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Target 10-Q 2010

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

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

EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2010

 

Commission File Number 1-6049

 


 

 

TARGET CORPORATION

(Exact name of registrant as specified in its charter)

 

Minnesota

 

41-0215170

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1000 Nicollet Mall, Minneapolis, Minnesota

 

55403

(Address of principal executive offices)

 

(Zip Code)

 

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

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

 


 

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

 

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

 

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

 

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

 

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

 

Indicate the number of shares outstanding of each of registrant’s classes of common stock, as of the latest practicable date. Total shares of common stock, par value $.0833, outstanding at August 25, 2010 were 721,447,816.

 



 

TARGET CORPORATION

 

TABLE OF CONTENTS

 

 

PART I

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

Consolidated Statements of Operations

1

 

Consolidated Statements of Financial Position

2

 

Consolidated Statements of Cash Flows

3

 

Consolidated Statements of Shareholders’ Investment

4

 

Notes to Consolidated Financial Statements

5

Item 2.

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

13

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

21

Item 4.

Controls and Procedures

21

 

 

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

22

Item 1A.

Risk Factors

22

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 3.

Defaults Upon Senior Securities

23

Item 4.

Reserved

23

Item 5.

Other Information

23

Item 6.

Exhibits

23

 

 

 

 

 

 

Signature

 

25

Exhibit Index

 

26

 



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Consolidated Statements of Operations

 

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

 

July 31

,

August 1

,

 

 

July 31

,

August 1

,

(millions, except per share data) (unaudited)

 

 

2010

 

2009

 

 

 

2010

 

2009

 

Sales

 

 

$

15,126

 

$

14,567

 

 

 

$

30,283

 

$

28,928

 

Credit card revenues

 

 

406

 

500

 

 

 

841

 

972

 

Total revenues

 

 

15,532

 

15,067

 

 

 

31,124

 

29,900

 

Cost of sales

 

 

10,293

 

9,914

 

 

 

20,705

 

19,851

 

Selling, general and administrative expenses

 

 

3,263

 

3,136

 

 

 

6,405

 

6,150

 

Credit card expenses

 

 

214

 

388

 

 

 

494

 

772

 

Depreciation and amortization

 

 

496

 

478

 

 

 

1,012

 

950

 

Earnings before interest expense and income taxes

 

 

1,266

 

1,151

 

 

 

2,508

 

2,177

 

Net interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecourse debt collateralized by credit card receivables

 

 

21

 

24

 

 

 

44

 

51

 

Other interest expense

 

 

165

 

171

 

 

 

330

 

348

 

Interest income

 

 

(1

)

(1

)

 

 

(1

)

(2

)

Net interest expense

 

 

185

 

194

 

 

 

373

 

397

 

Earnings before income taxes

 

 

1,081

 

957

 

 

 

2,135

 

1,780

 

Provision for income taxes

 

 

402

 

363

 

 

 

785

 

664

 

Net earnings

 

 

$

679

 

$

594

 

 

 

$

1,350

 

$

1,116

 

Basic earnings per share

 

 

$

0.93

 

$

0.79

 

 

 

$

1.84

 

$

1.48

 

Diluted earnings per share

 

 

$

0.92

 

$

0.79

 

 

 

$

1.82

 

$

1.48

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

731.1

 

752.0

 

 

 

735.5

 

752.1

 

Diluted

 

 

736.6

 

754.4

 

 

 

741.1

 

754.2

 

 

See accompanying Notes to Consolidated Financial Statements.

 

1



 

Consolidated Statements of Financial Position

 

 

July 31,

 

January 30

,

August 1,

 

(millions)

 

2010

 

2010

 

2009

 

Assets

 

(unaudited)

 

 

 

(unaudited)

 

Cash and cash equivalents, including marketable securities of $972, $1,617 and $385

 

$

1,540

 

$

2,200

 

$

957

 

Credit card receivables, net of allowance of $851, $1,016 and $1,004

 

6,137

 

6,966

 

7,288

 

Inventory

 

7,728

 

7,179

 

7,528

 

Other current assets

 

1,840

 

2,079

 

1,910

 

Total current assets

 

17,245

 

18,424

 

17,683

 

Property and equipment

 

 

 

 

 

 

 

Land

 

5,845

 

5,793

 

5,726

 

Buildings and improvements

 

22,568

 

22,152

 

21,530

 

Fixtures and equipment

 

4,602

 

4,743

 

4,481

 

Computer hardware and software

 

2,432

 

2,575

 

2,540

 

Construction-in-progress

 

772

 

502

 

978

 

Accumulated depreciation

 

(10,818)

 

(10,485)

 

(9,543)

 

Property and equipment, net

 

25,401

 

25,280

 

25,712

 

Other noncurrent assets

 

1,009

 

829

 

838

 

Total assets

 

$

43,655

 

$

44,533

 

$

44,233

 

Liabilities and shareholders’ investment

 

 

 

 

 

 

 

Accounts payable

 

$

6,228

 

$

6,511

 

$

6,233

 

Accrued and other current liabilities

 

3,057

 

3,120

 

3,004

 

Unsecured debt and other borrowings

 

782

 

796

 

517

 

Nonrecourse debt collateralized by credit card receivables

 

33

 

900

 

56

 

Total current liabilities

 

10,100

 

11,327

 

9,810

 

Unsecured debt and other borrowings

 

11,693

 

10,643

 

11,983

 

Nonrecourse debt collateralized by credit card receivables

 

4,044

 

4,475

 

5,458

 

Deferred income taxes

 

740

 

835

 

494

 

Other noncurrent liabilities

 

1,810

 

1,906

 

1,886

 

Total noncurrent liabilities

 

18,287

 

17,859

 

19,821

 

Shareholders’ investment

 

 

 

 

 

 

 

Common stock

 

60

 

62

 

63

 

Additional paid-in capital

 

3,085

 

2,919

 

2,822

 

Retained earnings

 

12,690

 

12,947

 

12,266

 

Accumulated other comprehensive loss

 

(567)

 

(581)

 

(549)

 

Total shareholders’ investment

 

15,268

 

15,347

 

14,602

 

Total liabilities and shareholders’ investment

 

$

43,655

 

$

44,533

 

$

44,233

 

Common shares outstanding

 

722.6

 

744.6

 

751.9

 

 

See accompanying Notes to Consolidated Financial Statements.

 

2



 

Consolidated Statements of Cash Flows

 

 

 

Six Months Ended

 

 

 

 

July 31

,

August 1

,

(millions) (unaudited)

 

 

2010

 

2009

 

Operating activities

 

 

 

 

 

 

Net earnings

 

 

$

1,350

 

$

1,116

 

Reconciliation to cash flow

 

 

 

 

 

 

Depreciation and amortization

 

 

1,012

 

950

 

Share-based compensation expense

 

 

52

 

48

 

Deferred income taxes

 

 

148

 

64

 

Bad debt expense

 

 

335

 

600

 

Loss/impairment of property and equipment, net

 

 

10

 

74

 

Other non-cash items affecting earnings

 

 

75

 

28

 

Changes in operating accounts providing / (requiring) cash

 

 

 

 

 

 

Accounts receivable originated at Target

 

 

241

 

154

 

Inventory

 

 

(549

)

(823

)

Other current assets

 

 

(76

)

(59

)

Other noncurrent assets

 

 

(106

)

19

 

Accounts payable

 

 

(283

)

(103

)

Accrued and other current liabilities

 

 

(247

)

30

 

Other noncurrent liabilities

 

 

(134

)

(47

)

Cash flow provided by operations

 

 

1,828

 

2,051

 

Investing activities

 

 

 

 

 

 

Expenditures for property and equipment

 

 

(991

)

(1,042

)

Proceeds from disposal of property and equipment

 

 

32

 

24

 

Change in accounts receivable originated at third parties

 

 

254

 

42

 

Other investments

 

 

(20

)

4

 

Cash flow required for investing activities

 

 

(725

)

(972

)

Financing activities

 

 

 

 

 

 

Additions to long-term debt

 

 

997

 

 

Reductions of long-term debt

 

 

(1,339

)

(754

)

Dividends paid

 

 

(252

)

(241

)

Repurchase of stock

 

 

(1,285

)

 

Stock option exercises and related tax benefit

 

 

116

 

9

 

Cash flow required for financing activities

 

 

(1,763

)

(986

)

Net increase/(decrease) in cash and cash equivalents

 

 

(660

)

93

 

Cash and cash equivalents at beginning of period

 

 

2,200

 

864

 

Cash and cash equivalents at end of period

 

 

$

1,540

 

$

957

 

 

See accompanying Notes to Consolidated Financial Statements.

 

3



 

Consolidated Statements of Shareholders’ Investment

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other
Comprehensive
Income/(Loss)

 

 

 

 

(millions, except footnotes)

 

Common
Stock
Shares

 

Stock
Par
Value

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

 

Pension and
Other
Benefit
Liability
Adjustments

 

Derivative
Instruments,
Foreign
Currency
and Other

 

 

Total

 

January 31, 2009

 

752.7

 

$

63

 

$

2,762

 

$

11,443

 

 

$

(510

)

$

(46

)

 

$

13,712

 

Net earnings

 

 

 

 

2,488

 

 

 

 

 

2,488

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

(27

)

 

 

(27

)

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

 

 

 

 

 

 

 

4

 

 

4

 

Currency translation adjustment, net of taxes of $0

 

 

 

 

 

 

 

(2

)

 

(2

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,463

 

Dividends declared

 

 

 

 

(503

)

 

 

 

 

(503

)

Repurchase of stock

 

(9.9

)

(1

)

 

(481

)

 

 

 

 

(482

)

Stock options and awards

 

1.8

 

 

157

 

 

 

 

 

 

157

 

January 30, 2010

 

744.6

 

$

62

 

$

2,919

 

$

12,947

 

 

$

(537

)

$

(44

)

 

$

15,347

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

1,350

 

 

 

 

 

1,350

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other benefit liability adjustments, net of taxes of $7

 

 

 

 

 

 

11

 

 

 

11

 

Net change on cash flow hedges, net of taxes of $1

 

 

 

 

 

 

 

2

 

 

2

 

Currency translation adjustment, net of taxes of $1

 

 

 

 

 

 

 

1

 

 

1

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,364

 

Dividends declared

 

 

 

 

(306

)

 

 

 

 

(306

)

Repurchase of stock

 

(25.1

)

(2

)

 

(1,301

)

 

 

 

 

(1,303

)

Stock options and awards

 

3.1

 

 

166

 

 

 

 

 

 

166

 

July 31, 2010

 

722.6

 

$

60

 

$

3,085

 

$

12,690

 

 

$

(526

)

$

(41

)

 

$

15,268

 

 

Dividends declared per share were $0.25 and $0.17 for the three months ended July 31, 2010, and August 1, 2009, respectively, and $0.42 and $0.33 for the six months ended July 31, 2010 and August 1, 2009, respectively.  For the fiscal year ended January 30, 2010, dividends declared per share were $0.67.

 

See accompanying Notes to Consolidated Financial Statements.

 

4



 

Notes to Consolidated Financial Statements

 

1.     Accounting Policies

 

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

 

Due to the seasonal nature of our business, quarterly revenues, expenses, earnings and cash flows are not necessarily indicative of the results that may be expected for the full year.

 

2.     Earnings Per Share

 

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

 

Earnings Per Share

 

Basic EPS

 

Diluted EPS

 

 

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 

Six Months Ended

 

 

 

July 31,

 

Aug. 1,

 

July 31,

 

Aug. 1,

 

July 31,

 

Aug. 1,

 

July 31,

 

Aug. 1,

 

(millions, except per share data)

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

Net earnings

 

$

679

 

$

594

 

$

1,350

 

$

1,116

 

$

679

 

$

594

 

$

1,350

 

$

1,116

 

Basic weighted average common shares outstanding

 

731.1

 

752.0

 

735.5

 

752.1

 

731.1

 

752.0

 

735.5

 

752.1

 

Incremental stock options, performance share units and restricted stock units

 

 

 

 

 

5.5

 

2.4

 

5.6

 

2.1

 

Weighted average common shares outstanding

 

731.1

 

752.0

 

735.5

 

752.1

 

736.6

 

754.4

 

741.1

 

754.2

 

Earnings per share

 

$

0.93

 

$

0.79

 

$

1.84

 

$

1.48

 

$

0.92

 

$

0.79

 

$

1.82

 

$

1.48

 

 

For the July 31, 2010, and August 1, 2009, computations, 11.6 million and 25.5 million stock options, respectively, were excluded from the calculation of weighted average shares for diluted EPS because their effects were antidilutive.

 

3.     Fair Value Measurements

 

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

 

5



 

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

 

Fair Value Measurements —

 

 

 

 

 

 

 

Recurring Basis

 

Fair Value at

 

Fair Value at

 

Fair Value at

 

 

 

July 31, 2010

 

January 30, 2010

 

August 1, 2009

 

(millions)

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

Level 1

 

Level 2

 

Level 3

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities

 

$

972

 

$

 

$

 

$

1,617

 

$

 

$

 

$

385

 

$

 

$

 

Other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid forward contracts

 

73

 

 

 

79

 

 

 

59

 

 

 

Other noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

 

164

 

 

 

131

 

 

 

131

 

 

Company-owned life insurance investments(b)

 

 

326

 

 

 

305

 

 

 

323

 

 

Total

 

$

1,045

 

$

490

 

$

 

$

1,696

 

$

436

 

$

 

$

444

 

$

454

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other noncurrent liabilities Interest rate swaps(a)

 

$

 

$

66

 

$

 

$

 

$

23

 

$

 

$

 

$

14

 

$

 

Total

 

$

 

$

66

 

$

 

$

 

$

23

 

$

 

$

 

$

14

 

$

 

 

(a)

There were no interest rate swaps designated as accounting hedges at July 31, 2010, January 30, 2010 or August 1, 2009.

(b)

Company-owned life insurance investments consist of equity index funds and fixed income assets. Amounts are presented net of loans of $239 million at July 31, 2010, $244 million at January 30, 2010, and $196 million at August 1, 2009 that are secured by some of these policies.

 

Position

 

Valuation Technique

Marketable securities

 

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

 

 

 

Prepaid forward contracts

 

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

 

 

 

Interest rate swaps/ forward and equity swaps

 

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

 

 

 

Company-owned life insurance investments

 

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

 

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

 

6



 

Fair Value Measurements — Nonrecurring Basis

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

Property and equipment

 

 

 

Long-lived assets held for sale

 

Long-lived assets held and used(a)

 

(millions)

 

Three Months
Ended

 

Six Months
Ended

 

Three Months
Ended

 

Six Months
Ended

 

Measured as of July 31, 2010:

 

 

 

 

 

 

 

 

 

Carrying amount

 

$

2

 

$

2

 

$

39

 

$

62

 

Fair value measurement

 

2

 

2

 

34

 

54

 

Gain/(loss)

 

 

 

(5

)

(8

)

Measured as of August 1, 2009:

 

 

 

 

 

 

 

 

 

Carrying amount

 

15

 

39

 

51

 

62

 

Fair value measurement

 

11

 

30

 

34

 

40

 

Gain/(loss)

 

(4

)

(9

)

(17

)

(22

)

 

(a)

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

 

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

 

Financial Instruments Not Measured at Fair Value

 

July 31, 2010

 

August 1, 2009

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(millions)

 

Amount

 

Value

 

Amount

 

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

Other current assets

 

 

 

 

 

 

 

 

 

Marketable securities(a)

 

$

24

 

$

24

 

$

18

 

$

18

 

Other noncurrent assets

 

 

 

 

 

 

 

 

 

Marketable securities(a)

 

 

 

3

 

3

 

Total

 

$

24

 

$

24

 

$

21

 

$

21

 

Financial liabilities

 

 

 

 

 

 

 

 

 

Total debt(b)

 

$

16,135

 

$

17,953

 

$

17,637

 

$

18,502

 

Total

 

$

16,135

 

$

17,953

 

$

17,637

 

$

18,502

 

 

(a)

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

(b)

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

 

The carrying amounts of credit card receivables, net of allowance, accounts payable, and certain accrued and other current liabilities approximate fair value at July 31, 2010.

 

4.     Credit Card Receivables

 

Credit card receivables are recorded net of an allowance for doubtful accounts. The allowance, recognized in an amount equal to the anticipated future write-offs of existing receivables, was $851 million at July 31, 2010, $1,016 million at January 30, 2010 and $1,004 million at August 1, 2009. This allowance includes provisions for uncollectible finance charges and other credit-related fees. We estimate future write-offs based on historical experience of delinquencies, risk scores, aging trends, and industry risk trends. Substantially all accounts continue to accrue finance charges until they are written off. Total receivables past due ninety days or more and still accruing finance charges were $246 million at July 31, 2010, $371 million at January 30, 2010 and $340 million at August 1, 2009. Accounts are written off when they become 180 days past due.

 

Under certain circumstances, we offer cardholder payment plans that modify finance charges and minimum payments, which meet the accounting definition of a troubled debt restructuring (TDRs). These concessions are made on an individual cardholder basis for economic or legal reasons specific to each individual cardholder’s circumstances. As a percentage of period-end gross receivables, receivables classified as TDRs were 6.3 percent at July 31, 2010, 6.7 percent at January 30, 2010, and 6.5 percent at August 1, 2009. Receivables classified as TDRs are treated consistently with other aged receivables in determining our allowance for doubtful accounts.

 

7



 

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

 

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

 

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

 

In the event of a decrease in the receivables principal amount such that JPMC’s interest in the entire portfolio would exceed 47 percent for three consecutive months, TRC (using the cash flows from the assets in the Trust) would be required to pay JPMC a pro rata amount of principal collections such that the portion owned by JPMC would not exceed 47 percent, unless JPMC provides a waiver. Conversely, at the option of the Corporation, JPMC may be required to fund an increase in the portfolio to maintain their 47 percent interest up to a maximum JPMC principal balance of $4.2 billion. Due to the continuing declines in gross credit card receivables, TRC repaid JPMC $153 million in the second quarter of 2010, $268 million in the first quarter of 2010 and $163 million in the fourth quarter of 2009 under the terms of this agreement. On August 25, 2010, TRC repaid an additional $33 million to JPMC.

 

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

 

5.     Contingencies

 

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

 

6.     Notes Payable and Long-Term Debt

 

We obtain short-term financing from time to time under our commercial paper program, a form of notes payable. There were no amounts outstanding under our commercial paper program at July 31, 2010, January 30, 2010, or August 1, 2009.

 

8



 

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

 

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

 

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

 

7.     Derivative Financial Instruments

 

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

 

Historically, the majority of our derivative instruments qualified for fair value hedge accounting treatment. During 2008, we terminated or de-designated certain interest rate swaps. Total net gains amortized into net interest expense for terminated or de-designated swaps were $11 million and $15 million during the three months ended July 31, 2010 and August 1, 2009, respectively. Total net gains amortized into net interest expense for terminated and de-designated swaps were $22 million and $33 million during the six months ended July 31, 2010 and August 1, 2009, respectively. The amount remaining on unamortized hedged debt valuation gains from terminated or de-designated interest rate swaps that will be amortized into earnings over the remaining lives totaled $175 million, $197 million and $230 million, at July 31, 2010, January 30, 2010 and August 1, 2009, respectively.

 

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

 

Derivative Contracts — Effect on Results of Operations

 

Three Months Ended

 

Six Months Ended

 

 

 

Classification of

 

July 31,

 

August 1,

 

July 31,

 

August 1,

 

(millions)

 

Income/(Expense)

 

2010

 

2009

 

2010

 

2009

 

Interest Rate Swaps

 

Other interest expense

 

$

13

 

$

16

 

$

28

 

$

32

 

 

At July 31, 2010, there were no derivative instruments designated as accounting hedges.

 

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

 

8.     Income Taxes

 

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

 

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

 

During the first quarter of 2010, we filed a tax accounting method change that resolved the uncertainty surrounding the timing of deductions for one of our tax positions, resulting in a $130 million decrease to our unrecognized tax benefit liability. Because this matter solely related to the timing of the deduction, this change had virtually no effect on net tax expense in the first quarter of 2010. As of July 31, 2010, our unrecognized tax benefit liability was $379 million.

 

It is possible that up to $55 million of unrecognized tax benefits as of July 31, 2010 will be recognized within the next twelve months because a variety of issues may be resolved. If these issues are favorably resolved, they would result in a corresponding reduction to income tax expense of approximately the same amount.

 

9



 

9.     Share Repurchase

 

Since the inception of our share repurchase program, which began in the fourth quarter of 2007, we have repurchased 128.6 million shares of our common stock, for a total cash investment of $6,620 million (average price per share of $51.46).

 

During the three months ended July 31, 2010, we repurchased 17.5 million shares of our common stock, for a total cash investment of $907 million (average price per share of $51.72). There were no prepaid forward contracts settled during the three months ended July 31, 2010.

 

During the six months ended July 31, 2010, we repurchased 25.1 million shares of our common stock, including 0.3 million shares through settlement of prepaid forward contracts, for a total cash investment of $1,301 million (average price per share of $51.89), of which $15 million was paid in prior periods. The prepaid forward contracts settled during the six months ended July 31, 2010 had a total cash investment of $15 million and an aggregate market value of $16 million at their respective settlement dates.

 

During the three months ended August 1, 2009, we repurchased 0.5 million shares of our common stock, for a total cash investment of $20 million (average price per share of $41.13), all of which was paid in prior periods. All shares reacquired during the three months ended August 1, 2009 were delivered upon settlement of prepaid forward contracts. The prepaid forward contracts settled during the three months ended August 1, 2009 had a total cash investment of $20 million and an aggregate market value of $21 million at their respective settlement dates.

 

During the six months ended August 1, 2009, we repurchased 1.2 million shares of our common stock, for a total cash investment of $42 million (average price per share of $34.62), of which $33 million was paid in prior periods. All shares reacquired during the six months ended August 1, 2009 were delivered upon settlement of prepaid forward contracts. The prepaid forward contracts settled during the six months ended August 1, 2009 had a total cash investment of $42 million and an aggregate market value of $44 million at their respective dates.

 

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

 

10.  Pension, Postretirement Health Care and Other Benefits

 

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

 

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

 

Net Pension Expense and

 

Pension Benefits

 

Postretirement Health Care Benefits

 

Postretirement Healthcare

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 

Six Months Ended

 

Expense

 

July 31,

 

Aug. 1,

 

July 31,

 

Aug. 1,

 

July 31,

 

Aug. 1,

 

July 31,

 

Aug. 1,

 

(millions)

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

Service cost

 

$

29

 

$

25

 

$

58

 

$

50

 

$

3

 

$

2

 

$

5

 

$

3

 

Interest cost

 

32

 

31

 

64

 

62

 

1

 

2

 

2

 

4

 

Expected return on assets

 

(48

)

(44

)

(96

)

(88

)

 

 

 

 

Recognized losses

 

11

 

6

 

22

 

12

 

1

 

 

2

 

 

Recognized prior service cost

 

 

(1

)

(1

)

(2

)

(3

)

 

(5

)

 

Total

 

$

24

 

$

17

 

$

47

 

$

34

 

$

2

 

$

4

 

$

4

 

$

7

 

 

We also maintain a nonqualified, unfunded deferred compensation plan for approximately 3,500 current and retired team members whose participation in our 401(k) plan is limited by statute or regulation. These team members choose from a menu of crediting rate alternatives that are the same as the investment choices in our 401(k) plan, including Target common stock. We credit an additional two percent per year to the accounts of all active participants, excluding executive officer

 

10



 

participants, in part to recognize the risks inherent to their participation in a plan of this nature. We also maintain a nonqualified, unfunded deferred compensation plan that was frozen during 1996, covering 11 current and 50 retired participants. In this plan, deferred compensation earns returns tied to market levels of interest rates plus an additional six percent return, with a minimum of 12 percent and a maximum of 20 percent, as determined by the plan’s terms.

 

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

 

The total change in fair value for contracts indexed to our own common stock recorded in earnings was a pretax (loss)/gain of $(7) million and $6 million for the three months ended July 31, 2010 and August 1, 2009, respectively, and a pretax (loss)/gain of $(1) million and $25 million for the six months ended July 31, 2010 and August 1, 2009, respectively. For the six months ended July 31, 2010, we invested approximately $11 million in prepaid forward contracts in our own common stock.  For the six months ended August 1, 2009, we invested approximately $9 million in such investment instruments, and these investments are included in the Consolidated Statements of Cash Flows within other investing activities. Adjusting our position in these investment vehicles may involve repurchasing shares of Target common stock when settling the forward contracts. There were no repurchases during the three months ended July 31, 2010.  For the six months ended July 31, 2010, these repurchases totaled 0.3 million shares, and for the three and six months ended August 1, 2009, these repurchases totaled 0.5 million and 1.2 million shares, respectively, and are included in the total share repurchases described in Note 9, Share Repurchase.

 

At July 31, 2010, January 30, 2010 and August 1, 2009, our outstanding interest in contracts indexed to our common stock was as follows:

 

Prepaid Forward Contracts on Target
Common Stock

 

 

 

Contractual

 

 

 

 

 

(millions, except per share data)

 

Number of Shares

 

Price Paid per Share

 

Fair
Value

 

Total Cash
Investment

 

August 1, 2009

 

1.3

 

$

41.11

 

$

59

 

$

55

 

January 30, 2010

 

1.5

 

42.77

 

79

 

66

 

July 31, 2010

 

1.4

 

43.49

 

73

 

62

 

 

11.  Segment Reporting

 

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

 

11



 

Business Segment Results

 

Three Months Ended July 31, 2010

 

 

Three Months Ended August 1, 2009

 

 

 

 

 

Credit

 

 

 

 

 

 

Credit

 

 

 

(millions)

 

Retail

 

Card

 

Total

 

 

Retail

 

Card

 

Total

 

Sales/Credit card revenues

 

$

15,126

 

$

406

 

$

15,532

 

 

$

14,567

 

$

500

 

$

15,067

 

Cost of sales

 

10,293

 

 

10,293

 

 

9,914

 

 

9,914

 

Bad debt expense(a)

 

 

138

 

138

 

 

 

303

 

303

 

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

 

3,246

 

93

 

3,339

 

 

3,115

 

106

 

3,221

 

Depreciation and amortization

 

491

 

5

 

496

 

 

474

 

4

 

478

 

Earnings before interest expense and income taxes

 

1,096

 

170

 

1,266

 

 

1,064

 

87

 

1,151

 

Interest expense on nonrecourse debt collateralized by credit card receivables

 

 

21

 

21

 

 

 

24

 

24

 

Segment profit

 

$

1,096

 

$

149

 

1,245

 

 

$

1,064

 

$

63

 

1,127

 

Unallocated (income) and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other interest expense

 

 

 

 

 

165

 

 

 

 

 

 

171