Annual Reports

  • 10-K (Mar 8, 2017)
  • 10-K (Mar 11, 2016)
  • 10-K (Mar 13, 2015)
  • 10-K (Mar 14, 2014)
  • 10-K (Mar 20, 2013)
  • 10-K (Mar 15, 2012)

 
Quarterly Reports

 
8-K

 
Other

Target 10-K 2013

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-K

(Mark One)    

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 2013

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                    to                                     

Commission file number 1-6049



LOGO

TARGET CORPORATION
(Exact name of registrant as specified in its charter)

Minnesota
(State or other jurisdiction of
incorporation or organization)
  41-0215170
(I.R.S. Employer
Identification No.)

1000 Nicollet Mall, Minneapolis, Minnesota
(Address of principal executive offices)

 

55403
(Zip Code)

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

Securities Registered Pursuant To Section 12(B) Of The Act:

Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, par value $0.0833 per share   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

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 ý No o

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, 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 ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  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 ý

Aggregate market value of the voting stock held by non-affiliates of the registrant on July 28, 2012 was $40,108,705,685, based on the closing price of $61.52 per share of Common Stock as reported on the New York Stock Exchange Composite Index.

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 March 15, 2013 were 641,387,165.

DOCUMENTS INCORPORATED BY REFERENCE

1.    Portions of Target's Proxy Statement to be filed on or about April 29, 2013 are incorporated into Part III.

   


Table of Contents

TABLE OF CONTENTS

PART I    

Item 1

  Business   2

Item 1A

  Risk Factors   5

Item 1B

  Unresolved Staff Comments   9

Item 2

  Properties   10

Item 3

  Legal Proceedings   11

Item 4

  Mine Safety Disclosures   11

Item 4A

  Executive Officers   11

PART II

 

 

Item 5

  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   12

Item 6

  Selected Financial Data   14

Item 7

  Management's Discussion and Analysis of Financial Condition and Results of Operations   14

Item 7A

  Quantitative and Qualitative Disclosures About Market Risk   29

Item 8

  Financial Statements and Supplementary Data   31

Item 9

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   65

Item 9A

  Controls and Procedures   65

Item 9B

  Other Information   65

PART III

 

 

Item 10

  Directors, Executive Officers and Corporate Governance   66

Item 11

  Executive Compensation   66

Item 12

  Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
  66

Item 13

  Certain Relationships and Related Transactions, and Director Independence   66

Item 14

  Principal Accountant Fees and Services   66

PART IV

 

 

Item 15

  Exhibits and Financial Statement Schedules   67

Signatures

 

70
Schedule II – Valuation and Qualifying Accounts   71
Exhibit Index   72
Exhibit 12 – Computations of Ratios of Earnings to Fixed Charges for each of the Five Years in the Period Ended February 2, 2013   74

1


Table of Contents


PART I

Item 1.    Business

General

Target Corporation (the Corporation or Target) was incorporated in Minnesota in 1902. We operate as three reportable segments: U.S. Retail, U.S. Credit Card and Canadian.

Our U.S. Retail Segment includes all of our U.S. merchandising operations. We offer both everyday essentials and fashionable, differentiated merchandise at discounted prices. Our ability to deliver a shopping experience that is preferred by our customers, referred to as "guests," is supported by our strong supply chain and technology infrastructure, a devotion to innovation that is ingrained in our organization and culture, and our disciplined approach to managing our current business and investing in future growth. Our business is designed to enable guests to purchase products seamlessly in stores, online or through their mobile device.

Our U.S. Credit Card Segment offers credit to qualified guests through our branded proprietary credit cards: the Target Credit Card and the Target Visa. Additionally, we offer a branded proprietary Target Debit Card. Collectively, these REDcards® help strengthen the bond with our guests, drive incremental sales and contribute to our results of operations. In the first quarter of 2013, we sold our credit card receivables portfolio. Subsequent to the sale, we will perform account servicing and primary marketing functions, and will earn a substantial portion of the profits generated by the portfolio. The transaction does not impact Target's 5% REDcard Rewards loyalty program and will have minimal impact on Target's current cardholders and guests. Beginning with the first quarter of 2013, income from the profit-sharing arrangement, net of account servicing expenses, will be recognized as an offset to selling, general and administrative (SG&A) expenses, and we will no longer report a U.S. Credit Card Segment. Refer to Note 7 of the Notes to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data for more information on our credit card receivables transaction.

Our Canadian Segment includes costs incurred in the U.S. and Canada related to our 2013 Canadian retail market entry.

Financial Highlights

Our fiscal year ends on the Saturday nearest January 31. Unless otherwise stated, references to years in this report relate to fiscal years, rather than to calendar years. Fiscal 2012 ended on February 2, 2013, and consisted of 53 weeks. Fiscal 2011 ended January 28, 2012, and consisted of 52 weeks. Fiscal 2010 ended January 29, 2011, and consisted of 52 weeks. Fiscal 2013 will end on February 1, 2014, and will consist of 52 weeks.

For information on key financial highlights and segment financial information, see the items referenced in Item 6, Selected Financial Data, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8, Financial Statements and Supplemental Data — Note 29, Segment Reporting, of this Annual Report on Form 10-K.

Seasonality

Due to the seasonal nature of our business, a larger share of annual revenues and earnings traditionally occurs in the fourth quarter because it includes the peak sales period from Thanksgiving to the end of December.

Merchandise

We sell a wide assortment of general merchandise and food in our stores. Our general merchandise and CityTarget stores offer a food assortment on a smaller scale than traditional supermarkets, while our SuperTarget stores offer a

2


Table of Contents

full line of food items comparable to traditional supermarkets. Over the past several years, we remodeled many of our general merchandise stores to expand the food assortment to include perishables and additional dry grocery, dairy and frozen items. Our digital channels include a wide assortment of general merchandise, including many items found in our stores and a complementary assortment, such as extended sizes and colors, that are only sold online.

A significant portion of our sales is from national brand merchandise. Approximately one-third of total sales in 2012 related to our owned and exclusive brands, including but not limited to the following:

  Owned Brands        
  Archer Farms®   Market Pantry®   Spritz™
  Archer Farms® Simply Balanced™   Merona®   Sutton & Dodge®
  Boots & Barkley®   Play Wonder®   Threshold™
  Circo®   Prospirit®   up & up®
  Embark®   Room Essentials®   Wine Cube®
  Gilligan & O'Malley®   Smith & Hawken®   Xhilaration®

 

Exclusive Brands

 

 

 

 
  Assets® by Sarah Blakely   Genuine Kids by OshKosh®   Nate Berkus for Target®
  Auro® by Goldtoe   Giada De Laurentiis™ for Target®   Nick & Nora®
  C9 by Champion®   Harajuku Mini for Target®   Paul Frank® for Target
  Chefmate®   Just One You made by Carter's   Shaun White
  Cherokee®   Kitchen Essentials® from Calphalon®   Simply Shabby Chic®
  Converse® One Star®   Liz Lange® for Target   Sonia Kashuk®
  dENiZEN™ by Levi's®   Mossimo®   Thomas O'Brien® Vintage Modern
  Fieldcrest®        

Merchandise is also sold through periodic exclusive design and creative partnerships. We also generate revenue from in-store amenities such as Target Café, Target Clinic, Target Pharmacy and Target Photo, and leased or licensed departments such as Target Optical, Pizza Hut, Portrait Studio and Starbucks.

   
Sales by Product Category
  Percentage of Sales
 
 
     
 
  2012
  2011
  2010
 
   

Household essentials (a)

  25 % 25 % 24 %

Hardlines (b)

  18   19   20  

Apparel and accessories (c)

  19   19   20  

Food and pet supplies (d)

  20   19   17  

Home furnishings and décor (e)

  18   18   19  
   

Total

  100 % 100 % 100 %
   
(a)
Includes pharmacy, beauty, personal care, baby care, cleaning and paper products.
(b)
Includes electronics (including video game hardware and software), music, movies, books, computer software, sporting goods and toys.
(c)
Includes apparel for women, men, boys, girls, toddlers, infants and newborns, as well as intimate apparel, jewelry, accessories and shoes.
(d)
Includes dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce and pet supplies.
(e)
Includes furniture, lighting, kitchenware, small appliances, home décor, bed and bath, home improvement, automotive and seasonal merchandise such as patio furniture and holiday décor.

Distribution

The vast majority of our merchandise is distributed through our network of 40 distribution centers, 37 in the United States and 3 in Canada. General merchandise is shipped to and from our distribution centers by common carriers. In addition, third parties distribute certain food items in the U.S. and Canada. Merchandise sold through Target.com is distributed through our own distribution network, through third parties, or shipped directly from vendors.

3


Table of Contents

Employees

At February 2, 2013, we employed approximately 361,000 full-time, part-time and seasonal employees, referred to as "team members." During our peak sales period from Thanksgiving to the end of December, our employment levels peaked at approximately 409,000 team members. We offer a broad range of company-paid benefits to our team members. Eligibility for, and the level of, these benefits varies, depending on team members' full-time or part-time status, compensation level, date of hire and/or length of service. These company-paid benefits include a pension plan, 401(k) plan, medical and dental plans, a retiree medical plan, disability insurance, paid vacation, tuition reimbursement, various team member assistance programs, life insurance and merchandise discounts. We consider our team member relations to be good.

Working Capital

Because of the seasonal nature of our business, our working capital needs are greater in the months leading up to our peak sales period from Thanksgiving to the end of December. The increase in working capital during this time is typically financed with cash flow provided by operations and short-term borrowings. Additional details are provided in the Liquidity and Capital Resources section in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

Effective inventory management is key to our ongoing success. We utilize various techniques including demand forecasting and planning and various forms of replenishment management. We achieve effective inventory management by being in-stock in core product offerings, maintaining positive vendor relationships, and carefully planning inventory levels for seasonal and apparel items to minimize markdowns.

Competition

We compete with traditional and off-price general merchandise retailers, apparel retailers, internet retailers, wholesale clubs, category specific retailers, drug stores, supermarkets and other forms of retail commerce. Our ability to positively differentiate ourselves from other retailers largely determines our competitive position within the retail industry.

Intellectual Property

Our brand image is a critical element of our business strategy. Our principal trademarks, including Target, SuperTarget and our "Bullseye Design," have been registered with the U.S. Patent and Trademark Office. We also seek to obtain and preserve intellectual property protection for our owned brands.

Geographic Information

Through 2012, all of our revenues were generated within the United States. Beginning in fiscal 2013, a modest percentage of our revenues will be generated in Canada. The vast majority of our long-lived assets are located within the United States and Canada.

Available Information

Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge at www.Target.com/Investors as soon as reasonably practicable after we file such material with, or furnish it to, the U.S. Securities and Exchange Commission (SEC). Our Corporate Governance Guidelines, Business Conduct Guide, Corporate Responsibility Report and the position descriptions for our Board of Directors and Board committees are also available free of charge in print upon request or at www.Target.com/Investors.

4


Table of Contents


Item 1A.    Risk Factors

Our business is subject to many risks. Set forth below are the most significant risks that we face.

If we are unable to positively differentiate ourselves from other retailers, our results of operations could be adversely affected.

The retail business is highly competitive. In the past we have been able to compete successfully by differentiating our guests' shopping experience by creating an attractive value proposition through a careful combination of price, merchandise assortment, convenience, guest service, loyalty programs and marketing efforts. Guest perceptions regarding the cleanliness and safety of our stores, our in-stock levels and other factors also affect our ability to compete. No single competitive factor is dominant, and actions by our competitors on any of these factors could have an adverse effect on our sales, gross margins and expenses.

We sell many products under our owned and exclusive brands discussed on page 2. These brands are an important part of our business because they differentiate us from other retailers, generally carry higher margins than national brand products and represent a significant portion of our overall sales. If one or more of these brands experiences a loss of consumer acceptance or confidence, our sales and gross margins could be adversely affected.

The continuing migration and evolution of retailing to online and mobile channels has increased our challenges in differentiating ourselves from other retailers. In particular, consumers are able to quickly and conveniently comparison shop with digital tools, which can lead to decisions based solely on price. We have been working with our vendors to offer unique and distinctive merchandise, and encouraging our guests to shop with confidence with our price match policy. Failure to effectively execute in these efforts, actions by our competitors in response to these efforts or failure of our vendors to manage their own channels and content could hurt our ability to differentiate ourselves from other retailers and, as a result, have an adverse effect on sales, gross margins and expenses.

Our continued success is substantially dependent on positive perceptions of Target which, if eroded, could adversely affect our business and our relationships with our guests and team members.

We believe that one of the reasons our guests prefer to shop at Target and our team members choose Target as a place of employment is the reputation we have built over many years for serving our four primary constituencies: guests, team members, the communities in which we operate and shareholders. To be successful in the future, we must continue to preserve, grow and leverage the value of Target's reputation. Reputational value is based in large part on perceptions of subjective qualities. While reputations may take decades to build, even isolated incidents can erode trust and confidence, particularly if they result in adverse mainstream and social media publicity, governmental investigations or litigation. Those types of incidents could have an adverse impact on perceptions and lead to tangible adverse effects on our business, including consumer boycotts, lost sales, loss of new store development opportunities, or team member retention and recruiting difficulties.

If we are unable to successfully develop and maintain a relevant and reliable multichannel experience for our guests, our reputation and results of operations could be adversely affected.

Our business has evolved from an in-store experience to interaction with guests across multiple channels (in-store, online, mobile and social media, among others). Our guests are using computers, tablets, mobile phones and other devices to shop in our stores and online and provide feedback and public commentary about all aspects of our business. We currently provide full and mobile versions of our website (Target.com), applications for mobile phones and tablets and interact with our guests through social media. Multichannel retailing is rapidly evolving and we must keep pace with changing guest expectations, and new developments and technology investments by our competitors. If we are unable to attract and retain team members or contract with third parties having the

5


Table of Contents

specialized skills needed to support our multichannel efforts, implement improvements to our guest-facing technology in a timely manner, or provide a convenient and consistent experience for our guests regardless of the ultimate sales channel, our ability to compete and our results of operations could be adversely affected. In addition, if Target.com and our other guest-facing technology systems do not reliably function as designed, we may experience a loss of guest confidence, data security breaches, lost sales or be exposed to fraudulent purchases, which, if significant, could adversely affect our reputation and results of operations.

If we fail to anticipate and respond quickly to changing consumer preferences, our sales, gross margins and profitability could suffer.

A substantial part of our business is dependent on our ability to make trend-right decisions and effectively manage our inventory in a broad range of merchandise categories, including apparel, home décor, seasonal offerings, food and other merchandise. Failure to accurately predict constantly changing consumer tastes, preferences, spending patterns and other lifestyle decisions may result in lost sales, spoilage and increased inventory markdowns, which would lead to a deterioration in our results of operations by hurting our sales, gross margins and profitability.

Our earnings are highly susceptible to the state of macroeconomic conditions and consumer confidence in the United States.

Most of our stores and all of our digital sales are in the United States, making our results highly dependent on U.S. consumer confidence and the health of the U.S. economy. In addition, a significant portion of our total sales is derived from stores located in five states: California, Texas, Florida, Minnesota and Illinois, resulting in further dependence on local economic conditions in these states. Deterioration in macroeconomic conditions, consumer confidence and guest financial situations could negatively affect our business in many ways, including slowing sales growth or reduction in overall sales, and reducing gross margins. These same considerations impact the success of our credit card program. Even though we no longer own a consumer credit card receivables portfolio, we share in the economic performance of the credit card program with TD Bank Group (TD). Deterioration in macroeconomic conditions could adversely affect the volume of new credit accounts, the amount of credit card program balances and the ability of credit card holders to pay their balances. These conditions could result in us receiving lower profit-sharing payments.

If we do not effectively manage our large and growing workforce, our labor costs and results of operations could be adversely affected.

With approximately 361,000 team members, our workforce costs represent our largest operating expense, and our business is dependent on our ability to attract, train and retain qualified team members. Many of those team members are in entry-level or part-time positions with historically high turnover rates. Our ability to meet our labor needs while controlling our costs is subject to external factors such as unemployment levels, prevailing wage rates, collective bargaining efforts, health care and other benefit costs and changing demographics. If we are unable to attract and retain adequate numbers of qualified team members, our operations, guest service levels and support functions could suffer. Those factors, together with increasing wage and benefit costs, could adversely affect our results of operations. As of March 20, 2013, none of our team members were working under collective bargaining agreements. We are periodically subject to labor organizing efforts. If we become subject to one or more collective bargaining agreements in the future, it could adversely affect our labor costs and how we operate our business.

Lack of availability of suitable locations in which to build new stores could slow our growth, and difficulty in executing plans for new stores, expansions and remodels could increase our costs and capital requirements.

Our future growth is dependent, in part, on our ability to build new stores and expand and remodel existing stores in a manner that achieves appropriate returns on our capital investment. We compete with other retailers and

6


Table of Contents

businesses for suitable locations for our stores. In addition, for many sites we are dependent on a third party developer's ability to acquire land, obtain financing and secure the necessary zoning changes and permits for a larger project, of which our store may be one component. Turmoil in the financial markets may make it difficult for third party developers to obtain financing for new projects. Local land use and other regulations applicable to the types of stores we desire to construct may affect our ability to find suitable locations and also influence the cost of constructing, expanding and remodeling our stores. A significant portion of our expected new store sites is located in fully developed markets, which is generally a more time-consuming and expensive undertaking than expansion into undeveloped suburban and ex-urban markets.

Interruptions in our supply chain or increased commodity prices and supply chain costs could adversely affect our gross margins, expenses and results of operations.

We are dependent on our vendors to supply merchandise in a timely and efficient manner. If a vendor fails to deliver on its commitments, whether due to financial difficulties or other reasons, we could experience merchandise out-of-stocks that could lead to lost sales. In addition, a large portion of our merchandise is sourced, directly or indirectly, from outside the United States, with China as our single largest source. Political or financial instability, trade restrictions, the outbreak of pandemics, labor unrest, transport capacity and costs, port security, weather conditions, natural disasters or other events that could slow port activities and affect foreign trade are beyond our control and could disrupt our supply of merchandise and/or adversely affect our results of operations. In addition, changes in the costs of procuring commodities used in our merchandise or the costs related to our supply chain, including labor, fuel, tariffs, and currency exchange rates could have an adverse effect on gross margins, expenses and results of operations.

Failure to address product safety concerns could adversely affect our sales and results of operations.

If our merchandise offerings, including food, drug and children's products, do not meet applicable safety standards or our guests' expectations regarding safety, we could experience lost sales and increased costs and be exposed to legal and reputational risk. All of our vendors must comply with applicable product safety laws, and we are dependent on them to ensure that the products we buy comply with all safety standards. Events that give rise to actual, potential or perceived product safety concerns, including food or drug contamination, could expose us to government enforcement action or private litigation and result in costly product recalls and other liabilities. In addition, negative guest perceptions regarding the safety of the products we sell could cause our guests to seek alternative sources for their needs, resulting in lost sales. In those circumstances, it may be difficult and costly for us to regain the confidence of our guests.

If our efforts to protect the security of personal information about our guests and team members are unsuccessful, we could be subject to costly government enforcement actions and private litigation and our reputation could suffer.

The nature of our business involves the receipt and storage of personal information about our guests and team members. We have a program in place to detect and respond to data security incidents. To date, all incidents we have experienced have been insignificant. If we experience a significant data security breach or fail to detect and appropriately respond to a significant data security breach, we could be exposed to government enforcement actions and private litigation. In addition, our guests could lose confidence in our ability to protect their personal information, which could cause them to discontinue usage of REDcards, decline to use our pharmacy services, or stop shopping with us altogether. The loss of confidence from a significant data security breach involving team members could hurt our reputation, cause team member recruiting and retention challenges, increase our labor costs and affect how we operate our business.

7


Table of Contents

Our failure to comply with federal, state or local laws, or changes in these laws could increase our costs, reduce our margins and lower our sales.

Our business is subject to a wide array of laws and regulations. Significant legislative changes that affect our relationship with our workforce could increase our expenses and adversely affect our operations. Examples of possible legislative changes affecting our relationship with our workforce include changes to an employer's obligation to recognize collective bargaining units, the process by which collective bargaining agreements are negotiated or imposed, minimum wage requirements, and health care mandates. In addition, changes in the regulatory environment regarding topics such as banking and consumer credit, Medicare reimbursements, privacy and information security, product safety, supply chain transparency or environmental protection, among others, could cause our expenses to increase without an ability to pass through any increased expenses through higher prices. In addition, if we fail to comply with applicable laws and regulations, particularly wage and hour laws, we could be subject to legal risk, including government enforcement action and class action civil litigation, which could adversely affect our results of operations by increasing our costs, reducing our margins and lowering our sales.

Weather conditions where our stores are located may impact consumer shopping patterns, which alone or together with natural disasters, particularly in areas where our sales are concentrated, could adversely affect our results of operations.

Uncharacteristic or significant weather conditions can affect consumer shopping patterns, particularly in apparel and seasonal items, which could lead to lost sales or greater than expected markdowns and adversely affect our short-term results of operations. In addition, our three largest states, by total sales, are California, Texas and Florida, areas where hurricanes and earthquakes are more prevalent. Natural disasters in those states or in other areas where our sales are concentrated could result in significant physical damage to or closure of one or more of our stores or distribution centers, and cause delays in the distribution of merchandise from our vendors to our distribution centers and stores, which could adversely affect our results of operations by increasing our costs and lowering our sales.

Changes in our effective income tax rate could adversely affect our profitability and results of operations.

Our effective income tax rate is influenced by a number of factors, including changes in tax law, tax treaties, interpretation of existing laws, and our ability to sustain our reporting positions on examination. Changes in any of those factors could change our effective tax rate, which could adversely affect our profitability and results of operations. In addition, the expansion of our retail store operations outside of the United States may cause greater volatility in our effective tax rate.

If we are unable to access the capital markets or obtain bank credit, our financial position, growth plans, liquidity and results of operations could suffer.

We are dependent on a stable, liquid and well-functioning financial system to fund our operations and growth plans. In particular, we have historically relied on the public debt markets to raise capital for new store development and other capital expenditures and the commercial paper market and bank credit facilities to fund seasonal needs for working capital. Our continued access to these markets depends on multiple factors including the condition of debt capital markets, our operating performance and maintaining strong debt ratings. 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 rating will remain the same. In addition, we use a variety of derivative products to manage our exposure to market risk, principally interest rate and equity price fluctuations. Disruptions or turmoil in the financial markets could reduce our ability to meet our capital requirements or fund our working capital needs, and lead to losses on derivative positions resulting from counterparty failures, which could adversely affect our financial position and results of operations.

8


Table of Contents

A significant disruption in our computer systems could adversely affect our operations.

We rely extensively on our computer systems to manage inventory, process guest transactions, service REDcard accounts and summarize and analyze results. Our systems are subject to damage or interruption from power outages, telecommunications failures, computer viruses and malicious attacks, security breaches and catastrophic events. If our systems are damaged or fail to function properly, we may incur substantial costs to repair or replace them, experience loss of critical data and interruptions or delays in our ability to manage inventories or process guest transactions, and encounter a loss of guest confidence which could adversely affect our results of operations.

If we do not effectively execute our plan to expand retail store operations into Canada, our financial results could be adversely affected.

Our 2013 entry into the Canadian retail market is our first retail store expansion outside of the United States. Our ability to successfully open the expected number of Canadian Target stores on schedule depends, in large measure, upon our ability to remodel existing assets, build our supply chain capabilities and technology systems and recruit, hire and retain qualified team members. In addition, our ability to offer the expected assortment of merchandise in certain markets may be impacted by the availability of local vendors of certain types of goods. The effective execution of our Canadian retail store expansion is also contingent on our ability to design new marketing programs that positively differentiate us from other retailers in Canada, and achieve market acceptance by Canadian guests. If we do not effectively execute our expansion plan in Canada, our financial performance could be adversely affected.

A disruption in relationships with third parties who provide us services in connection with certain aspects of our business could adversely affect our operations.

We rely on third parties to support a variety of business functions, including our Canadian supply chain, portions of our technology systems, multichannel platforms and distribution network, and extensions of credit for our 5% REDcard Rewards loyalty program. If we are unable to contract with third parties having the specialized skills needed to support those strategies or integrate their products and services with our business, or if those third parties fail to meet our performance standards and expectations, our reputation, sales and results of operations could be adversely affected. In addition, we could face increased costs associated with finding replacement providers or hiring new team members to provide these services in-house.

Item 1B.    Unresolved Staff Comments

Not applicable.

9


Table of Contents

Item 2.    Properties

At February 2, 2013, we had 1,778 stores in 49 states and the District of Columbia:

       
 
  Number of Stores
    
Retail Sq. Ft.
(in thousands)

   
  Number of Stores
   
Retail Sq. Ft.
(in thousands)

 
       

Alabama

    21     3,003  

Montana

    7     780  

Alaska

    3     504  

Nebraska

    14     2,006  

Arizona

    48     6,382  

Nevada

    19     2,461  

Arkansas

    9     1,165  

New Hampshire

    9     1,148  

California

    257     34,051  

New Jersey

    43     5,701  

Colorado

    40     6,080  

New Mexico

    9     1,024  

Connecticut

    20     2,672  

New York

    67     9,145  

Delaware

    3     440  

North Carolina

    47     6,225  

District of Columbia

    1     179  

North Dakota

    4     554  

Florida

    123     17,263  

Ohio

    64     8,002  

Georgia

    55     7,515  

Oklahoma

    15     2,157  

Hawaii

    4     695  

Oregon

    18     2,191  

Idaho

    6     664  

Pennsylvania

    63     8,239  

Illinois

    89     12,188  

Rhode Island

    4     517  

Indiana

    33     4,377  

South Carolina

    19     2,359  

Iowa

    22     3,015  

South Dakota

    5     580  

Kansas

    19     2,577  

Tennessee

    32     4,114  

Kentucky

    14     1,660  

Texas

    149     20,976  

Louisiana

    16     2,246  

Utah

    13     1,953  

Maine

    5     630  

Vermont

         

Maryland

    37     4,802  

Virginia

    57     7,650  

Massachusetts

    36     4,735  

Washington

    36     4,194  

Michigan

    59     7,058  

West Virginia

    6     755  

Minnesota

    75     10,777  

Wisconsin

    39     4,773  

Mississippi

    6     743  

Wyoming

    2     187  

Missouri

    36     4,735                  
       

             

Total

    1,778     237,847  
                   

The following table summarizes the number of owned or leased stores and distribution centers in the United States at February 2, 2013:

     
   
  Stores
  Distribution
Centers
(a)
 
     
 

Owned

    1,526     30  
 

Leased

    88     7  
 

Owned buildings on leased land

    164      
     
 

Total

    1,778     37  
     
(a)
The 37 distribution centers have a total of 49,559 thousand square feet.

We have announced plans to open 124 stores in Canada in 2013, with locations in each province. We also own 3 distribution centers in Canada, with a total of 3,963 thousand square feet.

We own our corporate headquarters buildings located in Minneapolis, Minnesota, and we lease and own additional office space in the United States. We lease our Canadian headquarters in Mississauga, Ontario. Our international sourcing operations have 25 office locations in 17 countries, all of which are leased. We also lease office space in Bangalore, India, where we operate various support functions. Our properties are in good condition, well maintained and suitable to carry on our business.

10


Table of Contents

For additional information on our properties, see the Capital Expenditures section in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 14 and 22 of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data.

Item 3.    Legal Proceedings

No response is required under Item 103 of Regulation S-K. For a description of other legal proceedings, see Note 19 of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data.

Item 4.    Mine Safety Disclosures

Not applicable.

Item 4A.    Executive Officers

Executive officers are elected by, and serve at the pleasure of, the Board of Directors. There is neither a family relationship between any of the officers named and any other executive officer or member of the Board of Directors, nor any arrangement or understanding pursuant to which any person was selected as an officer.

   
Name
  Title and Business Experience
  Age
 
   
Timothy R. Baer   Executive Vice President, General Counsel and Corporate Secretary since March 2007.     52  
Anthony S. Fisher   President, Target Canada since January 2011. Vice President, Merchandise Operations from February 2010 to January 2011. From January 1999 to February 2010, Mr. Fisher held several leadership positions with Target in Merchandise and Merchandise Planning.     38  
John D. Griffith   Executive Vice President, Property Development since February 2005.     51  
Beth M. Jacob   Executive Vice President and Chief Information Officer since January 2010. Senior Vice President and Chief Information Officer from July 2008 to January 2010. Vice President, Guest Operations, Target Financial Services from August 2006 to July 2008.     51  
Jeffrey J. Jones II   Executive Vice President and Chief Marketing Officer since April 2012. Partner and President of McKinney Ventures LLC from March 2006 to March 2012.     45  
Jodeen A. Kozlak   Executive Vice President, Human Resources since March 2007.     49  
John J. Mulligan   Executive Vice President and Chief Financial Officer since April 2012. Senior Vice President, Treasury, Accounting and Operations from February 2010 to April 2012. Vice President, Pay and Benefits from February 2007 to February 2010.     47  
Tina M. Schiel   Executive Vice President, Stores since January 2011. Senior Vice President, New Business Development from February 2010 to January 2011. Senior Vice President, Stores from February 2001 to February 2010.     47  
Terrence J. Scully   President, Financial and Retail Services since March 2003.     60  
Gregg W. Steinhafel   Chairman of the Board, President and Chief Executive Officer since February 2009. President and Chief Executive Officer since May 2008. Director since January 2007. President since August 1999.     58  
Kathryn A. Tesija   Executive Vice President, Merchandising and Supply Chain since October 2012. Executive Vice President, Merchandising from May 2008 to September 2012. Senior Vice President, Merchandising from July 2001 to April 2008.     50  
Laysha L. Ward   President, Community Relations and Target Foundation since July 2008. Vice President, Community Relations from February 2003 to July 2008.     45  
   

11


Table of Contents


PART II

Item 5.    Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the New York Stock Exchange under the symbol "TGT." We are authorized to issue up to 6,000,000,000 shares of common stock, par value $0.0833, and up to 5,000,000 shares of preferred stock, par value $0.01. At March 15, 2013, there were 16,412 shareholders of record. Dividends declared per share and the high and low closing common stock price for each fiscal quarter during 2012 and 2011 are disclosed in Note 30 of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data.

During the first quarter of 2012, we completed a $10 billion share repurchase program authorized by our Board of Directors in November 2007. In January 2012, our Board of Directors authorized the repurchase of an additional $5 billion of our common stock, with no stated expiration for the share repurchase program. Since the inception of the $5 billion share repurchase program and through the end of 2012, we have repurchased 27.3 million shares of our common stock for a total cash investment of $1,621 million ($59.44 average price per share).

The table below presents information with respect to Target common stock purchases made during the three months ended February 2, 2013 by Target or any "affiliated purchaser" of Target, as defined in Rule 10b-18(a)(3) under the Exchange Act.

   
Period
  Total Number
of Shares
Purchased 
(a)(b)
  Average
Price Paid
per Share 
(a)
  Total Number of
Shares Purchased
as Part of the
Current Program 
(a)
  Dollar Value of
Shares that May
Yet Be Purchased
Under the Program

 
   

October 28, 2012 through
November 24, 2012

    4,439,108   $ 62.78     21,304,584   $ 3,744,999,754  

November 25, 2012 through
December 29, 2012

    2,711,006     62.10     23,984,097     3,578,603,382  

December 30, 2012 through
February 2, 2013

    3,351,633     60.74     27,276,377     3,378,630,009  
   

    10,501,747   $ 61.96     27,276,377   $ 3,378,630,009  
   
(a)
The table above includes shares reacquired upon settlement of prepaid forward contracts. For the three months ended February 2, 2013, no shares were reacquired through these contracts. At February 2, 2013, we held asset positions in prepaid forward contracts for 1.2 million shares of our common stock, for a total cash investment of $54 million, or an average per share price of $45.46. Refer to Notes 25 and 27 of the Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data for further details of these contracts.
(b)
The number of shares above includes shares of common stock reacquired from team members who tendered 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 February 2, 2013, 91,565 shares were reacquired at an average per share price of $60.73 pursuant to our long-term incentive plan.

12


Table of Contents


Comparison of Cumulative Five Year Total Return

GRAPHIC

   
 
  Fiscal Years Ended  
 
  February 2,
2008

  January 31,
2009

  January 30,
2010

  January 29,
2011

  January 28,
2012

  February 2,
2013

 
   

Target

  $ 100.00   $ 55.44   $ 92.63   $ 99.76   $ 93.85   $ 117.28  

S&P 500 Index

    100.00     60.63     80.72     97.88     103.10     121.25  

Previous Peer Group

    100.00     77.50     95.09     106.52     117.91     146.56  

Current Peer Group

    100.00     77.58     99.38     113.90     126.61     159.53  
   

The graph above compares the cumulative total shareholder return on our common stock for the last five fiscal years with (i) the cumulative total return on the S&P 500 Index, (ii) the peer group used in previous filings consisting of 14 general merchandise, department store, food and specialty retailers which are large and meaningful competitors (Best Buy, Costco, CVS Caremark, Home Depot, J. C. Penney, Kohl's, Kroger, Lowe's, Macy's, Safeway, Sears, Supervalu, Walgreens, and Walmart) (Previous Peer Group), and (iii) a new peer group consisting of the 14 companies in the Previous Peer Group and Amazon.com. The change in peer groups was made to be consistent with the retail peer group used for our definitive Proxy Statement to be filed on or about April 29, 2013.

Both peer groups are weighted by the market capitalization of each component company. The graph assumes the investment of $100 in Target common stock, the S&P 500 Index, the Previous Peer Group and the Current Peer Group on February 2, 2008, and reinvestment of all dividends.

13


Table of Contents

Item 6.    Selected Financial Data

   
 
  As of or for the Year Ended  
(millions, except per share data)
  2012 (a)
  2011
  2010
  2009
  2008
  2007
 
   

Financial Results:

                                     

Total revenues

  $ 73,301   $ 69,865   $ 67,390   $ 65,357   $ 64,948   $ 63,367  

Net earnings

    2,999     2,929     2,920     2,488     2,214     2,849  

Per Share:

                                     

Basic earnings per share

    4.57     4.31     4.03     3.31     2.87     3.37  

Diluted earnings per share

    4.52     4.28     4.00     3.30     2.86     3.33  

Cash dividends declared per share

    1.38     1.15     0.92     0.67     0.62     0.54  

Financial Position:

                                     

Total assets

    48,163     46,630     43,705     44,533     44,106     44,560  

Long-term debt, including current portion

    17,648     17,483     15,726     16,814     18,752     16,590  
   
(a)
Consisted of 53 weeks.

Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

Our fiscal year ends on the Saturday nearest January 31. The 2012 period includes 53 weeks, while 2011 and 2010 each consisted of 52 weeks.

Consolidated revenues were $73,301 million for 2012, an increase of $3,436 million or 4.9 percent from the prior year. Consolidated earnings before interest expense and income taxes for 2012 increased by $49 million or 0.9 percent over 2011 to $5,371 million. Cash flow provided by operations was $5,325 million, $5,434 million and $5,271 million for 2012, 2011 and 2010, respectively. Diluted earnings per share in 2012 increased 5.6 percent to $4.52 from $4.28 in the prior year. Adjusted diluted earnings per share, which we believe is useful in providing period-to-period comparisons of the results of our U.S. operations, increased 7.9 percent to $4.76 in 2012 from $4.41 in the prior year.

   
Earnings Per Share
   
   
   
  Percent Change  
 
  2012 (a)
  2011
  2010
  2012/2011
  2011/2010
 
   

GAAP diluted earnings per share

  $ 4.52   $ 4.28   $ 4.00     5.6 %   7.0 %

Adjustments (b)

    0.24     0.13     (0.14 )            
   

Adjusted diluted earnings per share

  $ 4.76   $ 4.41   $ 3.86     7.9 %   14.3 %
   

Note:    A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 22.

(a)
Consisted of 53 weeks.
(b)
Adjustments represent the diluted EPS impact of our 2013 Canadian market entry, the gain on receivables held for sale, favorable resolution of various income tax matters and the loss on early retirement of debt.

Our 2012 financial results in our U.S. Retail Segment reflect increased sales of 5.1 percent over the same period last year due to a 2.7 percent comparable-store increase, the contribution from new stores and the additional week in 2012. Our 2012 U.S. Retail Segment earnings before interest expense, income taxes, depreciation and amortization (EBITDA) margin rate decreased slightly from the prior period, primarily due to a lower gross margin rate from our 5% REDcard Rewards loyalty program and our store remodel program. Our earnings before interest expense and income taxes (EBIT) margin rate remained consistent with the prior year due to a decrease in our depreciation and amortization rate.

14


Table of Contents

In the U.S. Credit Card Segment, we experienced a decrease in segment profit due to annualizing over a significant reserve reduction in the prior year and lower finance charge revenue resulting from a smaller portfolio. These changes were partially offset by lower interest expense due to repayment of $2,769 million in collateralized debt in the fourth quarter of 2011, as well as the additional week in 2012.

The 2012 and 2011 loss in our Canadian Segment totaling $369 million and $122 million, respectively, is comprised of start-up costs and depreciation related to our 2013 entry into the Canadian retail market.

Credit Card Receivables Transaction

On October 22, 2012, we reached an agreement to sell our entire consumer credit card portfolio to TD Bank Group (TD). Historically, our credit card receivables were recorded at par value less an allowance for doubtful accounts. With this agreement, our receivables are classified as held for sale at February 2, 2013, and are recorded at the lower of cost (par) or fair value. We recorded a gain of $161 million outside of our segments in 2012, representing the net adjustment to eliminate our allowance for doubtful accounts and record our receivables at lower of cost (par) or fair value.

On March 13, 2013, we completed the sale to TD for cash consideration of $5.7 billion, equal to the gross (par) value of the outstanding receivables at the time of closing. Concurrent with the sale of the portfolio for $5.7 billion, we repaid the nonrecourse debt collateralized by credit card receivables (2006/2007 Series Variable Funding Certificate) at par of $1.5 billion, resulting in net cash proceeds of $4.2 billion. As of March 20, 2013, we also have open tender offers to use up to an aggregate of $1.2 billion of cash proceeds from the sale to repurchase outstanding debt. Over time, we expect to apply the remaining proceeds from the sale in a manner that will preserve our strong investment-grade credit ratings by further reducing our debt position and continuing our current share repurchase program.

Following this sale, TD will underwrite, fund and own Target Credit Card and Target Visa receivables in the U.S. TD will control risk management policies and oversee regulatory compliance, and we will perform account servicing and primary marketing functions. We will earn a substantial portion of the profits generated by the Target Credit Card and Target Visa portfolios. This transaction will be accounted for as a sale, and the receivables will no longer be reported on our Consolidated Statements of Financial Position.

In the first quarter of 2013, we will recognize a gain on sale of $391 million related to consideration received in excess of the recorded amount of the receivables. Consideration received includes cash of $5.7 billion and a beneficial interest asset of $225 million. The beneficial interest effectively represents a receivable for the present value of future profit-sharing we expect to receive on the receivables sold. Based on historical payment patterns, we estimate that the beneficial interest asset will be reduced over a four year period, with larger reductions in the early years. As a result, a portion of the profit-sharing payments we receive from TD in the first four years of the arrangement will not be recorded as income on our Consolidated Statements of Operations.

Following the sale of our credit card portfolio in 2013, income from the profit-sharing arrangement, net of account servicing expenses, will be recognized within SG&A expenses. Including the profit-sharing arrangement in the U.S. Segment will reduce the SG&A rate below the historical U.S. Retail Segment SG&A rate, and raise EBITDA and EBIT margin rates above historical U.S. Retail Segment rates.

For comparison purposes, historical U.S. Retail Segment and U.S. Credit Card Segment results will be restated to form a new U.S. Segment. The combination of these two historical segments into a single U.S. Segment will result in a higher SG&A rate in 2013 compared with 2012, 2011 and 2010, reflecting credit card profit that will be retained by TD beginning in 2013.

Although we expect lower EBITDA and EBIT margin rates in the U.S. Segment compared with prior periods, we expect that the impact of the receivables sale transaction will become neutral and ultimately accretive to EPS over time.

15


Table of Contents

Analysis of Results of Operations

U.S. Retail Segment

   
U.S. Retail Segment Results
   
   
   
  Percent Change  
(dollars in millions)
  2012 (a)
  2011
  2010
  2012/2011
  2011/2010
 
   

Sales

  $ 71,960   $ 68,466   $ 65,786     5.1 %   4.1 %

Cost of sales

    50,568     47,860     45,725     5.7     4.7  
   

Gross margin

    21,392     20,606     20,061     3.8     2.7  

SG&A expenses (b)

    14,342     13,774     13,367     4.1     3.0  
   

EBITDA

    7,050     6,832     6,694     3.2     2.1  

Depreciation and amortization

    2,031     2,067     2,065     (1.8 )   0.1  
   

EBIT

  $ 5,019   $ 4,765   $ 4,629     5.3 %   2.9 %
   

Note:    See Note 29 to our Consolidated Financial Statements for a reconciliation of our segment results to earnings before income taxes.

(a)
Consisted of 53 weeks.
(b)
Effective with the October 2010 nationwide launch of our 5% REDcard Rewards loyalty program, we changed the formula under which the U.S. Retail Segment charges the U.S. Credit Card Segment to better align with the attributes of this program. Loyalty program charges were $300 million, $258 million and $102 million in 2012, 2011 and 2010, respectively. In all periods, these amounts were recorded as reductions to SG&A expenses within the U.S. Retail Segment and increases to operations and marketing expenses within the U.S. Credit Card Segment.

   
U.S. Retail Segment Rate Analysis
  2012 (a)
  2011
  2010
 
   

Gross margin rate

    29.7 %   30.1 %   30.5 %

SG&A expense rate

    19.9     20.1     20.3  

EBITDA margin rate

    9.8     10.0     10.2  

Depreciation and amortization expense rate

    2.8     3.0     3.1  

EBIT margin rate

    7.0     7.0     7.0  
   

Rate analysis metrics are computed by dividing the applicable amount by sales.

(a)
Consisted of 53 weeks.

Sales

Sales include merchandise sales, net of expected returns, and gift card breakage. Refer to Note 2 of the Notes to Consolidated Financial Statements for a definition of gift card breakage. Sales growth in 2012 and 2011 resulted from higher comparable-store sales and the contribution from new stores, with 2012 also benefitting by 1.7 percentage points from the additional week. Inflation did not materially affect sales in any period presented.

Refer to the Merchandise section in Item 1, Business, for additional product category information.

Comparable-store sales is a measure that highlights the performance of our existing stores and digital sales by measuring the change in sales 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 include all sales, except sales from stores open less than thirteen months.

   
Comparable-Store Sales
  2012
  2011
  2010
 
   

Comparable-store sales change

    2.7 %   3.0%     2.1 %

Drivers of change in comparable-store sales:

                   

Number of transactions

    0.5 %   0.4%     2.0 %

Average transaction amount

    2.3 %   2.6%     0.1 %

Selling price per unit

    1.3 %   0.3%     (2.3) %

Units per transaction

    1.0 %   2.3%     2.5 %
   

16


Table of Contents

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.

Credit is offered to qualified guests through our branded proprietary credit cards: the Target Credit Card and the Target Visa (Target Credit Cards). Additionally, we offer a branded proprietary Target Debit Card. Collectively, we refer to these products as REDcards®. Since October 2010, guests receive a 5-percent discount on virtually all purchases at checkout, every day, when they use a REDcard. In November 2011, guests also began to receive free shipping at Target.com when they use their REDcard.

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 representing a shift in tender type.

   
REDcard Penetration
  2012
  2011
  2010
 
   

Target Credit Cards

    7.9 %   6.8 %   5.2 %

Target Debit Card

    5.7     2.5     0.7 %
   

Total store REDcard Penetration

    13.6 %   9.3 %   5.9 %
   

Gross Margin Rate

Our gross margin rate was 29.7 percent in 2012, 30.1 percent in 2011 and 30.5 percent in 2010. The decrease in each period reflects the impact of our integrated growth strategies of our 5% REDcard Rewards loyalty program and our store remodel program, which impacted the rate by 0.4 percent and 0.5 percent in 2012 and 2011, respectively, partially offset by underlying rate improvements within categories in 2011. The REDcard Rewards loyalty program reduces gross margin rates because it drives incremental sales among guests who receive a 5-percent discount on virtually all items purchased. The remodel program reduces the overall gross margin rate because it drives incremental sales with a stronger-than-average mix in lower-than-average gross margin rate product categories, primarily food.

We changed certain merchandise vendor contracts beginning in 2013. As a result, we expect our gross margin rate to increase by about 20 to 25 basis points from prior years, with an equal and offsetting increase in our SG&A rate. This shift will result from a larger proportion of vendor income offsetting cost of sales as compared to certain advertising expenses within SG&A. This change will have no impact on our EBITDA or EBIT margins or margin rates as our SG&A rate will increase by the same amount.

In January 2013 we announced plans to price match top online retailers year-round. Based on our experience during the 2012 holiday season, we do not expect this change to significantly affect our gross margin rate.

Selling, General and Administrative Expense Rate

Our SG&A expense rate was 19.9 percent, 20.1 percent and 20.3 percent in 2012, 2011 and 2010, respectively. The change in 2012 was primarily due to improvements in store hourly payroll expense, which impacted the rate by 0.1 percent, and continued disciplined expense management across the Company, partially offset by technology and multichannel investments, which impacted the rate by nearly 0.2 percent. The change in 2011 was primarily due to increased loyalty program charges to the U.S. Credit Segment and favorable leverage on store hourly payroll expense.

As noted above, a 2013 change to certain merchandise vendor contracts is expected to increase our SG&A rate by about 20 to 25 basis points because vendor funding will no longer offset certain advertising expenses. This change will have no impact on our EBITDA or EBIT margins or margin rates as our gross margin rate will increase by the same amount.

Following the sale of our credit card portfolio in 2013, income from the profit-sharing arrangement, net of account servicing expenses, will be recognized as an offset to SG&A expenses.

17


Table of Contents

Depreciation and Amortization Expense Rate

Our depreciation and amortization expense rate was 2.8 percent, 3.0 percent and 3.1 percent in 2012, 2011 and 2010, respectively. The decrease in 2012 was due to the favorable impact of higher sales combined with stable depreciation and amortization expenses, reflecting the moderate pace of capital investments in recent years, and the impact from the additional week in 2012.

Store Data

   
Change in Number of Stores
   
   
  2012
  2011
 
   

Beginning store count

                1,763     1,750  

Opened

                23     21  

Closed

                (5 )   (3 )

Relocated

                (3 )   (5 )
   

Ending store count

                1,778     1,763  
   

Number of stores remodeled during the year

                252     394  
   
 
  Number of Stores   Retail Square Feet (a)  
Number of Stores and
Retail Square Feet

 
  February 2,
2013

  January 28,
2012

  February 2,
2013

  January 28,
2012

 
   

Target general merchandise stores

    391     637     46,584     76,999  

Expanded food assortment stores

    1,131     875     146,249     114,219  

SuperTarget stores

    251     251     44,500     44,503  

CityTarget stores

    5         514      
   

Total

    1,778     1,763     237,847     235,721  
   
(a)
In thousands, reflects total square feet less office, distribution center and vacant space.

U.S. Credit Card Segment

Credit is offered to qualified guests through the Target Credit Cards, which support our core retail operations and are important contributors to our overall profitability and engagement with our guests. Credit card revenues are comprised of finance charges, late fees and other revenue, and third party merchant fees, which are amounts received from merchants who accept the Target Visa.

18


Table of Contents

   
U.S Credit Card Segment Results
  2012 (a)   2011   2010  
(dollars in millions)
  Amount
  Rate (e)
  Amount
  Rate (e)
  Amount
  Rate (e)
 
   

Finance charge revenue

  $ 1,089     17.8 % $ 1,131     17.9 % $ 1,302     18.3 %

Late fees and other revenue

    173     2.8     179     2.8     197     2.8  

Third party merchant fees

    79     1.3     89     1.4     105     1.5  
   

Total revenue

    1,341     22.0     1,399     22.1     1,604     22.6  
   

Bad debt expense (b)

    196     3.2     154     2.4     528     7.4  

Operations and marketing expenses (b)

    562     9.2     550     8.7     433     6.1  

Depreciation and amortization

    13     0.2     17     0.3     19     0.3  
   

Total expenses

    771     12.6     721     11.4     980     13.8  
   

EBIT

    570     9.3     678     10.7     624     8.8  

Interest expense on nonrecourse debt collateralized by credit card receivables

    13           72           83        
   

Segment profit

  $ 557         $ 606         $ 541        
   

Average receivables funded by Target (c)

  $ 4,569         $ 2,514         $ 2,771        

Segment pretax ROIC (d)

    12.0 %         24.1 %         19.5 %      
   

Note:    See Note 29 to our Consolidated Financial Statements for a reconciliation of our segment results to earnings before income taxes.

(a)
Consisted of 53 weeks.
(b)
The combination of bad debt expense and operations and marketing expenses, less amounts the U.S. Retail Segment charges the U.S. Credit Card Segment for loyalty programs, within the U.S. Credit Card Segment represent credit card expenses on the Consolidated Statements of Operations. For 2012, fourth quarter bad debt expense was replaced by net write-offs in this calculation. See footnote (b) to our U.S. Retail Segment Results table for an explanation of our loyalty program charges.
(c)
Amounts represent the portion of average credit card receivables, at par, funded by Target. For 2012, 2011 and 2010, these amounts exclude $1,423 million, $3,801 million and $4,335 million, respectively, of receivables funded by nonrecourse debt collateralized by credit card receivables.
(d)
ROIC is return on invested capital. This rate equals our segment profit divided by average credit card receivables, at par, funded by Target, expressed as an annualized rate.
(e)
As a percentage of average credit card receivables, at par. For 2012, the additional week has been adjusted to provide comparable results to the prior period.

   
Spread Analysis – Total Portfolio
  2012 (a)   2011   2010  
(dollars in millions)
  Amount
  Rate
  Amount
  Rate
  Amount
  Rate
 
   

EBIT

  $ 570     9.3 (d) $ 678     10.7 (d) $ 624     8.8 (d)

LIBOR (b)

          0.2 %         0.2 %         0.3 %

Spread to LIBOR (c)

  $ 555     9.1 (d) $ 663     10.5 (d) $ 604     8.5 (d)
   

Note:    Numbers are individually rounded.

(a)
Consisted of 53 weeks.
(b)
Balance-weighted one-month LIBOR.
(c)
Spread to LIBOR is a metric used to analyze the performance of our total credit card portfolio because the 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.
(d)
As a percentage of average credit card receivables, at par. For 2012, the additional week has been adjusted to provide comparable results to the prior period.

Our primary measure of segment profit is the EBIT generated by our total credit card receivables portfolio less the interest expense on nonrecourse debt collateralized by credit card receivables. We also measure the performance of our overall credit card receivables portfolio by calculating the dollar Spread to LIBOR at the portfolio level. This metric approximates overall financial performance of the entire credit card portfolio 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. We

19


Table of Contents

continue to recognize an allowance for doubtful accounts and bad debt expense within our U.S. Credit Card Segment, which allows us to evaluate the performance of the portfolio. The allowance for doubtful accounts is eliminated in consolidation to present the receivables at the lower of cost (par) or fair value. On a consolidated basis, net write-offs are reported within credit card expenses in our Consolidated Statements of Operations.

In 2012 and 2011, segment revenues decreased from the prior year primarily due to lower average receivables resulting in reduced finance charge revenue. In 2012, segment expense increases were driven by higher bad debt expense, primarily attributable to annualizing over a significant reserve reduction in the prior year. In 2011, segment expenses decreased from the prior year as we significantly reduced our bad debt reserve due to improved trends in key measures of risk. Segment interest expense on nonrecourse debt declined in both 2012 and 2011 due to lower outstanding nonrecourse debt securitized by credit card receivables.

   
Receivables Rollforward Analysis
   
   
   
  Percent Change  
(dollars in millions)
  2012
  2011
  2010
  2012/2011
  2011/2010
 
   

Beginning credit card receivables, at par

  $ 6,357   $ 6,843   $ 7,982     (7.1 )%   (14.3 )%

Charges at Target

    6,294     5,098     3,699     23.5     37.8  

Charges at third parties

    4,709     5,192     5,815     (9.3 )   (10.7 )

Payments

    (12,286 )   (11,653 )   (11,283 )   5.4     3.3  

Other

    950     877     630     8.3     39.3  
   

Period-end credit card receivables, at par

  $ 6,024   $ 6,357   $ 6,843     (5.2 )%   (7.1 )%
   

Average credit card receivables, at par

  $ 5,992   $ 6,314   $ 7,106     (5.1 )%   (11.1 )%
   

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

    2.7 %   3.3 %   4.2 %            
   

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

    1.9 %   2.3 %   3.1 %            
   

 

   
Allowance for Doubtful Accounts
   
   
   
    
Percent Change
 
(dollars in millions)
  2012
  2011
  2010
  2012/2011
  2011/2010
 
   

Allowance at beginning of period

  $ 430   $ 690   $ 1,016     (37.7 )%   (32.1 )%

Bad debt expense

    196     154     528     27.3     (70.8 )

Write-offs (a)

    (424 )   (572 )   (1,007 )   (25.8 )   (43.2 )

Recoveries (a)

    133     158     153     (15.2 )   3.0  
   

Segment allowance at end of period

  $ 335   $ 430   $ 690     (22.0 )%   (37.7 )%
   

As a percentage of period-end credit card receivables, at par

    5.6 %   6.8 %   10.1 %            
   

Net write-offs as an annualized percentage of average credit card receivables, at par

    4.9 %   6.6 %   12.0 %            
   
(a)
Write-offs include the principal amount of losses (excluding accrued and unpaid finance charges), and recoveries include current period principal collections on previously written-off balances. These amounts combined represent net write-offs.

Period-end and average credit card receivables, at par, have declined because of an increase in payment rates and a decrease in Target Visa charges at third-parties, partially offset by an increase in charges at Target over the past two years. The decrease in charges at third parties is primarily due to the fact that we no longer issue new Target Visa accounts.

Canadian Segment

During 2012 and 2011, start-up costs reported in SG&A expense in the Consolidated Statements of Operations totaled $272 million and $74 million, respectively, and primarily consisted of compensation, benefits and third-party

20


Table of Contents

service expenses. Additionally, we recorded $97 million and $48 million in depreciation for 2012 and 2011, respectively.

Other Performance Factors

Net Interest Expense

Net interest expense was $762 million in 2012, including $78 million of interest on Canadian capitalized leases. This decrease of 12.0 percent, or $104 million, from 2011 was primarily due to an $87 million loss on early retirement of debt in 2011. As of March 20, 2013, we also have open tender offers to use up to an aggregate of $1.2 billion of cash proceeds from the sale to repurchase outstanding debt, which will impact interest expense in 2013.

Net interest expense was $866 million for 2011, increasing 14.4 percent, or $109 million from 2010. This increase was due to an $87 million loss on early retirement of debt, $44 million of interest on Canadian capitalized leases and higher average debt balances, partially offset by a lower average portfolio interest rate.

Provision for Income Taxes

Our effective income tax rate increased to 34.9 percent in 2012, from 34.3 percent in 2011, primarily due to a reduction in the favorable resolution of various income tax matters and the unfavorable impact of losses in Canada, which are tax effected at a lower rate than U.S. earnings. Various income tax matters were resolved in 2012 and 2011 which reduced tax expense by $58 million and $85 million, respectively. A tax rate reconciliation is provided in Note 23 to our Consolidated Financial Statements.

Our effective income tax rate decreased to 34.3 percent in 2011, from 35.1 percent in 2010, primarily due to a reduction in the structural domestic effective tax rate. This reduction was slightly offset by a reduction in the favorable resolution of various income tax matters and the unfavorable impact of losses in Canada, which are tax effected at a lower rate than U.S. earnings. Various income tax matters were resolved in 2011 and 2010 which reduced tax expense by $85 million and $102 million, respectively.

We expect a 2013 consolidated effective income tax rate of 35.7 percent to 36.7 percent, excluding the impact of resolution of income tax matters.

21


Table of Contents

Reconciliation of Non-GAAP Financial Measures to GAAP Measures

Our segment measure of profit is used by management to evaluate the return on our investment and to make operating decisions. To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share, which excludes the impact of our 2013 Canadian market entry, the gain on receivables held for sale, favorable resolution of various income tax matters and the loss on early retirement of debt. We believe this information is useful in providing period-to-period comparisons of the results of our U.S. operations. This measure is not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The most comparable GAAP measure is diluted earnings per share. Non-GAAP adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP. Other companies may calculate non-GAAP adjusted EPS differently than we do, limiting the usefulness of the measure for comparisons with other companies.

   
(millions, except per share data)
  U.S. Retail
  U.S.
Credit Card

  Total U.S.
  Canada
  Other
   
  Consolidated
GAAP Total

 
   

2012 (a)

                                         

Segment profit

  $ 5,019   $ 557   $ 5,576   $ (369 ) $       $ 5,206  

Other net interest expense (b)

                672     78             749  

Adjustment related to receivables held for sale (c)

                        (152 )       (152 )
                   

Earnings before income taxes

                4,904     (447 )   152         4,609  

Provision for income taxes (d)

                1,744     (132 )   (3 ) (f)     1,610  
                   

Net earnings

              $ 3,160   $ (315 ) $ 155       $ 2,999  
                   

Diluted earnings per share (e)

              $ 4.76   $ (0.48 ) $ 0.23       $ 4.52  
   

2011

                                         

Segment profit

  $ 4,765   $ 606   $ 5,371   $ (122 ) $       $ 5,250  

Other net interest expense (b)

                663     44     87   (g)     794  
                   

Earnings before income taxes

                4,708     (166 )   (87 )       4,456  

Provision for income taxes (d)

                1,690     (47 )   (117 ) (f)     1,527  
                   

Net earnings

              $ 3,018   $ (119 ) $ 30       $ 2,929  
                   

Diluted earnings per share (e)

              $ 4.41   $ (0.17 ) $ 0.04       $ 4.28  
   

2010

                                         

Segment profit

  $ 4,629   $ 541   $ 5,169   $   $       $ 5,169  

Other net interest expense (b)

                674                 674  
                   

Earnings before income taxes

                4,495                 4,495  

Provision for income taxes (d)

                1,677         (102 ) (f)     1,575  
                   

Net earnings

              $ 2,818   $   $ 102       $ 2,920  
                   

Diluted earnings per share (e)

              $ 3.86   $   $ 0.14       $ 4.00  
   

Note:  A non-GAAP financial measures summary is provided on page 14. The sum of the non-GAAP adjustments may not equal the total adjustment amounts due to rounding.

(a)
Consisted of 53 weeks.
(b)
Represents interest expense, net of interest income, not included in U.S. Credit Card Segment profit. For 2012, 2011 and 2010, U.S. Credit Card Segment profit included $13 million, $72 million and $83 million of interest expense on nonrecourse debt collateralized by credit card receivables, respectively. These amounts, along with other net interest expense, equal consolidated GAAP net interest expense.
(c)
Represents the gain on receivables held for sale recorded in our Consolidated Statements of Operations, plus the difference between U.S. Credit Card Segment bad debt expense and net write-offs for the fourth quarter of 2012.
(d)
Taxes are allocated to our business segments based on income tax rates applicable to the operations of the segment for the period.
(e)
For 2012, 2011 and 2010, average diluted shares outstanding were 663.3 million, 683.9 million and 729.4 million, respectively.
(f)
Represents the effect of resolution of income tax matters. The 2012 results also include a $55 million tax expense for the adjustment related to receivables held for sale, while the 2011 results include a $32 million tax benefit related to the loss on early retirement of debt.
(g)
Represents the loss on early retirement of debt.

22


Table of Contents

Analysis of Financial Condition

Liquidity and Capital Resources

Our period-end cash and cash equivalents balance was $784 million compared with $794 million in 2011. Short-term investments (highly liquid investments with an original maturity of three months or less from the time of purchase) of $130 million and $194 million were included in cash and cash equivalents at the end of 2012 and 2011, 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 certain dollar limits on our investments in individual funds or instruments.

Cash Flows

Our 2012 operations were funded by both internally and externally generated funds. Cash flow provided by operations was $5,325 million in 2012 compared with $5,434 million in 2011. During 2012, we issued $1.5 billion of unsecured debt that matures in July 2042, and we amended the 2006/2007 Series Variable Funding Certificate to obtain additional funding of $500 million and to extend the maturity to 2013. These cash flows, combined with our prior year-end cash position, allowed us to fund capital expenditures, pay current maturities, pay dividends and continue purchases under our share repurchase program.

Our 2012 period-end credit card receivables, at par, were $6,024 million compared with $6,357 million in 2011, a decrease of 5.2 percent. Average credit card receivables, at par, in 2012 decreased 5.1 percent compared with 2011 levels. This change was driven by the factors indicated in the U.S. Credit Card Segment above. As of February 2, 2013, $1,500 million of our credit card receivables portfolio was funded by third parties.

On October 22, 2012, we reached an agreement to sell our entire consumer credit card portfolio to TD Bank Group (TD). On March 13, 2013, we completed the sale to TD for cash consideration of $5.7 billion, equal to the gross (par) value of the outstanding receivables at the time of closing. Concurrent with the sale of the portfolio, we repaid the nonrecourse debt collateralized by credit card receivables (2006/2007 Series Variable Funding Certificate) at par of $1.5 billion, resulting in net cash proceeds of $4.2 billion. As of March 20, 2013, we also have open tender offers to use up to an aggregate of $1.2 billion of cash proceeds from the sale to repurchase outstanding debt. Over time, we expect to apply the remaining proceeds from the sale in a manner that will preserve our strong investment-grade credit ratings by further reducing our debt position and continuing our current share repurchase program.

Year-end inventory levels decreased slightly from $7,918 million in 2011 to $7,903 million in 2012, primarily due to supply chain management improvements and continued disciplined inventory management, partially offset by an increase in inventory for our 2013 Canadian retail market entry. Accounts payable increased by $199 million, or 2.9 percent over the same period.

Share Repurchases

During the first quarter of 2012, we completed a $10 billion share repurchase program authorized by our Board of Directors in November 2007, and began repurchasing shares under a new $5 billion program authorized by our Board of Directors in January 2012. During 2012, we repurchased 32.2 million shares of our common stock for a total investment of $1,900 million ($58.96 per share). During 2011, we repurchased 37.2 million shares of our common stock for a total investment of $1,894 million ($50.89 per share).

Dividends

We paid dividends totaling $869 million in 2012 and $750 million in 2011, for an increase of 15.9 percent. We declared dividends totaling $903 million ($1.38 per share) in 2012, for an increase of 16.2 percent over 2011. We declared dividends totaling $777 million ($1.15 per share) in 2011, an increase of 17.8 percent over 2010. We have

23


Table of Contents

paid dividends every quarter since our 1967 initial public offering, and it is our intent to continue to do so in the future.

Short-term and Long-term Financing

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. Our ability to access the long-term debt, commercial paper and securitized debt 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 debt ratings. As of February 2, 2013, our credit ratings were as follows:

   
Credit Ratings
   
  Standard and Poor's
   
 
 
  Moody's
  Fitch
 
   

Long-term debt

    A2     A+     A-  

Commercial paper

    P-1     A-1     F2  
   

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 rating will remain the same as described above.

As a measure of our financial condition, we monitor our interest coverage ratio, representing the ratio of pretax earnings before fixed charges to fixed charges. Fixed charges include interest expense and the interest portion of rent expense. Our interest coverage ratio was 6.1x in 2012, 5.9x in 2011 and 6.1x in 2010.

In 2012, we funded our peak sales season working capital needs through internally generated funds. In 2011, we funded our peak sales season working capital needs through our commercial paper program and used the cash generated from that sales season to repay the commercial paper issued.

   
Commercial Paper
   
   
   
 
(dollars in millions)
  2012
  2011
  2010
 
   

Maximum daily amount outstanding during the year

  $ 970   $ 1,211   $  

Average amount outstanding during the year

    120     244      

Amount outstanding at year-end

    970          

Weighted average interest rate

    0.16 %   0.11 %   %
   

We have additional liquidity through a committed $2.25 billion revolving credit facility obtained in October 2011 and expiring in October 2017. No balances were outstanding at any time during 2012 or 2011 under this facility.

Most of our long-term debt obligations contain covenants related to secured debt levels. Our credit facility also contains a debt leverage covenant. We are, and expect to remain, in compliance with these covenants, and these covenants have no practical effect on our ability to pay dividends. Additionally, at February 2, 2013, 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.

We believe our sources of liquidity will continue to be adequate to maintain operations, finance anticipated expansion and strategic initiatives, pay dividends and continue purchases under our share repurchase program for the foreseeable future. We continue to anticipate ample access to commercial paper and long-term financing.

24


Table of Contents

Capital Expenditures

   
 
  2012   2011    
 
Capital Expenditures (a)
   
   
   
   
   
   
   
 
(millions)
  U.S.
  Canada
  Total
  U.S.
  Canada
  Total
  2010
 
   

New stores

  $ 673   $ 417   $ 1,090   $ 439   $ 1,619   $ 2,058   $ 574  

Store remodels and expansions

    690         690     1,289         1,289     966  

Information technology, distribution and other

    982     515     1,497     748     273     1,021     589  
   

Total

  $ 2,345   $ 932   $ 3,277   $ 2,476   $ 1,892   $ 4,368   $ 2,129  
   
(a)
See Note 29 to our Consolidated Financial Statements for capital expenditures by segment.

The decrease in capital expenditures in 2012 from the prior year was primarily driven by the purchase of Zellers leases in Canada in 2011 and fewer store remodels in the U.S. in 2012, partially offset by continued investment in new stores in the U.S. and Canada and technology and multichannel investments. We expect approximately $3.8 billion of capital expenditures in 2013, reflecting an estimated $2.3 billion in our U.S. Segment and approximately $1.5 billion in our Canadian Segment.

Commitments and Contingencies

   
 
  Payments Due by Period  
Contractual Obligations
as of February 2, 2013
(millions)
 
  Total
  Less than
1 Year

  1-3
Years

  3-5
Years

  After 5
Years

 
   

Recorded contractual obligations:

                               

Long-term debt (a)

                               

Unsecured

  $ 13,179   $ 501   $ 1,028   $ 3,002   $ 8,648  

Nonrecourse

    1,500     1,500              

Capital lease obligations (b)

    4,997     136     323     294     4,244  

Real estate liabilities (c)

    316     316              

Deferred compensation (d)

    505     41     88     99     277  

Tax contingencies (e)

                     

Unrecorded contractual obligations:

                               

Interest payments – long-term debt

                               

Unsecured

    10,805     666     1,309     1,213     7,617  

Nonrecourse

    7     7              

Operating leases (b)

    4,029     179     343     312     3,195  

Real estate obligations (f)

    812     620     192          

Purchase obligations (g)

    1,472     685     646     40     101  

Future contributions to retirement plans (h)

                     
   

Contractual obligations

  $ 37,622   $ 4,651   $ 3,929   $ 4,960   $ 24,082  
   
(a)
Represents principal payments only, and excludes any fair market value adjustments recorded in long-term debt under derivative and hedge accounting rules. See Note 20 of the Notes to Consolidated Financial Statements for further information.
(b)
Total contractual lease payments include $3,323 million and $2,039 million of capital and operating lease payments, respectively, related to options to extend the lease term that are reasonably assured of being exercised. These payments also include $947 million and $181 million of legally binding minimum lease payments for stores that are expected to open in 2013 or later for capital and operating leases, respectively. Capital lease obligations include interest. See Note 22 of the Notes to Consolidated Financial Statements for further information.
(c)
Real estate liabilities include costs incurred but not paid related to the construction or remodeling of real estate and facilities.
(d)
Deferred compensation obligations include commitments related to our nonqualified deferred compensation plans. The timing of deferred compensation payouts is estimated based on payments currently made to former employees and retirees, forecasted investment returns, and the projected timing of future retirements.

25


Table of Contents

(e)
Estimated tax contingencies of $280 million, including interest and penalties, are not included in the table above because we are not able to make reasonably reliable estimates of the period of cash settlement. See Note 23 of the Notes to Consolidated Financial Statements for further information.
(f)
Real estate obligations include commitments for the purchase, construction or remodeling of real estate and facilities.
(g)
Purchase obligations include all legally binding contracts such as firm minimum commitments for inventory purchases, merchandise royalties, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. We issue inventory purchase orders in the normal course of business, which represent authorizations to purchase that are cancelable by their terms. We do not consider purchase orders to be firm inventory commitments; therefore, they are excluded from the table above. If we choose to cancel a purchase order, we may be obligated to reimburse the vendor for unrecoverable outlays incurred prior to cancellation. We also issue trade letters of credit in the ordinary course of business, which are excluded from this table as these obligations are conditioned on terms of the letter of credit being met.
(h)
We have not included obligations under our pension and postretirement health care benefit plans in the contractual obligations table above because no additional amounts are required to be funded as of February 2, 2013. Our historical practice regarding these plans has been to contribute amounts necessary to satisfy minimum pension funding requirements, plus periodic discretionary amounts determined to be appropriate.

Off Balance Sheet Arrangements:    Other than the unrecorded contractual obligations above, we do not have any arrangements or relationships with entities that are not consolidated into the financial statements.

Critical Accounting Estimates

Our analysis of operations and financial condition is based on our consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). Preparation of these consolidated financial statements requires us to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the consolidated financial statements, reported amounts of revenues and expenses during the reporting period and related disclosures of contingent assets and liabilities. In the Notes to Consolidated Financial Statements, we describe the significant accounting policies used in preparing the consolidated financial statements. Our estimates are evaluated on an ongoing basis and are drawn from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results could differ under other assumptions or conditions. However, we do not believe there is a reasonable likelihood that there will be a material change in future estimates or assumptions. Our senior management has discussed the development and selection of our critical accounting estimates with the Audit Committee of our Board of Directors. The following items in our consolidated financial statements require significant estimation or judgment:

Inventory and cost of sales:    We use the retail inventory method to account for the majority of our inventory and the related cost of sales. Under this method, inventory is stated at cost using the last-in, first-out (LIFO) method as determined by applying a cost-to-retail ratio to each merchandise grouping's ending retail value. The cost of our inventory includes the amount we pay to our suppliers to acquire inventory, freight costs incurred in connection with the delivery of product to our distribution centers and stores, and import costs, reduced by vendor income and cash discounts. The majority of our distribution center operating costs, including compensation and benefits, are expensed in the period incurred. Since inventory value is adjusted regularly to reflect market conditions, our inventory methodology reflects the lower of cost or market. We reduce inventory for estimated losses related to shrink and markdowns. Our shrink estimate is based on historical losses verified by ongoing physical inventory counts. Historically, our actual physical inventory count results have shown our estimates to be reliable. Markdowns designated for clearance activity are recorded when the salability of the merchandise has diminished. Inventory is at risk of obsolescence if economic conditions change, including changing consumer demand, guest preferences, changing consumer credit markets or increasing competition. We believe these risks are largely mitigated because our inventory typically turns in less than three months. Inventory was $7,903 million and $7,918 million at February 2, 2013 and January 28, 2012, respectively, and is further described in Note 12 of the Notes to Consolidated Financial Statements.

26


Table of Contents

Vendor income receivable:    Cost of sales and SG&A expenses are partially offset by various forms of consideration received from our vendors. This "vendor income" is earned for a variety of vendor-sponsored programs, such as volume rebates, markdown allowances, promotions and advertising allowances, as well as for our compliance programs. We establish a receivable for the vendor income that is earned but not yet received. Based on the agreements in place, this receivable is computed by estimating when we have completed our performance and when the amount is earned. The majority of all year-end vendor income receivables are collected within the following fiscal quarter, and we do not believe there is a reasonable likelihood that the assumptions used in our estimate will change significantly. Historically, adjustments to our vendor income receivable have not been material. Vendor income receivable was $621 million and $592 million at February 2, 2013 and January 28, 2012, respectively, and is described further in Note 4 of the Notes to Consolidated Financial Statements.

Credit card receivables accounting:    Historically, our credit card receivables were recorded at par value less an allowance for doubtful accounts. When receivables were recorded, we recognized an allowance for doubtful accounts in an amount equal to anticipated future write-offs. The allowance included provisions for uncollectible finance charges and other credit-related fees. We estimated future write-offs based on historical experience of delinquencies, risk scores, aging trends and industry risk trends. Accounts were automatically written off when they became 180 days past due. Management believes the allowance for doubtful accounts was appropriate to cover anticipated losses in our credit card accounts receivable; however, unexpected, significant deterioration in any of the factors mentioned above or in general economic conditions could have materially changed these expectations.

As of February 2, 2013, our consumer credit card receivables are recorded at the lower of cost (par) or fair value because they are classified as held for sale as a result of the credit card receivables transaction. Lower of cost (par) or fair value is determined on a segmented basis using the delinquency and credit-quality segmentation we have historically used to determine the allowance for doubtful accounts. Many nondelinquent balances are recorded at cost (par) because fair value exceeds cost. Delinquent balances are generally recorded at fair value, which reflects our expectation of losses on these receivables. Refer to Note 11 of the Notes to Consolidated Financial Statements for more information on our credit card receivables.

Long-lived assets:    Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. An impairment loss would be recognized when estimated undiscounted future cash flows from the operation and/or disposition of the assets are less than their carrying amount. Measurement of an impairment loss would be based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using discounted cash flows or independent opinions of value, as appropriate. A 10 percent decrease in the fair value of assets we intend to sell or close as of February 2, 2013 would result in additional impairment of $4 million in 2012. Historically, we have not realized material losses upon sale of long-lived assets.

Insurance/self-insurance:    We retain a substantial portion of the risk related to certain general liability, workers' compensation, property loss and team member medical and dental claims. However, we maintain stop-loss coverage to limit the exposure related to certain risks. Liabilities associated with these losses include estimates of both claims filed and losses incurred but not yet reported. We use actuarial methods which consider a number of factors to estimate our ultimate cost of losses. General liability and workers' compensation liabilities are recorded at our estimate of their net present value; other liabilities referred to above are not discounted. Our workers' compensation and general liability accrual was $627 million and $646 million at February 2, 2013 and January 28, 2012, respectively. We believe that the amounts accrued are appropriate; however, our liabilities could be significantly affected if future occurrences or loss developments differ from our assumptions. For example, a 5 percent increase or decrease in average claim costs would impact our self-insurance expense by $31 million in 2012. Historically, adjustments to our estimates have not been material. Refer to Item 7A for further disclosure of the market risks associated with these exposures.

27


Table of Contents

Income taxes:    We pay income taxes based on the tax statutes, regulations and case law of the various jurisdictions in which we operate. Significant judgment is required in determining the timing and amounts of deductible and taxable items, and in evaluating the ultimate resolution of tax matters in dispute with tax authorities. The benefits of uncertain tax positions are recorded in our financial statements only after determining it is likely the uncertain tax positions would withstand challenge by taxing authorities. We periodically reassess these probabilities, and record any changes in the financial statements as deemed appropriate. Liabilities for uncertain tax positions, including interest and penalties, were $280 million and $318 million at February 2, 2013 and January 28, 2012, respectively. We believe the resolution of these matters will not have a material adverse impact on our consolidated financial statements. Income taxes are described further in Note 23 of the Notes to Consolidated Financial Statements.

Pension and postretirement health care accounting:    We maintain a funded qualified defined benefit pension plan, as well as several smaller and unfunded nonqualified plans and a postretirement health care plan for certain current and retired team members. The costs for these plans are determined based on actuarial calculations using the assumptions described in the following paragraphs. Eligibility and the level of benefits varies depending on team members' full-time or part-time status, date of hire and/or length of service. The benefit obligation and related expense for these plans are determined based on actuarial calculations using assumptions about the expected long-term rate of return, the discount rate and compensation growth rates. The assumptions used to determine the period-end benefit obligation also establish the expense for the next year, with adjustments made for any significant plan or participant changes.

Our expected long-term rate of return on plan assets of 8.0 percent is determined by the portfolio composition, historical long-term investment performance and current market conditions. Our compound annual rate of return on qualified plans' assets was 5.7 percent, 10.0 percent, 7.8 percent and 9.5 percent for the 5-year, 10-year, 15-year and 20-year periods, respectively. A one percentage point decrease in our expected long-term rate of return would increase annual expense by $27 million.

The discount rate used to determine benefit obligations is adjusted annually based on the interest rate for long-term high-quality corporate bonds, using yields for maturities that are in line with the duration of our pension liabilities. Our benefit obligation and related expense will fluctuate with changes in interest rates. A 0.5 percentage point decrease to the weighted average discount rate would increase annual expense by $28 million.

Based on our experience, we use a graduated compensation growth schedule that assumes higher compensation growth for younger, shorter-service pension-eligible team members than it does for older, longer-service pension-eligible team members.

Pension and postretirement health care benefits are further described in Note 28 of the Notes to Consolidated Financial Statements.

Legal 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. Historically, adjustments to our estimates have not been material. 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 have a material adverse impact on our results of operations, cash flows or financial condition. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there may be a material adverse impact on the results of operations, cash flows or financial condition for the period in which the ruling occurs, or future periods.

New Accounting Pronouncements

We do not expect that any recently issued accounting pronouncements will have a material effect on our financial statements.

28


Table of Contents

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 U.S. Credit Card Segment, aggregate portfolio risks; for our Canadian Segment, the timing and amount of future capital investments in Canada and our subsequent financial performance; on a consolidated basis, statements regarding the adequacy of and costs associated with our sources of liquidity, the fair value of our consumer credit card receivables, the pending sale of these receivables and related gain, including beneficial interest, the application of proceeds from the sale and the impact on our future results of operations, earnings and rates, the continued execution of our share repurchase program, our expected capital expenditures, the expected effective income tax rate, the expected compliance with debt covenants, the expected impact of new accounting pronouncements, our intentions regarding future dividends, contributions and payments related to our pension and postretirement health care plans, the expected returns on pension plan assets, the impact of future changes in foreign currency exchange rates, the expected changes in gross margin and SG&A rates, the effects of macroeconomic conditions, the adequacy of our reserves for general liability, workers' compensation and property loss, the expected outcome of claims and litigation, the expected ability to recognize deferred tax assets and liabilities, including foreign net operating loss carryforwards, and the resolution of tax matters.

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 this Form 10-K, 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 7A.    Quantitative and Qualitative Disclosures About Market Risk

At February 2, 2013, our exposure to market risk was primarily from interest rate changes on our debt obligations, some of which are at a LIBOR-plus floating-rate, and on our credit card receivables, the majority of which are assessed finance charges at a Prime-based floating-rate. Historically, to manage our net interest margin, we generally maintained levels of floating-rate debt to generate similar changes in net interest expense as finance charge revenues fluctuated. The degree of floating asset and liability matching varied over time and in different interest rate environments. At February 2, 2013, the amount of floating-rate credit card assets exceeded the amount of net floating-rate debt obligations by approximately $1 billion. See further description of our debt and derivative instruments in Notes 20 and 21 of the Notes to Consolidated Financial Statements. As a result of the sale of our consumer credit card portfolio, funding risk was transferred to TD Bank Group. Following the sale, our interest rate exposure will primarily be due to the extent by which our floating rate debt obligations differ from our floating rate short term investments. In general, we expect our floating rate debt to exceed our floating rate short term investments over time but that may vary in different interest rate environments.

We record our general liability and workers' compensation liabilities at net present value; therefore, these liabilities fluctuate with changes in interest rates. Periodically, in certain interest rate environments, we economically hedge a portion of our exposure to these interest rate changes by entering into interest rate forward contracts that partially mitigate the effects of interest rate changes. Based on our balance sheet position at February 2, 2013, the annualized effect of a 0.5 percentage point decrease in interest rates would be to decrease earnings before income taxes by $9 million.

In addition, we are exposed to market return fluctuations on our qualified defined benefit pension plans. A 0.5 percentage point decrease to the weighted average discount rate would increase annual expense by $28 million. The value of our pension liabilities is inversely related to changes in interest rates. To protect against

29


Table of Contents

declines in interest rates, we hold high-quality, long-duration bonds and interest rate swaps in our pension plan trust. At year-end, we had hedged 36 percent of the interest rate exposure of our funded status.

As more fully described in Note 15 and Note 27 of the Notes to Consolidated Financial Statements, we are exposed to market returns on accumulated team member balances in our nonqualified, unfunded deferred compensation plans. We control the risk of offering the nonqualified plans by making investments in life insurance contracts and prepaid forward contracts on our own common stock that offset a substantial portion of our economic exposure to the returns on these plans. The annualized effect of a one percentage point change in market returns on our nonqualified defined contribution plans (inclusive of the effect of the investment vehicles used to manage our economic exposure) would not be significant.

We are exposed to market risk associated with foreign currency exchange rate fluctuations. We will be further exposed to this risk as we commence Canadian operations during 2013. During 2012 and 2011, gains and losses due to fluctuations in exchange rates were not significant as all stores were located in the United States, and the vast majority of imported merchandise was purchased in U.S. dollars.

There have been no other material changes in our primary risk exposures or management of market risks since the prior year.

30


Table of Contents

Item 8.   Financial Statements and Supplementary Data

Report of Management on the Consolidated Financial Statements

Management is responsible for the consistency, integrity and presentation of the information in the Annual Report. The consolidated financial statements and other information presented in this Annual Report have been prepared in accordance with accounting principles generally accepted in the United States and include necessary judgments and estimates by management.

To fulfill our responsibility, we maintain comprehensive systems of internal control designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with established procedures. The concept of reasonable assurance is based upon recognition that the cost of the controls should not exceed the benefit derived. We believe our systems of internal control provide this reasonable assurance.

The Board of Directors exercised its oversight role with respect to the Corporation's systems of internal control primarily through its Audit Committee, which is comprised of independent directors. The Committee oversees the Corporation's systems of internal control, accounting practices, financial reporting and audits to assess whether their quality, integrity and objectivity are sufficient to protect shareholders' investments.

In addition, our consolidated financial statements have been audited by Ernst & Young LLP, independent registered public accounting firm, whose report also appears on this page.


GRAPHIC
 
GRAPHIC
Gregg W. Steinhafel
Chief Executive Officer and President
March 20, 2013
  John J. Mulligan
Executive Vice President and
Chief Financial Officer

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

The Board of Directors and Shareholders
Target Corporation

We have audited the accompanying consolidated statements of financial position of Target Corporation and subsidiaries (the Corporation) as of February 2, 2013 and January 28, 2012, and the related consolidated statements of operations, comprehensive income, cash flows, and shareholders' investment for each of the three years in the period ended February 2, 2013. Our audits also included the financial statement schedule listed in Item 15(a). These financial statements and schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Target Corporation and subsidiaries at February 2, 2013 and January 28, 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 2, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Corporation's internal control over financial reporting as of February 2, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 20, 2013, expressed an unqualified opinion thereon.

GRAPHIC

Minneapolis, Minnesota

March 20, 2013

31


Table of Contents

Report of Management on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we assessed the effectiveness of our internal control over financial reporting as of February 2, 2013, based on the framework in Internal Control—Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we conclude that the Corporation's internal control over financial reporting is effective based on those criteria.

Our internal control over financial reporting as of February 2, 2013, has been audited by Ernst & Young LLP, the independent registered public accounting firm who has also audited our consolidated financial statements, as stated in their report which appears on this page.


GRAPHIC
 
GRAPHIC
Gregg W. Steinhafel
Chief Executive Officer and President
March 20, 2013
  John J. Mulligan
Executive Vice President and
Chief Financial Officer

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

The Board of Directors and Shareholders
Target Corporation

We have audited Target Corporation and subsidiaries' (the Corporation) internal control over financial reporting as of February 2, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Corporation's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of February 2, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of Target Corporation and subsidiaries as of February 2, 2013 and January 28, 2012, and the related consolidated statements of operations, comprehensive income, cash flows and shareholders' investment for each of the three years in the period ended February 2, 2013, and our report dated March 20, 2013, expressed an unqualified opinion thereon.

GRAPHIC

Minneapolis, Minnesota

March 20, 2013

32


Table of Contents

Consolidated Statements of Operations

   
(millions, except per share data)
  2012
  2011
  2010
 
   

Sales

  $ 71,960   $ 68,466   $ 65,786  

Credit card revenues

    1,341     1,399     1,604  
   

Total revenues

    73,301     69,865     67,390  

Cost of sales

    50,568     47,860     45,725  

Selling, general and administrative expenses

    14,914     14,106     13,469  

Credit card expenses

    467     446     860  

Depreciation and amortization

    2,142     2,131     2,084  

Gain on receivables held for sale

    (161 )        
   

Earnings before interest expense and income taxes

    5,371     5,322     5,252  

Net interest expense

    762     866     757  
   

Earnings before income taxes

    4,609     4,456     4,495  

Provision for income taxes

    1,610     1,527     1,575  
   

Net earnings

  $ 2,999   $ 2,929   $ 2,920  
   

Basic earnings per share

  $ 4.57   $ 4.31   $ 4.03  
   

Diluted earnings per share

  $ 4.52   $ 4.28   $ 4.00  
   

Weighted average common shares outstanding

                   

Basic

    656.7     679.1     723.6  

Diluted

    663.3     683.9     729.4  
   

See accompanying Notes to Consolidated Financial Statements.

33


Table of Contents

Consolidated Statements of Comprehensive Income

   
(millions) (unaudited)
  2012
  2011
  2010
 
   

Net earnings

  $ 2,999   $ 2,929   $ 2,920  

Other comprehensive income/(loss), net of tax

                   

Pension and other benefit liabilities, net of provision/(benefit) for taxes of $58, $(56) and $(3)

    92     (83 )   (4 )

Currency translation adjustment and cash flow hedges, net of provision/(benefit) for taxes of $8, $(11) and $3

    13     (17 )   4  
   

Other comprehensive income/(loss)

    105     (100 )    
   

Comprehensive income

  $ 3,104   $ 2,829   $ 2,920  
   

See accompanying Notes to Consolidated Financial Statements.

34


Table of Contents

Consolidated Statements of Financial Position

   
(millions, except footnotes)
  February 2, 2013
  January 28, 2012
 
   

Assets

             

Cash and cash equivalents, including short-term investments of $130 and $194

  $ 784   $ 794  

Credit card receivables, held for sale

    5,841      

Credit card receivables, net of allowance of $0 and $430

        5,927  

Inventory

    7,903     7,918  

Other current assets

    1,860     1,810  
   

Total current assets

    16,388     16,449  

Property and equipment

             

Land

    6,206     6,122  

Buildings and improvements

    28,653     26,837  

Fixtures and equipment

    5,362     5,141  

Computer hardware and software

    2,567     2,468  

Construction-in-progress

    1,176     963  

Accumulated depreciation

    (13,311 )   (12,382 )
   

Property and equipment, net

    30,653     29,149  

Other noncurrent assets

    1,122     1,032  
   

Total assets

  $ 48,163   $ 46,630  
   

Liabilities and shareholders' investment

             

Accounts payable

  $ 7,056   $ 6,857  

Accrued and other current liabilities

    3,981     3,644  

Unsecured debt and other borrowings

    1,494     3,036  

Nonrecourse debt collateralized by credit card receivables

    1,500     750  
   

Total current liabilities

    14,031     14,287  

Unsecured debt and other borrowings

    14,654     13,447  

Nonrecourse debt collateralized by credit card receivables

        250  

Deferred income taxes

    1,311     1,191  

Other noncurrent liabilities

    1,609     1,634  
   

Total noncurrent liabilities

    17,574     16,522  

Shareholders' investment

             

Common stock

    54     56  

Additional paid-in capital

    3,925     3,487  

Retained earnings

    13,155     12,959  

Accumulated other comprehensive loss

             

Pension and other benefit liabilities

    (532 )   (624 )

Currency translation adjustment and cash flow hedges

    (44 )   (57 )
   

Total shareholders' investment

    16,558     15,821  
   

Total liabilities and shareholders' investment

  $ 48,163   $ 46,630  
   

Common Stock Authorized 6,000,000,000 shares, $0.0833 par value; 645,294,423 shares issued and outstanding at February 2, 2013; 669,292,929 shares issued and outstanding at January 28, 2012.

Preferred Stock Authorized 5,000,000 shares, $0.01 par value; no shares were issued or outstanding at February 2, 2013 or January 28, 2012.

See accompanying Notes to Consolidated Financial Statements.

35


Table of Contents

Consolidated Statements of Cash Flows

   
(millions)
  2012
  2011
  2010
 
   

Operating activities

                   

Net earnings

  $ 2,999   $ 2,929   $ 2,920  

Reconciliation to cash flow

                   

Depreciation and amortization

    2,142     2,131     2,084  

Share-based compensation expense

    105     90     109  

Deferred income taxes

    (14 )   371     445  

Bad debt expense (a)

    206     154     528  

Gain on receivables held for sale

    (161 )        

Noncash (gains)/losses and other, net

    14     22     (145 )

Changes in operating accounts:

                   

Accounts receivable originated at Target

    (217 )   (187 )   (78 )

Inventory

    15     (322 )   (417 )

Other current assets

    (123 )   (150 )   (124 )

Other noncurrent assets

    (98 )   43     (212 )

Accounts payable

    199     232     115  

Accrued and other current liabilities

    138     218     149  

Other noncurrent liabilities

    120     (97 )   (103 )
   

Cash flow provided by operations

    5,325     5,434     5,271  
   

Investing activities

                   

Expenditures for property and equipment

    (3,277 )   (4,368 )   (2,129 )

Proceeds from disposal of property and equipment

    66     37     69  

Change in accounts receivable originated at third parties

    254     259     363  

Other investments

    102     (108 )   (47 )
   

Cash flow required for investing activities

    (2,855 )   (4,180 )   (1,744 )
   

Financing activities

                   

Change in commercial paper, net

    970          

Additions to short-term debt

        1,500      

Reductions of short-term debt

    (1,500 )        

Additions to long-term debt

    1,971     1,994     1,011  

Reductions of long-term debt

    (1,529 )   (3,125 )   (2,259 )

Dividends paid

    (869 )   (750 )   (609 )

Repurchase of stock

    (1,875 )   (1,842 )   (2,452 )

Stock option exercises and related tax benefit

    360     89     294  

Other

    (16 )   (6 )    
   

Cash flow required for financing activities

    (2,488 )   (2,140 )   (4,015 )
   

Effect of exchange rate changes on cash and cash equivalents

    8     (32 )    
   

Net decrease in cash and cash equivalents

    (10 )   (918 )   (488 )

Cash and cash equivalents at beginning of period

    794     1,712     2,200  
   

Cash and cash equivalents at end of period

  $ 784   $ 794   $ 1,712  
   

    

                            
   

Supplemental information

                   

Interest paid, net of capitalized interest

  $ 775   $ 816   $ 752  

Income taxes paid

    1,603     1,109     1,259  

Noncash financing activities

                   

Property and equipment acquired through capital lease obligations

    282     1,388     176  
   
(a)
Includes both bad debt expense on credit card receivables through the end of the third quarter of 2012 and net write-offs of credit card receivables during the fourth quarter of 2012.

See accompanying Notes to Consolidated Financial Statements.

36


Table of Contents

Consolidated Statements of Shareholders' Investment

   
(millions, except footnotes)
  Common
Stock
Shares

  Stock
Par
Value

  Additional
Paid-in
Capital

  Retained
Earnings

  Accumulated Other
Comprehensive
Income/(Loss)

  Total
 
   

January 30, 2010

    744.6     $62     $2,919     $12,947     $(581 )   $15,347  

Net earnings

                2,920         2,920  

Other comprehensive income

                         

Dividends declared

                (659 )       (659 )

Repurchase of stock

    (47.8 )   (4 )       (2,510 )       (2,514 )

Stock options and awards

    7.2     1     392             393  
   

January 29, 2011

    704.0   $ 59   $ 3,311   $ 12,698   $ (581 ) $ 15,487  

Net earnings

                2,929         2,929  

Other comprehensive income

                    (100 )   (100 )

Dividends declared

                (777 )       (777 )

Repurchase of stock

    (37.2 )   (3 )       (1,891 )       (1,894 )

Stock options and awards

    2.5         176             176  
   

January 28, 2012

    669.3   $ 56   $ 3,487   $ 12,959   $ (681 ) $ 15,821  

Net earnings

                2,999         2,999  

Other comprehensive income

                    105     105  

Dividends declared

                (903 )       (903 )

Repurchase of stock

    (32.2 )   (3 )       (1,900 )       (1,903 )

Stock options and awards

    8.2     1     438             439  
   

February 2, 2013

    645.3   $ 54   $ 3,925   $ 13,155   $ (576 ) $ 16,558  
   

Dividends declared per share were $1.38, $1.15 and $0.92 in 2012, 2011 and 2010, respectively.

See accompanying Notes to Consolidated Financial Statements.

37


Table of Contents

Notes to Consolidated Financial Statements

1. Summary of Accounting Policies

Organization    Target Corporation (Target, the Corporation, or the Company) operates three reportable segments: U.S. Retail, U.S. Credit Card and Canadian. Our U.S. Retail Segment includes all of our U.S. merchandising operations. Our U.S. Credit Card Segment offers credit to qualified guests through our branded proprietary credit cards: the Target Credit Card and the Target Visa (Target Credit Cards). Additionally, we offer a branded proprietary Target Debit Card. Collectively, we refer to these products as REDcards®, which strengthen the bond with our guests, drive incremental sales and contribute to our profitability. Our Canadian Segment was initially reported in the first quarter of 2011 as a result of our purchase of leasehold interests in Canada from Zellers, Inc. (Zellers). This segment includes costs incurred in the U.S. and Canada related to our 2013 Canadian retail market entry.

Consolidation    The consolidated financial statements include the balances of the Corporation and its subsidiaries after elimination of intercompany balances and transactions. All material subsidiaries are wholly owned. We consolidate variable interest entities where it has been determined that the Corporation is the primary beneficiary of those entities' operations, including a bankruptcy remote subsidiary through which we sell certain accounts receivable as a method of providing funding for our accounts receivable.

Use of estimates    The preparation of our consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions affecting reported amounts in the consolidated financial statements and accompanying notes. Actual results may differ significantly from those estimates.

Fiscal year    Our fiscal year ends on the Saturday nearest January 31. Unless otherwise stated, references to years in this report relate to fiscal years, rather than to calendar years. Fiscal 2012 ended February 2, 2013 and consisted of 53 weeks. Fiscal 2011 ended January 28, 2012, and consisted of 52 weeks. Fiscal 2010 ended January 29, 2011, and consisted of 52 weeks. Fiscal 2013 will end February 1, 2014, and will consist of 52 weeks.

Accounting policies    Our accounting policies are disclosed in the applicable Notes to the Consolidated Financial Statements.

2. Revenues

Our retail stores generally record revenue at the point of sale. Sales from our online and mobile applications include shipping revenue and are recorded upon delivery to the guest. Total revenues do not include sales tax because we are a pass-through conduit for collecting and remitting sales taxes. Generally, guests may return merchandise within 90 days of purchase. Revenues are recognized net of expected returns, which we estimate using historical return patterns as a percentage of sales. Commissions earned on sales generated by leased departments are included within sales and were $25 million, $22 million and $20 million in 2012, 2011 and 2010, respectively.

Revenue from gift card sales is recognized upon gift card redemption. Our gift cards do not have expiration dates. Based on historical redemption rates, a small and relatively stable percentage of gift cards will never be redeemed, referred to as "breakage." Estimated breakage revenue is recognized over time in proportion to actual gift card redemptions and was not material in any period presented.

Credit card revenues are recognized according to the contractual provisions of each credit card agreement. When accounts are written off, uncollected finance charges and late fees are recorded as a reduction of credit card revenues. Target retail sales charged on our credit cards totaled $5,807 million, $4,686 million and $3,455 million in 2012, 2011 and 2010, respectively.

38


Table of Contents

Since October 2010, guests receive a 5-percent discount on virtually all purchases at checkout every day when they use a REDcard. In November 2011, guests also began to receive free shipping at Target.com when they use their REDcard. The discounts associated with loyalty programs are included as reductions in sales in our Consolidated Statements of Operations and were $583 million, $340 million and $162 million in 2012, 2011 and 2010, respectively.

3. Cost of Sales and Selling, General and Administrative Expenses

The following table illustrates the primary costs classified in each major expense category:

 
Cost of Sales
  Selling, General and Administrative Expenses
 

Total cost of products sold including
•   Freight expenses associated with moving
    merchandise from our vendors to our
    distribution centers and our retail stores, and
    among our distribution and retail facilities
•   Vendor income that is not reimbursement of
    specific, incremental and identifiable costs
Inventory shrink
Markdowns
Outbound shipping and handling expenses
    associated with sales to our guests
Payment term cash discounts
Distribution center costs, including compensation
    and benefits costs
Import cost
    

 

Compensation and benefit costs including
•   Stores
•   Headquarters
Occupancy and operating costs of retail and
    headquarters facilities
Advertising, offset by vendor income that is a
    reimbursement of specific, incremental and
    identifiable costs
Pre-opening costs of stores and other facilities
Other administrative costs

 
Note:
The classification of these expenses varies across the retail industry.

4. Consideration Received from Vendors

We receive consideration for a variety of vendor-sponsored programs, such as volume rebates, markdown allowances, promotions and advertising allowances and for our compliance programs, referred to as "vendor income." Vendor income reduces either our inventory costs or SG&A expenses based on the provisions of the arrangement. Promotional and advertising allowances are intended to offset our costs of promoting and selling merchandise in our stores. Under our compliance programs, vendors are charged for merchandise shipments that do not meet our requirements (violations), such as late or incomplete shipments. These allowances are recorded when violations occur. Substantially all consideration received is recorded as a reduction of cost of sales.

We establish a receivable for vendor income that is earned but not yet received. Based on provisions of the agreements in place, this receivable is computed by estimating the amount earned when we have completed our performance. We perform detailed analyses to determine the appropriate level of the receivable in the aggregate. The majority of year-end receivables associated with these activities are collected within the following fiscal quarter. We have not historically had significant write-offs for these receivables.

39


Table of Contents

5. Advertising Costs

Advertising costs, which primarily consist of newspaper circulars, internet advertisements and media broadcast, are expensed at first showing or distribution of the advertisement, and are recorded net of related vendor income.

   
Advertising Costs
(millions)
  2012
  2011
  2010
 
   

Gross advertising costs

  $ 1,653   $ 1,589   $ 1,490  

Vendor income

    231     229     198  
   

Net advertising costs

  $ 1,422   $ 1,360   $ 1,292  
   

6. Earnings per Share

Basic earnings per share (EPS) is calculated as net earnings divided by the weighted average number of common shares outstanding during the period. Diluted EPS includes the potentially dilutive impact of share-based awards outstanding at period end, consisting of the incremental shares assumed to be issued upon the exercise of stock options and the incremental shares assumed to be issued under performance share and restricted stock unit arrangements.

   
Earnings Per Share
(millions, except per share data)
  2012
  2011
  2010
 
   

Net earnings

  $ 2,999   $ 2,929   $ 2,920  
   

Basic weighted average common shares outstanding

    656.7     679.1     723.6  

Dilutive impact of share-based awards (a)

    6.6     4.8     5.8  
   

Dilutive weighted average common shares outstanding

    663.3     683.9     729.4  
   

Basic earnings per share

  $ 4.57   $ 4.31   $ 4.03  

Dilutive earnings per share

  $ 4.52   $ 4.28   $ 4.00  
   
(a)
Excludes 5.0 million, 15.5 million and 10.9 million share-based awards for 2012, 2011 and 2010, respectively, because their effects were antidilutive.

7. Credit Card Receivables Transaction

On October 22, 2012, we reached an agreement to sell our entire consumer credit card portfolio to TD Bank Group (TD) for cash consideration equal to the gross (par) value of the outstanding receivables at the time of closing. Historically, our credit card receivables were recorded at par value less an allowance for doubtful accounts. With this agreement, our receivables are classified as held for sale at February 2, 2013, and are recorded at the lower of cost (par) or fair value. We recorded a gain of $161 million outside of our segments in 2012, representing the net adjustment to eliminate our allowance for doubtful accounts and record our receivables at lower of cost (par) or fair value.

On March 13, 2013, we completed the sale to TD for cash consideration of $5.7 billion, equal to the gross (par) value of the outstanding receivables at the time of closing. Subsequent to year-end, and concurrent with the sale of the portfolio, we repaid the nonrecourse debt collateralized by credit card receivables (2006/2007 Series Variable Funding Certificate) at par of $1.5 billion, resulting in net cash proceeds of $4.2 billion. As of March 20, 2013, we also have open tender offers to use up to an aggregate of $1.2 billion of cash proceeds from the sale to repurchase outstanding debt.

Following this sale, TD will underwrite, fund and own Target Credit Card and Target Visa receivables in the U.S. TD will control risk management policies and oversee regulatory compliance, and we will perform account servicing and primary marketing functions. We will earn a substantial portion of the profits generated by the Target Credit Card and Target Visa portfolios. This transaction will be accounted for as a sale, and the receivables will no longer be reported on our Consolidated Statements of Financial Position.

40


Table of Contents

Beginning with the first quarter of 2013, we will no longer report a U.S. Credit Card Segment. Income from the profit-sharing arrangement, net of account servicing expenses, will be recognized as an offset to SG&A expenses.

8. Canadian Leasehold Acquisition

During 2011, we purchased the leasehold interests in 189 sites operated by Zellers in Canada, in exchange for $1,861 million. In addition, we sold our right to acquire the leasehold interests in 54 of these sites to third-parties for a total of $225 million. These transactions resulted in a final net purchase price of $1,636 million, which was included in expenditures for property and equipment in the Consolidated Statements of Cash Flows.

As a result of the acquisition, the following net assets were recorded in our Canadian Segment: buildings and improvements of $2,887 million; finite-lived intangible assets of $23 million; unsecured debt and other borrowings of $1,274 million. The finite-lived intangible assets are recorded in other noncurrent assets on the Consolidated Statements of Financial Position and have an amortization period ranging from 3-13 years.

The acquired sites were subleased back to Zellers for various terms, which all end no later than March 31, 2013.

9. Fair Value Measurements

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).

   
Fair Value Measurements – Recurring Basis
  Fair Value at February 2, 2013   Fair Value at January 28, 2012  
(millions)
  Level 1
  Level 2
  Level 3
  Level 1
  Level 2
  Level 3
 
   

Assets

                                     

Cash and cash equivalents

                                     

Short-term investments

  $ 130   $   $   $ 194   $   $  

Other current assets

                                     

Interest rate swaps (a)

        4             20      

Prepaid forward contracts

    73             69          

Other noncurrent assets

                                     

Interest rate swaps (a)

        85             114      

Company-owned life insurance investments (b)

        269             371      
   

Total

  $ 203   $ 358   $   $ 263   $ 505   $  
   

Liabilities

                                     

Other current liabilities

                                     

Interest rate swaps (a)

  $   $ 2   $   $   $ 7   $  

Other noncurrent liabilities

                                     

Interest rate swaps (a)

  $   $ 54   $   $   $ 69   $  
   

Total

  $   $ 56   $   $   $ 76   $  
   
(a)
There was one interest rate swap designated as an accounting hedge at February 2, 2013 and January 28, 2012. See Note 21 for additional information on interest rate swaps.
(b)
Company-owned life insurance investments consist of equity index funds and fixed income assets. Amounts are presented net of nonrecourse loans that are secured by some of these policies. These loan amounts were $817 million at February 2, 2013 and $669 million at January 28, 2012.

41


Table of Contents

   
  Position
  Valuation Technique
   
 

Short-term investments

  Carrying value 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.

   

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 and would be classified as Level 1. The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for similar types of financial instruments and would be classified as Level 2.

   
Financial Instruments Not Measured at Fair Value
  February 2, 2013   January 28, 2012  
(millions)
  Carrying
Amount

  Fair
Value

  Carrying
Amount

  Fair
Value

 
   

Financial assets

                         

Other current assets

                         

Marketable securities (a)

  $ 61   $ 61   $ 35   $ 35  

Other noncurrent assets

                         

Marketable securities (a)

    4     4     6     6  
   

Total

  $ 65   $ 65   $ 41   $ 41  
   

Financial liabilities

                         

Total debt (b)

  $ 15,618   $ 18,143   $ 15,680   $ 18,142  
   

Total

  $ 15,618   $ 18,143   $ 15,680   $ 18,142  
   
(a)
Represents held-to-maturity investments and cash equivalents 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.

As of February 2, 2013, our consumer credit card receivables are recorded at the lower of cost (par) or fair value because they are classified as held for sale. We estimated the fair value of our consumer credit card portfolio to be approximately $6.3 billion using a cash flow-based, economic-profit model using Level 3 inputs, including the forecasted performance of the portfolio and a market-based discount rate. We used internal data to forecast expected payment patterns and write-offs, revenue, and operating expenses (credit EBIT yield) related to the credit card portfolio. Changes in macroeconomic conditions in the United States could affect the estimated fair value used in our lower of cost (par) or fair value assessment, which could cause gains or losses on our receivables held for sale. A one percentage point change in the forecasted credit EBIT yield would impact our fair value estimate by approximately $37 million. A one percentage point change in the forecasted discount rate would impact our fair value estimate by approximately $8 million. Refer to Note 7 for more information on our credit card receivables transaction. As of January 28, 2012, we estimated that the fair value of our credit card receivables approximated par value.

The carrying amounts of accounts payable and certain accrued and other current liabilities approximate fair value due to their short-term nature.

42


Table of Contents

10. Cash Equivalents

Cash equivalents include highly liquid investments with an original maturity of three months or less from the time of purchase. These investments were $130 million and $194 million at February 2, 2013 and January 28, 2012, respectively. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions. These receivables typically settle in less than five days and were $371 million and $330 million at February 2, 2013 and January 28, 2012, respectively. Payables due to Visa resulting from the use of Target Visa Cards are included within cash equivalents and were $34 million and $35 million at February 2, 2013 and January 28, 2012, respectively.

11. Credit Card Receivables

Historically, our credit card receivables were recorded at par value less an allowance for doubtful accounts. As of February 2, 2013, our consumer credit card receivables are recorded at the lower of cost (par) or fair value because they are classified as held for sale. Lower of cost (par) or fair value was determined on a segmented basis using the delinquency and credit-quality segmentation we have historically used to determine the allowance for doubtful accounts. Many nondelinquent balances are recorded at cost (par) because fair value exceeds cost. Delinquent balances are generally recorded at fair value, which reflects our expectation of losses on these receivables. Refer to Note 7 for more information on our credit card receivables transaction.

Credit card receivables are our only significant class of financing receivables. Substantially all past-due accounts accrue finance charges until they are written off. Accounts are written off when they become 180 days past due.

   
Age of Credit Card Receivables
  February 2, 2013   January 28, 2012  
(dollars in millions)
  Amount
  Percent of
Receivables

  Amount
  Percent of
Receivables

 
   

Current

  $ 5,614   93.1 % $ 5,791   91.1 %

1-29 days past due

    179   3.0     260   4.1  

30-59 days past due

    70   1.2     97   1.5  

60-89 days past due

    45   0.8     62   1.0  

90+ days past due

    116   1.9     147   2.3  
   

Credit card receivables, at par

  $ 6,024   100 % $ 6,357   100 %

Lower of cost or fair value adjustment

    183              

Allowance for doubtful accounts

            430      
   

Credit card receivables, net

  $ 5,841       $ 5,927      
   

Allowance for Doubtful Accounts

Historically, we recognized an allowance for doubtful accounts in an amount equal to the anticipated future write-offs of existing receivables and uncollectible finance charges and other credit-related fees. We estimated future write-offs on the entire credit card portfolio collectively based on historical experience of delinquencies, risk scores, aging trends and industry risk trends. We continue to recognize an allowance for doubtful accounts and bad debt expense within our U.S. Credit Card Segment, which allows us to evaluate the performance of the

43


Table of Contents

portfolio. The allowance for doubtful accounts is eliminated in consolidation to present the receivables at the lower of cost (par) or fair value.

   
Allowance for Doubtful Accounts
(millions)
  2012
  2011
  2010
 
   

Allowance at beginning of period

  $ 430   $ 690   $ 1,016  

Bad debt expense

    196     154     528  

Write-offs (a)

    (424 )   (572 )   (1,007 )

Recoveries (a)

    133     158     153  
   

Segment allowance at end of period

    335     430     690  

Elimination of segment allowance

    335          
   

Allowance at end of period

  $   $ 430   $ 690  
   
(a)
Write-offs include the principal amount of losses (excluding accrued and unpaid finance charges), and recoveries include current period principal collections on previously written-off balances. These amounts combined represent net write-offs.

We monitor both the credit quality and the delinquency status of the portfolio. We consider accounts 30 or more days past due as delinquent, and we update delinquency status daily. We also monitor risk in the portfolio by assigning internally generated scores to each account and by obtaining current FICO scores, a nationally recognized credit scoring model, for a statistically representative sample of accounts each month. The credit-quality segmentation presented below is consistent with the approach used in determining our allowance for doubtful accounts in our U.S. Credit Card Segment.

   
 
  February 2, 2013   January 28, 2012  
Receivables Credit Quality
   
  Percent of
Receivables

   
  Percent of
Receivables

 
(dollars in millions)
  Amount
  Amount
 
   

Nondelinquent accounts

                     

FICO score of 700 or above

  $ 2,826   46.8 % $ 2,882   45.4 %

FICO score of 600 to 699

    2,387   39.6     2,463   38.7  

FICO score below 600

    580   9.7     706   11.1  
   

Total nondelinquent accounts

    5,793   96.1     6,051   95.2  

Delinquent accounts (30+ days past due)

    231   3.9     306   4.8  
   

Credit card receivables, at par

    6,024   100 %   6,357   100 %

Lower of cost or fair value adjustment

    183              

Allowance for doubtful accounts

            430      
   

Credit card receivables, net

  $ 5,841