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TARGET CORP - Quarter Report: 2019 May (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 2019
 
Commission File Number 1-6049
 
 
targetbullseyea05a02a02a21.jpg
TARGET CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota
 
41-0215170
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1000 Nicollet Mall, Minneapolis, Minnesota
 
55403
(Address of principal executive offices)
 
(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 x No o
 
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 x No o
 
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  x
  Accelerated filer  o
 Non-accelerated filer  o
Smaller reporting company  o
Emerging growth company  o
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.  o
      
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                 Yes o No x
 
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 May 24, 2019 were 512,334,476.




TARGET CORPORATION
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Operations
 
 
 
 
Three Months Ended
(millions, except per share data) (unaudited)
May 4,
2019

 
May 5,
2018

Sales
$
17,401

 
$
16,556

Other revenue
226

 
225

Total revenue
17,627

 
16,781

Cost of sales
12,248

 
11,625

Selling, general and administrative expenses
3,663

 
3,545

Depreciation and amortization (exclusive of depreciation included in cost of sales)
581

 
570

Operating income
1,135

 
1,041

Net interest expense
126

 
121

Net other (income) / expense
(12
)
 
(7
)
Earnings from continuing operations before income taxes
1,021

 
927

Provision for income taxes
229

 
210

Net earnings from continuing operations
792

 
717

Discontinued operations, net of tax
3

 
1

Net earnings
$
795

 
$
718

Basic earnings per share
 
 
 
Continuing operations
$
1.54

 
$
1.34

Discontinued operations
—

 
—

Net earnings per share
$
1.54

 
$
1.34

Diluted earnings per share
 
 
 
Continuing operations
$
1.53

 
$
1.33

Discontinued operations
—

 
—

Net earnings per share
$
1.53

 
$
1.33

Weighted average common shares outstanding
 
 
 
Basic
515.7

 
536.9

Diluted
519.5

 
541.0

Antidilutive shares
0.1

 
2.2

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
(millions) (unaudited)
May 4,
2019

 
May 5,
2018

Net earnings
$
795

 
$
718

Other comprehensive income
 

 
 

Pension, net of tax
10

 
13

Currency translation adjustment and cash flow hedges, net of tax
3

 
(3
)
Other comprehensive income
13

 
10

Comprehensive income
$
808

 
$
728

 
See accompanying Notes to Consolidated Financial Statements.




2



Consolidated Statements of Financial Position
 

 
 

 
 

(millions, except footnotes) (unaudited)
May 4,
2019

 
February 2,
2019

 
May 5,
2018

Assets
 
 
 

 
 
Cash and cash equivalents
$
1,173

 
$
1,556

 
$
1,060

Inventory
9,060

 
9,497

 
8,652

Other current assets
1,374

 
1,466

 
1,164

Total current assets
11,607

 
12,519

 
10,876

Property and equipment
 

 
 

 
 

Land
6,061

 
6,064

 
6,090

Buildings and improvements
29,573

 
29,240

 
28,363

Fixtures and equipment
5,401

 
5,912

 
5,135

Computer hardware and software
2,553

 
2,544

 
2,511

Construction-in-progress
574

 
460

 
639

Accumulated depreciation
(18,456
)
 
(18,687
)
 
(17,971
)
Property and equipment, net
25,706

 
25,533

 
24,767

Operating lease assets
2,019

 
1,965

 
1,958

Other noncurrent assets
1,287

 
1,273

 
1,328

Total assets
$
40,619

 
$
41,290

 
$
38,929

Liabilities and shareholders’ investment
 

 
 

 
 

Accounts payable
$
8,360

 
$
9,761

 
$
8,131

Accrued and other current liabilities
3,823

 
4,201

 
3,630

Current portion of long-term debt and other borrowings
1,056

 
1,052

 
283

Total current liabilities
13,239

 
15,014

 
12,044

Long-term debt and other borrowings
11,357

 
10,223

 
11,107

Noncurrent operating lease liabilities
2,064

 
2,004

 
2,007

Deferred income taxes
1,034

 
972

 
744

Other noncurrent liabilities
1,808

 
1,780

 
1,869

Total noncurrent liabilities
16,263

 
14,979

 
15,727

Shareholders’ investment
 

 
 

 
 

Common stock
43

 
43

 
44

Additional paid-in capital
5,908

 
6,042

 
5,664

Retained earnings
5,958

 
6,017

 
6,187

Accumulated other comprehensive loss
(792
)
 
(805
)
 
(737
)
Total shareholders’ investment
11,117

 
11,297

 
11,158

Total liabilities and shareholders’ investment
$
40,619

 
$
41,290

 
$
38,929

Common Stock Authorized 6,000,000,000 shares, $0.0833 par value; 512,312,434, 517,761,600 and 532,916,612 shares issued and outstanding at May 4, 2019, February 2, 2019 and May 5, 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
 
 
 
 
Three Months Ended
(millions) (unaudited)
May 4,
2019

 
May 5,
2018

Operating activities
 

 
 

Net earnings
$
795

 
$
718

Earnings from discontinued operations, net of tax
3

 
1

Net earnings from continuing operations
792

 
717

Adjustments to reconcile net earnings to cash provided by operations
 

 
 

Depreciation and amortization
644

 
631

Share-based compensation expense
46

 
42

Deferred income taxes
59

 
48

Noncash losses / (gains) and other, net
10

 
40

Changes in operating accounts
 

 
 
Inventory
438

 
(55
)
Other assets
17

 
26

Accounts payable
(1,402
)
 
(604
)
Accrued and other liabilities
(281
)
 
(333
)
Cash provided by operating activities—continuing operations
323

 
512

Cash provided by operating activities—discontinued operations
—

 
2

Cash provided by operations
323

 
514

Investing activities
 

 
 

Expenditures for property and equipment
(655
)
 
(827
)
Proceeds from disposal of property and equipment
5

 
4

Other investments
1

 
5

Cash required for investing activities
(649
)
 
(818
)
Financing activities
 

 
 

Additions to long-term debt
994

 
—

Reductions of long-term debt
(13
)
 
(12
)
Dividends paid
(330
)
 
(334
)
Repurchase of stock
(320
)
 
(524
)
Accelerated share repurchase pending final settlement
(400
)
 
(425
)
Stock option exercises
12

 
16

Cash required for financing activities
(57
)
 
(1,279
)
Net decrease in cash and cash equivalents
(383
)
 
(1,583
)
Cash and cash equivalents at beginning of period
1,556

 
2,643

Cash and cash equivalents at end of period
$
1,173

 
$
1,060

Supplemental information
 
 
 
Leased assets obtained in exchange for new finance lease liabilities
$
126

 
$
5

Leased assets obtained in exchange for new operating lease liabilities
107

 
113

 

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


We declared $0.64 and $0.62 dividends per share for the three months ended May 4, 2019, and May 5, 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
(millions)
May 4,
2019

 
May 5,
2018

Apparel and accessories (a)
$
3,290

 
$
3,113

Beauty and household essentials (a)
4,971

 
4,617

Food and beverage
3,722

 
3,587

Hardlines
2,385

 
2,313

Home furnishings and décor
3,001

 
2,903

Other
32

 
23

Sales
17,401

 
16,556

 
 
 
 
Credit card profit sharing
160

 
167

Other
66

 
58

Other revenue
226

 
225

 
 
 
 
Total revenue
$
17,627

 
$
16,781

(a) 
For the three months ended May 4, 2019, and May 5, 2018, we reclassified certain non-apparel baby merchandise sales totaling $456 million and $390 million, 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 May 4, 2019, February 2, 2019, and May 5, 2018, the accrual for estimated returns was $124 million, $116 million, and $119 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



(millions)
February 2,
2019

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

 
Revenue Recognized From Beginning Liability

 
May 4,
2019

Gift card liability
$
840

 
$
213

 
$
(322
)
 
$
731

(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
May 4,
2019

 
February 2,
2019

 
May 5,
2018

Assets
 
 
 

 
 

 
 

Short-term investments
Cash and Cash Equivalents
Level 1
$
419

 
$
769

 
$
311

Prepaid forward contracts
Other Current Assets
Level 1
21

 
19

 
21

Interest rate swaps
Other Noncurrent Assets
Level 2
23

 
10

 
—

Liabilities
 
 
 

 
 

 
 

Interest rate swaps
Other Current Liabilities
Level 2
1

 
3

 
—

Interest rate swaps
Other Noncurrent Liabilities
Level 2
—

 
—

 
10

 
Significant Financial Instruments not Measured at Fair Value (a)

(millions)
May 4, 2019
 
February 2, 2019
 
May 5, 2018
Carrying
Amount

Fair
Value

 
Carrying
Amount

Fair
Value

 
Carrying
Amount

Fair
Value

Long-term debt, including current portion (b)
$
11,243

$
12,015

 
$
10,247

$
10,808

 
$
10,442

$
10,782

(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. Commercial Paper and Long-Term Debt

During the three months ended May 4, 2019, we issued $1,000 million of 10-year unsecured fixed rate debt at 3.375 percent, in advance of the June 2019 maturity of $1,000 million of 2.3 percent unsecured fixed rate debt.

We obtain short-term financing from time to time under our commercial paper program. For the three months ended May 4, 2019, the maximum amount outstanding was $744 million, and the average daily amount outstanding was $140 million at a weighted average annual interest rate of 2.4 percent. For the three months ended May 5, 2018, the maximum amount outstanding was $658 million, and the average daily amount outstanding was $127 million at a weighted average annual interest rate of 1.8 percent. As of May 4, 2019, and May 5, 2018, no balances were outstanding.


8



5. Derivative Financial Instruments
 
As required, we adopted Accounting Standards Update (ASU) No. 2017-12—Targeted Improvements to Accounting for Hedging Activities (Topic 815), as of February 3, 2019. The new standard did not affect our consolidated net earnings, financial position, or cash flows.

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. With the addition of these swaps, as of May 4, 2019, we were party to seven interest rate swaps with notional amounts totaling $2,500 million, compared with three interest rate swaps with notional amounts totaling $1,250 million as of May 5, 2018. 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 months ended May 4, 2019, and May 5, 2018. The gains and losses on the interest rate swaps and underlying debt recognized in Net Interest Expense were immaterial for each period presented.

The notional amounts of our interest rate swaps approximate the carrying amount of the associated debt primarily because the cumulative hedging adjustments included in the debt carrying amount were immaterial in each period presented.

6. 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.
 
Three Months Ended
(millions, except per share data)
May 4,
2019

 
May 5,
2018

Total number of shares purchased
3.6

 
6.9

Average price paid per share
$
76.98

 
$
71.24

Total investment
$
277

 
$
494

Note: Activity related to the first quarter 2019 and 2018 ASR arrangements described below is omitted because the transactions were not fully settled as of May 4, 2019, and May 5, 2018, respectively.

During the first quarter of 2019, we entered into an ASR to repurchase $275 to $400 million of our common stock under the existing $5 billion share repurchase program. Under the agreement, we paid $400 million and received an initial delivery of 3.0 million shares, which were retired, resulting in a $247 million reduction to Retained Earnings. As of May 4, 2019, $153 million is included as a reduction to Additional Paid-in Capital.

During the first quarter of 2018, we entered into an ASR to repurchase $225 to $425 million of our common stock. Under the agreement, we paid $425 million and received an initial delivery of 2.9 million shares, which were retired, resulting in a $200 million reduction to Retained Earnings. As of May 5, 2018, $225 million was included as a reduction to Additional Paid-in Capital. Upon settlement in the second quarter of 2018, we received an additional 0.2 million shares, which were retired, and $200 million for the remaining amount not settled in shares. In total, we repurchased 3.1 million shares under the ASR for a total cash investment of $225 million ($73.06 per share).


9



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

Net Pension Benefits Expense
 
Three Months Ended
(millions)
Classification
May 4,
2019

 
May 5,
2018

Service cost benefits earned
SG&A Expenses
$
23

 
$
24

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

 
37

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

 
21

Amortization of prior service cost
Net Other (Income) / Expense
(3
)
 
(3
)
Total
 
$
11

 
$
17

 
8. Accumulated Other Comprehensive (Loss) / Income
 
 
(millions)
Cash Flow
Hedges

 
Currency
Translation
Adjustment

 
Pension

 
Total

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

 
3

 
—

 
3

Amounts reclassified from AOCI, net of tax
—

 
—

 
10

 
10

May 4, 2019
$
(13
)
 
$
(17
)
 
$
(762
)
 
$
(792
)


10



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

•
GAAP earnings per share from continuing operations and adjusted earnings per share were $1.53.
•
Total revenue increased 5.0 percent, driven by a comparable sales increase and sales from new stores.
•
Comparable sales increased 4.8 percent, driven by a 4.3 percent increase in traffic.
◦
Comparable store sales grew 2.7 percent.
◦
Digital channel sales increased 42 percent, contributing 2.1 percentage points to comparable sales growth.
•
Operating income of $1,135 million was 9.0 percent higher than the comparable prior-year period.

Sales were $17,401 million for the three months ended May 4, 2019, an increase of $845 million, or 5.1 percent, from the same period in the prior year. Operating income for the three months ended May 4, 2019, increased by $94 million, or 9.0 percent, from the same period in the prior year to $1,135 million. The Analysis of Results of Operations discussion provides more information. Operating cash flow provided by continuing operations was $323 million for the three months ended May 4, 2019, a decrease of $189 million, or 36.9 percent, from $512 million for the three months ended May 5, 2018. Refer to the Operating Cash Flows discussion within the Liquidity and Capital Resources section of MD&A on page 17 for additional information.
 
Earnings Per Share from Continuing Operations
Three Months Ended
 
 

May 4,
2019

 
May 5,
2018

 
Change

GAAP diluted earnings per share
$
1.53

 
$
1.33

 
15.1
%
Adjustments
—

 
(0.01
)
 
 
Adjusted diluted earnings per share
$
1.53

 
$
1.32

 
15.9
%
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 15.

For the trailing twelve months ended May 4, 2019, after-tax return on invested capital from continuing operations (ROIC) was 14.3 percent, compared with 15.2 percent for the trailing twelve months ended May 5, 2018. Excluding the discrete impacts of the Tax Cuts and Jobs Act of 2017 (Tax Act), ROIC was 14.1 percent and 13.5 percent for the trailing twelve months ended May 4, 2019, and May 5, 2018, respectively. The calculation of ROIC is provided on page 16.


11



Analysis of Results of Operations

 
Three Months Ended
 
 

(dollars in millions)
May 4,
2019

 
May 5,
2018

 
Change

Sales
$
17,401

 
$
16,556

 
5.1
%
Other revenue
226

 
225

 
0.5

Total revenue
17,627

 
16,781

 
5.0

Cost of sales
12,248

 
11,625

 
5.4

Selling, general and administrative expenses
3,663

 
3,545

 
3.3

Depreciation and amortization (exclusive of depreciation included in cost of sales)
581

 
570

 
1.9

Operating income
$
1,135

 
$
1,041

 
9.0
%

Rate Analysis
Three Months Ended
 
May 4,
2019

 
May 5,
2018

Gross margin rate
29.6
%
 
29.8
%
SG&A expense rate
20.8

 
21.1

Depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate
3.3

 
3.4

Operating income margin rate
6.4

 
6.2

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 channel 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 months ended May 4, 2019, is due to a comparable sales increase of 4.8 percent and the contribution from new stores.
 
Comparable Sales
Three Months Ended
 
May 4,
2019

 
May 5,
2018

Comparable sales change
4.8
%
 
3.0
 %
Drivers of change in comparable sales
 

 
 

Number of transactions
4.3

 
3.7

Average transaction amount
0.5

 
(0.6
)
Note: Amounts may not foot due to rounding.


12



Contribution to Comparable Sales Change
Three Months Ended
 
May 4,
2019

 
May 5,
2018

Stores channel comparable sales change
2.7
%
 
1.9
%
Digital channel contribution to comparable sales change
2.1

 
1.1

Total comparable sales change
4.8
%
 
3.0
%
Note: Amounts may not foot due to rounding.

Sales by Channel
Three Months Ended
 
May 4,
2019

 
May 5,
2018

Stores originated
92.9
%
 
94.8
%
Digitally originated
7.1

 
5.2

Total
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
 
May 4,
2019

 
May 5,
2018

Target Debit Card
13.1
%
 
13.5
%
Target Credit Cards
10.4

 
10.6

Total REDcard Penetration
23.5
%
 
24.1
%
Note: Amounts may not foot due to rounding.

Gross Margin Rate
chart-e8bf0927eced5e8fade.jpg
For the three months ended May 4, 2019, our gross margin rate was 29.6 percent compared with 29.8 percent in the comparable period last year. The decrease was primarily due to increased digital fulfillment and supply chain costs, partially offset by the benefit of merchandising strategies, including cost savings initiatives and efforts to improve pricing and promotions.


13



Selling, General, and Administrative Expense Rate

For the three months ended May 4, 2019, our SG&A expense rate was 20.8 percent compared with 21.1 percent in the comparable period last year. The decrease reflects technology-related cost savings and a year-over-year benefit due to timing of marketing campaigns, neither of which was individually significant. In addition, broad expense control, including store labor productivity, offset pressure from wage growth.

Depreciation and Amortization Expense Rate

For the three months ended May 4, 2019, our depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate was 3.3 percent compared with 3.4 percent in the comparable period last year. The decrease was primarily due to the rate impact of higher sales in 2019.

Store Data
 
Change in Number of Stores
Three Months Ended
 
May 4,
2019

 
May 5,
2018

Beginning store count
1,844

 
1,822

Opened
7

 
7

Closed
—

 
—

Ending store count
1,851

 
1,829


Number of Stores and
Retail Square Feet
Number of Stores
 
Retail Square Feet (a)
May 4,
2019

February 2,
2019

May 5,
2018

 
May 4,
2019

February 2,
2019

May 5,
2018

170,000 or more sq. ft.
272

272

274

 
48,603

48,604

48,951

50,000 to 169,999 sq. ft.
1,501

1,501

1,502

 
188,918

188,900

189,258

49,999 or less sq. ft.
78

71

53

 
2,276

2,077

1,477

Total
1,851

1,844

1,829

 
239,797

239,581

239,686

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

Net Interest Expense
 
Net interest expense from continuing operations was $126 million and $121 million for the three months ended May 4, 2019, and May 5, 2018, respectively. The increase is primarily due to a higher average debt balance during the three months ended May 4, 2019, as compared with the prior-year period.

14




Provision for Income Taxes
 
Our effective income tax rate from continuing operations for the three months ended May 4, 2019, was 22.4 percent compared with 22.6 percent for the comparable period last year.

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.

 
 
Three Months Ended
 
 
May 4, 2019
 
May 5, 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
 
 
 
 
 
$
1.53

 
 
 
 
 
$
1.33

Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
Income tax matters (a)
 
—

 
—

 
—

 
—

 
(5
)
 
(0.01
)
Adjusted diluted earnings per share from continuing operations
 
 
 
 
 
$
1.53

 
 
 
 
 
$
1.32

Note: Amounts may not foot due to rounding.
(a) 
Represents certain income tax matters not related to current period operations.

Earnings from continuing operations before interest expense and income taxes (EBIT) and earnings before interest expense, income taxes, depreciation and amortization (EBITDA) are non-GAAP financial measures which we believe provide meaningful information about our operational efficiency compared with our competitors by excluding the impact of differences in tax jurisdictions and structures, debt levels, and for EBITDA, capital investment. These measures are not in accordance with, or an alternative to, GAAP. The most comparable GAAP measure is net earnings from continuing operations. EBIT and EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP. Other companies may calculate EBIT and EBITDA differently, limiting the usefulness of the measure for comparisons with other companies.
EBIT and EBITDA
 
Three Months Ended
 
 

(dollars in millions) (unaudited)
 
May 4,
2019
 
May 5,
2018
 
Change
Net earnings from continuing operations
 
$
792

 
$
717

 
10.5
%
+ Provision for income taxes
 
229

 
210

 
9.2

+ Net interest expense
 
126

 
121

 
3.3

EBIT
 
$
1,147

 
$
1,048

 
9.4
%
+ Total depreciation and amortization (a)
 
644

 
631

 
2.0

EBITDA
 
$
1,791

 
$
1,679

 
6.6
%
(a) 
Represents total depreciation and amortization, including amounts classified within Depreciation and Amortization and within Cost of Sales.

15





We have also disclosed after-tax ROIC, which is a ratio based on GAAP information. We believe this metric is useful in assessing the effectiveness of our capital allocation over time. Other companies may calculate ROIC differently, limiting the usefulness of the measure for comparisons with other companies.

After-Tax Return on Invested Capital
 
 
(dollars in millions)
 
 
 
 
 
 
Trailing Twelve Months
 
 
Numerator
 
May 4,
2019

 
May 5,
2018 (a)

 
 
Operating income
 
$
4,204

 
$
4,110

 
 
+ Net other income / (expense)
 
33

 
51

 
 
EBIT
 
4,237

 
4,161

 
 
+ Operating lease interest (b)
 
84

 
80

 
 
- Income taxes (c)(d)
 
878

 
692

 
 
Net operating profit after taxes
 
$
3,443

 
$
3,549

 
 

Denominator
 
May 4,
2019

 
May 5,
2018

 
April 29,
2017

Current portion of long-term debt and other borrowings
 
$
1,056

 
$
283

 
$
1,729

+ Noncurrent portion of long-term debt
 
11,357

 
11,107

 
10,916

+ Shareholders' equity
 
11,117

 
11,158

 
10,979

+ Operating lease liabilities (e)
 
2,231

 
2,157

 
2,049

- Cash and cash equivalents
 
1,173

 
1,060

 
2,680

- Net assets of discontinued operations (f)
 
—

 
—

 
17

Invested capital
 
$
24,588

 
$
23,645

 
$
22,976

Average invested capital (g)
 
$
24,116

 
$
23,310

 
 
After-tax return on invested capital (d)
 
14.3
%
 
15.2
%
 
 
After-tax return on invested capital excluding discrete impacts of Tax Act (d)
 
14.1
%
 
13.5
%
 
 
(a) 
Consisted of 53 weeks.
(b) 
Represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as finance leases. Calculated using the discount rate for each lease and recorded as a component of rent expense within SG&A Expenses. Operating lease interest is added back to Operating Income in the ROIC calculation to control for differences in capital structure between us and our competitors.
(c) 
Calculated using the effective tax rates for continuing operations, which were 20.3 percent and 16.3 percent for the trailing twelve months ended May 4, 2019, and May 5, 2018, respectively. For the trailing twelve months ended May 4, 2019, and May 5, 2018, includes tax effect of $861 million and $679 million, respectively, related to EBIT, and $17 million and $13 million, respectively, related to operating lease interest.
(d) 
The effective tax rate for the trailing twelve months ended May 4, 2019, and May 5, 2018, includes discrete tax benefits of $36 million and $343 million, respectively, related to the Tax Act.
(e) 
Total short-term and long-term operating lease liabilities included within Accrued and Other Current Liabilities and Noncurrent Operating Lease Liabilities.
(f) 
Included in Other Assets and Liabilities.
(g) 
Average based on the invested capital at the end of the current period and the invested capital at the end of the comparable prior period.

Analysis of Financial Condition
 
Liquidity and Capital Resources
 
Our cash and cash equivalents balance was $1,173 million at May 4, 2019, compared with $1,060 million for the same period in 2018. Our cash and cash equivalents balance includes short-term investments of $419 million, $769 million, and $311 million as of May 4, 2019, February 2, 2019, and May 5, 2018, respectively. Our investment policy is designed to preserve principal and liquidity of our short-term investments. This policy allows investments in large money market funds or in highly rated direct short-term instruments that mature in 60 days or less. We also place dollar limits on our investments in individual funds or instruments.
 
Capital Allocation

We follow a disciplined and balanced approach to capital allocation based on the following priorities, ranked in order of importance: first, we fully invest in opportunities to profitably grow our business, create sustainable long-term value, and maintain our current operations and assets; second, we maintain a competitive quarterly dividend and seek to grow it annually; and finally, we return any excess cash to shareholders by repurchasing shares within the limits of our credit rating goals.

Operating Cash Flows
 
Operating cash flow provided by continuing operations was $323 million for the three months ended May 4, 2019, compared with $512 million for the same period in 2018. The operating cash flow decrease is primarily due to higher cash settlement of accounts payable during the three months ended May 4, 2019, compared with the comparable prior-year period, driven by elevated inventory and accounts payable levels as of February 2, 2019, partially offset by a decrease in inventory during the three months ended May 4, 2019.
 
Inventory

Inventory was $9,060 million as of May 4, 2019, compared with $9,497 million and $8,652 million at February 2, 2019, and May 5, 2018, respectively. The decrease from February 2, 2019, reflects a reduction from elevated year-end inventory levels. Inventory increased from May 5, 2018 to support current and expected sales and our efforts to improve in-stock levels, including market share opportunities in toys and baby-related merchandise.

Dividends
 
We paid dividends totaling $330 million ($0.64 per share) and $334 million ($0.62 per share) for the three months ended May 4, 2019, and May 5, 2018, respectively, a per share increase of 3.2 percent. We declared dividends totaling $330 million ($0.64 per share) during the first quarter of 2019, a per share increase of 3.2 percent over the $333 million ($0.62 per share) of declared dividends during the first quarter of 2018. We have paid dividends every quarter since our 1967 initial public offering, and it is our intent to continue to do so in the future.

Share Repurchase
 
We returned $277 million to shareholders through share repurchase during the three months ended May 4, 2019. See Part II, Item 2 of this Quarterly Report on Form 10-Q and Note 6 to the Consolidated Financial Statements for more information.






16



Financing
 
Our financing strategy is to ensure liquidity and access to capital markets, to maintain a balanced spectrum of debt maturities, and to manage our net exposure to floating interest rate volatility. Within these parameters, we seek to minimize our borrowing costs. Our ability to access the long-term debt and commercial paper markets has provided us with ample sources of liquidity. Our continued access to these markets depends on multiple factors, including the condition of debt capital markets, our operating performance, and maintaining strong credit ratings. As of May 4, 2019, our credit ratings were as follows:
 
Credit Ratings
Moody’s
Standard and Poor’s
Fitch
Long-term debt
A2
A
A-
Commercial paper
P-1
A-1
F2
 
If our credit ratings were lowered, our ability to access the debt markets, our cost of funds, and other terms for new debt issuances could be adversely impacted. Each of the credit rating agencies reviews its rating periodically and there is no guarantee our current credit ratings will remain the same as described above.
 
During the three months ended May 4, 2019, we issued $1.0 billion of debt in advance of the June 2019 maturity of $1.0 billion of debt. Notes 4 and 5 to the Consolidated Financial Statements provide additional information.

We have additional liquidity through a committed $2.5 billion revolving credit facility obtained through a group of banks. In October 2018, we extended this credit facility by one year to October 2023. No balances were outstanding at any time during 2019 or 2018.
 
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. Additionally, as of May 4, 2019, no notes or debentures contained provisions requiring acceleration of payment upon a credit rating downgrade, except that certain outstanding notes allow the note holders to put the notes to us if within a matter of months of each other we experience both (i) a change in control; and (ii) our long-term credit ratings are either reduced and the resulting rating is noninvestment grade, or our long-term credit ratings are placed on watch for possible reduction and those ratings are subsequently reduced and the resulting rating is noninvestment grade.
 
We believe our sources of liquidity will continue to be adequate to maintain operations, finance anticipated expansion and strategic initiatives, fund debt maturities, pay dividends, and execute purchases under our share repurchase program for the foreseeable future. We continue to anticipate ample access to commercial paper and long-term financing.
 
Contractual Obligations and Commitments
 
As of the date of this report, other than the new borrowings discussed in Note 4 to the Consolidated Financial Statements, there were no material changes to our contractual obligations and commitments outside the ordinary course of business since February 2, 2019, as reported in our 2018 Form 10-K.
 
New Accounting Pronouncements

We do not expect any other recently issued accounting pronouncements to have a material effect on our financial statements.


17



Forward-Looking Statements
 
This report contains forward-looking statements, which are based on our current assumptions and expectations. These statements are typically accompanied by the words “expect,” “may,” “could,” “believe,” “would,” “might,” “anticipates,” or similar words. The principal forward-looking statements in this report include: our financial performance, statements regarding the adequacy of and costs associated with our sources of liquidity, the funding of debt maturities, the continued execution of our share repurchase program, our expected capital expenditures and new lease commitments, the expected compliance with debt covenants, the expected impact of new accounting pronouncements, our intentions regarding future dividends, the expected return on plan assets, the expected outcome of, and adequacy of our reserves for, claims, litigation and the resolution of tax matters, the expected impact of changes in information technology systems, and changes in our assumptions and expectations.
 
All such forward-looking statements are intended to enjoy the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. Although we believe there is a reasonable basis for the forward-looking statements, our actual results could be materially different. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth on our description of risk factors in Item 1A of our Form 10-K for the fiscal year ended February 2, 2019, which should be read in conjunction with the forward-looking statements in this report. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our Form 10-K for the fiscal year ended February 2, 2019.
 
Item 4. Controls and Procedures
 
Changes in Internal Control Over Financial Reporting
 
During the most recently completed fiscal quarter, the following change to our information technology systems materially affected, or is reasonably likely to materially affect, our internal control over financial reporting:
 
•
We are in the process of a broad multi-year migration of many mainframe-based systems and middleware products to a modern platform, including systems supporting inventory and supply chain-related transactions.
  
During the most recently completed fiscal quarter, no other change in our internal control over financial reporting materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this quarterly report, we conducted an evaluation, under supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at the reasonable assurance level. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the Securities and Exchange Commission (SEC) under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.


18



PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings

No response is required under Item 103 of Regulation S-K, nor have there been any material developments for any previously reported legal proceedings.

Item 1A. Risk Factors
 
There have been no material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
On September 20, 2016, our Board of Directors authorized a new $5 billion share repurchase program. We began repurchasing shares under this new authorization during the fourth quarter of 2016. There is no stated expiration for the share repurchase program. Under the program, we have repurchased 52.2 million shares of common stock through May 4, 2019, at an average price of $69.68, for a total investment of $3.6 billion, excluding the April 2019 ASR because the transaction was not fully settled as of May 4, 2019. The table below presents information with respect to Target common stock purchases made during the three months ended May 4, 2019, by Target or any "affiliated purchaser" of Target, as defined in Rule 10b-18(a)(3) under the Exchange Act.

Period
Total Number
of Shares
Purchased

 
Average
Price
Paid per
Share

 
Total Number of
Shares Purchased
as Part of Publicly Announced Programs

 
Dollar Value of
Shares that May
Yet Be Purchased
Under Publicly Announced Programs

February 3, 2019 through March 2, 2019
 
 
 
 
 
 
 
February 2019 ASR
1,500,000

 
$
74.23

 
1,500,000

 
$
1,417,349,966

March 3, 2019 through April 6, 2019
 
 
 
 
 
 
 
Open market and privately negotiated purchases
1,315,000

 
78.53

 
1,315,000

 
1,314,080,887

April 7, 2019 through May 4, 2019
 
 
 
 
 
 
 
February 2019 ASR
183,903

 
74.23

 
183,903

 
1,414,080,887

Open market and privately negotiated purchases
604,720

 
81.27

 
604,720

 
1,364,936,694

April 2019 ASR (a)
3,000,000

 
TBD

 
3,000,000

 
964,936,694

Total
6,603,623

 
TBD

 
6,603,623

 
$
964,936,694

(a) 
Refer to Note 6 of the Consolidated Financial Statements for further details about the ASR arrangements.

Item 3. Defaults Upon Senior Securities
 
Not applicable.
 
Item 4. Mine Safety Disclosures
 
Not applicable.
 
Item 5. Other Information
 
Not applicable.


19



Item 6.  Exhibits
(3)A
 
 
 
 
(3)B
 
 
 
 
(31)A
 
 
 
 
(31)B
 
 
 
 
(32)A
 
 
 
 
(32)B
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 

(1)         Incorporated by reference to Exhibit (3)A to the Registrant’s Form 8-K Report filed June 10, 2010.
 
(2)         Incorporated by reference to Exhibit (3)A to the Registrant’s Form 8-K Report filed November 12, 2015.



20



SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
TARGET CORPORATION
 
 
 
 
Dated: May 31, 2019
By:
 /s/ Cathy R. Smith
 
 
Cathy R. Smith
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
(Duly Authorized Officer and
 
 
Principal Financial Officer)
 
 
 
 
 
 
/s/ Robert M. Harrison
 
 
 
Robert M. Harrison
 
 
 
Senior Vice President, Chief Accounting Officer
 
 
 
and Controller
 
 
 
 
 
 
 
 
 
 
 
 

21