Edgar Filing: TARGET CORP

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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	)