Executive Summary

Third quarter 2019 includes the following notable items:

•

GAAP earnings per share from continuing operations were $1.37.

•

Adjusted earnings per share from continuing operations were $1.36.

•

Total revenue increased 4.7 percent, driven by a comparable sales increase and 
sales from new stores.

•

Comparable sales increased 4.5 percent, driven by a 3.1 percent increase in 
traffic.

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Comparable store sales grew 2.8 percent.

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Digital channel sales increased 31 percent, contributing 1.7 percentage points 
to comparable sales growth.

•

Operating income of $1,002 million was 22.3 percent higher than the comparable 
prior-year period.

Sales were $18,414 million for the three months ended November 2, 2019, an 
increase of $824 million, or 4.7 percent, from the same period in the prior 
year. Operating cash flow provided by continuing operations was $4,141 million 
for the nine months ended November 2, 2019, an increase of $527 million, or 
14.6 percent, from $3,614 million for the nine months ended November 3, 2018.


Analysis of Results of Operations


Summary of Operating Income

Three Months Ended


Gross margin rate is calculated as gross margin (sales less cost of sales) 
divided by sales. All other rates are calculated by dividing the applicable 
amount by total revenue.

Sales

Sales include all merchandise sales, net of expected returns, and gift card 
breakage. Comparable sales is a measure that highlights the performance of our 
stores and digital channels by measuring the change in sales for a period over 
the comparable, prior-year period of equivalent length. Comparable sales 
include all sales, except sales from stores open less than 13 months, digital 
acquisitions we have owned less than 13 months, stores that have been closed, 
and digital acquisitions that we no longer operate. Comparable sales measures 
vary across the retail industry. As a result, our comparable sales calculation 
is not necessarily comparable to similarly titled measures reported by other 
companies. Digitally originated sales include all sales initiated through 
mobile applications and our websites. Our stores fulfill the majority of 
digitally originated sales, including shipment from stores to guests, store 
pick-up or drive-up, and delivery via our wholly-owned subsidiary, Shipt. 
Digitally originated sales may also be fulfilled through our distribution 
centers, our vendors, or other third parties.

The increase in sales during the three and nine months ended November 2, 2019, 
is due to a comparable sales increase of 4.5 percent and 4.2 percent, 
respectively, and the contribution from new stores.


We monitor the percentage of purchases that are paid for using RedCards 
(RedCard Penetration) because our internal analysis has indicated that a 
meaningful portion of the incremental purchases on RedCards are also 
incremental sales for Target. Guests receive a 5 percent discount on virtually 
all purchases when they use a RedCard at Target.


Gross Margin Rate

For the three months ended November 2, 2019, our gross margin rate was 29.8 
percent compared with 28.7 percent in the comparable period last year. The 
increase was due to merchandising efforts to optimize costs, pricing, 
promotions, and assortment, combined with favorable category sales mix. For the 
three months ended November 2, 2019, aggregate supply chain and digital 
fulfillment costs had an insignificant impact on our gross margin rate relative 
to the comparable prior-year period. chart-f3989c2a483f5de29de.jpg For the nine 
months ended November 2, 2019, our gross margin rate was 30.0 percent compared 
with 29.6 percent in the comparable period last year. The increase was due to 
merchandising efforts to optimize costs, pricing, promotions, and assortment, 
and favorable category sales mix, partially offset by increased supply chain 
and digital fulfillment costs.

Selling, General, and Administrative Expense Rate


Other Performance Factors

Net Interest Expense

Net interest expense was $113 million and $359 million for the three and nine 
months ended November 2, 2019, respectively, and $115 million and $352 million 
for the three and nine months ended November 3, 2018, respectively.

Provision for Income Taxes

Our effective income tax rate from continuing operations for the three and nine 
months ended November 2, 2019, was 21.7 percent and 22.4 percent, respectively, 
compared with 13.6 percent and 19.9 percent, respectively, for the comparable 
periods last year. The effective income tax rates for the three and nine months 
ended November 3, 2018, included $39 million of discrete benefits of the Tax 
Act and, to a lesser extent, rate benefits from our global sourcing operations.

Reconciliation of Non-GAAP Financial Measures to GAAP Measures

To provide additional transparency, we have disclosed non-GAAP adjusted diluted 
earnings per share from continuing operations (Adjusted EPS). This metric 
excludes certain items presented below. We believe this information is useful 
in providing period-to-period comparisons of the results of our continuing 
operations. This measure is not in accordance with, or an alternative to, 
generally accepted accounting principles in the U.S. (GAAP). The most 
comparable GAAP measure is diluted earnings per share from continuing 
operations. Adjusted EPS should not be considered in isolation or as a 
substitution for analysis of our results as reported under GAAP. Other 
companies may calculate Adjusted EPS differently, limiting the usefulness of 
the measure for comparisons with other companies.

Earnings from continuing operations before interest expense and income taxes 
(EBIT) and earnings before interest expense, income taxes, depreciation and 
amortization (EBITDA) are non-GAAP financial measures which we believe provide 
meaningful information about our operational efficiency compared with our 
competitors by excluding the impact of differences in tax jurisdictions and 
structures, debt levels, and for EBITDA, capital investment. These measures are 
not in accordance with, or an alternative to, GAAP. The most comparable GAAP 
measure is net earnings from continuing operations. EBIT and EBITDA should not 
be considered in isolation or as a substitution for analysis of our results as 
reported under GAAP. Other companies may calculate EBIT and EBITDA differently, 
limiting the usefulness of the measure for comparisons with other companies.


We have also disclosed after-tax ROIC, which is a ratio based on GAAP 
information. We believe this metric is useful in assessing the effectiveness of 
our capital allocation over time. Other companies may calculate ROIC 
differently, limiting the usefulness of the measure for comparisons with other 
companies.


Analysis of Financial Condition

Liquidity and Capital Resources

Our cash and cash equivalents balance was $969 million, $1,556 million, and 
$825 million at November 2, 2019, February 2, 2019, and November 3, 2018, 
respectively. Our cash and cash equivalents balance includes short-term 
investments of $163 million, $769 million, and $42 million as of November 2, 
2019, February 2, 2019, and November 3, 2018, respectively. Our investment 
policy is designed to preserve principal and liquidity of our short-term 
investments. This policy allows investments in large money market funds or in 
highly rated direct short-term instruments that mature in 60 days or less. We 
also place dollar limits on our investments in individual funds or instruments.

Capital Allocation

We follow a disciplined and balanced approach to capital allocation based on 
the following priorities, ranked in order of importance: first, we fully invest 
in opportunities to profitably grow our business, create sustainable long-term 
value, and maintain our current operations and assets; second, we maintain a 
competitive quarterly dividend and seek to grow it annually; and finally, we 
return any excess cash to shareholders by repurchasing shares within the limits 
of our credit rating goals.

We expect 2019 capital expenditures to total approximately $3.1 billion, 
compared with $3.5 billion in 2018.

Operating Cash Flows

Operating cash flow provided by continuing operations was $4,141 million for 
the nine months ended November 2, 2019, compared with $3,614 million for the 
nine months ended November 3, 2018. The operating cash flow increase was 
primarily driven by higher net earnings during the nine months ended November 
2, 2019, compared with the same period in the prior year.

Inventory

Inventory was $11,396 million as of November 2, 2019, compared with $9,497 
million and $12,393 million at February 2, 2019, and November 3, 2018, 
respectively. The increase from February 2, 2019, reflects the seasonal 
inventory build ahead of the November and December holiday sales period. 
Inventory levels were lower as of November 2, 2019, compared with November 3, 
2018, partially due to timing of receipts because the Thanksgiving holiday is 
later in the current year. In addition, elevated inventory levels in the prior 
year reflected investments in toys and baby-related merchandise.

Dividends

We paid dividends totaling $337 million ($0.66 per share) and $995 million 
($1.94 per share) for the three and nine months ended November 2, 2019, 
respectively, and $337 million ($0.64 per share) and $1,001 million ($1.88 per 
share) for the three and nine months ended November 3, 2018, respectively, a 
per share increase of 3.1 percent and 3.2 percent, respectively. We declared 
dividends totaling $338 million ($0.66 per share) during the third quarter of 
2019, a per share increase of 3.1 percent over the $338 million ($0.64 per 
share) of declared dividends during the third quarter of 2018. We have paid 
dividends every quarter since our 1967 initial public offering, and it is our 
intent to continue to do so in the future.

Share Repurchase

We returned $294 million and $912 million to shareholders through share 
repurchase during the three and nine months ended November 2, 2019, 
respectively. See Part II, Item 2 of this Quarterly Report on Form 10-Q and 
Note 7 to the Consolidated Financial Statements for more information.

Financing

Our financing strategy is to ensure liquidity and access to capital markets, to 
maintain a balanced spectrum of debt maturities, and to manage our net exposure 
to floating interest rate volatility. Within these parameters, we seek to 
minimize our borrowing costs. Our ability to access the long-term debt and 
commercial paper markets has provided us with ample sources of liquidity. Our 
continued access to these markets depends on multiple factors, including the 
condition of debt capital markets, our operating performance, and maintaining 
strong credit ratings. As of November 2, 2019, our credit ratings were as 
follows:


Credit Ratings

Moody’s

Standard and Poor’s

Fitch Long-term debt

A2

A

A- Commercial paper

P-1

A-1

F1

If our credit ratings were lowered, our ability to access the debt markets, our 
cost of funds, and other terms for new debt issuances could be adversely 
impacted. Each of the credit rating agencies reviews its rating periodically 
and there is no guarantee our current credit ratings will remain the same as 
described above. Fitch raised our commercial paper rating from F2 to F1 during 
the three months ended August 3, 2019.

In March 2019, we issued $1.0 billion of debt, and in June 2019, we repaid $1.0 
billion of debt at maturity. Notes 5 and 6 to the Consolidated Financial 
Statements provide additional information.

We have additional liquidity through a committed $2.5 billion revolving credit 
facility obtained through a group of banks. In October 2018, we extended this 
credit facility by one year to October 2023. No balances were outstanding at 
any time during 2019 or 2018.

Most of our long-term debt obligations contain covenants related to secured 
debt levels. In addition to a secured debt level covenant, our credit facility 
also contains a debt leverage covenant. We are, and expect to remain, in 
compliance with these covenants. Additionally, as of November 2, 2019, no notes 
or debentures contained provisions requiring acceleration of payment upon a 
credit rating downgrade, except that certain outstanding notes allow the note 
holders to put the notes to us if within a matter of months of each other we 
experience both (i) a change in control; and (ii) our long-term credit ratings 
are either reduced and the resulting rating is noninvestment grade, or our 
long-term credit ratings are placed on watch for possible reduction and those 
ratings are subsequently reduced and the resulting rating is noninvestment 
grade.

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

Contractual Obligations and Commitments

As of the date of this report, other than the new borrowings discussed in Note 
5 to the Consolidated Financial Statements,

New Accounting Pronouncements

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


Controls and Procedures

Changes in Internal Control Over Financial Reporting

During the most recently completed fiscal quarter, the following change to our 
information technology systems materially affected, or is reasonably likely to 
materially affect, our internal control over financial reporting:

We are in the process of a broad multi-year migration of many mainframe-based 
systems and middleware products to a modern platform, including systems and 
processes supporting inventory and supply chain-related transactions.

During the most recently completed fiscal quarter, no other change in our 
internal control over financial reporting materially affected, or is reasonably 
likely to materially affect, our internal control over financial reporting.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report, we conducted an 
evaluation, under supervision and with the participation of management, 
including the chief executive officer and chief financial officer, of the 
effectiveness of the design and operation of our disclosure controls and 
procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act 
of 1934, as amended (Exchange Act). Based upon that evaluation, our chief 
executive officer and chief financial officer concluded that our disclosure 
controls and procedures are effective at the reasonable assurance level. 
Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) 
of the Exchange Act as controls and other procedures that are designed to 
ensure that information required to be disclosed by us in reports filed with 
the Securities and Exchange Commission (SEC) under the Exchange Act is 
recorded, processed, summarized, and reported within the time periods specified 
in the SEC’s rules and forms. Disclosure controls and procedures include, 
without limitation, controls and procedures designed to ensure that information 
required to be disclosed by us in reports filed under the Exchange Act is 
accumulated and communicated to our management, including our principal 
executive and principal financial officers, or persons performing similar 
functions, as appropriate, to allow timely decisions regarding required 
disclosure.