TARGET CORP
10-Qs and 10-Ks
PROXIES
2020Q1DLPFINEXTRPT
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549
FORM
10-Q
(Mark One)
For the quarterly period ended
August 1, 2020
OR
For the transition period from ____ to ____
Commission File Number
1-6049
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(Address of principal executive offices)
(I.R.S. Employer Identification No.)
(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
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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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.
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
☒
No
☐
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).
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☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | ||||||||||||||||||||||||
| Smaller reporting company |
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Emerging growth company |
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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.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
No
☒
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 21, 2020 were
500,617,844
.
TARGET CORPORATION
TABLE OF CONTENTS
| FINANCIAL STATEMENTS | ||||||||
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 1,
2020 |
August 3,
2019 |
August 1,
2020 |
August 3,
2019 |
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| Sales | $ |
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$ |
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$ |
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$ |
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| Other revenue |
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| Total revenue |
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| Cost of sales |
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| Selling, general and administrative expenses |
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Depreciation and amortization (exclusive of depreciation included in cost of sales)
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Operating income
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| Net interest expense |
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| Net other (income) / expense |
(
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(
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(
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| Earnings from continuing operations before income taxes |
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| Provision for income taxes |
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| Net earnings from continuing operations |
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| Discontinued operations, net of tax |
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| Net earnings | $ |
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$ |
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$ |
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$ |
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| Basic earnings per share | |||||||||||||||||||||||
| Continuing operations | $ |
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$ |
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$ |
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$ |
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| Discontinued operations |
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| Net earnings per share | $ |
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$ |
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$ |
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$ |
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| Diluted earnings per share | |||||||||||||||||||||||
| Continuing operations | $ |
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$ |
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$ |
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$ |
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| Discontinued operations |
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| Net earnings per share | $ |
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$ |
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$ |
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$ |
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| Weighted average common shares outstanding | |||||||||||||||||||||||
| Basic |
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| Diluted |
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| Antidilutive shares |
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Note: Per share amounts may not foot due to rounding.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
1
|
||||||||
| FINANCIAL STATEMENTS | ||||||||
| Consolidated Statements of Comprehensive Income | |||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (millions) (unaudited) |
August 1,
2020 |
August 3,
2019 |
August 1,
2020 |
August 3,
2019 |
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| Net earnings | $ |
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$ |
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$ |
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$ |
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| Other comprehensive income | |||||||||||||||||||||||
| Pension, net of tax |
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| Currency translation adjustment and cash flow hedges, net of tax |
(
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(
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| Other comprehensive income |
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| Comprehensive income | $ |
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$ |
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$ |
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$ |
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| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
2
|
||||||||
| FINANCIAL STATEMENTS | ||||||||
| Consolidated Statements of Financial Position | |||||||||||||||||
| (millions, except footnotes) (unaudited) |
August 1,
2020 |
February 1,
2020 |
August 3,
2019 |
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| Assets | |||||||||||||||||
| Cash and cash equivalents | $ |
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$ |
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$ |
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| Inventory |
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| Other current assets |
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| Total current assets |
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| Property and equipment | |||||||||||||||||
| Land |
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| Buildings and improvements |
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| Fixtures and equipment |
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| Computer hardware and software |
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| Construction-in-progress |
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| Accumulated depreciation |
(
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(
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(
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| Property and equipment, net |
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| Operating lease assets |
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| Other noncurrent assets |
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| Total assets | $ |
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$ |
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$ |
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| Liabilities and shareholders’ investment | |||||||||||||||||
| Accounts payable | $ |
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$ |
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$ |
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| Accrued and other current liabilities |
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| Current portion of long-term debt and other borrowings |
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| Total current liabilities |
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| Long-term debt and other borrowings |
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| Noncurrent operating lease liabilities |
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| Deferred income taxes |
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| Other noncurrent liabilities |
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| Total noncurrent liabilities |
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| Shareholders’ investment | |||||||||||||||||
| Common stock |
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| Additional paid-in capital |
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| Retained earnings |
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| Accumulated other comprehensive loss |
(
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(
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(
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| Total shareholders’ investment |
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| Total liabilities and shareholders’ investment | $ |
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$ |
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$ |
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Common Stock
Authorized
6,000,000,000
shares, $
0.0833
par value;
500,252,831
,
504,198,962
and
511,335,375
shares issued and outstanding at August 1, 2020, February 1, 2020, and August 3, 2019, respectively.
Preferred Stock
Authorized
5,000,000
shares, $
0.01
par value;
no
shares were issued or outstanding during any period presented.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
3
|
||||||||
| FINANCIAL STATEMENTS | ||||||||
| Consolidated Statements of Cash Flows | |||||||||||
| Six Months Ended | |||||||||||
| (millions) (unaudited) |
August 1,
2020 |
August 3,
2019 |
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| Operating activities | |||||||||||
| Net earnings | $ |
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$ |
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| Earnings from discontinued operations, net of tax |
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| Net earnings from continuing operations |
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| Adjustments to reconcile net earnings to cash provided by operations | |||||||||||
| Depreciation and amortization |
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| Share-based compensation expense |
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| Deferred income taxes |
(
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Noncash losses
/
(gains) and other, net
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| Changes in operating accounts | |||||||||||
| Inventory |
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| Other assets |
(
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| Accounts payable |
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(
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| Accrued and other liabilities |
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(
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| Cash provided by operating activities—continuing operations |
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Cash provided by
operating activities—discontinued operations
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| Cash provided by operations |
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| Investing activities | |||||||||||
| Expenditures for property and equipment |
(
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(
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| Proceeds from disposal of property and equipment |
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| Other investments |
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| Cash required for investing activities |
(
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(
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| Financing activities | |||||||||||
| Additions to long-term debt |
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| Reductions of long-term debt |
(
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(
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| Dividends paid |
(
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(
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| Repurchase of stock |
(
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(
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| Stock option exercises |
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| Cash provided by / (required for) financing activities |
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(
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| Net increase in cash and cash equivalents |
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| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period | $ |
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$ |
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| Supplemental information | |||||||||||
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Leased assets obtained in exchange for new finance lease liabilities
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$ |
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$ |
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Leased assets obtained in exchange for new operating lease liabilities
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| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
4
|
||||||||
| FINANCIAL STATEMENTS | ||||||||
| 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 | |||||||||||||||||||||||||||||
| February 2, 2019 |
|
$ |
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$ |
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$ |
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$ |
(
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$ |
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| Net earnings | — | — | — |
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— |
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| Other comprehensive income | — | — | — | — |
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| Dividends declared | — | — | — |
(
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— |
(
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| Repurchase of stock |
(
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— |
(
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— |
(
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Accelerated share repurchase pending final settlement
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(
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— |
(
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(
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— |
(
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| Stock options and awards |
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— |
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— | — |
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| May 4, 2019 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Net earnings | — | — | — |
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— |
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| Other comprehensive income | — | — | — | — |
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| Dividends declared | — | — | — |
(
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— |
(
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| Repurchase of stock |
(
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— |
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(
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— |
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| Stock options and awards |
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— |
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— | — |
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| August 3, 2019 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Net earnings | — | — | — |
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— |
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| Other comprehensive income | — | — | — | — |
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| Dividends declared | — | — | — |
(
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— |
(
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| Repurchase of stock |
(
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(
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(
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— |
(
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Accelerated share repurchase pending final settlement
|
(
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— |
(
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(
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— |
(
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| Stock options and awards |
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— |
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— | — |
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| November 2, 2019 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Net earnings | — | — | — |
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— |
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| Other comprehensive loss | — | — | — | — |
(
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(
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| Dividends declared | — | — | — |
(
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— |
(
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| Repurchase of stock |
(
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— |
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(
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— |
(
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| Stock options and awards |
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— |
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— | — |
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| February 1, 2020 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
5
|
||||||||
| FINANCIAL STATEMENTS | ||||||||
| 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 | |||||||||||||||||||||||||||||
| February 1, 2020 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Net earnings | — | — | — |
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— |
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| Other comprehensive income | — | — | — | — |
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| Dividends declared | — | — | — |
(
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— |
(
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| Repurchase of stock |
(
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— | — |
(
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— |
(
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| Stock options and awards |
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— |
(
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— | — |
(
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| May 2, 2020 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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| Net earnings | — | — | — |
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— |
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| Other comprehensive income | — | — | — | — |
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| Dividends declared | — | — | — |
(
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— |
(
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| Stock options and awards |
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— |
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— | — |
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| August 1, 2020 |
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$ |
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$ |
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$ |
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$ |
(
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$ |
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We declared $
0.68
and $
0.66
dividends per share for the three months ended August 1, 2020, and August 3, 2019, respectively, and $
2.62
per share for the fiscal year ended February 1, 2020.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
6
|
||||||||
| FINANCIAL STATEMENTS | ||||||||
| INDEX | ||||||||
| INDEX TO NOTES | |||||||||||
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
7
|
||||||||
| FINANCIAL STATEMENTS | ||||||||
| NOTES | ||||||||
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 United States (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 2019 Form 10-K.
We use the same accounting policies in preparing quarterly and annual financial statements. 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. Nearly all of our revenues are generated in the U.S. The vast majority of our long-lived assets are located within the U.S.
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.
Impact of Coronavirus (COVID-19)
On March 11, 2020, the World Health Organization declared the novel coronavirus disease (COVID-19) a pandemic, and on March 13, 2020, the United States declared a national emergency. States and cities have taken various measures in response to COVID-19, including mandating the closure of certain businesses and encouraging or requiring citizens to avoid large gatherings. To date all of our stores, digital channels, and distribution centers remain open.
Throughout the six months ended August 1, 2020, guest shopping patterns changed significantly and unpredictably in reaction to the COVID-19 pandemic.
Four
of our
five
core merchandise categories have experienced significant
sales grow
th
year-to-date
; however, sales of Apparel and Accessories declined significantly
in the first quarter
before rebounding in the second quarter.
Note 3
provides sales by category. In response to these changes, we have taken many actions, including accelerating purchases of certain merchandise in our core categories and slowing or canceling certain purchase orders, primarily for Apparel and Accessories. As a result of these actions, during the first quarter of 2020, we recorded $
216
million of purchase order cancellation fees in Cost of Sales.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
8
|
||||||||
| FINANCIAL STATEMENTS | ||||||||
| NOTES | ||||||||
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).
| Revenues | Three Months Ended | Six Months Ended | |||||||||||||||||||||
| (millions) |
August 1,
2020 |
August 3,
2019 |
August 1,
2020 |
August 3,
2019 |
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Apparel and accessories
(a)
|
$ |
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$ |
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$ |
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$ |
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Beauty and household essentials
(b)
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Food and beverage
(c)
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Hardlines
(d)
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Home furnishings and décor
(e)
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| Other |
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| Sales |
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| Credit card profit sharing |
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| Other |
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| Other revenue |
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| Total revenue | $ |
|
$ |
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$ |
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$ |
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(a)
Includes apparel for women, men, boys, girls, toddlers, infants and newborns, as well as jewelry, accessories, and shoes.
(b)
Includes beauty and personal care, baby gear, cleaning, paper products, and pet supplies.
(c)
Includes dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and food service in our stores.
(d)
Includes electronics (including video game hardware and software), toys, entertainment, sporting goods, and luggage.
(e)
Includes furniture, lighting, storage, kitchenware, small appliances, home décor, bed and bath, home improvement, school/office supplies, greeting cards and party supplies, and other seasonal merchandise.
Merchandise sales
– We record almost all retail store revenues at the point of sale. Digitally originated sales may include shipping revenue and are recorded upon delivery to the guest or upon guest pickup at the store. Sales are recognized net of expected returns, which we estimate using historical return patterns and our expectation of future returns. As of August 1, 2020, February 1, 2020, and August 3, 2019, the accrual for estimated returns was $
201
million, $
117
million, and $
131
million, respectively. Other than as described below, we have not historically had notable adjustments to our returns estimates.
From March 26, 2020 to April 26, 2020, we did not accept in-store merchandise returns and exchanges to protect our team members from COVID-19. We lengthened the return period for merchandise affected by this change. Our returns estimate for sales during the suspension period included significant assumptions, including the impact of the lengthened return period, sales mix, and recent changes in guest returns behavior. At May 2, 2020, the returns reserve totaled $
398
million. After resuming guest returns, we received fewer returns than originally expected. During the second quarter, we reduced our estimate of sales returns, which increased sales by $
146
million and operating income by $
110
million.
Revenue from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance.
| Gift Card Liability Activity |
February 1,
2020 |
Gift Cards Issued During Current Period But Not Redeemed
(b)
|
Revenue Recognized From Beginning Liability |
August 1,
2020 |
|||||||||||||||||||
| (millions) | |||||||||||||||||||||||
|
Gift card liability
(a)
|
$ |
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||
(a)
Included in Accrued and Other Current Liabilities.
(b)
Net of estimated breakage.
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.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
9
|
||||||||
| FINANCIAL STATEMENTS | ||||||||
| NOTES | ||||||||
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 |
August 1,
2020 |
February 1,
2020 |
August 3,
2019 |
||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Short-term investments | Cash and Cash Equivalents | Level 1 | $ |
|
$ |
|
$ |
|
|||||||||||||||
| Prepaid forward contracts | Other Current Assets | Level 1 |
|
|
|
||||||||||||||||||
|
Equity securities
(a)
|
Other Current Assets | Level 1 |
|
|
|
||||||||||||||||||
| Interest rate swaps | Other Noncurrent Assets | Level 2 |
|
|
|
||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Interest rate swaps | Other Noncurrent Liabilities | Level 2 |
|
|
|
||||||||||||||||||
(a)
Represents our investment in Casper Sleep Inc. common stock
.
|
Significant Financial Instruments Not Measured at Fair Value
(a)
(millions)
|
August 1, 2020 | February 1, 2020 | August 3, 2019 | |||||||||||||||||||||||
|
Carrying
Amount |
Fair
Value |
Carrying
Amount |
Fair
Value |
Carrying
Amount |
Fair
Value |
|||||||||||||||||||||
|
Long-term debt, including current portion
(b)
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||
(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 fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for the same or similar types of financial instruments and would be classified as Level 2. These amounts exclude commercial paper, unamortized swap valuation adjustments, and lease liabilities.
5.
Property and Equipment
6.
Commercial Paper and Long-Term Debt
In March 2020, we issued unsecured fixed rate debt of $
1.5
billion at
2.250
percent that matures in April 2025 and $
1.0
billion at
2.650
percent that matures in September 2030.
We obtain short-term financing from time to time under our commercial paper program.
No
balances were outstanding at any time during the six months ended August 1, 2020. For the six months ended August 3, 2019, the maximum amount outstanding was $
744
million, and the average daily amount outstanding was $
74
million at a weighted average annual interest rate of
2.4
percent, with
no
balance outstanding as of August 3, 2019.
In April 2020, we obtained a committed $
900
million
364
-day unsecured revolving credit facility that expires in April 2021. This new facility is in addition to our $
2.5
billion unsecured revolving credit facility that expires in October 2023.
No
balances were outstanding under either credit facility at any time during 2020 or 2019.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
10
|
||||||||
| FINANCIAL STATEMENTS | ||||||||
| NOTES | ||||||||
7.
Derivative Financial Instruments
Our derivative instruments consist of interest rate swaps used to mitigate interest rate risk. As a result, we have counterparty credit exposure to large global financial institutions, which we monitor on an ongoing basis.
Note 4
to the Consolidated Financial Statements provides the fair value and classification of these instruments.
As of August 1, 2020, and August 3, 2019, we were party to interest rate swaps with notional amounts totaling $
1.5
billion. We pay a variable rate and receive a fixed rate under each of these agreements. All of the agreements are designated as fair value hedges, and all were perfectly effective during the three and six months ended August 1, 2020, and August 3, 2019.
As of August 1, 2020, we were party to forward-starting interest rate swaps with notional amounts totaling $
250
million to hedge the interest rate exposure of anticipated future debt issuances. We designated these derivative financial instruments as cash flow hedges. We assess, both at inception and on an ongoing basis, whether the derivative financial instrument is highly effective in offsetting changes in cash flows of the hedged item and whether it is probable that the hedged forecasted transaction will occur. As of August 1, 2020, a $
12
million loss was recorded in Accumulated Other Comprehensive Loss and will be reclassified to Net Interest Expense when the forecasted transaction affects earnings.
| Effect of Hedges on Debt | ||||||||||||||||||||
| (millions) |
August 1,
2020 |
February 1,
2020 |
August 3,
2019 |
|||||||||||||||||
| Long-term debt and other borrowings | ||||||||||||||||||||
| Carrying amount of hedged debt | $ |
|
$ |
|
$ |
|
||||||||||||||
| Cumulative hedging adjustments, included in carrying amount |
|
|
|
|||||||||||||||||
| Effect of Hedges on Net Interest Expense | Three Months Ended | Six Months Ended | |||||||||||||||||||||
| (millions) |
August 1,
2020 |
August 3,
2019 |
August 1,
2020 |
August 3,
2019 |
|||||||||||||||||||
| Gain (loss) on fair value hedges recognized in Net Interest Expense | |||||||||||||||||||||||
| Interest rate swap designated as fair value hedges | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Hedged debt |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
8.
Share Repurchase
We periodically repurchase shares of our common stock under a board-authorized repurchase program through a combination of open market transactions, accelerated share repurchase (ASR) arrangements, and other privately negotiated transactions with financial institutions.
| Share Repurchase Activity | Three Months Ended | Six Months Ended | |||||||||||||||||||||
| (millions, except per share data) |
August 1,
2020 |
August 3,
2019
(a)
|
August 1,
2020 |
August 3,
2019
(a)
|
|||||||||||||||||||
| Number of shares purchased |
|
|
|
|
|||||||||||||||||||
| Average price paid per share | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Total investment | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
(a)
This table includes activity related to the ASR arrangement entered in first quarter 2019 because final settlement occurred in second quarter 2019. Under the ASR arrangement, we repurchased
4.2
million shares for a total cash investment of $
340
million. We did not enter into any new ASR arrangements during second quarter 2019.
In March 2020, we suspended share repurchase activity.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
11
|
||||||||
| FINANCIAL STATEMENTS | ||||||||
| NOTES | ||||||||
9.
Pension Benefits
We provide pension plan benefits to eligible team members.
| Net Pension Benefits Expense | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||
| (millions) | Classification |
August 1,
2020 |
August 3,
2019 |
August 1,
2020 |
August 3,
2019 |
|||||||||||||||||||||
| Service cost benefits earned | SG&A Expenses | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||
|
Interest cost on projected benefit obligation
|
Net Other (Income) / Expense |
|
|
|
|
|||||||||||||||||||||
| Expected return on assets | Net Other (Income) / Expense |
(
|
(
|
(
|
(
|
|||||||||||||||||||||
| Amortization of losses | Net Other (Income) / Expense |
|
|
|
|
|||||||||||||||||||||
| Amortization of prior service cost | Net Other (Income) / Expense |
(
|
(
|
(
|
(
|
|||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
10.
Accumulated Other Comprehensive Loss
| Change in Accumulated Other Comprehensive Loss |
Cash Flow
Hedges |
Currency Translation Adjustment | Pension | Total | |||||||||||||||||||
| (millions) | |||||||||||||||||||||||
| February 1, 2020 | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||
|
Other comprehensive income before reclassifications, net of tax
|
(
|
|
|
(
|
|||||||||||||||||||
|
Amounts reclassified from AOCI, net of tax
|
|
|
|
|
|||||||||||||||||||
| August 1, 2020 | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
12
|
||||||||
| MANAGEMENT'S DISCUSSION AND ANALYSIS | ||||||||
| FINANCIAL SUMMARY | ||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Summary
Second quarter 2020 includes the following notable items:
•
GAAP diluted earnings per share were $3.35.
•
Adjusted diluted earnings per share were $3.38.
•
Total revenue increased 24.7 percent, driven by an increase in comparable sales.
•
Comparable sales increased 24.3 percent, driven by an 18.8 percent increase in average transaction amount.
◦
Comparable store sales grew 10.9 percent.
◦
Digital channel sales increased 195 percent, contributing 13.4 percentage points to comparable sales growth.
•
Operating income of $2.3 billion was 73.8 percent higher than the comparable prior-year period.
Sales were $22.7 billion for the three months ended August 1, 2020, an increase of $4.5 billion, or 24.8 percent, from the same period in the prior year. Operating cash flow provided by continuing operations was $5.1 billion for the six months ended August 1, 2020, an increase of $2.3 billion, or 82.1 percent, from $2.8 billion for the six months ended August 3, 2019.
| Earnings Per Share from Continuing Operations | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||
|
August 1,
2020 |
August 3,
2019 |
Change |
August 1,
2020 |
August 3,
2019 |
Change | ||||||||||||||||||||||||||||||
| GAAP diluted earnings per share | $ | 3.35 | $ | 1.82 | 84.4 | % | $ | 3.91 | $ | 3.34 | 17.0 | % | |||||||||||||||||||||||
| Adjustments | 0.03 | — | 0.06 | — | |||||||||||||||||||||||||||||||
| Adjusted diluted earnings per share | $ | 3.38 | $ | 1.82 | 85.7 | % | $ | 3.96 | $ | 3.34 | 18.6 | % | |||||||||||||||||||||||
Note: Amounts may not foot due to rounding. Adjusted diluted earnings per share from continuing operations (Adjusted EPS), a non-GAAP metric, excludes the impact of certain items. Management believes that Adjusted EPS is useful in providing period-to-period comparisons of the results of our continuing operations. A reconciliation of non-GAAP financial measures to GAAP measures is provided on
page 19.
We report after-tax return on invested capital (ROIC) from continuing operations because we believe ROIC provides a meaningful measure of our capital-allocation effectiveness over time. For the trailing twelve months ended August 1, 2020, after-tax ROIC was 17.2 percent, compared with 15.2 percent for the trailing twelve months ended August 3, 2019. The calculation of ROIC is provided on
page 21.
Impact of COVID-19
On March 11, 2020, the World Health Organization declared the novel coronavirus disease (COVID-19) a pandemic, and on March 13, 2020, the United States declared a national emergency. The rapid development and fluidity of this situation limits our ability to predict the ultimate impact of COVID-19 on our business, financial condition and financial performance, which could be material. States and cities have taken various measures in response to COVID-19, including mandating the closure of certain businesses and encouraging or requiring citizens to avoid large gatherings. We have implemented numerous safety measures to protect our guests and team members — such as mandating face masks for all team members and guests in our stores, more rigorous cleaning processes, providing disposable face masks, gloves and thermometers for team members, installing distancing markers, limiting guest levels within our stores, and installing partitions at all stores. We have also reduced store hours to support increased cleaning and replenishment efforts and implemented quantity limits on certain high-demand merchandise. In addition, we have reserved certain store hours for guests with increased vulnerability to COVID-19. To date all of our stores, digital channels, and distribution centers remain open.
As the crisis has evolved, we have experienced unusually strong sales, as guests rely on Target for essential items like food, medicine, cleaning products, and household stock-up items. Underlying this trend, we saw significant volatility in our sales mix, including both category sales mix and the mix of sales in our stores and digital channels, including same-day fulfillment options.
•
During the first quarter, comparable sales increased 10.8 percent, reflecting a 0.9 percent increase in store originated comparable sales and a 141 percent increase in digitally originated comparable sales. The quarter began with strength across our multi-category portfolio, followed by a shift to strong comparable sales growth in our Food and Beverage and Beauty and Household Essentials core merchandising categories and significant comparable sales declines in Apparel and Accessories. Comparable sales in Apparel and Accessories recovered notably beginning mid-April.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
13
|
||||||||
| MANAGEMENT'S DISCUSSION AND ANALYSIS | ||||||||
| FINANCIAL SUMMARY | ||||||||
•
During the second quarter, comparable sales increased 24.3 percent, reflecting a 10.9 percent increase in store originated comparable sales and a 195 percent increase in digitally originated comparable sales. Comparable sales growth was strong across our multi-category portfolio, with slightly higher growth in lower-margin categories. Monthly variability in comparable sales continued, with comparable sales increases of 32.9 percent in May, 21.4 percent in June, and 19.7 percent in July.
For the six months ended August 1, 2020, gross margin has been
negatively impacted
by changes in both our category and channel sales mix, as well as actions that we have taken to allow us to better fulfill guest demand for essentials. Additionally, gross margin reflects COVID-19-related investments in pay and benefits for our supply chain team members.
Our SG&A expenses have also been significantly impacted by incremental costs related to investments in pay and benefits for store team members, the spikes in merchandise volume in stores and the supply chain, incremental safety and cleaning supplies, and the impact of additional team member hours dedicated to more rigorous cleaning routines in our facilities.
To support our team and minimize potential disruptions in their work to serve our guests, we have modified our plans for some of our strategic initiatives, including our previously announced remodel program. We have completed approximately 130 remodels in 2020, down from the previous expectation of approximately 300. Similarly, we now expect to open up to 30 new small format stores in 2020, rather than the 36 previously announced.
During the six months ended August 1, 2020, we issued $2.5 billion of 5-year and 10-year notes in an effort to increase our cash on hand. Additionally, we entered into a $900 million 364-day credit facility, increasing our total undrawn committed credit facilities to $3.4 billion. Our dividend policy remains unchanged; however, we have temporarily suspended share repurchase activity due to continued uncertainty in the current environment. The
Liquidity and Capital Resources
section provides additional information.
Analysis of Results of Operations
| Summary of Operating Income | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||
| (dollars in millions) |
August 1,
2020 |
August 3,
2019 |
Change |
August 1,
2020 |
August 3,
2019 |
Change | |||||||||||||||||||||||||||||
| Sales | $ | 22,696 | $ | 18,183 | 24.8 | % | $ | 42,067 | $ | 35,584 | 18.2 | % | |||||||||||||||||||||||
| Other revenue | 279 | 239 | 16.6 | 523 | 465 | 12.3 | |||||||||||||||||||||||||||||
| Total revenue | 22,975 | 18,422 | 24.7 | 42,590 | 36,049 | 18.1 | |||||||||||||||||||||||||||||
| Cost of sales | 15,673 | 12,625 | 24.1 | 30,183 | 24,874 | 21.3 | |||||||||||||||||||||||||||||
|
Selling, general and administrative expenses
|
4,460 | 3,912 | 14.0 | 8,520 | 7,575 | 12.5 | |||||||||||||||||||||||||||||
|
Depreciation and amortization (exclusive of depreciation included in cost of sales)
|
542 | 561 | (3.5) | 1,119 | 1,142 | (2.1) | |||||||||||||||||||||||||||||
| Operating income | $ | 2,300 | $ | 1,324 | 73.8 | % | $ | 2,768 | $ | 2,458 | 12.6 | % | |||||||||||||||||||||||
| Rate Analysis | Three Months Ended | Six Months Ended | |||||||||||||||||||||
|
August 1,
2020 |
August 3,
2019 |
August 1,
2020 |
August 3,
2019 |
||||||||||||||||||||
| Gross margin rate | 30.9 | % | 30.6 | % | 28.3 | % | 30.1 | % | |||||||||||||||
| SG&A expense rate | 19.4 | 21.2 | 20.0 | 21.0 | |||||||||||||||||||
|
Depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate
|
2.4 | 3.0 | 2.6 | 3.2 | |||||||||||||||||||
| Operating income margin rate | 10.0 | 7.2 | 6.5 | 6.8 | |||||||||||||||||||
Note: Gross margin rate is calculated as gross margin (sales less cost of sales) divided by sales. All other rates are calculated by dividing the applicable amount by total revenue.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
14
|
||||||||
| MANAGEMENT'S DISCUSSION AND ANALYSIS | ||||||||
| ANALYSIS OF OPERATIONS | ||||||||
Sales
Sales include all merchandise sales, net of expected returns, and our estimate of gift card breakage. We use comparable sales to evaluate the performance of our stores and digital channel sales by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales include all sales, except sales from stores open less than 13 months, digital acquisitions we have owned less than 13 months, stores that have been closed, and digital acquisitions that we no longer operate. Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies. Digitally originated sales include all sales initiated through mobile applications and our websites. Our stores fulfill the majority of digitally originated sales, including shipment from stores to guests, store Order Pick Up or Drive Up, and delivery via our wholly owned subsidiary, Shipt. Digitally originated sales may also be fulfilled through our distribution centers, our vendors, or other third parties.
Sales growth – from both comparable sales and new stores – represents an important driver of our long-term profitability. We expect that comparable sales growth will drive the majority of our total sales growth. We believe that our ability to successfully differentiate our guests’ shopping experience through a careful combination of merchandise assortment, price, convenience, guest experience, and other factors will over the long-term drive both increasing shopping frequency (traffic) and the amount spent each visit (average transaction amount).
The increase in sales during the three and six months ended August 1, 2020, is due to a comparable sales increase of 24.3 percent and 17.7 percent, respectively, and the contribution from new stores.
| Comparable Sales | Three Months Ended | Six Months Ended | |||||||||||||||||||||
|
August 1,
2020 |
August 3,
2019 |
August 1,
2020 |
August 3,
2019 |
||||||||||||||||||||
| Comparable sales change | 24.3 | % | 3.4 | % | 17.7 | % | 4.1 | % | |||||||||||||||
| Drivers of change in comparable sales | |||||||||||||||||||||||
| Number of transactions | 4.6 | 2.4 | 1.6 | 3.3 | |||||||||||||||||||
| Average transaction amount | 18.8 | 0.9 | 15.8 | 0.7 | |||||||||||||||||||
| Contribution to Comparable Sales Change | Three Months Ended | Six Months Ended | |||||||||||||||||||||
|
August 1,
2020 |
August 3,
2019 |
August 1,
2020 |
August 3,
2019 |
||||||||||||||||||||
|
Stores originated channel comparable sales change
|
10.9 | % | 1.5 | % | 6.0 | % | 2.1 | % | |||||||||||||||
| Contribution from digitally originated sales | 13.4 | 1.8 | 11.7 | 1.9 | |||||||||||||||||||
| Total comparable sales change | 24.3 | % | 3.4 | % | 17.7 | % | 4.1 | % | |||||||||||||||
Note: Amounts may not foot due to rounding.
| Sales by Channel | Three Months Ended | Six Months Ended | |||||||||||||||||||||
|
August 1,
2020 |
August 3,
2019 |
August 1,
2020 |
August 3,
2019 |
||||||||||||||||||||
| Stores originated | 82.8 | % | 92.7 | % | 83.7 | % | 92.8 | % | |||||||||||||||
| Digitally originated | 17.2 | 7.3 | 16.3 | 7.2 | |||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
15
|
||||||||
| MANAGEMENT'S DISCUSSION AND ANALYSIS | ||||||||
| ANALYSIS OF OPERATIONS | ||||||||
| Sales by Product Category | Three Months Ended | Six Months Ended | |||||||||||||||||||||
|
August 1,
2020 |
August 3,
2019 |
August 1,
2020 |
August 3,
2019 |
||||||||||||||||||||
| Apparel and accessories | 18 | % | 20 | % | 16 | % | 20 | % | |||||||||||||||
| Beauty and household essentials | 27 | 28 | 29 | 28 | |||||||||||||||||||
| Food and beverage | 19 | 19 | 21 | 20 | |||||||||||||||||||
| Hardlines | 16 | 14 | 15 | 14 | |||||||||||||||||||
| Home furnishings and décor | 20 | 19 | 19 | 18 | |||||||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
The collective interaction of a broad array of macroeconomic, competitive, and consumer behavioral factors, as well as sales mix, and transfer of sales to new stores makes further analysis of sales metrics infeasible. As previously discussed, we believe that COVID-19 has had a significant impact on the mix of sales amongst our sales channels and categories.
We monitor the percentage of purchases that are paid for using RedCards (RedCard Penetration) because our internal analysis has indicated that a meaningful portion of the incremental purchases on RedCards are also incremental sales for Target. Guests receive a 5 percent discount on virtually all purchases when they use a RedCard at Target.
| RedCard Penetration | Three Months Ended | Six Months Ended | |||||||||||||||||||||
|
August 1,
2020 |
August 3,
2019 |
August 1,
2020 |
August 3,
2019 |
||||||||||||||||||||
| Target Debit Card | 11.8 | % | 12.5 | % | 12.2 | % | 12.8 | % | |||||||||||||||
| Target Credit Cards | 8.7 | 10.7 | 9.2 | 10.6 | |||||||||||||||||||
| Total RedCard Penetration | 20.5 | % | 23.2 | % | 21.4 | % | 23.4 | % | |||||||||||||||
Note: Amounts may not foot due to rounding.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
16
|
||||||||
| MANAGEMENT'S DISCUSSION AND ANALYSIS | ||||||||
| ANALYSIS OF OPERATIONS | ||||||||
Gross Margin Rate
For the three months ended August 1, 2020, our gross margin rate was 30.9 percent compared with 30.6 percent in the comparable period last year. This increase reflected the net impact of merchandising strategies, primarily favorability in clearance and promotional markdowns, and the favorable impact of a change in our returns estimate for sales during the temporary returns suspension period in the first quarter of 2020. The increase was partially offset by increased digital fulfillment and supply chain costs (driven by unusually strong growth in digital volume and higher pay and benefit costs classified within Cost of Sales, including incremental pay and benefits due to COVID-19) and unfavorable category sales mix, as sales growth was strongest in lower-margin categories.
For the six months ended August 1, 2020, our gross margin rate was 28.3 percent compared with 30.1 percent in the comparable period last year. This decrease reflected increased digital fulfillment and supply chain costs (driven by unusually strong growth in digital volume and the impact of higher pay and benefit costs classified within Cost of Sales, including incremental pay and benefits due to COVID-19) and unfavorable category sales mix, as sales growth was strongest in lower-margin categories. The decrease was partially offset by the net impact of merchandising strategies, primarily favorability in clearance and promotional markdowns. Sales returns relating to the temporary returns suspension period during the first quarter of 2020 did not notably affect our year-to-date gross margin rate.
Selling, General, and Administrative Expense Rate
For the three and six months ended August 1, 2020, our SG&A expense rate was 19.4 percent and 20.0 percent, respectively, compared with 21.2 percent and 21.0 percent, respectively, in the comparable periods las
t year.
Incremental team member pay and benefits and investments to protect the health and safety of guests represented approximately $400 million of the $548 million increase in SG&A expenses for the three months ended August 1, 2020, and approximately $600 million of the $945 million increase for the six months ended August 1, 2020, compared with the prior year periods. From a rate perspective, these increased costs were more than offset by leverage resulting from strong revenue growth.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
17
|
||||||||
| MANAGEMENT'S DISCUSSION AND ANALYSIS | ||||||||
| ANALYSIS OF OPERATIONS | ||||||||
Store Data
| Change in Number of Stores | Three Months Ended | Six Months Ended | |||||||||||||||||||||
|
August 1,
2020 |
August 3,
2019 |
August 1,
2020 |
August 3,
2019 |
||||||||||||||||||||
| Beginning store count | 1,871 | 1,851 | 1,868 | 1,844 | |||||||||||||||||||
| Opened | — | 4 | 3 | 11 | |||||||||||||||||||
| Closed | — | (2) | — | (2) | |||||||||||||||||||
| Ending store count | 1,871 | 1,853 | 1,871 | 1,853 | |||||||||||||||||||
|
Number of Stores and
Retail Square Feet |
Number of Stores |
Retail Square Feet
(a)
|
|||||||||||||||||||||
|
August 1,
2020 |
February 1,
2020 |
August 3,
2019 |
August 1,
2020 |
February 1,
2020 |
August 3,
2019 |
||||||||||||||||||
| 170,000 or more sq. ft. | 272 | 272 | 272 | 48,613 | 48,619 | 48,619 | |||||||||||||||||
| 50,000 to 169,999 sq. ft. | 1,505 | 1,505 | 1,499 | 189,224 | 189,227 | 188,711 | |||||||||||||||||
| 49,999 or less sq. ft. | 94 | 91 | 82 | 2,745 | 2,670 | 2,357 | |||||||||||||||||
| Total | 1,871 | 1,868 | 1,853 | 240,582 | 240,516 | 239,687 | |||||||||||||||||
(a)
In thousands, reflects total square feet less office, distribution center, and vacant space.
Other Performance Factors
Provision for Income Taxes
Our effective income tax rate from continuing operations for the three and six months ended August 1, 2020, was 22.8 percent and 21.6 percent, respectively, compared with 23.0 percent and 22.7 percent, respectively, for the comparable periods last year. The effective tax rate for
the
six
months ended August 1, 2020,
reflects a
larger rate benefit from discrete items, primarily related to share-based payments, compared with the prior year
.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
18
|
||||||||
| MANAGEMENT'S DISCUSSION AND ANALYSIS | ||||||||
| RECONCILIATION OF NON-GAAP FINANCIAL MEASURES | ||||||||
Reconciliation of Non-GAAP Financial Measures to GAAP Measures
To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share from continuing operations (Adjusted EPS). This metric excludes certain items presented below. We believe this information is useful in providing period-to-period comparisons of the results of our continuing operations. This measure is not in accordance with, or an alternative to, generally accepted accounting principles in the U.S. (GAAP). The most comparable GAAP measure is diluted earnings per share from continuing operations. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate Adjusted EPS differently, limiting the usefulness of the measure for comparisons with other companies.
|
Reconciliation of Non-GAAP Adjusted EPS
|
Three Months Ended | |||||||||||||||||||||||||||||||||||||
| August 1, 2020 | August 3, 2019 | |||||||||||||||||||||||||||||||||||||
|
(millions, except per share data)
|
Pretax | Net of Tax | Per Share Amounts | Pretax | Net of Tax | Per Share Amounts | ||||||||||||||||||||||||||||||||
|
GAAP diluted earnings per share from continuing operations
|
$ | 3.35 | $ | 1.82 | ||||||||||||||||||||||||||||||||||
| Adjustments | ||||||||||||||||||||||||||||||||||||||
|
Gain on investment
(a)
|
$ | (9) | $ | (6) | $ | (0.01) | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
|
Other
(b)
|
25 | 18 | 0.04 | — | — | — | ||||||||||||||||||||||||||||||||
|
Adjusted diluted earnings per share from continuing operations
|
$ | 3.38 | $ | 1.82 | ||||||||||||||||||||||||||||||||||
|
Reconciliation of Non-GAAP Adjusted EPS
|
Six Months Ended | |||||||||||||||||||||||||||||||||||||
| August 1, 2020 | August 3, 2019 | |||||||||||||||||||||||||||||||||||||
|
(millions, except per share data)
|
Pretax | Net of Tax | Per Share Amounts | Pretax | Net of Tax | Per Share Amounts | ||||||||||||||||||||||||||||||||
|
GAAP diluted earnings per share from continuing operations
|
$ | 3.91 | $ | 3.34 | ||||||||||||||||||||||||||||||||||
| Adjustments | ||||||||||||||||||||||||||||||||||||||
|
Loss on investment
(a)
|
$ | 12 | $ | 9 | $ | 0.02 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
|
Other
(b)
|
25 | 18 | 0.04 | — | — | — | ||||||||||||||||||||||||||||||||
|
Adjusted diluted earnings per share from continuing operations
|
$ | 3.96 | $ | 3.34 | ||||||||||||||||||||||||||||||||||
Note: Amounts may not foot due to rounding.
(a)
Includes an unrealized (gain)
/
loss on our investment in Casper Sleep Inc., which is not core to our continuing operations.
(b)
Includes store damage and inventory losses related to civil unrest.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
19
|
||||||||
| MANAGEMENT'S DISCUSSION AND ANALYSIS | ||||||||
| RECONCILIATION OF NON-GAAP FINANCIAL MEASURES | ||||||||
Earnings from continuing operations before interest expense and income taxes (EBIT) and earnings from continuing operations before interest expense, income taxes, depreciation, and amortization (EBITDA) are non-GAAP financial measures. We believe these measures provide meaningful information about our operational efficiency compared with our competitors by excluding the impact of differences in tax jurisdictions and structures, debt levels, and for EBITDA, capital investment. These measures are not in accordance with, or an alternative to, GAAP. The most comparable GAAP measure is net earnings from continuing operations. EBIT and EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate EBIT and EBITDA differently, limiting the usefulness of the measures for comparisons with other companies.
| EBIT and EBITDA | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||
|
(dollars in millions) (unaudited) |
August 1,
2020 |
August 3,
2019 |
Change |
August 1,
2020 |
August 3,
2019 |
Change | ||||||||||||||||||||||||||||||||
| Net earnings from continuing operations | $ | 1,690 | $ | 938 | 80.3 | % | $ | 1,974 | $ | 1,730 | 14.1 | % | ||||||||||||||||||||||||||
| + Provision for income taxes | 499 | 279 | 78.3 | 544 | 509 | 7.0 | ||||||||||||||||||||||||||||||||
| + Net interest expense | 122 | 120 | 1.9 | 239 | 246 | (2.5) | ||||||||||||||||||||||||||||||||
|
EBIT
|
$ | 2,311 | $ | 1,337 | 72.8 | % | $ | 2,757 | $ | 2,485 | 11.0 | % | ||||||||||||||||||||||||||
|
+ Total depreciation and amortization
(a)
|
604 | 624 | (3.2) | 1,245 | 1,267 | (1.9) | ||||||||||||||||||||||||||||||||
| EBITDA | $ | 2,915 | $ | 1,961 | 48.6 | % | $ | 4,002 | $ | 3,752 | 6.7 | % | ||||||||||||||||||||||||||
(a)
Represents total depreciation and amortization, including amounts classified within Depreciation and Amortization and within Cost of Sales.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
20
|
||||||||
| MANAGEMENT'S DISCUSSION AND ANALYSIS | ||||||||
| RECONCILIATION OF NON-GAAP FINANCIAL MEASURES | ||||||||
We have also disclosed after-tax ROIC, which is a ratio based on GAAP information, with the exception of the add-back of operating lease interest to operating income. We believe this metric is useful in assessing the effectiveness of our capital allocation over time. Other companies may calculate ROIC differently, limiting the usefulness of the measure for comparisons with other companies.
| After-Tax Return on Invested Capital | ||||||||||||||||||||||||||
| (dollars in millions) | ||||||||||||||||||||||||||
| Trailing Twelve Months | ||||||||||||||||||||||||||
| Numerator |
August 1,
2020 |
August 3,
2019 |
||||||||||||||||||||||||
| Operating income | $ | 4,968 | $ | 4,395 | ||||||||||||||||||||||
| + Net other income / (expense) | (28) | 42 | ||||||||||||||||||||||||
| EBIT | 4,940 | 4,437 | ||||||||||||||||||||||||
|
+ Operating lease interest
(a)
|
87 | 85 | ||||||||||||||||||||||||
|
- Income taxes
(b)
|
1,076 | 937 | ||||||||||||||||||||||||
| Net operating profit after taxes | $ | 3,951 | $ | 3,585 | ||||||||||||||||||||||
| Denominator |
August 1,
2020 |
August 3,
2019 |
August 4,
2018 |
|||||||||||||||||
| Current portion of long-term debt and other borrowings | $ | 109 | $ | 1,153 | $ | 1,044 | ||||||||||||||
| + Noncurrent portion of long-term debt | 14,188 | 10,365 | 10,108 | |||||||||||||||||
| + Shareholders' investment | 12,578 | 11,836 | 11,167 | |||||||||||||||||
|
+ Operating lease liabilities
(c)
|
2,448 | 2,285 | 2,183 | |||||||||||||||||
| - Cash and cash equivalents | 7,284 | 1,656 | 1,180 | |||||||||||||||||
| Invested capital | $ | 22,039 | $ | 23,983 | $ | 23,322 | ||||||||||||||
|
Average invested capital
(d)
|
$ | 23,011 | $ | 23,652 | ||||||||||||||||
| After-tax return on invested capital | 17.2 | % | 15.2 | % | ||||||||||||||||
(a)
Represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as finance leases. Calculated using the discount rate for each lease and recorded as a component of rent expense within SG&A Expenses. Operating lease interest is added back to operating income in the ROIC calculation to control for differences in capital structure between us and our competitors.
(b)
Calculated using the effective tax rates for continuing operations, which were 21.4 percent and 20.7 percent for the trailing twelve months ended August 1, 2020, and August 3, 2019, respectively. For the trailing twelve months ended August 1, 2020, and August 3, 2019, includes tax effect of $1.1 billion and $919 million, respectively, related to EBIT, and $19 million and $18 million, respectively, related to operating lease interest.
(c)
Total short-term and long-term operating lease liabilities included within Accrued and Other Current Liabilities and Noncurrent Operating Lease Liabilities.
(d)
Average based on the invested capital at the end of the current period and the invested capital at the end of the comparable prior period.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
21
|
||||||||
| MANAGEMENT'S DISCUSSION AND ANALYSIS | ||||||||
| ANALYSIS OF FINANCIAL CONDITION | ||||||||
Analysis of Financial Condition
Liquidity and Capital Resources
Capital Allocation
We follow a disciplined and balanced approach to capital allocation based on the following priorities, ranked in order of importance: first, we fully invest in opportunities to profitably grow our business, create sustainable long-term value, and maintain our current operations and assets; second, we maintain a competitive quarterly dividend and seek to grow it annually; and finally, we return any excess cash to shareholders by repurchasing shares within the limits of our credit rating goals.
We believe our sources of liquidity will continue to be adequate to maintain operations, finance anticipated expansion and strategic initiatives, fund debt maturities, and pay dividends. In response to COVID-19, we have suspended our share repurchase program. We continue to anticipate ample access to commercial paper and long-term financing.
Our cash and cash equivalents balance was $7.3 billion, $2.6 billion, and $1.7 billion at August 1, 2020, February 1, 2020, and August 3, 2019, respectively. Our cash and cash equivalents balance includes short-term investments of $6.4 billion, $1.8 billion, and $796 million as of August 1, 2020, February 1, 2020, and August 3, 2019, respectively. Our investment policy is designed to preserve principal and liquidity of our short-term investments. This policy allows investments in large money market funds or in highly rated direct short-term instruments that mature in 60 days or less. We also place dollar limits on our investments in individual funds or instruments.
Operating Cash Flows
Operating cash flow provided by continuing operations was $5.1 billion for the six months ended August 1, 2020, compared with $2.8 billion for the six months ended August 3, 2019.
The increase reflects
stronger operating performance combined with
higher payables leverage during the
six
months ended
August 1, 2020
, due to increased inventory turnover
driven by strong sales
, compared with higher net settlement of accounts payable during the
six
months ended
August 3, 2019
,
resulting from
elevated inventory and accounts payable levels as of February 2, 2019.
Additionally, operating cash flows for the six months ended August 1, 2020, reflect increased payroll-related liabilities, including the deferral of employer social security tax payments. Also, lower first quarter 2020 pretax earnings resulted in a decrease in year-to-date income tax payments.
Inventory
Inventory was $8.9 billion as of August 1, 2020, compared with $9.0 billion and $9.1 billion at February 1, 2020, and August 3, 2019, respectively.
The decrease reflects elevated sell-through rates in
longer-lead time
merchandise categories
, partially offset by increases in Food and Beverage and Beauty and Household Essentials inventory to align with sales trends.
Investing Cash Flows
Cash flow for investing activities included capital expenditures of $1.4 billion for the six months ended August 1, 2020, and August 3, 2019. During the six months ended August 1, 2020, we completed new store and remodel projects that were in process as the COVID-19 crisis developed. However, in response to COVID-19, we have modified plans for some of our strategic initiatives including store remodels and new store openings. We expect full year 2020 capital expenditures to be at a lower level than in 2019
.
Dividends
We paid dividends totaling $330 million ($0.66 per share) and $662 million ($1.32 per share) for the three and six months ended August 1, 2020, respectively, and $328 million ($0.64 per share) and $658 million ($1.28 per share) for the three and six months ended August 3, 2019, respectively, a per share increase of 3.1 percent. We declared dividends totaling $344 million ($0.68 per share) during the second quarter of 2020, a per share increase of 3.0 percent over the $341 million ($0.66 per share) of declared dividends during the second quarter of 2019. We have paid dividends every quarter since our 1967 initial public offering, and it is our intent to continue to do so in the future.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
22
|
||||||||
| MANAGEMENT'S DISCUSSION AND ANALYSIS | ||||||||
| ANALYSIS OF FINANCIAL CONDITION | ||||||||
Share Repurchase
We returned $609 million to shareholders through share repurchase during the six months ended August 1, 2020. We did not repurchase any shares during the three months ended August 1, 2020. See
Part II
,
Item 2
,
Unregistered Sales of Equity Securities and Use of Proceeds
of this Quarterly Report on Form 10-Q and
Note 8
to the Consolidated Financial Statements for more information.
Financing
Our financing strategy is to ensure liquidity and access to capital markets, to maintain a balanced spectrum of debt maturities, and to manage our net exposure to floating interest rate volatility. Within these parameters, we seek to minimize our borrowing costs. Our ability to access the long-term debt and commercial paper markets has provided us with ample sources of liquidity. Our continued access to these markets depends on multiple factors, including the condition of debt capital markets, our operating performance, and maintaining strong credit ratings. As of August 1, 2020, our credit ratings were as follows:
| Credit Ratings | Moody’s | Standard and Poor’s | Fitch | ||||||||
| Long-term debt | A2 | A | A- | ||||||||
| Commercial paper | P-1 | A-1 | F1 | ||||||||
If our credit ratings were lowered, our ability to access the debt markets, our cost of funds, and other terms for new debt issuances could be adversely impacted. Each of the credit rating agencies reviews its rating periodically and there is no guarantee our current credit ratings will remain the same as described above.
In March 2020, we issued $2.5 billion of debt.
Notes 6
and
7
to the Consolidated Financial Statements provide additional information.
We have additional liquidity through a committed $900 million 364-day revolving credit facility obtained through a group of banks in April 2020, which expires in April 2021, and an existing $2.5 billion revolving credit facility obtained through a group of banks, which expires in October 2023. No balances were outstanding under either credit facility at any time during 2020 or 2019.
Most of our long-term debt obligations contain covenants related to secured debt levels. In addition to a secured debt level covenant, our credit facilities also contain a debt leverage covenant. We are, and expect to remain, in compliance with these covenants. Additionally, as of August 1, 2020, no notes or debentures contained provisions requiring acceleration of payment upon a credit rating downgrade, except that certain outstanding notes allow the note holders to put the notes to us if within a matter of months of each other we experience both (i) a change in control and (ii) our long-term credit ratings are either reduced and the resulting rating is non-investment grade, or our long-term credit ratings are placed on watch for possible reduction and those ratings are subsequently reduced and the resulting rating is non-investment grade.
Contractual Obligations and Commitments
As of the date of this report, other than the new borrowings discussed in
Note 6
to the Consolidated Financial Statements, there were no material changes to our contractual obligations and commitments outside the ordinary course of business since February 1, 2020, as reported in our 2019
Form 10-K
.
New Accounting Pronouncements
We do not expect any recently issued accounting pronouncements to have a material effect on our financial statements.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
23
|
||||||||
| MANAGEMENT'S DISCUSSION AND ANALYSIS & SUPPLEMENTAL INFORMATION | ||||||||
| FORWARD LOOKING STATEMENTS & CONTROLS AND PROCEDURES | ||||||||
Forward-Looking Statements
This report contains forward-looking statements, which are based on our current assumptions and expectations. These statements are typically accompanied by the words “expect,” “may,” “could,” “believe,” “would,” “might,” “anticipates,” or similar words. The principal forward-looking statements in this report include: our financial performance, statements regarding the adequacy of and costs associated with our sources of liquidity, the funding of debt maturities, the continued execution of our share repurchase program, our expected capital expenditures and new lease commitments, the expected compliance with debt covenants, the expected impact of new accounting pronouncements, our intentions regarding future dividends, the expected return on plan assets, the expected outcome of, and adequacy of our reserves for, claims, litigation and the resolution of tax matters, the expected impact of changes in information technology systems, future responses to and effects of the COVID-19 pandemic, and changes in our assumptions and expectations.
All such forward-looking statements are intended to enjoy the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. Although we believe there is a reasonable basis for the forward-looking statements, our actual results could be materially different. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth in our description of risk factors included in
Part I
,
Item 1A
,
Risk Factors
of our
Form 10-K
for the fiscal year ended February 1, 2020 and
Part II
,
Item 1A
,
Risk Factors
of our
Form 10-Q
for the quarter ended May 2, 2020, which should be read in conjunction with the forward-looking statements in this report. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our primary risk exposures or management of market risks from those disclosed in
Part II
,
Item 7A
,
Quantitative and Qualitative Disclosures About Market Risk
of our
Form 10-K
for the fiscal year ended February 1, 2020.
Item 4. Controls and Procedures
Changes in Internal Control Over Financial Reporting
During the most recently completed fiscal quarter, the following changes materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:
•
We are in the process of a broad multi-year migration of many mainframe-based systems and middleware products to a modern platform, including systems and processes supporting inventory and supply chain-related transactions.
•
In March 2020, as a result of COVID-19, we temporarily suspended physical inventory counts at our stores. We resumed physical inventory counts in June 2020 using a statistical sampling method, and we have continued to record estimated losses related to shrink and markdowns based upon historical rates.
During the most recently completed fiscal quarter, no other changes in our internal control over financial reporting materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report, we conducted an evaluation, under supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the SEC under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
24
|
||||||||
| SUPPLEMENTAL INFORMATION | ||||||||
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following update to a previously reported proceeding is being reported pursuant to Item 103 of Regulation S-K:
On July 28, 2020, the U.S. Court of Appeals for the Eighth Circuit affirmed the prior decision by the United States District Court for the District of Minnesota (the Court) dismissing the purported Employee Retirement Income Security Act of 1974 (ERISA) class action previously filed in the Court on August 30, 2017 (the Second ERISA Class Action). The Second ERISA Class Action involved claims arising from investments in Target stock by participants in or beneficiaries of the Target Corporation 401(k) Plan and the Target Corporation Ventures 401(k) Plan during Target’s expansion of retail operations into Canada and was previously described in Target’s annual report on
Form 10-K
for the fiscal year ended February 1, 2020.
Item 1A. Risk Factors
Other than as described in
Part II
,
Item
1A
,
Risk Factors
of our
Form 10-Q
for the quarter ended May 2, 2020, there have been no material changes to the risk factors described in
Part I
,
Item 1A
,
Risk Factors
of our
Form 10-K
for the fiscal year ended February 1, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 19, 2019, our Board of Directors authorized a $5 billion share repurchase program with no stated expiration. We began repurchasing shares under the authorization during the first quarter of 2020, prior to suspending share repurchase activity in March 2020. Under the program, we have repurchased 4.6 million shares of common stock at an average price of $105.80, for a total investment of $484 million. As of August 1, 2020, the dollar value of shares that may yet be purchased under the program is $4.5 billion. There were no Target common stock purchases made during the three months ended August 1, 2020, by Target or any "affiliated purchaser" of Target, as defined in Rule 10b-18(a)(3) under the Exchange Act.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
25
|
||||||||
| SUPPLEMENTAL INFORMATION | ||||||||
Item 6. Exhibits
| (3)A | ||||||||
| (3)B | ||||||||
| (10)D | ||||||||
| (10)T | ||||||||
| (10)U | ||||||||
| (10)V | ||||||||
| (10)Y | ||||||||
| (31)A | ||||||||
| (31)B | ||||||||
| (32)A | ||||||||
| (32)B | ||||||||
| 101.INS | XBRL Instance Document | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
(1)
Incorporated by reference to Exhibit (3)A to the Registrant’s Form 8-K Report filed June 10, 2010.
(2)
Incorporated by reference to Exhibit (3)B to the Registrant’s Form 8-K Report filed April 2, 2020.
(3)
Incorporated by reference to Exhibit (10)D to the Registrant’s Form 8-K Report filed June 11, 2020.
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
26
|
||||||||
| SUPPLEMENTAL INFORMATION | ||||||||
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TARGET CORPORATION | |||||||||||
| Dated: August 28, 2020 | By: | /s/ Michael J. Fiddelke | |||||||||
| Michael J. Fiddelke | |||||||||||
| Executive Vice President and | |||||||||||
| Chief Financial Officer | |||||||||||
| (Duly Authorized Officer and | |||||||||||
| Principal Financial Officer) | |||||||||||
| /s/ Robert M. Harrison | |||||||||||
| Robert M. Harrison | |||||||||||
| Senior Vice President, Chief Accounting Officer | |||||||||||
| and Controller | |||||||||||
| TARGET CORPORATION |
|
Q2 2020 Form 10-Q |
27
|
||||||||
TABLE OF CONTENTS
Part IprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 3. Defaults Upon Senior SecuritiesprintItem 4. Mine Safety DisclosuresprintItem 5. Other InformationprintItem 6. Exhibitsprint