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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 July 30, 2011

 

Commission File Number 1-6049

 


 

GRAPHIC

 

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 August 22, 2011 were 675,227,176.

 



 

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

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 4.

Controls and Procedures

24

 

 

 

PART II

OTHER INFORMATION

 

Item 1.

Legal Proceedings

25

Item 1A.

Risk Factors

25

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25

Item 3.

Defaults Upon Senior Securities

25

Item 4.

Reserved

25

Item 5.

Other Information

25

Item 6.

Exhibits

26

 

 

 

 

 

 

Signature

 

27

Exhibit Index

 

28

 



 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Consolidated Statements of Operations

 

 

 

Three Months Ended

 

 

 

Six Months Ended

 

 

 

 

July 30,

 

July 31,

 

 

 

July 30,

 

July 31,

 

(millions, except per share data) (unaudited)

 

 

2011

 

2010

 

 

 

2011

 

2010

 

Sales

 

 

$

15,895

 

$

15,126

 

 

 

$

31,475

 

$

30,283

 

Credit card revenues

 

 

345

 

406

 

 

 

700

 

841

 

Total revenues

 

 

16,240

 

15,532

 

 

 

32,175

 

31,124

 

Cost of sales

 

 

10,872

 

10,293

 

 

 

21,710

 

20,705

 

Selling, general and administrative expenses

 

 

3,473

 

3,263

 

 

 

6,705

 

6,405

 

Credit card expenses

 

 

86

 

214

 

 

 

174

 

494

 

Depreciation and amortization

 

 

509

 

496

 

 

 

1,022

 

1,012

 

Earnings before interest expense and income taxes

 

 

1,300

 

1,266

 

 

 

2,564

 

2,508

 

Net interest expense

 

 

 

 

 

 

 

 

 

 

 

 

Nonrecourse debt collateralized by credit card receivables

 

 

18

 

21

 

 

 

37

 

44

 

Other interest expense

 

 

174

 

165

 

 

 

338

 

330

 

Interest income

 

 

(1

)

(1

)

 

 

(1

)

(1

)

Net interest expense

 

 

191

 

185

 

 

 

374

 

373

 

Earnings before income taxes

 

 

1,109

 

1,081

 

 

 

2,190

 

2,135

 

Provision for income taxes

 

 

405

 

402

 

 

 

797

 

785

 

Net earnings

 

 

$

704

 

$

679

 

 

 

$

1,393

 

$

1,350

 

Basic earnings per share

 

 

$

1.03

 

$

0.93

 

 

 

$

2.03

 

$

1.84

 

Diluted earnings per share

 

 

$

1.03

 

$

0.92

 

 

 

$

2.02

 

$

1.82

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

680.8

 

731.1

 

 

 

686.7

 

735.5

 

Diluted

 

 

685.1

 

736.6

 

 

 

691.2

 

741.1

 

 

See accompanying Notes to Consolidated Financial Statements.

 

1



 

Consolidated Statements of Financial Position

 

 

July 30,

 

January 29,

 

July 31,

 

(millions)

 

2011

 

2011

 

2010

 

Assets

 

(unaudited)

 

 

 

(unaudited)

 

Cash and cash equivalents, including marketable securities of $116, $1,129 and $972

 

$

890

 

$

1,712

 

$

1,540

 

Credit card receivables, net of allowance of $480, $690 and $851

 

5,722

 

6,153

 

6,137

 

Inventory

 

7,926

 

7,596

 

7,728

 

Other current assets

 

1,521

 

1,752

 

1,840

 

Total current assets

 

16,059

 

17,213

 

17,245

 

Property and equipment

 

 

 

 

 

 

 

Land

 

5,999

 

5,928

 

5,845

 

Buildings and improvements

 

26,092

 

23,081

 

22,568

 

Fixtures and equipment

 

4,906

 

4,939

 

4,602

 

Computer hardware and software

 

2,392

 

2,533

 

2,432

 

Construction-in-progress

 

571

 

567

 

772

 

Accumulated depreciation

 

(11,587)

 

(11,555)

 

(10,818)

 

Property and equipment, net

 

28,373

 

25,493

 

25,401

 

Other noncurrent assets

 

1,067

 

999

 

1,009

 

Total assets

 

$

45,499

 

$

43,705

 

$

43,655

 

Liabilities and shareholders’ investment

 

 

 

 

 

 

 

Accounts payable

 

$

6,519

 

$

6,625

 

$

6,228

 

Accrued and other current liabilities

 

3,721

 

3,326

 

3,057

 

Unsecured debt and other borrowings

 

1,130

 

119

 

782

 

Nonrecourse debt collateralized by credit card receivables

 

250

 

 

33

 

Total current liabilities

 

11,620

 

10,070

 

10,100

 

Unsecured debt and other borrowings

 

12,661

 

11,653

 

11,693

 

Nonrecourse debt collateralized by credit card receivables

 

3,499

 

3,954

 

4,044

 

Deferred income taxes

 

969

 

934

 

740

 

Other noncurrent liabilities

 

1,644

 

1,607

 

1,810

 

Total noncurrent liabilities

 

18,773

 

18,148

 

18,287

 

Shareholders’ investment

 

 

 

 

 

 

 

Common stock

 

56

 

59

 

60

 

Additional paid-in capital

 

3,385

 

3,311

 

3,085

 

Retained earnings

 

12,213

 

12,698

 

12,690

 

Accumulated other comprehensive loss

 

(548)

 

(581)

 

(567)

 

Total shareholders’ investment

 

15,106

 

15,487

 

15,268

 

Total liabilities and shareholders’ investment

 

$

45,499

 

$

43,705

 

$

43,655

 

Common shares outstanding

 

675.2

 

704.0

 

722.6

 

 

See accompanying Notes to Consolidated Financial Statements.

 

2



 

Consolidated Statements of Cash Flows

 

 

 

Six Months Ended

 

 

 

 

July 30,

 

July 31,

 

(millions) (unaudited)

 

 

2011

 

2010

 

Operating activities

 

 

 

 

 

 

Net earnings

 

 

$

1,393

 

$

1,350

 

Reconciliation to cash flow

 

 

 

 

 

 

Depreciation and amortization

 

 

1,022

 

1,012

 

Share-based compensation expense

 

 

44

 

52

 

Deferred income taxes

 

 

122

 

148

 

Bad debt expense

 

 

27

 

335

 

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

 

 

62

 

(39

)

Changes in operating accounts:

 

 

 

 

 

 

Accounts receivable originated at Target

 

 

143

 

241

 

Inventory

 

 

(330

)

(549

)

Other current assets

 

 

80

 

5

 

Other noncurrent assets

 

 

16

 

(118

)

Accounts payable

 

 

(119

)

(283

)

Accrued and other current liabilities

 

 

(129

)

(247

)

Other noncurrent liabilities

 

 

5

 

(79

)

Cash flow provided by operations

 

 

2,336

 

1,828

 

Investing activities

 

 

 

 

 

 

Expenditures for property and equipment

 

 

(2,379

)

(991

)

Proceeds from disposal of property and equipment

 

 

2

 

32

 

Change in accounts receivable originated at third parties

 

 

261

 

254

 

Other investments

 

 

(19

)

(20

)

Cash flow required for investing activities

 

 

(2,135

)

(725

)

Financing activities

 

 

 

 

 

 

Additions to long-term debt

 

 

1,000

 

997

 

Reductions of long-term debt

 

 

(238

)

(1,339

)

Dividends paid

 

 

(346

)

(252

)

Repurchase of stock

 

 

(1,493

)

(1,285

)

Stock option exercises and related tax benefit

 

 

34

 

116

 

Other

 

 

20

 

 

Cash flow required for financing activities

 

 

(1,023

)

(1,763

)

Net decrease in cash and cash equivalents

 

 

(822

)

(660

)

Cash and cash equivalents at beginning of period

 

 

1,712

 

2,200

 

Cash and cash equivalents at end of period

 

 

$

890

 

$

1,540

 

 

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

 

 

 

 

1,393

 

 

 

1,393

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and other benefit liability adjustments, net of taxes of $11

 

 

 

 

 

16

 

 

16

 

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

 

 

 

 

 

 

2

 

2

 

Currency translation adjustment, net of taxes of $9

 

 

 

 

 

 

15

 

15

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

1,426

 

Dividends declared

 

 

 

 

(374

)

 

 

(374

)

Repurchase of stock

 

(29.7

)

(3

)

 

(1,504

)

 

 

(1,507

)

Stock options and awards

 

0.9

 

 

74

 

 

 

 

74

 

July 30, 2011

 

675.2

 

$

56

 

$

3,385

 

$

12,213

 

$

(525

)

$

(23

)

$

15,106

 

 

Dividends declared per share were $0.30 and $0.25 for the three months ended July 30, 2011 and July 31, 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.

 

Assets and liabilities of operations with functional currencies other than the U.S. dollar are translated at period-end exchange rates. Income statement accounts are translated using exchange rates prevailing during the period. Translation adjustments are reflected within accumulated other comprehensive income in shareholders’ equity. Gains and losses from foreign currency transactions are included in net earnings. During the six months ended July 30, 2011 the value of $1.00 ranged from C$0.94 (Canadian dollars) to C$1.00 and averaged C$0.97. On July 30, 2011, $1.00 was equivalent to C$0.96.

 

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 share-based awards outstanding at period end, consisting of the incremental shares assumed to be issued upon the exercise of stock options and the incremental shares assumed to be issued under performance share and restricted stock unit arrangements.

 

Earnings Per Share

 

Three Months Ended

 

Six Months Ended

 

(millions, except per share data)

 

July 30, 2011

 

July 31, 2010

 

July 30, 2011

 

July 31, 2010

 

Net earnings

 

$

704

 

$

679

 

$

1,393

 

$

1,350

 

Basic weighted average common shares outstanding

 

680.8

 

731.1

 

686.7

 

735.5

 

Dilutive impact of share-based awards(a)

 

4.3

 

5.5

 

4.5

 

5.6

 

Diluted weighted average common shares outstanding

 

685.1

 

736.6

 

691.2

 

741.1

 

Basic earnings per share

 

$

1.03

 

$

0.93

 

$

2.03

 

$

1.84

 

Diluted earnings per share

 

$

1.03

 

$

0.92

 

$

2.02

 

$

1.82

 

(a) Excluded 18.5 million and 16.5 million share-based awards for the three and six months ended July 30, 2011, respectively, and 11.6 million share-based awards for both the three and six months ended July 31, 2010 because their effects were antidilutive.

 

3.  Canadian Leasehold Acquisition

 

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. We believe this transaction will allow us to open 125 to 135 Target stores in Canada, primarily during 2013. During the second quarter of 2011, we paid one-half of the purchase price and selected 105 sites.

 

We recorded the acquired assets in our Canadian Segment at their preliminary estimated fair values. The final allocation of the purchase price will be determined when the asset acquisition is completed in the third quarter of 2011. In the second quarter of 2011, we recorded capital lease assets, included in property and equipment, of $2,393 million and capital lease obligations, included in unsecured debt and other borrowings, of $1,012 million.

 

The acquired assets were subleased back to Zellers for terms through March 2013, or earlier at our option.

 

We have the right to select up to 115 additional leases before our final payment in the third quarter of 2011. We have also entered into an agreement with a third party retailer to sell our right to acquire leasehold interests in up to 39 of these sites.

 

5



 

4.   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).

 

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

 

Fair Value Measurements —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring Basis

 

Fair Value at
July 30, 2011

 

Fair Value at
January 29, 2011

 

Fair Value at
July 31, 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

 

$

116

 

$

 

$

 

$

1,129

 

$

 

$

 

$

972

 

$

 

$

Other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid forward contracts

 

74

 

 

 

63

 

 

 

73

 

 

Other

 

 

6

 

 

 

 

 

 

 

Other noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

 

140

 

 

 

139

 

 

 

164

 

Company-owned life insurance investments(b)

 

 

366

 

 

 

358

 

 

 

341

 

Total

 

$

190

 

$

512

 

$

 

$

1,192

 

$

497

 

$

 

$

1,045

 

$

505

 

$

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other noncurrent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps(a)

 

$

 

$

68

 

$

 

$

 

$

54

 

$

 

$

 

$

66

 

$

Total

 

$

 

$

68

 

$

 

$

 

$

54

 

$

 

$

 

$

66

 

$

(a)            There was one interest rate swap designated as an accounting hedge at July 30, 2011, and no interest rate swaps designated as accounting hedges at January 29, 2011 or July 31, 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 $656 million at July 30, 2011, $645 million at January 29, 2011 and $624 million at July 31, 2010.

 

Position

 

Valuation Technique

Marketable securities

 

Initially valued at transaction price. Subsequently valued at carrying value, as cash equivalents (including money market funds) approximate 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 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 during the period ended July 30, 2011:

 

 

 

 

 

 

 

 

 

Carrying amount

 

$

9

 

$

11

 

$

68

 

$

97

 

Fair value measurement

 

8

 

10

 

44

 

65

 

Gain/(loss)

 

$

(1

)

$

(1

)

$

(24

)

$

(32

)

Measured during the period ended July 31, 2010:

 

 

 

 

 

 

 

 

 

Carrying amount

 

$

2

 

$

2

 

$

39

 

$

62

 

Fair value measurement

 

2

 

2

 

34

 

54

 

Gain/(loss)

 

$

 

$

 

$

(5

)

$

(8

)

(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

 

July 30, 2011

 

January 29, 2011

 

July 31, 2010

 

Measured at Fair Value

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(millions)

 

Amount

 

Value

 

Amount

 

Value

 

Amount

 

Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities(a)

 

$

23

 

$

23

 

$

32

 

$

32

 

$

24

 

$

24

 

Other noncurrent assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketable securities(a)

 

 

 

4

 

4

 

 

 

Total

 

$

23

 

$

23

 

$

36

 

$

36

 

$

24

 

$

24

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt(b)

 

$

16,035

 

$

17,931

 

$

15,241

 

$

16,661

 

$

16,135

 

$

17,953

 

Total

 

$

16,035

 

$

17,931

 

$

15,241

 

$

16,661

 

$

16,135

 

$

17,953

 

(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 July 30, 2011.

 

5.  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 July 30, 2011, January 29, 2011, and July 31, 2010. Accounts are written off when they become 180 days past due.

 

Age of Credit Card Receivables

 

July 30, 2011

 

January 29, 2011

 

July 31, 2010

 

 

 

 

 

Percent of

 

 

 

Percent of

 

 

 

Percent of

 

(dollars in millions)

 

Amount

 

Receivables

 

Amount

 

Receivables

 

Amount

 

Receivables

 

Current

 

$

5,671

 

91.4%

 

$

6,132

 

89.6

%

$

6,167

 

88.3%

 

1-29 days past due

 

242

 

3.9

 

292

 

4.3

 

312

 

4.5

 

30-59 days past due

 

101

 

1.6

 

131

 

1.9

 

162

 

2.3

 

60-89 days past due

 

60

 

1.0

 

79

 

1.1

 

101

 

1.4

 

90+ days past due

 

128

 

2.1

 

209

 

3.1

 

246

 

3.5

 

Period-end gross credit card receivables

 

$

6,202

 

100%

 

$

6,843

 

100

%

$

6,988

 

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

 

Three Months Ended

 

 

Six Months Ended

 

(millions)

 

July 30, 2011

 

July 31, 2010

 

July 30, 2011

 

July 31, 2010

 

Allowance at beginning of period

 

$   565

 

$   930

 

$   690

 

$  1,016

 

Bad debt expense

 

15

 

138

 

27

 

335

 

Write-offs(a)

 

(142

)

(256

)

(326

)

(573

)

Recoveries(a)

 

42

 

39

 

89

 

73

 

Allowance at end of period

 

$   480

 

$   851

 

$   480

 

$   851

 

(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. The credit quality segmentation presented below is consistent with the approach used in determining our allowance for doubtful accounts.

 

Receivables Credit Quality

 

 

 

 

 

 

 

(millions)

 

July 30, 2011

 

January 29, 2011

 

July 31, 2010

 

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

 

 

 

 

 

 

 

FICO score of 700 or above

 

$   2,786

 

$   2,819

 

$   2,789

 

FICO score of 600 to 699

 

2,500

 

2,737

 

2,782

 

FICO score below 600

 

627

 

868

 

908

 

Total nondelinquent accounts

 

5,913

 

6,424

 

6,479

 

Delinquent accounts (30+ days past due)

 

289

 

419

 

509

 

Period-end gross credit card receivables

 

$   6,202

 

$   6,843

 

$   6,988

 

 

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 5.4 percent at July 30, 2011, 5.9 percent at January 29, 2011 and 6.3 percent at July 31, 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 $226 million and $421 million during first six months of 2011 and 2010, respectively.

 

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

 

July 30, 2011

 

January 29, 2011

 

July 31, 2010

 

 

 

Debt

 

 

 

Debt

 

 

 

Debt

 

 

 

(millions)

 

Balance

 

Collateral

 

Balance

 

Collateral

 

Balance

 

Collateral

 

2008 Series(a)

 

$

2,749

 

$

2,828

 

$

2,954

 

$

3,061

 

$

3,077

 

$

3,212

 

2006/2007 Series

 

1,000

 

1,266

 

1,000

 

1,266

 

1,000

 

1,266

 

Total

 

$

3,749

 

$

4,094

 

$

3,954

 

$

4,327

 

$

4,077

 

$

4,478

 

(a) The debt balance for the 2008 Series is net of a 7% discount from JPMC. The unamortized portion of this discount was $79 million, $107 million and $134 million as of July 30, 2011, January 29, 2011, and July 31, 2010, respectively.

 

6.   Commitments and Contingencies

 

Due to our second quarter acquisition of leases from Zellers, we have future minimum lease payments of $2.9 billion, with a net present value of $1.0 billion, at July 30, 2011 which is reflected as capital lease obligations within unsecured debt and other borrowings in the Consolidated Statement of Financial Position. We also have the obligation to pay Zellers the remaining purchase price of C$912.5 million in the third quarter of 2011.

 

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 will be material to our results of operations, cash flows or financial condition.

 

7.   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 30, 2011, January 29, 2011, or July 31, 2010. During the three and six months ended July 30, 2011 the maximum amount outstanding was $850 million and the average amount outstanding was $329 million and $164 million, respectively.  There were no amounts outstanding under our commercial paper program at any time during the three or six months ended July 31, 2010.

 

9



 

In July 2011, we issued $350 million of unsecured fixed rate debt at 1.125% and $650 million of unsecured floating rate debt at three-month LIBOR plus 17 basis points that matures in July 2014.  Proceeds from this issuance were used for general corporate purposes.

 

In addition, TR LLC has made payments to JPMC to reduce its interest in our credit card receivables as described in Note 5, Credit Card Receivables.

 

8.     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 large global financial institutions.  We monitor this concentration of counterparty credit risk on an ongoing basis.

 

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 July 30, 2011 and July 31, 2010, respectively.  Total net gains amortized into net interest expense for terminated or de-designated swaps were $20 million and $22 million during the six months ended July 30, 2011 and July 31, 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 $132 million, $152 million and $175 million, at July 30, 2011, January 29, 2011 and July 31, 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

 

Six Months Ended

 

(millions)

 

Classification of
Income/(Expense)

 

July 30,
2011

 

July 31,
2010

 

July 30,
2011

 

July 31,
2010

 

Interest rate swaps

 

Other interest expense

 

$

11

 

$

13

 

$

22

 

$

28

 

 

In July 2011, in conjunction with the $350 million fixed rate debt issuance, we entered into an interest rate swap with a notional amount of $350 million, under which we pay a variable rate and receive a fixed rate.  This swap has been designated as a fair value hedge, and there was no ineffectiveness recognized related to this hedge during the three or six months ended July 30, 2011. There were no derivative instruments designated as hedges as of July 31, 2010. See Note 4, Fair Value Measurements, for a description of the fair value measurement of derivative contracts and their classification on the Consolidated Statements of Financial Position.

 

9.     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.

 

We expect that within the next twelve months $12 million to $60 million of unrecognized tax benefits will be recognized as several 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.

 

10



 

10.  Share Repurchase

 

We repurchase shares primarily through open market transactions under a $10 billion share repurchase plan authorized by our Board of Directors in November 2007.

 

Share Repurchases

(millions, except per share data)

 

Total Number of
Shares Purchased

 

Average Price
Paid per Share

 

Total
Investment

 

First quarter 2010

 

7.5

 

$

52.27

 

$

394

 

Second quarter 2010

 

17.6

 

51.72

 

907

 

Year-to-date 2010

 

25.1

 

$

51.89

 

$

1,301

 

 

 

 

 

 

 

 

 

First quarter 2011

 

15.4

 

$

53.32

 

$

819

 

Second quarter 2011

 

14.3

 

48.11

 

688

 

Year-to-date 2011

 

29.7

 

$

50.81

 

$

1,507

 

 

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

 

Settlement of Prepaid Forward Contracts(a)
(millions)

 

Total Number of
Shares Reacquired

 

Total Cash
Investment

 

Aggregate
Market Value(b)

 

First quarter 2010

 

0.3

 

$

15

 

$

16

 

Second quarter 2010

 

 

 

 

Year-to-date 2010

 

0.3

 

$

15

 

$

16

 

 

 

 

 

 

 

 

 

First quarter 2011

 

0.1

 

$

7

 

$

7

 

Second quarter 2011

 

0.2

 

7

 

7

 

Year-to-date 2011

 

0.3

 

$

14

 

$

14

 

(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 11.

(b) At their respective settlement dates.

 

11.  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.

 

Net Pension and

 

Pension Benefits

 

Postretirement Health Care Benefits

 

Postretirement Health

 

Three Months Ended

 

Six Months Ended

 

Three Months Ended

 

Six Months Ended

 

Care Benefits Expense

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

July 30,

 

July 31,

 

(millions)

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

2011

 

2010

 

Service cost

 

$

29

 

$

29

 

$

58

 

$

58

 

$

2

 

$

3

 

$

4

 

$

5

 

Interest cost

 

35