10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2015
 
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 x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
 
Large accelerated filer  x  Accelerated filer  o  Non-accelerated filer  o  Smaller Reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).                 Yes o No x
 
Indicate the number of shares outstanding of each of registrant’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $0.0833, outstanding at November 19, 2015 were 616,051,610.







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)
October 31,
2015

 
November 1,
2014

October 31,
2015

November 1,
2014

Sales
$
17,613

 
$
17,254

$
52,159

$
50,868

Cost of sales
12,440

 
12,171

36,402

35,716

Selling, general and administrative expenses
3,736

 
3,644

10,745

10,619

Depreciation and amortization
561

 
535

1,651

1,584

Earnings from continuing operations before interest expense and income taxes
876

 
904

3,361

2,949

Net interest expense
151

 
146

455

730

Earnings from continuing operations before income taxes
725

 
758

2,906

2,219

Provision for income taxes
249

 
232

1,006

730

Net earnings from continuing operations
476

 
526

1,900

1,489

Discontinued operations, net of tax
73

 
(174
)
37

(485
)
Net earnings
$
549

 
$
352

$
1,937

$
1,004

Basic earnings / (loss) per share
 
 
 
 
 
Continuing operations
$
0.76

 
$
0.83

$
3.00

$
2.35

Discontinued operations
0.12

 
(0.28
)
0.06

(0.76
)
Net earnings per share
$
0.88

 
$
0.55

$
3.06

$
1.58

Diluted earnings / (loss) per share
 
 
 
 
 
Continuing operations
$
0.76

 
$
0.82

$
2.98

$
2.33

Discontinued operations
0.11

 
(0.27
)
0.06

(0.76
)
Net earnings per share
$
0.87

 
$
0.55

$
3.03

$
1.57

Weighted average common shares outstanding
 
 
 
 
 
Basic
623.7

 
634.0

633.5

633.6

Dilutive impact of share-based awards
5.1

 
5.6

5.2

5.1

Diluted
628.8

 
639.6

638.7

638.7

Antidilutive shares

 
2.3


4.2


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

See accompanying Notes to Consolidated Financial Statements.

1




Consolidated Statements of Comprehensive Income
 
 
 
Three Months Ended
Nine Months Ended
(millions) (unaudited)
October 31,
2015

 
November 1,
2014

October 31,
2015

 
November 1,
2014

Net earnings
$
549

 
$
352

$
1,937

 
$
1,004

Other comprehensive income, net of tax
 

 
 

 

 
 

Pension and other benefit liabilities, net of taxes of $8, $4, $84 and $12
13

 
7

130

 
21

Currency translation adjustment and cash flow hedges, net of taxes of $1, $1, $2 and $2
(1
)
 
(138
)

 
(53
)
Other comprehensive income / (loss)
12

 
(131
)
130

 
(32
)
Comprehensive income
$
561

 
$
221

$
2,067

 
$
972

 
See accompanying Notes to Consolidated Financial Statements.

2




Consolidated Statements of Financial Position
 

 
 

 
 

(millions)
October 31,
2015

 
January 31,
2015

 
November 1,
2014

Assets
(unaudited)

 
 

 
(unaudited)

Cash and cash equivalents, including short term investments of $1,154, $1,520 and $4
$
1,977

 
$
2,210

 
$
718

Inventory
10,374

 
8,283

 
9,957

Assets of discontinued operations
451

 
1,333

 
808

Other current assets
2,402

 
2,261

 
2,355

Total current assets
15,204

 
14,087

 
13,838

Property and equipment
 

 
 

 
 

Land
6,118

 
6,127

 
6,111

Buildings and improvements
26,912

 
26,613

 
26,439

Fixtures and equipment
5,283

 
5,329

 
5,247

Computer hardware and software
2,652

 
2,552

 
2,437

Construction-in-progress
428

 
424

 
440

Accumulated depreciation
(15,921
)
 
(15,093
)
 
(14,641
)
Property and equipment, net
25,472

 
25,952

 
26,033

Noncurrent assets of discontinued operations
42

 
442

 
5,540

Other noncurrent assets
978

 
923

 
1,050

Total assets
$
41,696

 
$
41,404

 
$
46,461

Liabilities and shareholders’ investment
 

 
 

 
 

Accounts payable
$
8,904

 
$
7,759

 
$
8,839

Accrued and other current liabilities
3,868

 
3,783

 
3,697

Current portion of long-term debt and other borrowings
825

 
91

 
483

Liabilities of discontinued operations
261

 
103

 
506

Total current liabilities
13,858

 
11,736

 
13,525

Long-term debt and other borrowings
11,951

 
12,705

 
12,623

Deferred income taxes
1,316

 
1,321

 
1,195

Noncurrent liabilities of discontinued operations
36

 
193

 
1,292

Other noncurrent liabilities
1,279

 
1,452

 
1,453

Total noncurrent liabilities
14,582

 
15,671

 
16,563

Shareholders’ investment
 

 
 

 
 

Common stock
52

 
53

 
53

Additional paid-in capital
5,314

 
4,899

 
4,612

Retained earnings
8,359

 
9,644

 
12,631

Accumulated other comprehensive loss
 

 
 

 
 

Pension and other benefit liabilities
(431
)
 
(561
)
 
(401
)
Currency translation adjustment and cash flow hedges
(38
)
 
(38
)
 
(522
)
Total shareholders’ investment
13,256

 
13,997

 
16,373

Total liabilities and shareholders’ investment
$
41,696

 
$
41,404

 
$
46,461

 
Common Stock Authorized 6,000,000,000 shares, $.0833 par value; 618,604,168, 640,213,987 and 634,378,337 shares issued and outstanding at October 31, 2015, January 31, 2015 and November 1, 2014, respectively.
 
Preferred Stock Authorized 5,000,000 shares, $.01 par value; no shares were issued or outstanding at October 31, 2015, January 31, 2015 or November 1, 2014.
 
See accompanying Notes to Consolidated Financial Statements.

3




Consolidated Statements of Cash Flows
 
 
 
 
 
Nine Months Ended
 
(millions) (unaudited)
October 31,
2015

 
November 1,
2014

 
Operating activities
 

 
 

 
Net earnings
$
1,937

 
$
1,004

 
Earnings / (losses) from discontinued operations, net of tax
37

 
(485
)
 
Net earnings from continuing operations
1,900

 
1,489

 
Adjustments to reconcile net earnings to cash provided by operations:
 

 
 

 
Depreciation and amortization
1,651

 
1,584

 
Share-based compensation expense
84

 
61

 
Deferred income taxes
(111
)
 
(213
)
 
Loss on debt extinguishment

 
285

 
Noncash (gains) / losses and other, net
(25
)
 
(33
)
 
Changes in operating accounts
 

 
 
 
Inventory
(2,096
)
 
(2,186
)
 
Other assets
95

 
92

 
Accounts payable and accrued liabilities
1,458

 
1,520

 
Cash provided by operating activities—continuing operations
2,956

 
2,599

 
Cash provided by / (required for) operating activities—discontinued operations
804

 
(549
)
 
Cash provided by operations
3,760

 
2,050

 
Investing activities
 

 
 

 
Expenditures for property and equipment
(1,129
)
 
(1,362
)
 
Proceeds from disposal of property and equipment
21

 
84

 
Proceeds from sale of business
8

 

 
Cash paid for acquisitions, net of cash assumed

 
(18
)
 
Other investments
12

 
88

 
Cash required for investing activities—continuing operations
(1,088
)
 
(1,208
)
 
Cash provided by / (required for) investing activities—discontinued operations
19

 
(208
)
 
Cash required for investing activities
(1,069
)
 
(1,416
)
 
Financing activities
 

 
 

 
Change in commercial paper, net

 
305

 
Additions to long-term debt

 
1,993

 
Reductions of long-term debt
(72
)
 
(2,062
)
 
Dividends paid
(1,017
)
 
(874
)
 
Repurchase of stock
(2,179
)
 

 
Stock option exercises and related tax benefit
344

 
88

 
Cash required for financing activities
(2,924
)
 
(550
)
 
Effect of exchange rate changes on cash and cash equivalents

 
1

 
Net (decrease) / increase in cash and cash equivalents
(233
)
 
85

 
Cash and cash equivalents at beginning of period
2,210

 
695

(a) 
Cash and cash equivalents at end of period
$
1,977

 
$
780

(b) 
 
(a) Includes cash of our discontinued operations of $25 million at February 1, 2014.
(b) Includes cash of our discontinued operations of $62 million at November 1, 2014.

 
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

February 1, 2014
632.9

 
$
53

 
$
4,470

 
$
12,599

 
$
(891
)
 
$
16,231

Net earnings

 

 

 
(1,636
)
 

 
(1,636
)
Other comprehensive income

 

 

 

 
292

 
292

Dividends declared

 

 

 
(1,273
)
 

 
(1,273
)
Repurchase of stock
(0.8
)
 

 

 
(46
)
 

 
(46
)
Stock options and awards
8.1

 

 
429

 

 

 
429

January 31, 2015
640.2

 
$
53

 
$
4,899

 
$
9,644

 
$
(599
)
 
$
13,997

(unaudited)
 

 
 

 
 

 
 

 
 

 
 

Net earnings

 

 

 
1,937

 

 
1,937

Other comprehensive income

 

 

 

 
130

 
130

Dividends declared

 

 

 
(1,039
)
 

 
(1,039
)
Repurchase of stock
(27.3
)
 
(2
)
 

 
(2,183
)
 

 
(2,185
)
Stock options and awards
5.7

 
1

 
415

 

 

 
416

October 31, 2015
618.6

 
$
52

 
$
5,314

 
$
8,359

 
$
(469
)
 
$
13,256


We declared $1.64 and $1.47 per share dividends for the nine months ended October 31, 2015 and November 1, 2014, respectively, and $1.99 per share for the fiscal year ended January 31, 2015.
 
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 in our 2014 Form 10-K.  We use the same accounting policies in preparing quarterly and annual financial statements.  All adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature. Certain prior-year amounts have been reclassified to conform to the current year presentation. Unless otherwise noted, amounts presented within the Notes to Consolidated Financial Statements refer to our continuing operations.
 
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. Pharmacies and Clinics Transaction

On June 12, 2015, we entered into an asset purchase agreement with CVS Pharmacy, Inc. (CVS) to sell our pharmacy and clinic businesses for cash consideration of approximately $1.9 billion. The closing of the transaction is subject to regulatory approval and other customary conditions. Either party will be permitted to terminate the agreement if the closing has not occurred on or before March 15, 2016 (or September 15, 2016 solely in the event that, as of March 15, 2016, all conditions other than regulatory approval have been satisfied or waived). Following the closing, CVS will operate the pharmacy and clinic businesses in our stores on a long term basis.

The agreement includes the sale of inventory and other assets. These currently held-for-sale assets have been classified as follows.


(millions)
 
October 31,
2015

 
January 31,
2015

 
November 1,
2014

Inventory included in other current assets
 
$
456

 
$
506

(a) 
$
507

Other current assets
 
15

 
3

(a) 
3

Other noncurrent assets
 

 
12

(a) 
12

Total
 
$
471

 
$
521

 
$
522

(a) Amounts have been updated to be comparable with the current period.



6




3. Canada Exit

Background

On January 15, 2015, Target Canada Co. and certain other wholly owned subsidiaries of Target (collectively Canada Subsidiaries), comprising substantially all of our Canadian operations and our historical Canadian Segment, filed for protection (the Filing) under the Companies' Creditors Arrangement Act (CCAA) with the Ontario Superior Court of Justice in Toronto (the Court) and were deconsolidated. The Canada Subsidiaries are executing a liquidation through the CCAA process.

Discontinued Operations
Three Months Ended
 
Nine Months Ended
(millions)
October 31,
2015

November 1,
2014

 
October 31,
2015

November 1,
2014

Sales
$

$
479

 
$

$
1,321

Cost of sales

386

 

1,072

SG&A expenses 

250

 

685

Depreciation and amortization

70

 

207

Interest expense

19

 

57

Pretax loss from operations

(246
)
 

(700
)
Pretax exit costs (a)
(2
)

 
(115
)

Income taxes
75

72

 
152

215

Earnings / (losses) from discontinued operations
$
73

$
(174
)
 
$
37

$
(485
)
(a) For the three and nine months ended October 31, 2015, pretax exit costs related to our ongoing support of the liquidation process and other professional fees. For the nine months ended October 31, 2015, pretax exits costs also included an increase to our accrual for the estimated probable losses related to claims that may be asserted against us, primarily under guarantees of certain leases.

Recorded Assets and Liabilities

Assets and Liabilities of Discontinued Operations
(millions)
October 31,
2015

January 31,
2015

 
 
November 1,
2014

Income tax benefit
$
181

$
1,430

 
Inventory
$
603

Receivables from Canada Subsidiaries
312

326

 
Property and equipment, net
4,846

Receivables under the debtor-in-possession credit facility

19

 
Other
899

Total assets
$
493

$
1,775

 
Total assets
$
6,348

 
 
 
 
Capital lease obligations
$
1,198

Accrued liabilities
$
297

$
296

 
Accounts payable and other liabilities
600

Total liabilities
$
297

$
296

 
Total liabilities
$
1,798


Accrued liabilities include estimated probable losses related to claims that may be asserted against us, primarily under guarantees of certain leases. The beneficiaries of those guarantees may seek damages or other related relief as a result of our exit from Canada. Our probable loss estimate is based on the expectation that claims will be asserted against us and negotiated settlements will be reached, and not on any determination that it is probable we would be found liable were these claims to be litigated. Our estimates involve significant judgment and are based on currently available information, an assessment of the validity of certain claims and estimated payments by the Canada Subsidiaries. We are not able to reasonably estimate a range of possible losses in excess of the accrual because there are significant factual and legal issues to be resolved. We believe that it is reasonably possible that future changes to our estimates of loss and the ultimate amount paid on these claims could be material to our results of operations in future periods. Any such losses would be reported in discontinued operations.

Receivables from the Canada Subsidiaries primarily relate to loans made to fund the operations of the Canada Subsidiaries and receivables generated in the ordinary course of business prior to deconsolidation. To assess recoverability, we estimated the fair value of the underlying net assets of the Canada Subsidiaries available for distribution to their creditors in relation to the estimated creditor claims and the priority of these claims. Our estimates involve significant judgment and are based on currently available

7




information, an assessment of the validity of certain claims and estimated payments by the Canada Subsidiaries. Our ultimate recovery is subject to the final liquidation value of the Canada Subsidiaries.

On November 23, 2015, we reached a settlement with an entity that controls guaranteed leases representing approximately 30 percent of the recorded accrual. Under the settlement terms, this entity has subrogated to us their claims against the Canada Subsidiaries. The settlement amount is materially consistent with our previously recorded accrual.

Income Taxes

During the three and nine months ended October 31, 2015, we recognized net tax benefits of $75 million and $152 million, respectively, in discontinued operations, which primarily relate to our pretax exit costs and change in the estimated tax benefit from our investment losses in Canada. During the fourth quarter of 2014, we recognized a tax benefit of $1,627 million in discontinued operations. The majority of the tax benefit was received in the first quarter of 2015, and we expect to use substantially all of the remainder to reduce our 2015 estimated tax payments.

4. Restructuring Initiatives

In 2015, we initiated a series of headquarters workforce reductions intended to increase organizational effectiveness and provide cost savings that can be reinvested in our growth initiatives. As a result, we recorded $21 million and $135 million of severance and other benefits-related charges within selling, general and administrative expenses (SG&A) during the three and nine months ended October 31, 2015, respectively. The vast majority of these expenses require cash expenditures. These costs were not included in our segment results.

Restructuring Costs
October 31, 2015
(millions)
Three Months
Ended

 
Nine Months
Ended

Severance
$
19

 
$
127

Pension and other
2

 
8

Total
$
21

 
$
135


Accruals for restructuring costs are included in other current liabilities.

Restructuring-Related Liabilities
(millions)
Severance

 
Pension and
Other

 
Total

Restructuring liability as of January 31, 2015
$

 
$

 
$

Charges during period
127

 
8

 
135

Paid or otherwise settled
(113
)
 
(8
)
 
(121
)
Restructuring liability as of October 31, 2015
$
14

 
$

 
$
14



8




5. Fair Value Measurements
 
Fair value measurements are reported in 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, 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
(millions)
Pricing Category
October 31,
2015

 
January 31,
2015

 
November 1,
2014

Assets
 
 

 
 

 
 

Cash and cash equivalents
 
 

 
 

 
 

Short-term investments
Level 1
$
1,154

 
$
1,520

 
$
4

Other current assets
 
 

 
 

 
 

Interest rate swaps(a)
Level 2
19

 

 

Prepaid forward contracts
Level 1
34

 
38

 
42

Beneficial interest asset
Level 3
23

 
43

 
50

Other noncurrent assets
 
 

 
 

 
 

Interest rate swaps(a)
Level 2
22

 
65

 
51

Company-owned life insurance investments(b)
Level 2
325

 
322

 
322

Beneficial interest asset
Level 3
15

 
31

 
37

Liabilities
 
 

 
 

 
 

Other current liabilities
 
 

 
 

 
 

Interest rate swaps(a)
Level 2
12

 

 

Other noncurrent liabilities
 
 

 
 

 
 

Interest rate swaps(a)
Level 2

 
24

 
28

(a)  See Note 10 for additional information on interest rate swaps.
(b)  Company-owned life insurance investments consist of equity index funds and fixed income assets. Amounts are presented net of nonrecourse loans that are secured by some of these policies. These loan amounts totaled $789 million at October 31, 2015, $773 million at January 31, 2015 and $780 million at November 1, 2014.
 
Significant Financial Instruments not Measured at Fair Value (a)

(millions)
October 31, 2015
 
January 31, 2015
 
November 1, 2014
Carrying
Amount

Fair
Value

 
Carrying
Amount

Fair
Value

 
Carrying
Amount

Fair
Value

Debt (b)
$
11,921

$
13,322

 
$
11,946

$
14,089

 
$
12,332

$
13,779

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

6. Notes Payable and Long-Term Debt
 
We obtain short-term financing from time to time under our commercial paper program, a form of notes payable.
 
Commercial Paper
Three Months Ended
 
Nine Months Ended
(dollars in millions)
October 31,
2015

 
November 1,
2014

 
October 31,
2015

 
November 1,
2014

Maximum daily amount outstanding during the period
$

 
$
386

 
$

 
$
590

Average daily amount outstanding during the period

 
51

 

 
160

Amount outstanding at period-end

 
386

 

 
386

Weighted average interest rate
%
 
0.12
%
 
%
 
0.11
%


9




7. Goodwill and Intangible Assets

We review long-lived assets for impairment when events or changes in circumstances, such as a decision to discontinue a business, indicate that the asset’s carrying value may not be recoverable. We also review goodwill for impairment when events or circumstances indicate it is more likely than not the fair value of a reporting unit is below its carrying value. During the third quarter 2015, we announced our decision to wind down certain noncore operations. As a result, we recorded a $35 million pretax impairment loss, which included approximately $23 million of intangible assets and $12 million of goodwill. These costs were included in SG&A on our Consolidated Statements of Operations, but were not included in our segment results.

8. Property and Equipment

We review long-lived assets for impairment when events or changes in circumstances, such as a decision to relocate or close a store, make significant software changes or discontinue projects, indicate that the asset’s carrying value may not be recoverable. We recognized impairment losses during each of the periods presented, primarily resulting from discontinued projects, store closures, and completed or planned land sales.

Impairments (a)
Three Months Ended
 
Nine Months Ended
(millions)
October 31,
2015

 
November 1,
2014

 
October 31,
2015

 
November 1,
2014

Total segment impairments
$
4

 
$
18

 
$
44

 
$
77

Unallocated impairments (b)
4

 

 
4

 
16

Total impairments
$
8

 
$
18

 
$
48

 
$
93

(a) Substantially all of the impairments are recorded in selling, general and administrative expense on the Consolidated Statements of Operations.
(b) For the three and nine months ended October 31, 2015, represents long-lived asset impairments from our decision to wind down certain noncore operations. For the nine months ended November 1, 2014, represents impairments of undeveloped land. These costs were not included in our segment results.

9. Data Breach

In the fourth quarter of 2013, we experienced a data breach in which an intruder stole certain payment card and other guest information from our network (the Data Breach). Based on our investigation, we believe that the intruder installed malware on our point-of-sale system in our U.S. stores and stole payment card data from up to approximately 40 million credit and debit card accounts of guests who shopped at our U.S. stores between November 27 and December 17, 2013. In addition, the intruder stole certain guest information, including names, mailing addresses, phone numbers or email addresses, for up to 70 million individuals.

Data Breach Related Accruals

Each of the four major payment card networks made a written claim against us regarding the Data Breach, either directly or through our acquiring banks. During the third quarter we entered into settlement agreements with two of the four payment card networks. We have resolved a claim from a third network and expect to resolve the remaining claim in the fourth quarter, both on terms consistent with our accrual.

As previously reported, we entered into a Settlement Agreement to resolve and dismiss the claims asserted on behalf of a class of guests whose information was compromised in the Data Breach. Pursuant to the Settlement Agreement, Target has agreed to pay $10 million to class member guests, certain administrative costs associated with the settlement, and attorneys’ fees and expenses to class counsel as the Court may award. That settlement received Court approval on November 17, 2015.

Actions related to the Data Breach that remain pending are: (1) a class action brought on behalf of financial institutions; (2)
one action previously filed in Canada; (3) several putative class action suits brought on behalf of shareholders; and (4) ongoing investigations by State Attorneys General and the Federal Trade Commission.

Our accrual for estimated probable losses is based on actual settlements reached to date, discussions with the remaining two payment card networks and the expectation of negotiated settlements in the pending actions.We have not based our accrual on any determination that it is probable we would be found liable for the losses we have accrued were these claims to be litigated. While our estimates may change as new information becomes available, we do not believe any adjustments will be material.

10




 
Expenses Incurred and Amounts Accrued  

Data Breach Balance Sheet Rollforward
(millions)
Liabilities

 
Insurance Receivable

Balance at February 1, 2014
$
61

 
$
44

Expenses incurred / insurance receivable recorded (a)
186

 
46

Payments made / received
(69
)
 
(28
)
Balance at November 1, 2014
$
178

 
$
62


Balance at January 31, 2015
$
171

 
$
60

Expenses incurred / insurance receivable recorded (a)
38

 

Payments made / received
(95
)
 
(5
)
Balance at October 31, 2015
$
114

 
$
55

(a) Includes expenditures and accruals for Data Breach-related costs and expected insurance recoveries as described below.

We recorded $26 million and $38 million of pretax Data Breach-related expenses during the three and nine months ended October 31, 2015, respectively. Along with legal and other professional services, expenses include an adjustment to the accrual in the third quarter of 2015 based on refined estimates of our probable exposure. We recorded $12 million of pretax Data Breach-related expenses during the three months ended November 1, 2014. We recorded $186 million of pretax Data Breach-related expenses, partially offset by expected insurance proceeds of $46 million, for net expenses of $140 million during the nine months ended November 1, 2014. These expenses were included in our Consolidated Statements of Operations as SG&A, but were not part of our segment results.

Since the Data Breach, we have incurred $290 million of cumulative expenses, partially offset by expected insurance recoveries of $90 million, for net cumulative expenses of $200 million.

Insurance Coverage

To limit our exposure to losses relating to Data Breach and other claims, we maintained $100 million of network-security insurance coverage during the period that the Data Breach occurred, above a $10 million deductible and with a $50 million sublimit for settlements with the payment card networks. This coverage, and certain other customary business-insurance coverage, has reduced our exposure related to the Data Breach. We will pursue recoveries to the maximum extent available under the policies. Since the Data Breach, we have received $35 million from our network-security insurance carriers of the $90 million accrued.

10. Derivative Financial Instruments
 
Our derivative instruments primarily consist of interest rate swaps, which are used to mitigate interest rate risk. As a result of our use of derivative instruments, we have counterparty credit exposure to large global financial institutions. We monitor this concentration of counterparty credit risk on an ongoing basis. See Note 5 for a description of the fair value measurement of our derivative instruments and their classification on the Consolidated Statements of Financial Position.
 
As of October 31, 2015 and November 1, 2014, three interest rate swaps with notional amounts totaling $1,250 million were designated as fair value hedges. No ineffectiveness was recognized during the three and nine months ended October 31, 2015 or November 1, 2014.
 
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
(millions)
Three Months Ended
 
Nine Months Ended
Type of Contract
 
Classification of (Income)/Expense
October 31,
2015

 
November 1,
2014

 
October 31,
2015

 
November 1,
2014

Interest rate swaps
 
Net interest expense
$
(9
)
 
$
(9
)
 
$
(28
)
 
$
(23
)

11




 
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 $20 million, $34 million and $38 million, at October 31, 2015, January 31, 2015 and November 1, 2014, respectively.
 
11. Share Repurchase

In June 2015, our Board of Directors authorized a $5 billion expansion of our existing share repurchase program to $10 billion. Under this program, we have repurchased 77.2 million shares of common stock through October 31, 2015, at an average price of $68.86, for a total investment of $5.3 billion.

Share Repurchases
Nine Months Ended
(millions, except per share data)
October 31,
2015 (a)

 
November 1,
 2014 (b)

Total number of shares purchased
27.3

 
0.6

Average price paid per share
$
79.84

 
$
55.36

Total investment
$
2,182

 
$
34

(a) Includes 0.1 million shares delivered upon the noncash settlement of prepaid contracts, which had an original cash investment of $3 million and an aggregate market value at their settlement dates of $7 million. These contracts are among the investment vehicles used to reduce our economic exposure related to our nonqualified deferred compensation plans. Note 12 provides the details of our positions in prepaid forward contracts.
(b) All of the shares reacquired were delivered upon the noncash settlement of prepaid forward contracts which had an original cash investment of $34 million and an aggregate market value at their settlement dates of $35 million.

12. Pension, Postretirement Health Care and Other Benefits
 
Pension and Postretirement Health Care Benefits
 
We provide qualified defined benefit pension plans, unfunded nonqualified pension plans and 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
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
(millions)
Oct 31,
2015

 
Nov 1,
2014

 
Oct 31,
2015

 
Nov 1,
2014

 
Oct 31,
2015

 
Nov 1,
2014

 
Oct 31,
2015

 
Nov 1,
2014

Service cost
$
27

 
$
28

 
$
82

 
$
84

 
$

 
$
2

 
$
2

 
$
4

Interest cost
38

 
37

 
115

 
112

 

 

 
1

 
1

Expected return on assets
(65
)
 
(58
)
 
(195
)
 
(175
)
 

 

 

 

Amortization of losses
20

 
16

 
62

 
49

 
9

 
1

 
11

 
4

Amortization of prior service cost
(3
)
 
(2
)
 
(9
)
 
(8
)
 
(19
)
 
(4
)
 
(28
)
 
(12
)
Curtailment gain








(43
)



(43
)


Settlement charges
1

 

 
3

 

 

 

 

 

Total
$
18

 
$
21

 
$
58

 
$
62

 
$
(53
)
 
$
(1
)
 
$
(57
)
 
$
(3
)
 
Effective April 1, 2016, we will discontinue the postretirement health care benefits that were offered to team members upon early retirement and prior to Medicare eligibility.  This decision resulted in a $58 million reduction in the projected postretirement health care benefit obligation and a $43 million curtailment gain recorded in SG&A during the three months ended October 31, 2015.

As a result of the restructuring initiatives discussed in Note 4, we remeasured the assets and liabilities of our largest pension plan as of March 9, 2015. The remeasurement resulted in a $208 million reduction to the projected benefit obligation, primarily resulting from a 41 basis point increase in the discount rate used, and a $47 million reduction of plan assets. Subsequent to the remeasurement, the pension plan was overfunded, with plan assets of $3,725 million exceeding the projected benefit obligation of $3,604 million.

12




We expect this remeasurement will reduce 2015 pension expense by $26 million, $8 million and $19 million of which was recognized during the three and nine months ended October 31, 2015, respectively.

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 loss of $2 million and pretax income of $2 million for the three and nine months ended October 31, 2015, respectively, and pretax income of $1 million and $3 million for the three and nine months ended November 1, 2014, respectively. During the nine months ended October 31, 2015 and November 1, 2014, we made no investments in prepaid forward contracts in our own common stock. Adjusting our position in these investment vehicles may involve repurchasing shares of Target common stock when settling the forward contracts as described in Note 11. The settlement dates of these instruments are regularly renegotiated with the counterparty.
 
Prepaid Forward Contracts on Target Common Stock

(millions, except per share data)
Number of Shares

 
Contractual
Price Paid
per Share

 
Contractual
Fair Value

 
Total Cash Investment

October 31, 2015
0.4

 
$
41.13

 
$
34

 
$
18

January 31, 2015
0.5

 
$
41.11

 
$
38

 
$
21

November 1, 2014
0.7

 
$
42.88

 
$
42

 
$
29


13. Accumulated Other Comprehensive Income
 
 
(millions)
Cash Flow
Hedges

 
Currency
Translation
Adjustment

 
Pension and
Other
Benefits

 
Total

January 31, 2015
$
(22
)
 
$
(16
)
 
$
(561
)
 
$
(599
)
Other comprehensive income before reclassifications

 
(3
)
 
134

 
131

Amounts reclassified from AOCI
3

(a) 

 
(4
)
(b) 
(1
)
October 31, 2015
$
(19
)
 
$
(19
)
 
$
(431
)
 
$
(469
)
(a) Represents gains and losses on cash flow hedges, net of $2 million of taxes.
(b) Represents amortization of pension and other benefit liabilities, net of $2 million of taxes.


13




14. Segment Reporting
 
Our segment measure of profit is used by management to evaluate performance and make operating decisions. 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, online or through mobile devices.
 
Business Segment Results
Three Months Ended
 
Nine Months Ended
(millions)
October 31,
2015

 
November 1,
2014

 
October 31,
2015

 
November 1,
2014

Sales
$
17,613

 
$
17,254

 
$
52,159

 
$
50,868

Cost of sales
12,440

 
12,171

 
36,402

 
35,716

Gross margin
5,173

 
5,083

 
15,757

 
15,152

Selling, general and administrative expenses (a)(f)
3,650

 
3,632

 
10,533

 
10,450

Depreciation and amortization
561

 
535

 
1,651

 
1,584

Segment profit
$
962

 
$
916

 
$
3,573

 
$
3,118

Restructuring costs (b)(f)
(21
)
 

 
(135
)
 

Data Breach related costs (c)(f)
(26
)
 
(12
)
 
(38
)
 
(140
)
Impairments (d)(f)
(39
)
 

 
(39
)
 
(16
)
Card brand conversion costs (e)(f)

 

 

 
(13
)
Earnings from continuing operations before interest expense and income taxes
876

 
904

 
3,361

 
2,949

Net interest expense
151

 
146

 
455

 
730

Earnings from continuing operations before income taxes
$
725

 
$
758

 
$
2,906

 
$
2,219

Note: Amounts may not foot due to rounding.
(a)  Beginning with the first quarter of 2015, segment EBIT includes the impact of the reduction of the the beneficial interest asset. For comparison purposes, prior year segment EBIT has been revised.
(b) Refer to Note 4 for more information on restructuring costs.
(c) Refer to Note 9 for more information on Data Breach related costs.
(d) Refer to Note 7 and Note 8 for more information on impairments.
(e) Expense related to converting co-branded card program to MasterCard.
(f) The sum of segment SG&A expenses, restructuring costs, Data Breach related costs, impairments and card brand conversion costs equal consolidated SG&A expenses.

Reconciliation of Segment Assets to Total Assets
(millions)
October 31,
2015

 
January 31,
2015

 
November 1,
2014

Segment assets
$
41,148

 
$
39,569

 
$
40,051

Assets of discontinued operations
493

 
1,775

 
6,348

Unallocated assets (a)
55

 
60

 
62

Total assets
$
41,696

 
$
41,404

 
$
46,461

(a) Represents the insurance receivable related to the Data Breach.

14




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Executive Summary
 
Third quarter 2015 includes the following notable items:

GAAP earnings per share were $0.87, including $0.11 related to discontinued operations.
Adjusted earnings per share from continuing operations were $0.86.
Third quarter comparable sales grew 1.9 percent, driven by traffic growth of 1.4 percent.
Digital channel sales increased by 20 percent, contributing 0.4 percentage points to comparable sales growth.
We returned $1.3 billion to shareholders in the third quarter through dividends and share repurchase.

Sales were $17,613 million for the three months ended October 31, 2015, an increase of $359 million or 2.1 percent from the same period in the prior year. Operating cash flow provided by continuing operations was $2,956 million and $2,599 million for the nine months ended October 31, 2015 and November 1, 2014, respectively. 
 
Earnings Per Share from Continuing Operations
Three Months Ended
 
 

 
Nine Months Ended
 
 

October 31,
2015

 
November 1,
2014

 
Change

 
October 31,
2015

 
November 1,
2014

 
Change

GAAP diluted earnings per share
$
0.76

 
$
0.82

 
(7.9
)%
 
$
2.98

 
$
2.33

 
27.7
%
Adjustments
0.10

 
(0.04
)
 
 
 
0.21

 
0.39

 
 

Adjusted diluted earnings per share
$
0.86

 
$
0.79

 
8.6
 %
 
$
3.18

 
$
2.72

 
16.9
%
Note:  Amounts may not foot due to rounding. Adjusted diluted earnings per share from continuing operations (Adjusted EPS), a non-GAAP metric, excludes the impact of certain matters not related to our routine retail operations and the impact of our discontinued Canadian operations. Management believes that Adjusted EPS is meaningful to provide period-to-period comparisons of our operating results. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 21.

We are reporting after-tax return on invested capital (ROIC) for continuing operations as we believe ROIC provides a meaningful measure of the effectiveness of our capital allocation over time. For the trailing twelve months ended October 31, 2015, ROIC was 13.0 percent, compared with 11.2 percent for the trailing twelve months ended November 1, 2014. A reconciliation of ROIC is provided on page 22.

Pharmacies and Clinics Transaction

On June 12, 2015, we entered into an asset purchase agreement with CVS Pharmacy, Inc. (CVS) to sell our pharmacy and clinic businesses for cash consideration of approximately $1.9 billion. The closing of the transaction is subject to regulatory approval and other customary conditions. Either party will be permitted to terminate the agreement if the closing has not occurred on or before March 15, 2016 (or September 15, 2016 solely in the event that, as of March 15, 2016, all conditions other than regulatory approval have been satisfied or waived). Following the closing, CVS will operate the pharmacy and clinic businesses in our stores under a long term operating agreement. No profit-sharing arrangement exists. CVS will make an ongoing annual, inflation-adjusted occupancy-related payment to us, starting at approximately $20 million to $25 million in the first year of the agreement. We also entered a development agreement with CVS through which we may jointly develop small-format stores.

Based on current estimates, we expect to record a pretax gain of approximately $500 million to $550 million at closing, which will be recorded outside of segment results and excluded from Adjusted EPS. We also expect to record deferred income of approximately $800 million, which we will recognize into income evenly over the 23 year weighted average remaining accounting useful life of our stores.

We expect to use the $1.3 billion to $1.4 billion of after-tax proceeds to settle the approximately $200 million of retained pharmacy and clinic net liabilities (primarily accounts payable, net of accounts receivable) and return capital to shareholders.


15




Had this transaction closed prior to this year, our reported sales, cost of goods sold, and SG&A expense for the nine months ended October 31, 2015 would have been lower by approximately $3.3 billion, $2.6 billion and $0.7 billion, respectively, with no notable effect on EBITDA and EBIT. This transaction is expected to be accretive to EPS in every period following the closing, and should add 50 basis points or more to ROIC over time. In addition, due to the lower sales base, we expect the transaction to have a favorable impact on our EBITDA and EBIT margin rates.

Refer to Note 2 of the Financial Statements for additional information about the transaction.

Analysis of Results of Operations
 
Segment Results
 
 
Three Months Ended
 
 

 
Nine Months Ended
 
 

(dollars in millions)
October 31,
2015

 
November 1,
2014

 
Percent
Change

 
October 31,
2015

 
November 1,
2014

 
Percent
Change

Sales
$
17,613

 
$
17,254

 
2.1
%
 
$
52,159

 
$
50,868

 
2.5
%
Cost of sales
12,440

 
12,171

 
2.2

 
36,402

 
35,716

 
1.9

Gross margin
5,173

 
5,083

 
1.8

 
15,757

 
15,152

 
4.0

SG&A expenses (a)
3,650

 
3,632

 
0.5

 
10,533

 
10,450

 
0.8

EBITDA
1,523

 
1,451

 
4.9

 
5,224

 
4,702

 
11.1

Depreciation and amortization
561

 
535

 
4.8

 
1,651

 
1,584

 
4.3

EBIT
$
962

 
$
916

 
5.0
%
 
$
3,573

 
$
3,118

 
14.6
%
Note: We operate as a single segment which includes all of our continuing operations, excluding net interest expense, Data Breach related costs and certain other expenses that are discretely managed. Our segment operations are designed to enable guests to purchase products seamlessly in stores, online or through mobile devices. Beginning with the first quarter of 2015, segment EBIT includes the impact of the reduction of the beneficial interest asset. For comparison purposes, prior year segment EBIT has been revised. See Note 14 of our Financial Statements for a reconciliation of our segment results to earnings before income taxes.
(a) SG&A includes $166 million and $477 million of net profit-sharing income under our credit card program agreement for the three and nine months ended October 31, 2015, respectively, and $161 million and $466 million for the three and nine months ended November 1, 2014, respectively.

Rate Analysis
Three Months Ended
 
Nine Months Ended
 
October 31,
2015

 
November 1,
2014

 
October 31,
2015

 
November 1,
2014

Gross margin rate
29.4
%
 
29.5
%
 
30.2
%
 
29.8
%
SG&A expense rate
20.7

 
21.1

 
20.2

 
20.5

EBITDA margin rate
8.6

 
8.4

 
10.0

 
9.2

Depreciation and amortization expense rate
3.2

 
3.1

 
3.2

 
3.1

EBIT margin rate
5.5

 
5.3

 
6.8

 
6.1

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


16




Sales
 
Sales include merchandise sales, net of expected returns, from our stores and digital channels, and gift card breakage. Digital channel sales include all sales initiated through mobile applications and our conventional websites. Digital channel sales may be fulfilled through our distribution centers or our stores.

Sales by Channel
Three Months Ended
 
Nine Months Ended
 
October 31,
2015

 
November 1,
2014

 
October 31,
2015

 
November 1,
2014

Stores
97.3
%
 
97.7
%
 
97.2
%
 
97.8
%
Digital
2.7

 
2.3

 
2.8

 
2.2

Total
100
%
 
100
%
 
100
%
 
100
%
 
Sales by Product Category
Three Months Ended
 
Nine Months Ended
 
October 31,
2015

 
November 1,
2014

 
October 31,
2015

 
November 1,
2014

Household essentials
28
%
 
27
%
 
28
%
 
27
%
Hardlines
13

 
15

 
14

 
15

Apparel and accessories
19

 
19

 
20

 
19

Food and pet supplies
22

 
21

 
21

 
22

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 channel sales by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales include all sales, except sales from stores open less than 13 months, digital acquisitions operating less than one year, stores that have been closed and digital acquisitions that we no longer operate. 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
Three Months Ended
 
Nine Months Ended
 
October 31,
2015

 
November 1,
2014

 
October 31,
2015

 
November 1,
2014

Comparable sales change
1.9
 %
 
1.2
 %
 
2.2
 %
 
0.3
 %
Drivers of change in comparable sales
 

 
 

 
 

 
 

Number of transactions
1.4

 
(0.4
)
 
1.3

 
(1.5
)
Average transaction amount
0.4

 
1.6

 
0.9

 
1.8

Selling price per unit
2.5

 
3.1

 
3.8

 
2.6

Units per transaction
(2.1
)
 
(1.5
)
 
(2.8
)
 
(0.8
)
Note: Amounts may not foot due to rounding.

Contribution to Comparable Sales Change
Three Months Ended
 
Nine Months Ended
 
October 31,
2015

 
November 1,
2014

 
October 31,
2015

 
November 1,
2014

Stores channel comparable sales change
1.4
%
 
0.6
%
 
1.6
%
 
(0.2
)%
Digital channel contribution to comparable sales change
0.4

 
0.6

 
0.6

 
0.5

Total comparable sales change
1.9
%
 
1.2
%
 
2.2
%
 
0.3
 %
Note: Amounts may not foot due to rounding.

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.


17




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. Guests receive a 5 percent discount on virtually all purchases when they use a REDcard at Target.
 
REDcard Penetration
Three Months Ended
 
Nine Months Ended
 
October 31,
2015

 
November 1,
2014

 
October 31,
2015

 
November 1,
2014

Target Debit Card
12.1
%
 
11.2
%
 
12.0
%
 
11.2
%
Target Credit Cards
10.2

 
9.8

 
9.9

 
9.5

Total REDcard Penetration
22.3
%
 
21.0
%
 
22.0
%
 
20.7
%
Note: Amounts may not foot due to rounding.

Gross Margin Rate

For the three and nine months ended October 31, 2015, our gross margin rate was 29.4 percent and 30.2 percent compared with 29.5 percent and 29.8 percent in the comparable period last year. For the quarter, the decrease was primarily due to higher digital channel sales and other items, including pharmacy reimbursement pressure, partially offset by a favorable category sales mix. Year-to-date, the increase was primarily due to lower promotional activity relative to the highly promotional period in 2014 following the Data Breach and favorable category sales mix, partially offset by the impact of increased digital channel sales.
 

18




Selling, General and Administrative Expense Rate

For the three and nine months ended October 31, 2015, our SG&A expense rate was 20.7 percent and 20.2 percent, respectively, decreasing from 21.1 percent and 20.5 percent in the comparable period last year. The quarter and year-to-date decrease primarily resulted from cost saving initiatives and reduced marketing expense, partially offset by increased incentive compensation. For the quarter, the decrease was also partially offset by higher stores hourly payroll and payment card-related expenses due to the roll-out of chip-enabled REDcards.
 
Store Data
 
Change in Number of Stores
Three Months Ended
 
Nine Months Ended
 
October 31,
2015

 
November 1,
2014

 
October 31,
2015

 
November 1,
2014

Beginning store count
1,799

 
1,795

 
1,790

 
1,793

Opened
6

 
6

 
15

 
16

Closed

 

 

 
(8
)
Ending store count
1,805

 
1,801

 
1,805

 
1,801

Number of stores remodeled during the period
8

 
13

 
9

 
39



19




Number of Stores and Retail Square Feet
Number of Stores
 
Retail Square Feet(a)
October 31,
2015

 
January 31,
2015

 
November 1,
2014

 
October 31,
2015

 
January 31,
2015

 
November 1,
2014

Expanded food assortment stores
1,306

 
1,292

 
1,294

 
168,745

 
167,026

 
167,291

SuperTarget stores
249

 
249

 
249

 
44,150

 
44,151

 
44,151

General merchandise stores
232

 
240

 
249

 
27,028

 
27,945

 
28,861

CityTarget stores
9

 
8

 
8

 
987

 
820

 
820

TargetExpress stores
9

 
1

 
1

 
173

 
21

 
21

Total
1,805

 
1,790

 
1,801

 
241,083

 
239,963

 
241,144

(a) In thousands; reflects total square feet, less office, distribution center and vacant space.
 
Other Performance Factors

Consolidated Selling, General and Administrative Expenses

We recorded certain selling, general and administrative expenses outside of the segment. For the three and nine months ended October 31, 2015, these expenses included $39 million of impairments, $21 million and $135 million, respectively, of restructuring costs, and $26 million and $38 million, respectively, of Data Breach-related costs. For the three months ended November 1, 2014, these expenses included $12 million of Data Breach-related costs. For the nine months ended November 1, 2014, these expenses included $140 million of Data Breach-related costs (net of expected insurance proceeds), $16 million of impairments, and $13 million of costs related to plans to convert existing co-branded REDcards to MasterCard co-branded chip-and-PIN cards in 2015 to support the accelerated transition to chip-and-PIN-enabled REDcards. Additional information about these items is provided within the Reconciliation of Non-GAAP Financial Measures to GAAP Measures on page 21.

Net Interest Expense
 
Net interest expense from continuing operations was $151 million and $455 million for the three and nine months ended October 31, 2015, respectively, compared to $146 million and $730 million for the three and nine months ended November 1, 2014, respectively. Net interest expense for the nine months ended November 1, 2014 included a loss on early retirement of debt of $285 million.

Provision for Income Taxes
 
Our effective income tax rate from continuing operations for the three and nine months ended October 31, 2015 was 34.3 percent and 34.6 percent, respectively, compared with 30.6 percent and 32.9 percent for the three and nine months ended November 1, 2014. The increase was primarily due to the favorable resolution of various tax matters during the three and nine months ended November 1, 2014. The resolution of income tax matters reduced tax expense by $0 million and $8 million for the three and nine months ended October 31, 2015, respectively, compared with $30 million and $31 million for the same periods in the prior year. 

Discontinued Operations

Income from discontinued operations, net of tax, was $73 million and $37 million for the three and nine months ended October 31, 2015. During the three and nine months ended October 31, 2015, we changed the estimated tax benefit from our investment losses in Canada. In addition, we incurred costs related to our ongoing support of the liquidation process and other professional fees, and for the nine months ended October 31, 2015, we increased our accrual for the estimated probable losses related to claims that may be asserted against us, primarily under guarantees of certain leases.

On November 23, 2015, we reached a settlement with an entity that controls guaranteed leases representing approximately 30 percent of the recorded accrual. Under the settlement terms, this entity has subrogated to us their claims against the Canada Subsidiaries. The settlement amount is materially consistent with our previously recorded accrual.

See Note 3 of the Financial Statements for information regarding our Canada exit.


20




Reconciliation of Non-GAAP Financial Measures to GAAP Measures
 
To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share from continuing operations (Adjusted EPS). This metric excludes restructuring costs, net expenses related to the 2013 data breach and other matters presented below. We believe this information is useful in providing period-to-period comparisons of the results of our continuing operations. This measure is not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The most comparable GAAP measure is diluted earnings per share from continuing operations. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP. Other companies may calculate Adjusted EPS differently than we do, limiting the usefulness of the measure for comparisons with other companies. Prior year amounts have been revised to present Adjusted EPS on a continuing operations basis.

Adjusted EPS
 
Three Months Ended
 
 
October 31, 2015
 
November 1, 2014
(millions, except per share data)
 
Pretax

 
Net of Tax

 
Per Share Amounts

 
Pretax

 
Net of Tax

 
Per Share Amounts

GAAP diluted earnings per share from continuing operations
 
 
 
 
 
$
0.76

 
 
 
 
 
$
0.82

Adjustments
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring costs (a)
 
$
21

 
$
13

 
$
0.02

 
$

 
$

 
$

Data Breach-related costs (b)
 
26

 
20

 
0.03

 
12

 
7

 
0.01

Impairments (c)
 
39

 
29

 
0.05