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 November 3, 2018
 
Commission File Number 1-6049
 
 
targetbullseyea05a02a02a19.jpg
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes 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 November 21, 2018 were 521,833,603.




TARGET CORPORATION
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Operations
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
(millions, except per share data) (unaudited)
November 3,
2018

 
October 28,
2017
As Adjusted (a)

 
November 3,
2018

 
October 28,
2017
As Adjusted (a)

Sales
$
17,590

 
$
16,647

 
$
51,699

 
$
49,052

Other revenue
231

 
227

 
680

 
679

Total revenue
17,821

 
16,874

 
52,379

 
49,731

Cost of sales
12,535

 
11,712

 
36,400

 
34,330

Selling, general and administrative expenses
3,937

 
3,733

 
11,347

 
10,686

Depreciation and amortization (exclusive of depreciation included in cost of sales)
530

 
582

 
1,639

 
1,620

Operating income
819

 
847

 
2,993

 
3,095

Net interest expense
115

 
251

 
352

 
521

Net other (income) / expense
(9
)
 
(15
)
 
(21
)
 
(44
)
Earnings from continuing operations before income taxes
713

 
611

 
2,662

 
2,618

Provision for income taxes
97

 
135

 
530

 
798

Net earnings from continuing operations
616

 
476

 
2,132

 
1,820

Discontinued operations, net of tax
6

 
2

 
7

 
7

Net earnings
$
622

 
$
478

 
$
2,139

 
$
1,827

Basic earnings per share
 
 
 
 
 
 
 
Continuing operations
$
1.17

 
$
0.87

 
$
4.01

 
$
3.31

Discontinued operations
0.01

 
—

 
0.01

 
0.01

Net earnings per share
$
1.18

 
$
0.88

 
$
4.02

 
$
3.33

Diluted earnings per share
 
 
 
 
 
 
 
Continuing operations
$
1.16

 
$
0.87

 
$
3.98

 
$
3.30

Discontinued operations
0.01

 
—

 
0.01

 
0.01

Net earnings per share
$
1.17

 
$
0.87

 
$
3.99

 
$
3.31

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
525.9

 
544.5

 
531.5

 
548.7

Dilutive impact of share-based awards
5.3

 
3.4

 
4.7

 
3.1

Diluted
531.2

 
547.9

 
536.2

 
551.8

Antidilutive shares
—

 
4.5

 
—

 
4.1

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.


1



Consolidated Statements of Comprehensive Income
 
 
 
 
Three Months Ended
 
Nine Months Ended
(millions) (unaudited)
November 3,
2018

 
October 28,
2017
As Adjusted (a)

 
November 3,
2018

 
October 28,
2017
As Adjusted (a)

Net earnings
$
622

 
$
478

 
$
2,139

 
$
1,827

Other comprehensive income
 

 
 

 
 

 
 

Pension, net of tax
13

 
8

 
42

 
22

Currency translation adjustment and cash flow hedges, net of tax
(4
)
 
(2
)
 
(9
)
 
6

Other comprehensive income
9

 
6

 
33

 
28

Comprehensive income
$
631

 
$
484

 
$
2,172

 
$
1,855

 
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.


2



Consolidated Statements of Financial Position
 

 
 

 
 

(millions) (unaudited)
November 3,
2018

 
February 3,
2018
As Adjusted (a)

 
October 28,
2017
As Adjusted (a)

Assets
 
 
 

 
 
Cash and cash equivalents
$
825

 
$
2,643

 
$
2,725

Inventory
12,393

 
8,597

 
10,517

Other current assets
1,421

 
1,300

 
1,444

Total current assets
14,639

 
12,540

 
14,686

Property and equipment
 

 
 

 
 

Land
6,069

 
6,095

 
6,087

Buildings and improvements
29,090

 
28,131

 
27,946

Fixtures and equipment
5,784

 
5,623

 
5,548

Computer hardware and software
2,660

 
2,645

 
2,658

Construction-in-progress
384

 
440

 
389

Accumulated depreciation
(18,380
)
 
(18,398
)
 
(17,979
)
Property and equipment, net
25,607

 
24,536

 
24,649

Operating lease assets
1,997

 
1,884

 
1,861

Other noncurrent assets
1,329

 
1,343

 
813

Total assets
$
43,572

 
$
40,303

 
$
42,009

Liabilities and shareholders’ investment
 

 
 

 
 

Accounts payable
$
11,959

 
$
8,677

 
$
9,986

Accrued and other current liabilities
4,096

 
4,094

 
3,875

Current portion of long-term debt and other borrowings
1,535

 
281

 
1,366

Total current liabilities
17,590

 
13,052

 
15,227

Long-term debt and other borrowings
10,104

 
11,117

 
11,090

Noncurrent operating lease liabilities
2,046

 
1,924

 
1,901

Deferred income taxes
970

 
693

 
915

Other noncurrent liabilities
1,782

 
1,866

 
1,784

Total noncurrent liabilities
14,902

 
15,600

 
15,690

Shareholders’ investment
 

 
 

 
 

Common stock
43

 
45

 
45

Additional paid-in capital
5,867

 
5,858

 
5,762

Retained earnings
5,884

 
6,495

 
5,895

Accumulated other comprehensive loss
(714
)
 
(747
)
 
(610
)
Total shareholders’ investment
11,080

 
11,651

 
11,092

Total liabilities and shareholders’ investment
$
43,572

 
$
40,303

 
$
42,009

Common Stock Authorized 6,000,000,000 shares, $0.0833 par value; 521,810,597, 541,681,670 and 543,913,318 shares issued and outstanding at November 3, 2018, February 3, 2018 and October 28, 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.


3



Consolidated Statements of Cash Flows
 
 
 
 
Nine Months Ended
(millions) (unaudited)
November 3,
2018

 
October 28,
2017
As Adjusted (a)

Operating activities
 

 
 

Net earnings
$
2,139

 
$
1,827

Earnings from discontinued operations, net of tax
7

 
7

Net earnings from continuing operations
2,132

 
1,820

Adjustments to reconcile net earnings to cash provided by operations
 

 
 

Depreciation and amortization
1,826

 
1,809

Share-based compensation expense
106

 
81

Deferred income taxes
261

 
33

Loss on debt extinguishment
—

 
123

Noncash losses / (gains) and other, net
85

 
209

Changes in operating accounts
 

 
 
Inventory
(3,796
)
 
(2,277
)
Other assets
(140
)
 
(88
)
Accounts payable
3,298

 
2,735

Accrued and other liabilities
(158
)
 
(25
)
Cash provided by operating activities—continuing operations
3,614

 
4,420

Cash provided by operating activities—discontinued operations
10

 
75

Cash provided by operations
3,624

 
4,495

Investing activities
 

 
 

Expenditures for property and equipment
(2,873
)
 
(2,049
)
Proceeds from disposal of property and equipment
39

 
27

Other investments
15

 
(62
)
Cash required for investing activities
(2,819
)
 
(2,084
)
Financing activities
 

 
 

Change in commercial paper, net
490

 
—

Additions to long-term debt
—

 
739

Reductions of long-term debt
(268
)
 
(1,093
)
Dividends paid
(1,001
)
 
(1,001
)
Repurchase of stock (Note 10)
(1,485
)
 
(618
)
Accelerated share repurchase pending final settlement (Note 10)
(450
)
 
(250
)
Stock option exercises
91

 
25

Cash required for financing activities
(2,623
)
 
(2,198
)
Net (decrease) / increase in cash and cash equivalents
(1,818
)
 
213

Cash and cash equivalents at beginning of period
2,643

 
2,512

Cash and cash equivalents at end of period
$
825

 
$
2,725

 

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.


4



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
—

 
—

 
—

 
2,139

 
—

 
2,139

Other comprehensive income
—

 
—

 
—

 
—

 
33

 
33

Dividends declared
—

 
—

 
—

 
(1,012
)
 
—

 
(1,012
)
Repurchase of stock
(19.0
)
 
(2
)
 
—

 
(1,451
)
 
—

 
(1,453
)
Accelerated share repurchase pending final settlement
(3.5
)
 
—

 
(163
)
 
(287
)
 
—

 
(450
)
Stock options and awards
2.6

 
—

 
172

 
—

 
—

 
172

November 3, 2018
521.8

 
$
43

 
$
5,867

 
$
5,884

 
$
(714
)
 
$
11,080


We declared $1.90 and $1.84 per share dividends for the nine months ended November 3, 2018 and October 28, 2017, respectively, and $2.46 per share for the fiscal year ended February 3, 2018.
 
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.


5



Notes to Consolidated Financial Statements (unaudited)
 
1. Accounting Policies
 
These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by 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. Certain prior-year amounts have been reclassified to conform to the current year presentation. 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 nine months ended October 28, 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.


6



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 nine months ended October 28, 2017, we reclassified $(15) million and $(44) 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)
October 28,
2017
As Previously Reported
 
 
 
October 28,
2017
As Adjusted
Sales
$
16,667

$
(20
)

(a) 
$
—

 
$
—

 
$
16,647

Other revenue
—

227

(a) 
—

 
—

 
227

Total revenue
16,667

207

 
—

 
—

 
16,874

Cost of sales
11,712

—

 
—

 
—

 
11,712

Selling, general and administrative expenses
3,512

207

(a) 
(2
)
(b) 
15

(c) 
3,733

Depreciation and amortization (exclusive of depreciation included in cost of sales)
574

—

 
9

(b) 
—

 
582

Operating income
869

—

 
(7
)
 
(15
)
 
847

Net interest expense
254

—

 
(3
)
(b) 
—

 
251

Net other (income) / expense
—

—

 
—

 
(15
)
(c) 
(15
)
Earnings from continuing operations before income taxes
615

—

 
(4
)
 
—

 
611

Provision for income taxes
137

—

 
(1
)
 
—

 
135

Net earnings from continuing operations
478

—

 
(3
)
 
—

 
476

Discontinued operations, net of tax
2

—

 
—

 
—

 
2

Net earnings
$
480

$
—

 
$
(3
)
 
$
—

 
$
478

Basic earnings per share
 
 
 
 
 
 
 
 
Continuing operations
$
0.88

 
 
 
 
 
 
$
0.87

Discontinued operations
—

 
 
 
 
 
 
—

Net earnings per share
$
0.88

 
 
 
 
 
 
$
0.88

Diluted earnings per share
 
 
 
 
 
 
 
 
Continuing operations
$
0.87

 
 
 
 
 
 
$
0.87

Discontinued operations
—

 
 
 
 
 
 
—

Net earnings per share
$
0.88

 
 
 
 
 
 
$
0.87

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.


7



Effect of Accounting Standards Adoption on Consolidated Statement of Operations
 
 
 
 
 
 
Nine Months
Ended
Effect of the Adoption of
 
Nine Months
Ended
 
ASC
Topic 606
(Revenue
Recognition)
 
ASC
Topic 842
(Leases)
 
ASU
2017-07
(Pension)
 
(millions, except per share data) (unaudited)
October 28,
2017
As Previously Reported
 
 
 
October 28,
2017
As Adjusted
Sales
$
49,113

$
(61
)

(a) 
$
—

 
$
—

 
$
49,052

Other revenue
—

679

(a) 
—

 
—

 
679

Total revenue
49,113

618

 
—

 
—

 
49,731

Cost of sales
34,330

—

 
—

 
—

 
34,330

Selling, general and administrative expenses
10,027

618

(a) 
(4
)
(b) 
44

(c) 
10,686

Depreciation and amortization (exclusive of depreciation included in cost of sales)
1,596

—

 
24

(b) 
—

 
1,620

Operating income
3,160

—

 
(20
)
 
(44
)
 
3,095

Net interest expense
532

—

 
(10
)
(b) 
—

 
521

Net other (income) / expense
—

—

 
—

 
(44
)
(c) 
(44
)
Earnings from continuing operations before income taxes
2,628

—

 
(10
)
 
—

 
2,618

Provision for income taxes
802

—

 
(4
)
 
—

 
798

Net earnings from continuing operations
1,826

—

 
(6
)
 
—

 
1,820

Discontinued operations, net of tax
7

—

 
—

 
—

 
7

Net earnings
$
1,833

$
—

 
$
(6
)
 
$
—

 
$
1,827

Basic earnings per share
 
 
 
 
 
 
 
 
Continuing operations
$
3.33

 
 
 
 
 
 
$
3.31

Discontinued operations
0.01

 
 
 
 
 
 
0.01

Net earnings per share
$
3.34

 
 
 
 
 
 
$
3.33

Diluted earnings per share
 
 
 
 
 
 
 
 
Continuing operations
$
3.31

 
 
 
 
 
 
$
3.30

Discontinued operations
0.01

 
 
 
 
 
 
0.01

Net earnings per share
$
3.32

 
 
 
 
 
 
$
3.31

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 nine months ended October 28, 2017, we reclassified $170 million and $512 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.









8



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.

9



Effect of Accounting Standards Adoption on Consolidated Statement of Financial Position
 
 
 
 
 
 
 
 
 
Effect of the Adoption of
 
 
(millions) (unaudited)
October 28,
2017
As Previously Reported
 
ASC
Topic 606
(Revenue
Recognition)
 
ASC
Topic 842
(Leases)
 
October 28,
 2017
As Adjusted
Assets
 
 
 

 
 
 
 
Cash and cash equivalents
$
2,725

 
$
—

 
$
—

 
$
2,725

Inventory
10,586

 
(69
)
(a) 
—

 
10,517

Other current assets
1,398

 
69

(a) 
(23
)
(b) 
1,444

Total current assets
14,709

 
—

 
(23
)
 
14,686

Property and equipment
 

 
 
 
 
 
 

Land
6,087

 
—

 
—

 
6,087

Buildings and improvements
28,310

 
—

 
(363
)
(c) 
27,946

Fixtures and equipment
5,548

 
—

 
—

 
5,548

Computer hardware and software
2,658

 
—

 
—

 
2,658

Construction-in-progress
389

 
—

 
—

 
389

Accumulated depreciation
(17,880
)
 
—

 
(99
)
(c) 
(17,979
)
Property and equipment, net
25,112

 
—

 
(462
)
 
24,649

Operating lease assets
—

 
—

 
1,861

(d) 
1,861

Other noncurrent assets
887

 
—

 
(74
)
(e) 
813

Total assets
$
40,708

 
$
—

 
$
1,302

 
$
42,009

Liabilities and shareholders’ investment
 

 
 
 
 
 
 

Accounts payable
$
9,986

 
$
—

 
$
—

 
$
9,986

Accrued and other current liabilities
4,036

 
(14
)
(k) 
(149
)
(f) 
3,875

Current portion of long-term debt and other borrowings
1,354

 
—

 
12

(g) 
1,366

Total current liabilities
15,376

 
(14
)
 
(137
)
 
15,227

Long-term debt and other borrowings
11,277

 
—

 
(187
)
(g) 
11,090

Noncurrent operating lease liabilities
—

 
—

 
1,901

(h) 
1,901

Deferred income taxes
944

 
6

 
(34
)
 
915

Other noncurrent liabilities
1,974

 
—

 
(189
)
(i) 
1,784

Total noncurrent liabilities
14,195

 
6

 
1,491

 
15,690

Shareholders’ investment
 

 
 
 
 
 
 

Common stock
45

 
—

 
—

 
45

Additional paid-in capital
5,762

 
—

 
—

 
5,762

Retained earnings
5,940

 
8

(k) 
(52
)
(j) 
5,895

Accumulated other comprehensive loss
(610
)
 
—

 
—

 
(610
)
Total shareholders’ investment
11,137

 
8

 
(52
)
 
11,092

Total liabilities and shareholders’ investment
$
40,708

 
$
—

 
$
1,302

 
$
42,009

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.

10



(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
 
Nine Months Ended
(millions)
November 3,
2018

 
October 28,
2017

 
November 3,
2018

 
October 28,
2017

Apparel and accessories
$
3,622

 
$
3,456

 
$
10,969

 
$
10,515

Beauty and household essentials
4,385

 
4,135

 
13,023

 
12,293

Food and beverage
3,611

 
3,442

 
10,570

 
10,108

Hardlines
2,478

 
2,278

 
7,292

 
6,898

Home furnishings and décor
3,476

 
3,316

 
9,781

 
9,174

Other
18

 
20

 
64

 
64

Sales
17,590

 
16,647

 
51,699

 
49,052

 
 
 
 
 
 
 
 
Credit card profit sharing
169

 
170

 
503

 
512

Other
62

 
57

 
177

 
167

Other revenue
231

 
227

 
680

 
679

 
 
 
 
 
 
 
 
Total revenue
$
17,821

 
$
16,874

 
$
52,379

 
$
49,731


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 at the 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 November 3, 2018, February 3, 2018, and October 28, 2017, the accrual for estimated returns was $125 million, $110 million, and $127 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.

11



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

 
November 3,
2018

Gift card liability
$
709

 
$
357

 
$
(469
)
 
$
597

(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 $224 million and $663 million for the three and nine months ended November 3, 2018, respectively, and $215 million and $639 million for the three and nine months ended October 28, 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)
Classification
Pricing Category
November 3,
2018

 
February 3,
2018

 
October 28,
2017

Assets
 
 
 

 
 

 
 

Short-term investments
Cash and Cash Equivalents
Level 1
$
42

 
$
1,906

 
$
2,003

Prepaid forward contracts
Other Current Assets
Level 1
23

 
23

 
30

Interest rate swaps
Other Noncurrent Assets
Level 2
—

 
—

 
1

Liabilities
 
 
 

 
 

 
 

Interest rate swaps
Other Current Liabilities
Level 2
6

 
—

 
—

Interest rate swaps
Other Noncurrent Liabilities
Level 2
7

 
6

 
—

 
Significant Financial Instruments not Measured at Fair Value (a)

(millions)
November 3, 2018
 
February 3, 2018
 
October 28, 2017
Carrying
Amount

Fair
Value

 
Carrying
Amount

Fair
Value

 
Carrying
Amount

Fair
Value

Long-term debt, including current portion (b)
$
10,245

$
10,396

 
$
10,440

$
11,155

 
$
11,522

$
12,403

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


12



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 no impairment losses during the three months ended November 3, 2018, and $85 million of impairment losses during the nine months ended November 3, 2018, primarily resulting from planned store closures. We recognized impairment losses of $1 million and $89 million during the three and nine months ended October 28, 2017, respectively, primarily resulting from planned or completed store closures and supply chain changes. The impairments are recorded in Selling, General and Administrative Expenses on the Consolidated Statements of Operations.

6. Commercial Paper and Long-Term Debt

During the three and nine months ended November 3, 2018, we issued no new long-term debt and did not repurchase existing long-term debt before its maturity.

In October 2017, we issued unsecured fixed rate debt of $750 million at 3.9 percent that matures in November 2047. During the three months ended October 28, 2017, we repurchased $344 million of debt before its maturity at a market value of $463 million. We recognized a loss on early retirement of approximately $123 million, which was recorded in Net Interest Expense in our Consolidated Statements of Operations.

We obtain short-term financing from time to time under our commercial paper program. For the three and nine months ended November 3, 2018, the maximum amount outstanding was $490 million and $658 million, respectively, and the average daily amount outstanding was $35 million and $54 million, respectively, at a weighted average annual interest rate of 2.2 percent and 1.9 percent, respectively. As of November 3, 2018, $490 million was outstanding and is classified within Current Portion of Long-Term Debt and Other Borrowings on our Consolidated Statement of Financial Position. No balances were outstanding at any time during the nine months ended October 28, 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.
 
During the nine months ended November 3, 2018, we entered into two interest rate swaps, each with a notional amount of $250 million, under which we pay a variable rate and receive a fixed rate. We designated these swaps as fair value hedges. With the addition of these swaps, as of November 3, 2018, four interest rate swaps with notional amounts totaling $1,500 million were designated as fair value hedges. As of October 28, 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 nine months ended November 3, 2018 or October 28, 2017.

We recorded expense of $1 million and $2 million during the three and nine months ended November 3, 2018, and income of $2 million and $8 million during the three and nine months ended October 28, 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.

13



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
November 3,
2018

February 3,
2018

October 28,
2017

Assets
 
 
 
 
Operating lease assets
Operating Lease Assets
$
1,997

$
1,884

$
1,861

Finance lease assets
Buildings and Improvements, net of Accumulated Depreciation (a)
781

836

811

Total leased assets
 
$
2,778

$
2,720

$
2,672

Liabilities
 
 
 
 
Current
 
 
 
 
Operating
Accrued and Other Current Liabilities
$
162

$
147

$
140

Finance
Current Portion of Long-term Debt and Other Borrowings
50

80

79

Noncurrent
 
 
 
 
Operating
Noncurrent Operating Lease Liabilities
2,046

1,924

1,901

Finance
Long-term Debt and Other Borrowings
867

885

854

Total lease liabilities
 
$
3,125

$
3,036

$
2,974

(a) 
Finance lease assets are recorded net of accumulated amortization of $352 million, $317 million, and $300 million as of November 3, 2018, February 3, 2018, and October 28, 2017, respectively.

Lease Cost
 
Three Months Ended
 
Nine Months Ended
(millions)
Classification
November 3,
2018

October 28,
2017

 
November 3,
2018

October 28,
2017

Operating lease cost (a)
SG&A Expenses
$
63

$
55

 
$
186

$
162

Finance lease cost
 
 
 
 
 
 
Amortization of leased assets
Depreciation and Amortization (b)
16

16

 
49

46

Interest on lease liabilities
Net Interest Expense
10

10

 
32

31

Sublease income (c)
Other Revenue
(3
)
(2
)
 
(8
)
(6
)
Net lease cost
 
$
86

$
79

 
$
259

$
233

(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 $36 million for the three and nine months ended November 3, 2018, respectively, and $12 million and $35 million for the three and nine months ended October 28, 2017, respectively, which is included in Other Revenue.


14



Maturity of Lease Liabilities
(millions)
Operating 
Leases (a)

Finance
Leases (b)

Total

2018
$
59

$
22

$
81

2019
246

91

337

2020
237

88

325

2021
230

88

318

2022
224

90

314

After 2022
1,970

940

2,910

Total lease payments
$
2,966

$
1,319

$
4,285

Less: Interest
758

402

 

Present value of lease liabilities
$
2,208

$
917

 

(a) 
Operating lease payments include $813 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $363 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 $257 million of legally binding minimum lease payments for leases signed but not yet commenced.

Lease Term and Discount Rate
November 3,
2018

February 3,
2018

October 28,
2017

Weighted-average remaining lease term (years)
 
 
 
Operating leases
14.4

15.2

15.5

Finance leases
15.4

15.4

15.0

Weighted-average discount rate
 
 
 
Operating leases
3.89
%
3.88
%
3.89
%
Finance leases
4.70
%
4.64
%
4.61
%

Other Information
Nine Months Ended
(millions)
November 3,
2018

October 28,
2017

Cash paid for amounts included in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
$
160

$
146

Operating cash flows from finance leases
32

31

Financing cash flows from finance leases
67

30

Leased assets obtained in exchange for new finance lease liabilities
29

97

Leased assets obtained in exchange for new operating lease liabilities
228

153


9. Income Taxes

 
Three Months Ended
 
Nine Months Ended
(dollars in millions)
November 3,
2018

 
October 28,
2017

 
November 3,
2018

 
October 28,
2017

Income tax expense
$
97

 
$
135

 
$
530

 
$
798

Effective tax rate
13.6
%
 
22.2
%
 
19.9
%
 
30.5
%

For the three and nine months ended November 3, 2018, our income tax rate was 13.6 percent and 19.9 percent, respectively, compared with 22.2 percent and 30.5 percent for the three and nine months ended October 28, 2017, respectively. For the three and nine months ended November 3, 2018, the effective tax rate reflects benefits of the Tax Cuts and Jobs Act (the Tax Act), including the lower federal statutory rate of 21 percent and measurement period adjustments recorded during the third quarter, and to a lesser extent, discrete tax benefits. For the three and nine months ended October 28, 2017, the effective tax rate reflects

15



a federal statutory rate of 35 percent offset by prior-period discrete tax benefits of $55 million and $56 million, respectively, primarily related to our global sourcing operations.

In 2017, we recorded provisional amounts for certain income tax effects of the Tax Act for which the accounting under ASC Topic 740, Income Taxes, was incomplete but a reasonable estimate could be determined. During the third quarter of 2018, we recorded adjustments to previously-recorded provisional amounts related to the Tax Act, resulting in a $39 million tax benefit, primarily related to the remeasurement of deferred tax assets and liabilities. During the fourth quarter, we will complete our Tax Act accounting. We do not expect any material adjustments.

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 nine months ended November 3, 2018.

10. Share Repurchase

 
Three Months Ended
Nine Months Ended
(millions, except per share data)
November 3,
2018

 
October 28,
2017

November 3,
2018

 
October 28,
2017

Total number of shares purchased
6.3

 
0.2

19.0

 
10.8

Average price paid per share
$
84.00

 
$
58.74

$
76.38

 
$
56.80

Total investment
$
526

 
$
10

$
1,451

 
$
611

Note: Activity related to the third quarter 2018 and 2017 accelerated share repurchases (ASRs) described below is omitted because the transactions were not fully settled as of November 3, 2018 and October 28, 2017, respectively.

During the third quarter of 2018, we entered into an ASR to repurchase $325 to $450 million of our common stock under the existing $5 billion share repurchase program. Under the agreement, we paid $450 million and received an initial delivery of 3.5 million shares, which were retired, resulting in a $287 million reduction to Retained Earnings. As of November 3, 2018, $163 million is included in the Consolidated Statement of Financial Position as a reduction to Additional Paid-in Capital.

During the third quarter of 2017, we entered into an ASR to repurchase $150 to $250 million of our common stock under the existing $5 billion share repurchase program. Under the agreement, we paid $250 million and received an initial delivery of 2.5 million shares, which were retired. Upon settlement in the fourth quarter of 2017, we received an additional 0.3 million shares, which were retired, and $89 million for the remaining amount not settled in shares. In total, we repurchased 2.8 million shares under the ASR for a total cash investment of $161 million ($57.78 per share). Within the Consolidated Statements of Cash Flows, we reclassified $139 million related to the initial share delivery from the ASR entered into during the third quarter 2017 from Repurchase of Stock to Accelerated Share Repurchase Pending Final Settlement to conform to the current year presentation.

11. Pension Benefits
 
We provide pension plan benefits to eligible team members.

Net Pension Benefits Expense
Three Months Ended
 
Nine Months Ended
(millions)
November 3,
2018

 
October 28,
2017

 
November 3,
2018

 
October 28,
2017

Service cost
$
24

 
$
21

 
$
72

 
$
63

Interest cost
37

 
34

 
110

 
103

Expected return on assets
(62
)
 
(61
)
 
(185
)
 
(184
)
Amortization of losses
20

 
15

 
61

 
45

Amortization of prior service cost
(3
)
 
(3
)
 
(8
)
 
(8
)
Settlement charges
1

 
—

 
4

 
—

Total
$
17

 
$
6

 
$
54

 
$
19

 

16



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
—

 
(10
)
 
—

 
(10
)
Amounts reclassified from AOCI, net of tax
1

 
—

 
42

 
43

November 3, 2018
$
(13
)
 
$
(23
)
 
$
(678
)
 
$
(714
)



17



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Executive Summary
 
Third quarter 2018 includes the following notable items:

•
GAAP earnings per share from continuing operations were $1.16.
•
Adjusted earnings per share from continuing operations were $1.09.
•
Sales increased 5.7 percent.
•
Comparable sales increased 5.1 percent, driven by a 5.3 percent increase in traffic.
◦
Comparable store sales grew 3.2 percent.
◦
Digital channel sales increased 49 percent, contributing 1.9 percentage points to comparable sales.

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 $17,590 million for the three months ended November 3, 2018, an increase of $943 million or 5.7 percent from the same period in the prior year. Operating cash flow provided by continuing operations was $3,614 million for the nine months ended November 3, 2018, a decrease of $806 million, or 18.2 percent, from $4,420 million for the nine months ended October 28, 2017. Refer to the Operating Cash Flows discussion within the Liquidity and Capital Resources section of MD&A on page 27 for additional information.
 
Earnings Per Share from Continuing Operations
Three Months Ended