10-Q 1 tgt-20180804x10xq.htm 10-Q Document


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 August 4, 2018
 
Commission File Number 1-6049
 
 
targetbullseyea05a02a02a17.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
 
 
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, 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 August 22, 2018 were 526,350,987.





TARGET CORPORATION
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Operations
 
 
 
 
 
 
 
 
Three Months Ended
 
Six Months Ended
(millions, except per share data) (unaudited)
August 4,
2018

 
July 29,
2017
As Adjusted (a)

 
August 4,
2018

 
July 29,
2017
As Adjusted (a)

Sales
$
17,552

 
$
16,410

 
$
34,108

 
$
32,405

Other revenue
224

 
224

 
450

 
452

Total revenue
17,776

 
16,634

 
34,558

 
32,857

Cost of sales
12,239

 
11,419

 
23,865

 
22,618

Selling, general and administrative expenses
3,865

 
3,601

 
7,410

 
6,953

Depreciation and amortization (exclusive of depreciation included in cost of sales)
539

 
521

 
1,109

 
1,038

Operating income
1,133

 
1,093

 
2,174

 
2,248

Net interest expense
115

 
131

 
237

 
272

Net other (income) / expense
(4
)
 
(15
)
 
(12
)
 
(30
)
Earnings from continuing operations before income taxes
1,022

 
977

 
1,949

 
2,006

Provision for income taxes
223

 
307

 
433

 
661

Net earnings from continuing operations
799

 
670

 
1,516

 
1,345

Discontinued operations, net of tax

 
1

 
1

 
4

Net earnings
$
799

 
$
671

 
$
1,517

 
$
1,349

Basic earnings per share
 
 
 
 
 
 
 
Continuing operations
$
1.50

 
$
1.22

 
$
2.84

 
$
2.44

Discontinued operations

 

 

 
0.01

Net earnings per share
$
1.50

 
$
1.22

 
$
2.84

 
$
2.45

Diluted earnings per share
 
 
 
 
 
 
 
Continuing operations
$
1.49

 
$
1.21

 
$
2.81

 
$
2.43

Discontinued operations

 

 

 
0.01

Net earnings per share
$
1.49

 
$
1.22

 
$
2.82

 
$
2.44

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
531.7

 
549.3

 
534.3

 
550.8

Dilutive impact of share-based awards
4.6

 
2.6

 
4.3

 
2.8

Diluted
536.3

 
551.9

 
538.6

 
553.6

Antidilutive shares

 
5.2

 

 
3.6

Dividends declared per share
$
0.64

 
$
0.62

 
$
1.26

 
$
1.22

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

See accompanying Notes to Consolidated Financial Statements.

(a) 
Refer to Note 2 regarding the adoption of new accounting standards for revenue recognition, leases, and pensions, including impacts on previously reported results.


1




Consolidated Statements of Comprehensive Income
 
 
 
 
Three Months Ended
 
Six Months Ended
(millions) (unaudited)
August 4,
2018

 
July 29,
2017
As Adjusted (a)

 
August 4,
2018

 
July 29,
2017
As Adjusted (a)

Net earnings
$
799

 
$
671

 
$
1,517

 
$
1,349

Other comprehensive income
 

 
 

 
 

 
 

Pension, net of tax
16

 
7

 
29

 
14

Currency translation adjustment and cash flow hedges, net of tax
(2
)
 
3

 
(5
)
 
8

Other comprehensive income
14

 
10

 
24

 
22

Comprehensive income
$
813

 
$
681

 
$
1,541

 
$
1,371

 
See accompanying Notes to Consolidated Financial Statements.

(a) 
Refer to Note 2 regarding the adoption of new accounting standards for revenue recognition, leases, and pensions, including impacts on previously reported results.


2




Consolidated Statements of Financial Position
 

 
 

 
 

(millions) (unaudited)
August 4,
2018

 
February 3,
2018
As Adjusted (a)

 
July 29,
2017
As Adjusted (a)

Assets
 
 
 

 
 
Cash and cash equivalents
$
1,180

 
$
2,643

 
$
2,291

Inventory
9,112

 
8,597

 
8,192

Other current assets
1,211

 
1,300

 
1,114

Total current assets
11,503

 
12,540

 
11,597

Property and equipment
 

 
 

 
 

Land
6,074

 
6,095

 
6,089

Buildings and improvements
28,629

 
28,131

 
27,616

Fixtures and equipment
5,356

 
5,623

 
5,361

Computer hardware and software
2,575

 
2,645

 
2,518

Construction-in-progress
685

 
440

 
423

Accumulated depreciation
(18,147
)
 
(18,398
)
 
(17,603
)
Property and equipment, net
25,172

 
24,536

 
24,404

Operating lease assets
1,976

 
1,884

 
1,857

Other noncurrent assets
1,345

 
1,343

 
809

Total assets
$
39,996

 
$
40,303

 
$
38,667

Liabilities and shareholders’ investment
 

 
 

 
 

Accounts payable
$
9,116

 
$
8,677

 
$
7,584

Accrued and other current liabilities
3,878

 
4,094

 
3,627

Current portion of long-term debt and other borrowings
1,044

 
281

 
1,365

Total current liabilities
14,038

 
13,052

 
12,576

Long-term debt and other borrowings
10,108

 
11,117

 
10,706

Noncurrent operating lease liabilities
2,028

 
1,924

 
1,897

Deferred income taxes
828

 
693

 
757

Other noncurrent liabilities
1,827

 
1,866

 
1,676

Total noncurrent liabilities
14,791

 
15,600

 
15,036

Shareholders’ investment
 

 
 

 
 

Common stock
44

 
45

 
46

Additional paid-in capital
5,788

 
5,858

 
5,707

Retained earnings
6,058

 
6,495

 
5,918

Accumulated other comprehensive loss
(723
)
 
(747
)
 
(616
)
Total shareholders’ investment
11,167

 
11,651

 
11,055

Total liabilities and shareholders’ investment
$
39,996

 
$
40,303

 
$
38,667

Common Stock Authorized 6,000,000,000 shares, $0.0833 par value; 526,112,846, 541,681,670 and 546,183,291 shares issued and outstanding at August 4, 2018, February 3, 2018 and July 29, 2017, 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.

(a) 
Refer to Note 2 regarding the adoption of new accounting standards for revenue recognition, leases, and pensions, including impacts on previously reported results.


3




Consolidated Statements of Cash Flows
 
 
 
 
Six Months Ended
(millions) (unaudited)
August 4,
2018

 
July 29,
2017
As Adjusted (a)

Operating activities
 

 
 

Net earnings
$
1,517

 
$
1,349

Earnings from discontinued operations, net of tax
1

 
4

Net earnings from continuing operations
1,516

 
1,345

Adjustments to reconcile net earnings to cash provided by operations
 

 
 

Depreciation and amortization
1,234

 
1,166

Share-based compensation expense
71

 
43

Deferred income taxes
129

 
(90
)
Noncash losses / (gains) and other, net
99

 
94

Changes in operating accounts
 

 
 
Inventory
(515
)
 
52

Other assets
1

 
71

Accounts payable
342

 
332

Accrued and other liabilities
(154
)
 
(144
)
Cash provided by operating activities—continuing operations
2,723

 
2,869

Cash provided by operating activities—discontinued operations
1

 
57

Cash provided by operations
2,724

 
2,926

Investing activities
 

 
 

Expenditures for property and equipment
(1,856
)
 
(1,203
)
Proceeds from disposal of property and equipment
15

 
22

Other investments
3

 
(80
)
Cash required for investing activities
(1,838
)
 
(1,261
)
Financing activities
 

 
 

Reductions of long-term debt
(255
)
 
(617
)
Dividends paid
(665
)
 
(663
)
Repurchase of stock
(954
)
 
(615
)
Accelerated share repurchase pending final settlement
(525
)
 

Stock option exercises
50

 
9

Cash required for financing activities
(2,349
)
 
(1,886
)
Net decrease in cash and cash equivalents
(1,463
)
 
(221
)
Cash and cash equivalents at beginning of period
2,643

 
2,512

Cash and cash equivalents at end of period
$
1,180

 
$
2,291

 

See accompanying Notes to Consolidated Financial Statements.

(a) 
Refer to Note 2 regarding the adoption of new accounting standards for revenue recognition, leases, and pensions, including impacts on previously reported results.


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

January 28, 2017
As Adjusted (a)
556.2

 
$
46

 
$
5,661

 
$
5,846

 
$
(638
)
 
$
10,915

Net earnings

 

 

 
2,914

 

 
2,914

Other comprehensive income

 

 

 

 
8

 
8

Dividends declared

 

 

 
(1,356
)
 

 
(1,356
)
Repurchase of stock
(17.6
)
 
(1
)
 

 
(1,026
)
 

 
(1,027
)
Stock options and awards
3.1

 

 
197

 

 

 
197

Reclassification of tax effects to retained earnings

 

 

 
117

 
(117
)
 

February 3, 2018
As Adjusted (a)
541.7

 
$
45

 
$
5,858

 
$
6,495

 
$
(747
)
 
$
11,651

Net earnings

 

 

 
1,517

 

 
1,517

Other comprehensive income

 

 

 

 
24

 
24

Dividends declared

 

 

 
(674
)
 

 
(674
)
Repurchase of stock
(12.7
)
 
(1
)
 

 
(925
)
 

 
(926
)
Accelerated share repurchase pending final settlement
(4.6
)
 

 
(170
)
 
(355
)
 

 
(525
)
Stock options and awards
1.7

 

 
100

 

 

 
100

August 4, 2018
526.1

 
$
44

 
$
5,788

 
$
6,058

 
$
(723
)
 
$
11,167

 
See accompanying Notes to Consolidated Financial Statements.

(a) 
Refer to Note 2 regarding the adoption of new accounting standards for revenue recognition, leases, and pensions, including impacts on previously reported results.


5




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 Exchanged 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 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 2017 Form 10-K.

We use the same accounting policies in preparing quarterly and annual financial statements. Note 2 provides information about our adoption of new accounting standards for revenue recognition, leases, and pensions. 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. Virtually all of our revenues are generated in the United States. The vast majority of our long-lived assets are located within the United States.

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. Accounting Standards Adopted

Revenue Recognition

We adopted Accounting Standards Update (ASU) No. 2014-09—Revenue from Contracts with Customers (Topic 606), as of February 4, 2018, using the full retrospective approach. The new standard did not materially affect our consolidated net earnings, financial position, or cash flows. The new standard resulted in minor changes to the timing of recognition of revenues for certain promotional gift card programs.

For the three and six months ended July 29, 2017, we reclassified profit-sharing income under our credit card program agreement to Other Revenue from Selling, General and Administrative Expenses (SG&A). In addition, we reclassified certain advertising, rental, and other miscellaneous revenues, none of which was individually significant, from Sales and SG&A to Other Revenues.

Leases

We adopted ASU No. 2016-02—Leases (Topic 842), as of February 4, 2018, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements.
In addition, we elected the hindsight practical expedient to determine the lease term for existing leases. Our election of the hindsight practical expedient resulted in the shortening of lease terms for certain existing leases and the useful lives of corresponding leasehold improvements. In our application of hindsight, we evaluated the performance of the leased stores and the associated markets in relation to our overall real estate strategies, which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.

Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $1.3 billion and $1.4 billion, respectively, as of February 4, 2018. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was recorded as an adjustment to retained earnings. The standard did not materially impact our consolidated net earnings and had no impact on cash flows.


6




Pensions

In the first quarter of 2018, we adopted ASU No. 2017-07—Compensation – Retirement Benefits (Topic 715) using the full retrospective approach. The new standard requires employers to disaggregate and present separately the current service cost component from the other components of net benefit cost within the Consolidated Statement of Operations. For the three and six months ended July 29, 2017, we reclassified $(15) million and $(30) million, respectively, of non-service cost components of net benefit cost to Net Other (Income) / Expense from SG&A on our Consolidated Statements of Operations.

Effect of Accounting Standards Adoption on Consolidated Statement of Operations
 
 
 
 
 
 
Three Months
Ended
Effect of the Adoption of
 
Three Months
Ended
 
ASC
Topic 606
(Revenue
Recognition)
 
ASC
Topic 842
(Leases)
 
ASU
2017-07
(Pension)
 
(millions, except per share data) (unaudited)
July 29,
2017
As Previously Reported
 
 
 
July 29,
2017
As Adjusted
Sales
$
16,429

$
(19
)
(a) 
$

 
$

 
$
16,410

Other revenue

224

(a) 

 

 
224

Total revenue
16,429

205

 

 

 
16,634

Cost of sales
11,419


 

 

 
11,419

Selling, general and administrative expenses
3,382

205

(a) 
(2
)
 
15

(c) 
3,601

Depreciation and amortization (exclusive of depreciation included in cost of sales)
514


 
8

(b) 

 
521

Operating income
1,114


 
(6
)
 
(15
)
 
1,093

Net interest expense
135


 
(3
)
(b) 

 
131

Net other (income) / expense


 

 
(15
)
(c) 
(15
)
Earnings from continuing operations before income taxes
979


 
(3
)
 

 
977

Provision for income taxes
308


 
(1
)
 

 
307

Net earnings from continuing operations
671


 
(2
)
 

 
670

Discontinued operations, net of tax
1


 

 

 
1

Net earnings
$
672

$

 
$
(2
)
 
$

 
$
671

Basic earnings per share
 
 
 
 
 
 
 
 
Continuing operations
$
1.22

 
 
 
 
 
 
$
1.22

Discontinued operations

 
 
 
 
 
 

Net earnings per share
$
1.22

 
 
 
 
 
 
$
1.22

Diluted earnings per share
 
 
 
 
 
 
 
 
Continuing operations
$
1.22

 
 
 
 
 
 
$
1.21

Discontinued operations

 
 
 
 
 
 

Net earnings per share
$
1.22

 
 
 
 
 
 
$
1.22

Note: Per share amounts may not foot due to rounding. The sum of "As Previously Reported" amounts and effects of the adoption of the new standards may not equal "As Adjusted" amounts due to rounding. Footnote explanations are provided on page 8.


7




Effect of Accounting Standards Adoption on Consolidated Statement of Operations
 
 
 
 
 
 
Six Months
Ended
Effect of the Adoption of
 
Six Months
Ended
 
ASC
Topic 606
(Revenue
Recognition)
 
ASC
Topic 842
(Leases)
 
ASU
2017-07
(Pension)
 
(millions, except per share data) (unaudited)
July 29,
2017
As Previously Reported
 
 
 
July 29,
2017
As Adjusted
Sales
$
32,446

$
(41
)
(a) 
$

 
$

 
$
32,405

Other revenue

452

(a) 

 

 
452

Total revenue
32,446

411

 

 

 
32,857

Cost of sales
22,618


 

 

 
22,618

Selling, general and administrative expenses
6,515

411

(a) 
(2
)
 
30

(c) 
6,953

Depreciation and amortization (exclusive of depreciation included in cost of sales)
1,022


 
16

(b) 

 
1,038

Operating income
2,291


 
(14
)
 
(30
)
 
2,248

Net interest expense
278


 
(7
)
(b) 

 
272

Net other (income) / expense


 

 
(30
)
(c) 
(30
)
Earnings from continuing operations before income taxes
2,013


 
(7
)
 

 
2,006

Provision for income taxes
664


 
(3
)
 

 
661

Net earnings from continuing operations
1,349


 
(4
)
 

 
1,345

Discontinued operations, net of tax
4


 

 

 
4

Net earnings
$
1,353

$

 
$
(4
)
 
$

 
$
1,349

Basic earnings per share
 
 
 
 
 
 
 
 
Continuing operations
$
2.45

 
 
 
 
 
 
$
2.44

Discontinued operations
0.01

 
 
 
 
 
 
0.01

Net earnings per share
$
2.45

 
 
 
 
 
 
$
2.45

Diluted earnings per share
 
 
 
 
 
 
 
 
Continuing operations
$
2.44

 
 
 
 
 
 
$
2.43

Discontinued operations
0.01

 
 
 
 
 
 
0.01

Net earnings per share
$
2.44

 
 
 
 
 
 
$
2.44

Note: Per share amounts may not foot due to rounding. The sum of "As Previously Reported" amounts and effects of the adoption of the new standards may not equal "As Adjusted" amounts due to rounding.
(a) 
For the three and six months ended July 29, 2017, we reclassified $172 million and $342 million, respectively, of profit-sharing income under our credit card program agreement to Other Revenue from SG&A. In addition, we reclassified certain advertising, rental, and other miscellaneous revenues, none of which was individually significant, from Sales and SG&A to Other Revenues.
(b) 
Relates to lease-term changes under the hindsight practical expedient.
(c) 
Relates to non-service cost components reclassified to Net Other (Income) / Expense from SG&A.









8




Effect of Accounting Standards Adoption on Consolidated Statement of Financial Position
 
 
 
 
 
 
 
 
 
Effect of the Adoption of
 
 
(millions) (unaudited)
February 3,
2018
As Previously Reported
 
ASC
Topic 606
(Revenue
Recognition)
 
ASC
Topic 842
(Leases)
 
February 3,
2018
As Adjusted
Assets
 
 
 

 
 
 
 
Cash and cash equivalents
$
2,643

 
$

 
$

 
$
2,643

Inventory
8,657

 
(60
)
(a) 

 
8,597

Other current assets
1,264

 
60

(a) 
(24
)
(b) 
1,300

Total current assets
12,564

 

 
(24
)
 
12,540

Property and equipment
 

 
 
 
 
 
 

Land
6,095

 

 

 
6,095

Buildings and improvements
28,396

 

 
(265
)
(c) 
28,131

Fixtures and equipment
5,623

 

 

 
5,623

Computer hardware and software
2,645

 

 

 
2,645

Construction-in-progress
440

 

 

 
440

Accumulated depreciation
(18,181
)
 

 
(217
)
(c) 
(18,398
)
Property and equipment, net
25,018

 

 
(482
)
 
24,536

Operating lease assets

 

 
1,884

(d) 
1,884

Other noncurrent assets
1,417

 

 
(74
)
(e) 
1,343

Total assets
$
38,999

 
$

 
$
1,304

 
$
40,303

Liabilities and shareholders’ investment
 

 
 
 
 
 
 

Accounts payable
$
8,677

 
$

 
$

 
$
8,677

Accrued and other current liabilities
4,254

 
(14
)
(k) 
(146
)
(f) 
4,094

Current portion of long-term debt and other borrowings
270

 

 
11

(g) 
281

Total current liabilities
13,201

 
(14
)
 
(135
)
 
13,052

Long-term debt and other borrowings
11,317

 

 
(200
)
(g) 
11,117

Noncurrent operating lease liabilities

 

 
1,924

(h) 
1,924

Deferred income taxes
713

 
4

 
(24
)
 
693

Other noncurrent liabilities
2,059

 

 
(192
)
(i) 
1,866

Total noncurrent liabilities
14,089

 
4

 
1,508

 
15,600

Shareholders’ investment
 

 
 
 
 
 
 

Common stock
45

 

 

 
45

Additional paid-in capital
5,858

 

 

 
5,858

Retained earnings
6,553

 
10

(k) 
(69
)
(j) 
6,495

Accumulated other comprehensive loss
(747
)
 

 

 
(747
)
Total shareholders’ investment
11,709

 
10

 
(69
)
 
11,651

Total liabilities and shareholders’ investment
$
38,999

 
$

 
$
1,304

 
$
40,303

Note: The sum of "As Previously Reported" amounts and effects of the adoption of the new standards may not equal "As Adjusted" amounts due to rounding. Footnote explanations are provided on page 10.

9




Effect of Accounting Standards Adoption on Consolidated Statement of Financial Position
 
 
 
 
 
 
 
 
 
Effect of the Adoption of
 
 
(millions) (unaudited)
July 29,
2017
As Previously Reported
 
ASC
Topic 606
(Revenue
Recognition)
 
ASC
Topic 842
(Leases)
 
July 29,
 2017
As Adjusted
Assets
 
 
 

 
 
 
 
Cash and cash equivalents
$
2,291

 
$

 
$

 
$
2,291

Inventory
8,257

 
(65
)
(a) 

 
8,192

Other current assets
1,072

 
65

(a) 
(23
)
(b) 
1,114

Total current assets
11,620

 

 
(23
)
 
11,597

Property and equipment
 

 
 
 
 
 
 

Land
6,089

 

 

 
6,089

Buildings and improvements
28,041

 

 
(425
)
(c) 
27,616

Fixtures and equipment
5,361

 

 

 
5,361

Computer hardware and software
2,518

 

 

 
2,518

Construction-in-progress
423

 

 

 
423

Accumulated depreciation
(17,571
)
 

 
(32
)
(c) 
(17,603
)
Property and equipment, net
24,861

 

 
(457
)
 
24,404

Operating lease assets

 

 
1,857

(d) 
1,857

Other noncurrent assets
885

 

 
(76
)
(e) 
809

Total assets
$
37,366

 
$

 
$
1,301

 
$
38,667

Liabilities and shareholders’ investment
 

 
 
 
 
 
 

Accounts payable
$
7,584

 
$

 
$

 
$
7,584

Accrued and other current liabilities
3,790

 
(14
)
(k) 
(150
)
(f) 
3,627

Current portion of long-term debt and other borrowings
1,355

 

 
11

(g) 
1,365

Total current liabilities
12,729

 
(14
)
 
(139
)
 
12,576

Long-term debt and other borrowings
10,892

 

 
(185
)
(g) 
10,706

Noncurrent operating lease liabilities

 

 
1,897

(h) 
1,897

Deferred income taxes
784

 
6

 
(33
)
 
757

Other noncurrent liabilities
1,863

 

 
(188
)
(i) 
1,676

Total noncurrent liabilities
13,539

 
6

 
1,491

 
15,036

Shareholders’ investment
 

 
 
 
 
 
 

Common stock
46

 

 

 
46

Additional paid-in capital
5,707

 

 

 
5,707

Retained earnings
5,961

 
8

(k) 
(51
)
(j) 
5,918

Accumulated other comprehensive loss
(616
)
 

 

 
(616
)
Total shareholders’ investment
11,098

 
8

 
(51
)
 
11,055

Total liabilities and shareholders’ investment
$
37,366

 
$

 
$
1,301

 
$
38,667

Note: The sum of "As Previously Reported" amounts and effects of the adoption of the new standards may not equal "As Adjusted" amounts due to rounding.

(a) 
Represents estimated merchandise returns, which were reclassified from Inventory to Other Current Assets.
(b) 
Represents prepaid rent reclassified to Operating Lease Assets.
(c) 
For both periods presented, represents impact of changes in finance lease terms and related leasehold improvements (net of accumulated depreciation) under the hindsight practical expedient and derecognition of approximately $135 million of non-Target owned properties that were consolidated under previously existing build-to-suit accounting rules.
(d) 
Represents capitalization of operating lease assets and reclassification of leasehold acquisition costs, straight-line rent accrual, and tenant incentives.
(e) 
Represents reclassification of leasehold acquisition costs to Operating Lease Assets.

10




(f) 
Represents reclassification of straight-line rent accrual to Operating Lease Assets, partially offset by recognition of the current portion of operating lease liabilities.
(g) 
Represents the impact of changes in financing lease terms for certain leases due to the election of the hindsight practical expedient.
(h) 
Represents recognition of operating lease liabilities.
(i) 
For both periods presented, represents derecognition of approximately $135 million of liabilities related to non-Target owned properties that were consolidated under previously existing build-to-suit accounting rules and reclassification of tenant incentives to Operating Lease Assets.
(j) 
Represents the retained earnings impact of lease-term changes due to the use of hindsight, primarily from the shortening of lease terms for certain existing leases and useful lives of corresponding leasehold improvements.
(k) 
Primarily represents the impact of a change in timing of revenue recognition for certain promotional gift card programs.

3. 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).

During the first quarter of 2018, we reclassified certain income streams, including credit card profit sharing income, to Other Revenue on our Consolidated Statements of Operations and conformed prior periods. Note 2 provides additional information.

Revenues
Three Months Ended
 
Six Months Ended
(millions)
August 4,
2018

 
July 29,
2017

 
August 4,
2018

 
July 29,
2017

Apparel and accessories
$
3,843

 
$
3,646

 
$
7,347

 
$
7,059

Beauty and household essentials
4,411

 
4,107

 
8,638

 
8,157

Food and beverage
3,372

 
3,213

 
6,959

 
6,666

Hardlines
2,501

 
2,311

 
4,814

 
4,621

Home furnishings and décor
3,402

 
3,111

 
6,304

 
5,858

Other
23

 
22

 
46

 
44

Sales
17,552

 
16,410

 
34,108

 
32,405

 
 
 
 
 
 
 
 
Credit card profit sharing
167

 
172

 
333

 
342

Other
57

 
52

 
117

 
110

Other revenue
224

 
224

 
450

 
452

 
 
 
 
 
 
 
 
Total revenue
$
17,776

 
$
16,634

 
$
34,558

 
$
32,857


Merchandise sales – We record almost all retail store revenues at the point of sale. Digital channel originated sales may include shipping revenue and are recorded upon delivery to the guest or upon guest pickup in store. Total revenues do not include sales tax because we are a pass-through conduit for collecting and remitting sales taxes. Generally, guests may return national brand merchandise within 90 days of purchase and owned and exclusive brands within one year of purchase. Sales are recognized net of expected returns, which we estimate using historical return patterns and our expectation of future returns. As of August 4, 2018, February 3, 2018, and July 29, 2017, the accrual for estimated returns was $114 million, $110 million, and $121 million, respectively. We have not historically had material adjustments to our returns estimates.
Under certain vendor arrangements the purchase and sale of inventory is virtually simultaneous. We record revenue and related costs gross for the vast majority of these arrangements, with approximately 5 percent of consolidated sales made under such arrangements. We concluded that we are the principal in these transactions for a number of reasons, most notably because we 1) control the overall economics of the transactions, including setting the sales price and realizing the majority of cash flows from the sale, 2) control the relationship with the customer, and 3) are responsible for fulfilling the promise to provide goods to the customer.

11




Revenue from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance. Our gift cards do not expire. Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as "breakage." Estimated breakage revenue is recognized over time in proportion to actual gift card redemptions.
(millions)
February 3,
2018

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

 
Revenue Recognized From Beginning Liability

 
August 4,
2018

Gift card liability
$
709

 
$
298

 
$
(403
)
 
$
604

(a) 
Net of estimated breakage.

Guests receive a 5 percent discount on virtually all purchases and receive free shipping at Target.com when they use their Target-branded credit or debit card (REDcards). The 5 percent discount is included as a sales reduction in our Consolidated Statements of Operations and was $227 million and $441 million for the three and six months ended August 4, 2018, respectively, and $214 million and $424 million for the three and six months ended July 29, 2017, respectively.
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.

4. 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)
Pricing Category
August 4,
2018

 
February 3,
2018

 
July 29,
2017

Assets
 
 

 
 

 
 

Cash and Cash Equivalents
 
 

 
 

 
 

Short-term investments
Level 1
$
353

 
$
1,906

 
$
1,617

Other Current Assets
 
 

 
 

 
 

Prepaid forward contracts
Level 1
22

 
23

 
37

Other Noncurrent Assets
 
 

 
 

 
 

Interest rate swaps
Level 2

 

 
4

Liabilities
 
 

 
 

 
 

Other current liabilities
 
 

 
 

 
 

Interest rate swaps
Level 2
7

 

 

Other Noncurrent Liabilities
 
 

 
 

 
 

Interest rate swaps
Level 2
2

 
6

 

 
Significant Financial Instruments not Measured at Fair Value (a)

(millions)
August 4, 2018
 
February 3, 2018
 
July 29, 2017
Carrying
Amount

Fair
Value

 
Carrying
Amount

Fair
Value

 
Carrying
Amount

Fair
Value

Debt (b)
$
10,243

$
10,682

 
$
10,440

$
11,155

 
$
11,122

$
12,143

(a) 
The carrying amounts of certain other current assets, accounts payable, and certain accrued and other current liabilities approximate fair value due to their short-term nature.
(b) 
The carrying amount and estimated fair value of debt exclude unamortized swap valuation adjustments and lease liabilities.


12




5. Property and Equipment

We review long-lived assets for impairment when events or changes in circumstances—such as a decision to relocate or close a store or distribution center, discontinue projects, or make significant software changes—indicate that the asset’s carrying value may not be recoverable. We recognized impairment losses of $78 million and $85 million during the three and six months ended August 4, 2018, respectively, primarily resulting from planned store closures. We recognized impairment losses of $87 million and $88 million during the three and six months ended July 29, 2017, respectively, primarily resulting from planned or completed store closures and supply chain changes. The impairments are recorded in selling, general and administrative expense on the Consolidated Statements of Operations.

6. 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. For the six months ended August 4, 2018, the maximum amount outstanding was $658 million and the average daily amount outstanding was $63 million at a weighted average annual interest rate of 1.8 percent. As of August 4, 2018, no balances were outstanding. No balances were outstanding at any time during the six months ended July 29, 2017.

7. Derivative Financial Instruments
 
Our derivative instruments primarily consist of interest rate swaps, which we use to mitigate interest rate risk. As a result of our use of derivative instruments, we have counterparty credit exposure to large global financial institutions. We monitor this concentration of counterparty credit risk on an ongoing basis. Note 4 provides the fair value and classification of these instruments.
 
In March 2018, we entered into an interest rate swap with a notional amount of $250 million, under which we pay a variable rate and receive a fixed rate. We designated this swap as a fair value hedge. With the addition of this swap, as of August 4, 2018, three interest rate swaps with notional amounts totaling $1,250 million were designated as fair value hedges. As of July 29, 2017, two interest rate swaps with notional amounts totaling $1,000 million were designated as fair value hedges. No ineffectiveness was recognized during the three and six months ended August 4, 2018 or July 29, 2017.

We recorded expense of $1 million during both the three and six months ended August 4, 2018, and income of $2 million and $6 million during the three and six months ended July 29, 2017, respectively, within Net Interest Expense on our Consolidated Statements of Operations related to periodic payments, valuation adjustments, and amortization of gains or losses on our interest rate swaps.
  
8. Leases

We lease certain retail stores, warehouses, distribution centers, office space, land, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 50 years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Certain of our lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We rent or sublease certain real estate to third parties. Our sublease portfolio consists mainly of operating leases with CVS Pharmacy Inc. for space within our stores.

13




Leases
(millions)
Classification
August 4,
2018

February 3,
2018

July 29,
2017

Assets
 
 
 
 
Operating lease assets
Operating Lease Assets
$
1,976

$
1,884

$
1,857

Finance lease assets
Buildings and Improvements, net of Accumulated Depreciation (a)
785

836

827

Total leased assets
 
$
2,761

$
2,720

$
2,684

Liabilities
 
 
 
 
Current
 
 
 
 
Operating
Accrued and Other Current Liabilities
$
155

$
147

$
134

Finance
Current Portion of Long-term Debt and Other Borrowings
50

80

78

Noncurrent
 
 
 
 
Operating
Noncurrent Operating Lease Liabilities
2,028

1,924

1,897

Finance
Long-term Debt and Other Borrowings
868

885

866

Total lease liabilities
 
$
3,101

$
3,036

$
2,975

(a) 
Finance lease assets are recorded net of accumulated amortization of $336 million, $317 million, and $284 million as of August 4, 2018, February 3, 2018, and July 29, 2017, respectively.

Lease Cost
 
Three Months Ended
 
Six Months Ended
(millions)
Classification
August 4,
2018

July 29,
2017

 
August 4,
2018

July 29,
2017

Operating lease cost (a)
SG&A Expenses
$
61

$
54

 
$
121

$
108

Finance lease cost
 
 
 
 
 
 
Amortization of leased assets
Depreciation and Amortization (b)
17

16

 
33

31

Interest on lease liabilities
Net Interest Expense
10

10

 
21

20

Sublease income (c)
Other Revenue
(3
)
(2
)
 
(5
)
(4
)
Net lease cost
 
$
85

$
78

 
$
170

$
155

(a) 
Includes short-term leases and variable lease costs, which are immaterial.
(b) 
Supply chain-related amounts are included in Cost of Sales.
(c) 
Sublease income excludes rental income from owned properties of $12 million and $23 million for the three and six months ended August 4, 2018, respectively, and $12 million and $23 million for the three and six months ended July 29, 2017, respectively, which is included in Other Revenue.


14




Maturity of Lease Liabilities
(millions)
Operating 
Leases (a)

Finance
Leases (b)

Total

2018
$
117

$
45

$
162

2019
237

90

327

2020
227

87

314

2021
219

87

306

2022
214

88

302

After 2022
1,936

930

2,866

Total lease payments
$
2,950

$
1,327

$
4,277

Less: Interest
767

409

 

Present value of lease liabilities
$
2,183

$
918

 

Note: For leases commencing prior to 2018, minimum lease payments excludes payments to landlords for real estate taxes and common area maintenance.
(a) 
Operating lease payments include $795 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $311 million of legally binding minimum lease payments for leases signed but not yet commenced.
(b) 
Finance lease payments include $122 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $203 million of legally binding minimum lease payments for leases signed but not yet commenced.

Lease Term and Discount Rate
August 4,
2018

February 3,
2018

July 29,
2017

Weighted-average remaining lease term (years)
 
 
 
Operating leases
14.7

15.2

15.7

Finance leases
15.6

15.4

15.2

Weighted-average discount rate
 
 
 
Operating leases
3.90
%
3.88
%
3.90
%
Finance leases
4.71
%
4.64
%
4.61
%

Other Information
Six Months Ended
(millions)
August 4,
2018

July 29,
2017

Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
$
105

$
96

Operating cash flows from finance leases
22

20

Financing cash flows from finance leases
55

19

Leased assets obtained in exchange for new finance lease liabilities
15

97

Leased assets obtained in exchange for new operating lease liabilities
169

114


9. Income Taxes

 
Three Months Ended
 
Six Months Ended
(dollars in millions)
August 4,
2018

 
July 29,
2017
As Adjusted

 
August 4,
2018

 
July 29,
2017
As Adjusted

Income tax expense
$
223

 
$
307

 
$
433

 
$
661

Effective tax rate
21.8
%
 
31.4
%
 
22.2
%
 
33.0
%

For the three and six months ended August 4, 2018, our income tax rate decreased by 9.6 percentage points and 10.8 percentage points, respectively, compared with the three and six months ended July 29, 2017, primarily due to the lower federal corporate

15




tax rate enacted by the Tax Cuts and Jobs Act (the Tax Act), partially offset by certain other provisions, none of which was individually significant.

In 2017, we recorded provisional amounts for certain income tax effects of the Tax Act for which the accounting under ASC Topic 740 was incomplete but a reasonable estimate could be determined. During the three and six months ended August 4, 2018, we made no adjustments to previously-recorded provisional amounts related to the Tax Act. Additional work is necessary for a more detailed analysis of (1) certain deferred tax assets and liabilities, including 2017 accelerated depreciation deductions, and (2) historical foreign earnings and outside book/tax basis differences. We do not expect subsequent adjustments to be material, but any such adjustments related to these amounts will be recorded to tax expense in the quarter of 2018 in which we complete the analysis.

Beginning with the first quarter of 2018, we are subject to a new tax on global intangible low-taxed income that is imposed on foreign earnings. We have made an accounting election to record this tax as a period cost and thus have not adjusted any of the deferred tax assets or liabilities of our foreign subsidiaries for the new tax. Impacts of this new tax were immaterial and are included in our provision for income taxes for the three and six months ended August 4, 2018.

10. Share Repurchase

 
Six Months Ended
(millions, except per share data)
August 4,
2018

 
July 29,
2017

Total number of shares purchased
12.7

 
10.6

Average price paid per share
$
72.64

 
$
56.76

Total investment
$
925

 
$
601

Note: Activity related to the July 2018 accelerated share repurchase (ASR) described below is omitted because the transaction was not fully settled as of August 4, 2018.

During July 2018, we entered into an ASR to repurchase $400 to $525 million of our common stock under the existing $5 billion share repurchase program. Under the agreement, we paid $525 million and received an initial delivery of 4.6 million shares, which were retired, resulting in a $355 million reduction to Retained Earnings. As of August 4, 2018, $170 million is included in the Consolidated Statement of Financial Position as a reduction to Additional Paid-in Capital.

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

Net Pension Benefits Expense
Three Months Ended
 
Six Months Ended
(millions)
August 4,
2018

 
July 29,
2017

 
August 4,
2018

 
July 29,
2017

Service cost
$
25

 
$
21

 
$
49

 
$
42

Interest cost
37

 
34

 
73

 
69

Expected return on assets
(62
)
 
(61
)
 
(123
)
 
(123
)
Amortization of losses
20

 
15

 
41

 
30

Amortization of prior service cost
(3
)
 
(3
)
 
(6
)
 
(5
)
Settlements
3

 

 
3

 

Total
$
20

 
$
6

 
$
37

 
$
13

 

16




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

 
Currency
Translation
Adjustment

 
Pension

 
Total

February 3, 2018
$
(14
)
 
$
(13
)
 
$
(720
)
 
$
(747
)
Other comprehensive income before reclassifications, net of tax

 
(5
)
 

 
(5
)
Amounts reclassified from AOCI, net of tax

 

 
29

 
29

August 4, 2018
$
(14
)
 
$
(18
)
 
$
(691
)
 
$
(723
)



17




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Executive Summary
 
Second quarter 2018 includes the following notable items:

GAAP earnings per share from continuing operations were $1.49.
Adjusted earnings per share from continuing operations were $1.47.
Sales increased 7.0 percent.
Comparable sales increased 6.5 percent, driven by a 6.4 percent increase in traffic.
Comparable store sales grew 4.9 percent.
Digital channel sales increased 41 percent.

As described in Note 2 to the Consolidated Financial Statements, certain prior-year amounts have been adjusted to reflect the impact of adopting Accounting Standards Update (ASU) No. 2014-09—Revenue from Contracts with Customers (Topic 606), ASU No. 2016-02—Leases (Topic 842), and ASU No. 2017-07—Compensation – Retirement Benefits (Topic 715) and adjusted throughout this document to conform to the current year presentation.

Sales were $17,552 million for the three months ended August 4, 2018, an increase of $1,142 million or 7.0 percent from the same period in the prior year. Operating cash flow provided by continuing operations was $2,723 million for the six months ended August 4, 2018, a decrease of $146 million, or 5.1 percent, from $2,869 million for the six months ended July 29, 2017. Refer to the Operating Cash Flows discussion within the Liquidity and Capital Resources section of MD&A on page 26 for additional information.
 
Earnings Per Share from Continuing Operations
Three Months Ended
 
 

 
Six Months Ended
 
 

August 4,
2018

 
July 29,
2017
As Adjusted (a)

 
Change

 
August 4,
2018

 
July 29,
2017
As Adjusted (a)

 
Change

GAAP diluted earnings per share
$
1.49