10-Q 1 a13-16907_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 August 3, 2013

 

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 S No £

 

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 S No £

 

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  S  Accelerated filer  £  Non-accelerated filer  £  Smaller Reporting company  £

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).                 Yes £ No S

 

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 23, 2013 were 631,124,948.

 



 

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

13

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

21

Item 4.

Controls and Procedures

21

 

 

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

22

Item 1A.

Risk Factors

22

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 3.

Defaults Upon Senior Securities

22

Item 4.

Mine Safety Disclosures

22

Item 5.

Other Information

22

Item 6.

Exhibits

23

 

 

 

Signature

 

24

Exhibit Index

 

25

 



 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Consolidated Statements of Operations

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

(millions, except per share data) (unaudited)

 

2013

 

2012

 

2013

 

2012

 

Sales

 

$

17,117

 

$

16,451

 

$

33,823

 

$

32,989

 

Credit card revenues

 

 

328

 

 

657

 

Total revenues

 

17,117

 

16,779

 

33,823

 

33,646

 

Cost of sales

 

11,745

 

11,297

 

23,308

 

22,838

 

Selling, general and administrative expenses

 

3,698

 

3,588

 

7,287

 

6,981

 

Credit card expenses

 

 

108

 

 

228

 

Depreciation and amortization

 

542

 

531

 

1,079

 

1,060

 

Gain on receivables transaction

 

 

 

(391

)

 

Earnings before interest expense and income taxes

 

1,132

 

1,255

 

2,540

 

2,539

 

Net interest expense

 

171

 

184

 

801

 

366

 

Earnings before income taxes

 

961

 

1,071

 

1,739

 

2,173

 

Provision for income taxes

 

350

 

367

 

629

 

772

 

Net earnings

 

$

611

 

$

704

 

$

1,110

 

$

1,401

 

Basic earnings per share

 

$

0.96

 

$

1.07

 

$

1.74

 

$

2.12

 

Diluted earnings per share

 

$

0.95

 

$

1.06

 

$

1.72

 

$

2.10

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

634.8

 

656.7

 

638.4

 

661.5

 

Dilutive impact of share-based awards(a)

 

7.2

 

6.2

 

7.3

 

6.1

 

Diluted

 

642.0

 

662.9

 

645.7

 

667.6

 

(a) Excludes 0.1 million and 2.2 million share-based awards for the three and six months ended August 3, 2013, respectively, and 5.8 million and 8.7 million share-based awards for the three and six months ended July 28, 2012, respectively, because their effects were antidilutive.

 

See accompanying Notes to Consolidated Financial Statements.

 

1



 

Consolidated Statements of Comprehensive Income

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

(millions) (unaudited)

 

2013

 

2012

 

2013

 

2012

 

Net earnings

 

$

611

 

$

704

 

$

1,110

 

$

1,401

 

Other comprehensive income/(loss), net of tax

 

 

 

 

 

 

 

 

 

Pension and other benefit liabilities, net of taxes of $8, $9, $34 and $19

 

12

 

14

 

52

 

28

 

Currency translation adjustment and cash flow hedges, net of taxes of $(2), $16, $7 and $0

 

(100

)

(25

)

(129

)

1

 

Other comprehensive (loss)/income

 

(88

)

(11

)

(77

)

29

 

Comprehensive income

 

$

523

 

$

693

 

$

1,033

 

$

1,430

 

 

See accompanying Notes to Consolidated Financial Statements.

 

2



 

Consolidated Statements of Financial Position

 

 

 

 

 

 

 

 

 

August 3,

 

February 2,

 

July 28,

 

(millions)

 

2013

 

2013

 

2012

 

Assets

 

(unaudited)

 

 

 

(unaudited)

 

Cash and cash equivalents, including short-term investments of $249, $130 and $830

 

$

1,018

 

$

784

 

$

1,442

 

Inventory

 

8,441

 

7,903

 

7,733

 

Other current assets

 

1,944

 

1,860

 

1,700

 

Credit card receivables, held for sale

 

 

5,841

 

 

Credit card receivables, net of allowance of $0, $0 and $365

 

 

 

5,540

 

Total current assets

 

11,403

 

16,388

 

16,415

 

Property and equipment

 

 

 

 

 

 

 

Land

 

6,213

 

6,206

 

6,137

 

Buildings and improvements

 

29,336

 

28,653

 

27,394

 

Fixtures and equipment

 

5,351

 

5,362

 

5,192

 

Computer hardware and software

 

2,532

 

2,567

 

2,333

 

Construction-in-progress

 

1,456

 

1,176

 

1,260

 

Accumulated depreciation

 

(13,483

)

(13,311

)

(12,542

)

Property and equipment, net

 

31,405

 

30,653

 

29,774

 

Other noncurrent assets

 

1,354

 

1,122

 

1,136

 

Total assets

 

$

44,162

 

$

48,163

 

$

47,325

 

Liabilities and shareholders’ investment

 

 

 

 

 

 

 

Accounts payable

 

$

7,078

 

$

7,056

 

$

6,505

 

Accrued and other current liabilities

 

3,705

 

3,981

 

3,539

 

Current portion of long-term debt and other borrowings

 

1,833

 

2,994

 

3,285

 

Total current liabilities

 

12,616

 

14,031

 

13,329

 

Long-term debt and other borrowings

 

12,655

 

14,654

 

15,229

 

Deferred income taxes

 

1,331

 

1,311

 

1,173

 

Other noncurrent liabilities

 

1,540

 

1,609

 

1,697

 

Total noncurrent liabilities

 

15,526

 

17,574

 

18,099

 

Shareholders’ investment

 

 

 

 

 

 

 

Common stock

 

53

 

54

 

54

 

Additional paid-in capital

 

4,335

 

3,925

 

3,721

 

Retained earnings

 

12,285

 

13,155

 

12,774

 

Accumulated other comprehensive loss

 

 

 

 

 

 

 

Pension and other benefit liabilities

 

(480

)

(532

)

(596

)

Currency translation adjustment and cash flow hedges

 

(173

)

(44

)

(56

)

Total shareholders’ investment

 

16,020

 

16,558

 

15,897

 

Total liabilities and shareholders’ investment

 

$

44,162

 

$

48,163

 

$

47,325

 

 

Common Stock Authorized 6,000,000,000 shares, $.0833 par value; 630,924,647, 645,294,423 and 653,907,367 shares issued and outstanding at August 3, 2013, February 2, 2013 and July 28, 2012, respectively.

 

Preferred Stock Authorized 5,000,000 shares, $.01 par value; no shares were issued or outstanding at August 3, 2013, February 2, 2013 or July 28, 2012.

 

See accompanying Notes to Consolidated Financial Statements.

 

3



 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

(millions) (unaudited)

 

2013

 

2012

 

Operating activities

 

 

 

 

 

Net earnings

 

$

1,110

 

$

1,401

 

Adjustments to reconcile net earnings to cash provided by operations

 

 

 

 

 

Depreciation and amortization

 

1,079

 

1,060

 

Share-based compensation expense

 

55

 

48

 

Deferred income taxes

 

(136

)

(92

)

Bad debt expense(a)

 

41

 

95

 

Gain on receivables transaction

 

(391

)

 

Loss on debt extinguishment

 

445

 

 

Noncash (gains)/losses and other, net

 

(2

)

(1

)

Changes in operating accounts:

 

 

 

 

 

Accounts receivable originated at Target

 

157

 

116

 

Proceeds on sale of accounts receivable originated at Target

 

2,703

 

 

Inventory

 

(527

)

185

 

Other current assets

 

(56

)

72

 

Other noncurrent assets

 

47

 

(9

)

Accounts payable

 

17

 

(352

)

Accrued and other current liabilities

 

(403

)

(150

)

Other noncurrent liabilities

 

(30

)

98

 

Cash provided by operations

 

4,109

 

2,471

 

Investing activities

 

 

 

 

 

Expenditures for property and equipment

 

(1,917

)

(1,603

)

Proceeds from disposal of property and equipment

 

48

 

18

 

Change in accounts receivable originated at third parties

 

121

 

176

 

Proceeds from sale of accounts receivable originated at third parties

 

3,002

 

 

Cash paid for acquisitions, net of cash assumed

 

(58

)

 

Other investments

 

73

 

(18

)

Cash provided by/(required for) investing activities

 

1,269

 

(1,427

)

Financing activities

 

 

 

 

 

Change in commercial paper, net

 

(163

)

 

Additions to long-term debt

 

 

1,971

 

Reductions of long-term debt

 

(3,424

)

(1,011

)

Dividends paid

 

(463

)

(399

)

Repurchase of stock

 

(1,461

)

(1,130

)

Stock option exercises and related tax benefit

 

363

 

183

 

Other

 

 

(16

)

Cash required for financing activities

 

(5,148

)

(402

)

Effect of exchange rate changes on cash and cash equivalents

 

4

 

6

 

Net increase in cash and cash equivalents

 

234

 

648

 

Cash and cash equivalents at beginning of period

 

784

 

794

 

Cash and cash equivalents at end of period

 

$

1,018

 

$

1,442

 

 

(a) Includes net write-offs of credit card receivables prior to the sale of receivables on March 13, 2013, and bad debt expense on credit card receivables during the six months ended July 28, 2012.

 

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 per share data)

 

Shares

 

Value

 

Capital

 

Earnings

 

Income/(Loss)

 

Total

 

January 28, 2012

 

669.3

 

$

56

 

$

3,487

 

$

12,959

 

$

(681

)

$

15,821

 

Net earnings

 

 

 

 

2,999

 

 

2,999

 

Other comprehensive income

 

 

 

 

 

105

 

105

 

Dividends declared

 

 

 

 

(903

)

 

(903

)

Repurchase of stock

 

(32.2

)

(3

)

 

(1,900

)

 

(1,903

)

Stock options and awards

 

8.2

 

1

 

438

 

 

 

439

 

February 2, 2013

 

645.3

 

$

54

 

$

3,925

 

$

13,155

 

$

(576

)

$

16,558

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

1,110

 

 

1,110

 

Other comprehensive income

 

 

 

 

 

(77

)

(77

)

Dividends declared

 

 

 

 

(504

)

 

(504

)

Repurchase of stock

 

(21.9

)

(2

)

 

(1,476

)

 

(1,478

)

Stock options and awards

 

7.5

 

1

 

410

 

 

 

411

 

August 3, 2013

 

630.9

 

$

53

 

$

4,335

 

$

12,285

 

$

(653

)

$

16,020

 

 

Dividends declared per share were $0.43 and $0.36 for the three months ended August 3, 2013 and July 28, 2012, respectively. For the fiscal year ended February 2, 2013, dividends declared per share were $1.38.

 

See accompanying Notes to Consolidated Financial Statements.

 

5



 

Notes to Consolidated Financial Statements (unaudited)

 

1. Accounting Policies

 

These financial statements should be read in conjunction with the financial statement disclosures contained in our 2012 Form 10-K.  The same accounting policies are followed in preparing quarterly and annual financial data.   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. Credit Card Receivables Transaction

 

On March 13, 2013, we sold our entire U.S. consumer credit card portfolio to TD Bank Group (TD) and recognized a gain of $391 million. Consideration received included cash of $5.7 billion, equal to the gross (par) value of the outstanding receivables at the time of closing, and a $225 million beneficial interest asset. This transaction was accounted for as a sale, and the receivables are no longer reported in our Consolidated Statements of Financial Position. The beneficial interest asset effectively represents a receivable for the present value of future profit-sharing we expect to receive on the receivables sold.  Concurrent with the sale of the portfolio, we repaid the nonrecourse debt collateralized by credit card receivables (2006/2007 Series Variable Funding Certificate) at par of $1.5 billion, resulting in net cash proceeds of $4.2 billion.

 

TD now underwrites, funds and owns Target Credit Card and Target Visa consumer receivables in the U.S. TD controls risk management policies and oversees regulatory compliance, and we perform account servicing and primary marketing functions. We earn a substantial portion of the profits generated by the Target Credit Card and Target Visa portfolios. Income from the TD profit-sharing arrangement and our related account servicing expenses are classified within SG&A expenses in the U.S. Segment.

 

The U.S. Segment earned credit card revenues prior to the close of the transaction and during the three and six months ended August 3, 2013 earned $183 million and $288 million, respectively, of profit-sharing income from TD.  On a consolidated basis, this profit-sharing income is offset by a $29 million and $45 million reduction in the beneficial interest asset, for a net $154 million and $243 million impact for the three and six months ended August 3, 2013, respectively. These amounts are classified within SG&A expenses in the Consolidated Statements of Operations.

 

The $225 million beneficial interest asset recognized at the close of the transaction was reduced during the three and six months ended August 3, 2013 by $31 million and $45 million, respectively, of profit-sharing payments related to sold receivables.  The beneficial interest asset also had a $2 million revaluation adjustment during the three months ended August 3, 2013, with no net revaluation adjustment for the six months ended August 3, 2013.  As of August 3, 2013, $180 million of a beneficial interest asset remains and is recorded within other current assets and other noncurrent assets in our Consolidated Statements of Financial Position.  Based on historical payment patterns, we estimate that the beneficial interest asset will be reduced over a four-year period following the close of the transaction, with larger reductions in the early years.

 

6



 

3. 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).

 

Fair Value Measurements - Recurring Basis

 

 

Fair Value at

 

Fair Value at

 

Fair Value at

 

 

 

August 3, 2013

 

February 2, 2013

 

July 28, 2012

 

(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

 

$

249

 

$

 

$

 

$

130

 

$

 

$

 

$

830

 

$

 

$

 

Other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

 

 

 

 

4

 

 

 

19

 

 

Prepaid forward contracts

 

73

 

 

 

73

 

 

 

72

 

 

 

Beneficial interest asset(b)

 

 

 

91

 

 

 

 

 

 

 

Other noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

 

74

 

 

 

85

 

 

 

93

 

 

Company-owned life insurance investments(c)

 

 

297

 

 

 

269

 

 

 

386

 

 

Beneficial interest asset(b)

 

 

 

89

 

 

 

 

 

 

 

Total

 

$

322

 

$

371

 

$

180

 

$

203

 

$

358

 

$

 

$

902

 

$

498

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

$

 

$

 

$

 

$

 

$

2

 

$

 

$

 

$

7

 

$

 

Other noncurrent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

 

45

 

 

 

54

 

 

 

62

 

 

Total

 

$

 

$

45

 

$

 

$

 

$

56

 

$

 

$

 

$

69

 

$

 

 

(a) There was one interest rate swap designated as an accounting hedge in all periods presented. See Note 5 for additional information on interest rate swaps.

(b)  A rollforward of the Level 3 beneficial interest asset is included in Note 2.

(c) 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 $787 million at August 3, 2013, $817 million at February 2, 2013 and $667 million at July 28, 2012.

 

7



 

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.

 

 

 

Beneficial interest asset

 

Valued using a cash-flow based economic-profit model, which includes inputs of the forecasted performance of the receivables portfolio and a market-based discount rate. Internal data is used 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. A one percentage point change in the forecasted credit EBIT yield would impact our fair value estimate by approximately $26 million. A one percentage point change in the forecasted discount rate would impact our fair value estimate by approximately $6 million. As described in Note 2, this beneficial interest asset effectively represents a receivable for the present value of future profit-sharing we expect to receive on the receivables sold. As a result, a portion of the profit-sharing payments we receive from TD will reduce the beneficial interest asset. As the asset is reduced over time, changes in the forecasted credit EBIT yield and the forecasted discount rate will have a smaller impact on the estimated fair value.

 

The carrying amount and estimated fair value of debt, a significant financial instrument not measured at fair value in the Consolidated Statements of Financial Position, was $12,484 million and $14,018 million, respectively, at August 3, 2013, $15,618 million and $18,143 million, respectively, at February 2, 2013, and $16,647 million and $19,666 million, respectively at July 28, 2012.  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.  The carrying amount and estimated fair value of debt excludes unamortized swap valuation adjustments and capital lease obligations.

 

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

 

4. 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

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

(dollars in millions)

 

2013

 

2012

 

2013

 

2012

 

Maximum daily amount outstanding during the period

 

$

920

 

$

620

 

$

1,465

 

$

620

 

Average daily amount outstanding during the period

 

301

 

240

 

394

 

201

 

Amount outstanding at period-end

 

807

 

 

807

 

 

Weighted average interest rate

 

0.19

  %

0.21

  %

0.14

  %

0.16

  %

 

Concurrent with the sale of our credit card receivables portfolio, we repaid $1.5 billion of nonrecourse debt collateralized by credit card receivables (the 2006/2007 Series Variable Funding Certificate). We also used $1.4 billion of proceeds from the transaction to repurchase at market value an additional $970 million of debt during the first quarter of 2013. We recognized a loss on this early retirement of $445 million, which was recorded in net interest expense in our Consolidated Statements of Operations. Refer to Note 2 for more information on our credit card receivables transaction.

 

8



 

5. Derivative Financial Instruments

 

We use interest rate swaps to mitigate interest-rate risk. As a result of our use of derivative instruments, we have counterparty credit risk with large global financial institutions.   We monitor this concentration of counterparty credit risk on an ongoing basis. See Note 3 for a description of the fair value measurement of our derivative instruments and their classification on the Consolidated Statements of Financial Position.

 

As of August 3, 2013 and July 28, 2012, one swap was designated as a fair value hedge for accounting purposes, and no ineffectiveness was recognized during the three and six months ended August 3, 2013 or July 28, 2012.

 

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

 

Six Months Ended

 

(millions)

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

Type of Contract

 

Classification of Income/(Expense)

 

2013

 

2012

 

2013

 

2012

 

Interest rate swaps

 

Net interest expense

 

$

7

 

$

9

 

$

15

 

$

19

 

 

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 $63 million, $75 million and $93 million, at August 3, 2013, February 2, 2013 and July 28, 2012, respectively.

 

6. Share Repurchase

 

Share Repurchases

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

(millions, except per share data)

 

2013

 

2012

 

2013

 

2012

 

Total number of shares purchased

 

13.3

 

9.6

 

21.9

 

20.2

 

Average price paid per share

 

$

69.57

 

$

57.09

 

$

67.41

 

$

57.21

 

Total investment

 

$

927

 

$

549

 

$

1,474

 

$

1,154

 

 

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

 

Settlement of Prepaid Forward Contracts(a)

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

(millions)

 

2013

 

2012

 

2013

 

2012

 

Total number of shares purchased

 

0.1

 

0.2

 

0.2

 

0.4

 

Total cash investment

 

$

7

 

$

11

 

$

14

 

$

23

 

Aggregate market value(b)

 

$

8

 

$

11

 

$

17

 

$

24

 

 

(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 7.

(b)  At their respective settlement dates.

 

7. Pension, Postretirement Health Care and Other Benefits

 

Pension and Postretirement Health Care Benefits

 

We have qualified defined benefit pension plans, unfunded nonqualified pension plans and provide certain postretirement health care benefits to eligible team members.

 

9



 

Net Pension and Postretirement
Health Care Benefits Expense

 

Pension Benefits

 

Postretirement Health Care Benefits

 

 

 

Three Months
Ended

 

Six Months Ended

 

Three Months
Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

(millions)

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

Service cost

 

$

29

 

$

30

 

$

59

 

$

60

 

$

1

 

$

2

 

$

3

 

$

4

 

Interest cost

 

34

 

35

 

69

 

70

 

1

 

 

1

 

1

 

Expected return on assets

 

(58

)

(55

)

(117

)

(110

)

 

 

 

 

Amortization of losses

 

25

 

26

 

50

 

52

 

2

 

1

 

3

 

2

 

Amortization of prior service cost

 

(2

)

 

(5

)

 

(4

)

(2

)

(8

)

(4

)

Total

 

$

28

 

$

36

 

$

56

 

$

72

 

$

 

$

1

 

$

(1

)

$

3

 

 

Other Benefits

 

We offer unfunded nonqualified deferred compensation plans to certain team members. We mitigate some of our risk of these 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 $1 million and $4 million for the three months ended August 3, 2013 and July 28, 2012, respectively, and pretax income of $12 million and $15 million for the six months ended August 3, 2013 and July 28, 2012, respectively. For the six months ended August 3, 2013 and July 28, 2012, we invested $6 million and $13 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 6. The settlement dates of these instruments are regularly renegotiated with the counterparty.

 

Prepaid Forward Contracts on Target Common Stock

 

 

 

Contractual

 

 

 

 

 

(millions, except per share data)

 

Number of
Shares

 

Price Paid
per Share

 

Contractual
Fair Value

 

Total Cash
Investment

 

July 28, 2012

 

1.2

 

$

44.70

 

$

72

 

$

53

 

February 2, 2013

 

1.2

 

45.46

 

73

 

54

 

August 3, 2013

 

1.0

 

45.01

 

73

 

46

 

 

8. Accumulated Other Comprehensive Income

 

(millions)

 

Cash Flow
Hedges

 

Currency
Translation
Adjustment

 

Pension and
Other
Benefit

 

Total

 

February 2, 2013

 

$

(29

)

$

(15

)

$

(532

)

$

(576

)

Other comprehensive income before reclassifications

 

 

(30

)

28

 

(2

)

Amounts reclassified from AOCI

 

1

(a)

 

12

(b)

13

 

May 4, 2013

 

$

(28

)

$

(45

)

$

(492

)

$

(565

)

Other comprehensive income before reclassifications

 

 

(101

)

 

(101

)

Amounts reclassified from AOCI

 

1

(a)

 

12

(b)

13

 

August 3, 2013

 

$

(27

)

$

(146

)

$

(480

)

$

(653

)

 

(a) Represents gains and losses on cash flow hedges, net of $1 million of taxes, which is recorded in net interest expense on the Consolidated Statements of Operations.

(b) Represents amortization of pension and other benefit liabilities, net of $8 million of taxes, which is recorded in SG&A expenses on the Consolidated Statements of Operations. See Note 7 for additional information.

 

10



 

9. Segment Reporting

 

We operate as two segments: U.S. and Canadian. 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 August 3, 2013

 

Three Months Ended July 28, 2012

 

(millions)

 

U.S.

 

Canadian

 

Total

 

U.S.

 

Canadian

 

Total

 

Sales

 

$

16,841

 

$

275

 

$

17,117

 

$

16,451

 

$

 

$

16,451

 

Cost of sales

 

11,556

 

188

 

11,745

 

11,297

 

 

11,297

 

Selling, general and administrative expenses(a)

 

3,462

 

207

 

3,669

 

3,322

 

47

 

3,368

 

Depreciation and amortization

 

493

 

49

 

542

 

508

 

22

 

531

 

Segment profit

 

$

1,330

 

$

(169

)

$

1,161

 

$

1,324

 

$

(69

)

$

1,255

 

Gain on receivables transaction

 

 

 

 

 

 

 

 

 

 

 

Reduction of beneficial interest asset(a)

 

 

 

 

 

(29

)

 

 

 

 

 

Earnings before interest expense and income taxes

 

 

 

 

 

1,132

 

 

 

 

 

1,255

 

Net interest expense

 

 

 

 

 

171

 

 

 

 

 

184

 

Earnings before income taxes

 

 

 

 

 

$

961

 

 

 

 

 

$

1,071

 

 

Business Segment Results

 

Six Months Ended August 3, 2013

 

Six Months Ended July 28, 2012

 

(millions)

 

U.S.

 

Canadian

 

Total

 

U.S.

 

Canadian

 

Total

 

Sales

 

$

33,462

 

$

361

 

$

33,823

 

$

32,989

 

$

 

$

32,989

 

Cost of sales

 

23,067

 

241

 

23,308

 

22,838

 

 

22,838

 

Selling, general and administrative expenses(a)

 

6,842

 

400

 

7,242

 

6,471

 

81

 

6,552

 

Depreciation and amortization

 

984

 

94

 

1,079

 

1,016

 

44

 

1,060

 

Segment profit

 

2,569

 

(374

)

2,194

 

2,664

 

(125

)

2,539

 

Gain on receivables transaction

 

 

 

 

 

391

 

 

 

 

 

 

Reduction of beneficial interest asset(a)

 

 

 

 

 

(45

)

 

 

 

 

 

Earnings before interest expense and income taxes

 

 

 

 

 

2,540

 

 

 

 

 

2,539

 

Net interest expense

 

 

 

 

 

801

 

 

 

 

 

366

 

Earnings before income taxes

 

 

 

 

 

$

1,739

 

 

 

 

 

$

2,173

 

Note: The sum of the segment amounts may not equal the total amounts due to rounding.

Note: Through fiscal 2012, we operated as three business segments: U.S. Retail, U.S. Credit Card and Canadian. Following the sale of our credit card receivables portfolio described in Note 2, we operate as two segments: U.S. and Canadian. Prior period segment results have been revised to reflect the combination of our historical U.S. Retail Segment and U.S. Credit Card Segment into one U.S. Segment.

(a) Our U.S. Segment includes all TD profit-sharing amounts in segment EBIT; however, under GAAP, some amounts received from TD reduce the beneficial interest asset and are not recorded in consolidated earnings.  Segment SG&A expenses plus these amounts equal consolidated SG&A expenses.

 

11



 

Total Assets by Segment
(millions)

 

August 3,
2013

 

February 2,
2013

 

July 28,
2012

 

U.S.

 

$

37,810

 

$

43,289

 

$

43,475

 

Canadian

 

6,172

 

4,722

 

3,850

 

Total segment assets

 

43,982

 

48,011

 

47,325

 

Unallocated assets (a)

 

180

 

152

 

 

Total assets

 

$

44,162

 

$

48,163

 

$

47,325

 

Note: Prior period segment results have been revised to reflect the combination of our historical U.S. Retail Segment and U.S. Credit Card Segment into one U.S. Segment.

(a) Represents the beneficial interest asset for the period ended August 3, 2013. For the period ended February 2, 2013, represents the net adjustment to eliminate our allowance for doubtful accounts and record our credit card receivables at lower of cost (par) or fair value.

 

12



 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Executive Summary

 

Notable items for the second quarter of 2013 include:

·                  GAAP earnings per share were $0.95, including $0.21 of dilution related to the Canadian Segment

·                  Adjusted earnings per share were $1.19 on a comparable sales increase of 1.2 percent

·                  We paid dividends of $231 million and repurchased 13.3 million of our shares for $927 million

·                  We opened 44 Canadian stores, bringing the total Canadian store count to 68

 

Sales were $17,117 million for the three months ended August 3, 2013, an increase of $666 million or 4.0 percent from the same period in the prior year. Cash flow provided by operations was $4,109 million and $2,471 million for the six months ended August 3, 2013 and July 28, 2012, respectively.  On March 13, 2013, we sold our entire U.S. consumer credit card portfolio to TD Bank Group (TD) and recognized a gain of $391 million. This transaction is described in Note 2 to the financial statements included in this Form 10-Q. In connection with the sale of our U.S. credit card receivables, we received cash of $5.7 billion. Of this amount, $2.7 billion is included in cash flow provided by operations and $3.0 billion is included in cash flow provided by investing activities.

 

Earnings Per Share

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

 

 

August 3,

 

July 28,

 

 

 

August 3,

 

July 28,

 

 

 

 

 

2013

 

2012

 

Change

 

2013

 

2012

 

Change

 

GAAP diluted earnings per share

 

$

0.95

 

$

1.06

 

(10.4

)%

$

1.72

 

$

2.10

 

(18.1

)%

Adjustments(a)

 

0.24

 

0.06

 

 

 

0.52

 

0.13

 

 

 

Adjusted diluted earnings per share

 

$

1.19

 

$

1.12

 

6.1

%

$

2.24

 

$

2.23

 

0.5

%

Note: A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 18.

(a) Adjustments represent the diluted EPS impact of our 2013 Canadian market entry, adjustments related to the sale of our U.S. credit card receivables portfolio, favorable resolution of various income tax matters and the loss on early retirement of debt.

 

Analysis of Results of Operations

 

U.S. Segment

 

U.S. Segment Results

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

 

 

August 3,

 

July 28,

 

Percent

 

August 3,

 

July 28,

 

Percent

 

(dollars in millions)

 

2013

 

2012

 

Change

 

2013

 

2012

 

Change

 

Sales

 

$

16,841

 

$

16,451

 

2.4

 %

$

33,462

 

$

32,989

 

1.4

 %

Cost of sales

 

11,556

 

11,297

 

2.3

 

23,067

 

22,838

 

1.0

 

Gross margin

 

5,285

 

5,154

 

2.5

 

10,395

 

10,151

 

2.4

 

SG&A expenses(a)

 

3,462

 

3,322

 

4.2

 

6,842

 

6,471

 

5.8

 

EBITDA

 

1,823

 

1,832

 

(0.5

)

3,553

 

3,680

 

(3.5

)

Depreciation and amortization

 

493

 

508

 

(3.1

)

984

 

1,016

 

(3.2

)

EBIT

 

$

1,330

 

$

1,324

 

0.4

 %

$

2,569

 

$

2,664

 

(3.6

) %

Note: Prior period segment results have been revised to reflect the combination of our historical U.S. Retail Segment and U.S. Credit Card Segment into one U.S. Segment. Quarterly and full-year historical information for the three most recently completed years reflecting the results for the U.S. Segment and Canadian Segment are attached as Exhibit (99) to our current report on Form 8-K filed April 16, 2013.

Note: See Note 9 to our consolidated financial statements for a reconciliation of our segment results to earnings before income taxes.

(a) SG&A includes credit card revenues and expenses for all periods presented prior to the March 2013 sale of our U.S. consumer credit card portfolio to TD Bank. For the three and six months ended August 3, 2013, SG&A also includes $183 million and $288 million, respectively, of profit-sharing income from the arrangement with TD.

 

13



 

U.S. Segment Rate Analysis

 

 

 

Three Months Ended July 28, 2012

 

2013 U.S. Segment Change vs. 2012

 

 

Three
Months Ended
August 3, 2013

 

U.S. Segment,
as revised

 

Impact of
Historical U.S.
Credit Card
Segment(a)

 

Historical U.S.
Retail Segment

 

U.S. Segment,
as revised

 

Historical
U.S. Retail
Segment

 

Gross margin rate

 

31.4

 %

31.3

 %

 pp

31.3

 %

0.1

 pp

0.1

 pp

SG&A expense rate

 

20.6

 

20.2

 

(0.9

)

21.1

 

0.4

 

(0.5

)

EBITDA margin rate

 

10.8

 

11.1

 

0.9

 

10.2

 

(0.3

)

0.6

 

Depreciation and amortization expense rate

 

2.9

 

3.1

 

 

3.1

 

(0.2

)

(0.2

)

EBIT margin rate

 

7.9

 

8.0

 

0.8

 

7.2

 

(0.1

)

0.7

 

 

U.S. Segment Rate Analysis 

 

 

 

Six Months Ended July 28, 2012

 

2013 U.S. Segment Change vs. 2012

 

 

Six
Months Ended
August 3, 2013

 

U.S. Segment,
as revised

 

Impact of
Historical U.S.
Credit Card
Segment(a)

 

Historical U.S.
Retail Segment

 

U.S. Segment,
as revised

 

Historical
U.S. Retail
Segment

 

Gross margin rate

 

31.1

 %

30.8

 %

 pp

30.8

 %

0.3

 pp

0.3

 pp

SG&A expense rate

 

20.4

 

19.6

 

(0.9

)

20.5

 

0.8

 

(0.1

)

EBITDA margin rate

 

10.6

 

11.2

 

0.9

 

10.3

 

(0.5

)

0.3

 

Depreciation and amortization expense rate

 

2.9

 

3.1

 

 

3.1

 

(0.1

)

(0.2

)

EBIT margin rate

 

7.7

 

8.1

 

0.9

 

7.2

 

(0.4

)

0.5

 

Rate analysis metrics are computed by dividing the applicable amount by sales.

(a) Represents the impact of combining the historical U.S. Credit Card Segment and the U.S. Retail Segment into one U.S. Segment. Compared with the historical U.S. Retail Segment results for the same period, segment results, as revised, reflect lower SG&A rates and increased EBIT and EBITDA margin rates resulting from the inclusion of credit card profits, net of expenses, within SG&A compared with historical U.S. Segment results for the same period.

 

Sales

 

Sales include merchandise sales, net of expected returns, from our stores and our digital business, as well as gift card breakage. See Item 1 in our Form 10-K for the fiscal year ended February 2, 2013 for a description of our product categories.

 

Sales by Product Category

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

 

 

2013

 

2012

 

2013

 

2012

 

Household essentials

 

27

 %

27

 %

27

 %

27

 %

Hardlines

 

15

 

15

 

15

 

16

 

Apparel and accessories

 

20

 

20

 

20

 

20

 

Food and pet supplies

 

20

 

20

 

21

 

20

 

Home furnishings and décor

 

18

 

18

 

17

 

17

 

Total

 

100

 %

100

 %

100

 %

100

 %

 

Comparable sales is a measure that highlights the performance of our existing stores and digital sales by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies. Comparable sales include all sales, except sales from stores open less than 13 months.

 

Comparable Sales

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

 

 

2013

 

2012

 

2013

 

2012

 

Comparable sales change

 

1.2

 %

3.1

 %

0.3

 %

4.2

 %

Drivers of change in comparable sales:

 

 

 

 

 

 

 

 

 

Number of transactions

 

(1.4

)

0.7

 

(1.6

)

1.3

 

Average transaction amount

 

2.7

 

2.4

 

2.0

 

2.8

 

Selling price per unit

 

1.6

 

1.1

 

0.5

 

1.8

 

Units per transaction

 

1.0

 

1.3

 

1.4

 

1.0

 

 

The collective interaction of a broad array of macroeconomic, competitive and consumer behavioral factors, as well as sales mix, and transfer of sales to new stores makes further analysis of sales metrics infeasible.

 

14



 

Credit is offered by TD to qualified guests through branded proprietary credit cards: the Target Credit Card and the Target Visa (Target Credit Cards). Additionally, we offer a branded proprietary Target Debit Card.  Collectively, we refer to these products as REDcards®. Guests receive a 5-percent discount on virtually all purchases when they use a REDcard at Target.  We monitor the percentage of sales that are paid for using REDcards (REDcard Penetration) because our internal analysis has indicated that a meaningful portion of the incremental purchases on REDcards are also incremental sales for Target, with the remainder representing a shift in tender type.

 

REDcard Penetration

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

 

 

2013

 

2012

 

2013

 

2012

 

Target Credit Cards

 

9.3

 %

7.7

 %

8.9

 %

7.4

 %

Target Debit Card

 

9.4

 

5.1

 

9.0

 

4.8

 

Total REDcard Penetration

 

18.7

 %

12.8

 %

17.9

 %

12.2

 %

 

Gross Margin Rate

 

For the three and six months ended August 3, 2013, our gross margin rate was 31.4 percent and 31.1 percent, increasing from 31.3 percent and 30.8 percent in the comparable periods last year. The improvement in our gross margin rate is primarily due to underlying rate improvements within categories and a 0.2 percentage point benefit in each period related to changes we made to certain merchandise vendor contracts. Vendor contract changes regarding payments received in support of marketing programs resulted in more vendor consideration being recognized in 2013 as a reduction of our cost of sales rather than a reduction to SG&A.  The change to vendor contracts increased our gross margin rate for both the three and six months ended August 3, 2013, with an equal and offsetting increase in our SG&A rate, and has no impact on EBITDA or EBIT margin rates.  The benefits to the gross margin rate were partially offset in each period by a 0.3 percentage point impact from our integrated growth strategies of our 5% REDcard Rewards loyalty program and our store remodel program.

 

Selling, General and Administrative Expense Rate

 

For the three and six months ended August 3, 2013, our SG&A expense rate was 20.6 percent and 20.4 percent, increasing from 20.2 percent and 19.6 percent in the comparable periods last year. The SG&A rate increased 0.6 percentage points in each period due to a smaller contribution from the credit card portfolio. Our continued investment in technology and distribution in support of multichannel initiatives also increased the rate. The 2013 change to certain merchandise vendor contracts increased our SG&A rate by 0.2 percentage points for both periods, with an equal and offsetting increase to the gross margin rate discussed above. Increases in the SG&A rate were partially offset by the continued benefit from our expense optimization efforts and a 0.6 and 0.4 percentage point benefit for the three and six months ended August 3, 2013, respectively, from favorable incentive compensation and store hourly payroll.

 

Depreciation and Amortization Expense Rate

 

For the three and six months ended August 3, 2013, our depreciation and amortization expense rate was 2.9 percent compared with 3.1 percent in both periods last year. The decrease was due to the favorable impact of higher sales combined with stable depreciation and amortization expenses from the steady pace of capital investments in recent years.

 

Store Data

 

Change in Number of Stores

 

Three Months Ended

 

Six Months Ended

 

 

 

August 3,

 

July 28,

 

August 3,

 

July 28,

 

 

 

2013

 

2012

 

2013

 

2012

 

Beginning store count

 

1,784

 

1,764

 

1,778

 

1,763

 

Opened

 

4

 

9

 

10

 

12

 

Closed

 

 

 

 

(1

)

Relocated

 

 

(1

)

 

(2

)

Ending store count