Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 20, 2017)
  • 10-Q (Aug 21, 2017)
  • 10-Q (May 22, 2017)
  • 10-Q (Nov 23, 2016)
  • 10-Q (Aug 24, 2016)
  • 10-Q (May 25, 2016)

 
8-K

 
Other

Target 10-Q 2011

 

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 April 30, 2011

 

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 $0.0833, outstanding at May 23, 2011 were 689,145,299.

 



 

TARGET CORPORATION

 

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

Consolidated Statements of Operations

1

 

Consolidated Statements of Financial Position

2

 

Consolidated Statements of Cash Flows

3

 

Consolidated Statements of Shareholders’ Investment

4

 

Notes to Consolidated Financial Statements

5

Item 2.

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

13

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 4.

Controls and Procedures

22

 

 

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

23

Item 1A.

Risk Factors

23

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

Item 3.

Defaults Upon Senior Securities

23

Item 4.

Reserved

23

Item 5.

Other Information

23

Item 6.

Exhibits

24

 

 

 

 

 

 

Signature

 

25

Exhibit Index

 

26

 



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Consolidated Statements of Operations

 

 

 

Three Months Ended

 

 

 

 

April 30,

 

May 1,

 

(millions, except per share data) (unaudited)

 

 

2011

 

2010

 

Sales

 

 

$

15,580

 

$

15,158

 

Credit card revenues

 

 

355

 

435

 

Total revenues

 

 

15,935

 

15,593

 

Cost of sales

 

 

10,838

 

10,412

 

Selling, general and administrative expenses

 

 

3,233

 

3,143

 

Credit card expenses

 

 

88

 

280

 

Depreciation and amortization

 

 

512

 

516

 

Earnings before interest expense and income taxes

 

 

1,264

 

1,242

 

Net interest expense

 

 

 

 

 

 

Nonrecourse debt collateralized by credit card receivables

 

 

19

 

23

 

Other interest expense

 

 

164

 

165

 

Interest income

 

 

 

(1

)

Net interest expense

 

 

183

 

187

 

Earnings before income taxes

 

 

1,081

 

1,055

 

Provision for income taxes

 

 

392

 

384

 

Net earnings

 

 

$

689

 

$

671

 

Basic earnings per share

 

 

$

0.99

 

$

0.91

 

Diluted earnings per share

 

 

$

0.99

 

$

0.90

 

Weighted average common shares outstanding

 

 

 

 

 

 

Basic

 

 

692.6

 

739.9

 

Diluted

 

 

697.4

 

745.7

 

 

See accompanying Notes to Consolidated Financial Statements.

 

1



 

Consolidated Statements of Financial Position

 

 

April 30,

 

January 29,

 

May 1,

 

(millions)

 

2011

 

2011

 

2010

 

Assets

 

(unaudited)

 

 

 

(unaudited)

 

Cash and cash equivalents, including marketable securities of $872, $1,129 and $1,015

 

$

1,424

 

$

1,712

 

$

1,578

 

Credit card receivables, net of allowance of $565, $690 and $930

 

5,721

 

6,153

 

6,330

 

Inventory

 

7,696

 

7,596

 

7,249

 

Other current assets

 

1,527

 

1,752

 

2,065

 

Total current assets

 

16,368

 

17,213

 

17,222

 

Property and equipment

 

 

 

 

 

 

 

Land

 

5,989

 

5,928

 

5,803

 

Buildings and improvements

 

23,197

 

23,081

 

22,332

 

Fixtures and equipment

 

4,691

 

4,939

 

4,597

 

Computer hardware and software

 

2,270

 

2,533

 

2,428

 

Construction-in-progress

 

837

 

567

 

497

 

Accumulated depreciation

 

(11,336)

 

(11,555)

 

(10,445)

 

Property and equipment, net

 

25,648

 

25,493

 

25,212

 

Other noncurrent assets

 

980

 

999

 

889

 

Total assets

 

$

42,996

 

$

43,705

 

$

43,323

 

Liabilities and shareholders’ investment

 

 

 

 

 

 

 

Accounts payable

 

$

6,296

 

$

6,625

 

$

6,150

 

Accrued and other current liabilities

 

3,229

 

3,326

 

3,183

 

Unsecured debt and other borrowings

 

1,124

 

119

 

797

 

Nonrecourse debt collateralized by credit card receivables

 

189

 

 

67

 

Total current liabilities

 

10,838

 

10,070

 

10,197

 

Unsecured debt and other borrowings

 

10,640

 

11,653

 

10,642

 

Nonrecourse debt collateralized by credit card receivables

 

3,776

 

3,954

 

4,152

 

Deferred income taxes

 

916

 

934

 

916

 

Other noncurrent liabilities

 

1,596

 

1,607

 

1,819

 

Total noncurrent liabilities

 

16,928

 

18,148

 

17,529

 

Shareholders’ investment

 

 

 

 

 

 

 

Common stock

 

57

 

59

 

62

 

Additional paid-in capital

 

3,345

 

3,311

 

3,010

 

Retained earnings

 

12,398

 

12,698

 

13,098

 

Accumulated other comprehensive loss

 

(570)

 

(581)

 

(573)

 

Total shareholders’ investment

 

15,230

 

15,487

 

15,597

 

Total liabilities and shareholders’ investment

 

$

42,996

 

$

43,705

 

$

43,323

 

Common shares outstanding

 

689.0

 

704.0

 

738.9

 

 

See accompanying Notes to Consolidated Financial Statements.

 

2



 

Consolidated Statements of Cash Flows

 

 

 

Three Months Ended

 

 

 

 

April 30,

 

May 1,

 

(millions) (unaudited)

 

 

2011

 

2010

 

Operating activities

 

 

 

 

 

 

Net earnings

 

 

$

689

 

$

671

 

Reconciliation to cash flow

 

 

 

 

 

 

Depreciation and amortization

 

 

512

 

516

 

Share-based compensation expense

 

 

21

 

25

 

Deferred income taxes

 

 

100

 

109

 

Bad debt expense

 

 

12

 

197

 

Non-cash (gains)/losses and other, net

 

 

19

 

(119

)

Changes in operating accounts:

 

 

 

 

 

 

Accounts receivable originated at Target

 

 

149

 

201

 

Inventory

 

 

(99

)

(70

)

Other current assets

 

 

84

 

(56

)

Other noncurrent assets

 

 

14

 

(35

)

Accounts payable

 

 

(330

)

(361

)

Accrued and other current liabilities

 

 

(103

)

63

 

Other noncurrent liabilities

 

 

(16

)

17

 

Cash flow provided by operations

 

 

1,052

 

1,158

 

Investing activities

 

 

 

 

 

 

Expenditures for property and equipment

 

 

(632

)

(407

)

Proceeds from disposal of property and equipment

 

 

1

 

12

 

Change in accounts receivable originated at third parties

 

 

271

 

238

 

Other investments

 

 

(10

)

(18

)

Cash flow required for investing activities

 

 

(370

)

(175

)

Financing activities

 

 

 

 

 

 

Reductions of long-term debt

 

 

 

(1,170

)

Dividends paid

 

 

(174

)

(126

)

Repurchase of stock

 

 

(812

)

(378

)

Stock option exercises and related tax benefit

 

 

16

 

69

 

Cash flow required for financing activities

 

 

(970

)

(1,605

)

Net decrease in cash and cash equivalents

 

 

(288

)

(622

)

Cash and cash equivalents at beginning of period

 

 

1,712

 

2,200

 

Cash and cash equivalents at end of period

 

 

$

1,424

 

$

1,578

 

 

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 30, 2010

 

744.6

 

$

62

 

$

2,919

 

$

12,947

 

 

$

(537

)

$

(44

)

 

$

15,347

 

Net earnings

 

 

 

 

2,920

 

 

 

 

 

2,920

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other benefit liability adjustments, net of taxes of $4

 

 

 

 

 

 

(4

)

 

 

(4

)

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

 

 

 

 

 

 

 

3

 

 

3

 

Currency translation adjustment, net of taxes of $1

 

 

 

 

 

 

 

1

 

 

1

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,920

 

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

 

 

$

(541

)

$

(40

)

 

$

15,487

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

689

 

 

 

 

 

689

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other benefit liability adjustments, net of taxes of $5

 

 

 

 

 

 

9

 

 

 

9

 

Net change on cash flow hedges, net of taxes of $0

 

 

 

 

 

 

 

1

 

 

1

 

Currency translation adjustment, net of taxes of $0

 

 

 

 

 

 

 

1

 

 

1

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

700

 

Dividends declared

 

 

 

 

(172

)

 

 

 

 

(172

)

Repurchase of stock

 

(15.4

)

(2

)

 

(817

)

 

 

 

 

(819

)

Stock options and awards

 

0.4

 

 

34

 

 

 

 

 

 

34

 

April 30, 2011

 

689.0

 

$

57

 

$

3,345

 

$

12,398

 

 

$

(532

)

$

(38

)

 

$

15,230

 

 

Dividends declared per share were $0.25 and $0.17 for the three months ended April 30, 2011 and May 1, 2010, respectively.  For the fiscal year ended January 29, 2011, dividends declared per share were $0.92.

 

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 2010 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 the notes in our Form 10-K for the fiscal year ended January 29, 2011, 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.  All amounts are in U.S. dollars unless otherwise stated.

 

2.  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 stock-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)

 

April 30, 2011

 

May 1, 2010

 

Net earnings

 

$       689

 

$       671

 

Basic weighted average common shares outstanding

 

692.6

 

739.9

 

Dilutive impact of stock-based awards

 

4.8

 

5.8

 

Diluted weighted average common shares outstanding

 

697.4

 

745.7

 

Basic earnings per share

 

$      0.99

 

$      0.91

 

Diluted earnings per share

 

$      0.99

 

$      0.90

 

 

For the quarter ended April 30, 2011 and May 1, 2010, 14.5 million and 11.6 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

 

 

 

April 30, 2011

 

January 29, 2011

 

May 1, 2010

 

(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

 

$

872

 

$

 

$

 

$

1,129

 

$

 

$

 

$

1,015

 

$

 

$

 

Other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid forward contracts

 

65

 

 

 

63

 

 

 

69

 

 

 

Other

 

 

4

 

 

 

 

 

 

 

 

Other noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

 

132

 

 

 

139

 

 

 

133

 

 

Company-owned life insurance investments(b)

 

 

370

 

 

 

358

 

 

 

343

 

 

Total

 

$

937

 

$

506

 

$

 

$

1,192

 

$

497

 

$

 

$

1,084

 

$

476

 

$

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other noncurrent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a) 

 

$

 

$

54

 

$

 

$

 

$

54

 

$

 

$

 

$

29

 

$

 

Total

 

$

 

$

54

 

$

 

$

 

$

54

 

$

 

$

 

$

29

 

$

 

(a)                 There were no interest rate swaps designated as accounting hedges at April 30, 2011, January 29, 2011 or May 1, 2010.

(b)                 Company-owned life insurance investments consist of equity index funds and fixed income assets.  Amounts are presented net of loans that are secured by some of these policies of $648 million at April 30, 2011, $645 million at January 29, 2011, and $615 million at May 1, 2010.

 

Position

 

Valuation Technique

Marketable securities

 

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

 

Prepaid forward contracts

 

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

 

Interest rate swaps

 

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

 

Company-owned life insurance investments

 

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

 

Certain assets are measured at fair value on a nonrecurring basis; that is, the assets 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

 

(millions)

 

Long-lived assets held for sale

 

Long-lived assets held and used(a)

 

Measured during the three months ended April 30, 2011:

 

 

 

 

 

Carrying amount

 

$

2

 

$

30

 

Fair value measurement

 

 

2

 

 

22

 

Gain/(loss)

 

$

 

$

(8

)

Measured during the three months ended May 1, 2010:

 

 

 

 

 

 

 

Carrying amount

 

$

 

$

29

 

Fair value measurement

 

 

 

 

26

 

Gain/(loss)

 

$

 

$

(3

)

(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 generally 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

 

April 30, 2011

 

January 29, 2011

 

May 1, 2010

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(millions)

 

Amount

 

Value

 

Amount

 

Value

 

Amount

 

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities(a)

 

$

24

 

$

24

 

$

32

 

$

32

 

$

34

 

$

34

 

Other noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities(a)

 

2

 

2

 

4

 

4

 

3

 

3

 

Total

 

$

26

 

$

26

 

$

36

 

$

36

 

$

37

 

$

37

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt(b)

 

$

15,251

 

$

16,859

 

$

15,241

 

$

16,661

 

$

15,291

 

$

16,659

 

Total

 

$

15,251

 

$

16,859

 

$

15,241

 

$

16,661

 

$

15,291

 

$

16,659

 

(a)                 Held-to-maturity government-issued 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 April 30, 2011.

 

4.  Credit Card Receivables

 

Credit card receivables are recorded net of an allowance for doubtful accounts and are our only significant class of receivables. Substantially all accounts continue to accrue finance charges until they are written off. All past due accounts were incurring finance charges at April 30, 2011, January 29, 2011, and May 1, 2010. Accounts are written off when they become 180 days past due.

 

Age of Credit Card Receivables

 

April 30, 2011

 

January 29, 2011

 

May 1, 2010

 

 

 

 

 

Percent of

 

 

 

Percent of

 

 

 

Percent of

 

(dollars in millions)

 

Amount

 

Receivables

 

Amount

 

Receivables

 

Amount

 

Receivables

 

Current

 

$

5,749

 

91.5%

 

$

6,132

 

89.6

%

$

6,425

 

88.5%

 

1-29 days past due

 

227

 

3.6

 

292

 

4.3

 

283

 

3.9

 

30-59 days past due

 

100

 

1.6

 

131

 

1.9

 

166

 

2.3

 

60-89 days past due

 

59

 

0.9

 

79

 

1.1

 

107

 

1.5

 

90+ days past due

 

151

 

2.4

 

209

 

3.1

 

279

 

3.8

 

Period-end gross credit card receivables

 

$

6,286

 

100%

 

$

6,843

 

100

%

$

7,260

 

100%

 

 

7



 

Allowance for Doubtful Accounts

 

The allowance for doubtful accounts is recognized in an amount equal to the anticipated future write-offs of existing receivables and includes provisions for uncollectible finance charges and other credit-related fees. We estimate future write-offs on the entire credit card portfolio collectively based on historical experience of delinquencies, risk scores, aging trends and industry risk trends.

 

Allowance for Doubtful Accounts

 

 

 

 

 

 

 

(millions)

 

April 30, 2011

 

January 29, 2011

 

May 1, 2010

 

Allowance at beginning of period

 

$   690

 

$   1,016

 

$   1,016

 

Bad debt expense

 

12

 

528

 

197

 

Write-offs(a)

 

(184

)

(1,007

)

(318

)

Recoveries(a)

 

47

 

153

 

35

 

Allowance at end of period

 

$   565

 

$   690

 

$   930

 

(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.

 

Deterioration of the macroeconomic conditions in the United States would adversely affect the risk profile of our credit card receivables portfolio based on credit card holders’ ability to pay their balances. If such deterioration were to occur, it would lead to an increase in bad debt expense. The Corporation monitors both the credit quality and the delinquency status of the credit card receivables 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 periodically obtaining a statistically representative sample of current FICO scores, a nationally recognized credit scoring model. We update these FICO scores monthly, most recently in April 2011. The credit quality segmentation presented below is consistent with the approach used in determining our allowance for doubtful accounts.

 

Receivables Credit Quality

 

 

 

 

 

 

 

(millions)

 

April 30, 2011

 

January 29, 2011

 

May 1, 2010

 

Nondelinquent accounts (Current and 1 – 29 days past due)

 

 

 

 

 

 

 

FICO score of 700 or above

 

$   2,771

 

$   2,819

 

$   2,812

 

FICO score of 600 to 699

 

2,503

 

2,737

 

2,861

 

FICO score below 600

 

702

 

868

 

1,034

 

Total nondelinquent accounts

 

5,976

 

6,424

 

6,707

 

Delinquent accounts (30+ days past due)

 

310

 

419

 

553

 

Period-end gross credit card receivables

 

$   6,286

 

$   6,843

 

$   7,260

 

 

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 (TDR). 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 5.8 percent at April 30, 2011, 5.9 percent at January 29, 2011 and 6.5 percent at May 1, 2010. Receivables classified as TDRs are treated consistently with other aged receivables in determining our allowance for doubtful accounts.

 

Funding for Credit Card Receivables

 

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 LLC (TR LLC), formerly known as Target Receivables Corporation (TRC), a wholly owned, bankruptcy remote subsidiary. TR LLC 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. TR LLC 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 based upon the applicable accounting guidance. The receivables transferred to the Trust are not available to general creditors of the Corporation.

 

During 2006 and 2007, we sold an interest in our credit card receivables by issuing a Variable Funding Certificate. Parties who hold the Variable Funding Certificate receive interest at a variable short-term market rate. The Variable Funding Certificate matures in 2012 and 2013.

 

8



 

In the second quarter of 2008, we sold an interest in our credit card receivables to JPMorgan Chase (JPMC). The interest sold represented 47 percent of the receivables portfolio at the time of the transaction. 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, TR LLC (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 principal balance of $4.2 billion. Due to declines in gross credit card receivables, TR LLC repaid JPMC $566 million during 2010. No payments were made during the first quarter of 2011.  On May 25, 2011, TR LLC repaid an additional $189 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.  In the first quarter of 2011, this agreement was amended to allow the Corporation to prepay the principal balance on the note payable to JPMC between September 30, 2011 and January 31, 2012. If we elect to prepay the outstanding balance, we will be required to pay a make-whole premium ranging from $85 million to $103 million, dependent upon the prepayment date.

 

All interests in our Credit Card Receivables issued by the Trust are accounted for as secured borrowings. Interest and principal payments are satisfied provided the cash flows from the Trust assets are sufficient and are nonrecourse to the general assets of the Corporation. 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 the third party’s prorata share of cash flows from the Trust assets.

 

Securitized Borrowings

 

April 30, 2011

 

January 29, 2011

 

May 1, 2010

 

 

 

Debt

 

 

 

Debt

 

 

 

Debt

 

 

 

(millions)

 

Balance

 

Collateral

 

Balance

 

Collateral

 

Balance

 

Collateral

 

2008 Series(a)

 

$

2,965

 

$

3,061

 

$

2,954

 

$

3,061

 

$

3,219

 

$

3,372

 

2006/2007 Series

 

1,000

 

1,266

 

1,000

 

1,266

 

1,000

 

1,266

 

Total

 

$

3,965

 

$

4,327

 

$

3,954

 

$

4,327

 

$

4,219

 

$

4,638

 

(a) The debt balance for the 2008 Series is net of a 7% discount from JPMC. The unamortized portion of this discount was $96 million, $107 million and $153 million as of April 30, 2011, January 29, 2011, and May 1, 2010, respectively.

 

5.  Commitments and Contingencies

 

In January 2011, we entered into an agreement to purchase the leasehold interests in up to 220 sites in Canada currently operated by Zellers Inc. (Zellers), in exchange for C$1,825 million (Canadian dollars), due in two equal installments, one on May 27, 2011 and one in the third quarter of this year. We believe this transaction will allow us to open 100 to 150 Target stores in Canada, primarily during 2013. We are still in the process of evaluating each location currently leased by Zellers. We have selected 105 locations and expect to finalize the acquisition of these sites by early June 2011. We have the right to select up to 115 additional leases in advance of the second payment in third quarter 2011. We plan to invest between $1.8 billion to $2.3 billion over the next three years to renovate sites that we intend to convert into Target stores, establish supply chain capabilities, and build information-technology infrastructure. The amount we ultimately invest will be largely dependent on the number of sites we elect to convert into Target stores. During the three months ended April 30, 2011, the value of $1.00 ranged from C$0.95 to C$1.00.  On May 23, 2011, the value of $1.00 was equivalent to C$0.98.

 

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 April 30, 2011, January 29, 2011, or May 1, 2010.

 

9


 


 

There were no amounts outstanding under our commercial paper program at any time during the three months ended April 30, 2011 or May 1, 2010.

 

In April 2010, TR LLC 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, TR LLC has made payments to JPMC to reduce its interest in our credit card receivables as described in Note 4, Credit Card Receivables.

 

7.              Derivative Financial Instruments

 

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

 

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 that were accounted for as hedges. Total net gains amortized into net interest expense for terminated or de-designated swaps were $10 million and $11 million during the three months ended April 30, 2011 and May 1, 2010, respectively.  The amount remaining on unamortized hedged debt valuation gains from terminated or de-designated interest rate swaps that will be amortized into earnings over the remaining lives of the underlying debt totaled $142 million, $152 million and $186 million, at April 30, 2011, January 29, 2011 and May 1, 2010, respectively.

 

Periodic payments, valuation adjustments and amortization of gains or losses from the termination or de-designation of derivative contracts are summarized below:

 

Derivative Contracts – Effect on Results of Operations

 

 

 

Three Months Ended

 

 

 

Classification of

 

 

 

 

 

April 30,

 

May 1,

 

(millions)

 

Income/(Expense)

 

 

 

 

 

2011

 

2010

 

Interest Rate Swaps

 

Other interest expense

 

 

 

 

 

 

 

$

11

 

$

14

 

 

At April 30, 2011, 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 2010 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.

 

It is reasonably possible that the amount of the unrecognized tax benefit liabilities with respect to our other unrecognized tax positions will increase or decrease during the next twelve months; however an estimate of the amount or range of the change cannot be made at this time.

 

9.  Share Repurchase

 

We repurchased shares primarily through open market transactions under a $10 billion share repurchase plan authorized by our Board of Directors in November 2007. Share repurchases for the three months ended April 30, 2011 and May 1, 2010 were as follows:

 

10



 

Share Repurchases
(millions, except per share data)

 

Total Number of
Shares Purchased

 

Average Price
Paid per Share

 

Total
Investment

 

Three months ended May 1, 2010

 

7.5

 

$

52.27

 

$

394

 

Three months ended April 30, 2011

 

15.4

 

53.32

 

819

 

 

Of the shares reacquired, a portion was delivered upon settlement of prepaid forward contracts as follows:

 

Settlement of Prepaid Forward Contracts(a)
(millions)

 

Total Cash
Investment

 

Aggregate
Market Value

(b)

Three months ended May 1, 2010

 

$

15

 

$

16

 

Three months ended April 30, 2011

 

7

 

7

 

(a)These contracts are among the investment vehicles used to reduce our economic exposure related to our nonqualified deferred compensation plans. The details of our positions in prepaid forward contracts have been provided in Note 10.

(b)At their respective settlement dates.

 

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 and Postretirement

 

Pension Benefits

 

Postretirement Health Care Benefits

 

Health Care Benefits Expense

 

Three Months Ended

 

Three Months Ended

 

 

 

April 30,

 

May 1,

 

April 30,

 

May 1,

 

(millions)

 

2011

 

2010

 

2011

 

2010

 

Service cost

 

$

29

 

$

29

 

$

2

 

$

2

 

Interest cost

 

34

 

32

 

1

 

1

 

Expected return on assets

 

(51

)

(48

)

 

 

Recognized losses

 

16

 

11

 

1

 

1

 

Recognized prior service cost

 

(1

)

(1

)

(2

)

(2

)

Total

 

$

27

 

$

23

 

$

2

 

$

2

 

 

Even though we are not required to make any contributions, we may elect to make contributions depending on investment performance and the pension plan funded status in 2011.

 

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 2 percent per year to the accounts of all active participants, excluding executive officer participants, in part to recognize the risks inherent to their participation in a plan of this nature. We also maintain a nonqualified, unfunded deferred compensation plan that was frozen during 1996, covering substantially fewer than 100 participants, most of whom are retired. In this plan, deferred compensation earns returns tied to market levels of interest rates plus an additional 6 percent return, with a minimum of 12 percent and a maximum of 20 percent, as determined by the plan’s terms.

 

We mitigate some of our risk of offering the nonqualified plans through investing in vehicles, including company-owned life insurance and prepaid forward contracts in our own common stock, that offset a substantial portion of our economic exposure to the returns of these plans. These investment vehicles 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.

 

11



 

The total change in fair value for contracts indexed to our own common stock recognized in earnings was pretax income/(loss) of $(7) million during the three months ended April 30, 2011 and $7 million during the three months ended May 1, 2010. During first quarter 2011, we invested approximately $16 million in such investment instruments. This activity is included in the Consolidated Statements of Cash Flows within other investing activities. No investments were made in first quarter 2010. Adjusting our position in these investment vehicles may involve repurchasing shares of Target common stock when settling the forward contracts. For the three months ended April 30, 2011 and May 1, 2010, these repurchases totaled 0.1 million and 0.3 million shares, respectively, and are included in the total share repurchases described in Note 9.

 

At April 30, 2011, January 29, 2011 and May 1, 2010, 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

 

May 1, 2010

 

1.2

 

$

 41.67

 

$

69

 

$

 51

 

January 29, 2011

 

1.2

 

44.09

 

63

 

51

 

April 30, 2011

 

1.3

 

45.12

 

65

 

60

 

 

11.  Segment Reporting

 

In January 2011, we entered into an agreement to purchase leasehold interests in up to 220 sites in Canada currently operated by Zellers. We believe this transaction will allow us to open 100 to 150 Target stores in Canada, primarily during 2013. We are still in the process of evaluating each location currently leased by Zellers. We have selected 105 locations and expect to finalize the acquisition of these sites by early June 2011. We have the right to select up to 115 additional leases in advance of the second payment in third quarter 2011. As a result of this transaction, we now have three reportable business segments: U.S. Retail, U.S. Credit Card and Canadian.

 

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.

 

Business Segment Results

 

Three Months Ended April 30, 2011

 

Three Months Ended May 1, 2010

 

 

 

U.S.

 

U.S.
Credit

 

 

 

 

 

U.S.

 

U.S.
Credit

 

 

 

 

 

(millions)

 

Retail

 

Card

 

Canadian

 

Total

 

Retail

 

Card

 

Canadian

 

Total

 

Sales/Credit card revenues

 

$

15,580

 

$

355

 

$

 

 

$

15,935

 

$

15,158

 

$

435

 

$

 

$

15,593

 

Cost of sales

 

10,838

 

 

 

 

 

10,838

 

10,412

 

 

 

10,412

 

Bad debt expense(a)

 

 

12

 

 

 

 

12

 

 

197

 

 

197

 

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

 

3,173

 

125

 

 

11

 

 

3,309

 

3,126

 

100

 

 

3,226

 

Depreciation and amortization

 

507

 

5

 

 

 

 

512

 

512

 

4

 

 

516

 

Earnings/(loss) before interest expense and income taxes

 

1,062

 

213

 

 

(11

)

 

1,264

 

1,108

 

134

 

 

1,242

 

Interest expense on nonrecourse debt collateralized by credit card receivables

 

 

19

 

 

 

 

19

 

 

23

 

 

23

 

Segment profit/(loss)

 

$

1,062

 

$

194

 

$

(11

)

 

$

1,245

 

$

1,108