Edgar Filing: TARGET CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended August 4, 2018

Commission File Number 1-6049

TARGET CORPORATION

(Exact name of registrant as specified in its charter)



Minnesota		41-0215170
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1000 Nicollet Mall, Minneapolis, Minnesota		55403
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 612/304-6073

Former name, former address and former fiscal year, if changed since last report: N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).



Large accelerated filer x	Accelerated filer o		Non-accelerated filer o
Smaller reporting company o		Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

Indicate the number of shares outstanding of each of registrant’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $0.0833, outstanding at August 22, 2018 were 526,350,987.

TARGET CORPORATION

TABLE OF CONTENTS



PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	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	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30

Signature		31

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements



Consolidated Statements of Operations
	Three Months Ended						Six Months Ended
(millions, except per share data) (unaudited)	August 4, 2018			July 29, 2017 As Adjusted ^(a)			August 4, 2018			July 29, 2017 As Adjusted ^(a)
Sales	$	17,552		$	16,410		$	34,108		$	32,405
Other revenue	224			224			450			452
Total revenue	17,776			16,634			34,558			32,857
Cost of sales	12,239			11,419			23,865			22,618
Selling, general and administrative expenses	3,865			3,601			7,410			6,953
Depreciation and amortization (exclusive of depreciation included in cost of sales)	539			521			1,109			1,038
Operating income	1,133			1,093			2,174			2,248
Net interest expense	115			131			237			272
Net other (income) / expense	(4		)	(15		)	(12		)	(30		)
Earnings from continuing operations before income taxes	1,022			977			1,949			2,006
Provision for income taxes	223			307			433			661
Net earnings from continuing operations	799			670			1,516			1,345
Discontinued operations, net of tax	—			1			1			4
Net earnings	$	799		$	671		$	1,517		$	1,349
Basic earnings per share
Continuing operations	$	1.50		$	1.22		$	2.84		$	2.44
Discontinued operations	—			—			—			0.01
Net earnings per share	$	1.50		$	1.22		$	2.84		$	2.45
Diluted earnings per share
Continuing operations	$	1.49		$	1.21		$	2.81		$	2.43
Discontinued operations	—			—			—			0.01
Net earnings per share	$	1.49		$	1.22		$	2.82		$	2.44
Weighted average common shares outstanding
Basic	531.7			549.3			534.3			550.8
Dilutive impact of share-based awards	4.6			2.6			4.3			2.8
Diluted	536.3			551.9			538.6			553.6
Antidilutive shares	—			5.2			—			3.6
Dividends declared per share	$	0.64		$	0.62		$	1.26		$	1.22

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

See accompanying Notes to Consolidated Financial Statements.


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



Consolidated Statements of Comprehensive Income
	Three Months Ended					Six Months Ended
(millions) (unaudited)	August 4, 2018			July 29, 2017 As Adjusted ^(a)		August 4, 2018			July 29, 2017 As Adjusted ^(a)
Net earnings	$	799		$	671	$	1,517		$	1,349
Other comprehensive income
Pension, net of tax	16			7		29			14
Currency translation adjustment and cash flow hedges, net of tax	(2		)	3		(5		)	8
Other comprehensive income	14			10		24			22
Comprehensive income	$	813		$	681	$	1,541		$	1,371

See accompanying Notes to Consolidated Financial Statements.


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



Consolidated Statements of Financial Position
(millions) (unaudited)	August 4, 2018			February 3, 2018 As Adjusted ^(a)			July 29, 2017 As Adjusted ^(a)
Assets
Cash and cash equivalents	$	1,180		$	2,643		$	2,291
Inventory	9,112			8,597			8,192
Other current assets	1,211			1,300			1,114
Total current assets	11,503			12,540			11,597
Property and equipment
Land	6,074			6,095			6,089
Buildings and improvements	28,629			28,131			27,616
Fixtures and equipment	5,356			5,623			5,361
Computer hardware and software	2,575			2,645			2,518
Construction-in-progress	685			440			423
Accumulated depreciation	(18,147		)	(18,398		)	(17,603		)
Property and equipment, net	25,172			24,536			24,404
Operating lease assets	1,976			1,884			1,857
Other noncurrent assets	1,345			1,343			809
Total assets	$	39,996		$	40,303		$	38,667
Liabilities and shareholders’ investment
Accounts payable	$	9,116		$	8,677		$	7,584
Accrued and other current liabilities	3,878			4,094			3,627
Current portion of long-term debt and other borrowings	1,044			281			1,365
Total current liabilities	14,038			13,052			12,576
Long-term debt and other borrowings	10,108			11,117			10,706
Noncurrent operating lease liabilities	2,028			1,924			1,897
Deferred income taxes	828			693			757
Other noncurrent liabilities	1,827			1,866			1,676
Total noncurrent liabilities	14,791			15,600			15,036
Shareholders’ investment
Common stock	44			45			46
Additional paid-in capital	5,788			5,858			5,707
Retained earnings	6,058			6,495			5,918
Accumulated other comprehensive loss	(723		)	(747		)	(616		)
Total shareholders’ investment	11,167			11,651			11,055
Total liabilities and shareholders’ investment	$	39,996		$	40,303		$	38,667

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

Preferred Stock Authorized 5,000,000 shares, $0.01 par value; no shares were issued or outstanding during any period presented.

See accompanying Notes to Consolidated Financial Statements.


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



Consolidated Statements of Cash Flows
	Six Months Ended
(millions) (unaudited)	August 4, 2018			July 29, 2017 As Adjusted ^(a)
Operating activities
Net earnings	$	1,517		$	1,349
Earnings from discontinued operations, net of tax	1			4
Net earnings from continuing operations	1,516			1,345
Adjustments to reconcile net earnings to cash provided by operations
Depreciation and amortization	1,234			1,166
Share-based compensation expense	71			43
Deferred income taxes	129			(90		)
Noncash losses / (gains) and other, net	99			94
Changes in operating accounts
Inventory	(515		)	52
Other assets	1			71
Accounts payable	342			332
Accrued and other liabilities	(154		)	(144		)
Cash provided by operating activities—continuing operations	2,723			2,869
Cash provided by operating activities—discontinued operations	1			57
Cash provided by operations	2,724			2,926
Investing activities
Expenditures for property and equipment	(1,856		)	(1,203		)
Proceeds from disposal of property and equipment	15			22
Other investments	3			(80		)
Cash required for investing activities	(1,838		)	(1,261		)
Financing activities
Reductions of long-term debt	(255		)	(617		)
Dividends paid	(665		)	(663		)
Repurchase of stock	(954		)	(615		)
Accelerated share repurchase pending final settlement	(525		)	—
Stock option exercises	50			9
Cash required for financing activities	(2,349		)	(1,886		)
Net decrease in cash and cash equivalents	(1,463		)	(221		)
Cash and cash equivalents at beginning of period	2,643			2,512
Cash and cash equivalents at end of period	$	1,180		$	2,291

See accompanying Notes to Consolidated Financial Statements.


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



Consolidated Statements of Shareholders’ Investment
	Common		Stock			Additional						Accumulated Other
	Stock		Par			Paid-in			Retained			Comprehensive
(millions) (unaudited)	Shares		Value			Capital			Earnings			(Loss) / Income			Total
January 28, 2017 As Adjusted ^(a)	556.2		$	46		$	5,661		$	5,846		$	(638	)	$	10,915
Net earnings	—		—			—			2,914			—			2,914
Other comprehensive income	—		—			—			—			8			8
Dividends declared	—		—			—			(1,356		)	—			(1,356		)
Repurchase of stock	(17.6	)	(1		)	—			(1,026		)	—			(1,027		)
Stock options and awards	3.1		—			197			—			—			197
Reclassification of tax effects to retained earnings	—		—			—			117			(117		)	—
February 3, 2018 As Adjusted ^(a)	541.7		$	45		$	5,858		$	6,495		$	(747	)	$	11,651
Net earnings	—		—			—			1,517			—			1,517
Other comprehensive income	—		—			—			—			24			24
Dividends declared	—		—			—			(674		)	—			(674		)
Repurchase of stock	(12.7	)	(1		)	—			(925		)	—			(926		)
Accelerated share repurchase pending final settlement	(4.6	)	—			(170		)	(355		)	—			(525		)
Stock options and awards	1.7		—			100			—			—			100
August 4, 2018	526.1		$	44		$	5,788		$	6,058		$	(723	)	$	11,167

See accompanying Notes to Consolidated Financial Statements.


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

Notes to Consolidated Financial Statements (unaudited)

1. Accounting Policies

These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations of the Securities and Exchanged Commission (SEC) applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (U.S. GAAP) for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statement disclosures in our 2017 Form 10-K.

We use the same accounting policies in preparing quarterly and annual financial statements. Note 2 provides information about our adoption of new accounting standards for revenue recognition, leases, and pensions. Unless otherwise noted, amounts presented within the Notes to Consolidated Financial Statements refer to our continuing operations.

We operate as a single segment that includes all of our continuing operations, which are designed to enable guests to purchase products seamlessly in stores or through our digital channels. Virtually all of our revenues are generated in the United States. The vast majority of our long-lived assets are located within the United States.

Due to the seasonal nature of our business, quarterly revenues, expenses, earnings, and cash flows are not necessarily indicative of the results that may be expected for the full year.

2. Accounting Standards Adopted

Revenue Recognition

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

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

Leases

We adopted ASU No. 2016-02—Leases (Topic 842), as of February 4, 2018, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements.

In addition, we elected the hindsight practical expedient to determine the lease term for existing leases. Our election of the hindsight practical expedient resulted in the shortening of lease terms for certain existing leases and the useful lives of corresponding leasehold improvements. In our application of hindsight, we evaluated the performance of the leased stores and the associated markets in relation to our overall real estate strategies, which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.

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

Pensions

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



Effect of Accounting Standards Adoption on Consolidated Statement of Operations

	Three Months Ended		Effect of the Adoption of												Three Months Ended
			ASC Topic 606 (Revenue Recognition)				ASC Topic 842 (Leases)				ASU 2017-07 (Pension)
(millions, except per share data) (unaudited)	July 29, 2017 As Previously Reported														July 29, 2017 As Adjusted
Sales	$	16,429	$	(19	)	^(a)	$	—			$	—			$	16,410
Other revenue	—		224			^(a)	—				—				224
Total revenue	16,429		205				—				—				16,634
Cost of sales	11,419		—				—				—				11,419
Selling, general and administrative expenses	3,382		205			^(a)	(2		)		15			^(c)	3,601
Depreciation and amortization (exclusive of depreciation included in cost of sales)	514		—				8			^(b)	—				521
Operating income	1,114		—				(6		)		(15		)		1,093
Net interest expense	135		—				(3		)	^(b)	—				131
Net other (income) / expense	—		—				—				(15		)	^(c)	(15		)
Earnings from continuing operations before income taxes	979		—				(3		)		—				977
Provision for income taxes	308		—				(1		)		—				307
Net earnings from continuing operations	671		—				(2		)		—				670
Discontinued operations, net of tax	1		—				—				—				1
Net earnings	$	672	$	—			$	(2	)		$	—			$	671
Basic earnings per share
Continuing operations	$	1.22													$	1.22
Discontinued operations	—														—
Net earnings per share	$	1.22													$	1.22
Diluted earnings per share
Continuing operations	$	1.22													$	1.21
Discontinued operations	—														—
Net earnings per share	$	1.22													$	1.22

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



Effect of Accounting Standards Adoption on Consolidated Statement of Operations

	Six Months Ended		Effect of the Adoption of												Six Months Ended
			ASC Topic 606 (Revenue Recognition)				ASC Topic 842 (Leases)				ASU 2017-07 (Pension)
(millions, except per share data) (unaudited)	July 29, 2017 As Previously Reported														July 29, 2017 As Adjusted
Sales	$	32,446	$	(41	)	^(a)	$	—			$	—			$	32,405
Other revenue	—		452			^(a)	—				—				452
Total revenue	32,446		411				—				—				32,857
Cost of sales	22,618		—				—				—				22,618
Selling, general and administrative expenses	6,515		411			^(a)	(2		)		30			^(c)	6,953
Depreciation and amortization (exclusive of depreciation included in cost of sales)	1,022		—				16			^(b)	—				1,038
Operating income	2,291		—				(14		)		(30		)		2,248
Net interest expense	278		—				(7		)	^(b)	—				272
Net other (income) / expense	—		—				—				(30		)	^(c)	(30		)
Earnings from continuing operations before income taxes	2,013		—				(7		)		—				2,006
Provision for income taxes	664		—				(3		)		—				661
Net earnings from continuing operations	1,349		—				(4		)		—				1,345
Discontinued operations, net of tax	4		—				—				—				4
Net earnings	$	1,353	$	—			$	(4	)		$	—			$	1,349
Basic earnings per share
Continuing operations	$	2.45													$	2.44
Discontinued operations	0.01														0.01
Net earnings per share	$	2.45													$	2.45
Diluted earnings per share
Continuing operations	$	2.44													$	2.43
Discontinued operations	0.01														0.01
Net earnings per share	$	2.44													$	2.44

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


^(a)	For the three and six months ended July 29, 2017, we reclassified $172 million and $342 million, respectively, of profit-sharing income under our credit card program agreement to Other Revenue from SG&A. In addition, we reclassified certain advertising, rental, and other miscellaneous revenues, none of which was individually significant, from Sales and SG&A to Other Revenues.


^(b)	Relates to lease-term changes under the hindsight practical expedient.


^(c)	Relates to non-service cost components reclassified to Net Other (Income) / Expense from SG&A.



Effect of Accounting Standards Adoption on Consolidated Statement of Financial Position

				Effect of the Adoption of
(millions) (unaudited)	February 3, 2018 As Previously Reported			ASC Topic 606 (Revenue Recognition)				ASC Topic 842 (Leases)				February 3, 2018 As Adjusted
Assets
Cash and cash equivalents	$	2,643		$	—			$	—			$	2,643
Inventory	8,657			(60		)	^(a)	—				8,597
Other current assets	1,264			60			^(a)	(24		)	^(b)	1,300
Total current assets	12,564			—				(24		)		12,540
Property and equipment
Land	6,095			—				—				6,095
Buildings and improvements	28,396			—				(265		)	^(c)	28,131
Fixtures and equipment	5,623			—				—				5,623
Computer hardware and software	2,645			—				—				2,645
Construction-in-progress	440			—				—				440
Accumulated depreciation	(18,181		)	—				(217		)	^(c)	(18,398		)
Property and equipment, net	25,018			—				(482		)		24,536
Operating lease assets	—			—				1,884			^(d)	1,884
Other noncurrent assets	1,417			—				(74		)	^(e)	1,343
Total assets	$	38,999		$	—			$	1,304			$	40,303
Liabilities and shareholders’ investment
Accounts payable	$	8,677		$	—			$	—			$	8,677
Accrued and other current liabilities	4,254			(14		)	^(k)	(146		)	^(f)	4,094
Current portion of long-term debt and other borrowings	270			—				11			^(g)	281
Total current liabilities	13,201			(14		)		(135		)		13,052
Long-term debt and other borrowings	11,317			—				(200		)	^(g)	11,117
Noncurrent operating lease liabilities	—			—				1,924			^(h)	1,924
Deferred income taxes	713			4				(24		)		693
Other noncurrent liabilities	2,059			—				(192		)	⁽ⁱ⁾	1,866
Total noncurrent liabilities	14,089			4				1,508				15,600
Shareholders’ investment
Common stock	45			—				—				45
Additional paid-in capital	5,858			—				—				5,858
Retained earnings	6,553			10			^(k)	(69		)	^(j)	6,495
Accumulated other comprehensive loss	(747		)	—				—				(747		)
Total shareholders’ investment	11,709			10				(69		)		11,651
Total liabilities and shareholders’ investment	$	38,999		$	—			$	1,304			$	40,303

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



Effect of Accounting Standards Adoption on Consolidated Statement of Financial Position

				Effect of the Adoption of
(millions) (unaudited)	July 29, 2017 As Previously Reported			ASC Topic 606 (Revenue Recognition)				ASC Topic 842 (Leases)				July 29, 2017 As Adjusted
Assets
Cash and cash equivalents	$	2,291		$	—			$	—			$	2,291
Inventory	8,257			(65		)	^(a)	—				8,192
Other current assets	1,072			65			^(a)	(23		)	^(b)	1,114
Total current assets	11,620			—				(23		)		11,597
Property and equipment
Land	6,089			—				—				6,089
Buildings and improvements	28,041			—				(425		)	^(c)	27,616
Fixtures and equipment	5,361			—				—				5,361
Computer hardware and software	2,518			—				—				2,518
Construction-in-progress	423			—				—				423
Accumulated depreciation	(17,571		)	—				(32		)	^(c)	(17,603		)
Property and equipment, net	24,861			—				(457		)		24,404
Operating lease assets	—			—				1,857			^(d)	1,857
Other noncurrent assets	885			—				(76		)	^(e)	809
Total assets	$	37,366		$	—			$	1,301			$	38,667
Liabilities and shareholders’ investment
Accounts payable	$	7,584		$	—			$	—			$	7,584
Accrued and other current liabilities	3,790			(14		)	^(k)	(150		)	^(f)	3,627
Current portion of long-term debt and other borrowings	1,355			—				11			^(g)	1,365
Total current liabilities	12,729			(14		)		(139		)		12,576
Long-term debt and other borrowings	10,892			—				(185		)	^(g)	10,706
Noncurrent operating lease liabilities	—			—				1,897			^(h)	1,897
Deferred income taxes	784			6				(33		)		757
Other noncurrent liabilities	1,863			—				(188		)	⁽ⁱ⁾	1,676
Total noncurrent liabilities	13,539			6				1,491				15,036
Shareholders’ investment
Common stock	46			—				—				46
Additional paid-in capital	5,707			—				—				5,707
Retained earnings	5,961			8			^(k)	(51		)	^(j)	5,918
Accumulated other comprehensive loss	(616		)	—				—				(616		)
Total shareholders’ investment	11,098			8				(51		)		11,055
Total liabilities and shareholders’ investment	$	37,366		$	—			$	1,301			$	38,667

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


^(a)	Represents estimated merchandise returns, which were reclassified from Inventory to Other Current Assets.


^(b)	Represents prepaid rent reclassified to Operating Lease Assets.


^(c)	For both periods presented, represents impact of changes in finance lease terms and related leasehold improvements (net of accumulated depreciation) under the hindsight practical expedient and derecognition of approximately $135 million of non-Target owned properties that were consolidated under previously existing build-to-suit accounting rules.


^(d)	Represents capitalization of operating lease assets and reclassification of leasehold acquisition costs, straight-line rent accrual, and tenant incentives.


^(e)	Represents reclassification of leasehold acquisition costs to Operating Lease Assets.


^(f)	Represents reclassification of straight-line rent accrual to Operating Lease Assets, partially offset by recognition of the current portion of operating lease liabilities.


^(g)	Represents the impact of changes in financing lease terms for certain leases due to the election of the hindsight practical expedient.


^(h)	Represents recognition of operating lease liabilities.


⁽ⁱ⁾	For both periods presented, represents derecognition of approximately $135 million of liabilities related to non-Target owned properties that were consolidated under previously existing build-to-suit accounting rules and reclassification of tenant incentives to Operating Lease Assets.


^(j)	Represents the retained earnings impact of lease-term changes due to the use of hindsight, primarily from the shortening of lease terms for certain existing leases and useful lives of corresponding leasehold improvements.


^(k)	Primarily represents the impact of a change in timing of revenue recognition for certain promotional gift card programs.

3. Revenues

General merchandise sales represent the vast majority of our revenues. We also earn revenues from a variety of other sources, most notably credit card profit sharing income from our arrangement with TD Bank Group (TD).

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



Revenues	Three Months Ended				Six Months Ended
(millions)	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017
Apparel and accessories	$	3,843	$	3,646	$	7,347	$	7,059
Beauty and household essentials	4,411		4,107		8,638		8,157
Food and beverage	3,372		3,213		6,959		6,666
Hardlines	2,501		2,311		4,814		4,621
Home furnishings and décor	3,402		3,111		6,304		5,858
Other	23		22		46		44
Sales	17,552		16,410		34,108		32,405

Credit card profit sharing	167		172		333		342
Other	57		52		117		110
Other revenue	224		224		450		452

Total revenue	$	17,776	$	16,634	$	34,558	$	32,857

Merchandise sales – We record almost all retail store revenues at the point of sale. Digital channel originated sales may include shipping revenue and are recorded upon delivery to the guest or upon guest pickup in store. Total revenues do not include sales tax because we are a pass-through conduit for collecting and remitting sales taxes. Generally, guests may return national brand merchandise within 90 days of purchase and owned and exclusive brands within one year of purchase. Sales are recognized net of expected returns, which we estimate using historical return patterns and our expectation of future returns. As of August 4, 2018, February 3, 2018, and July 29, 2017, the accrual for estimated returns was $114 million, $110 million, and $121 million, respectively. We have not historically had material adjustments to our returns estimates.

Under certain vendor arrangements the purchase and sale of inventory is virtually simultaneous. We record revenue and related costs gross for the vast majority of these arrangements, with approximately 5 percent of consolidated sales made under such arrangements. We concluded that we are the principal in these transactions for a number of reasons, most notably because we 1) control the overall economics of the transactions, including setting the sales price and realizing the majority of cash flows from the sale, 2) control the relationship with the customer, and 3) are responsible for fulfilling the promise to provide goods to the customer.

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



(millions)	February 3, 2018		Gift Cards Issued During Current Period But Not Redeemed ^(a)		Revenue Recognized From Beginning Liability			August 4, 2018
Gift card liability	$	709	$	298	$	(403	)	$	604


^(a)	Net of estimated breakage.

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

Credit card profit sharing – We receive payments under a credit card program agreement with TD. Under the agreement, we receive a percentage of the profits generated by the Target Credit Card and Target MasterCard receivables in exchange for performing account servicing and primary marketing functions. TD underwrites, funds, and owns Target Credit Card and Target MasterCard receivables, controls risk management policies, and oversees regulatory compliance.

4. Fair Value Measurements

Fair value measurements are reported in one of three levels reflecting the valuation techniques used to determine fair value.



Fair Value Measurements - Recurring Basis		Fair Value at
(millions)	Pricing Category	August 4, 2018		February 3, 2018		July 29, 2017
Assets
Cash and Cash Equivalents
Short-term investments	Level 1	$	353	$	1,906	$	1,617
Other Current Assets
Prepaid forward contracts	Level 1	22		23		37
Other Noncurrent Assets
Interest rate swaps	Level 2	—		—		4
Liabilities
Other current liabilities
Interest rate swaps	Level 2	7		—		—
Other Noncurrent Liabilities
Interest rate swaps	Level 2	2		6		—



Significant Financial Instruments not Measured at Fair Value ^(a) (millions)	August 4, 2018				February 3, 2018				July 29, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Debt ^(b)	$	10,243	$	10,682	$	10,440	$	11,155	$	11,122	$	12,143


^(a)	The carrying amounts of certain other current assets, accounts payable, and certain accrued and other current liabilities approximate fair value due to their short-term nature.


^(b)	The carrying amount and estimated fair value of debt exclude unamortized swap valuation adjustments and lease liabilities.

5. Property and Equipment

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

6. Notes Payable and Long-Term Debt

We obtain short-term financing from time to time under our commercial paper program, a form of notes payable. For the six months ended August 4, 2018, the maximum amount outstanding was $658 million and the average daily amount outstanding was $63 million at a weighted average annual interest rate of 1.8 percent. As of August 4, 2018, no balances were outstanding. No balances were outstanding at any time during the six months ended July 29, 2017.

7. Derivative Financial Instruments

Our derivative instruments primarily consist of interest rate swaps, which we use to mitigate interest rate risk. As a result of our use of derivative instruments, we have counterparty credit exposure to large global financial institutions. We monitor this concentration of counterparty credit risk on an ongoing basis. Note 4 provides the fair value and classification of these instruments.

In March 2018, we entered into an interest rate swap with a notional amount of $250 million, under which we pay a variable rate and receive a fixed rate. We designated this swap as a fair value hedge. With the addition of this swap, as of August 4, 2018, three interest rate swaps with notional amounts totaling $1,250 million were designated as fair value hedges. As of July 29, 2017, two interest rate swaps with notional amounts totaling $1,000 million were designated as fair value hedges. No ineffectiveness was recognized during the three and six months ended August 4, 2018 or July 29, 2017.

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

8. Leases

We lease certain retail stores, warehouses, distribution centers, office space, land, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 50 years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

Certain of our lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We rent or sublease certain real estate to third parties. Our sublease portfolio consists mainly of operating leases with CVS Pharmacy Inc. for space within our stores.



Leases (millions)	Classification	August 4, 2018		February 3, 2018		July 29, 2017
Assets
Operating lease assets	Operating Lease Assets	$	1,976	$	1,884	$	1,857
Finance lease assets	Buildings and Improvements, net of Accumulated Depreciation ^(a)	785		836		827
Total leased assets		$	2,761	$	2,720	$	2,684
Liabilities
Current
Operating	Accrued and Other Current Liabilities	$	155	$	147	$	134
Finance	Current Portion of Long-term Debt and Other Borrowings	50		80		78
Noncurrent
Operating	Noncurrent Operating Lease Liabilities	2,028		1,924		1,897
Finance	Long-term Debt and Other Borrowings	868		885		866
Total lease liabilities		$	3,101	$	3,036	$	2,975


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



Lease Cost		Three Months Ended						Six Months Ended
(millions)	Classification	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Operating lease cost ^(a)	SG&A Expenses	$	61		$	54		$	121		$	108
Finance lease cost
Amortization of leased assets	Depreciation and Amortization ^(b)	17			16			33			31
Interest on lease liabilities	Net Interest Expense	10			10			21			20
Sublease income ^(c)	Other Revenue	(3		)	(2		)	(5		)	(4		)
Net lease cost		$	85		$	78		$	170		$	155


^(a)	Includes short-term leases and variable lease costs, which are immaterial.


^(b)	Supply chain-related amounts are included in Cost of Sales.


^(c)	Sublease income excludes rental income from owned properties of $12 million and $23 million for the three and six months ended August 4, 2018, respectively, and $12 million and $23 million for the three and six months ended July 29, 2017, respectively, which is included in Other Revenue.



Maturity of Lease Liabilities (millions)	Operating Leases ^(a)		Finance Leases ^(b)		Total
2018	$	117	$	45	$	162
2019	237		90		327
2020	227		87		314
2021	219		87		306
2022	214		88		302
After 2022	1,936		930		2,866
Total lease payments	$	2,950	$	1,327	$	4,277
Less: Interest	767		409
Present value of lease liabilities	$	2,183	$	918

Note: For leases commencing prior to 2018, minimum lease payments excludes payments to landlords for real estate taxes and common area maintenance.


^(a)	Operating lease payments include $795 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $311 million of legally binding minimum lease payments for leases signed but not yet commenced.


^(b)	Finance lease payments include $122 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $203 million of legally binding minimum lease payments for leases signed but not yet commenced.



Lease Term and Discount Rate	August 4, 2018		February 3, 2018		July 29, 2017
Weighted-average remaining lease term (years)
Operating leases	14.7		15.2		15.7
Finance leases	15.6		15.4		15.2
Weighted-average discount rate
Operating leases	3.90	%	3.88	%	3.90	%
Finance leases	4.71	%	4.64	%	4.61	%



Other Information	Six Months Ended
(millions)	August 4, 2018		July 29, 2017
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	105	$	96
Operating cash flows from finance leases	22		20
Financing cash flows from finance leases	55		19
Leased assets obtained in exchange for new finance lease liabilities	15		97
Leased assets obtained in exchange for new operating lease liabilities	169		114

9. Income Taxes



	Three Months Ended						Six Months Ended
(dollars in millions)	August 4, 2018			July 29, 2017 As Adjusted			August 4, 2018			July 29, 2017 As Adjusted
Income tax expense	$	223		$	307		$	433		$	661
Effective tax rate	21.8		%	31.4		%	22.2		%	33.0		%

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

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

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

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

10. Share Repurchase



	Six Months Ended
(millions, except per share data)	August 4, 2018		July 29, 2017
Total number of shares purchased	12.7		10.6
Average price paid per share	$	72.64	$	56.76
Total investment	$	925	$	601

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

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

11. Pension Benefits

We provide pension plan benefits to certain eligible team members.



Net Pension Benefits Expense	Three Months Ended						Six Months Ended
(millions)	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017
Service cost	$	25		$	21		$	49		$	42
Interest cost	37			34			73			69
Expected return on assets	(62		)	(61		)	(123		)	(123		)
Amortization of losses	20			15			41			30
Amortization of prior service cost	(3		)	(3		)	(6		)	(5		)
Settlements	3			—			3			—
Total	$	20		$	6		$	37		$	13

12. Accumulated Other Comprehensive (Loss) / Income



(millions)	Cash Flow Hedges			Currency Translation Adjustment			Pension			Total
February 3, 2018	$	(14	)	$	(13	)	$	(720	)	$	(747	)
Other comprehensive income before reclassifications, net of tax	—			(5		)	—			(5		)
Amounts reclassified from AOCI, net of tax	—			—			29			29
August 4, 2018	$	(14	)	$	(18	)	$	(691	)	$	(723	)

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

Executive Summary

Second quarter 2018 includes the following notable items:


•	GAAP earnings per share from continuing operations were $1.49.


•	Adjusted earnings per share from continuing operations were $1.47.


•	Sales increased 7.0 percent.


•	Comparable sales increased 6.5 percent, driven by a 6.4 percent increase in traffic.


◦	Comparable store sales grew 4.9 percent.


◦	Digital channel sales increased 41 percent.

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

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

Earnings Per Share from Continuing Operations

Three Months Ended

Six Months Ended

August 4,
2018

July 29,

2017

As Adjusted ^(a)

Change

August 4,
2018

July 29,

2017

As Adjusted ^(a)