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12: R1 Cover Page HTML 68K
13: R2 Consolidated Statements of Operations HTML 106K
14: R3 Consolidated Statements of Comprehensive Income HTML 38K
15: R4 Consolidated Statements of Financial Position HTML 103K
16: R5 Consolidated Statements of Financial Position HTML 33K
(Parenthetical)
17: R6 Consolidated Statements of Cash Flows HTML 106K
18: R7 Consolidated Statements of Shareholders' HTML 78K
Investment
19: R8 Consolidated Statements of Shareholders' HTML 18K
Investment (Parenthetical)
20: R9 Accounting Policies HTML 19K
21: R10 Coronavirus (Covid-19) HTML 19K
22: R11 Revenues HTML 59K
23: R12 Fair Value Measurements HTML 46K
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38: R27 Revenues - Narrative (Details) HTML 17K
39: R28 Revenues - Gift Card Liability (Details) HTML 22K
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(Exact name of registrant as specified in its charter)
iMinnesota
(State or other jurisdiction of incorporation or organization)
i1000
Nicollet Mall, iMinneapolis, iMinnesota
(Address of principal executive offices)
i41-0215170
(I.R.S.
Employer Identification No.)
i55403
(Zip Code)
Registrant’s telephone number, including area code: i612/i304-6073
Former name, former address and former fiscal year, if changed since last report: N/A
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol(s)
Name
of each exchange on which registered
iCommon stock, par value $0.0833 per share
iTGT
iNew
York Stock Exchange
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.
iYes☒No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐No ☒
Indicate the number of shares outstanding of each of registrant’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $0.0833, outstanding at November 20, 2020 were i500,773,141.
Current
portion of long-term debt and other borrowings
i131
i161
i1,159
Total
current liabilities
i19,357
i14,487
i16,608
Long-term
debt and other borrowings
i12,490
i11,338
i10,513
Noncurrent
operating lease liabilities
i2,196
i2,275
i2,208
Deferred
income taxes
i1,171
i1,122
i1,215
Other
noncurrent liabilities
i2,128
i1,724
i1,652
Total
noncurrent liabilities
i17,985
i16,459
i15,588
Shareholders’
investment
Common stock
i42
i42
i42
Additional
paid-in capital
i6,285
i6,226
i6,006
Retained
earnings
i7,789
i6,433
i6,270
Accumulated
other comprehensive loss
(i797)
(i868)
(i773)
Total
shareholders’ investment
i13,319
i11,833
i11,545
Total
liabilities and shareholders’ investment
$
i50,661
$
i42,779
$
i43,741
Common
Stock Authorized iii6,000,000,000//
shares, $iii0.0833//
par value; ii500,754,729/, ii504,198,962/
and ii506,677,740/ shares issued and outstanding
as of October 31, 2020, February 1, 2020, and November 2, 2019, respectively.
Preferred Stock Authorized iii5,000,000//
shares, $iii0.01//
par value; iiiiiino/////
shares were issued or outstanding during any period presented.
We
declared $i0.68 and $i0.66 dividends per share for the three months ended October 31, 2020, and November 2,
2019, respectively, and $i2.62 per share for the fiscal year ended February 1, 2020.
Notes to Consolidated Financial Statements (unaudited)
1. iAccounting
Policies
These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by United States (U.S.) generally accepted accounting principles (U.S. GAAP) for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statement disclosures in our 2019 Form 10-K.
We use the same accounting policies in preparing quarterly and annual financial statements. Unless
otherwise noted, amounts presented within the Notes to Consolidated Financial Statements refer to our continuing operations.
We operate as a single segment that includes all of our continuing operations, which are designed to enable guests to purchase products seamlessly in stores or through our digital channels. Nearly all of our revenues are generated in the U.S. The vast majority of our long-lived assets are located within the U.S.
Due to the seasonal nature of our business, quarterly revenues, expenses, earnings, and cash flows are not necessarily indicative of the results that may be expected for the full year.
2.
iCoronavirus (COVID-19)
On March 11, 2020, the World Health Organization declared the novel coronavirus disease (COVID-19) a pandemic, and on March 13, 2020, the United States declared a national emergency. States and cities have taken various measures in response to COVID-19, including mandating the closure of certain businesses and encouraging or requiring citizens
to avoid large gatherings. To date, virtually all of our stores, digital channels, and distribution centers have remained open.
Throughout the nine months ended October 31, 2020, guest shopping patterns changed significantly and unpredictably in reaction to the COVID-19 pandemic.iFour of our ifive
core merchandise categories have experienced significant sales growth throughout the year; however, sales of Apparel and Accessories declined significantly in the first quarter before rebounding in the second and third quarters. Note 3 provides sales by category. In response to these changes, we have taken many actions, including accelerating purchases of certain merchandise in our core categories and slowing or canceling certain purchase orders, primarily for Apparel and Accessories. As a result of these actions, during the first quarter of 2020, we recorded $i216 million
of purchase order cancellation fees in Cost of Sales.
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).
(a)Includes
apparel for women, men, boys, girls, toddlers, infants and newborns, as well as jewelry, accessories, and shoes.
(b)Includes beauty and personal care, baby gear, cleaning, paper products, and pet supplies.
(c)Includes dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and food service in our stores.
(d)Includes electronics (including video game hardware and software), toys, entertainment, sporting goods, and luggage.
(e)Includes furniture, lighting, storage, kitchenware, small appliances, home décor, bed and bath, home improvement, school/office supplies, greeting cards and party supplies, and other seasonal merchandise.
/
Merchandise
sales – We record almost all retail store revenues at the point of sale. Digitally originated sales may include shipping revenue and are recorded upon delivery to the guest or upon guest pickup at the store. Sales are recognized net of expected returns, which we estimate using historical return patterns and our expectation of future returns. As of October 31, 2020, February 1, 2020, and November 2, 2019, the accrual for estimated returns was $i182
million, $i117 million, and $i137 million, respectively.
i
Revenue
from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance.
(a)Included
in Accrued and Other Current Liabilities.
(b)Net of estimated breakage.
/
Credit card profit sharing – We receive payments under a credit card program agreement with TD. Under the agreement, we receive a percentage of the profits generated by the Target Credit Card and Target MasterCard receivables in exchange for performing account servicing and primary marketing functions. TD underwrites, funds, and owns Target Credit Card and Target MasterCard receivables, controls risk management policies, and oversees regulatory compliance.
(a)The
carrying amounts of certain other current assets, commercial paper, accounts payable, and certain accrued and other current liabilities approximate fair value due to their short-term nature.
(b)The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for the same or similar types of financial instruments and would be classified as Level 2. These amounts exclude commercial paper, unamortized swap valuation adjustments, and lease liabilities.
/
5. iProperty
and Equipment
We review long-lived assets for impairment when store performance expectations, 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 charges of $i2 million and $i62
million during the three and nine months ended October 31, 2020, respectively. We recognized impairment charges of $i7 million and $i21
million during the three and nine months ended November 2, 2019, respectively. These impairment charges are included in Selling, General and Administrative Expenses (SG&A).
6. iCommercial Paper and Long-Term Debt
In March 2020, we issued unsecured fixed rate debt
of $i1.5 billion at i2.250 percent that matures in April 2025 and $i1.0 billion
at i2.650 percent that matures in September 2030. In October 2020, we repurchased $i1.77 billion of debt before its maturity at a market value of $i2.25 billion.
We recognized a loss on early retirement of $i512 million, which was recorded in Net Interest Expense.
We obtain short-term financing from time to time under our commercial paper program. iNo
balances were outstanding at any time during the nine months ended October 31, 2020. For the nine months ended November 2, 2019, the maximum amount outstanding was $i744 million, and the average daily amount outstanding was $i55
million at a weighted average annual interest rate of i2.4 percent, with ino balance outstanding as of November 2,
2019.
In April 2020, we obtained a committed $i900 million i364-day unsecured revolving credit facility. This new facility was
in addition to our $i2.5 billion unsecured revolving credit facility that expires in October 2023. We terminated the i364-day facility in November 2020. iiiNo//
balances were outstanding under either credit facility at any time during 2020 or 2019.
Our derivative instruments consist of interest rate swaps used to mitigate interest rate risk. As a result, we have counterparty credit exposure to large global financial institutions, which we monitor on an ongoing basis. Note 4 to the Consolidated Financial Statements provides the fair value and classification of these instruments.
As of October 31, 2020, and November 2, 2019, we were party to interest rate swaps with notional amounts totaling $ii1.5/ billion.
We pay a variable rate and receive a fixed rate under each of these agreements. All of the agreements are designated as fair value hedges, and all were perfectly effective during the three and nine months ended October 31, 2020, and November 2, 2019.
As of October 31, 2020, we were party to forward-starting interest rate swaps with notional amounts totaling $i250 million
to hedge the interest rate exposure of anticipated future debt issuances. We designated these derivative financial instruments as cash flow hedges. We assess, both at inception and on an ongoing basis, whether the derivative financial instrument is highly effective in offsetting changes in cash flows of the hedged item and whether it is probable that the hedged forecasted transaction will occur. As of October 31, 2020, a $i1 million
loss was recorded in Accumulated Other Comprehensive Loss and will be reclassified to Net Interest Expense when the forecasted transaction affects earnings.
Gain
(loss) on fair value hedges recognized in Net Interest Expense
Interest rate swap designated as fair value hedges
$
(i36)
$
i14
$
i66
$
i115
Hedged
debt
i36
(i14)
(i66)
(i115)
Total
$
i—
$
i—
$
i—
$
i—
/
8.
iShare Repurchase
We periodically repurchase shares of our common stock under a board-authorized repurchase program through a combination of open market transactions, accelerated share repurchase (ASR) arrangements, and other privately negotiated transactions with financial institutions.
(a)This
table excludes activity related to the ASR arrangement described below because final settlement had not occurred as of November 2, 2019.
/
During the third quarter of 2019, we entered into an ASR arrangement to repurchase $i300 to $i450 million
of our common stock. Under the agreement, we paid $i450 million and received an initial delivery of i2.5 million
shares, which were retired, resulting in a $i272 million reduction to Retained Earnings. As of November 2, 2019, $i178 million
was included as a reduction to Additional Paid-in Capital. Upon final settlement in the fourth quarter of 2019, we received an additional i0.2 million shares, which were retired, and $i127 million
for the remaining amount not settled in shares. In total, we repurchased i2.7 million shares under the ASR arrangement for a total cash investment of $i323 million
($i117.64 per share).
•Operating income of $1.9 billion was 93.1 percent higher than the comparable prior-year
period.
•We repurchased $1.77 billion of debt before its maturity at a market value of $2.25 billion, resulting in a loss of $512 million.
Sales were $22.3 billion for the three months ended October 31, 2020, an increase of $3.9 billion, or 21.3 percent, from the same period in the prior year. Operating cash flow provided by continuing operations was $7.0 billion for the nine months ended October 31, 2020, an increase of $2.9 billion, or 70.1 percent, from $4.1 billion for the nine months ended November 2, 2019.
Note: Amounts may not foot due to rounding.
Adjusted diluted earnings per share from continuing operations (Adjusted EPS), a non-GAAP metric, excludes the impact of certain items. Management believes that Adjusted EPS is useful in providing period-to-period comparisons of the results of our continuing operations. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 19.
We report after-tax return on invested capital (ROIC) from continuing operations because we believe ROIC provides a meaningful measure of our capital-allocation effectiveness over time. For the trailing twelve months ended October 31, 2020, after-tax ROIC was 19.9 percent, compared with 15.0 percent for the trailing twelve months ended November 2, 2019. The calculation of ROIC is provided on
page 21.
COVID-19
On March 11, 2020, the World Health Organization declared the novel coronavirus disease (COVID-19) a pandemic, and on March 13, 2020, the United States declared a national emergency. The rapid development and fluidity of this situation limits our ability to predict the ultimate impact of COVID-19 on our business, financial condition and financial performance, which could be material. States and cities have taken various measures in response to COVID-19, including mandating the closure of certain businesses and encouraging or requiring citizens to avoid large gatherings. We have implemented numerous safety measures to protect our guests and team members — such as mandating face masks for all
team members and guests in our stores, more rigorous cleaning processes, providing disposable face masks, gloves and thermometers for team members, installing distancing markers, limiting guest levels within our stores, and installing partitions at all stores. To date, virtually all of our stores, digital channels, and distribution centers have remained open.
As the pandemic has evolved, we have experienced unusually strong sales, as guests rely on Target for essential items like food, medicine, cleaning products, and household stock-up items, as well as merchandise associated with guests spending more time at home. Underlying this trend, we saw significant volatility in our sales mix, including both category sales mix and the mix of sales in our stores and digital channels, including same-day fulfillment options.
•During the first quarter, comparable sales increased 10.8 percent, reflecting a 0.9 percent increase in store originated comparable sales and a 141 percent increase in digitally originated comparable sales. The quarter began with strength across our multi-category portfolio, followed by a shift to strong comparable sales growth in our Food and Beverage and Beauty and Household Essentials core merchandising categories and significant comparable sales declines in Apparel and Accessories. Comparable sales in Apparel and Accessories recovered notably beginning mid-April.
•During the second quarter, comparable sales increased
24.3 percent, reflecting a 10.9 percent increase in store originated comparable sales and a 195 percent increase in digitally originated comparable sales. Comparable sales growth was strong across our multi-category portfolio, with slightly higher growth in lower-margin categories.
•During the third quarter, comparable sales increased 20.7 percent, reflecting a 9.9 percent increase in store originated comparable sales and a 155 percent increase in digitally originated comparable sales. Comparable sales growth strength continued across our multi-category portfolio, with slightly higher growth in lower-margin categories.
For the nine months ended October 31, 2020, gross margin has been negatively impacted by changes in both
our category and channel sales mix, as well as actions that we have taken to allow us to better fulfill guest demand for essentials. Additionally, gross margin reflects the portion of investments in pay and benefits classified within Cost of Sales. Exceptionally low clearance and promotional markdown rates partially offset these pressures.
Our SG&A expenses include significant incremental costs related to investments in pay and benefits for store team members, the spikes in merchandise volume in stores and the supply chain, incremental safety and cleaning supplies, and the impact of additional team member hours dedicated to more rigorous cleaning routines in our facilities. From an SG&A expense rate perspective, these incremental costs were more than offset by cost leverage resulting from exceptionally strong sales growth.
To
support our team and minimize potential disruptions in their work to serve our guests, we have modified our plans for some of our strategic initiatives, including our previously announced remodel program. We have completed approximately 130 remodels in 2020, down from the previous expectation of approximately 300. Similarly, we opened 29 new small format stores in 2020, rather than the 36 previously announced.
During the first quarter 2020, we issued $2.5 billion of 5-year and 10-year notes in an effort to increase our cash on hand. Additionally, we entered into a $900 million 364-day credit facility, increasing our total undrawn committed credit facilities to $3.4 billion. Our operating performance during the second and third quarters of 2020 and current financial position allowed us to repurchase $1.77 billion of
debt before its maturity at a market value of $2.25 billion in October 2020 and terminate the 364-day credit facility in November 2020. Note 6 to the Consolidated Financial Statements and the Liquidity and Capital Resources section provide additional information.
Depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate
2.4
3.1
2.5
3.1
Operating
income margin rate
8.5
5.4
7.2
6.3
Note: Gross margin rate is calculated as gross margin (sales less cost of sales) divided by sales. All other rates are calculated by dividing the applicable amount by total revenue.
Sales
Sales include all merchandise
sales, net of expected returns, and our estimate of gift card breakage. We use comparable sales to evaluate the performance of our stores and digital channel sales by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales include all sales, except sales from stores open less than 13 months, digital acquisitions we have owned less than 13 months, stores that have been closed, and digital acquisitions that we no longer operate. Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies. Digitally originated sales include all sales initiated through mobile applications and our websites. Our stores fulfill the majority of digitally originated sales, including shipment
from stores to guests, store Order Pick Up or Drive Up, and delivery via our wholly owned subsidiary, Shipt. Digitally originated sales may also be fulfilled through our distribution centers, our vendors, or other third parties.
Sales growth – from both comparable sales and new stores – represents an important driver of our long-term profitability. We expect that comparable sales growth will drive the majority of our total sales growth. We believe that our ability to successfully differentiate our guests’ shopping experience through a careful combination of merchandise assortment, price, convenience, guest experience, and other factors will over the long-term drive both increasing shopping frequency (traffic) and the amount spent each visit (average transaction amount).
The increase in sales during the three
and nine months ended October 31, 2020, is due to a comparable sales increase of 20.7 percent and 18.7 percent, respectively, and the contribution from new stores.
The
collective interaction of a broad array of macroeconomic, competitive, and consumer behavioral factors, as well as sales mix, and transfer of sales to new stores makes further analysis of sales metrics infeasible. As previously discussed, we believe that COVID-19 has had a significant impact on the mix of sales amongst our sales channels and categories.
We monitor the percentage of purchases that are paid for using RedCards (RedCard Penetration) because our internal analysis has indicated that a meaningful portion of the incremental purchases on RedCards are also incremental sales for Target. Guests receive a 5 percent discount on virtually all purchases when they use a RedCard at Target.
For the three months ended October 31, 2020, our gross margin rate was 30.6 percent compared with 29.8 percent in the comparable period last year.
This increase reflected the net impact of merchandising actions, most notably the benefit of exceptionally low clearance and promotional markdown rates. The increase was partially offset by increased digital fulfillment and supply chain costs (stemming from unusually strong growth in digital volume and higher pay and benefit costs classified within Cost of Sales) and the impact of category sales mix, as sales growth was strongest in lower-margin categories.
For the nine months ended October 31, 2020, our gross margin rate was 29.1 percent compared with 30.0 percent in the comparable period last year. This decrease reflected increased digital fulfillment and supply chain costs (stemming from unusually strong growth in digital volume
combined with the impact of higher pay and benefit costs classified within Cost of Sales) and the impact of category sales mix, as sales growth was strongest in lower-margin categories. The decrease was partially offset by the net impact of merchandising actions, most notably the benefit of exceptionally low clearance and promotional markdown rates.
Selling, General, and Administrative Expense Rate
For the three and nine months ended October 31, 2020, our SG&A expense rate was 20.5 percent and 20.2 percent, respectively, compared with 22.3 percent and 21.4 percent, respectively, in the comparable periods last year. Incremental team member pay and benefits and investments to protect the health and safety of guests represented approximately
$300 million of the $494 million increase in SG&A expenses for the three months ended October 31, 2020, and approximately $900 million of the $1.4 billion increase for the nine months ended October 31, 2020, compared with the prior year periods. From a rate perspective, these increased costs were more than offset by leverage resulting from strong revenue growth.
(a)In
thousands, reflects total square feet less office, distribution center, and vacant space.
Other Performance Factors
Net Interest Expense
Net interest expense was $632 million and $871 million for the three and nine months ended October 31, 2020, respectively, and $113 million and $359 million for the three and nine months ended November 2, 2019, respectively. Net interest expense for the three and nine months ended October 31, 2020, increased primarily due
to a loss on early retirement of debt of $512 million.
Provision for Income Taxes
Our effective income tax rate from continuing operations for the three and nine months ended October 31, 2020, was 21.9 percent and 21.7 percent, respectively, compared with 21.7 percent and 22.4 percent, respectively, for the comparable periods last year. The effective tax rate for the nine months ended October 31, 2020, reflects a larger rate benefit from discrete items, primarily related to share-based payments, compared with the prior year.
Reconciliation of Non-GAAP Financial Measures to GAAP Measures
To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share from continuing operations (Adjusted EPS). This metric excludes certain items presented below. We believe this information is useful in providing period-to-period comparisons of the results of our continuing operations. This measure is not in accordance with, or an alternative to, generally accepted accounting principles in the U.S. (GAAP). The most comparable GAAP measure is diluted earnings per share from continuing operations. Adjusted EPS should
not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate Adjusted EPS differently, limiting the usefulness of the measure for comparisons with other companies.
GAAP diluted earnings per share from continuing operations
$
5.91
$
4.71
Adjustments
Loss
on debt extinguishment
$
512
$
379
$
0.75
$
—
$
—
$
—
Loss on investment (a)
19
18
0.03
—
—
—
Other
(b)
33
24
0.05
(9)
(6)
(0.01)
Adjusted diluted earnings per share from continuing operations
$
6.75
$
4.70
Note:
Amounts may not foot due to rounding.
(a)Includes an unrealized loss on our investment in Casper Sleep Inc., which is not core to our continuing operations.
(b)For 2020, includes store damage and inventory losses related to civil unrest. For 2019, represents an insurance recovery related to the 2013 data breach.
Earnings from continuing operations before interest expense and income taxes (EBIT) and earnings from continuing operations before interest expense, income taxes, depreciation, and amortization (EBITDA) are non-GAAP financial measures. We believe these measures provide meaningful information about our operational efficiency compared with our competitors by excluding the impact of differences in tax jurisdictions and structures, debt levels, and for EBITDA, capital investment. These measures are not in accordance with, or an alternative to, GAAP. The most comparable GAAP measure is net earnings from continuing operations. EBIT and EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate EBIT and EBITDA differently, limiting the usefulness of the measures for comparisons with other
companies.
We have also disclosed after-tax ROIC, which is a ratio based on GAAP information, with the exception of the add-back of operating lease interest to operating income. We believe this metric is useful in assessing the effectiveness of our capital allocation over time. Other companies may calculate ROIC differently, limiting the usefulness of the measure for comparisons with other
companies.
Current portion of long-term debt and other borrowings
$
131
$
1,159
$
1,535
+ Noncurrent portion of long-term debt
12,490
10,513
10,104
+
Shareholders' investment
13,319
11,545
11,080
+ Operating lease liabilities (c)
2,400
2,390
2,208
- Cash and cash equivalents
5,996
969
825
Invested
capital
$
22,344
$
24,638
$
24,102
Average invested capital (d)
$
23,491
$
24,369
After-tax
return on invested capital
19.9
%
15.0
%
(a)Represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as finance leases. Calculated using the discount rate for each lease and recorded as a component of rent expense within SG&A Expenses. Operating lease interest is added back to operating income in the ROIC calculation to control for differences in capital structure between us and our competitors.
(b)Calculated
using the effective tax rates for continuing operations, which were 21.5 percent and 22.1 percent for the trailing twelve months ended October 31, 2020, and November 2, 2019, respectively. For the trailing twelve months ended October 31, 2020, and November 2, 2019, includes tax effect of $1.3 billion and $1.0 billion, respectively, related to EBIT, and $19 million and $19 million, respectively, related to operating lease interest.
(c)Total short-term and long-term operating lease liabilities included within Accrued and Other Current Liabilities and Noncurrent Operating Lease Liabilities.
(d)Average based on the invested capital at the
end of the current period and the invested capital at the end of the comparable prior period.
We follow a disciplined and balanced approach to capital allocation
based on the following priorities, ranked in order of importance: first, we fully invest in opportunities to profitably grow our business, create sustainable long-term value, and maintain our current operations and assets; second, we maintain a competitive quarterly dividend and seek to grow it annually; and finally, we return any excess cash to shareholders by repurchasing shares within the limits of our credit rating goals.
We believe our sources of liquidity will continue to be adequate to maintain operations, finance anticipated expansion and strategic initiatives, fund debt maturities, and pay dividends. In response to COVID-19, we suspended our share repurchase program in March 2020. In November 2020, we lifted the share repurchase suspension and announced that we expect to resume share repurchases in 2021. We continue to anticipate ample access to commercial paper and long-term financing.
Our
cash and cash equivalents balance was $6.0 billion, $2.6 billion, and $1.0 billion as of October 31, 2020, February 1, 2020, and November 2, 2019, respectively. Our cash and cash equivalents balance includes short-term investments of $5.1 billion, $1.8 billion, and $163 million as of October 31, 2020, February 1, 2020, and November 2, 2019, respectively. Our investment policy is designed to preserve principal and liquidity of our short-term investments. This policy allows investments in large money market funds or in highly rated direct short-term instruments that mature in 60 days or less. We also place dollar limits on our investments in individual funds or instruments.
Operating
Cash Flows
Operating cash flow provided by continuing operations was $7.0 billion for the nine months ended October 31, 2020, compared with $4.1 billion for the nine months ended November 2, 2019. The increase reflects stronger operating performance combined with higher payables leverage during the nine months ended October 31, 2020, due to increased inventory turnover driven by strong sales, compared with the nine months ended November 2, 2019. Additionally, operating cash flows for the nine months ended October 31, 2020, reflect increased payroll-related liabilities, including the deferral of employer social
security tax payments.
Inventory
Inventory was $12.7 billion as of October 31, 2020, compared with $9.0 billion and $11.4 billion at February 1, 2020, and November 2, 2019, respectively. The increase reflects efforts to align inventory with sales trends.
Investing Cash Flows
Cash flow required for investing activities included capital expenditures of $2.0 billion and $2.4 billion for the nine months ended October 31, 2020, and November 2,
2019, respectively. During the nine months ended October 31, 2020, we completed new store and remodel projects that were in process as the COVID-19 crisis developed. However, in response to COVID-19, we have modified plans for some of our strategic initiatives including store remodels and new store openings. We expect full year 2020 capital expenditures to be $2.5 billion to $3.0 billion.
Dividends
We paid dividends totaling $340 million ($0.68 per share) and $1.0 billion ($2.00 per share) for the three and nine months ended October 31, 2020, respectively, and $337 million ($0.66 per share) and $995 million ($1.94 per share) for the three and nine months ended November 2,
2019, respectively, a per share increase of 3.0 percent and 3.1 percent, respectively. We declared dividends totaling $346 million ($0.68 per share) during the third quarter of 2020, a per share increase of 3.0 percent over the $338 million ($0.66 per share) of declared dividends during the third quarter of 2019. We have paid dividends every quarter since our 1967 initial public offering, and it is our intent to continue to do so in the future.
Our financing strategy is to ensure liquidity and access to capital markets, to maintain a balanced spectrum of debt maturities, and to manage our net exposure to floating interest rate volatility. Within these parameters, we seek to minimize our borrowing costs. Our ability to access the long-term debt and commercial paper markets has provided us with ample sources of liquidity. Our continued access to these markets depends on multiple factors, including the condition of debt capital markets, our operating performance, and maintaining strong credit ratings. As of October 31, 2020, our credit ratings were as follows:
Credit Ratings
Moody’s
Standard and Poor’s
Fitch
Long-term
debt
A2
A
A-
Commercial paper
P-1
A-1
F1
If our credit ratings were lowered, our ability to access the debt markets, our cost of funds, and other terms for new debt issuances could be adversely impacted. Each of the credit rating agencies reviews its rating periodically and there is no guarantee our current credit ratings will remain the same as described above.
We have additional liquidity through a committed $2.5
billion revolving credit facility obtained through a group of banks, which expires in October 2023. No balances were outstanding under any credit facility at any time during 2020 or 2019.
Most of our long-term debt obligations contain covenants related to secured debt levels. In addition to a secured debt level covenant, our credit facilities also contain a debt leverage covenant. We are, and expect to remain, in compliance with these covenants. Additionally, as of October 31, 2020, no notes or debentures contained provisions requiring acceleration of payment upon a credit rating downgrade, except that certain outstanding notes allow the note holders to put the notes to us if within a matter of months of each other we experience both (i) a change in control and (ii) our long-term credit ratings are either reduced and the resulting rating
is non-investment grade, or our long-term credit ratings are placed on watch for possible reduction and those ratings are subsequently reduced and the resulting rating is non-investment grade.
Contractual Obligations and Commitments
As of the date of this report, other than the new borrowings and payments discussed in Note 6 to the Consolidated Financial Statements, there were no material changes to our contractual obligations and commitments outside the ordinary course of business since February 1, 2020,
as reported in our 2019 Form 10-K.
New Accounting Pronouncements
We do not expect any recently issued accounting pronouncements to have a material effect on our financial statements.
TARGET
CORPORATION
Q3 2020 Form 10-Q
23
MANAGEMENT'S DISCUSSION AND ANALYSIS & SUPPLEMENTAL INFORMATION
This report contains forward-looking statements, which are based on our current assumptions and expectations. These statements are typically accompanied by the words “expect,”“may,”“could,”“believe,”“would,”“might,”“anticipates,” or similar words. The principal forward-looking statements in this report include: our financial performance, statements regarding the adequacy of and costs associated
with our sources of liquidity, the funding of debt maturities, the continued execution of our share repurchase program, our expected capital expenditures and new lease commitments, the expected compliance with debt covenants, the expected impact of new accounting pronouncements, our intentions regarding future dividends, the expected return on plan assets, the expected outcome of, and adequacy of our reserves for, claims, litigation and the resolution of tax matters, the expected impact of changes in information technology systems, future responses to and effects of the COVID-19 pandemic, and changes in our assumptions and expectations.
All such forward-looking statements are intended to enjoy the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. Although we believe there is a reasonable basis for
the forward-looking statements, our actual results could be materially different. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth in our description of risk factors included in Part I, Item 1A, Risk Factors of our Form 10-K
for the fiscal year ended February 1, 2020 and Part II, Item 1A, Risk Factors of our Form 10-Q for the
quarter ended May 2, 2020, which should be read in conjunction with the forward-looking statements in this report. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Changes in Internal Control Over Financial Reporting
During the most recently completed fiscal quarter, the following changes materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:
•We are in the process of a broad multi-year migration of many mainframe-based systems and middleware products to a modern platform, including systems and processes supporting inventory and supply chain-related transactions.
•In March 2020, as a result of COVID-19, we temporarily suspended physical inventory counts at our stores. We resumed physical inventory counts in
June 2020 using a statistical sampling method, and we have continued to record estimated losses related to shrink and markdowns based upon historical rates.
During the most recently completed fiscal quarter, no other changes in our internal control over financial reporting materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this quarterly report, we conducted an evaluation, under supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the SEC under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On September 19, 2019, our Board of Directors authorized a $5 billion share repurchase program with no stated expiration. We began repurchasing shares under the authorization during the first quarter of 2020. Under the program, we have repurchased 4.6 million
shares of common stock at an average price of $105.80, for a total investment of $484 million. As of October 31, 2020, the dollar value of shares that may yet be purchased under the program is $4.5 billion. There were no Target common stock purchases made during the three months ended October 31, 2020, by Target or any "affiliated purchaser" of Target, as defined in Rule 10b-18(a)(3) under the Exchange Act.
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.
