UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

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

EXCHANGE ACT OF 1934

For the quarterly period ended October 30, 2010

 

Commission File Number 1-6049

 


 

 

TARGET CORPORATION

(Exact name of registrant as specified in its charter)

 

Minnesota

 

41-0215170

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1000 Nicollet Mall, Minneapolis, Minnesota

 

55403

(Address of principal executive offices)

 

(Zip Code)

 

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

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

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.             Yes  x   No  o

 

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

 

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

 

Large accelerated filer  x   Accelerated filer  o   Non-accelerated filer  o   Smaller Reporting company  o

 

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

 

Indicate the number of shares outstanding of each of registrant’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $.0833, outstanding at December 1, 2010 were 708,081,740.

 



 

TARGET CORPORATION

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

Consolidated Statements of Operations

1

 

Consolidated Statements of Financial Position

2

 

Consolidated Statements of Cash Flows

3

 

Consolidated Statements of Shareholders’ Investment

4

 

Notes to Consolidated Financial Statements

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

22

 

 

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3.

Defaults Upon Senior Securities

24

Item 4.

Reserved

24

Item 5.

Other Information

24

Item 6.

Exhibits

24

 

 

 

 

 

 

Signature

 

26

Exhibit Index

 

27

 



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Consolidated Statements of Operations

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

October 30,

 

October 31,

 

 

 

October 30,

 

October 31,

 

(millions, except per share data) (unaudited)

 

 

2010

 

2009

 

 

 

2010

 

2009

 

Sales

 

 

$

15,226

 

$

14,789

 

 

 

$

45,509

 

$

43,717

 

Credit card revenues

 

 

379

 

487

 

 

 

1,220

 

1,459

 

Total revenues

 

 

15,605

 

15,276

 

 

 

46,729

 

45,176

 

Cost of sales

 

 

10,562

 

10,229

 

 

 

31,267

 

30,080

 

Selling, general and administrative expenses

 

 

3,345

 

3,255

 

 

 

9,749

 

9,405

 

Credit card expenses

 

 

198

 

381

 

 

 

693

 

1,153

 

Depreciation and amortization

 

 

533

 

537

 

 

 

1,545

 

1,487

 

Earnings before interest expense and income taxes

 

 

967

 

874

 

 

 

3,475

 

3,051

 

Net interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecourse debt collateralized by credit card receivables

 

 

20

 

23

 

 

 

64

 

74

 

Other interest expense

 

 

175

 

168

 

 

 

505

 

517

 

Interest income

 

 

(1

)

 

 

 

(2

)

(3

)

Net interest expense

 

 

194

 

191

 

 

 

567

 

588

 

Earnings before income taxes

 

 

773

 

683

 

 

 

2,908

 

2,463

 

Provision for income taxes

 

 

238

 

247

 

 

 

1,023

 

911

 

Net earnings

 

 

$

535

 

$

436

 

 

 

$

1,885

 

$

1,552

 

Basic earnings per share

 

 

$

0.75

 

$

0.58

 

 

 

$

2.59

 

$

2.06

 

Diluted earnings per share

 

 

$

0.74

 

$

0.58

 

 

 

$

2.57

 

$

2.06

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

715.4

 

751.8

 

 

 

728.8

 

752.0

 

Diluted

 

 

721.0

 

755.7

 

 

 

734.4

 

754.3

 

 

See accompanying Notes to Consolidated Financial Statements.

 

1



 

Consolidated Statements of Financial Position

 

 

October 30,

 

January 30,

 

October 31,

 

(millions)

 

2010

 

2010

 

2009

 

Assets

 

(unaudited)

 

 

 

(unaudited)

 

Cash and cash equivalents, including marketable securities of $349, $1,617 and $273

 

$

936

 

$

2,200

 

$

864

 

Credit card receivables, net of allowance of $775, $1,016 and $1,025

 

5,955

 

6,966

 

7,023

 

Inventory

 

9,550

 

7,179

 

9,382

 

Other current assets

 

1,905

 

2,079

 

2,314

 

Total current assets

 

18,346

 

18,424

 

19,583

 

Property and equipment

 

 

 

 

 

 

 

Land

 

5,891

 

5,793

 

5,754

 

Buildings and improvements

 

23,101

 

22,152

 

22,250

 

Fixtures and equipment

 

4,908

 

4,743

 

4,732

 

Computer hardware and software

 

2,461

 

2,575

 

2,599

 

Construction-in-progress

 

448

 

502

 

291

 

Accumulated depreciation

 

(11,219)

 

(10,485)

 

(10,035)

 

Property and equipment, net

 

25,590

 

25,280

 

25,591

 

Other noncurrent assets

 

1,013

 

829

 

805

 

Total assets

 

$

44,949

 

$

44,533

 

$

45,979

 

Liabilities and shareholders’ investment

 

 

 

 

 

 

 

Accounts payable

 

$

7,761

 

$

6,511

 

$

7,641

 

Accrued and other current liabilities

 

3,179

 

3,120

 

3,117

 

Unsecured debt and other borrowings

 

814

 

796

 

577

 

Nonrecourse debt collateralized by credit card receivables

 

36

 

900

 

1,063

 

Total current liabilities

 

11,790

 

11,327

 

12,398

 

Unsecured debt and other borrowings

 

11,737

 

10,643

 

11,432

 

Nonrecourse debt collateralized by credit card receivables

 

3,943

 

4,475

 

4,463

 

Deferred income taxes

 

814

 

835

 

804

 

Other noncurrent liabilities

 

1,786

 

1,906

 

1,911

 

Total noncurrent liabilities

 

18,280

 

17,859

 

18,610

 

Shareholders’ investment

 

 

 

 

 

 

 

Common stock

 

59

 

62

 

63

 

Additional paid-in capital

 

3,128

 

2,919

 

2,866

 

Retained earnings

 

12,254

 

12,947

 

12,559

 

Accumulated other comprehensive loss

 

(562)

 

(581)

 

(517)

 

Total shareholders’ investment

 

14,879

 

15,347

 

14,971

 

Total liabilities and shareholders’ investment

 

$

44,949

 

$

44,533

 

$

45,979

 

Common shares outstanding

 

707.9

 

744.6

 

752.2

 

 

See accompanying Notes to Consolidated Financial Statements.

 

2



 

Consolidated Statements of Cash Flows

 

 

 

Nine Months Ended

 

 

 

 

October 30,

 

October 31,

 

(millions) (unaudited)

 

 

2010

 

2009

 

Operating activities

 

 

 

 

 

 

Net earnings

 

 

$

1,885

 

$

1,552

 

Reconciliation to cash flow

 

 

 

 

 

 

Depreciation and amortization

 

 

1,545

 

1,487

 

Share-based compensation expense

 

 

77

 

72

 

Deferred income taxes

 

 

249

 

451

 

Bad debt expense

 

 

445

 

900

 

Loss/impairment of property and equipment, net

 

 

12

 

85

 

Other non-cash items affecting earnings

 

 

128

 

44

 

Changes in operating accounts providing / (requiring) cash

 

 

 

 

 

 

Accounts receivable originated at Target

 

 

241

 

190

 

Inventory

 

 

(2,371

)

(2,677

)

Other current assets

 

 

(187

)

(251

)

Other noncurrent assets

 

 

(118

)

27

 

Accounts payable

 

 

1,250

 

1,303

 

Accrued and other current liabilities

 

 

(141

)

(148

)

Other noncurrent liabilities

 

 

(163

)

(8

)

Cash flow provided by operations

 

 

2,852

 

3,027

 

Investing activities

 

 

 

 

 

 

Expenditures for property and equipment

 

 

(1,607

)

(1,440

)

Proceeds from disposal of property and equipment

 

 

36

 

25

 

Change in accounts receivable originated at third parties

 

 

325

 

(29

)

Other investments

 

 

(70

)

10

 

Cash flow required for investing activities

 

 

(1,316

)

(1,434

)

Financing activities

 

 

 

 

 

 

Additions to long-term debt

 

 

997

 

 

Reductions of long-term debt

 

 

(1,450

)

(1,255

)

Dividends paid

 

 

(432

)

(369

)

Repurchase of stock

 

 

(2,055

)

 

Stock option exercises and related tax benefit

 

 

133

 

31

 

Other

 

 

7

 

 

Cash flow required for financing activities

 

 

(2,800

)

(1,593

)

Net (decrease)/increase in cash and cash equivalents

 

 

(1,264

)

 

Cash and cash equivalents at beginning of period

 

 

2,200

 

864

 

Cash and cash equivalents at end of period

 

 

$

936

 

$

864

 

 

See accompanying Notes to Consolidated Financial Statements.

 

3



 

Consolidated Statements of Shareholders’ Investment

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other
Comprehensive
Income/(Loss)

 

 

 

 

(millions, except footnotes)

 

Common
Stock
Shares

 

Stock
Par
Value

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

 

Pension and
Other
Benefit
Liability
Adjustments

 

Derivative
Instruments,
Foreign
Currency
and Other

 

 

Total

 

January 31, 2009

 

752.7

 

$

63

 

$

2,762

 

$

11,443

 

 

$

(510

)

$

(46

)

 

$

13,712

 

Net earnings

 

 

 

 

2,488

 

 

 

 

 

2,488

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other benefit liability adjustments, net of taxes of $17

 

 

 

 

 

 

(27

)

 

 

(27

)

Net change on cash flow hedges, net of taxes of $2

 

 

 

 

 

 

 

4

 

 

4

 

Currency translation adjustment, net of taxes of $0

 

 

 

 

 

 

 

(2

)

 

(2

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,463

 

Dividends declared

 

 

 

 

(503

)

 

 

 

 

(503

)

Repurchase of stock

 

(9.9

)

(1

)

 

(481

)

 

 

 

 

(482

)

Stock options and awards

 

1.8

 

 

157

 

 

 

 

 

 

157

 

January 30, 2010

 

744.6

 

$

62

 

$

2,919

 

$

12,947

 

 

$

(537

)

$

(44

)

 

$

15,347

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

1,885

 

 

 

 

 

1,885

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other benefit liability adjustments, net of taxes of $11

 

 

 

 

 

 

16

 

 

 

16

 

Net change on cash flow hedges, net of taxes of $2

 

 

 

 

 

 

 

2

 

 

2

 

Currency translation adjustment, net of taxes of $0

 

 

 

 

 

 

 

1

 

 

1

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,904

 

Dividends declared

 

 

 

 

(483

)

 

 

 

 

(483

)

Repurchase of stock

 

(40.2

)

(3

)

 

(2,095

)

 

 

 

 

(2,098

)

Stock options and awards

 

3.5

 

 

209

 

 

 

 

 

 

209

 

October 30, 2010

 

707.9

 

$

59

 

$

3,128

 

$

12,254

 

 

$

(521

)

$

(41

)

 

$

14,879

 

 

Dividends declared per share were $0.25 and $0.17 for the three months ended October 30, 2010, and October 31, 2009, respectively, and $0.67 and $0.50 for the nine months ended October 30, 2010 and October 31, 2009, respectively.  For the fiscal year ended January 30, 2010, dividends declared per share were $0.67.

 

See accompanying Notes to Consolidated Financial Statements.

 

4



 

Notes to Consolidated Financial Statements

 

1.  Accounting Policies

 

The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statement disclosures contained in the 2009 Form 10-K for Target Corporation (Target or the Corporation). The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. See Note 1 in our Form 10-K for the fiscal year ended January 30, 2010, for those policies. In the opinion of management, all adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature.

 

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.  Earnings Per Share

 

Basic earnings per share (EPS) is net earnings divided by the weighted average number of common shares outstanding during the period. Diluted EPS includes the incremental shares assumed to be issued upon the exercise of stock options and under performance share and restricted stock unit arrangements.

 

Earnings Per Share

 

Basic EPS

 

Diluted EPS

 

 

 

Three Months Ended

 

Nine Months Ended

 

Three Months Ended

 

Nine Months Ended

 

 

 

Oct. 30

,

Oct. 31

,

Oct. 30

,

Oct. 31,

 

Oct. 30

,

Oct. 31,

 

Oct. 30

,

Oct. 31

,

(millions, except per share data)

 

2010

 

2009

 

2010

 

2009 

 

2010

 

2009 

 

2010

 

2009

 

Net earnings

 

$

535

 

$

436

 

$

1,885

 

$

1,552 

 

$

535

 

$

436 

 

$

1,885

 

$

1,552

 

Basic weighted average common shares outstanding

 

715.4

 

751.8

 

728.8

 

752.0 

 

715.4

 

751.8 

 

728.8

 

752.0

 

Incremental stock options, performance share units and restricted stock units

 

 

 

 

— 

 

5.6

 

3.9 

 

5.6

 

2.3

 

Weighted average common shares outstanding

 

715.4

 

751.8

 

728.8

 

752.0 

 

721.0

 

755.7 

 

734.4

 

754.3

 

Earnings per share

 

$

0.75

 

$

0.58

 

$

2.59

 

$

2.06 

 

$

0.74

 

$

0.58 

 

$

2.57

 

$

2.06

 

 

For the October 30, 2010 and October 31, 2009 computations, 10.7 million and 16.3 million stock options, respectively, were excluded from the calculation of weighted average shares for diluted EPS because their effects were antidilutive.

 

3.   Fair Value Measurements

 

Fair value is the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties. A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor.  Fair value measurements are categorized into one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs available at the measurement date, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).

 

5



 

The following table presents financial assets and liabilities measured at fair value on a recurring basis:

 

Fair Value Measurements —

 

 

 

 

 

 

 

Recurring Basis

 

Fair Value at

 

Fair Value at

 

Fair Value at

 

 

 

October 30, 2010

 

January 30, 2010

 

October 31, 2009

 

(millions)

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

$

349

 

$

 

$

 

$

1,617

 

$

 

$

 

$

273

 

$

 

$

 

Other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid forward contracts

 

62

 

 

 

79

 

 

 

54

 

 

 

Other noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

 

172

 

 

 

131

 

 

 

134

 

 

Company-owned life insurance investments(b)

 

 

337

 

 

 

305

 

 

 

292

 

 

Total

 

$

411

 

$

509

 

$

 

$

1,696

 

$

436

 

$

 

$

327

 

$

426

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other noncurrent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a) 

 

$

 

$

80

 

$

 

$

 

$

23

 

$

 

$

 

$

21

 

$

 

Total

 

$

 

$

80

 

$

 

$

 

$

23

 

$

 

$

 

$

21

 

$

 

(a)                   There were no interest rate swaps designated as accounting hedges at October 30, 2010, January 30, 2010 or October 31, 2009.

(b)                   Company-owned life insurance investments consist of equity index funds and fixed income assets.  Amounts are presented net of loans of $242 million at October 30, 2010, $244 million at January 30, 2010, and $240 million at October 31, 2009 that are secured by some of these policies.

 

Position

 

Valuation Technique

Marketable securities

 

Initially valued at transaction price. Carrying value of cash equivalents (including money market funds) approximates fair value because maturities are less than three months.

 

Prepaid forward contracts

 

Initially valued at transaction price. Subsequently valued by reference to the market price of Target common stock.

 

Interest rate swaps

 

Valuation models are calibrated to initial trade price. Subsequent valuations are based on observable inputs to the valuation model (e.g., interest rates and credit spreads). Model inputs are changed only when corroborated by market data. A credit risk adjustment is made on each swap using observable market credit spreads.

 

Company-owned life insurance investments

 

Includes investments in separate accounts that are valued based on market rates credited by the insurer. 

 

Certain assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on  an ongoing basis but are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment).  The fair value measurements related to long-lived assets held for sale and held and used in the following table were determined using available market prices at the measurement date based on recent investments or pending transactions of similar assets, third-party independent appraisals, valuation multiples or public comparables, less cost to sell where appropriate. We classify these measurements as Level 2.

 

6



 

Fair Value Measurements — Nonrecurring Basis

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

Property and equipment

 

 

 

Long-lived assets held for sale

 

Long-lived assets held and used(a)

 

(millions)

 

Three Months

Ended

 

Nine Months

Ended

 

Three Months

Ended

 

Nine Months

Ended

 

Measured as of Oct. 30, 2010:

 

 

 

 

 

 

 

 

 

Carrying amount

 

$

 

$

2

 

$

25

 

$

73

 

Fair value measurement

 

 

2

 

23

 

63

 

Gain/(loss)

 

 

 

(2

)

(10

)

Measured as of Oct. 31, 2009:

 

 

 

 

 

 

 

 

 

Carrying amount

 

34

 

61

 

29

 

83

 

Fair value measurement

 

31

 

49

 

22

 

55

 

Gain/(loss)

 

(3

)

(12

)

(7

)

(28

)

(a)         Primarily relates to real estate and buildings intended for sale in the future but not currently meeting the held for sale criteria.

 

The following table presents the carrying amounts and estimated fair values of financial instruments not measured at fair value in the Consolidated Statements of Financial Position. The fair value of marketable securities is determined using available market prices at the reporting date. The fair value of debt is measured using a discounted cash flow analysis based on our current market interest rates for similar types of financial instruments.

 

Financial Instruments Not Measured at Fair Value

 

October 30, 2010

 

October 31, 2009

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(millions)

 

Amount

 

Value

 

Amount

 

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

Other current assets

 

 

 

 

 

 

 

 

 

Marketable securities(a)

 

$

73

 

$

73

 

$

55

 

$

55

 

Other noncurrent assets

 

 

 

 

 

 

 

 

 

Marketable securities(a)

 

 

 

4

 

4

 

Total

 

$

73

 

$

73

 

$

59

 

$

59

 

Financial liabilities

 

 

 

 

 

 

 

 

 

Total debt(b)

 

$

16,037

 

$

17,880

 

$

17,149

 

$

18,441

 

Total

 

$

16,037

 

$

17,880

 

$

17,149

 

$

18,441

 

(a)                   Amounts include held-to-maturity government and money market investments that are held to satisfy the regulatory requirements of Target Bank and Target National Bank.

(b)                   Represents the sum of nonrecourse debt collateralized by credit card receivables and unsecured debt and other borrowings excluding unamortized swap valuation adjustments and capital lease obligations.

 

The carrying amounts of credit card receivables, net of allowance, accounts payable, and certain accrued and other current liabilities approximate fair value at October 30, 2010.

 

4.  Credit Card Receivables

 

Credit card receivables are recorded net of an allowance for doubtful accounts. The allowance, recognized in an amount equal to the anticipated future write-offs of existing receivables, was $775 million at October 30, 2010, $1,016 million at January 30, 2010 and $1,025 million at October 31, 2009. This allowance includes provisions for uncollectible finance charges and other credit-related fees. We estimate future write-offs based on historical experience of delinquencies, risk scores, aging trends, and industry risk trends. Substantially all accounts continue to accrue finance charges until they are written off. Total receivables past due ninety days or more and still accruing finance charges were $234 million at October 30, 2010, $371 million at January 30, 2010 and $370 million at October 31, 2009. Accounts are written off when they become 180 days past due.

 

Under certain circumstances, we offer cardholder payment plans that modify finance charges and minimum payments, which meet the accounting definition of a troubled debt restructuring (TDRs). These concessions are made on an individual cardholder basis for economic or legal reasons specific to each individual cardholder’s circumstances. As a percentage of period-end gross receivables, receivables classified as TDRs were 6.3 percent at October 30, 2010, 6.7 percent at January 30, 2010, and 6.7 percent at October 31, 2009. Receivables classified as TDRs are treated consistently with other aged receivables in determining our allowance for doubtful accounts.

 

7



 

As a method of providing funding for our credit card receivables, we sell on an ongoing basis all of our consumer credit card receivables to Target Receivables Corporation (TRC), a wholly owned, bankruptcy remote subsidiary. TRC then transfers the receivables to the Target Credit Card Master Trust (the Trust), which from time to time will sell debt securities to third parties either directly or through a related trust. These debt securities represent undivided interests in the Trust assets. TRC uses the proceeds from the sale of debt securities and its share of collections on the receivables to pay the purchase price of the receivables to the Corporation.

 

We consolidate the receivables within the Trust and any debt securities issued by the Trust, or a related trust, in our Consolidated Statements of Financial Position. The receivables transferred to the Trust are not available to general creditors of the Corporation. The payments to the holders of the debt securities issued by the Trust or the related trust are made solely from the assets transferred to the Trust or the related trust and are nonrecourse to the general assets of the Corporation. Upon termination of the securitization program and repayment of all debt securities, any remaining assets could be distributed to the Corporation in a liquidation of TRC.

 

In the second quarter of 2008, we sold an interest in our credit card receivables to a JPMorgan Chase affiliate (JPMC). The interest sold represented 47 percent of the receivables portfolio at the time of the transaction. This transaction was accounted for as a secured borrowing, and accordingly, the credit card receivables within the Trust and the note payable issued are reflected in our Consolidated Statements of Financial Position. Notwithstanding this accounting treatment, the accounts receivable assets that collateralize the note payable supply the cash flow to pay principal and interest to the note holder; the receivables are not available to general creditors of the Corporation; and the payments to JPMC are made solely from the Trust and are nonrecourse to the general assets of the Corporation. Interest and principal payments due on the note are satisfied provided the cash flows from the Trust assets are sufficient. If the cash flows are less than the periodic interest, the available amount, if any, is paid with respect to interest. Interest shortfalls will be paid to the extent subsequent cash flows from the assets in the Trust are sufficient.  Future principal payments will be made from JPMC’s prorata share of cash flows from the Trust assets.

 

In the event of a decrease in the receivables principal amount such that JPMC’s interest in the entire portfolio would exceed 47 percent for three consecutive months, TRC (using the cash flows from the assets in the Trust) would be required to pay JPMC a pro rata amount of principal collections such that the portion owned by JPMC would not exceed 47 percent, unless JPMC provides a waiver. Conversely, at the option of the Corporation, JPMC may be required to fund an increase in the portfolio to maintain their 47 percent interest up to a maximum JPMC principal balance of $4.2 billion. Due to the continuing declines in gross credit card receivables, TRC repaid JPMC $110 million and $530 million for the three and nine months ended October 30, 2010, respectively, under the terms of this agreement. No payments were made during the nine months ended October 31, 2009. On November 26, 2010, TRC repaid an additional $36 million to JPMC.

 

If a three-month average of monthly finance charge excess (JPMC’s prorata share of finance charge collections less write-offs and specified expenses) is less than 2 percent of the outstanding principal balance of JPMC’s interest, the Corporation must implement mutually agreed-upon underwriting strategies. If the three-month average finance charge excess falls below 1 percent of the outstanding principal balance of JPMC’s interest, JPMC may compel the Corporation to implement underwriting and collections activities, provided those activities are compatible with the Corporation’s systems, as well as consistent with similar credit card receivable portfolios managed by JPMC. If the Corporation fails to implement the activities, JPMC has the right to cause the accelerated repayment of the note payable issued in the transaction. As noted in the preceding paragraph, payments would be made solely from the Trust assets.

 

5.  Contingencies

 

We are exposed to claims and litigation arising in the ordinary course of business and use various methods to resolve these matters in a manner that we believe serves the best interest of our shareholders and other constituents. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities. We do not believe that any of the currently identified claims or litigation matters will materially affect our results of operations, cash flows or financial condition.

 

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. There were no amounts outstanding under our commercial paper program at October 30, 2010, January 30, 2010, or October 31, 2009. There were no amounts outstanding under our commercial paper program at any time during the three and nine months ended October 30, 2010. During the three and nine months ended October 31, 2009 the maximum amount outstanding was $112 million and the average amount outstanding was $4 million and $1 million, respectively.

 

8



 

In July 2010, we issued $1 billion of long-term debt at 3.875% that matures in July 2020.  Proceeds from this issuance were used for general corporate purposes.

 

In April 2010, TRC repurchased and retired the entire $900 million series of nonrecourse debt collateralized by credit card receivables, at par, that otherwise would have matured in October 2010. No gain or loss was recorded other than insignificant expenses associated with retiring this debt.

 

In addition, TRC has made payments to JPMC to reduce its interest in our credit card receivables as described in Note 4, Credit Card Receivables.

 

7.     Derivative Financial Instruments

 

Derivative financial instruments are reported at fair value on the Consolidated Statements of Financial Position. Historically our derivative instruments have primarily consisted of interest rate swaps. We use these derivatives to mitigate our interest rate risk.  We have counterparty credit risk resulting from our derivative instruments. This risk lies primarily with two global financial institutions.  We monitor this concentration of counterparty credit risk on an ongoing basis.

 

During 2008, we terminated or de-designated certain interest rate swaps that were accounted for as hedges. Total net gains amortized into net interest expense for terminated or de-designated swaps were $11 million and $13 million during the three months ended October 30, 2010 and October 31, 2009, respectively. Total net gains amortized into net interest expense for terminated and de-designated swaps were $34 million and $46 million during the nine months ended October 30, 2010 and October 31, 2009, respectively. The amount remaining on unamortized hedged debt valuation gains from terminated or de-designated interest rate swaps that will be amortized into earnings over the remaining lives of the underlying debt totaled $164 million, $197 million and $216 million, at October 30, 2010, January 30, 2010 and October 31, 2009, respectively.

 

Periodic payments, valuation adjustments and amortization of gains or losses related to derivative contracts are summarized below:

 

Derivative Contracts — Effect on Results of Operations

 

Three Months Ended

 

Nine Months Ended

 

 

 

Classification of

 

Oct. 30,

 

Oct. 31,

 

Oct. 30,

 

Oct. 31,

 

(millions)

 

Income/(Expense)

 

2010

 

2009

 

2010

 

2009

 

Interest Rate Swaps

 

Other interest expense

 

$

12

 

$

17

 

$

40

 

$

48

 

 

At October 30, 2010, there were no derivative instruments designated as accounting hedges.

 

See Note 3, Fair Value Measurements, for a description of the fair value measurement of derivative contracts and their classification on the Consolidated Statements of Financial Position.

 

8.  Income Taxes

 

We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations for years before 2009 and, with few exceptions, are no longer subject to state and local or non-U.S. income tax examinations by tax authorities for years before 2003.

 

We accrue for the effects of uncertain tax positions and the related potential penalties and interest.

 

During the first quarter of 2010, we filed a tax accounting method change that resolved the uncertainty surrounding the timing of deductions for one of our tax positions, resulting in a $130 million decrease to our unrecognized tax benefit liability. Because this matter solely related to the timing of the deduction, this change had virtually no effect on net tax expense in the first quarter of 2010.

 

During the third quarter of 2010, we recorded a reduction to income tax expense of $45 million due to the favorable resolution of various state income tax matters. As of October 30, 2010, our unrecognized tax benefit liability was $337 million.

 

9



 

9.  Share Repurchase

 

Since the inception of our share repurchase program, which began in the fourth quarter of 2007, we have repurchased 143.8 million shares of our common stock, for a total cash investment of $7,413 million (average price per share of $51.55).

 

During the three months ended October 30, 2010, we repurchased 15.2 million shares of our common stock, including 0.5 million shares through settlement of prepaid forward contracts, for a total cash investment of $793 million (average price per share of $52.29), of which $9 million was paid in prior periods. The prepaid forward contracts settled during the three months ended October 30, 2010 had a total cash investment of $24 million and an aggregate market value of $26 million at their respective settlement dates.

 

During the nine months ended October 30, 2010, we repurchased 40.2 million shares of our common stock, including 0.8 million shares through settlement of prepaid forward contracts, for a total cash investment of $2,093 million (average price per share of $52.04), of which $24 million was paid in prior periods. The prepaid forward contracts settled during the nine months ended October 30, 2010 had a total cash investment of $39 million and an aggregate market value of $42 million at their respective settlement dates.

 

During the three months ended October 31, 2009, we repurchased 0.3 million shares of our common stock, for a total cash investment of $14 million (average price per share of $43.80), of which $9 million was paid in prior periods. All shares reacquired during the three months ended October 31, 2009 were delivered upon settlement of prepaid forward contracts.  The prepaid forward contracts settled during the three months ended October 31, 2009 had a total cash investment of $14 million and an aggregate market value of $15 million at their respective settlement dates.

 

During the nine months ended October 31, 2009, we repurchased 1.5 million shares of our common stock, for a total cash investment of $56 million (average price per share of $36.57), of which $42 million was paid in prior periods. All shares reacquired during the nine months ended October 31, 2009 were delivered upon settlement of prepaid forward contracts. The prepaid forward contracts settled during the nine months ended October 31, 2009 had a total cash investment of $56 million and an aggregate market value of $60 million at their respective settlement dates.

 

See Note 10, Pension, Postretirement Health Care and Other Benefits, for further details of our prepaid forward contracts.

 

10.  Pension, Postretirement Health Care and Other Benefits

 

We have qualified defined benefit pension plans covering team members who meet age and service requirements, including in certain circumstances, date of hire. We also have unfunded, nonqualified pension plans for team members with qualified plan compensation restrictions. Eligibility for, and the level of, these benefits varies depending on team members’ date of hire, length of service and/or team member compensation. Upon early retirement and prior to Medicare eligibility, team members also become eligible for certain health care benefits if they meet minimum age and service requirements and agree to contribute a portion of the cost. Effective January 1, 2009, our qualified defined benefit pension plan was closed to new participants, with limited exceptions.

 

The following table provides a summary of the amounts recognized in our Consolidated Statements of Financial Position for our postretirement benefit plans:

 

Net Pension Expense and

 

Pension Benefits

 

Postretirement Health Care Benefits

 

Postretirement Healthcare

 

Three Months Ended

 

Nine Months Ended

 

Three Months Ended

 

Nine Months Ended

 

Expense

 

Oct. 30,

 

Oct. 31,

 

Oct. 30,

 

Oct. 31,

 

Oct. 30,

 

Oct. 31,

 

Oct. 30,

 

Oct. 31,

 

(millions)

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

Service cost

 

$

29

 

$

25

 

$

87

 

$

75

 

$

2

 

$

2

 

$

7

 

$

5

 

Interest cost

 

32

 

32

 

96

 

94

 

1

 

2

 

3

 

6

 

Expected return on assets

 

(48

)

(44

)

(144

)

(132

)

 

 

 

 

Recognized losses

 

11

 

6

 

33

 

18

 

1

 

 

3

 

 

Recognized prior service cost

 

 

(1

)

(1

)

(3

)

(2

)

 

(7

)

 

Total

 

$

24

 

$

18

 

$

71

 

$

52

 

$

2

 

$

4

 

$

6

 

$

11

 

 

10



 

We will likely make contributions in the range of $100 million to $300 million to our qualified defined benefit pension plan during the fourth quarter of 2010, depending on a variety of factors, including the calculation of the pension liability based on prevailing interest rates at the end of the fiscal year.

 

We also maintain a nonqualified, unfunded deferred compensation plan for approximately 3,500 current and retired team members whose participation in our 401(k) plan is limited by statute or regulation. These team members choose from a menu of crediting rate alternatives that are the same as the investment choices in our 401(k) plan, including Target common stock. We credit an additional two percent per year to the accounts of all active participants, excluding executive officer participants, in part to recognize the risks inherent to their participation in a plan of this nature. We also maintain a nonqualified, unfunded deferred compensation plan that was frozen during 1996, covering substantially fewer than 100 participants, most of whom are retired. In this plan, deferred compensation earns returns tied to market levels of interest rates plus an additional 6 percent return, with a minimum of 12 percent and a maximum of 20 percent, as determined by the plan’s terms.

 

We control some of our risk of offering the nonqualified plans by investing in vehicles that offset a substantial portion of our economic exposure to the returns of the plans.  These investment vehicles include company-owned life insurance on approximately 4,000 highly compensated current and former team members who have given their consent to be insured and prepaid forward contracts in our own common stock. All of these investments are general corporate assets and are marked-to-market with the related gains and losses recognized in the Consolidated Statements of Operations in the period they occur.

 

The total change in fair value for contracts indexed to our own common stock recorded in earnings was a pretax gain of $1 million and $6 million for the three months ended October 30, 2010 and October 31, 2009, respectively, and a pretax gain of $1 million and $31 million for the nine months ended October 30, 2010 and October 31, 2009, respectively. For the nine months ended October 30, 2010, we invested approximately $26 million in prepaid forward contracts in our own common stock.  For the nine months ended October 31, 2009, we invested approximately $14 million in such investment instruments, and these investments are included in the Consolidated Statements of Cash Flows within other investing activities. Adjusting our position in these investment vehicles may involve repurchasing shares of Target common stock when settling the forward contracts. For the three and nine months ended October 30, 2010, these repurchases totaled 0.5 million and 0.8 million shares, respectively, and for the three and nine months ended October 31, 2009, these repurchases totaled 0.3 million and 1.5 million shares, respectively, and are included in the total share repurchases described in Note 9, Share Repurchase.

 

At October 30, 2010, January 30, 2010 and October 31, 2009, our outstanding interest in contracts indexed to our common stock was as follows:

 

Prepaid Forward Contracts on Target
Common Stock

 

 

 

Contractual

 

 

 

 

 

(millions, except per share data)

 

Number of
Shares

 

Price Paid
per Share

 

Fair
Value

 

Total Cash
Investment

 

October 31, 2009

 

1.1

 

$

41.11

 

$

54

 

$

46

 

January 30, 2010

 

1.5

 

42.77

 

79

 

66

 

October 30, 2010

 

1.2

 

43.87

 

62

 

53

 

 

11.  Segment Reporting

 

Our measure of profit for each segment is a measure that management considers analytically useful in measuring the return we are achieving on our investment.

 

11



 

Business Segment Results

 

Three Months Ended October 30, 2010

 

Three Months Ended October 31, 2009

 

 

 

 

Credit

 

 

 

 

 

 

Credit

 

 

 

(millions)

 

Retail

 

Card

 

Total

 

 

Retail

 

Card

 

Total

 

Sales/Credit card revenues

 

$

15,226

 

$

379

 

$

15,605

 

 

$

14,789

 

$

487

 

$

15,276

 

Cost of sales

 

10,562

 

 

10,562

 

 

10,229

 

 

10,229

 

Bad debt expense(a)

 

 

110

 

110

 

 

 

301

 

301

 

Selling, general and administrative/ Operations and marketing expenses(a), (b)

 

3,319

 

114

 

3,433

 

 

3,236

 

99

 

3,335

 

Depreciation and amortization

 

529

 

5

 

533

 

 

533

 

4

 

537

 

Earnings before interest expense and income taxes

 

816

 

150

 

967

 

 

791

 

83

 

874

 

Interest expense on nonrecourse debt collateralized by credit card receivables

 

 

20

 

20

 

 

 

23

 

23

 

Segment profit

 

$

816

 

$

130

 

947

 

 

$

791

 

$

60

 

851

 

Unallocated (income) and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other interest expense

 

 

 

 

 

175

 

 

 

 

 

 

168

 

Interest income

 

 

 

 

 

(1)

 

 

 

 

 

 

 

Earnings before income taxes

 

 

 

 

 

$

773

 

 

 

 

 

 

$

683

 

 

 

 

Nine Months Ended October 30, 2010

 

Nine Months Ended October 31, 2009

 

 

 

 

Credit

 

 

 

 

 

 

Credit

 

 

 

(millions)

 

Retail

 

Card

 

Total

 

 

Retail

 

Card

 

Total

 

Sales/Credit card revenues

 

$

45,509

 

$

1,220

 

$

46,729

 

 

$

43,717

 

$

1,459

 

$

45,176

 

Cost of sales

 

31,267

 

 

31,267

 

 

30,080

 

 

30,080

 

Bad debt expense(a)

 

 

445

 

445

 

 

 

900

 

900

 

Selling, general and administrative/ Operations and marketing expenses(a), (b)

 

9,689

 

307

 

9,997

 

 

9,345

 

312

 

9,658

 

Depreciation and amortization

 

1,532

 

14

 

1,545

 

 

1,476

 

11

 

1,487

 

Earnings before interest expense and income taxes

 

3,021

 

454

 

3,475

 

 

2,816

 

236

 

3,051

 

Interest expense on nonrecourse debt collateralized by credit card receivables

 

 

64

 

64

 

 

 

74

 

74

 

Segment profit

 

$

3,021

 

$

390

 

3,411

 

 

$

2,816

 

$

162

 

2,977

 

Unallocated (income) and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other interest expense

 

 

 

 

 

505

 

 

 

 

 

 

517

 

Interest income

 

 

 

 

 

(2

)

 

 

 

 

 

(3

)

Earnings before income taxes

 

 

 

 

 

$

2,908

 

 

 

 

 

 

$

2,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

The combination of bad debt expense and operations and marketing expenses within the Credit Card Segment represent credit card expenses on the Consolidated Statements of Operations.

(b)

Loyalty Program discounts are recorded as reductions to sales in our Retail Segment. Effective with the October 2010 nationwide launch of our new 5% REDcard rewards loyalty program, we changed the formula under which our Credit Card segment reimburses our Retail Segment to better align with the attributes of the new program. In the three months and nine months ended October 30, 2010, these reimbursed amounts were $26 million and $60 million, respectively, compared with $19 million and $59 million in the corresponding periods in 2009. In all periods these amounts were recorded as reductions to SG&A expenses within the Retail Segment and increases to operations and marketing expenses within the Credit Card Segment.

Note: The sum of the segment amounts may not equal the total amounts due to rounding.

 

12



 

Total Assets by Segment

 

October 30, 2010

 

January 30, 2010

 

October 31, 2009

 

 

 

 

 

Credit

 

 

 

 

 

Credit

 

 

 

 

 

Credit

 

 

 

(millions)

 

Retail

 

Card

 

Total

 

Retail

 

Card

 

Total

 

Retail

 

Card

 

Total

 

Total assets

 

$

38,617

 

$

6,332

 

$

44,949

 

$

37,200

 

$

7,333

 

$44,533

 

$

38,519

 

$

7,460

 

$

45,979

 

 

Substantially all of our revenues are generated in, and long-lived assets are located in, the United States.

 

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

 

Executive Summary

 

Our financial results for the third quarter of 2010 in our Retail Segment reflect increased sales of 3.0 percent over the same period last year due to a 1.6 percent comparable-store increase combined with the contribution from new stores.  Our Retail Segment EBITDA and EBIT margin rates remained essentially unchanged in the third quarter of 2010 compared with the prior year.  In the Credit Card Segment, we achieved a significant increase in segment profit primarily due to declining bad debt expense driven by improved trends in key measures of risk.

 

Cash flow provided by operations was $2,852 million and $3,027 million for the nine months ended October 30, 2010 and October 31, 2009, respectively. We opened 13 new stores and 75 new stores in the first three quarters of 2010 and 2009, respectively. During the first three quarters of 2010, we remodeled 341 stores under our current store remodel program, significantly more than the 62 stores we remodeled in the comparable prior year period.

 

Analysis of Results of Operations

 

Retail Segment

 

Retail Segment Results

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

October 30,

 

October 31,

 

Percent

 

 

 

October 30,

 

October 31,

 

Percent

 

(millions)

 

2010

 

2009

 

Change

 

 

 

2010

 

2009

 

Change

 

Sales

 

$

15,226

 

$

14,789

 

3.0

%

 

 

$

45,509

 

$

43,717

 

4.1

%

Cost of sales

 

10,562

 

10,229

 

3.3

 

 

 

31,267

 

30,080

 

3.9

 

Gross margin

 

4,664

 

4,560

 

2.3

 

 

 

14,242

 

13,637

 

4.4

 

SG&A expenses(a)

 

3,319

 

3,236

 

2.6

 

 

 

9,689

 

9,345

 

3.7

 

EBITDA

 

1,345

 

1,324

 

1.6

 

 

 

4,553

 

4,292

 

6.1

 

Depreciation and amortization

 

529

 

533

 

(0.8

)

 

 

1,532

 

1,476

 

3.8

 

EBIT

 

$

816

 

$

791

 

3.2

%

 

 

$

3,021

 

$

2,816

 

7.3

%

EBITDA is earnings before interest expense, income taxes, depreciation and amortization.

EBIT is earnings before interest expense and income taxes.

(a)   Loyalty Program discounts are recorded as reductions to sales in our Retail Segment. Effective with the October 2010 nationwide launch of our new 5% REDcard rewards loyalty program, we changed the formula under which our Credit Card segment reimburses our Retail Segment to better align with the attributes of the new program. In the three months and nine months ended October 30, 2010, these reimbursed amounts were $26 million and $60 million, respectively, compared with $19 million and $59 million in the corresponding periods in 2009. In all periods these amounts were recorded as reductions to SG&A expenses within the Retail Segment and increases to operations and marketing expenses within the Credit Card Segment.

 

13



 

Retail Segment Rate Analysis

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

October 30,

 

October 31,

 

 

 

October 30,

 

October 31,

 

 

 

2010

 

2009

 

 

 

2010

 

2009

 

Gross margin rate

 

30.6%

 

30.8%

 

 

 

31.3%

 

31.2%

 

SG&A expense rate

 

21.8%

 

21.9%

 

 

 

21.3%

 

21.4%

 

EBITDA margin rate

 

8.8%

 

9.0%

 

 

 

10.0%

 

9.8%

 

Depreciation and amortization expense rate

 

3.5%

 

3.6%

 

 

 

3.4%

 

3.4%

 

EBIT margin rate

 

5.4%

 

5.3%

 

 

 

6.6%

 

6.4%

 

Retail Segment rate analysis metrics are computed by dividing the applicable amount by sales.

 

Sales

 

Sales include merchandise sales, net of expected returns, from our stores and our online business, as well as gift card breakage. Comparable-store sales is a measure that indicates the performance of our existing stores by measuring the growth in sales for such stores for a period over the comparable, prior-year period of equivalent length. The method of calculating comparable-store sales varies across the retail industry. As a result, our comparable-store sales calculation is not necessarily comparable to similarly titled measures reported by other companies.

 

Comparable-store sales are sales from our online business and sales from general merchandise and SuperTarget stores open longer than one year, including:

·                          sales from stores that have been remodeled or expanded while remaining open (including our current store remodel program)

·                          sales from stores that have been relocated to new buildings of the same format within the same trade area, in which the new store opens at about the same time as the old store closes

 

Comparable-store sales do not include:

·                          sales from general merchandise stores that have been converted, or relocated within the same trade area, to a SuperTarget store format

·                          sales from stores that were intentionally closed to be remodeled, expanded or reconstructed

 

Comparable-Store Sales

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

October 30,

 

October 31,

 

 

 

October 30,

 

October 31,

 

 

 

2010

 

2009

 

 

 

2010

 

2009

 

Comparable-store sales

 

1.6 %

 

(1.6)%

 

 

 

2.0 %

 

(3.9)%

 

Components of changes in comparable-store sales:

 

 

 

 

 

 

 

 

 

 

 

Number of transactions

 

2.1 %

 

0.6 %

 

 

 

2.3 %

 

(1.1)%

 

Average transaction amount

 

(0.5)%

 

(2.2)%

 

 

 

(0.2)%

 

(2.8)%

 

Units per transaction

 

3.0 %

 

(1.6)%

 

 

 

2.1 %

 

(2.4)%

 

Selling price per unit

 

(3.3)%

 

(0.6)%

 

 

 

(2.2)%

 

(0.4)%

 

The comparable-store sales increases or decreases above are calculated by comparing sales in fiscal year periods with comparable prior fiscal year periods of equivalent length.

 

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.

 

Beginning April 2010, all new qualified credit card applicants receive the Target Card, and we no longer issue the Target Visa to credit card applicants. Existing Target Visa cardholders are not affected.  Beginning October 2010, guests receive a 5 percent discount on virtually all purchases at check-out every day when they use a REDcard at any Target store or on Target.com.  Target’s REDcards include the Target Credit Card, Target Visa Credit Card and Target Debit Card.  This new REDcard rewards program replaced the existing rewards program in which account holders received an initial 10 percent-off coupon for opening the account and earned points toward a 10 percent-off coupon on subsequent purchases. These changes are intended to simplify the program and to generate profitable incremental retail sales.

 

14



 

We monitor the percentage of store sales that are paid for using REDcards (REDcard Penetration), because our internal analysis has indicated that a meaningful portion of the incremental purchases on our REDcards are also incremental sales for Target, with the remainder of the incremental purchases on the REDcards representing a shift in tender type.

 

REDcard Penetration Analysis

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

October 30,

 

October 31,

 

 

 

October 30,

 

October 31,

 

 

 

2010

 

2009

 

 

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Target Credit Penetration

 

4.9

%

5.1

%

 

 

4.7

%

5.2

%

Target Debit Penetration

 

0.6

%

0.4

%

 

 

0.5

%

0.4

%

Total Store REDcard Penetration

 

5.5

%

5.5

%

 

 

5.2

%

5.6

%

 

Gross Margin Rate

 

Gross margin rate represents gross margin (sales less cost of sales) as a percentage of sales. See Note 3 in our Form 10-K for the fiscal year ended January 30, 2010 for a description of costs included in cost of sales. Markup is the difference between an item’s cost and its retail price (expressed as a percentage of its retail price). Factors that affect markup include vendor offerings and negotiations, vendor income, sourcing strategies, market forces like raw material and freight costs, and competitive influences. Markdowns are the reduction in the original or previous price of retail merchandise. Factors that affect markdowns include inventory management, competitive influences and economic conditions.

 

For the three and nine months ended October 30, 2010, our gross margin rate was 30.6 percent and 31.3 percent respectively, compared with 30.8 percent and 31.2 percent in the same periods last year. Sales mix had little impact on gross margin rates as overall sales growth rates were similar for both lower margin rate categories and higher margin rate categories for the three and nine months ended October 30, 2010. There were no other significant variances in the drivers of gross margin rate.

 

Selling, General and Administrative Expense Rate

 

Our selling, general and administrative (SG&A) expense rate represents SG&A expenses as a percentage of sales. See Note 3 in our Form 10-K for the fiscal year ended January 30, 2010 for a description of costs included in SG&A expenses. SG&A expenses exclude depreciation and amortization, as well as expenses associated with our credit card operations, which are reflected separately in our Consolidated Statements of Operations.

 

For the three and nine months ended October 30, 2010, SG&A expense rates of 21.8 percent and 21.3 percent, respectively, were essentially unchanged from the 21.9 percent and 21.4 percent in the same periods last year.

 

Depreciation and Amortization Expense Rate

 

Our depreciation and amortization expense rate represents depreciation and amortization expense as a percentage of sales. For the three and nine months ended October 30, 2010, our depreciation and amortization expense rate was 3.5 percent and 3.4 percent, respectively, largely consistent with the 3.6 percent and 3.4 percent for the respective periods last year.

 

Store Data

 

During the three months ended October 30, 2010, we opened 10 new general merchandise stores (9 net of one relocation). During the three months ended October 31, 2009, we opened 25 new stores, including 20 general merchandise stores (19 net of one relocation) and 5 SuperTarget stores. During the nine months ended October 30, 2010, we opened 13 new general merchandise stores (12 net of one relocation). During the nine months ended October 31, 2009, we opened 75 new stores (61 net of relocations and closings). During the first three quarters of 2010, we remodeled 341 stores under our current store remodel program, significantly more than the 62 stores we remodeled in the comparable prior year period.

 

15



 

Number of Stores and Retail Square Feet

 

Number of Stores

 

Retail Square Feet(a)

 

 

 

October 30,

 

January 30,

 

October 31,

 

October 30,

 

January 30,

 

October 31,

 

 

 

2010

 

2010

 

2009

 

2010

 

2010

 

2009

 

Target general merchandise stores

 

1,501

 

1,489

 

1,491

 

189,354

 

187,449

 

187,481

 

SuperTarget stores

 

251

 

251

 

252

 

44,504

 

44,492

 

44,645

 

Total

 

1,752

 

1,740

 

1,743

 

233,858

 

231,941

 

232,126

 

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

 

Credit Card Segment

 

We offer credit to qualified guests through the Target Visa and the Target Card. Our credit card program supports our core retail operations and remains an important contributor to our overall profitability and engagement with our guests.  Beginning April 2010, all new qualified credit card applicants receive the Target Card, and we no longer issue the Target Visa to credit card applicants. Existing Target Visa cardholders are not affected.  Beginning October 2010, guests receive a 5 percent discount on virtually all purchases at check-out every day when they use a REDcard at any Target store or on Target.com.  This new REDcard rewards program replaced the existing rewards program in which account holders received an initial 10 percent-off coupon for opening the account and earned points toward a 10 percent-off coupon on subsequent purchases. These changes are intended to simplify the program and to generate profitable incremental retail sales.

 

Credit card revenues are comprised of finance charges, late fees and other revenues, and third party merchant fees, which are the amounts received from merchants who accept the Target Visa credit card.

 

16



 

Credit Card Segment Results

 

Three Months Ended

 

Three Months Ended

 

 

 

October 30, 2010

 

October 31, 2009

 

 

 

Amount

 

Annualized

 

Amount

 

Annualized

 

(millions)

 

(in millions)

 

Rate(d)

 

(in millions)

 

Rate(d)

 

Finance charge revenue

 

$

315

 

18.4

%

$

365

 

17.8

%

Late fees and other revenue

 

38

 

2.2

 

92

 

4.5

 

Third party merchant fees

 

26

 

1.5

 

30

 

1.5

 

Total revenues

 

379

 

22.1

 

487

 

23.8

 

Bad debt expense

 

110

 

6.4

 

301

 

14.7

 

Operations and marketing expenses(a)

 

114

 

6.7

 

99

 

4.8

 

Depreciation and amortization

 

5

 

0.3

 

4

 

0.2

 

Total expenses

 

229

 

13.4

 

404

 

19.7

 

EBIT

 

150

 

8.8

 

83

 

4.1

 

Interest expense on nonrecourse debt collateralized by credit card Receivables

 

20

 

 

 

23

 

 

 

Segment profit

 

$

130

 

 

$

60

 

 

 

Average receivables funded by Target(b)

 

$

2,811

 

 

$

2,677

 

 

 

Segment pretax ROIC(c)

 

18.5

%

 

9.0

%

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

October 30, 2010

 

October 31, 2009

 

 

 

Amount

 

Annualized

 

Amount

 

Annualized

 

(millions)

 

(in millions)

 

Rate(d)

 

(in millions)

 

Rate(d)

 

Finance charge revenue

 

$

989

 

18.4

%

$

1,097

 

17.4

%

Late fees and other revenue

 

152

 

2.8

 

270

 

4.3

 

Third party merchant fees

 

79

 

1.5

 

92

 

1.5

 

Total revenues

 

1,220

 

22.7

 

1,459

 

23.1

 

Bad debt expense

 

445

 

8.3

 

900

 

14.3

 

Operations and marketing expenses(a)

 

307

 

5.7

 

312

 

4.9

 

Depreciation and amortization

 

14

 

0.3

 

11

 

0.2

 

Total expenses

 

766

 

14.3

 

1,223

 

19.4

 

EBIT

 

454

 

8.4

 

236

 

3.7

 

Interest expense on nonrecourse debt collateralized by credit card receivables

 

64

 

 

 

74

 

 

 

Segment profit

 

$

390

 

 

$

162

 

 

 

Average receivables funded by Target(b)

 

$

2,705

 

 

$

2,910

 

 

 

Segment pretax ROIC(c)

 

19.2

%

 

7.4

%

 

 

 

(a)

Loyalty Program discounts are recorded as reductions to sales in our Retail Segment. Effective with the October 2010 nationwide launch of our new 5% REDcard rewards loyalty program, we changed the formula under which our Credit Card segment reimburses our Retail Segment to better align with the attributes of the new program. In the three months and nine months ended October 30, 2010, these reimbursed amounts were $26 million and $60 million, respectively, compared with $19 million and $59 million in the corresponding periods in 2009. In all periods these amounts were recorded as reductions to SG&A expenses within the Retail Segment and increases to operations and marketing expenses within the Credit Card Segment.

(b)

Amounts represent the portion of average gross credit card receivables funded by Target. These amounts exclude $4,048 million and $4,461 million for the three and nine months ended October 30, 2010, respectively, and $5,520 million and $5,508 million for the three and nine months ended October 31, 2009, respectively of receivables funded by nonrecourse debt collateralized by credit card receivables.

(c)

ROIC is return on invested capital, and this rate equals our segment profit divided by average gross credit card receivables funded by Target, expressed as an annualized rate.

(d)

As an annualized percentage of average gross credit card receivables.

 

17



 

Spread Analysis - Total Portfolio

 

Three Months Ended

 

Three Months Ended

 

 

 

October 30, 2010

 

October 31, 2009

 

 

 

Amount

 

Annualized

 

Amount

 

Annualized

 

 

 

(in millions)

 

Rate

 

(in millions)

 

Rate

 

EBIT

 

$

150

 

8.8%

(c)

$

83

 

4.1%

(c)

LIBOR(a)

 

 

 

0.3%

 

 

 

0.3%

 

Spread to LIBOR(b)

 

$

146

 

8.5%

(c)

$

78

 

3.8%

(c)

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

October 30, 2010

 

October 31, 2009

 

 

 

Amount

 

Annualized

 

Amount

 

Annualized

 

 

 

(in millions)

 

Rate

 

(in millions)

 

Rate

 

EBIT

 

$

454

 

8.4%

(c)

$

236

 

3.7%

(c)

LIBOR(a)

 

 

 

0.3%

 

 

 

0.3%

 

Spread to LIBOR(b)

 

$

439

 

8.1%

(c)

$

213

 

3.4%

(c)

 

(a)

Balance-weighted one-month LIBOR.

(b)

Spread to LIBOR is a metric used to analyze the performance of our total credit card portfolio because the vast majority of our portfolio earned finance charge revenue at rates tied to the Prime Rate, and the interest rate on all nonrecourse debt securitized by credit card receivables is tied to LIBOR.

(c)

As a percentage of average gross credit card receivables.

 

Our primary measure of segment profit in our Credit Card Segment is the EBIT generated by our total credit card receivables portfolio less the interest expense on nonrecourse debt collateralized by credit card receivables. We analyze this measure of profit in light of the amount of capital we have invested in our credit card receivables. In addition, we measure the performance of our overall credit card receivables portfolio by calculating the dollar Spread to LIBOR at the portfolio level. This metric approximates the overall financial performance of the entire credit card portfolio we manage by measuring the difference between EBIT earned on the portfolio and a hypothetical benchmark rate financing cost applied to the entire portfolio. The interest rate on all nonrecourse debt securitized by credit card receivables is tied to LIBOR. As a result of regulatory actions that affect our portfolio, effective January 2010, we implemented a terms change that converted the minimum APR for the majority of our accounts to a variable rate, and we eliminated penalty pricing for all current, or nondelinquent accounts. Additionally, beginning in August 2010 late fee limitations went into effect that resulted in reduced late fee revenue.

 

Credit Card Segment profit for the three months ended October 30, 2010 increased to $130 million from $60 million for the three months ended October 31, 2009, driven mostly by favorability in bad debt expense. Segment revenues were $379 million, a decrease of $107 million, or 22.1 percent, from the same period in the prior year, primarily driven by lower average receivables as well as reduced late fees. Segment expenses were $229 million, a decrease of $174 million, or 43.2 percent, from prior year driven primarily by lower bad debt expense due to lower actual and expected write-offs. Interest expense on nonrecourse debt declined by $3 million from last year, due to a decrease in nonrecourse debt securitized by credit card receivables.

 

During the nine months ended October 30, 2010, Credit Card Segment profit increased to $390 million from $162 million in the same period last year driven mostly by favorability in bad debt expense.  Segment revenues were $1,220 million, a decrease of $239 million, or 16.4 percent, from the same period in the prior year, primarily due to lower average receivables as well as reduced late feesSegment expenses were $766 million, a decrease of $458 million, or 37.4 percent, from the same period in the prior year, primarily driven by lower bad debt expense due to lower actual and expected write-offs. Interest expense on nonrecourse debt declined by $10 million from last year, due to a decrease in nonrecourse debt securitized by credit card receivables.

 

18



 

Receivables Rollforward Analysis

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

October 30,

 

October 31,

 

 

 

October 30,

 

October 31,

 

(millions)

 

2010

 

2009

 

 

 

2010

 

2009

 

Beginning gross credit card receivables

 

$

6,988

 

$

8,293

 

 

 

$

7,982

 

$

9,094

 

Charges at Target

 

811

 

799

 

 

 

2,295

 

2,445

 

Charges at third parties

 

1,409

 

1,648

 

 

 

4,357

 

5,080

 

Payments

 

(2,643

)

(2,870

)

 

 

(8,350

)

(9,071

)

Other

 

165

 

178

 

 

 

446

 

500

 

Period-end gross credit card receivables

 

$

6,730

 

$

8,048

 

 

 

$

6,730

 

$

8,048

 

Average gross credit card receivables

 

$

6,859

 

$

8,197

 

 

 

$

7,166

 

$

8,418

 

Accounts with three or more payments (60+ days) past due as a percentage of period-end gross credit card receivables

 

4.9

%

6.5

%

 

 

4.9

%

6.5

%

Accounts with four or more payments (90+ days) past due as a percentage of period-end gross credit card receivables

 

3.5

%

4.6

%

 

 

3.5

%

4.6

%

 

Allowance for Doubtful Accounts

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

October 30,

 

October 31,

 

 

 

October 30,

 

October 31,

 

(millions)

 

2010

 

2009

 

 

 

2010

 

2009

 

Allowance at beginning of period

 

$

851

 

$

1,004

 

 

 

$

1,016

 

$

1,010

 

Bad debt expense

 

110

 

301

 

 

 

445

 

900

 

Net write-offs(a)

 

(186

)

(280

)

 

 

(686

)

(885

)

Allowance at end of period

 

$

775

 

$

1,025

 

 

 

$

775

 

$

1,025

 

As a percentage of period-end gross credit card receivables

 

11.5

%

12.7

%

 

 

11.5

%

12.7

%

Net write-offs as a percentage of average gross credit card receivables (annualized)

 

10.9

%

13.7

%

 

 

12.8

%

14.0

%

(a)       Net write-offs include the principal amount of losses (excluding accrued and unpaid finance charges) less current period principal recoveries.

 

Our period-end gross credit card receivables at October 30, 2010 were $6,730 million compared with $8,048 million at October 31, 2009, a decrease of 16.4 percent. Average gross credit card receivables for the three months ended October 30, 2010 decreased 16.3 percent compared with the same period last year. In response to regulatory changes and credit card industry trends, we have undertaken risk management and underwriting initiatives that have reduced available credit lines for higher-risk cardholders.  Additionally, we have experienced an increase in payment rates and a decrease in charge activity resulting from reductions in card usage by our guests.

 

Other Performance Factors

 

Net Interest Expense

 

Net interest expense was $194 million for the three months ended October 30, 2010, increasing $3 million, or 1.4 percent from the same period last year due to a higher average net portfolio interest rate, partially offset by lower average debt balances reflecting lower average credit card receivables. Net interest expense was $567 million for the nine months ended October 30, 2010, decreasing $21 million, or 3.6 percent from the same period last year due to lower average debt balances reflecting lower average credit card receivables, partially offset by a higher average net portfolio interest rate.

 

19



 

Provision for Income Taxes

 

Our effective income tax rate for the nine months ended October 30, 2010 was 35.2 percent compared with 37.0 percent for the nine months ended October 31, 2009. The third quarter effective tax rate decreased to 30.8 percent in 2010 from 36.1 percent in 2009 primarily due to the favorable resolution of various state income tax matters, which reduced income tax expense by $45 million.

 

Analysis of Financial Condition

 

Liquidity and Capital Resources

 

Cash flow provided by operations was $2,852 million for the nine months ended October 30, 2010 compared with $3,027 million for the same period last year. This cash flow, combined with our year-end cash position, allowed us to fund capital expenditures, pay dividends to shareholders, and continue our share repurchase program.

 

Our period-end gross credit card receivables were $6,730 million at October 30, 2010 compared with $8,048 million at October 31, 2009, a decrease of 16.4 percent. This change was driven by the factors indicated in the Credit Card Segment discussion. This trend and the factors influencing it are likely to continue for the remainder of 2010.  Due to the decrease in gross credit card receivables, TRC, using cash flows from the receivables, repaid JPMC $110 million and $530 million for the three and nine months ended October 30, 2010, respectively, under the terms of our agreement with them as described in Note 4, Credit Card Receivables. No payments were made during the nine months ended October 31, 2009. To the extent the receivables balance continues to decline, TRC expects to continue to pay JPMC a prorata portion of principal collections such that the portion owned by an affiliate of JPMC would not exceed 47 percent.

 

Inventory levels increased $168 million, or 1.8 percent, from October 31, 2009 to October 30, 2010, reflecting higher inventory levels required to support comparatively higher retail square footage, as well as to support traffic-driving strategic initiatives. Accounts payable increased by $121 million, or 1.6 percent over the same period.

 

Capital expenditures for the three months ended October 30, 2010 were $616 million compared with $399 million for the three months ended October 31, 2009. This increase was driven by higher capital expenditures for store remodels, partially offset by lower expenditures for new stores. Capital expenditures for the nine months ended October 30, 2010 were $1,607 million compared with $1,440 million for the nine months ended October 31, 2009, due to higher capital expenditures for store remodels, partially offset by lower expenditures for new stores.

 

During the three and nine months ended October 30, 2010, we repurchased 15.2 million and 40.2 million shares, respectively, of our common stock for a total cash investment of $793 million and $2,093 million, respectively. During the three and nine months ended October 31, 2009, we repurchased 0.3 million and 1.5 million shares, respectively, of our common stock for a total cash investment of $14 million and $56 million, respectively.

 

We paid dividends totaling $181 million and $432 million during the three and nine months ended October 30, 2010, respectively, an increase of 41.5 percent and 17.3 percent, respectively, from the same period last year. We have paid dividends every quarter since our first dividend was declared following our 1967 initial public offering, and it is our intent to continue to do so in the future.

 

Our financing strategy is to ensure liquidity and access to capital markets, to manage our net exposure to floating interest rate volatility, and to maintain a balanced spectrum of debt maturities. Within these parameters, we seek to minimize our borrowing costs. As described in Note 6, in July 2010, we issued $1 billion of long-term debt at 3.875% that matures in July 2020.

 

We will likely make contributions in the range of $100 million to $300 million to our qualified defined benefit pension plan during the fourth quarter of 2010, depending on a variety of factors, including the calculation of the pension liability based on prevailing interest rates at the end of the fiscal year.

 

An additional source of liquidity is available to us through a committed $2 billion unsecured revolving credit facility obtained through a group of banks in April 2007, which will expire in April 2012. No balances were outstanding at any time during 2010 or 2009 under this credit facility.

 

Most of our long-term debt obligations contain covenants related to secured debt levels. In addition to a secured debt level covenant, our credit facility also contains a debt leverage covenant. We are, and expect to remain, in compliance with these

 

20



 

covenants. Additionally, at October 30, 2010, no notes or debentures contained provisions requiring acceleration of payment upon a debt 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 debt ratings are either reduced and the resulting rating is non-investment grade, or our long-term debt ratings are placed on watch for possible reduction and those ratings are subsequently reduced and the resulting rating is non-investment grade.

 

New Accounting Pronouncements

 

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140” (SFAS 166), codified in the Transfers and Servicing accounting principles, which amends the derecognition guidance in former FASB Statement No. 140 and eliminates the exemption from consolidation for qualifying special-purpose entities. We adopted this guidance at the beginning of fiscal 2010 and adoption had no impact on our consolidated net earnings, cash flows or financial position.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (SFAS 167), codified in the Consolidation accounting principles, which amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under former FASB Interpretation No. 46(R). We adopted this guidance at the beginning of fiscal 2010 and the adoption had no impact on our consolidated net earnings, cash flows or financial position.

 

Outlook

 

Our outlook is based on the application of business judgment in light of current business trends, our assumptions regarding the macroeconomic environment, and estimates of the impact of current initiatives, the most significant of which are our store remodel program and the new 5 percent REDcard rewards program.

 

Beginning October 2010, guests receive a 5 percent discount on virtually all purchases at check-out every day when they use a REDcard at any Target store or on Target.com.  Target’s REDcards include the Target Credit Card, Target Visa Credit Card and Target Debit Card.  This new REDcard rewards program replaced the existing rewards program in which account holders received an initial 10 percent-off coupon for opening the account and earned points toward a 10 percent-off coupon on subsequent purchases. These changes are intended to simplify the program and drive incremental sales.

 

In our Retail Segment in the fourth quarter, we expect that comparable-store sales will increase in the 2 percent to 4 percent range.  This is driven by our expectation that our store remodel program will contribute over a full percentage point of incremental comparable store sales in the fourth quarter, and separately that our new REDcard rewards program will add about a full percentage point of incremental comparable fourth quarter sales. Our store remodel and new rewards strategies are designed to contribute incremental sales at lower gross margin rates and SG&A expense rates than our base business. We expect that this effect will be more pronounced in the fourth quarter than in prior quarters as the initiatives more fully roll out. On an overall basis, we expect to produce an EBITDA margin rate in the fourth quarter 2010 consistent with the fourth quarter 2009, due to favorable leverage of SG&A expenses offsetting the gross margin rate declines associated with our store remodel and new rewards strategies. Additionally, we expect a slightly better EBIT margin rate in the fourth quarter compared with the same period last year and into 2011, due to continued favorable leverage of depreciation and amortization expenses.

 

In our Credit Card Segment in the fourth quarter, we expect continued improvement in segment profit. We expect year-over-year receivables declines in the fourth quarter to be in line with our year-to-date experience, inclusive of a small increment of high credit-quality receivables resulting from the 5% REDcard rewards program. The dollar value of expected write-offs is expected to be consistent with our third quarter experience.  We expect that the allowance for doubtful accounts will continue to decline in the fourth quarter, with the extent of that decline dependent on continued improvement in portfolio risks and reflective of seasonal factors.

 

Effective with the October 2010 nationwide launch of our new 5% REDcard rewards loyalty program, we changed the formula under which our Credit Card segment reimburses our Retail Segment to better align with the attributes of the new program. The overall effects of this change are not expected to be significant.

 

We expect to continue to execute against our share repurchase plan, the pace of which will be dependent on market conditions and the amount of future net earnings and cash flows. We expect our 2010 capital expenditures to be approximately $2 billion, reflective of projects we will complete in 2010 as well as initial spending for our 2011 and 2012 new store programs. Approximately half of our expected 2010 capital expenditures relate to 341 remodeled stores under our store remodel program.

 

21



 

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 words of similar import. The principal forward-looking statements in this report include: for our Retail Segment, our outlook for comparable-store sales trends, gross margin rate, SG&A expense rates, and EBITDA and EBIT margin rates; for our Credit Card Segment, our outlook for segment profit, gross credit card receivables, write-offs, allowance for doubtful accounts, and bad debt expense; on a consolidated basis, the expected compliance with debt covenants, our expectations related to our new REDcard rewards program and store remodel program, the continued execution of our share repurchase program, our expected capital expenditures, our intentions regarding future dividends, and the expected outcome of claims and litigation.

 

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 on our description of risk factors in Item 1A to our Form 10-Q for the quarter ended July 31, 2010 and our Form 10-K for the fiscal year ended January 30, 2010, 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 our Form 10-K for the fiscal year ended January 30, 2010.

 

Item 4.  Controls and Procedures

 

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. 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 Securities and Exchange Commission (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.

 

Changes in Control Over Financial Reporting

We have initiated a multi-year effort to upgrade the technology supporting our financial systems. As part of this effort, we have licensed enterprise resource planning (ERP) software from SAP AG and have begun a process to expand and upgrade our financial systems. There were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

22



 

PART II. OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The following governmental enforcement proceedings relating to environmental matters are reported pursuant to instruction 5(C) of Item 103 of Regulation S-K because they involve potential monetary sanctions in excess of $100,000:

 

We are a defendant in a civil lawsuit filed by the California Attorney General and a number of California District Attorneys in June 2009 alleging that we did not handle and dispose of certain unsold products as a hazardous waste and that we have violated California’s hazardous waste laws.  The case is in the discovery phase and the Court has issued a preliminary injunction requiring that Target comply with all California hazardous waste laws.

 

We are the subject of an ongoing Environmental Protection Agency (EPA) investigation for alleged violations of the Clean Air Act (CAA).  In March 2009, the EPA issued a Finding of Violation (FOV) related to alleged violations of the CAA, specifically the National Emission Standards for Hazardous Air Pollutants (NESHAP) promulgated by the EPA for asbestos.  The FOV pertains to the remodeling of 36 Target stores that occurred between January 1, 2003 and October 28, 2007.  The EPA FOV process is ongoing and no specific relief has been sought to date by the EPA.

 

For a description of other legal proceedings, see Note 5 of the Notes to Consolidated Financial Statements included in Item 1, Financial Statements.

 

The American Jobs Creation Act of 2004 requires SEC registrants to disclose if they have been required to pay certain penalties for failing to disclose to the Internal Revenue Service their participation in listed transactions. We have not been required to pay any of the penalties set forth in Section 6707A(e)(2) of the Internal Revenue Code.

 

Item 1A.  Risk Factors

 

Other than as described in our Form 10-Q for the quarter ended July 31, 2010, there have been no changes to the risk factors described in our annual report on Form 10-K for the fiscal year ended January 30, 2010.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table presents information with respect to purchases of Target common stock made during the three months ended October 30, 2010, by the Corporation or any “affiliated purchaser” of the Corporation, as defined in Rule 10b-18(a)(3) under the Exchange Act.

 

Since the inception of our share repurchase program, which began in the fourth quarter of 2007, we have repurchased 143.8 million common shares of our common stock, for a total cash investment of $7,413 million ($51.55 average price per share).

 

23



 

 

 

 

 

 

 

Total Number

 

Approximate

 

 

 

 

 

 

 

of Shares

 

Dollar Value of

 

 

 

 

 

 

 

Purchased as

 

Shares that

 

 

 

Total

 

 

 

Part of

 

May Yet Be

 

 

 

Number

 

Average

 

Publicly

 

Purchased

 

 

 

of Shares

 

Price Paid

 

Announced

 

Under the

 

Period

 

Purchased

(b)

per Share

(b)

Program

(b)

Program

 

August 1, 2010 through August 28, 2010

 

3,371,000

 

$

51.06

 

132,011,395

 

$

3,207,496,908

 

August 29, 2010 through October 2, 2010

 

6,814,286

(a)

51.90

 

138,757,471

 

2,857,342,156

 

October 3, 2010 through October 30, 2010

 

5,044,453

 

53.62

 

143,801,924

 

2,586,865,984

 

 

 

15,229,739

 

$

52.29

 

143,801,924

 

$

2,586,865,984

 

 

(a)  The number of shares above includes shares of common stock reacquired from team members who wish to tender owned shares to satisfy the tax withholding on equity awards as part of our long-term incentive plans or to satisfy the exercise price on stock option exercises. For the three months ended October 30, 2010, 68,210 shares were acquired at an average per share price of $52.71 pursuant to our long-term incentive plan.

(b)  The table above includes shares reacquired upon settlement of prepaid forward contracts. For the three months ended October 30, 2010, 0.5 million shares were reacquired through these contracts. At October 30, 2010, we held asset positions in prepaid forward contracts for 1.2 million shares of our common stock, for a total cash investment of $53 million, or $43.87 per share.

 

Item 3.  Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.  Reserved.

 

Item 5.  Other Information

 

Not applicable.

 

Item 6.  Exhibits

 

(3)A

Amended and Restated Articles of Incorporation (as amended Jun 10, 2010)(1)

 

 

(3)B

By-laws (as amended through September 10, 2009)(2)

 

 

(10)A*

Target Corporation Executive Excess Long Term Disability Plan (restated effective January 1, 2010)

 

 

(12)

Statements of Computations of Ratios of Earnings to Fixed Charges

 

 

(31)A

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

(31)B

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

(32)A

Certification of the Chief Executive Officer As Adopted Pursuant to 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

(32)B

Certification of the Chief Financial Officer As Adopted Pursuant to 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

 

24



 

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

 


 

*

Management Compensation plan required to be filed as an exhibit to this Form 10-Q.

 

 

(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 September 10, 2009

 

25



 

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:  December 3, 2010

By:

/s/ Douglas A. Scovanner

 

 

 

Douglas A. Scovanner

 

 

 

Executive Vice President,

 

 

Chief Financial Officer

 

 

and Chief Accounting Officer

 

26



 

EXHIBIT INDEX

 

Exhibit

 

Description

 

Manner of Filing

 

 

 

 

 

(3)A

 

Amended and Restated Articles of Incorporation (as amended June 10, 2010)

 

Incorporated by Reference

 

 

 

 

 

(3)B

 

By-Laws (as amended through September 10, 2009)

 

Incorporated by Reference

 

 

 

 

 

(10)A

 

Target Corporation Executive Excess Long Term Disability Plan (restated effective January 1, 2010)

 

Filed Electronically

 

 

 

 

 

(12)

 

Statements of Computations of Ratios of Earnings to Fixed Charges

 

Filed Electronically

 

 

 

 

 

(31)A

 

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed Electronically

 

 

 

 

 

(31)B

 

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed Electronically

 

 

 

 

 

(32)A

 

Certification of the Chief Executive Officer As Adopted Pursuant to 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed Electronically

 

 

 

 

 

(32)B

 

Certification of the Chief Financial Officer As Adopted Pursuant to 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed Electronically

 

 

 

 

 

101.INS

 

XBRL Instance Document

 

Filed Electronically

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema

 

Filed Electronically

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase

 

Filed Electronically

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase

 

Filed Electronically

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase

 

Filed Electronically

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase

 

Filed Electronically

 

27