Attached files
| file | filename |
|---|---|
| EX-31.A - EXHIBIT 31.A - TARGET CORP | tgt-20180804xexhibit31a.htm |
| EX-32.B - EXHIBIT 32.B - TARGET CORP | tgt-20180804xexhibit32b.htm |
| EX-32.A - EXHIBIT 32.A - TARGET CORP | tgt-20180804xexhibit32a.htm |
| EX-31.B - EXHIBIT 31.B - TARGET CORP | tgt-20180804xexhibit31b.htm |
| EX-12 - EXHIBIT 12 - TARGET CORP | tgt-20180804xexhibit12.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 4, 2018
Commission File Number 1-6049
TARGET CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota | 41-0215170 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1000 Nicollet Mall, Minneapolis, Minnesota | 55403 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: 612/304-6073
Former name, former address and former fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | |||
Smaller reporting company o | Emerging growth company o | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of registrant’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $0.0833, outstanding at August 22, 2018 were 526,350,987.
TARGET CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations | |||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
(millions, except per share data) (unaudited) | August 4, 2018 | July 29, 2017 As Adjusted (a) | August 4, 2018 | July 29, 2017 As Adjusted (a) | |||||||||||
Sales | $ | 17,552 | $ | 16,410 | $ | 34,108 | $ | 32,405 | |||||||
Other revenue | 224 | 224 | 450 | 452 | |||||||||||
Total revenue | 17,776 | 16,634 | 34,558 | 32,857 | |||||||||||
Cost of sales | 12,239 | 11,419 | 23,865 | 22,618 | |||||||||||
Selling, general and administrative expenses | 3,865 | 3,601 | 7,410 | 6,953 | |||||||||||
Depreciation and amortization (exclusive of depreciation included in cost of sales) | 539 | 521 | 1,109 | 1,038 | |||||||||||
Operating income | 1,133 | 1,093 | 2,174 | 2,248 | |||||||||||
Net interest expense | 115 | 131 | 237 | 272 | |||||||||||
Net other (income) / expense | (4 | ) | (15 | ) | (12 | ) | (30 | ) | |||||||
Earnings from continuing operations before income taxes | 1,022 | 977 | 1,949 | 2,006 | |||||||||||
Provision for income taxes | 223 | 307 | 433 | 661 | |||||||||||
Net earnings from continuing operations | 799 | 670 | 1,516 | 1,345 | |||||||||||
Discontinued operations, net of tax | — | 1 | 1 | 4 | |||||||||||
Net earnings | $ | 799 | $ | 671 | $ | 1,517 | $ | 1,349 | |||||||
Basic earnings per share | |||||||||||||||
Continuing operations | $ | 1.50 | $ | 1.22 | $ | 2.84 | $ | 2.44 | |||||||
Discontinued operations | — | — | — | 0.01 | |||||||||||
Net earnings per share | $ | 1.50 | $ | 1.22 | $ | 2.84 | $ | 2.45 | |||||||
Diluted earnings per share | |||||||||||||||
Continuing operations | $ | 1.49 | $ | 1.21 | $ | 2.81 | $ | 2.43 | |||||||
Discontinued operations | — | — | — | 0.01 | |||||||||||
Net earnings per share | $ | 1.49 | $ | 1.22 | $ | 2.82 | $ | 2.44 | |||||||
Weighted average common shares outstanding | |||||||||||||||
Basic | 531.7 | 549.3 | 534.3 | 550.8 | |||||||||||
Dilutive impact of share-based awards | 4.6 | 2.6 | 4.3 | 2.8 | |||||||||||
Diluted | 536.3 | 551.9 | 538.6 | 553.6 | |||||||||||
Antidilutive shares | — | 5.2 | — | 3.6 | |||||||||||
Dividends declared per share | $ | 0.64 | $ | 0.62 | $ | 1.26 | $ | 1.22 | |||||||
Note: Per share amounts may not foot due to rounding.
See accompanying Notes to Consolidated Financial Statements.
(a) | Refer to Note 2 regarding the adoption of new accounting standards for revenue recognition, leases, and pensions, including impacts on previously reported results. |
1
Consolidated Statements of Comprehensive Income | |||||||||||||||
Three Months Ended | Six Months Ended | ||||||||||||||
(millions) (unaudited) | August 4, 2018 | July 29, 2017 As Adjusted (a) | August 4, 2018 | July 29, 2017 As Adjusted (a) | |||||||||||
Net earnings | $ | 799 | $ | 671 | $ | 1,517 | $ | 1,349 | |||||||
Other comprehensive income | |||||||||||||||
Pension, net of tax | 16 | 7 | 29 | 14 | |||||||||||
Currency translation adjustment and cash flow hedges, net of tax | (2 | ) | 3 | (5 | ) | 8 | |||||||||
Other comprehensive income | 14 | 10 | 24 | 22 | |||||||||||
Comprehensive income | $ | 813 | $ | 681 | $ | 1,541 | $ | 1,371 | |||||||
See accompanying Notes to Consolidated Financial Statements.
(a) | Refer to Note 2 regarding the adoption of new accounting standards for revenue recognition, leases, and pensions, including impacts on previously reported results. |
2
Consolidated Statements of Financial Position | |||||||||||
(millions) (unaudited) | August 4, 2018 | February 3, 2018 As Adjusted (a) | July 29, 2017 As Adjusted (a) | ||||||||
Assets | |||||||||||
Cash and cash equivalents | $ | 1,180 | $ | 2,643 | $ | 2,291 | |||||
Inventory | 9,112 | 8,597 | 8,192 | ||||||||
Other current assets | 1,211 | 1,300 | 1,114 | ||||||||
Total current assets | 11,503 | 12,540 | 11,597 | ||||||||
Property and equipment | |||||||||||
Land | 6,074 | 6,095 | 6,089 | ||||||||
Buildings and improvements | 28,629 | 28,131 | 27,616 | ||||||||
Fixtures and equipment | 5,356 | 5,623 | 5,361 | ||||||||
Computer hardware and software | 2,575 | 2,645 | 2,518 | ||||||||
Construction-in-progress | 685 | 440 | 423 | ||||||||
Accumulated depreciation | (18,147 | ) | (18,398 | ) | (17,603 | ) | |||||
Property and equipment, net | 25,172 | 24,536 | 24,404 | ||||||||
Operating lease assets | 1,976 | 1,884 | 1,857 | ||||||||
Other noncurrent assets | 1,345 | 1,343 | 809 | ||||||||
Total assets | $ | 39,996 | $ | 40,303 | $ | 38,667 | |||||
Liabilities and shareholders’ investment | |||||||||||
Accounts payable | $ | 9,116 | $ | 8,677 | $ | 7,584 | |||||
Accrued and other current liabilities | 3,878 | 4,094 | 3,627 | ||||||||
Current portion of long-term debt and other borrowings | 1,044 | 281 | 1,365 | ||||||||
Total current liabilities | 14,038 | 13,052 | 12,576 | ||||||||
Long-term debt and other borrowings | 10,108 | 11,117 | 10,706 | ||||||||
Noncurrent operating lease liabilities | 2,028 | 1,924 | 1,897 | ||||||||
Deferred income taxes | 828 | 693 | 757 | ||||||||
Other noncurrent liabilities | 1,827 | 1,866 | 1,676 | ||||||||
Total noncurrent liabilities | 14,791 | 15,600 | 15,036 | ||||||||
Shareholders’ investment | |||||||||||
Common stock | 44 | 45 | 46 | ||||||||
Additional paid-in capital | 5,788 | 5,858 | 5,707 | ||||||||
Retained earnings | 6,058 | 6,495 | 5,918 | ||||||||
Accumulated other comprehensive loss | (723 | ) | (747 | ) | (616 | ) | |||||
Total shareholders’ investment | 11,167 | 11,651 | 11,055 | ||||||||
Total liabilities and shareholders’ investment | $ | 39,996 | $ | 40,303 | $ | 38,667 | |||||
Common Stock Authorized 6,000,000,000 shares, $0.0833 par value; 526,112,846, 541,681,670 and 546,183,291 shares issued and outstanding at August 4, 2018, February 3, 2018 and July 29, 2017, respectively.
Preferred Stock Authorized 5,000,000 shares, $0.01 par value; no shares were issued or outstanding during any period presented.
See accompanying Notes to Consolidated Financial Statements.
(a) | Refer to Note 2 regarding the adoption of new accounting standards for revenue recognition, leases, and pensions, including impacts on previously reported results. |
3
Consolidated Statements of Cash Flows | |||||||
Six Months Ended | |||||||
(millions) (unaudited) | August 4, 2018 | July 29, 2017 As Adjusted (a) | |||||
Operating activities | |||||||
Net earnings | $ | 1,517 | $ | 1,349 | |||
Earnings from discontinued operations, net of tax | 1 | 4 | |||||
Net earnings from continuing operations | 1,516 | 1,345 | |||||
Adjustments to reconcile net earnings to cash provided by operations | |||||||
Depreciation and amortization | 1,234 | 1,166 | |||||
Share-based compensation expense | 71 | 43 | |||||
Deferred income taxes | 129 | (90 | ) | ||||
Noncash losses / (gains) and other, net | 99 | 94 | |||||
Changes in operating accounts | |||||||
Inventory | (515 | ) | 52 | ||||
Other assets | 1 | 71 | |||||
Accounts payable | 342 | 332 | |||||
Accrued and other liabilities | (154 | ) | (144 | ) | |||
Cash provided by operating activities—continuing operations | 2,723 | 2,869 | |||||
Cash provided by operating activities—discontinued operations | 1 | 57 | |||||
Cash provided by operations | 2,724 | 2,926 | |||||
Investing activities | |||||||
Expenditures for property and equipment | (1,856 | ) | (1,203 | ) | |||
Proceeds from disposal of property and equipment | 15 | 22 | |||||
Other investments | 3 | (80 | ) | ||||
Cash required for investing activities | (1,838 | ) | (1,261 | ) | |||
Financing activities | |||||||
Reductions of long-term debt | (255 | ) | (617 | ) | |||
Dividends paid | (665 | ) | (663 | ) | |||
Repurchase of stock | (954 | ) | (615 | ) | |||
Accelerated share repurchase pending final settlement | (525 | ) | — | ||||
Stock option exercises | 50 | 9 | |||||
Cash required for financing activities | (2,349 | ) | (1,886 | ) | |||
Net decrease in cash and cash equivalents | (1,463 | ) | (221 | ) | |||
Cash and cash equivalents at beginning of period | 2,643 | 2,512 | |||||
Cash and cash equivalents at end of period | $ | 1,180 | $ | 2,291 | |||
See accompanying Notes to Consolidated Financial Statements.
(a) | Refer to Note 2 regarding the adoption of new accounting standards for revenue recognition, leases, and pensions, including impacts on previously reported results. |
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 | — | — | — | 1,517 | — | 1,517 | ||||||||||||||||
Other comprehensive income | — | — | — | — | 24 | 24 | ||||||||||||||||
Dividends declared | — | — | — | (674 | ) | — | (674 | ) | ||||||||||||||
Repurchase of stock | (12.7 | ) | (1 | ) | — | (925 | ) | — | (926 | ) | ||||||||||||
Accelerated share repurchase pending final settlement | (4.6 | ) | — | (170 | ) | (355 | ) | — | (525 | ) | ||||||||||||
Stock options and awards | 1.7 | — | 100 | — | — | 100 | ||||||||||||||||
August 4, 2018 | 526.1 | $ | 44 | $ | 5,788 | $ | 6,058 | $ | (723 | ) | $ | 11,167 | ||||||||||
See accompanying Notes to Consolidated Financial Statements.
(a) | Refer to Note 2 regarding the adoption of new accounting standards for revenue recognition, leases, and pensions, including impacts on previously reported results. |
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 Exchanged Commission (SEC) applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (U.S. GAAP) for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statement disclosures in our 2017 Form 10-K.
We use the same accounting policies in preparing quarterly and annual financial statements. Note 2 provides information about our adoption of new accounting standards for revenue recognition, leases, and pensions. Unless otherwise noted, amounts presented within the Notes to Consolidated Financial Statements refer to our continuing operations.
We operate as a single segment that includes all of our continuing operations, which are designed to enable guests to purchase products seamlessly in stores or through our digital channels. Virtually all of our revenues are generated in the United States. The vast majority of our long-lived assets are located within the United States.
Due to the seasonal nature of our business, quarterly revenues, expenses, earnings, and cash flows are not necessarily indicative of the results that may be expected for the full year.
2. Accounting Standards Adopted
Revenue Recognition
We adopted Accounting Standards Update (ASU) No. 2014-09—Revenue from Contracts with Customers (Topic 606), as of February 4, 2018, using the full retrospective approach. The new standard did not materially affect our consolidated net earnings, financial position, or cash flows. The new standard resulted in minor changes to the timing of recognition of revenues for certain promotional gift card programs.
For the three and six months ended July 29, 2017, we reclassified profit-sharing income under our credit card program agreement to Other Revenue from Selling, General and Administrative Expenses (SG&A). In addition, we reclassified certain advertising, rental, and other miscellaneous revenues, none of which was individually significant, from Sales and SG&A to Other Revenues.
Leases
We adopted ASU No. 2016-02—Leases (Topic 842), as of February 4, 2018, using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We also elected the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements.
In addition, we elected the hindsight practical expedient to determine the lease term for existing leases. Our election of the hindsight practical expedient resulted in the shortening of lease terms for certain existing leases and the useful lives of corresponding leasehold improvements. In our application of hindsight, we evaluated the performance of the leased stores and the associated markets in relation to our overall real estate strategies, which resulted in the determination that most renewal options would not be reasonably certain in determining the expected lease term.
Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $1.3 billion and $1.4 billion, respectively, as of February 4, 2018. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was recorded as an adjustment to retained earnings. The standard did not materially impact our consolidated net earnings and had no impact on cash flows.
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 six months ended July 29, 2017, we reclassified $(15) million and $(30) million, respectively, of non-service cost components of net benefit cost to Net Other (Income) / Expense from SG&A on our Consolidated Statements of Operations.
Effect of Accounting Standards Adoption on Consolidated Statement of Operations | ||||||||||||||||||
Three Months Ended | Effect of the Adoption of | Three Months Ended | ||||||||||||||||
ASC Topic 606 (Revenue Recognition) | ASC Topic 842 (Leases) | ASU 2017-07 (Pension) | ||||||||||||||||
(millions, except per share data) (unaudited) | July 29, 2017 As Previously Reported | July 29, 2017 As Adjusted | ||||||||||||||||
Sales | $ | 16,429 | $ | (19 | ) | (a) | $ | — | $ | — | $ | 16,410 | ||||||
Other revenue | — | 224 | (a) | — | — | 224 | ||||||||||||
Total revenue | 16,429 | 205 | — | — | 16,634 | |||||||||||||
Cost of sales | 11,419 | — | — | — | 11,419 | |||||||||||||
Selling, general and administrative expenses | 3,382 | 205 | (a) | (2 | ) | 15 | (c) | 3,601 | ||||||||||
Depreciation and amortization (exclusive of depreciation included in cost of sales) | 514 | — | 8 | (b) | — | 521 | ||||||||||||
Operating income | 1,114 | — | (6 | ) | (15 | ) | 1,093 | |||||||||||
Net interest expense | 135 | — | (3 | ) | (b) | — | 131 | |||||||||||
Net other (income) / expense | — | — | — | (15 | ) | (c) | (15 | ) | ||||||||||
Earnings from continuing operations before income taxes | 979 | — | (3 | ) | — | 977 | ||||||||||||
Provision for income taxes | 308 | — | (1 | ) | — | 307 | ||||||||||||
Net earnings from continuing operations | 671 | — | (2 | ) | — | 670 | ||||||||||||
Discontinued operations, net of tax | 1 | — | — | — | 1 | |||||||||||||
Net earnings | $ | 672 | $ | — | $ | (2 | ) | $ | — | $ | 671 | |||||||
Basic earnings per share | ||||||||||||||||||
Continuing operations | $ | 1.22 | $ | 1.22 | ||||||||||||||
Discontinued operations | — | — | ||||||||||||||||
Net earnings per share | $ | 1.22 | $ | 1.22 | ||||||||||||||
Diluted earnings per share | ||||||||||||||||||
Continuing operations | $ | 1.22 | $ | 1.21 | ||||||||||||||
Discontinued operations | — | — | ||||||||||||||||
Net earnings per share | $ | 1.22 | $ | 1.22 | ||||||||||||||
Note: Per share amounts may not foot due to rounding. The sum of "As Previously Reported" amounts and effects of the adoption of the new standards may not equal "As Adjusted" amounts due to rounding. Footnote explanations are provided on page 8.
7
Effect of Accounting Standards Adoption on Consolidated Statement of Operations | ||||||||||||||||||
Six Months Ended | Effect of the Adoption of | Six Months Ended | ||||||||||||||||
ASC Topic 606 (Revenue Recognition) | ASC Topic 842 (Leases) | ASU 2017-07 (Pension) | ||||||||||||||||
(millions, except per share data) (unaudited) | July 29, 2017 As Previously Reported | July 29, 2017 As Adjusted | ||||||||||||||||
Sales | $ | 32,446 | $ | (41 | ) | (a) | $ | — | $ | — | $ | 32,405 | ||||||
Other revenue | — | 452 | (a) | — | — | 452 | ||||||||||||
Total revenue | 32,446 | 411 | — | — | 32,857 | |||||||||||||
Cost of sales | 22,618 | — | — | — | 22,618 | |||||||||||||
Selling, general and administrative expenses | 6,515 | 411 | (a) | (2 | ) | 30 | (c) | 6,953 | ||||||||||
Depreciation and amortization (exclusive of depreciation included in cost of sales) | 1,022 | — | 16 | (b) | — | 1,038 | ||||||||||||
Operating income | 2,291 | — | (14 | ) | (30 | ) | 2,248 | |||||||||||
Net interest expense | 278 | — | (7 | ) | (b) | — | 272 | |||||||||||
Net other (income) / expense | — | — | — | (30 | ) | (c) | (30 | ) | ||||||||||
Earnings from continuing operations before income taxes | 2,013 | — | (7 | ) | — | 2,006 | ||||||||||||
Provision for income taxes | 664 | — | (3 | ) | — | 661 | ||||||||||||
Net earnings from continuing operations | 1,349 | — | (4 | ) | — | 1,345 | ||||||||||||
Discontinued operations, net of tax | 4 | — | — | — | 4 | |||||||||||||
Net earnings | $ | 1,353 | $ | — | $ | (4 | ) | $ | — | $ | 1,349 | |||||||
Basic earnings per share | ||||||||||||||||||
Continuing operations | $ | 2.45 | $ | 2.44 | ||||||||||||||
Discontinued operations | 0.01 | 0.01 | ||||||||||||||||
Net earnings per share | $ | 2.45 | $ | 2.45 | ||||||||||||||
Diluted earnings per share | ||||||||||||||||||
Continuing operations | $ | 2.44 | $ | 2.43 | ||||||||||||||
Discontinued operations | 0.01 | 0.01 | ||||||||||||||||
Net earnings per share | $ | 2.44 | $ | 2.44 | ||||||||||||||
Note: Per share amounts may not foot due to rounding. The sum of "As Previously Reported" amounts and effects of the adoption of the new standards may not equal "As Adjusted" amounts due to rounding.
(a) | For the three and six months ended July 29, 2017, we reclassified $172 million and $342 million, respectively, of profit-sharing income under our credit card program agreement to Other Revenue from SG&A. In addition, we reclassified certain advertising, rental, and other miscellaneous revenues, none of which was individually significant, from Sales and SG&A to Other Revenues. |
(b) | Relates to lease-term changes under the hindsight practical expedient. |
(c) | Relates to non-service cost components reclassified to Net Other (Income) / Expense from SG&A. |
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.
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Effect of Accounting Standards Adoption on Consolidated Statement of Financial Position | |||||||||||||||
Effect of the Adoption of | |||||||||||||||
(millions) (unaudited) | July 29, 2017 As Previously Reported | ASC Topic 606 (Revenue Recognition) | ASC Topic 842 (Leases) | July 29, 2017 As Adjusted | |||||||||||
Assets | |||||||||||||||
Cash and cash equivalents | $ | 2,291 | $ | — | $ | — | $ | 2,291 | |||||||
Inventory | 8,257 | (65 | ) | (a) | — | 8,192 | |||||||||
Other current assets | 1,072 | 65 | (a) | (23 | ) | (b) | 1,114 | ||||||||
Total current assets | 11,620 | — | (23 | ) | 11,597 | ||||||||||
Property and equipment | |||||||||||||||
Land | 6,089 | — | — | 6,089 | |||||||||||
Buildings and improvements | 28,041 | — | (425 | ) | (c) | 27,616 | |||||||||
Fixtures and equipment | 5,361 | — | — | 5,361 | |||||||||||
Computer hardware and software | 2,518 | — | — | 2,518 | |||||||||||
Construction-in-progress | 423 | — | — | 423 | |||||||||||
Accumulated depreciation | (17,571 | ) | — | (32 | ) | (c) | (17,603 | ) | |||||||
Property and equipment, net | 24,861 | — | (457 | ) | 24,404 | ||||||||||
Operating lease assets | — | — | 1,857 | (d) | 1,857 | ||||||||||
Other noncurrent assets | 885 | — | (76 | ) | (e) | 809 | |||||||||
Total assets | $ | 37,366 | $ | — | $ | 1,301 | $ | 38,667 | |||||||
Liabilities and shareholders’ investment | |||||||||||||||
Accounts payable | $ | 7,584 | $ | — | $ | — | $ | 7,584 | |||||||
Accrued and other current liabilities | 3,790 | (14 | ) | (k) | (150 | ) | (f) | 3,627 | |||||||
Current portion of long-term debt and other borrowings | 1,355 | — | 11 | (g) | 1,365 | ||||||||||
Total current liabilities | 12,729 | (14 | ) | (139 | ) | 12,576 | |||||||||
Long-term debt and other borrowings | 10,892 | — | (185 | ) | (g) | 10,706 | |||||||||
Noncurrent operating lease liabilities | — | — | 1,897 | (h) | 1,897 | ||||||||||
Deferred income taxes | 784 | 6 | (33 | ) | 757 | ||||||||||
Other noncurrent liabilities | 1,863 | — | (188 | ) | (i) | 1,676 | |||||||||
Total noncurrent liabilities | 13,539 | 6 | 1,491 | 15,036 | |||||||||||
Shareholders’ investment | |||||||||||||||
Common stock | 46 | — | — | 46 | |||||||||||
Additional paid-in capital | 5,707 | — | — | 5,707 | |||||||||||
Retained earnings | 5,961 | 8 | (k) | (51 | ) | (j) | 5,918 | ||||||||
Accumulated other comprehensive loss | (616 | ) | — | — | (616 | ) | |||||||||
Total shareholders’ investment | 11,098 | 8 | (51 | ) | 11,055 | ||||||||||
Total liabilities and shareholders’ investment | $ | 37,366 | $ | — | $ | 1,301 | $ | 38,667 | |||||||
Note: The sum of "As Previously Reported" amounts and effects of the adoption of the new standards may not equal "As Adjusted" amounts due to rounding.
(a) | Represents estimated merchandise returns, which were reclassified from Inventory to Other Current Assets. |
(b) | Represents prepaid rent reclassified to Operating Lease Assets. |
(c) | For both periods presented, represents impact of changes in finance lease terms and related leasehold improvements (net of accumulated depreciation) under the hindsight practical expedient and derecognition of approximately $135 million of non-Target owned properties that were consolidated under previously existing build-to-suit accounting rules. |
(d) | Represents capitalization of operating lease assets and reclassification of leasehold acquisition costs, straight-line rent accrual, and tenant incentives. |
(e) | Represents reclassification of leasehold acquisition costs to Operating Lease Assets. |
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(f) | Represents reclassification of straight-line rent accrual to Operating Lease Assets, partially offset by recognition of the current portion of operating lease liabilities. |
(g) | Represents the impact of changes in financing lease terms for certain leases due to the election of the hindsight practical expedient. |
(h) | Represents recognition of operating lease liabilities. |
(i) | For both periods presented, represents derecognition of approximately $135 million of liabilities related to non-Target owned properties that were consolidated under previously existing build-to-suit accounting rules and reclassification of tenant incentives to Operating Lease Assets. |
(j) | Represents the retained earnings impact of lease-term changes due to the use of hindsight, primarily from the shortening of lease terms for certain existing leases and useful lives of corresponding leasehold improvements. |
(k) | Primarily represents the impact of a change in timing of revenue recognition for certain promotional gift card programs. |
3. Revenues
General merchandise sales represent the vast majority of our revenues. We also earn revenues from a variety of other sources, most notably credit card profit sharing income from our arrangement with TD Bank Group (TD).
During the first quarter of 2018, we reclassified certain income streams, including credit card profit sharing income, to Other Revenue on our Consolidated Statements of Operations and conformed prior periods. Note 2 provides additional information.
Revenues | Three Months Ended | Six Months Ended | |||||||||||||
(millions) | August 4, 2018 | July 29, 2017 | August 4, 2018 | July 29, 2017 | |||||||||||
Apparel and accessories | $ | 3,843 | $ | 3,646 | $ | 7,347 | $ | 7,059 | |||||||
Beauty and household essentials | 4,411 | 4,107 | 8,638 | 8,157 | |||||||||||
Food and beverage | 3,372 | 3,213 | 6,959 | 6,666 | |||||||||||
Hardlines | 2,501 | 2,311 | 4,814 | 4,621 | |||||||||||
Home furnishings and décor | 3,402 | 3,111 | 6,304 | 5,858 | |||||||||||
Other | 23 | 22 | 46 | 44 | |||||||||||
Sales | 17,552 | 16,410 | 34,108 | 32,405 | |||||||||||
Credit card profit sharing | 167 | 172 | 333 | 342 | |||||||||||
Other | 57 | 52 | 117 | 110 | |||||||||||
Other revenue | 224 | 224 | 450 | 452 | |||||||||||
Total revenue | $ | 17,776 | $ | 16,634 | $ | 34,558 | $ | 32,857 | |||||||
Merchandise sales – We record almost all retail store revenues at the point of sale. Digital channel originated sales may include shipping revenue and are recorded upon delivery to the guest or upon guest pickup in store. Total revenues do not include sales tax because we are a pass-through conduit for collecting and remitting sales taxes. Generally, guests may return national brand merchandise within 90 days of purchase and owned and exclusive brands within one year of purchase. Sales are recognized net of expected returns, which we estimate using historical return patterns and our expectation of future returns. As of August 4, 2018, February 3, 2018, and July 29, 2017, the accrual for estimated returns was $114 million, $110 million, and $121 million, respectively. We have not historically had material adjustments to our returns estimates.
Under certain vendor arrangements the purchase and sale of inventory is virtually simultaneous. We record revenue and related costs gross for the vast majority of these arrangements, with approximately 5 percent of consolidated sales made under such arrangements. We concluded that we are the principal in these transactions for a number of reasons, most notably because we 1) control the overall economics of the transactions, including setting the sales price and realizing the majority of cash flows from the sale, 2) control the relationship with the customer, and 3) are responsible for fulfilling the promise to provide goods to the customer.
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Revenue from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance. Our gift cards do not expire. Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as "breakage." Estimated breakage revenue is recognized over time in proportion to actual gift card redemptions.
(millions) | February 3, 2018 | Gift Cards Issued During Current Period But Not Redeemed (a) | Revenue Recognized From Beginning Liability | August 4, 2018 | |||||||||||
Gift card liability | $ | 709 | $ | 298 | $ | (403 | ) | $ | 604 | ||||||
(a) | Net of estimated breakage. |
Guests receive a 5 percent discount on virtually all purchases and receive free shipping at Target.com when they use their Target-branded credit or debit card (REDcards). The 5 percent discount is included as a sales reduction in our Consolidated Statements of Operations and was $227 million and $441 million for the three and six months ended August 4, 2018, respectively, and $214 million and $424 million for the three and six months ended July 29, 2017, respectively.
Credit card profit sharing – We receive payments under a credit card program agreement with TD. Under the agreement, we receive a percentage of the profits generated by the Target Credit Card and Target MasterCard receivables in exchange for performing account servicing and primary marketing functions. TD underwrites, funds, and owns Target Credit Card and Target MasterCard receivables, controls risk management policies, and oversees regulatory compliance.
4. Fair Value Measurements
Fair value measurements are reported in one of three levels reflecting the valuation techniques used to determine fair value.
Fair Value Measurements - Recurring Basis | Fair Value at | |||||||||||
(millions) | Pricing Category | August 4, 2018 | February 3, 2018 | July 29, 2017 | ||||||||
Assets | ||||||||||||
Cash and Cash Equivalents | ||||||||||||
Short-term investments | Level 1 | $ | 353 | $ | 1,906 | $ | 1,617 | |||||
Other Current Assets | ||||||||||||
Prepaid forward contracts | Level 1 | 22 | 23 | 37 | ||||||||
Other Noncurrent Assets | ||||||||||||
Interest rate swaps | Level 2 | — | — | 4 | ||||||||
Liabilities | ||||||||||||
Other current liabilities | ||||||||||||
Interest rate swaps | Level 2 | 7 | — | — | ||||||||
Other Noncurrent Liabilities | ||||||||||||
Interest rate swaps | Level 2 | 2 | 6 | — | ||||||||
Significant Financial Instruments not Measured at Fair Value (a) (millions) | August 4, 2018 | February 3, 2018 | July 29, 2017 | |||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||
Debt (b) | $ | 10,243 | $ | 10,682 | $ | 10,440 | $ | 11,155 | $ | 11,122 | $ | 12,143 | ||||||||
(a) | The carrying amounts of certain other current assets, accounts payable, and certain accrued and other current liabilities approximate fair value due to their short-term nature. |
(b) | The carrying amount and estimated fair value of debt exclude unamortized swap valuation adjustments and lease liabilities. |
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5. Property and Equipment
We review long-lived assets for impairment when events or changes in circumstances—such as a decision to relocate or close a store or distribution center, discontinue projects, or make significant software changes—indicate that the asset’s carrying value may not be recoverable. We recognized impairment losses of $78 million and $85 million during the three and six months ended August 4, 2018, respectively, primarily resulting from planned store closures. We recognized impairment losses of $87 million and $88 million during the three and six months ended July 29, 2017, respectively, primarily resulting from planned or completed store closures and supply chain changes. The impairments are recorded in selling, general and administrative expense on the Consolidated Statements of Operations.
6. Notes Payable and Long-Term Debt
We obtain short-term financing from time to time under our commercial paper program, a form of notes payable. For the six months ended August 4, 2018, the maximum amount outstanding was $658 million and the average daily amount outstanding was $63 million at a weighted average annual interest rate of 1.8 percent. As of August 4, 2018, no balances were outstanding. No balances were outstanding at any time during the six months ended July 29, 2017.
7. Derivative Financial Instruments
Our derivative instruments primarily consist of interest rate swaps, which we use to mitigate interest rate risk. As a result of our use of derivative instruments, we have counterparty credit exposure to large global financial institutions. We monitor this concentration of counterparty credit risk on an ongoing basis. Note 4 provides the fair value and classification of these instruments.
In March 2018, we entered into an interest rate swap with a notional amount of $250 million, under which we pay a variable rate and receive a fixed rate. We designated this swap as a fair value hedge. With the addition of this swap, as of August 4, 2018, three interest rate swaps with notional amounts totaling $1,250 million were designated as fair value hedges. As of July 29, 2017, two interest rate swaps with notional amounts totaling $1,000 million were designated as fair value hedges. No ineffectiveness was recognized during the three and six months ended August 4, 2018 or July 29, 2017.
We recorded expense of $1 million during both the three and six months ended August 4, 2018, and income of $2 million and $6 million during the three and six months ended July 29, 2017, respectively, within Net Interest Expense on our Consolidated Statements of Operations related to periodic payments, valuation adjustments, and amortization of gains or losses on our interest rate swaps.
8. Leases
We lease certain retail stores, warehouses, distribution centers, office space, land, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 50 years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Certain of our lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We rent or sublease certain real estate to third parties. Our sublease portfolio consists mainly of operating leases with CVS Pharmacy Inc. for space within our stores.
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Leases (millions) | Classification | August 4, 2018 | February 3, 2018 | July 29, 2017 | ||||||
Assets | ||||||||||
Operating lease assets | Operating Lease Assets | $ | 1,976 | $ | 1,884 | $ | 1,857 | |||
Finance lease assets | Buildings and Improvements, net of Accumulated Depreciation (a) | 785 | 836 | 827 | ||||||
Total leased assets | $ | 2,761 | $ | 2,720 | $ | 2,684 | ||||
Liabilities | ||||||||||
Current | ||||||||||
Operating | Accrued and Other Current Liabilities | $ | 155 | $ | 147 | $ | 134 | |||
Finance | Current Portion of Long-term Debt and Other Borrowings | 50 | 80 | 78 | ||||||
Noncurrent | ||||||||||
Operating | Noncurrent Operating Lease Liabilities | 2,028 | 1,924 | 1,897 | ||||||
Finance | Long-term Debt and Other Borrowings | 868 | 885 | 866 | ||||||
Total lease liabilities | $ | 3,101 | $ | 3,036 | $ | 2,975 | ||||
(a) | Finance lease assets are recorded net of accumulated amortization of $336 million, $317 million, and $284 million as of August 4, 2018, February 3, 2018, and July 29, 2017, respectively. |
Lease Cost | Three Months Ended | Six Months Ended | ||||||||||||
(millions) | Classification | August 4, 2018 | July 29, 2017 | August 4, 2018 | July 29, 2017 | |||||||||
Operating lease cost (a) | SG&A Expenses | $ | 61 | $ | 54 | $ | 121 | $ | 108 | |||||
Finance lease cost | ||||||||||||||
Amortization of leased assets | Depreciation and Amortization (b) | 17 | 16 | 33 | 31 | |||||||||
Interest on lease liabilities | Net Interest Expense | 10 | 10 | 21 | 20 | |||||||||
Sublease income (c) | Other Revenue | (3 | ) | (2 | ) | (5 | ) | (4 | ) | |||||
Net lease cost | $ | 85 | $ | 78 | $ | 170 | $ | 155 | ||||||
(a) | Includes short-term leases and variable lease costs, which are immaterial. |
(b) | Supply chain-related amounts are included in Cost of Sales. |
(c) | Sublease income excludes rental income from owned properties of $12 million and $23 million for the three and six months ended August 4, 2018, respectively, and $12 million and $23 million for the three and six months ended July 29, 2017, respectively, which is included in Other Revenue. |
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Maturity of Lease Liabilities (millions) | Operating Leases (a) | Finance Leases (b) | Total | ||||||
2018 | $ | 117 | $ | 45 | $ | 162 | |||
2019 | 237 | 90 | 327 | ||||||
2020 | 227 | 87 | 314 | ||||||
2021 | 219 | 87 | 306 | ||||||
2022 | 214 | 88 | 302 | ||||||
After 2022 | 1,936 | 930 | 2,866 | ||||||
Total lease payments | $ | 2,950 | $ | 1,327 | $ | 4,277 | |||
Less: Interest | 767 | 409 | |||||||
Present value of lease liabilities | $ | 2,183 | $ | 918 | |||||
Note: For leases commencing prior to 2018, minimum lease payments excludes payments to landlords for real estate taxes and common area maintenance.
(a) | Operating lease payments include $795 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $311 million of legally binding minimum lease payments for leases signed but not yet commenced. |
(b) | Finance lease payments include $122 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $203 million of legally binding minimum lease payments for leases signed but not yet commenced. |
Lease Term and Discount Rate | August 4, 2018 | February 3, 2018 | July 29, 2017 | |||
Weighted-average remaining lease term (years) | ||||||
Operating leases | 14.7 | 15.2 | 15.7 | |||
Finance leases | 15.6 | 15.4 | 15.2 | |||
Weighted-average discount rate | ||||||
Operating leases | 3.90 | % | 3.88 | % | 3.90 | % |
Finance leases | 4.71 | % | 4.64 | % | 4.61 | % |
Other Information | Six Months Ended | |||||
(millions) | August 4, 2018 | July 29, 2017 | ||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||
Operating cash flows from operating leases | $ | 105 | $ | 96 | ||
Operating cash flows from finance leases | 22 | 20 | ||||
Financing cash flows from finance leases | 55 | 19 | ||||
Leased assets obtained in exchange for new finance lease liabilities | 15 | 97 | ||||
Leased assets obtained in exchange for new operating lease liabilities | 169 | 114 | ||||
9. Income Taxes
Three Months Ended | Six Months Ended | ||||||||||||||
(dollars in millions) | August 4, 2018 | July 29, 2017 As Adjusted | August 4, 2018 | July 29, 2017 As Adjusted | |||||||||||
Income tax expense | $ | 223 | $ | 307 | $ | 433 | $ | 661 | |||||||
Effective tax rate | 21.8 | % | 31.4 | % | 22.2 | % | 33.0 | % | |||||||
For the three and six months ended August 4, 2018, our income tax rate decreased by 9.6 percentage points and 10.8 percentage points, respectively, compared with the three and six months ended July 29, 2017, primarily due to the lower federal corporate
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tax rate enacted by the Tax Cuts and Jobs Act (the Tax Act), partially offset by certain other provisions, none of which was individually significant.
In 2017, we recorded provisional amounts for certain income tax effects of the Tax Act for which the accounting under ASC Topic 740 was incomplete but a reasonable estimate could be determined. During the three and six months ended August 4, 2018, we made no adjustments to previously-recorded provisional amounts related to the Tax Act. Additional work is necessary for a more detailed analysis of (1) certain deferred tax assets and liabilities, including 2017 accelerated depreciation deductions, and (2) historical foreign earnings and outside book/tax basis differences. We do not expect subsequent adjustments to be material, but any such adjustments related to these amounts will be recorded to tax expense in the quarter of 2018 in which we complete the analysis.
Beginning with the first quarter of 2018, we are subject to a new tax on global intangible low-taxed income that is imposed on foreign earnings. We have made an accounting election to record this tax as a period cost and thus have not adjusted any of the deferred tax assets or liabilities of our foreign subsidiaries for the new tax. Impacts of this new tax were immaterial and are included in our provision for income taxes for the three and six months ended August 4, 2018.
10. Share Repurchase
Six Months Ended | |||||||
(millions, except per share data) | August 4, 2018 | July 29, 2017 | |||||
Total number of shares purchased | 12.7 | 10.6 | |||||
Average price paid per share | $ | 72.64 | $ | 56.76 | |||
Total investment | $ | 925 | $ | 601 | |||
Note: Activity related to the July 2018 accelerated share repurchase (ASR) described below is omitted because the transaction was not fully settled as of August 4, 2018.
During July 2018, we entered into an ASR to repurchase $400 to $525 million of our common stock under the existing $5 billion share repurchase program. Under the agreement, we paid $525 million and received an initial delivery of 4.6 million shares, which were retired, resulting in a $355 million reduction to Retained Earnings. As of August 4, 2018, $170 million is included in the Consolidated Statement of Financial Position as a reduction to Additional Paid-in Capital.
11. Pension Benefits
We provide pension plan benefits to certain eligible team members.
Net Pension Benefits Expense | Three Months Ended | Six Months Ended | |||||||||||||
(millions) | August 4, 2018 | July 29, 2017 | August 4, 2018 | July 29, 2017 | |||||||||||
Service cost | $ | 25 | $ | 21 | $ | 49 | $ | 42 | |||||||
Interest cost | 37 | 34 | 73 | 69 | |||||||||||
Expected return on assets | (62 | ) | (61 | ) | (123 | ) | (123 | ) | |||||||
Amortization of losses | 20 | 15 | 41 | 30 | |||||||||||
Amortization of prior service cost | (3 | ) | (3 | ) | (6 | ) | (5 | ) | |||||||
Settlements | 3 | — | 3 | — | |||||||||||
Total | $ | 20 | |||||||||||||