 2, 2019, and February 3, 2018, respectively, from Apparel and Accessories to Beauty and Household Essentials.
Merchandise sales – 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. Total revenues do not include sales tax because we are a pass-through conduit for collecting and remitting sales taxes. Generally, guests may return national brand merchandise within 90 days of purchase and owned and exclusive brands within one year of purchase. Sales are recognized net of expected returns, which we estimate using historical return patterns and our expectation of future returns. As of February 1, 2020, February 2, 2019, and February 3, 2018, the liability for estimated returns was $117 million, $116 million, and $110 million, respectively. We have not historically had material adjustments to our returns estimates.
We routinely enter into arrangements with vendors whereby we do not purchase or pay for merchandise until the merchandise is ultimately sold to a guest. Under the vast majority of these arrangements, which represent less than 5 percent of consolidated sales, we record revenue and related costs gross. We concluded that we are the principal in these transactions for a number of reasons, most notably because we 1) control the overall economics of the transactions, including setting the sales price and realizing the majority of cash flows from the sale, 2) control the relationship with the customer, and 3) are responsible for fulfilling the promise to provide goods to the customer. Merchandise received under these arrangements is not included in Inventory because the purchase and sale of this inventory are virtually simultaneous.
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|
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|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
40
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
Revenue from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance. Our gift cards do not expire. Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as "breakage." Estimated breakage revenue is recognized over time in proportion to actual gift card redemptions.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gift Card Liability Activity
|
February 2,
2019
|
|
Gift Cards Issued During Current Period But Not Redeemed (b)
|
|
Revenue Recognized From Beginning Liability
|
|
February 1,
2020
|
(millions)
|
|
|
|
|
|
|
|
Gift card liability (a)
|
$
|
840
|
|
|
$
|
719
|
|
|
$
|
(624)
|
|
|
$
|
935
|
|
(b)Net of estimated breakage.
Guests receive a 5 percent discount on nearly all purchases and receive free shipping at Target.com when they use their Target Debit Card, Target Credit Card, or Target MasterCard (RedCards). The discount is included as a sales reduction and was $962 million, $953 million, and $933 million in 2019, 2018, and 2017, respectively.
Target Circle program members earn 1 percent rewards on nearly all non-RedCard purchases. Revenue related to reward redemptions and deferred revenue under this loyalty program were immaterial to our Consolidated Financial Statements for the year ended February 1, 2020.
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.
Other – Includes rental income, advertising, membership fees, and other miscellaneous revenues, none of which are individually significant.
3. Cost of Sales and Selling, General and Administrative Expenses
The following table illustrates the primary items classified in each major expense category:
|
|
|
|
|
|
Cost of Sales
|
Selling, General and Administrative Expenses
|
Total cost of products sold including
• Freight expenses associated with moving
merchandise from our vendors to and between our
distribution centers and our retail stores
• Vendor income that is not reimbursement of
specific, incremental, and identifiable costs
Inventory shrink
Markdowns
Outbound shipping and handling expenses
associated with sales to our guests
Payment term cash discounts
Distribution center costs, including compensation
and benefits costs and depreciation
Compensation and benefit costs associated with
shipment of merchandise from stores
Import costs
|
Compensation and benefit costs for stores and
headquarters, except ship from store costs classified
as cost of sales
Occupancy and operating costs of retail and
headquarters facilities
Advertising, offset by vendor income that is a
reimbursement of specific, incremental, and
identifiable costs
Pre-opening and exit costs of stores and other facilities
Credit cards servicing expenses
Costs associated with accepting 3rd party bank issued
payment cards
Litigation and defense costs and related insurance
recovery
Other administrative costs
|
Note: The classification of these expenses varies across the retail industry.
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|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
41
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
4. Consideration Received from Vendors
We receive consideration for a variety of vendor-sponsored programs, such as volume rebates, markdown allowances, promotions, and advertising allowances and for our compliance programs, referred to as "vendor income." Additionally, under our compliance programs, vendors are charged for merchandise shipments that do not meet our requirements (violations), such as late or incomplete shipments. Substantially all vendor income is recorded as a reduction of Cost of Sales.
We establish a receivable for vendor income that is earned but not yet received. Based on historical trending and data, this receivable is computed by forecasting vendor income collections, and estimating the amount earned. The majority of the year-end vendor income receivables are collected within the following fiscal quarter, and we do not believe there is a reasonable likelihood that the assumptions used in our estimate will change significantly. Historically, adjustments to our vendor income receivable have not been material.
5. Advertising Costs
Advertising costs, which primarily consist of newspaper circulars, digital advertisements, and media broadcast, are generally expensed at first showing or distribution of the advertisement.
|
|
|
|
|
|
|
|
|
|
|
|
Advertising Costs
(millions)
|
2019
|
|
2018
|
|
2017
|
|
Gross advertising costs
|
$
|
1,647
|
|
$
|
1,494
|
|
$
|
1,476
|
|
Vendor income
|
—
|
|
—
|
|
(19)
|
|
Net advertising costs
|
$
|
1,647
|
|
$
|
1,494
|
|
$
|
1,457
|
|
6. Fair Value Measurements
Fair value measurements are reported in one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements - Recurring Basis
|
|
|
Fair Value as of
|
|
|
(millions)
|
Classification
|
Pricing Category
|
February 1,
2020
|
|
February 2,
2019
|
Assets
|
|
|
|
|
|
Short-term investments (a)
|
Cash and Cash Equivalents
|
|
Level 1
|
|
$
|
1,810
|
|
|
$
|
769
|
|
Prepaid forward contracts (b)
|
Other Current Assets
|
|
Level 1
|
|
23
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (c)
|
Other Noncurrent Assets
|
|
Level 2
|
|
137
|
|
|
10
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (c)
|
Other Current Liabilities
|
|
Level 2
|
|
—
|
|
|
3
|
|
|
|
|
|
|
|
(a)Carrying value approximates fair value because maturities are less than three months.
(b)Initially valued at transaction price. Subsequently valued by reference to the market price of Target common stock.
(c)Valuations are based on observable inputs to the valuation model (e.g., interest rates and credit spreads). See Note 16 for additional information on interest rate swaps.
We recorded a $41 million pretax impairment charge within Net Other (Income) / Expense related to our investment in Casper Sleep Inc. for which we determined the fair value had declined to $39 million as of February 1, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
42
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Financial Instruments not Measured at Fair Value (a)
|
As of February 1,
2020
|
|
|
As of February 2,
2019
|
|
(millions)
|
Carrying
Amount
|
Fair
Value
|
|
Carrying
Amount
|
Fair
Value
|
Long-term debt, including current portion (b)
|
$
|
9,992
|
|
$
|
11,864
|
|
|
$
|
10,247
|
|
$
|
10,808
|
|
(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.
7. Cash and Cash Equivalents
Cash equivalents include highly liquid investments with an original maturity of three months or less from the time of purchase. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions. These receivables typically settle in five days or less.
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
(millions)
|
February 1,
2020
|
February 2,
2019
|
|
|
|
Cash
|
$
|
326
|
|
$
|
359
|
|
Short-term investments
|
1,810
|
|
769
|
|
Receivables from third-party financial institutions for credit and debit card transactions
|
441
|
|
428
|
|
Cash and cash equivalents (a)
|
$
|
2,577
|
|
$
|
1,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)We have access to these funds without any significant restrictions, taxes or penalties.
As of February 1, 2020 and February 2, 2019, we reclassified book overdrafts of $209 million and $242 million, respectively, to Accounts Payable and $23 million and $25 million, respectively, to Accrued and Other Current Liabilities.
8. Inventory
The vast majority of our inventory is accounted for under the retail inventory accounting method (RIM) using the last-in, first-out (LIFO) method. Inventory is stated at the lower of LIFO cost or market. Inventory cost includes the amount we pay to our suppliers to acquire inventory, freight costs incurred to deliver product to our distribution centers and stores, and import costs, reduced by vendor income and cash discounts. Distribution center operating costs, including compensation and benefits, are expensed in the period incurred. Inventory is also reduced for estimated losses related to shrink and markdowns. The LIFO provision is calculated based on inventory levels, markup rates, and internally measured retail price indices.
Under RIM, inventory cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the inventory retail value. RIM is an averaging method that has been widely used in the retail industry due to its practicality. The use of RIM will result in inventory being valued at the lower of cost or market because permanent markdowns are taken as a reduction of the retail value of inventory.
9. Other Current Assets
|
|
|
|
|
|
|
|
|
Other Current Assets
(millions)
|
February 1,
2020
|
February 2,
2019
|
Income tax and other receivables
|
$
|
498
|
|
$
|
632
|
|
Vendor income receivable
|
464
|
|
468
|
|
Prepaid expenses
|
154
|
|
157
|
|
|
|
|
Other
|
217
|
|
209
|
|
Total
|
$
|
1,333
|
|
$
|
1,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
43
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
10. Property and Equipment
Property and equipment, including assets acquired under finance leases, is depreciated using the straight-line method over estimated useful lives or lease terms if shorter. We amortize leasehold improvements purchased after the beginning of the initial lease term over the shorter of the assets' useful lives or a term that includes the original lease term, plus any renewals that are reasonably certain at the date the leasehold improvements are acquired. Depreciation expense for 2019, 2018, and 2017 was $2,591 million, $2,460 million, and $2,462 million, respectively, including depreciation expense included in Cost of Sales. For income tax purposes, accelerated depreciation methods are generally used. Repair and maintenance costs are expensed as incurred. Facility pre-opening costs, including supplies and payroll, are expensed as incurred.
|
|
|
|
|
|
Estimated Useful Lives
|
Life (Years)
|
Buildings and improvements
|
8-39
|
Fixtures and equipment
|
2-15
|
Computer hardware and software
|
2-7
|
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 a project, or make significant software changes—indicate that the asset's carrying value may not be recoverable. We recognized impairment losses of $23 million, $92 million, and $91 million during 2019, 2018, and 2017, respectively. The impairment losses primarily resulted from store impairments and planned or completed store closures, and for 2017, also included supply chain changes. For asset groups classified as held for sale, measurement of an impairment loss is based on the excess of the carrying amount of the asset group over its fair value. We estimate fair value by obtaining market appraisals, obtaining valuations from third-party brokers, or using other valuation techniques. Impairments are recorded in Selling, General and Administrative Expenses.
11. Other Noncurrent Assets
|
|
|
|
|
|
|
|
|
Other Noncurrent Assets
(millions)
|
February 1,
2020
|
February 2,
2019
|
Goodwill and intangible assets
|
$
|
686
|
|
$
|
699
|
|
Company-owned life insurance investments, net of loans
|
418
|
|
380
|
|
|
|
|
|
|
|
Other
|
254
|
|
194
|
|
Total
|
$
|
1,358
|
|
$
|
1,273
|
|
12. Goodwill and Intangible Assets
Goodwill totaled $633 million as of February 1, 2020 and February 2, 2019. No impairments were recorded in 2019, 2018, or 2017 as a result of the annual goodwill impairment tests performed.
Intangible assets, net of accumulated amortization, totaled $53 million and $66 million as of February 1, 2020, and February 2, 2019, respectively, primarily related to trademarks and customer relationships. We use both accelerated and straight-line methods to amortize definite-lived intangible assets over 4 to 15 years. The weighted average life of intangible assets was 8 years as of February 1, 2020. Amortization expense was $13 million, $14 million, and $14 million in 2019, 2018, and 2017, respectively, and is estimated to be less than $15 million annually through 2024.
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
44
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
13. Accrued and Other Current Liabilities
|
|
|
|
|
|
|
|
|
Accrued and Other Current Liabilities
(millions)
|
February 1,
2020
|
February 2,
2019
|
Wages and benefits
|
$
|
1,158
|
|
$
|
1,229
|
|
Gift card liability, net of estimated breakage
|
935
|
|
840
|
|
Real estate, sales, and other taxes payable
|
601
|
|
601
|
|
Dividends payable
|
333
|
|
331
|
|
Current portion of operating lease liabilities
|
200
|
|
166
|
|
Workers' compensation and general liability (a)
|
155
|
|
142
|
|
Interest payable
|
69
|
|
62
|
|
|
|
|
Other
|
955
|
|
830
|
|
Total
|
$
|
4,406
|
|
$
|
4,201
|
|
(a)We retain a substantial portion of the risk related to general liability and workers' compensation claims. We estimate our ultimate cost based on analysis of historical data and actuarial estimates. General liability and workers' compensation liabilities are recorded at our estimate of their net present value.
14. Commitments and Contingencies
Contingencies
We are exposed to claims and litigation arising in the ordinary course of business and use various methods to resolve these matters in a manner that we believe serves the best interest of our shareholders and other constituents. When a loss is probable, we record an accrual based on the reasonably estimable loss or range of loss. When no point of loss is more likely than another, we record the lowest amount in the estimated range of loss and, if material, disclose the estimated range of loss. We do not record liabilities for reasonably possible loss contingencies, but do disclose a range of reasonably possible losses if they are material and we are able to estimate such a range. If we cannot provide a range of reasonably possible losses, we explain the factors that prevent us from determining such a range. Historically, adjustments to our estimates have not been material. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities. We do not believe that any of these identified claims or litigation will be material to our results of operations, cash flows, or financial condition.
Commitments
Purchase obligations, which include all legally binding contracts such as firm commitments for inventory purchases, merchandise royalties, equipment purchases, marketing-related contracts, software acquisition/license commitments, and service contracts, were $676 million and $992 million as of February 1, 2020 and February 2, 2019, respectively. These purchase obligations are primarily due within three years and recorded as liabilities when goods are received or services rendered. Real estate obligations, which include legally binding minimum lease payments for leases signed but not yet commenced, and commitments for the purchase, construction, or remodeling of real estate and facilities, were $1,403 million and $1,134 million as of February 1, 2020 and February 2, 2019, respectively. Over half of these real estate obligations are due within five years, a portion of which are recorded as liabilities.
We issue letters of credit and surety bonds in the ordinary course of business. Trade letters of credit totaled $1,544 million and $1,746 million as of February 1, 2020 and February 2, 2019, respectively, a portion of which are reflected in accounts payable. Standby letters of credit and surety bonds, relating primarily to insurance and regulatory requirements, totaled $468 million and $403 million as of February 1, 2020 and February 2, 2019, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
45
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
15. Commercial Paper and Long-Term Debt
As of February 1, 2020, the carrying value and maturities of our debt portfolio were as follows:
|
|
|
|
|
|
|
|
|
Debt Maturities
|
February 1, 2020
|
|
(dollars in millions)
|
Rate (a)
|
Balance
|
|
Due 2020-2024
|
3.8
|
%
|
$
|
2,205
|
|
Due 2025-2029
|
3.3
|
|
2,180
|
|
Due 2030-2034
|
4.2
|
|
1,305
|
|
Due 2035-2039
|
6.8
|
|
1,109
|
|
Due 2040-2044
|
4.0
|
|
1,466
|
|
Due 2045-2049
|
3.7
|
|
1,727
|
|
Total notes and debentures
|
4.1
|
|
9,992
|
|
Swap valuation adjustments
|
|
137
|
|
Finance lease liabilities
|
|
1,370
|
|
Less: Amounts due within one year
|
|
(161)
|
|
Long-term debt and other borrowings
|
|
$
|
11,338
|
|
(a)Reflects the dollar weighted average stated interest rate as of year-end.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required Principal Payments
(millions)
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total required principal payments
|
$
|
94
|
|
$
|
1,056
|
|
$
|
63
|
|
$
|
—
|
|
$
|
1,000
|
|
In January 2020, we issued $750 million of 10-year unsecured fixed rate debt at 2.350 percent, and separately, we redeemed $1,000 million of 3.875 percent unsecured fixed rate debt before its maturity. We recognized a loss on early retirement of approximately $10 million, which was recorded in Net Interest Expense.
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 2.3 percent unsecured fixed rate debt at maturity.
In October 2017, we issued $750 million of 30-year unsecured fixed rate debt at 3.9 percent. In addition to debt repaid at its maturity during 2017, during October 2017, we redeemed $344 million of debt before its maturity at a value of $463 million. We recognized a loss on early retirement of approximately $123 million, which was recorded in Net Interest Expense.
We obtain short-term financing from time to time under our commercial paper program.
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper
(dollars in millions)
|
2019
|
|
2018
|
|
2017
|
|
Maximum daily amount outstanding during the year
|
$
|
744
|
|
$
|
658
|
|
$
|
—
|
|
Average amount outstanding during the year
|
41
|
|
63
|
|
—
|
|
Amount outstanding at year-end
|
—
|
|
—
|
|
—
|
|
Weighted average interest rate
|
2.36
|
%
|
2.00
|
%
|
—
|
%
|
We have a committed $2.5 billion revolving credit facility that expires in October 2023. No balances were outstanding under our credit facility at any time during 2019, 2018, or 2017.
Substantially all of our outstanding borrowings are senior, unsecured obligations. Most of our long-term debt obligations contain covenants related to secured debt levels. In addition to a secured debt level covenant, our credit facility also contains a debt leverage covenant. We are, and expect to remain, in compliance with these covenants, which have no practical effect on our ability to pay dividends.
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
46
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
16. 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 6 provides the fair value and classification of these instruments.
During 2019, we entered into interest rate swaps with a total notional amount of $1,000 million. Under the swap agreements, we pay a floating rate equal to 1-month London Interbank Offered Rate (LIBOR) and receive a weighted average fixed rate of 2.5 percent. The agreements have a weighted average remaining maturity of 9.2 years. Under the two previously existing swap agreements, each with a notional of $250 million, which mature during 2024 and 2026, respectively, we pay a floating rate equal to 1-month LIBOR and receive a weighted average fixed rate of 2.9 percent. As of February 1, 2020 and February 2, 2019, interest rate swaps with notional amounts totaling $1,500 million were designated as fair value hedges, and all were perfectly effective during 2019 and 2018.
|
|
|
|
|
|
|
|
|
Effect of Hedges on Debt
(millions)
|
February 1,
2020
|
February 2,
2019
|
Current portion of long-term debt and other borrowings
|
|
|
Carrying amount of hedged debt
|
$
|
—
|
|
$
|
996
|
|
Cumulative hedging adjustments, included in carrying amount
|
—
|
|
(3)
|
|
Long-term debt and other borrowings
|
|
|
|
|
Carrying amount of hedged debt
|
1,630
|
|
508
|
|
Cumulative hedging adjustments, included in carrying amount
|
137
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Hedges on Net Interest Expense
(millions)
|
2019
|
|
2018
|
|
2017
|
|
Gain (loss) on fair value hedges recognized in Net Interest Expense
|
|
|
|
Interest rate swap designated as fair value hedges
|
$
|
130
|
|
$
|
13
|
|
$
|
(10)
|
|
Hedged debt
|
(130)
|
|
(13)
|
|
10
|
|
Total
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
17. Leases
We lease certain retail stores, warehouses, distribution centers, office space, land, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. We combine lease and nonlease components for new and reassessed leases.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 50 years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Certain of our lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We rent or sublease certain real estate to third parties. Our lease and sublease portfolio consists mainly of operating leases with CVS Pharmacy Inc. (CVS) for space within our stores.
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
47
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases
(millions)
|
Classification
|
February 1,
2020
|
February 2,
2019
|
Assets
|
|
|
|
Operating
|
Operating Lease Assets
|
$
|
2,236
|
|
$
|
1,965
|
|
Finance
|
Buildings and Improvements, net of Accumulated Depreciation (a)
|
1,180
|
|
872
|
|
Total leased assets
|
|
$
|
3,416
|
|
$
|
2,837
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating
|
Accrued and Other Current Liabilities
|
$
|
200
|
|
$
|
166
|
|
Finance
|
Current Portion of Long-term Debt and Other Borrowings
|
67
|
|
53
|
|
Noncurrent
|
|
|
|
Operating
|
Noncurrent Operating Lease Liabilities
|
2,275
|
|
2,004
|
|
Finance
|
Long-term Debt and Other Borrowings
|
1,303
|
|
968
|
|
Total lease liabilities
|
|
$
|
3,845
|
|
$
|
3,191
|
|
Note: We use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
(a)Finance lease assets are recorded net of accumulated amortization of $441 million and $371 million as of February 1, 2020 and February 2, 2019, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Cost
(millions)
|
Classification
|
2019
|
|
2018
|
|
2017
|
|
Operating lease cost (a)
|
SG&A Expenses
|
$
|
287
|
|
$
|
251
|
|
$
|
221
|
|
Finance lease cost
|
|
|
|
|
Amortization of leased assets
|
Depreciation and Amortization (b)
|
82
|
|
65
|
|
63
|
|
Interest on lease liabilities
|
Net Interest Expense
|
51
|
|
42
|
|
42
|
|
Sublease income (c)
|
Other Revenue
|
(13)
|
|
(11)
|
|
(9)
|
|
Net lease cost
|
|
$
|
407
|
|
$
|
347
|
|
$
|
317
|
|
(a)Includes short-term leases and variable lease costs, which are immaterial.
(b)Supply chain-related amounts are included in Cost of Sales.
(c)Sublease income excludes rental income from owned properties of $48 million, $47 million, and $47 million for 2019, 2018, and 2017, respectively, which is included in Other Revenue.
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
48
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities
(millions)
|
Operating
Leases (a)
|
Finance
Leases (b)
|
Total
|
2020
|
$
|
284
|
|
$
|
121
|
|
$
|
405
|
|
2021
|
278
|
|
127
|
|
405
|
|
2022
|
274
|
|
127
|
|
401
|
|
2023
|
270
|
|
125
|
|
395
|
|
2024
|
261
|
|
120
|
|
381
|
|
After 2024
|
1,838
|
|
1,270
|
|
3,108
|
|
Total lease payments
|
$
|
3,205
|
|
$
|
1,890
|
|
$
|
5,095
|
|
Less: Interest
|
730
|
|
520
|
|
|
Present value of lease liabilities
|
$
|
2,475
|
|
$
|
1,370
|
|
|
(a)Operating lease payments include $901 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $275 million of legally binding minimum lease payments for leases signed but not yet commenced.
(b)Finance lease payments include $118 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $462 million of legally binding minimum lease payments for leases signed but not yet commenced.
|
|
|
|
|
|
|
|
|
Lease Term and Discount Rate
|
February 1,
2020
|
February 2,
2019
|
Weighted average remaining lease term (years)
|
|
|
Operating leases
|
13.2
|
14.2
|
Finance leases
|
15.4
|
15.4
|
Weighted average discount rate
|
|
|
Operating leases
|
3.71
|
%
|
3.91
|
%
|
Finance leases
|
4.23
|
%
|
4.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Information
(millions)
|
2019
|
|
2018
|
|
2017
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows from operating leases
|
$
|
254
|
|
$
|
231
|
|
$
|
198
|
|
Operating cash flows from finance leases
|
49
|
|
45
|
|
42
|
|
Financing cash flows from finance leases
|
57
|
|
80
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
49
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
18. Income Taxes
Earnings from continuing operations before income taxes were $4,190 million, $3,676 million, and $3,630 million during 2019, 2018, and 2017, respectively, including $653 million, $565 million, and $566 million earned by our foreign entities subject to tax outside of the U.S. During 2019, we reached an agreement with the IRS on certain tax positions related to our global sourcing operations, and as a result, we reclassified $169 million and $156 million of previously disclosed 2018 and 2017 earnings, respectively, from foreign to domestic to conform to the current period classification.
|
|
|
|
|
|
|
|
|
|
|
|
Tax Rate Reconciliation – Continuing Operations
|
2019
|
|
2018
|
|
2017
|
|
Federal statutory rate
|
21.0
|
%
|
21.0
|
%
|
33.7
|
%
|
State income taxes, net of the federal tax benefit
|
3.7
|
|
3.6
|
|
2.2
|
|
International
|
(1.4)
|
|
(1.3)
|
|
(4.6)
|
|
Tax Act (a)
|
—
|
|
(1.0)
|
|
(9.5)
|
|
Excess tax benefit related to share-based payments
|
(0.4)
|
|
(0.3)
|
|
(0.1)
|
|
|
|
|
|
Federal tax credits
|
(0.8)
|
|
(1.1)
|
|
(0.8)
|
|
Other
|
(0.1)
|
|
(0.6)
|
|
(1.0)
|
|
Effective tax rate
|
22.0
|
%
|
20.3
|
%
|
19.9
|
%
|
(a)Represents the discrete benefit of remeasuring our net deferred tax liabilities at the new lower U.S. corporate income tax rate.
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
(millions)
|
2019
|
|
2018
|
|
2017
|
|
Current:
|
|
|
|
Federal
|
$
|
536
|
|
$
|
257
|
|
$
|
746
|
|
State
|
169
|
|
116
|
|
105
|
|
International
|
38
|
|
51
|
|
59
|
|
Total current
|
743
|
|
424
|
|
910
|
|
Deferred:
|
|
|
|
Federal
|
150
|
|
263
|
|
(229)
|
|
State
|
29
|
|
57
|
|
27
|
|
International
|
(1)
|
|
2
|
|
14
|
|
Total deferred
|
178
|
|
322
|
|
(188)
|
|
Total provision
|
$
|
921
|
|
$
|
746
|
|
$
|
722
|
|
In December 2017, the U.S. government enacted the Tax Cuts and Jobs Act tax reform legislation (the Tax Act), which among other matters reduced the U.S. corporate income tax rate from 35 percent to 21 percent effective January 1, 2018.
In 2017, we recorded a provisional $343 million net tax benefit primarily related to the remeasurement of certain deferred tax assets and liabilities, including $372 million of benefit from the new lower rate, partially offset by $29 million of deferred income tax expense from our foreign operations. During 2018, we completed our Tax Act accounting and recorded adjustments to previously-recorded provisional amounts, resulting in a $36 million tax benefit primarily related to the remeasurement of deferred tax assets and liabilities.
Beginning with 2018, we are subject to a new tax on global intangible low-taxed income that is imposed on foreign earnings. We have made an accounting election to record this tax as a period cost and thus have not adjusted any of the deferred tax assets or liabilities of our foreign subsidiaries for the new tax. Net impacts of this new tax were immaterial and are included in our provision for income taxes for 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
50
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Asset / (Liability)
(millions)
|
February 1,
2020
|
February 2,
2019
|
Gross deferred tax assets:
|
|
|
Accrued and deferred compensation
|
$
|
264
|
|
$
|
248
|
|
Accruals and reserves not currently deductible
|
169
|
|
181
|
|
Self-insured benefits
|
124
|
|
114
|
|
Deferred occupancy income
|
148
|
|
157
|
|
Lease liabilities
|
1,000
|
|
823
|
|
Other
|
58
|
|
40
|
|
Total gross deferred tax assets
|
1,763
|
|
1,563
|
|
Gross deferred tax liabilities:
|
|
|
Property and equipment
|
(1,767)
|
|
(1,557)
|
|
Leased assets
|
(880)
|
|
(731)
|
|
Inventory
|
(156)
|
|
(140)
|
|
Other
|
(74)
|
|
(95)
|
|
Total gross deferred tax liabilities
|
(2,877)
|
|
(2,523)
|
|
Total net deferred tax liability
|
$
|
(1,114)
|
|
$
|
(960)
|
|
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year the temporary differences are expected to be recovered or settled. Tax rate changes affecting deferred tax assets and liabilities are recognized at the enactment date. We recognized a net tax benefit of $36 million and $372 million in 2018 and 2017, respectively, primarily because we remeasured our net deferred tax liabilities using the new lower U.S. corporate tax rate.
Beginning in 2017, due to changes effected by the Tax Act and other reasons, we have not asserted indefinite reinvestment in our foreign operations. Because of this change, we recorded a deferred tax charge of $29 million during 2017.
We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. The U.S. Internal Revenue Service (IRS) has completed exams on the U.S. federal income tax returns for years 2017 and prior. With few exceptions, we are no longer subject to state and local or non-U.S. income tax examinations by tax authorities for years before 2013.
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Liability for Unrecognized Tax Benefits
(millions)
|
2019
|
|
2018
|
|
2017
|
|
Balance at beginning of period
|
$
|
300
|
|
$
|
325
|
|
$
|
153
|
|
Additions based on tax positions related to the current year
|
28
|
|
58
|
|
112
|
|
Additions for tax positions of prior years
|
13
|
|
10
|
|
142
|
|
Reductions for tax positions of prior years
|
(69)
|
|
(91)
|
|
(71)
|
|
Settlements
|
(112)
|
|
(2)
|
|
(11)
|
|
Balance at end of period
|
$
|
160
|
|
$
|
300
|
|
$
|
325
|
|
As a result of the 2019 agreement with the IRS on certain tax positions related to our global sourcing operations, we reclassified $149 million of our liability for unrecognized tax benefits to taxes payable. This settlement had an insignificant effect on 2019 income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
51
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
If we were to prevail on all unrecognized tax benefits recorded, $113 million of the $160 million reserve would benefit the effective tax rate. In addition, the reversal of accrued penalties and interest would also benefit the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense. During the years ended February 1, 2020, February 2, 2019, and February 3, 2018, we recorded an expense / (benefit) from accrued penalties and interest of $(2) million, $3 million, and $(12) million, respectively. As of February 1, 2020, February 2, 2019, and February 3, 2018 total accrued interest and penalties were $27 million, $32 million, and $29 million, respectively.
It is reasonably possible that the amount of the unrecognized tax benefits with respect to our other unrecognized tax positions will increase or decrease during the next twelve months; however, an estimate of the amount or range of the change cannot be made at this time.
19. Other Noncurrent Liabilities
|
|
|
|
|
|
|
|
|
Other Noncurrent Liabilities
(millions)
|
February 1,
2020
|
February 2,
2019
|
Deferred occupancy income (a)
|
$
|
539
|
|
$
|
570
|
|
Deferred compensation
|
493
|
|
472
|
|
Workers' compensation and general liability
|
310
|
|
281
|
|
Income tax
|
180
|
|
312
|
|
|
|
|
Pension benefits
|
107
|
|
40
|
|
Other
|
95
|
|
105
|
|
Total
|
$
|
1,724
|
|
$
|
1,780
|
|
(a)To be amortized evenly through 2038.
20. 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.
In an ASR arrangement, in exchange for an up-front payment, we receive an initial delivery of shares of our common stock and at settlement may receive additional shares, cash, or a combination of both. The total number of shares ultimately repurchased and, therefore, the average repurchase price paid per share, is determined upon settlement of the ASR based on the volume-weighted average price of our common stock during the term of the contract, less an agreed-upon discount. We retire shares in the period they are received and account for the up-front payment as a reduction to Shareholders’ Investment.
|
|
|
|
|
|
|
|
|
|
|
|
Share Repurchase Activity
(millions, except per share data)
|
2019
|
|
2018
|
|
2017
|
|
Total number of shares purchased
|
16.0
|
|
27.2
|
|
17.6
|
|
Average price paid per share
|
$
|
95.07
|
|
$
|
75.88
|
|
$
|
58.44
|
|
Total investment
|
$
|
1,518
|
|
$
|
2,067
|
|
$
|
1,026
|
|
21. Share-Based Compensation
We maintain a long-term incentive plan (the Plan) for key team members and non-employee members of our Board of Directors. The Plan allows us to grant equity-based compensation awards, including stock options, stock appreciation rights, performance share units, restricted stock units, restricted stock awards, or a combination of awards (collectively, share-based awards). The number of unissued common shares reserved for future grants under the Plan was 16.9 million as of February 1, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
52
|
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|
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|
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|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
Compensation expense associated with share-based awards is recognized on a straight-line basis over the required service period and reflects estimated forfeitures. Share-based compensation expense recognized in Selling, General and Administrative Expenses was $152 million, $134 million, and $115 million in 2019, 2018, and 2017, respectively. The related income tax benefit was $27 million, $26 million, and $26 million in 2019, 2018, and 2017, respectively.
Restricted Stock Units
We issue restricted stock units and performance-based restricted stock units generally with 3-year cliff or 4-year graduated vesting from the grant date (collectively restricted stock units) to certain team members. The final number of shares issued under performance-based restricted stock units is based on our total shareholder return relative to a retail peer group over a 3-year performance period. We also regularly issue restricted stock units to our Board of Directors, which vest quarterly over a 1-year period and are settled in shares of Target common stock upon departure from the Board. The fair value for restricted stock units is calculated based on the stock price on the date of grant, incorporating an analysis of the total shareholder return performance measure where applicable. The weighted average grant date fair value for restricted stock units was $80.01, $72.65, and $56.19 in 2019, 2018, and 2017, respectively.
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|
|
|
|
|
|
|
Restricted Stock Unit Activity
|
Total Nonvested Units
|
|
|
Restricted
Stock (a)
|
Grant Date
Fair Value (b)
|
February 2, 2019
|
3,815
|
|
$
|
66.86
|
|
Granted
|
2,157
|
|
80.01
|
|
Forfeited
|
(556)
|
|
71.74
|
|
Vested
|
(1,100)
|
|
66.76
|
|
February 1, 2020
|
4,316
|
|
$
|
72.93
|
|
(a)Represents the number of shares of restricted stock units, in thousands. For performance-based restricted stock units, assumes attainment of maximum payout rates as set forth in the performance criteria. Applying actual or expected payout rates, the number of outstanding restricted stock units and performance-based restricted stock units as of February 1, 2020 was 4,278 thousand.
(b)Weighted average per unit.
The expense recognized each period is partially dependent upon our estimate of the number of shares that will ultimately be issued. As of February 1, 2020, there was $149 million of total unrecognized compensation expense related to restricted stock units, which is expected to be recognized over a weighted average period of 2.5 years. The fair value of restricted stock units vested and converted to shares of Target common stock was $89 million, $119 million, and $87 million in 2019, 2018, and 2017, respectively.
Performance Share Units
We issue performance share units to certain team members that represent shares potentially issuable in the future. Issuance is based upon our performance, generally relative to a retail peer group, over a 3-year performance period on certain measures primarily including sales growth, after-tax return on invested capital, and EPS growth. The fair value of performance share units is calculated based on the stock price on the date of grant. The weighted average grant date fair value for performance share units was $86.81, $70.94, and $55.93 in 2019, 2018, and 2017, respectively.
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|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
53
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
|
|
|
|
|
|
|
|
|
Performance Share Unit Activity
|
Total Nonvested Units
|
|
|
Performance
Share Units (a)
|
Grant Date
Fair Value (b)
|
February 2, 2019
|
3,623
|
|
$
|
67.47
|
|
Granted
|
1,447
|
|
86.81
|
|
Forfeited
|
(875)
|
|
66.64
|
|
Vested
|
(620)
|
|
72.32
|
|
February 1, 2020
|
3,575
|
|
$
|
72.80
|
|
(a)Represents the number of performance share units, in thousands. Assumes attainment of maximum payout rates as set forth in the performance criteria. Applying actual or expected payout rates, the number of outstanding performance share units as of February 1, 2020 was 1,944 thousand.
(b)Weighted average per unit.
The expense recognized each period is partially dependent upon our estimate of the number of shares that will ultimately be issued. Future compensation expense for unvested awards could reach a maximum of $158 million assuming payout of all unvested awards. The unrecognized expense is expected to be recognized over a weighted average period of 2.1 years. The fair value of performance share units vested and converted to shares of Target common stock was $50 million in 2019, $43 million in 2018, and $30 million in 2017.
Stock Options
In May 2017, we granted price-vested stock options (price-vested options) to certain team members, which have met the market condition and will become exercisable in 2020 pending service condition achievement. Shares received upon exercise, net of exercise costs and taxes, are subject to a 1-year post-exercise holding period. The fair value of the price-vested options was estimated using a lattice model.
Through 2013, we granted nonqualified stock options to certain team members. All are vested and currently exercisable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Activity
|
Stock Options
|
|
|
|
|
|
|
|
Total Outstanding
|
|
|
|
Exercisable
|
|
|
|
Number of
Options (a)
|
Exercise
Price (b)
|
Intrinsic
Value (c)
|
|
Number of
Options (a)
|
Exercise
Price (b)
|
Intrinsic
Value (c)
|
February 2, 2019
|
3,990
|
|
$
|
55.49
|
|
$
|
63
|
|
|
2,039
|
|
$
|
55.38
|
|
$
|
32
|
|
Granted
|
—
|
|
—
|
|
|
|
|
|
|
Expired/forfeited
|
(188)
|
|
55.63
|
|
|
|
|
|
|
Exercised/issued
|
(1,324)
|
|
55.03
|
|
|
|
|
|
|
February 1, 2020
|
2,478
|
|
$
|
55.72
|
|
$
|
136
|
|
|
714
|
|
$
|
56.02
|
|
$
|
39
|
|
(a)In thousands.
(b)Weighted average per share.
(c)Represents stock price appreciation subsequent to the grant date, in millions.
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Exercises
(millions)
|
2019
|
|
2018
|
|
2017
|
|
Cash received for exercise price
|
$
|
73
|
|
$
|
96
|
|
$
|
109
|
|
Intrinsic value
|
59
|
|
50
|
|
34
|
|
Income tax benefit
|
15
|
|
12
|
|
13
|
|
As of February 1, 2020, there was $1 million of total unrecognized compensation expense related to price-vested options, which is expected to be recognized over a weighted average period of 0.3 years. The weighted average remaining life of exercisable options is 2.1 years, and the weighted average remaining life of all outstanding options is 3.5 years. No options vested in 2019, 2018 or 2017.
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|
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|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
54
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
22. Defined Contribution Plans
Team members who meet eligibility requirements can participate in a defined contribution 401(k) plan by investing up to 80 percent of their eligible earnings, as limited by statute or regulation. We match 100 percent of each team member's contribution up to 5 percent of eligible earnings. Company match contributions are made to funds designated by the participant, none of which are based on Target common stock.
In addition, we maintain an unfunded, nonqualified deferred compensation plan for a broad management group whose participation in our 401(k) plan is limited by statute or regulation. These team members choose from a menu of crediting rate alternatives that are generally the same as the investment choices in our 401(k) plan, but also includes a fund based on Target common stock. We credit an additional 2 percent per year to the accounts of all active participants, excluding executive officers, in part to recognize the risks inherent to their participation in this plan. We also maintain a frozen, unfunded, nonqualified deferred compensation plan covering approximately 50 participants. Our total liability under these plans was $551 million and $517 million as of February 1, 2020 and February 2, 2019, respectively.
We mitigate our risk of offering the nonqualified plans through investing in company-owned life insurance and prepaid forward contracts that substantially offset our economic exposure to the returns of these plans. These investments are general corporate assets and are marked to market with the related gains and losses recognized in the Consolidated Statements of Operations in the period they occur. See Notes 6 and 11 for additional information.
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|
|
|
|
|
|
|
|
|
|
|
Plan Expenses
|
|
|
|
(millions)
|
2019
|
|
2018
|
|
2017
|
|
401(k) plan matching contributions expense
|
$
|
237
|
|
$
|
229
|
|
$
|
219
|
|
|
|
|
|
|
|
|
|
Nonqualified deferred compensation plans
|
|
|
|
Benefits expense
|
80
|
|
18
|
|
83
|
|
Related investment expense (income)
|
(53)
|
|
6
|
|
(48)
|
|
Nonqualified plan net expense
|
$
|
27
|
|
$
|
24
|
|
$
|
35
|
|
23. Pension Plans
We have a U.S. qualified defined benefit pension plan covering team members who meet age and service requirements, including date of hire in certain circumstances. Effective January 1, 2009, our qualified defined benefit pension plan was closed to new participants, with limited exceptions. We also have unfunded nonqualified pension plans for team members with qualified plan compensation restrictions, as well as international plans. Eligibility for, and the level of, these benefits varies depending on each team member's date of hire, length of service and/or team member compensation.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status
|
Qualified Plan
|
|
|
Nonqualified and International Plans
|
|
(millions)
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
Projected benefit obligations
|
$
|
4,492
|
|
$
|
3,905
|
|
|
$
|
66
|
|
$
|
53
|
|
Fair value of plan assets
|
4,430
|
|
3,915
|
|
|
11
|
|
10
|
|
Funded / (underfunded) status
|
$
|
(62)
|
|
$
|
10
|
|
|
$
|
(55)
|
|
$
|
(43)
|
|
Contributions and Estimated Future Benefit Payments
Our obligations to plan participants can be met over time through a combination of company contributions to these plans and earnings on plan assets. We are not required to make any contributions to our qualified defined benefit pension plan in 2020. However, depending on investment performance and plan funded status, we may elect to make a contribution.
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
55
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
|
|
|
|
|
|
Estimated Future Benefit Payments
(millions)
|
Pension
Benefits
|
2020
|
$
|
304
|
|
2021
|
207
|
|
2022
|
216
|
|
2023
|
224
|
|
2024
|
232
|
|
2025-2029
|
1,266
|
|
Cost of Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Pension Benefits Expense
|
|
|
|
|
(millions)
|
Classification
|
2019
|
|
2018
|
|
2017
|
|
Service cost benefits earned
|
SG&A Expenses
|
$
|
93
|
|
$
|
95
|
|
$
|
86
|
|
Interest cost on projected benefit obligation
|
Net Other (Income) / Expense
|
149
|
|
146
|
|
140
|
|
Expected return on assets
|
Net Other (Income) / Expense
|
(248)
|
|
(246)
|
|
(250)
|
|
Amortization of losses
|
Net Other (Income) / Expense
|
62
|
|
82
|
|
61
|
|
Amortization of prior service cost
|
Net Other (Income) / Expense
|
(11)
|
|
(11)
|
|
(11)
|
|
Settlement charges
|
Net Other (Income) / Expense
|
1
|
|
4
|
|
1
|
|
Total
|
|
$
|
46
|
|
$
|
70
|
|
$
|
27
|
|
Assumptions
|
|
|
|
|
|
|
|
|
Benefit Obligation Weighted Average Assumptions
|
|
|
|
2019
|
|
2018
|
|
Discount rate
|
3.13
|
%
|
4.28
|
%
|
Average assumed rate of compensation increase
|
3.00
|
|
3.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Benefit Expense Weighted Average Assumptions
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Discount rate
|
4.28
|
%
|
3.93
|
%
|
4.40
|
%
|
Expected long-term rate of return on plan assets
|
6.30
|
|
6.30
|
|
6.55
|
|
Average assumed rate of compensation increase
|
3.00
|
|
3.00
|
|
3.00
|
|
The weighted average assumptions used to measure net periodic benefit expense each year are the rates as of the beginning of the year (i.e., the prior measurement date). Our most recent compound annual rate of return on qualified plan assets was 6.6 percent, 9.0 percent, 7.2 percent, and 6.3 percent for the 5-year, 10-year, 15-year, and 20-year time periods, respectively.
The market-related value of plan assets is used in calculating the expected return on assets. Historical differences between expected and actual returns are deferred and recognized in the market-related value over a 5-year period from the year in which they occur.
We review the expected long-term rate of return annually and revise it as appropriate. Additionally, we monitor the mix of investments in our portfolio to ensure alignment with our long-term strategy to manage pension cost and reduce volatility in our assets. Our 2019 expected annualized long-term rate of return assumptions were 6.5 percent for domestic equity securities, 8.0 percent for international equity securities, 4.5 percent for long-duration debt securities, 8.0 percent for diversified funds, and 7.0 percent for other investments. These estimates are a judgmental matter in which we consider the composition of our asset portfolio, our historical long-term investment performance, and current market conditions.
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
56
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Projected Benefit Obligation
|
Qualified Plan
|
|
|
Nonqualified and International Plans
|
|
(millions)
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
Benefit obligation at beginning of period
|
$
|
3,905
|
|
$
|
4,061
|
|
|
$
|
53
|
|
$
|
63
|
|
Service cost
|
90
|
|
93
|
|
|
3
|
|
2
|
|
Interest cost
|
146
|
|
145
|
|
|
3
|
|
1
|
|
Actuarial (gain) / loss
|
615
|
|
(167)
|
|
|
11
|
|
(1)
|
|
Participant contributions
|
11
|
|
6
|
|
|
—
|
|
—
|
|
Benefits paid
|
(275)
|
|
(233)
|
|
|
(4)
|
|
(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of period (a)
|
$
|
4,492
|
|
$
|
3,905
|
|
|
$
|
66
|
|
$
|
53
|
|
(a)Accumulated benefit obligation—the present value of benefits earned to date assuming no future salary growth—is materially consistent with the projected benefit obligation in each period presented.
Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
Qualified Plan
|
|
|
Nonqualified and International Plans
|
|
(millions)
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
Fair value of plan assets at beginning of period
|
$
|
3,915
|
|
$
|
4,107
|
|
|
$
|
10
|
|
$
|
11
|
|
Actual return on plan assets
|
729
|
|
(65)
|
|
|
—
|
|
(1)
|
|
Employer contributions
|
50
|
|
100
|
|
|
5
|
|
12
|
|
Participant contributions
|
11
|
|
6
|
|
|
—
|
|
—
|
|
Benefits paid
|
(275)
|
|
(233)
|
|
|
(4)
|
|
(12)
|
|
Fair value of plan assets at end of period
|
$
|
4,430
|
|
$
|
3,915
|
|
|
$
|
11
|
|
$
|
10
|
|
Our asset allocation policy is designed to reduce the long-term cost of funding our pension obligations. The plan invests with both passive and active investment managers depending on the investment. The plan also seeks to reduce the risk associated with adverse movements in interest rates by employing an interest rate hedging program, which may include the use of interest rate swaps, total return swaps, and other instruments.
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Current Targeted
|
|
Actual Allocation
|
|
|
Allocation
|
|
2019
|
|
2018
|
|
Domestic equity securities (a)
|
15
|
%
|
14
|
%
|
13
|
%
|
International equity securities
|
10
|
|
10
|
|
9
|
|
Debt securities
|
45
|
|
46
|
|
47
|
|
Diversified funds
|
25
|
|
25
|
|
24
|
|
Other (b)
|
5
|
|
5
|
|
7
|
|
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
(a)Equity securities include our common stock in amounts substantially less than 1 percent of total plan assets in both periods presented.
(b)Other assets include private equity, mezzanine and high-yield debt, natural resources and timberland funds, multi-strategy hedge funds, derivative instruments, and real estate.
|
|
|
|
|
|
|
|
|
|
|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
57
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
NOTES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Fair Value at
|
|
|
(millions)
|
Pricing Category
|
January 31, 2020
|
|
January 31, 2019
|
Cash and cash equivalents
|
Level 1
|
|
$
|
12
|
|
|
$
|
3
|
|
Derivatives
|
Level 2
|
|
18
|
|
|
12
|
|
Government securities (a)
|
Level 2
|
|
604
|
|
|
631
|
|
Fixed income (b)
|
Level 2
|
|
1,330
|
|
|
1,123
|
|
|
|
1,964
|
|
|
1,769
|
|
Investments valued using NAV per share (c)
|
|
|
|
|
Fixed income
|
|
64
|
|
|
54
|
|
Private equity funds
|
|
75
|
|
|
84
|
|
Cash and cash equivalents
|
|
163
|
|
|
100
|
|
Common collective trusts
|
|
961
|
|
|
828
|
|
Diversified funds
|
|
1,109
|
|
|
952
|
|
Other
|
|
105
|
|
|
138
|
|
Total plan assets
|
|
$
|
4,441
|
|
|
$
|
3,925
|
|
(a)Investments in government securities and long-term government bonds.
(b)Investments in corporate and municipal bonds.
(c)In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position.
|
|
|
|
|
|
|
|
|
Position
|
|
Valuation Technique
|
Cash and cash equivalents
|
|
Carrying value approximates fair value.
|
Derivatives
|
|
Swap derivatives - Valuations are based on observable inputs to the valuation model (e.g., interest rates and credit spreads). Model inputs are changed only when corroborated by market data. A credit risk adjustment is made on each swap using observable market credit spreads.
Option derivatives - Valued at transaction price initially. Subsequent valuations are based on observable inputs to the valuation model (e.g., underlying investments).
|
Government securities
and fixed income
|
|
Valued using matrix pricing models and quoted prices of securities with similar characteristics.
|
Amounts Included in Shareholders' Investment
|
|
|
|
|
|
|
|
|
Amounts in Accumulated Other Comprehensive Loss
|
|
|
(millions)
|
2019
|
|
2018
|
|
Net actuarial loss
|
$
|
1,138
|
|
$
|
1,060
|
|
Prior service credits
|
(13)
|
|
(24)
|
|
Amounts in Accumulated Other Comprehensive Loss (a)(b)
|
$
|
1,125
|
|
$
|
1,036
|
|
(a)$837 million and $772 million, net of tax, at the end of 2019 and 2018, respectively.
(b)We expect 2020 net pension expense to include amortization expense of $116 million ($86 million, net of tax) related to net actuarial loss and prior service credit balances included in Accumulated Other Comprehensive Loss.
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TARGET CORPORATION
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2019 Form 10-K
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58
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FINANCIAL STATEMENTS
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NOTES
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24. Accumulated Other Comprehensive Loss
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(millions)
|
Cash Flow
Hedges
|
|
Currency
Translation
Adjustment
|
|
Pension
|
|
Total
|
February 2, 2019
|
$
|
(13)
|
|
|
$
|
(20)
|
|
|
$
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(772)
|
|
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$
|
(805)
|
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Other Comprehensive Income / (Loss) before reclassifications, net of tax
|
—
|
|
|
1
|
|
|
(104)
|
|
|
(103)
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Amounts reclassified from AOCL, net of tax
|
1
|
|
(a)
|
—
|
|
|
39
|
|
(b)
|
40
|
|
|
|
|
|
|
|
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February 1, 2020
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$
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(12)
|
|
|
$
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(19)
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|
|
$
|
(837)
|
|
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$
|
(868)
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(a)Represents amortization of gains and losses on cash flow hedges, net of taxes, which is recorded in Net Interest Expense.
(b)Represents amortization of pension gains and losses, net of $13 million of taxes, which is recorded in Net Other (Income)/Expense. See Note 23 for additional information.
25. Quarterly Results (Unaudited)
Due to the seasonal nature of our business, fourth quarter operating results typically represent a substantially larger share of total year revenues and earnings because they include the November and December holiday sales period. We follow the same accounting policies for preparing quarterly and annual financial data. The table below summarizes quarterly results for 2019 and 2018:
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|
|
|
|
|
|
|
|
|
|
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|
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Quarterly Results
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First Quarter
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|
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Second Quarter
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Third Quarter
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Fourth Quarter
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Total Year
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(millions, except per share data)
|
2019
|
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2018
|
|
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2019
|
|
2018
|
|
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2019
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2018
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2019
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2018
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2019
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2018
|
|
Sales
|
$
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17,401
|
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$
|
16,556
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|
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$
|
18,183
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$
|
17,552
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|
|
$
|
18,414
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|
$
|
17,590
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|
|
$
|
23,133
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|
$
|
22,734
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|
|
$
|
77,130
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|
$
|
74,433
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Other revenue
|
226
|
|
225
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|
|
239
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|
224
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|
|
251
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|
231
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|
|
265
|
|
243
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|
|
982
|
|
923
|
|
Total revenue
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17,627
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|
16,781
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|
18,422
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17,776
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|
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18,665
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17,821
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|
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23,398
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22,977
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|
78,112
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75,356
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Cost of sales
|
12,248
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11,625
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12,625
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|
12,239
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|
|
12,935
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12,535
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17,056
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|
16,900
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|
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54,864
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53,299
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Selling, general and administrative expenses
|
3,663
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|
3,545
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|
|
3,912
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|
3,865
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|
|
4,153
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|
3,937
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|
|
4,504
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|
4,376
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|
|
16,233
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|
15,723
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Depreciation and amortization (exclusive of depreciation included in cost of sales)
|
581
|
|
570
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|
|
561
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|
539
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|
|
575
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|
530
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|
|
640
|
|
584
|
|
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2,357
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|
2,224
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Operating income
|
1,135
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|
1,041
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|
|
1,324
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|
1,133
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|
|
1,002
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|
819
|
|
|
1,198
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|
1,117
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|
|
4,658
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|
4,110
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|
Net interest expense
|
126
|
|
121
|
|
|
120
|
|
115
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|
|
113
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|
115
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|
|
118
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|
110
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|
|
477
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|
461
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Net other (income) / expense
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(12)
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(7)
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(13)
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(4)
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(12)
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(9)
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29
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(7)
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(9)
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(27)
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Earnings from continuing operations before income taxes
|
1,021
|
|
927
|
|
|
1,217
|
|
1,022
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|
|
901
|
|
713
|
|
|
1,051
|
|
1,014
|
|
|
4,190
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|
3,676
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|
Provision for income taxes
|
229
|
|
210
|
|
|
279
|
|
223
|
|
|
195
|
|
97
|
|
|
218
|
|
216
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|
|
921
|
|
746
|
|
Net earnings from continuing operations
|
792
|
|
717
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|
|
938
|
|
799
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|
|
706
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|
616
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|
|
833
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|
798
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|
|
3,269
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|
2,930
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Discontinued operations, net of tax
|
3
|
|
1
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|
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—
|
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—
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|
|
8
|
|
6
|
|
|
1
|
|
1
|
|
|
12
|
|
7
|
|
Net earnings
|
$
|
795
|
|
$
|
718
|
|
|
$
|
938
|
|
$
|
799
|
|
|
$
|
714
|
|
$
|
622
|
|
|
$
|
834
|
|
$
|
799
|
|
|
$
|
3,281
|
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$
|
2,937
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Basic earnings per share
|
|
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Continuing operations
|
$
|
1.54
|
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$
|
1.34
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|
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$
|
1.83
|
|
$
|
1.50
|
|
|
$
|
1.38
|
|
$
|
1.17
|
|
|
$
|
1.64
|
|
$
|
1.53
|
|
|
$
|
6.39
|
|
$
|
5.54
|
|
Discontinued operations
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
0.02
|
|
0.01
|
|
|
—
|
|
—
|
|
|
0.02
|
|
0.01
|
|
Net earnings per share
|
$
|
1.54
|
|
$
|
1.34
|
|
|
$
|
1.83
|
|
$
|
1.50
|
|
|
$
|
1.40
|
|
$
|
1.18
|
|
|
$
|
1.65
|
|
$
|
1.54
|
|
|
$
|
6.42
|
|
$
|
5.55
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
1.53
|
|
$
|
1.33
|
|
|
$
|
1.82
|
|
$
|
1.49
|
|
|
$
|
1.37
|
|
$
|
1.16
|
|
|
$
|
1.63
|
|
$
|
1.52
|
|
|
$
|
6.34
|
|
$
|
5.50
|
|
Discontinued operations
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
0.02
|
|
0.01
|
|
|
—
|
|
—
|
|
|
0.02
|
|
0.01
|
|
Net earnings per share
|
$
|
1.53
|
|
$
|
1.33
|
|
|
$
|
1.82
|
|
$
|
1.49
|
|
|
$
|
1.39
|
|
$
|
1.17
|
|
|
$
|
1.63
|
|
$
|
1.52
|
|
|
$
|
6.36
|
|
$
|
5.51
|
|
Dividends declared per share
|
$
|
0.64
|
|
$
|
0.62
|
|
|
$
|
0.66
|
|
$
|
0.64
|
|
|
$
|
0.66
|
|
$
|
0.64
|
|
|
$
|
0.66
|
|
$
|
0.64
|
|
|
$
|
2.62
|
|
$
|
2.54
|
|
Note: Per share amounts are computed independently for each of the quarters presented. The sum of the quarters may not equal the total year amount due to the impact of changes in average quarterly shares outstanding and all other quarterly amounts may not equal the total year due to rounding.
|
|
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|
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|
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|
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|
|
TARGET CORPORATION
|
|
2019 Form 10-K
|
59
|