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UNITED STATES SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 2019
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-6049
TARGET CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota
(State or other jurisdiction of incorporation or organization)
1000 Nicollet Mall, Minneapolis, Minnesota
(Address of principal executive offices)
41-0215170
(I.R.S. Employer Identification No.)
55403
(Zip Code)
Registrant’s telephone number, including area code: 612/304-6073
Former name, former address and former fiscal year, if changed since last report: N/A
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
|
| | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common stock, par value $0.0833 per share | | TGT | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).
|
| | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ |
Smaller reporting company | ☐ | Emerging growth company | ☐ |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of registrant’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $0.0833, outstanding at November 22, 2019 were 506,737,121.
TARGET CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
|
| | | | | | | | | | | | | | | |
Consolidated Statements of Operations | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(millions, except per share data) (unaudited) | November 2, 2019 |
| | November 3, 2018 |
| | November 2, 2019 |
| | November 3, 2018 |
|
Sales | $ | 18,414 |
| | $ | 17,590 |
| | $ | 53,997 |
| | $ | 51,699 |
|
Other revenue | 251 |
| | 231 |
| | 716 |
| | 680 |
|
Total revenue | 18,665 |
| | 17,821 |
| | 54,713 |
| | 52,379 |
|
Cost of sales | 12,935 |
| | 12,535 |
| | 37,808 |
| | 36,400 |
|
Selling, general and administrative expenses | 4,153 |
| | 3,937 |
| | 11,728 |
| | 11,347 |
|
Depreciation and amortization (exclusive of depreciation included in cost of sales) | 575 |
| | 530 |
| | 1,717 |
| | 1,639 |
|
Operating income | 1,002 |
| | 819 |
| | 3,460 |
| | 2,993 |
|
Net interest expense | 113 |
| | 115 |
| | 359 |
| | 352 |
|
Net other (income) / expense | (12 | ) | | (9 | ) | | (38 | ) | | (21 | ) |
Earnings from continuing operations before income taxes | 901 |
| | 713 |
| | 3,139 |
| | 2,662 |
|
Provision for income taxes | 195 |
| | 97 |
| | 703 |
| | 530 |
|
Net earnings from continuing operations | 706 |
| | 616 |
| | 2,436 |
| | 2,132 |
|
Discontinued operations, net of tax | 8 |
| | 6 |
| | 11 |
| | 7 |
|
Net earnings | $ | 714 |
| | $ | 622 |
| | $ | 2,447 |
| | $ | 2,139 |
|
Basic earnings per share | | | | | | | |
Continuing operations | $ | 1.38 |
| | $ | 1.17 |
| | $ | 4.75 |
| | $ | 4.01 |
|
Discontinued operations | 0.02 |
| | 0.01 |
| | 0.02 |
| | 0.01 |
|
Net earnings per share | $ | 1.40 |
| | $ | 1.18 |
| | $ | 4.77 |
| | $ | 4.02 |
|
Diluted earnings per share | | | | | | | |
Continuing operations | $ | 1.37 |
| | $ | 1.16 |
| | $ | 4.71 |
| | $ | 3.98 |
|
Discontinued operations | 0.02 |
| | 0.01 |
| | 0.02 |
| | 0.01 |
|
Net earnings per share | $ | 1.39 |
| | $ | 1.17 |
| | $ | 4.74 |
| | $ | 3.99 |
|
Weighted average common shares outstanding | | | | | | | |
Basic | 509.7 |
| | 525.9 |
| | 512.5 |
| | 531.5 |
|
Diluted | 514.8 |
| | 531.2 |
| | 516.8 |
| | 536.2 |
|
Antidilutive shares | — |
| | — |
| | — |
| | — |
|
Note: Per share amounts may not foot due to rounding.
See accompanying Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | |
Consolidated Statements of Comprehensive Income | | | |
| Three Months Ended | | Nine Months Ended |
(millions) (unaudited) | November 2, 2019 |
| | November 3, 2018 |
| | November 2, 2019 |
| | November 3, 2018 |
|
Net earnings | $ | 714 |
| | $ | 622 |
| | $ | 2,447 |
| | $ | 2,139 |
|
Other comprehensive income | |
| | |
| | |
| | |
|
Pension, net of tax | 10 |
| | 13 |
| | 30 |
| | 42 |
|
Currency translation adjustment and cash flow hedges, net of tax | (1 | ) | | (4 | ) | | 2 |
| | (9 | ) |
Other comprehensive income | 9 |
| | 9 |
| | 32 |
| | 33 |
|
Comprehensive income | $ | 723 |
| | $ | 631 |
| | $ | 2,479 |
| | $ | 2,172 |
|
See accompanying Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | |
Consolidated Statements of Financial Position | |
| | |
| | |
|
(millions, except footnotes) (unaudited) | November 2, 2019 |
| | February 2, 2019 |
| | November 3, 2018 |
|
Assets | | | |
| | |
Cash and cash equivalents | $ | 969 |
| | $ | 1,556 |
| | $ | 825 |
|
Inventory | 11,396 |
| | 9,497 |
| | 12,393 |
|
Other current assets | 1,440 |
| | 1,466 |
| | 1,421 |
|
Total current assets | 13,805 |
| | 12,519 |
| | 14,639 |
|
Property and equipment | |
| | |
| | |
|
Land | 6,040 |
| | 6,064 |
| | 6,069 |
|
Buildings and improvements | 30,467 |
| | 29,240 |
| | 29,090 |
|
Fixtures and equipment | 6,032 |
| | 5,912 |
| | 5,784 |
|
Computer hardware and software | 2,636 |
| | 2,544 |
| | 2,660 |
|
Construction-in-progress | 298 |
| | 460 |
| | 384 |
|
Accumulated depreciation | (19,089 | ) | | (18,687 | ) | | (18,380 | ) |
Property and equipment, net | 26,384 |
| | 25,533 |
| | 25,607 |
|
Operating lease assets | 2,151 |
| | 1,965 |
| | 1,997 |
|
Other noncurrent assets | 1,401 |
| | 1,273 |
| | 1,329 |
|
Total assets | $ | 43,741 |
| | $ | 41,290 |
| | $ | 43,572 |
|
Liabilities and shareholders’ investment | |
| | |
| | |
|
Accounts payable | $ | 11,258 |
| | $ | 9,761 |
| | $ | 11,959 |
|
Accrued and other current liabilities | 4,191 |
| | 4,201 |
| | 4,096 |
|
Current portion of long-term debt and other borrowings | 1,159 |
| | 1,052 |
| | 1,535 |
|
Total current liabilities | 16,608 |
| | 15,014 |
| | 17,590 |
|
Long-term debt and other borrowings | 10,513 |
| | 10,223 |
| | 10,104 |
|
Noncurrent operating lease liabilities | 2,208 |
| | 2,004 |
| | 2,046 |
|
Deferred income taxes | 1,215 |
| | 972 |
| | 970 |
|
Other noncurrent liabilities | 1,652 |
| | 1,780 |
| | 1,782 |
|
Total noncurrent liabilities | 15,588 |
| | 14,979 |
| | 14,902 |
|
Shareholders’ investment | |
| | |
| | |
|
Common stock | 42 |
| | 43 |
| | 43 |
|
Additional paid-in capital | 6,006 |
| | 6,042 |
| | 5,867 |
|
Retained earnings | 6,270 |
| | 6,017 |
| | 5,884 |
|
Accumulated other comprehensive loss | (773 | ) | | (805 | ) | | (714 | ) |
Total shareholders’ investment | 11,545 |
| | 11,297 |
| | 11,080 |
|
Total liabilities and shareholders’ investment | $ | 43,741 |
| | $ | 41,290 |
| | $ | 43,572 |
|
Common Stock Authorized 6,000,000,000 shares, $0.0833 par value; 506,677,740, 517,761,600 and 521,810,597 shares issued and outstanding at November 2, 2019, February 2, 2019, and November 3, 2018, respectively.
Preferred Stock Authorized 5,000,000 shares, $0.01 par value; no shares were issued or outstanding during any period presented.
See accompanying Notes to Consolidated Financial Statements.
|
| | | | | | | |
Consolidated Statements of Cash Flows | | | |
| Nine Months Ended |
(millions) (unaudited) | November 2, 2019 |
| | November 3, 2018 |
|
Operating activities | |
| | |
|
Net earnings | $ | 2,447 |
| | $ | 2,139 |
|
Earnings from discontinued operations, net of tax | 11 |
| | 7 |
|
Net earnings from continuing operations | 2,436 |
| | 2,132 |
|
Adjustments to reconcile net earnings to cash provided by operations | |
| | |
|
Depreciation and amortization | 1,905 |
| | 1,826 |
|
Share-based compensation expense | 116 |
| | 106 |
|
Deferred income taxes | 235 |
| | 261 |
|
Noncash losses / (gains) and other, net | 6 |
| | 85 |
|
Changes in operating accounts | |
| | |
Inventory | (1,899 | ) | | (3,796 | ) |
Other assets | (10 | ) | | (140 | ) |
Accounts payable | 1,473 |
| | 3,298 |
|
Accrued and other liabilities | (121 | ) | | (158 | ) |
Cash provided by operating activities—continuing operations | 4,141 |
| | 3,614 |
|
Cash provided by operating activities—discontinued operations | 18 |
| | 10 |
|
Cash provided by operations | 4,159 |
| | 3,624 |
|
Investing activities | |
| | |
|
Expenditures for property and equipment | (2,403 | ) | | (2,873 | ) |
Proceeds from disposal of property and equipment | 29 |
| | 39 |
|
Other investments | 14 |
| | 15 |
|
Cash required for investing activities | (2,360 | ) | | (2,819 | ) |
Financing activities | |
| | |
|
Change in commercial paper, net | — |
| | 490 |
|
Additions to long-term debt | 994 |
| | — |
|
Reductions of long-term debt | (1,041 | ) | | (268 | ) |
Dividends paid | (995 | ) | | (1,001 | ) |
Repurchase of stock | (959 | ) | | (1,485 | ) |
Accelerated share repurchase pending final settlement | (450 | ) | | (450 | ) |
Stock option exercises | 65 |
| | 91 |
|
Cash required for financing activities | (2,386 | ) | | (2,623 | ) |
Net decrease in cash and cash equivalents | (587 | ) | | (1,818 | ) |
Cash and cash equivalents at beginning of period | 1,556 |
| | 2,643 |
|
Cash and cash equivalents at end of period | $ | 969 |
| | $ | 825 |
|
Supplemental information | | | |
Leased assets obtained in exchange for new finance lease liabilities | $ | 301 |
| | $ | 29 |
|
Leased assets obtained in exchange for new operating lease liabilities | 334 |
| | 228 |
|
See accompanying Notes to Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | | | | | | | | |
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 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
Consolidated Statements of Shareholders’ Investment |
| Common |
| | Stock |
| | Additional |
| | |
| | Accumulated Other |
| | |
|
| Stock |
| | Par |
| | Paid-in |
| | Retained |
| | Comprehensive |
| | |
|
(millions) (unaudited) | Shares |
| | Value |
| | Capital |
| | Earnings |
| | (Loss) / Income |
| | Total |
|
February 2, 2019 | 517.8 |
| | $ | 43 |
| | $ | 6,042 |
| | $ | 6,017 |
| | $ | (805 | ) | | $ | 11,297 |
|
Net earnings | — |
| | — |
| | — |
| | 795 |
| | — |
| | 795 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 13 |
| | 13 |
|
Dividends declared | — |
| | — |
| | — |
| | (330 | ) | | — |
| | (330 | ) |
Repurchase of stock | (3.6 | ) | | — |
| | — |
| | (277 | ) | | — |
| | (277 | ) |
Accelerated share repurchase pending final settlement | (3.0 | ) | | — |
| | (153 | ) | | (247 | ) | | — |
| | (400 | ) |
Stock options and awards | 1.1 |
| | — |
| | 19 |
| | — |
| | — |
| | 19 |
|
May 4, 2019 | 512.3 |
| | $ | 43 |
| | $ | 5,908 |
| | $ | 5,958 |
| | $ | (792 | ) | | $ | 11,117 |
|
Net earnings | — |
| | — |
| | — |
| | 938 |
| | — |
| | 938 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 10 |
| | 10 |
|
Dividends declared | — |
| | — |
| | — |
| | (341 | ) | | — |
| | (341 | ) |
Repurchase of stock | (1.3 | ) | | — |
| | 153 |
| | (94 | ) | | — |
| | 59 |
|
Stock options and awards | 0.3 |
| | — |
| | 53 |
| | — |
| | — |
| | 53 |
|
August 3, 2019 | 511.3 |
| | $ | 43 |
| | $ | 6,114 |
| | $ | 6,461 |
| | $ | (782 | ) | | $ | 11,836 |
|
Net earnings | — |
| | — |
| | — |
| | 714 |
| | — |
| | 714 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 9 |
| | 9 |
|
Dividends declared | — |
| | — |
| | — |
| | (338 | ) | | — |
| | (338 | ) |
Repurchase of stock | (3.0 | ) | | (1 | ) | | — |
| | (295 | ) | | — |
| | (296 | ) |
Accelerated share repurchase pending final settlement | (2.5 | ) | | — |
| | (178 | ) | | (272 | ) | | — |
| | (450 | ) |
Stock options and awards | 0.9 |
| | — |
| | 70 |
| | — |
| | — |
| | 70 |
|
November 2, 2019 | 506.7 |
| | $ | 42 |
| | $ | 6,006 |
| | $ | 6,270 |
| | $ | (773 | ) | | $ | 11,545 |
|
We declared $0.66 and $0.64 dividends per share for the three months ended November 2, 2019, and November 3, 2018, respectively, and $2.54 per share for the fiscal year ended February 2, 2019.
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements (unaudited)
1. Accounting Policies
These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by United States (U.S.) generally accepted accounting principles (U.S. GAAP) for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statement disclosures in our 2018 Form 10-K.
We use the same accounting policies in preparing quarterly and annual financial statements. Unless otherwise noted, amounts presented within the Notes to Consolidated Financial Statements refer to our continuing operations.
We operate as a single segment that includes all of our continuing operations, which are designed to enable guests to purchase products seamlessly in stores or through our digital channels. Nearly all of our revenues are generated in the U.S. The vast majority of our long-lived assets are located within the U.S.
Due to the seasonal nature of our business, quarterly revenues, expenses, earnings, and cash flows are not necessarily indicative of the results that may be expected for the full year.
2. Revenues
General merchandise sales represent the vast majority of our revenues. We also earn revenues from a variety of other sources, most notably credit card profit sharing income from our arrangement with TD Bank Group (TD).
|
| | | | | | | | | | | | | | | |
Revenues | Three Months Ended | | Nine Months Ended |
(millions) | November 2, 2019 |
| | November 3, 2018 |
| | November 2, 2019 |
| | November 3, 2018 |
|
Apparel and accessories (a) | $ | 3,564 |
| | $ | 3,219 |
| | $ | 10,510 |
| | $ | 9,803 |
|
Beauty and household essentials (a) | 5,125 |
| | 4,788 |
| | 15,172 |
| | 14,189 |
|
Food and beverage | 3,717 |
| | 3,611 |
| | 10,899 |
| | 10,570 |
|
Hardlines | 2,460 |
| | 2,478 |
| | 7,348 |
| | 7,292 |
|
Home furnishings and décor | 3,527 |
| | 3,476 |
| | 9,985 |
| | 9,781 |
|
Other | 21 |
| | 18 |
| | 83 |
| | 64 |
|
Sales | 18,414 |
| | 17,590 |
| | 53,997 |
| | 51,699 |
|
| | | | | | | |
Credit card profit sharing | 177 |
| | 169 |
| | 505 |
| | 503 |
|
Other | 74 |
| | 62 |
| | 211 |
| | 177 |
|
Other revenue | 251 |
| | 231 |
| | 716 |
| | 680 |
|
| | | | | | | |
Total revenue | $ | 18,665 |
| | $ | 17,821 |
| | $ | 54,713 |
| | $ | 52,379 |
|
| |
(a) | We reclassified certain non-apparel baby merchandise sales totaling $406 million and $1,260 million for the three and nine months ended November 2, 2019, respectively, and $403 million and $1,166 million for the three and nine months ended November 3, 2018, respectively, from Apparel and Accessories to Beauty and Household Essentials. |
We record almost all retail store revenues at the point of sale. Digitally originated sales may include shipping revenue and are recorded upon delivery to the guest or upon guest pickup at the store. Sales are recognized net of expected returns, which we estimate using historical return patterns and our expectation of future returns. As of November 2, 2019, February 2, 2019, and November 3, 2018, the accrual for estimated returns was $137 million, $116 million, and $125 million, respectively. We have not historically had material adjustments to our returns estimates.
Revenue from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance.
|
| | | | | | | | | | | | | | | |
Gift Card Liability Activity | February 2, 2019 |
| | Gift Cards Issued During Current Period But Not Redeemed (a) |
| | Revenue Recognized From Beginning Liability |
| | November 2, 2019 |
|
(millions) | | | |
Gift card liability | $ | 840 |
| | $ | 386 |
| | $ | (543 | ) | | $ | 683 |
|
| |
(a) | Net of estimated breakage. |
Credit card profit sharing – We receive payments under a credit card program agreement with TD. Under the agreement, we receive a percentage of the profits generated by the Target Credit Card and Target MasterCard receivables in exchange for performing account servicing and primary marketing functions. TD underwrites, funds, and owns Target Credit Card and Target MasterCard receivables, controls risk management policies, and oversees regulatory compliance.
3. Fair Value Measurements
Fair value measurements are reported in one of three levels reflecting the valuation techniques used to determine fair value.
|
| | | | | | | | | | | | | |
Fair Value Measurements - Recurring Basis | | Fair Value at |
(millions) | Classification | Pricing Category | November 2, 2019 |
| | February 2, 2019 |
| | November 3, 2018 |
|
Assets | | | |
| | |
| | |
|
Short-term investments | Cash and Cash Equivalents | Level 1 | $ | 163 |
| | $ | 769 |
| | $ | 42 |
|
Prepaid forward contracts | Other Current Assets | Level 1 | 24 |
| | 19 |
| | 23 |
|
Interest rate swaps | Other Noncurrent Assets | Level 2 | 122 |
| | 10 |
| | — |
|
Liabilities | | | |
| | |
| | |
|
Interest rate swaps | Other Current Liabilities | Level 2 | — |
| | 3 |
| | 6 |
|
Interest rate swaps | Other Noncurrent Liabilities | Level 2 | — |
| | — |
| | 7 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Significant Financial Instruments Not Measured at Fair Value (a)
(millions) | November 2, 2019 | | February 2, 2019 | | November 3, 2018 |
Carrying Amount |
| Fair Value |
| | Carrying Amount |
| Fair Value |
| | Carrying Amount |
| Fair Value |
|
Long-term debt, including current portion (b) | $ | 10,246 |
| $ | 11,870 |
| | $ | 10,247 |
| $ | 10,808 |
| | $ | 10,245 |
| $ | 10,396 |
|
| |
(a) | The carrying amounts of certain other current assets, commercial paper, accounts payable, and certain accrued and other current liabilities approximate fair value due to their short-term nature. |
| |
(b) | The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for the same or similar types of financial instruments and would be classified as Level 2. These amounts exclude commercial paper, unamortized swap valuation adjustments, and lease liabilities. |
4. Property and Equipment
We review long-lived assets for impairment when store performance expectations, events, or changes in circumstances—such as a decision to relocate or close a store or distribution center, discontinue projects, or make significant software changes—indicate that the asset’s carrying value may not be recoverable. We recognized impairment charges of $7 million and $21 million during the three and nine months ended November 2, 2019, respectively, primarily resulting from store impairments. We recognized no impairment charges during the three months ended November 3, 2018, and $85 million of impairment charges during the nine months ended November 3, 2018, primarily resulting from planned store closures. The impairment charges are recorded in Selling, General and Administrative Expenses.
5. Commercial Paper and Long-Term Debt
In March 2019, we issued $1,000 million of 10-year unsecured fixed rate debt at 3.375 percent, and in June 2019, we repaid $1,000 million of unsecured 2.3 percent fixed rate debt at maturity.
Our commercial paper program provides a source of short-term financing. For the nine months ended November 2, 2019, the maximum amount outstanding was $744 million, and the average daily amount outstanding was $55 million at a weighted average annual interest rate of 2.4 percent. For the nine months ended November 3, 2018, the maximum amount outstanding was $658 million, and the average daily amount outstanding was $54 million at a weighted average annual interest rate of 1.9 percent. As of November 2, 2019, no balances were outstanding. As of November 3, 2018, $490 million was outstanding and is classified within Current Portion of Long-Term Debt and Other Borrowings on our Consolidated Statement of Financial Position.
6. Derivative Financial Instruments
Our derivative instruments consist of interest rate swaps used to mitigate interest rate risk. As a result, we have counterparty credit exposure to large global financial institutions, which we monitor on an ongoing basis. Note 3 provides the fair value and classification of these instruments.
In March 2019, we entered into interest rate swaps with a total notional amount of $1,000 million, and in June 2019, interest rate swaps with a total notional amount of $1,000 million matured. As of November 2, 2019, and November 3, 2018, we were party to interest rate swaps with notional amounts totaling $1,500 million. We pay a variable rate and receive a fixed rate under each of these agreements. All of the agreements are designated as fair value hedges, and all were perfectly effective during the three and nine months ended November 2, 2019, and November 3, 2018.
|
| | | | | | | | | | | | |
Effect of Hedges on Debt |
(millions) | | November 2, 2019 |
| | February 2, 2019 |
| | November 3, 2018 |
|
Current portion of long-term debt and other borrowings | | | | | | |
Carrying amount of hedged debt | | $ | — |
| | $ | 996 |
| | $ | 993 |
|
Cumulative hedging adjustments, included in carrying amount | | — |
| | (3 | ) | | (6 | ) |
Long-term debt and other borrowings | | | | | | |
Carrying amount of hedged debt | | 1,614 |
| | 508 |
| | 491 |
|
Cumulative hedging adjustments, included in carrying amount | | 122 |
| | 10 |
| | (7 | ) |
|
| | | | | | | | | | | | | | | |
Effect of Hedges on Net Interest Expense | Three Months Ended | | Nine Months Ended |
(millions) | November 2, 2019 |
| | November 3, 2018 |
| | November 2, 2019 |
| | November 3, 2018 |
|
Gain (loss) on fair value hedges recognized in Net Interest Expense | | | | | | | |
Interest rate swap designated as fair value hedges | $ | 14 |
| | $ | (4 | ) | | $ | 115 |
| | $ | (7 | ) |
Hedged debt | (14 | ) | | 4 |
| | (115 | ) | | 7 |
|
Total | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
7. Share Repurchase
We periodically repurchase shares of our common stock under a board-authorized repurchase program through a combination of open market transactions, accelerated share repurchase (ASR) arrangements, and other privately negotiated transactions with financial institutions.
|
| | | | | | | | | | | | | | |
Share Repurchase Activity | Three Months Ended | Nine Months Ended |
(millions, except per share data) | November 2, 2019 |
| | November 3, 2018 |
| November 2, 2019 |
| | November 3, 2018 |
|
Number of shares purchased | 3.0 |
| | 6.3 |
| 10.8 |
| | 19.0 |
|
Average price paid per share | $ | 99.25 |
| | $ | 84.00 |
| $ | 84.28 |
| | $ | 76.38 |
|
Total investment | $ | 294 |
| | $ | 526 |
| $ | 912 |
| | $ | 1,451 |
|
Note: This table excludes activity related to the ASR arrangements described below because final settlement had not occurred as of November 2, 2019, and November 3, 2018, respectively.
During the third quarter of 2019, we entered into an ASR arrangement to repurchase $300 to $450 million of our common stock. Under the agreement, we paid $450 million and received an initial delivery of 2.5 million shares, which were retired, resulting in a $272 million reduction to Retained Earnings. As of November 2, 2019, $178 million is included in the Consolidated Statement of Financial Position as a reduction to Additional Paid-in Capital.
During the third quarter of 2018, we entered into an ASR arrangement to repurchase $325 to $450 million of our common stock. Under the agreement, we paid $450 million and received an initial delivery of 3.5 million shares, which were retired, resulting in a $287 million reduction to Retained Earnings. As of November 3, 2018, $163 million was included as a reduction to Additional Paid-in Capital. Upon final settlement in the fourth quarter of 2018, we received an additional 2.2 million shares, which were retired, and $3.6 million for the remaining amount not settled in shares. In total, we repurchased 5.7 million shares under the ASR arrangement for a total cash investment of $446 million ($77.98 per share).
8. Pension Benefits
We provide pension plan benefits to eligible team members.
|
| | | | | | | | | | | | | | | | |
Net Pension Benefits Expense | | Three Months Ended | | Nine Months Ended |
(millions) | Classification | November 2, 2019 |
| | November 3, 2018 |
| | November 2, 2019 |
| | November 3, 2018 |
|
Service cost benefits earned | SG&A Expenses | $ | 23 |
| | $ | 24 |
| | $ | 69 |
| | $ | 72 |
|
Interest cost on projected benefit obligation | Net Other (Income) / Expense | 37 |
| | 37 |
| | 111 |
| | 110 |
|
Expected return on assets | Net Other (Income) / Expense | (62 | ) | | (62 | ) | | (186 | ) | | (185 | ) |
Amortization of losses | Net Other (Income) / Expense | 16 |
| | 20 |
| | 47 |
| | 61 |
|
Amortization of prior service cost | Net Other (Income) / Expense | (3 | ) | | (3 | ) | | (8 | ) | | (8 | ) |
Settlement charges | Net Other (Income) / Expense | — |
| | 1 |
| | — |
| | 4 |
|
Total | | $ | 11 |
| | $ | 17 |
| | $ | 33 |
| | $ | 54 |
|
9. Accumulated Other Comprehensive (Loss) / Income
|
| | | | | | | | | | | | | | | |
Change in Accumulated Other Comprehensive Income | Cash Flow Hedges |
| | Currency Translation Adjustment |
| | Pension |
| | Total |
|
(millions) | | | |
February 2, 2019 | $ | (13 | ) | | $ | (20 | ) | | $ | (772 | ) | | $ | (805 | ) |
Other comprehensive income before reclassifications, net of tax | — |
| | 2 |
| | — |
| | 2 |
|
Amounts reclassified from AOCI, net of tax | — |
| | — |
| | 30 |
| | 30 |
|
November 2, 2019 | $ | (13 | ) | | $ | (18 | ) | | $ | (742 | ) | | $ | (773 | ) |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Third quarter 2019 includes the following notable items:
| |
• | GAAP earnings per share from continuing operations were $1.37. |
| |
• | Adjusted earnings per share from continuing operations were $1.36. |
| |
• | Total revenue increased 4.7 percent, driven by a comparable sales increase and sales from new stores. |
| |
• | Comparable sales increased 4.5 percent, driven by a 3.1 percent increase in traffic. |
| |
◦ | Comparable store sales grew 2.8 percent. |
| |
◦ | Digital channel sales increased 31 percent, contributing 1.7 percentage points to comparable sales growth. |
| |
• | Operating income of $1,002 million was 22.3 percent higher than the comparable prior-year period. |
Sales were $18,414 million for the three months ended November 2, 2019, an increase of $824 million, or 4.7 percent, from the same period in the prior year. Operating cash flow provided by continuing operations was $4,141 million for the nine months ended November 2, 2019, an increase<