10-Q 1 a12-21775_110q.htm 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 October 27, 2012

 

Commission File Number 1-6049

 


 

GRAPHIC

 

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

 


 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).             Yes  x   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

 

Large accelerated filer  x  Accelerated filer  o  Non-accelerated filer  o  Smaller Reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 November 16, 2012 were 650,794,426.

 



 

TARGET CORPORATION

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

Consolidated Statements of Operations

1

 

Consolidated Statements of Comprehensive Income

2

 

Consolidated Statements of Financial Position

3

 

Consolidated Statements of Cash Flows

4

 

Consolidated Statements of Shareholders’ Investment

5

 

Notes to Consolidated Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

 

 

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 3.

Defaults Upon Senior Securities

26

Item 4.

Mine Safety Disclosures

26

Item 5.

Other Information

26

Item 6.

Exhibits

27

 

 

 

 

 

 

Signature

 

28

Exhibit Index

 

29

 



 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated Statements of Operations

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 27,

 

October 29,

 

October 27,

 

October 29,

 

(millions, except per share data) (unaudited)

 

 2012

 

 2011

 

 2012

 

 2011

 

Sales

 

$

16,601

 

$

16,054

 

$

49,589

 

$

47,529

 

Credit card revenues

 

328

 

348

 

986

 

1,048

 

Total revenues

 

16,929

 

16,402

 

50,575

 

48,577

 

Cost of sales

 

11,569

 

11,165

 

34,406

 

32,874

 

Selling, general and administrative expenses

 

3,704

 

3,525

 

10,686

 

10,230

 

Credit card expenses

 

106

 

109

 

333

 

283

 

Depreciation and amortization

 

542

 

546

 

1,603

 

1,568

 

Gain on receivables held for sale

 

(156

)

 

(156

)

 

Earnings before interest expense and income taxes

 

1,164

 

1,057

 

3,703

 

3,622

 

Net interest expense

 

192

 

200

 

558

 

574

 

Earnings before income taxes

 

972

 

857

 

3,145

 

3,048

 

Provision for income taxes

 

335

 

302

 

1,107

 

1,100

 

Net earnings

 

$

637

 

$

555

 

$

2,038

 

$

1,948

 

Basic earnings per share

 

$

0.97

 

$

0.82

 

$

3.09

 

$

2.85

 

Diluted earnings per share

 

$

0.96

 

$

0.82

 

$

3.06

 

$

2.84

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

654.8

 

673.2

 

659.3

 

682.2

 

Diluted

 

662.2

 

678.3

 

665.8

 

686.9

 

 

See accompanying Notes to Consolidated Financial Statements.

 

1



 

Consolidated Statements of Comprehensive Income

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 27,

 

October 29,

 

October 27,

 

October 29,

 

(millions) (unaudited)

 

2012

 

2011

 

2012

 

2011

 

Net earnings

 

$

637

 

$

555

 

$

2,038

 

$

1,948

 

Other comprehensive income/(loss), net of tax

 

 

 

 

 

 

 

 

 

Pension and other benefit liabilities, net of taxes of $9, $6, $28 and $16

 

15

 

9

 

43

 

25

 

Currency translation adjustment and cash flow hedges, net of taxes of $7, $15, $7 and $4

 

11

 

(24)

 

12

 

(7)

 

Other comprehensive income/(loss)

 

26

 

(15)

 

55

 

18

 

Comprehensive income

 

$

663

 

$

540

 

$

2,093

 

$

1,966

 

 

See accompanying Notes to Consolidated Financial Statements.

 

2



 

Consolidated Statements of Financial Position

 

 

 

 

 

 

 

 

 

October 27,

 

January 28,

 

October 29,

 

(millions)

 

2012

 

2012

 

 2011

 

Assets

 

(unaudited)

 

 

 

(unaudited)

 

Cash and cash equivalents, including short-term investments of $800, $194 and $66

 

$

1,469

 

$

794

 

$

821

 

Credit card receivables, held for sale

 

5,647

 

 

 

Credit card receivables, net of allowance of $0, $430 and $431

 

 

5,927

 

5,713

 

Inventory

 

9,533

 

7,918

 

9,890

 

Other current assets

 

1,846

 

1,810

 

1,948

 

Total current assets

 

18,495

 

16,449

 

18,372

 

Property and equipment

 

 

 

 

 

 

 

Land

 

6,188

 

6,122

 

6,069

 

Buildings and improvements

 

27,800

 

26,837

 

26,850

 

Fixtures and equipment

 

5,280

 

5,141

 

5,153

 

Computer hardware and software

 

2,418

 

2,468

 

2,457

 

Construction-in-progress

 

1,365

 

963

 

546

 

Accumulated depreciation

 

(12,982

)

(12,382

)

(12,035

)

Property and equipment, net

 

30,069

 

29,149

 

29,040

 

Other noncurrent assets

 

1,015

 

1,032

 

1,035

 

Total assets

 

$

49,579

 

$

46,630

 

$

48,447

 

Liabilities and shareholders’ investment

 

 

 

 

 

 

 

Accounts payable

 

$

8,050

 

$

6,857

 

$

8,053

 

Accrued and other current liabilities

 

3,631

 

3,644

 

3,273

 

Unsecured debt and other borrowings

 

2,528

 

3,036

 

2,313

 

Nonrecourse debt collateralized by credit card receivables

 

1,500

 

750

 

500

 

Total current liabilities

 

15,709

 

14,287

 

14,139

 

Unsecured debt and other borrowings

 

14,526

 

13,447

 

12,897

 

Nonrecourse debt collateralized by credit card receivables

 

 

250

 

3,259

 

Deferred income taxes

 

1,279

 

1,191

 

1,199

 

Other noncurrent liabilities

 

1,713

 

1,634

 

1,689

 

Total noncurrent liabilities

 

17,518

 

16,522

 

19,044

 

Shareholders’ investment

 

 

 

 

 

 

 

Common stock

 

55

 

56

 

56

 

Additional paid-in capital

 

3,854

 

3,487

 

3,431

 

Retained earnings

 

13,069

 

12,959

 

12,340

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

Pension and other benefit liabilities

 

(581

)

(624

)

(516

)

Currency translation adjustment and cash flow hedges

 

(45

)

(57

)

(47

)

Total shareholders’ investment

 

16,352

 

15,821

 

15,264

 

Total liabilities and shareholders’ investment

 

$

49,579

 

$

46,630

 

$

48,447

 

Common shares outstanding

 

654.5

 

669.3

 

671.4

 

 

See accompanying Notes to Consolidated Financial Statements.

 

3



 

Consolidated Statements of Cash Flows

 

 

 

 

 

Nine Months Ended

 

 

 

October 27,

 

October 29,

 

(millions) (unaudited)

 

 2012

 

 2011

 

Operating activities

 

 

 

 

 

Net earnings

 

$

2,038

 

$

1,948

 

Reconciliation to cash flow

 

 

 

 

 

Depreciation and amortization

 

1,603

 

1,568

 

Share-based compensation expense

 

74

 

61

 

Deferred income taxes

 

73

 

397

 

Bad debt expense

 

141

 

67

 

Gain on receivables held for sale

 

(156

)

 

Non-cash (gains)/losses and other, net

 

(15

)

76

 

Changes in operating accounts:

 

 

 

 

 

Accounts receivable originated at Target

 

97

 

120

 

Inventory

 

(1,615

)

(2,294

)

Other current assets

 

(98

)

(131

)

Other noncurrent assets

 

 

49

 

Accounts payable

 

1,193

 

1,428

 

Accrued and other current liabilities

 

(109

)

(360

)

Other noncurrent liabilities

 

122

 

46

 

Cash flow provided by operations

 

3,348

 

2,975

 

Investing activities

 

 

 

 

 

Expenditures for property and equipment

 

(2,338

)

(3,750

)

Proceeds from disposal of property and equipment

 

35

 

7

 

Change in accounts receivable originated at third parties

 

192

 

253

 

Other investments

 

86

 

(114

)

Cash flow required for investing activities

 

(2,025

)

(3,604

)

Financing activities

 

 

 

 

 

Change in commercial paper, net

 

 

1,211

 

Additions to long-term debt

 

1,971

 

1,000

 

Reductions of long-term debt

 

(1,024

)

(272

)

Dividends paid

 

(635

)

(549

)

Repurchase of stock

 

(1,230

)

(1,693

)

Stock option exercises and related tax benefit

 

279

 

66

 

Other

 

(16

)

1

 

Cash flow required for financing activities

 

(655

)

(236

)

Effect of exchange rate changes on cash and cash equivalents

 

7

 

(26

)

Net increase (decrease) in cash and cash equivalents

 

675

 

(891

)

Cash and cash equivalents at beginning of period

 

794

 

1,712

 

Cash and cash equivalents at end of period

 

$

1,469

 

$

821

 

 

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, except footnotes)

 

Shares

 

Value

 

Capital

 

Earnings

 

Income/(Loss)

 

Total

 

January 29, 2011

 

704.0

 

$

59

 

$

3,311

 

$

12,698

 

$

(581

)

$

15,487

 

Net earnings

 

 

 

 

2,929

 

 

2,929

 

Other comprehensive income

 

 

 

 

 

(100

)

(100

)

Dividends declared

 

 

 

 

(777

)

 

(777

)

Repurchase of stock

 

(37.2

)

(3

)

 

(1,891

)

 

(1,894

)

Stock options and awards

 

2.5

 

 

176

 

 

 

176

 

January 28, 2012

 

669.3

 

$

56

 

$

3,487

 

$

12,959

 

$

(681)

 

$

15,821

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

2,038

 

 

2,038

 

Other comprehensive income

 

 

 

 

 

55

 

55

 

Dividends declared

 

 

 

 

(671

)

 

(671

)

Repurchase of stock

 

(21.8

)

(2

)

 

(1,257

)

 

(1,259

)

Stock options and awards

 

7.0

 

1

 

367

 

 

 

368

 

October 27, 2012

 

654.5

 

$

55

 

$

3,854

 

$

13,069

 

$

(626

)

$

16,352

 

 

Dividends declared per share were $0.36 and $0.30 for the three months ended October 27, 2012 and October 29, 2011, respectively. For the fiscal year ended January 28, 2012, dividends declared per share were $1.15.

 

See accompanying Notes to Consolidated Financial Statements.

 

5



 

Notes to Consolidated Financial Statements (unaudited)

 

1. Accounting Policies

 

The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statement disclosures contained in the 2011 Form 10-K for Target Corporation (Target or the Corporation). The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. See the notes in our Form 10-K for the fiscal year ended January 28, 2012, for those policies. In the opinion of management, all adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature.

 

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. Earnings Per Share

 

Basic earnings per share (EPS) is calculated as net earnings divided by the weighted average number of common shares outstanding during the period. Diluted EPS includes the potentially dilutive impact of share-based awards outstanding at period end, consisting of the incremental shares assumed to be issued upon the exercise of stock options and the incremental shares assumed to be issued under performance share and restricted stock unit arrangements.

 

Earnings Per Share

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 27,

 

October 29,

 

October 27,

 

October 29,

 

(millions, except per share data)

 

2012

 

2011

 

2012

 

2011

 

Net earnings

 

$

637

 

$

555

 

$

2,038

 

$

1,948

 

Basic weighted average common shares outstanding

 

654.8

 

673.2

 

659.3

 

682.2

 

Dilutive impact of share-based awards(a)

 

7.4

 

5.1

 

6.5

 

4.7

 

Diluted weighted average common shares outstanding

 

662.2

 

678.3

 

665.8

 

686.9

 

Basic earnings per share

 

$

0.97

 

$

0.82

 

$

3.09

 

$

2.85

 

Diluted earnings per share

 

$

0.96

 

$

0.82

 

$

3.06

 

$

2.84

 

 

(a) Excludes 0.6 million and 6.0 million share-based awards for the three and nine months ended October 27, 2012, respectively, and 13.9 million and 15.6 million share-based awards for the three and nine months ended October 29, 2011, respectively, because their effects were antidilutive.

 

3. Credit Card Receivables Transaction

 

On October 22, 2012, we reached an agreement to sell our entire consumer credit card portfolio to TD Bank Group (TD) for cash consideration equal to the gross (par) value of the outstanding receivables at the time of closing. The sale, which is subject to regulatory approval and other customary closing conditions, is expected to close in the first half of 2013. Following close, TD will underwrite, fund and own Target Credit Card and Target Visa receivables in the U.S. TD will control risk management policies and regulatory compliance, and we will perform account servicing and primary marketing functions. We will earn a substantial portion of the profits generated by the Target Credit Card and Target Visa portfolios.

 

Historically, our credit card receivables were recorded at par value less an allowance for doubtful accounts. With this agreement, our receivables are now classified as held for sale and recorded at the lower of cost (par) or fair value. As a result of this change, we recorded a gain of $156 million in the third quarter of 2012. At closing, this transaction is expected to be accounted for as a sale, and the receivables will no longer be reported on our Consolidated Statements of Financial Position.

 

4. Fair Value Measurements

 

Fair value measurements are categorized into 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 available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).

 

6



 

Fair Value Measurements - Recurring Basis

 

 

 

Fair Value at
October 27, 2012

 

Fair Value at
January 28, 2012

 

Fair Value at
October 29, 2011

 

(millions)

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

 

$

800

 

$

 

$

 

$

194

 

$

 

$

 

$

66

 

$

 

$

 

Other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

 

11

 

 

 

20

 

 

 

 

 

Prepaid forward contracts

 

76

 

 

 

69

 

 

 

70

 

 

 

Other

 

 

 

 

 

 

 

 

6

 

 

Other noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

 

90

 

 

 

114

 

 

 

136

 

 

Company-owned life

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

insurance investments(b)

 

 

258

 

 

 

371

 

 

 

365

 

 

Total

 

$

876

 

$

359

 

$

 

$

263

 

$

505

 

$

 

$

136

 

$

507

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

$

 

$

4

 

$

 

$

 

$

7

 

$

 

$

 

$

 

$

 

Other noncurrent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

 

59

 

 

 

69

 

 

 

71

 

 

Total

 

$

 

$

63

 

$

 

$

 

$

76

 

$

 

$

 

$

71

 

$

 

 

(a) There was one interest rate swap designated as an accounting hedge in all periods presented. See Note 8 for additional information on interest rate swaps.

(b) Company-owned life insurance investments consist of equity index funds and fixed income assets. Amounts are presented net of nonrecourse loans that are secured by some of these policies. These loan amounts were $807 million at October 27, 2012, $669 million at January 28, 2012 and $665 million at October 29, 2011.

 

Position

 

Valuation Technique

Short-term investments

 

Carrying value approximates fair value because maturities are less than three months.

 

 

 

Prepaid forward contracts

 

Initially valued at transaction price. Subsequently valued by reference to the market price of Target common stock.

 

 

 

Interest rate swaps

 

Valuation models are calibrated to initial trade price. Subsequent 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.

 

 

 

Company-owned life insurance investments

 

Includes investments in separate accounts that are valued based on market rates credited by the insurer.

 

The following table presents the carrying amounts and estimated fair values of financial instruments not measured at fair value in the Consolidated Statements of Financial Position. The fair value of marketable securities is determined using available market prices at the reporting date and would be classified as Level 1. The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for similar types of financial instruments and would be classified as Level 2.

 

7



 

Financial Instruments Not Measured at Fair Value

 

October 27, 2012

 

January 28, 2012

 

October 29, 2011

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(millions)

 

Amount

 

Value

 

Amount

 

Value

 

Amount

 

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities(a)

 

$

75

 

$

75

 

$

35

 

$

35

 

$

78

 

$

78

 

Other noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities(a)

 

4

 

4

 

6

 

6

 

 

 

Total

 

$

79

 

$

79

 

$

41

 

$

41

 

$

78

 

$

78

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt(b)

 

$

16,647

 

$

19,796

 

$

15,680

 

$

18,142

 

$

17,228

 

$

19,793

 

Total

 

$

16,647

 

$

19,796

 

$

15,680

 

$

18,142

 

$

17,228

 

$

19,793

 

 

(a)  Held-to-maturity investments that are held to satisfy the regulatory requirements of Target Bank and Target National Bank.

(b) Represents the sum of nonrecourse debt collateralized by credit card receivables and unsecured debt and other borrowings, excluding unamortized swap valuation adjustments and capital lease obligations.

 

As of October 27, 2012, our consumer credit card receivables are recorded at the lower of cost (par) or fair value because they are classified as held for sale. We estimated the fair value of our consumer credit card portfolio to be approximately $6.0 billion using a cash flow-based, economic-profit model using Level 3 inputs, including the forecasted performance of the portfolio and a market-based discount rate. We used internal data to forecast expected payment patterns and write-offs, revenue, and operating expenses (credit EBIT yield) related to the credit card portfolio. Changes in macroeconomic conditions in the United States could affect the estimated fair value used in our lower of cost (par) or fair value assessment, which could cause gains or losses on our receivables held for sale. A one percentage point change in the forecasted credit EBIT yield would impact our fair value estimate by approximately $33 million. A one percentage point change in the forecasted discount rate would impact our fair value estimate by approximately $7 million. Refer to Note 3 for more information on our credit card receivables transaction. As of January 28, 2012 and October 29, 2011, we estimated that the fair value of our credit card receivables approximated par value.

 

The carrying amounts of accounts payable and certain accrued and other current liabilities approximate fair value due to their short-term nature.

 

5. Credit Card Receivables

 

Historically, our credit card receivables were recorded at par value less an allowance for doubtful accounts. Effective October 27, 2012, our consumer credit card receivables are recorded at the lower of cost (par) or fair value because they are classified as held for sale. Lower of cost (par) or fair value was determined on a segmented basis using the delinquency and credit-quality segmentation we have historically used to help determine the allowance for doubtful accounts.  Many nondelinquent balances are recorded at cost (par) because fair value exceeds cost.  Delinquent balances are generally recorded at fair value, which reflects our expectation of losses on these receivables.  Refer to Note 3 for more information on our credit card receivables transaction.

 

Credit card receivables are our only significant class of financing receivables. Substantially all past-due accounts accrue finance charges until they are written off. Accounts are written off when they become 180 days past due.

 

8



 

Age of Credit Card Receivables

 

October 27, 2012

 

January 28, 2012

 

October 29, 2011

 

 

 

 

 

Percent of

 

 

 

Percent of

 

 

 

Percent of

 

(dollars in millions)

 

Amount

 

Receivables

 

Amount

 

Receivables

 

Amount

 

Receivables

 

Current

 

$

5,355

 

91.7

%

 

$

5,791

 

91.1

%

 

$

5,568

 

90.6

%

 

1-29 days past due

 

238

 

4.1

 

 

260

 

4.1

 

 

266

 

4.3

 

 

30-59 days past due

 

82

 

1.4

 

 

97

 

1.5

 

 

109

 

1.8

 

 

60-89 days past due

 

50

 

0.9

 

 

62

 

1.0

 

 

64

 

1.1

 

 

90+ days past due

 

111

 

1.9

 

 

147

 

2.3

 

 

137

 

2.2

 

 

Credit card receivables, at par

 

 

5,836

 

100

%

 

 

6,357

 

100

%

 

 

6,144

 

100

%

 

Lower of cost or fair value adjustment

 

 

189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

 

 

 

 

 

 

430

 

 

 

 

 

431

 

 

 

 

Credit card receivables, net

 

$

5,647

 

 

 

 

$

5,927

 

 

 

 

$

5,713

 

 

 

 

 

Allowance for Doubtful Accounts

 

Historically, we recognized an allowance for doubtful accounts in an amount equal to the anticipated future write-offs of existing receivables and uncollectible finance charges and other credit-related fees. We estimated future write-offs on the entire credit card portfolio collectively based on historical experience of delinquencies, risk scores, aging trends and industry risk trends. We continue to recognize an allowance for doubtful accounts and bad debt expense within our Credit Card Segment, which allows us to evaluate the performance of the portfolio. The allowance for doubtful accounts is eliminated in consolidation to present the receivables at the lower of cost (par) or fair value.

 

Allowance for Doubtful Accounts

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 27,

 

October 29,

 

October 27,

 

October 29,

 

(millions)

 

2012

 

2011

 

2012

 

2011

 

Allowance at beginning of period

 

$

365

 

$

480

 

$

430

 

$

690

 

Bad debt expense

 

46

 

40

 

141

 

67

 

Write-offs(a)

 

(95

)

(122

)

(326

)

(448)

 

Recoveries(a)

 

29

 

33

 

100

 

122

 

Segment allowance at end of period

 

345

 

431

 

345

 

431

 

Elimination of segment allowance

 

345

 

 

345

 

 

Allowance at end of period

 

$

 

$

431

 

$

 

$

431

 

 

 

(aWrite-offs include the principal amount of losses (excluding accrued and unpaid finance charges), and recoveries include current period collections on previously written-off balances. These amounts combined represent net write-offs.

 

We monitor both the credit quality and the delinquency status of the credit card receivables portfolio. We consider accounts 30 or more days past due as delinquent, and we update delinquency status daily. We also monitor risk in the portfolio by assigning internally generated scores to each account and by obtaining current FICO scores, a nationally recognized credit scoring model, for a statistically representative sample of accounts each month. The credit-quality segmentation presented below is consistent with the approach we use to determine the allowance for doubtful accounts in our Credit Card Segment.

 

Receivables Credit Quality

 

October 27, 2012

 

January 28, 2012

 

October 29, 2011

 

 

 

 

 

Percent of

 

 

 

Percent of

 

 

 

Percent of

 

(dollars in millions)

 

Amount

 

Receivables

 

Amount

 

Receivables

 

Amount

 

Receivables

 

Nondelinquent accounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FICO score of 700 or above

 

$

2,728

 

46.7

%

 

$

2,882

 

45.4

%

 

$

2,775

 

45.2

%

 

FICO score of 600 to 699

 

2,334

 

40.0

 

 

2,463

 

38.7

 

 

2,404

 

39.1

 

 

FICO score below 600

 

531

 

9.1

 

 

706

 

11.1

 

 

655

 

10.7

 

 

Total nondelinquent accounts

 

5,593

 

95.8

 

 

6,051

 

95.2

 

 

5,834

 

95.0

 

 

Delinquent accounts (30+ days past due)

 

243

 

4.2

 

 

306

 

4.8

 

 

310

 

5.0

 

 

Credit card receivables, at par

 

$

5,836

 

100

%

 

$

6,357

 

100

%

 

$

6,144

 

100

%

 

Lower of cost or fair value adjustment

 

 

189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for doubtful accounts

 

 

 

 

 

 

 

430

 

 

 

 

 

431

 

 

 

 

Credit card receivables, net

 

$

5,647

 

 

 

 

$

5,927

 

 

 

 

$

5,713

 

 

 

 

 

9



 

Funding for Credit Card Receivables

 

As a method of providing funding for our credit card receivables, we sell, on an ongoing basis, all of our consumer credit card receivables to Target Receivables LLC (TR LLC), a wholly owned, bankruptcy remote subsidiary. TR LLC then transfers the receivables to the Target Credit Card Master Trust (the Trust), which from time to time will sell debt securities to third parties, either directly or through a related trust. These debt securities represent undivided interests in the Trust assets. TR LLC uses the proceeds from the sale of debt securities and its share of collections on the receivables to pay the purchase price of the receivables to the Corporation.

 

We consolidate the receivables within the Trust and any debt securities issued by the Trust, or a related trust, in our Consolidated Statements of Financial Position. The receivables transferred to the Trust are not available to general creditors of the Corporation.

 

Interests in our credit card receivables issued by the Trust are accounted for as secured borrowings. Interest and principal payments are satisfied provided the cash flows from the Trust assets are sufficient and are nonrecourse to the general assets of the Corporation. If the cash flows are less than the periodic interest, the available amount, if any, is paid with respect to interest. Interest shortfalls will be paid to the extent subsequent cash flows from the assets in the Trust are sufficient. Future principal payments will be made from the third party’s pro rata share of cash flows from the Trust assets.

 

Securitized Borrowings

 

October 27, 2012

 

January 28, 2012

 

October 29, 2011

 

(millions)

 

Debt Balance

 

Collateral

 

Debt Balance

 

Collateral

 

Debt Balance

 

Collateral

 

2008 Series

 

$

 

$

 

$

 

$

 

$

2,759

 

$

2,828

 

2006/2007 Series

 

1,500

 

1,899

 

1,000

 

1,266

 

1,000

 

1,266

 

Total

 

$

1,500

 

$

1,899

 

$

1,000

 

$

1,266

 

$

3,759

 

$

4,094

 

 

In March 2012, we amended the 2006/2007 Series Variable Funding Certificate to obtain additional funding of $500 million and to extend the maturity to 2013. Parties who hold the Variable Funding Certificate receive interest at a variable short-term market rate. We will repay this borrowing at par concurrent with the closing of the credit card receivables transaction described in Note 3.

 

6. Commitments and 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. 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 the currently identified claims or litigation will be material to our results of operations, cash flows or financial condition.

 

7. Notes Payable and Long-Term Debt

 

We obtain short-term financing from time to time under our commercial paper program, a form of notes payable.

 

Commercial Paper

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 27,

 

October 29,

 

October 27,

 

October 29,

 

(dollars in millions)

 

2012

 

2011

 

2012

 

2011

 

Maximum daily amount outstanding during the period

 

$

 

$

1,211

 

$

620

 

$

1,211

 

Average daily amount outstanding during the period

 

$

 

$

351

 

$

134

 

$

227

 

Amount outstanding at period-end

 

$

 

$

1,211

 

$

 

$

1,211

 

Weighted average interest rate

 

n/a

 

0.11%

 

0.16%

 

0.11%

 

 

In June 2012, we issued $1.5 billion of unsecured fixed rate debt at 4.0% that matures in July 2042. Proceeds from this issuance were used for general corporate purposes.

 

10



 

8. Derivative Financial Instruments

 

Historically our derivative instruments have primarily consisted of interest rate swaps used to mitigate interest rate risk. We have counterparty credit risk with large global financial institutions resulting from our derivative instruments. We monitor this concentration of counterparty credit risk on an ongoing basis. See Note 4 for a description of the fair value measurement of our derivative instruments and their classification on the Consolidated Statements of Financial Position.

 

As of October 27, 2012 and October 29, 2011, one swap was designated as a fair value hedge for accounting purposes, and no ineffectiveness was recognized during the three or nine months ended October 27, 2012 or October 29, 2011.

 

Periodic payments, valuation adjustments and amortization of gains or losses on our derivative contracts had the following effect on our Consolidated Statements of Operations:

 

Derivative Contracts - Effect on Results of Operations

 

Three Months Ended

 

Nine Months Ended

 

(millions)

 

 

 

October 27,

 

October 29,

 

October 27,

 

October 29,

 

Type of Contract

 

Classification of Income/(Expense)

 

2012

 

2011

 

2012

 

2011

 

Interest rate swaps

 

Net interest expense

 

$

12

 

$

10

 

$

32

 

$

32

 

 

The amount remaining on unamortized hedged debt valuation gains from terminated or de-designated interest rate swaps that will be amortized into earnings over the remaining lives of the underlying debt totaled $84 million, $111 million and $122 million, at October 27, 2012, January 28, 2012 and October 29, 2011, respectively.

 

9. Income Taxes

 

We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations for years before 2011 and, with few exceptions, are no longer subject to state and local or non-U.S. income tax examinations by tax authorities for years before 2003.

 

At October 27, 2012, foreign net operating loss carryforwards of approximately $470 million (resulting in a $125 million deferred tax asset) are available to offset future income. These carryforwards expire in 2032 and are expected to be fully utilized prior to expiration.

 

It is reasonably possible that the amount of our unrecognized tax benefits will significantly 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.

 

10. Share Repurchase

 

We repurchase shares primarily through open market transactions under a $5 billion share repurchase program authorized by our Board of Directors in January 2012. During the first quarter of 2012, we completed a $10 billion share repurchase program that was authorized by our Board of Directors in November 2007.

 

Share Repurchases

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 27,

 

October 29,

 

October 27,

 

October 29,

 

(millions, except per share data)

 

2012

 

2011

 

2012

 

2011

 

Total number of shares purchased

 

1.7

 

4.5

 

21.8

 

34.1

 

Average price paid per share

 

$

62.90

 

$

50.45

 

$

57.53

 

$

50.76

 

Total investment

 

$

104

 

$

226

 

$

1,255

 

$

1,733

 

 

11



 

Of the shares repurchased, a portion was delivered upon settlement of prepaid forward contracts as follows:

 

Settlement of Prepaid Forward Contracts(a)

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 27,

 

October 29,

 

October 27,

 

October 29,

 

(millions)

 

2012

 

2011

 

2012

 

2011

 

Total number of shares purchased

 

0.1

 

0.5

 

0.5

 

0.8

 

Total cash investment

 

$

4

 

$

26

 

$

25

 

$

40

 

Aggregate market value(b)

 

$

5

 

$

26

 

$

29

 

$

40

 

(a) These contracts are among the investment vehicles used to reduce our economic exposure related to our nonqualified deferred compensation plans. The details of our positions in prepaid forward contracts are provided in Note 11.

(b)  At their respective settlement dates.

 

11. Pension, Postretirement Health Care and Other Benefits

 

We have qualified defined benefit pension plans covering team members who meet age and service requirements, including in certain circumstances, date of hire. We also have unfunded nonqualified pension plans for team members with qualified plan compensation restrictions. Eligibility for, and the level of, these benefits varies depending on team members’ date of hire, length of service and/or team member compensation. Upon early retirement and prior to Medicare eligibility, team members also become eligible for certain health care benefits if they meet minimum age and service requirements and agree to contribute a portion of the cost. Effective January 1, 2009, our qualified defined benefit pension plan was closed to new participants, with limited exceptions.

 

Net Pension Benefits Expense

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 27,

 

October 29,

 

October 27,

 

October 29,

 

(millions)

 

2012

 

2011

 

2012

 

2011

 

Service cost benefits earned during the period

 

$

30

 

$

29

 

$

90

 

$

87

 

Interest cost on projected benefit obligation

 

35

 

34

 

105

 

103

 

Expected return on assets

 

(55

)

(51

)

(165

)

(153)

 

Amortization of losses

 

26

 

16

 

78

 

50

 

Amortization of prior service cost

 

 

 

 

(2)

 

Total

 

$

36

 

$

28

 

$

108

 

$

85

 

 

Net Postretirement Health Care Benefits Expense

 

Three Months Ended

 

Nine Months Ended

 

 

 

October 27,

 

October 29,

 

October 27,

 

October 29,

 

(millions)

 

2012

 

2011

 

2012

 

2011

 

Service cost benefits earned during the period

 

$

3

 

$

3

 

$

7

 

$

7

 

Interest cost on projected benefit obligation

 

1

 

1

 

2

 

3

 

Expected return on assets

 

 

 

 

 

Amortization of losses

 

 

1

 

2

 

3

 

Amortization of prior service cost

 

(3

)

(3

)

(7

)

(7)

 

Total

 

$

1

 

$

2

 

$

4

 

$

6

 

 

We are not required to make any contributions in 2012. However, depending on investment performance and plan funded status, we may elect to make a contribution.

 

Our unfunded, nonqualified deferred compensation plan is offered to approximately 3,000 current and retired team members 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 the same as the investment choices in our 401(k) plan, including Target common stock. We credit an additional 2 percent per year to the accounts of all active participants, excluding members of our management executive committee, in part to recognize the risks inherent to their participation in a plan of this nature. We also maintain a nonqualified, unfunded deferred compensation plan that was frozen during 1996, covering substantially fewer than 100 participants, most of whom are retired. In this plan, deferred compensation earns returns tied to market levels of interest rates plus an additional 6 percent return, with a minimum of 12 percent and a maximum of 20 percent, as determined by the plan’s terms.

 

12



 

We mitigate some of our risk of offering the nonqualified plans through investing in vehicles, including company-owned life insurance and prepaid forward contracts in our own common stock, that offset a substantial portion of our economic exposure to the returns of these plans. These investment vehicles 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.

 

The total change in fair value for contracts indexed to our own common stock recognized in earnings was pretax income of $3 million and $6 million for the three months ended October 27, 2012 and October 29, 2011, and pretax income of $18 million and $3 million for the nine months ended October 27, 2012 and October 29, 2011, respectively. For the nine months ended October 27, 2012 and October 29, 2011, we invested $19 million and $44 million, respectively, in such investment instruments, and this activity is included in the Consolidated Statements of Cash Flows within other investing activities. Adjusting our position in these investment vehicles may involve repurchasing shares of Target common stock when settling the forward contracts as described in Note 10. The settlement dates of these instruments are regularly renegotiated with the counterparty.

 

Prepaid Forward Contracts on Target Common Stock

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Contractual

 

Contractual

 

Total Cash

 

(millions, except per share data)

 

Shares

 

Price Paid

 

Fair Value

 

Investment

 

October 29, 2011

 

1.3

 

$

43.78

 

$

70

 

$

55

 

January 28, 2012

 

1.4

 

44.21

 

69

 

61

 

October 27, 2012

 

1.2

 

45.46

 

76

 

54

 

 

12. Segment Reporting

 

Our segment measure of profit is used by management to evaluate the return on our investment and to make operating decisions.

 

Business Segment Results

 

Three Months Ended October 27, 2012

 

Three Months Ended October 29, 2011

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

U.S.

 

Credit

 

 

 

 

 

U.S.

 

Credit

 

 

 

 

 

(millions)

 

Retail

 

Card

 

Canadian

 

Total

 

Retail

 

Card

 

Canadian

 

Total

 

Sales/Credit card revenues

 

$

16,601

 

$

328

 

$

 

$

16,929

 

$

16,054

 

$

348

 

$

 

$

16,402

 

Cost of sales

 

11,569

 

 

 

11,569

 

11,165

 

 

 

11,165

 

Bad debt expense(a)

 

 

46

 

 

46

 

 

40

 

 

40

 

Selling, general and administrative/ Operations and marketing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses(a), (b)

 

3,553

 

138

 

72

 

3,764

 

3,433

 

143

 

18

 

3,594

 

Depreciation and amortization

 

516

 

3

 

24

 

542

 

525

 

4

 

17

 

546

 

Segment EBIT (c)

 

963

 

141

 

(96

)

1,008

 

931

 

161

 

(35

)

1,057

 

Interest expense on nonrecourse debt collateralized by credit card receivables (d)

 

 

3

 

 

3

 

 

18

 

 

18

 

Segment profit/(loss)

 

$

963

 

$

138

 

$

(96

)

$

1,005

 

$

931

 

$

143

 

$

(35

)

$

1,039

 

Unallocated (income) and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other net interest expense (d)

 

 

 

 

 

 

 

189

 

 

 

 

 

 

 

182

 

Gain on receivables held for sale (e)

 

 

 

 

 

 

 

(156

)

 

 

 

 

 

 

 

 

Earnings before income taxes

 

 

 

 

 

 

 

$

972

 

 

 

 

 

 

 

$

857

 

 

13



 

Business Segment Results

 

Nine Months Ended October 27, 2012

 

Nine Months Ended October 29, 2011

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

U.S.

 

 

 

 

 

 

 

U.S.

 

Credit

 

 

 

 

 

U.S.

 

Credit

 

 

 

 

 

(millions)

 

Retail

 

Card

 

Canadian

 

Total

 

Retail

 

Card

 

Canadian

 

Total

 

Sales/Credit card revenues

 

$

49,589

 

$

986

 

$

 

$

50,575

 

$

47,529

 

$

1,048

 

$

 

$

48,577

 

Cost of sales

 

34,406

 

 

 

34,406

 

32,874

 

 

 

32,874

 

Bad debt expense(a)

 

 

141

 

 

141

 

 

67

 

 

67

 

Selling, general and administrative/ Operations and marketing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses(a), (b)

 

10,315

 

409

 

154

 

10,878

 

9,988

 

405

 

53