Target 10-Q 2010
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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
(Exact name of registrant as specified in its charter)
Registrants 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 registrants 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.
TABLE OF CONTENTS
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
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.
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.
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 liabilitys 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).
The following table presents financial assets and liabilities measured at fair value on a recurring basis:
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.
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.
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 cardholders 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.
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 JPMCs prorata share of cash flows from the Trust assets.
In the event of a decrease in the receivables principal amount such that JPMCs 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 (JPMCs prorata share of finance charge collections less write-offs and specified expenses) is less than 2 percent of the outstanding principal balance of JPMCs 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 JPMCs interest, JPMC may compel the Corporation to implement underwriting and collections activities, provided those activities are compatible with the Corporations 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.
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.
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:
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. 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:
We also maintain a nonqualified, unfunded deferred compensation plan for approximately 3,500 current and retired team members whose participation in our 401(k) plan is limited by statute or regulation. These team members choose from a menu of crediting rate alternatives that are the same as the investment choices in our 401(k) plan, including Target common stock. We credit an additional two percent per year to the accounts of all active participants, excluding executive officer
participants, in part to recognize the risks inherent to their participation in a plan of this nature. We also maintain a nonqualified, unfunded deferred compensation plan that was frozen during 1996, covering 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 plans 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:
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.