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Washington, D.C. 20549

☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 29, 2023

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission File Number 1-6049

 

(Exact name of registrant as specified in its charter)

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.0833 per share

TGT

New York Stock Exchange

 

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).   Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐     

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

Total shares of common stock, par value $0.0833, outstanding at August 18, 2023, were 461,605,464.

See accompanying Notes to Consolidated Financial Statements.

See accompanying Notes to Consolidated Financial Statements.

Common Stock Authorized 6,000,000,000 shares, $0.0833 par value; 461,600,640, 460,346,947, and 460,236,393 shares issued and outstanding as of July 29, 2023, January 28, 2023, and July 30, 2022, respectively.

Preferred Stock Authorized 5,000,000 shares, $0.01 par value; no shares were issued or outstanding during any period presented.

See accompanying Notes to Consolidated Financial Statements.

 

See accompanying Notes to Consolidated Financial Statements.

We declared $1.10 and $1.08 dividends per share for the three months ended July 29, 2023 and July 30, 2022, respectively, and $4.14 per share for the fiscal year ended January 28, 2023.

See accompanying Notes to Consolidated Financial Statements.

These unaudited condensed consolidated financial statements are prepared in accordance with the rules and regulations of the Securities and Exchange Commission applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by United States generally accepted accounting principles (U.S. GAAP) for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the financial statement disclosures in our most recent Form 10-K.

We use the same accounting policies in preparing quarterly and annual financial statements.

We operate as a single segment that is designed to enable guests to purchase products seamlessly in stores or through our digital channels. Nearly all of our revenues are generated in the U.S. The vast majority of our long-lived assets are located within the U.S.

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.

Merchandise sales represent the vast majority of our revenues. We also earn revenues from a variety of other sources, most notably credit card profit-sharing income from our arrangement with TD Bank Group (TD).

(a)Includes apparel for women, men, boys, girls, toddlers, infants and newborns, as well as jewelry, accessories, and shoes.

(b)Includes beauty and personal care, baby gear, cleaning, paper products, and pet supplies.

(c)Includes dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce, and food service in our stores.

(d)Includes electronics (including video game hardware and software), toys, entertainment, sporting goods, and luggage.

(e)Includes furniture, lighting, storage, kitchenware, small appliances, home décor, bed and bath, home improvement, school/office supplies, greeting cards and party supplies, and other seasonal merchandise.

Merchandise sales — We record almost all retail store revenues at the point of sale. Digitally originated sales may include shipping revenue and are recorded upon delivery to the guest or upon guest pickup at the store. Sales are recognized net of expected returns, which we estimate using historical return patterns and our expectation of future returns. As of July 29, 2023, January 28, 2023, and July 30, 2022, the accrual for estimated returns was $177 million, $174 million, and $175 million, respectively.

Revenue from Target gift card sales is recognized upon gift card redemption, which is typically within one year of issuance.

(a)Included in Accrued and Other Current Liabilities.

(b)Net of estimated breakage.

Credit card profit sharing — We receive payments under a credit card program agreement with TD. Under the agreement, we receive a percentage of the profits generated by the Target Credit Card and Target MasterCard receivables in exchange for performing account servicing and primary marketing functions. TD underwrites, funds, and owns Target Credit Card and Target MasterCard receivables, controls risk management policies, and oversees regulatory compliance.

Other — Includes advertising revenue, Shipt membership and service revenues, commissions earned on third-party sales through Target.com, rental income, and other miscellaneous revenues.

Fair value measurements are reported in one of three levels reflecting the significant inputs used to determine fair value.

 

Financial Instruments Measured On a Recurring Basis									Fair Value
(millions)			Classification			Measurement Level			July 29, 2023						January 28, 2023						July 30, 2022
Assets
Short-term investments			Cash and Cash Equivalents			Level 1			$	739					$	1,343					$	189
Prepaid forward contracts			Other Current Assets			Level 1			23						27						26
Interest rate swaps			Other Current Assets			Level 2			—						—						34
Interest rate swaps			Other Noncurrent Assets			Level 2			—						7						290
Liabilities
Interest rate swaps			Other Current Liabilities			Level 2			6						—						—
Interest rate swaps			Other Noncurrent Liabilities			Level 2			130						81						6

(a)The carrying amounts of certain other current assets, commercial paper, accounts payable, and certain accrued and other current liabilities approximate fair value due to their short-term nature.

(b)The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for the same or similar types of financial instruments and would be classified as Level 2. These amounts exclude commercial paper, fair value hedge adjustments, and lease liabilities.

We have arrangements with several financial institutions to act as our paying agents to certain vendors. The arrangements also permit the financial institutions to provide vendors with an option, at our vendors' sole discretion, to sell their receivables from Target to the financial institutions. A vendor’s election to receive early payment at a discounted amount from the financial institutions does not change the amount that we must remit to the financial institutions or our payment date, which is up to 120 days from the invoice date.

We do not pay any fees or pledge any security to these financial institutions under these arrangements. The arrangements can be terminated by either party with notice ranging up to 120 days.

Our outstanding vendor obligations eligible for early payment under these arrangements totaled $3.7 billion, $3.4 billion, and $4.6 billion as of July 29, 2023, January 28, 2023, and July 30, 2022, respectively, and are included within Accounts Payable on our Consolidated Statements of Financial Position. Our outstanding vendor obligations do not represent actual receivables sold by our vendors to the financial institutions, which may be lower.

We review long-lived assets for impairment when store performance expectations, events, or changes in circumstances—such as a decision to relocate or close a store, office, or distribution center, discontinue a project, or make significant software changes—indicate that the asset’s carrying value may not be recoverable. We recognized impairment charges of $33 million for the three and six months ended July 29, 2023. We recognized impairment charges of $27 million and $50 million for the three and six months ended July 30, 2022, respectively. These impairment charges are included in Selling, General and Administrative Expenses (SG&A).

We obtain short-term financing from time to time under our commercial paper program. For the six months ended July 29, 2023 and July 30, 2022, the maximum amounts outstanding were $90 million and $1.5 billion, respectively, and the average daily amounts outstanding were $2 million and $538 million, respectively, at a weighted average annual interest rate of 4.9 percent and 1.1 percent, respectively. No balances were outstanding as of July 29, 2023. As of July 30, 2022, $1.5 billion was outstanding and is classified within Current Portion of Long-Term Debt and Other Borrowings on our Consolidated Statements of Financial Position.

Our derivative instruments consist of interest rate swaps used to mitigate interest rate risk. As a result, we have counterparty credit exposure to large global financial institutions, which we monitor on an ongoing basis. Note 3 to the Consolidated Financial Statements provides the fair value and classification of these instruments.

We were party to interest rate swaps with notional amounts totaling $2.45 billion as of July 29, 2023 and January 28, 2023, and $2.25 billion as of July 30, 2022. We pay a floating rate and receive a fixed rate under each of these agreements. All of the agreements are designated as fair value hedges, and all were considered to be perfectly effective under the shortcut method during the three and six months ended July 29, 2023 and July 30, 2022.

During 2023, we amended interest rate swaps with notional amounts totaling $1.5 billion to replace the London Interbank Offered Rate (LIBOR) with the daily Secured Overnight Financing Rate (SOFR) as part of our planned reference rate reform activities. These amendments did not result in any change to our application of hedge accounting or any impact to our consolidated financial statements.

We were party to forward-starting interest rate swaps with notional amounts totaling $2.15 billion as of July 30, 2022. During 2022, we terminated all remaining forward-starting interest rate swap agreements. The resulting gains upon termination were recorded in Accumulated Other Comprehensive Loss and will be recognized as a reduction to Net Interest Expense over the respective term of the debt.

We periodically repurchase shares of our common stock under a board-authorized repurchase program through a combination of open market transactions, accelerated share repurchase (ASR) arrangements, and other privately negotiated transactions with financial institutions. We did not repurchase any of our shares during the six months ended July 29, 2023.

(a)    Includes activity related to the ASR arrangement that we entered into during the first quarter of 2022 because final settlement occurred in the second quarter of 2022. Under the ASR arrangement, we repurchased 12.5 million shares for a total cash investment of $2.6 billion. We did not enter into an ASR arrangement during any other periods presented.

We provide pension plan benefits to eligible team members.

 

 

Change in Accumulated Other Comprehensive Income (Loss)			Cash Flow Hedges						Currency Translation Adjustment						Pension						Total
(millions)
January 28, 2023			$	300					$	(23)					$	(696)					$	(419)
Amounts reclassified from AOCI, net of tax			(9)						—						3						(6)
July 29, 2023			$	291					$	(23)					$	(693)					$	(425)

Second quarter 2023 included the following notable items:

•GAAP and Adjusted diluted earnings per share were $1.80.

•Total revenue was $24.8 billion, a decrease of (4.9) percent, reflecting a total sales decrease of (4.9) percent and a 1.3 percent increase in other revenue.

•Comparable sales decreased (5.4) percent, reflecting a (4.8) percent decrease in traffic and a (0.7) percent decrease in average transaction amount.

◦Comparable stores-originated sales declined (4.3) percent.

◦Comparable digitally-originated sales declined (10.5) percent.

•Operating income of $1.2 billion was 273.0 percent higher than the comparable prior-year period. See Business Environment below for additional information.

Cash flow provided by operating activities was $3.4 billion for the six months ended July 29, 2023, compared with $47 million cash flow required for operating activities for the six months ended July 30, 2022. The drivers of the operating cash flow increase are described on page 21.

Note: Amounts may not foot due to rounding. Adjusted diluted earnings per share (Adjusted EPS), a non-GAAP metric, excludes the impact of certain items. Management believes that Adjusted EPS is useful in providing period-to-period comparisons of the results of our operations. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 19.

We report after-tax return on invested capital (ROIC) because we believe ROIC provides a meaningful measure of our capital allocation effectiveness over time. For the trailing twelve months ended July 29, 2023, after-tax ROIC was 13.7 percent, compared with 18.4 percent for the trailing twelve months ended July 30, 2022. The calculation of ROIC is provided on page 20.

During the first two quarters of 2023, sales growth in our Frequency categories (Beauty & Household Essentials and Food & Beverage) was more than offset by accelerating decreases in our Discretionary categories (Apparel & Accessories, Hardlines, and Home Furnishings & Décor). This trend of decreased Discretionary category sales began in 2022. In response to this trend, during 2022 we took actions and employed strategies to align inventories with sales trends. These actions, as well as improvements in the supply chain, have resulted in decreased inventory as of July 29, 2023 compared with January 28, 2023 and July 30, 2022. These actions and improvements have also resulted in a reduction in costs related to managing elevated inventory levels and reduced our working capital investment.

Along with supply chain improvements, we have experienced a significant decrease in freight costs due to a decline in freight rates compared to 2022. We have also experienced lower digital fulfillment costs due to a decrease in digital sales and a continued shift by our guests to lower-cost same-day fulfillment options.

We continue to experience higher inventory shrink, as a percentage of sales, relative to historical levels — including significantly higher shrink rates at certain stores. We believe that this trend is pervasive across the retail industry. Increased shrink has had, and if current trends persist will continue to have, an adverse impact on our results of operations, including potential impairment of our long-lived assets.

The Gross Margin Rate analysis on page 17 and the Inventory section on page 21 provide additional information.

Note: 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 include all merchandise sales, net of expected returns, and our estimate of gift card breakage. We use comparable sales to evaluate the performance of our stores and digital channel sales 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 Order Pickup or Drive Up, and delivery via Shipt. Digitally originated sales may also be fulfilled through our distribution centers, our vendors, or other third parties.

Sales growth—from both comparable sales and new stores—represents an important driver of our long-term profitability. We expect that comparable sales growth will drive the majority of our total sales growth. We believe that our ability to successfully differentiate our guests’ shopping experience through a careful combination of merchandise assortment, price, convenience, guest experience, and other factors will, over the long-term, drive both increasing shopping frequency (number of transactions, or "traffic") and the amount spent each visit (average transaction amount).

Note: Sales fulfilled by stores include in-store purchases and digitally originated sales fulfilled by shipping merchandise from stores to guests, Order Pickup, Drive Up, and Shipt.

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. For the three months ended July 29, 2023 and July 30, 2022, total RedCard Penetration was 18.6 percent and 20.1 percent, respectively. For the six months ended July 29, 2023 and July 30, 2022, total RedCard Penetration was 18.8 percent and 20.2 percent, respectively.

For the three months ended July 29, 2023, our gross margin rate was 27.0 percent compared with 21.5 percent in the comparable prior-year period. For the six months ended July 29, 2023, our gross margin rate was 26.7 percent compared with 23.5 percent in the comparable prior-year period. For both the three and six months ended July 29, 2023, the increase reflected the net impact of

•merchandising benefit, including

◦lower clearance and promotional markdown rates and other costs compared with the prior-year, which included the impact of inventory impairments and other actions;

◦lower freight costs; and

◦retail price increases;

•lower digital fulfillment costs due to a decrease in digital volume and a shift by our guests to lower-cost same-day fulfillment options; and

•higher inventory shrink.

For the three months ended July 29, 2023, our SG&A expense rate was 20.9 percent compared with 19.2 percent for the comparable prior-year period. For the six months ended July 29, 2023, our SG&A expense rate was 20.4 percent compared with 19.1 percent for the comparable prior-year period. The increase reflected the deleveraging impact of lower sales and the net impact of cost increases across our business, including investments in team member pay and benefits.

(a)In thousands; reflects total square feet less office, supply chain facilities, and vacant space.

 

Net interest expense was $141 million and $288 million for the three and six months ended July 29, 2023, respectively, compared with $112 million and $224 million in the respective comparable prior-year periods. The increase in net interest expense was primarily due to higher average debt levels in addition to higher floating interest rates for the three and six months ended July 29, 2023 compared with the prior-year periods.

 

Our effective income tax rate for the three and six months ended July 29, 2023 was 22.2 percent and 21.6 percent, respectively, compared with 15.8 percent and 18.7 percent in the respective comparable prior-year periods.The increase reflects higher pretax earnings in the current year, resulting in a smaller tax rate benefit from ongoing and discrete tax items.

To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share (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 operations. This measure is not in accordance with, or an alternative to, U.S. GAAP. The most comparable GAAP measure is diluted earnings per share. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate Adjusted EPS differently, limiting the usefulness of the measure for comparisons with other companies.

Note: Amounts may not foot due to rounding.

(a)Other items unrelated to current period operations, none of which were individually significant.

Earnings before interest expense and income taxes (EBIT) and earnings before interest expense, income taxes, depreciation, and amortization (EBITDA) are non-GAAP financial measures. We believe these measures 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. EBIT and EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate EBIT and EBITDA differently, limiting the usefulness of the measures for comparisons with other companies.