TARGET CORPORATION Executive Overview
We continue to make strategic investments to support our durable operating and financial model that further differentiatesTarget and is designed to drive sustainable sales and profit growth. During 2021, in support of our enterprise strategy described in Item 1 on page 2 of this Form 10-K, we •Expanded our digital fulfillment capabilities, including adding permanent storage capacity in more than 200 high-volume stores, adding thousands of new items to the list available for Order Pickup and Drive Up, and doubling the number of Drive Up parking stalls compared with last year. During 2021, over 50 percent of our digital sales were fulfilled by our same-day fulfillment options: Order Pickup, Drive Up, and delivery via Shipt. •Continued the steady stream of newness across our assortment and continued to introduce new owned brands, including our arts and crafts owned brand, Mondo LlamaTM, our sweet and savory food brand, Favorite DayTM, our pet food brand, KindfullTM, and our first dedicated storage and home organization owned brand, BrightroomTM. For the first time in history, 11 brands delivered$1 billion or more in sales, with 4 brands delivering over$2 billion in sales, driven by strength in Apparel, Home Furnishings & Decor and Food & Beverage. •Launched Ulta Beauty atTarget on Target.com and in about 100Target locations, and expanded our Apple andDisney experiences. •Remodeled 145 stores. •Opened 32 new stores, including 28 additional small format stores in key urban markets and on college campuses. •Invested significantly in our team, including recognition bonuses and launch of a new debt-free education assistance program.
Financial Summary
2021 included the following notable items:
•GAAP diluted earnings per share were$14.10 . •Adjusted diluted earnings per share were$13.56 . •Total revenue increased 13.3 percent, driven by an increase in comparable sales. •Comparable sales increased 12.7 percent, driven by a 12.3 percent increase in traffic. •Comparable store originated sales grew 11.0 percent. •Comparable digitally originated sales increased 20.8 percent. •Operating income of$8.9 billion was 36.8 percent higher than the comparable prior-year period. •We recognized a$335 million pretax gain on the sale ofDermstore . Sales were$104.6 billion for 2021, an increase of$12.2 billion , or 13.2 percent, from the prior year. Operating cash flow provided by continuing operations was$8.6 billion for 2021, a decrease of$(1.9) billion , or (18.1) percent, from$10.5 billion for 2020. The drivers of the operating cash flow decrease are described on page 2 7 . Earnings Per Share From Percent Change Continuing Operations 2021 2020 2019 2021/2020 2020/2019 GAAP diluted earnings per share$ 14.10 $ 8.64 $ 6.34 63.1 % 36.3 % Adjustments (0.53) 0.78 0.05
Adjusted diluted earnings per share
Note: Amounts may not foot due to rounding. Adjusted diluted earnings per share from continuing operations (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 continuing operations. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 24 . We report after-tax return on invested capital (ROIC) from continuing operations because we believe ROIC provides a meaningful measure of our capital-allocation effectiveness over time. For the trailing twelve months endedJanuary 29, 2022 , after-tax ROIC was 33.1 percent, compared with 23.5 percent for the trailing twelve months endedJanuary 30, 2021 . The calculation of ROIC is provided on page 26 .TARGET CORPORATION [[Image Removed: tgt-20220129_g2.jpg]] 2021 Form 10-K 19
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table ofContents
FINANCIAL SUMMARY & ANALYSIS OF OPERATIONS Index to Financial Statements
COVID-19
The COVID-19 pandemic continues to evolve. In 2020 and 2021, governments took various measures in response to COVID-19, such as mandating the closure of certain businesses and encouraging or requiring citizens to avoid large gatherings. To date, virtually all of our stores, digital channels, and distribution centers have remained open.
Since the onset of the COVID-19 pandemic, we have experienced strong comparable sales growth and significant volatility in our sales category and channel mix.
Supply Chain Disruptions
In recent months, we have seen increasing supply chain disruptions. In addition to country of origin production delays, trucker and dockworker shortages, a broad-based surge in consumer demand, and other factors have led to industry-wideU.S. port and ground transportation delays. In response, we have taken various actions, including ordering merchandise earlier, securing ocean freight routes, and increased use of air transport for certain merchandise. Some of these supply chain disruptions and resulting actions have resulted in increased costs. The Gross Margin Rate analysis on page 22 provides additional information.
Sale of
InFebruary 2021 , we soldDermstore LLC (Dermstore ) for$356 million in cash and recognized a$335 million pretax gain, which is included in Net Other (Income) / Expense.Dermstore represented less than 1 percent of our consolidated revenues, operating income and net assets.
Analysis of Results of Operations
Summary of Operating Income Percent Change (dollars in millions) 2021 2020 2019 2021/2020 2020/2019 Sales$ 104,611 $ 92,400 $ 77,130 13.2 % 19.8 % Other revenue 1,394 1,161 982 20.2 18.2 Total revenue 106,005 93,561 78,112 13.3 19.8 Cost of sales 74,963 66,177 54,864 13.3 20.6 SG&A expenses 19,752 18,615 16,233 6.1 14.7 Depreciation and amortization (exclusive of depreciation included in cost of sales) 2,344 2,230 2,357 5.1 (5.4) Operating income$ 8,946 $ 6,539 $ 4,658 36.8 % 40.4 % Rate Analysis 2021 2020 2019 Gross margin rate 28.3 % 28.4 % 28.9 % SG&A expense rate 18.6 19.9 20.8
Depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate
2.2 2.4 3.0
Operating income margin rate 8.4 7.0 6.0
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.
A discussion regarding Results of Operations and Analysis of Financial Condition for 2020, as compared to 2019, is included in Part II , Item 7 ,
MD&A to our Annual Report on Form 10-K for the year ended January 30,
2021.
TARGET CORPORATION [[Image Removed: tgt-20220129_g2.jpg]] 2021 Form 10-K 20
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF OPERATIONS Index to Financial Statements
Sales
Sales include all merchandise sales, net of expected returns, and our estimate
of gift card breakage. Note 4 to the Financial Statements defines 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).
Comparable Sales 2021 2020 2019
Comparable sales change 12.7 % 19.3 % 3.4 %
Drivers of change in comparable sales
Number of transactions (traffic) 12.3 3.7 2.7
Average transaction amount 0.4 15.0 0.7
Comparable Sales by Channel 2021 2020 2019
Stores originated comparable sales change 11.0 % 7.2 % 1.4 %
Digitally originated comparable sales change 20.8 144.7 28.6
Sales by Channel 2021 2020 2019
Stores originated 81.1 % 82.1 % 91.2 %
Digitally originated 18.9 17.9 8.8
Total 100 % 100 % 100 %
Sales by Fulfillment Channel 2021 2020 2019
Stores 96.4 % 96.0 % 97.2 %
Other 3.6 4.0 2.8
Total 100 % 100 % 100 %
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.
Sales by Product Category 2021 2020 2019 Apparel and accessories
17 % 16 % 19 %
Beauty and household essentials 26 26 27
Food and beverage 20 20 19
Hardlines 18 18 16
Home furnishings and décor 19 20 19
Total 100 % 100 % 100 %
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF OPERATIONS Index to Financial Statements
Note 4 to the Financial Statements provides additional product category
sales information. The collective interaction of a broad array of macroeconomic,
competitive, and consumer behavioral factors, as well as sales mix, and transfer
of sales to new stores makes further analysis of sales metrics infeasible.
TD Bank Group offers credit to qualified guests through Target -branded credit
cards: the Target Credit Card and the Target MasterCard Credit Card (Target
Credit Cards). Additionally, we offer a branded proprietary Target Debit Card.
Collectively, we refer to these products as RedCards™. 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 incremental
purchases on our RedCards are also incremental sales for Target . Guests receive
a 5 percent discount on virtually all purchases when they use a RedCard at
Target . RedCard sales increased for all years presented below; however, RedCard
penetration declined as total Sales increased at a faster pace.
RedCard Penetration 2021 2020 2019
Target Debit Card 11.7 % 12.3 % 12.6 %
Target Credit Cards 8.7 9.2 10.7
Total RedCard Penetration 20.5 % 21.5 % 23.3 %
Note: Amounts may not foot due to rounding.
Gross Margin Rate
[[Image Removed: tgt-20220129_g13.jpg]]
Our gross margin rate was 28.3 percent in 2021 and 28.4 percent in 2020. This
decrease reflected the net impact of
•supply chain pressure related to increased compensation and headcount in our
distribution centers, partially offset by the small net benefit of a higher
percentage of digital sales fulfilled through our lower-cost same-day
fulfillment options
•higher merchandise and freight costs partially offset by historically low
promotional and clearance markdown rates; and
•favorable mix in the relative growth rates of higher and lower margin
categories.
Selling, General and Administrative (SG&A) Expense Rate
Our SG&A expense rate was 18.6 percent in 2021, compared with 19.9 percent in 2020, reflecting the leverage benefit from strong revenue growth.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF OPERATIONS Index to Financial Statements
Store Data
Change in Number of Stores 2021 2020
Beginning store count 1,897 1,868
Opened 32 30
Closed (3) (1)
Ending store count 1,926 1,897
Number of Stores and Number of Stores Retail Square Feet (a)
Retail Square Feet January 29, 2022 January 30, 2021 January 29, 2022 January 30, 2021
170,000 or more sq. ft. 274 273 49,071 48,798
50,000 to 169,999 sq. ft. 1,516 1,509 190,205 189,508
49,999 or less sq. ft. 136 115 4,008 3,342
Total 1,926 1,897 243,284 241,648
(a)In thousands; reflects total square feet less office, distribution center, and vacant space.
Other Performance Factors Net Interest Expense
Net interest expense was
Net Other (Income) / Expense
Net Other (Income) / Expense was$(382) million and$16 million for 2021 and 2020, respectively. 2021 included the$335 million gain on theFebruary 2021 sale ofDermstore . Provision for Income Taxes Our 2021 effective income tax rate was 22.0 percent compared with 21.2 percent in 2020. The rate increase was driven by significantly higher pretax earnings, which diluted the tax-rate benefit of fixed and discrete tax items.
Note 19 to the Financial Statements provides additional information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Financial Statements
Reconciliation of Non-GAAP Financial Measures to GAAP Measures
To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share from continuing operations (Adjusted EPS). This metric excludes certain items presented below. We believe this information is useful in providing period-to-period comparisons of the results of our continuing operations. This measure is not in accordance with, or an alternative to, generally accepted accounting principles in theU.S. (GAAP). The most comparable GAAP measure is diluted earnings per share from continuing operations. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate Adjusted EPS differently than we do, limiting the usefulness of the measure for comparisons with other companies. Reconciliation of Non-GAAP Adjusted EPS 2021 2020 2019 Per Share Per Share Per Share (millions, except per share data) Pretax Net of Tax Amounts Pretax Net of Tax Amounts Pretax Net of Tax Amounts GAAP diluted earnings per share from continuing operations$ 14.10 $ 8.64 $ 6.34 Adjustments Gain on Dermstore Sale$ (335) $ (269) $ (0.55) $ - $ - $ - $ - $ - $ - Loss on debt extinguishment - - - 512 379 0.75 10 8 0.01 Loss on investment (a) - - - 19 14 0.03 41 31 0.06 Other (b) 9 7 0.01 28 20 0.04 (17) (13) (0.02) Income tax matters (c) - - - - (21) (0.04) - - - Adjusted diluted earnings per share from continuing operations$ 13.56 $ 9.42 $ 6.39 Note: Amounts may not foot due to rounding. (a)Represents a loss on our investment inCasper Sleep Inc. , which is not core to our continuing operations. (b)Other items unrelated to current period operations, none of which were individually significant. (c)Represents benefits from the resolution of certain income tax matters unrelated to current period operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Financial Statements
Earnings from continuing operations before interest expense and income taxes (EBIT) and earnings from continuing operations 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 from continuing operations. 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. EBIT and EBITDA Percent Change (dollars in millions) 2021 2020 2019 2021/2020 2020/2019
Net earnings from continuing operations
59.0 % 33.6 %
+ Provision for income taxes 1,961 1,178 921 66.5 27.9
+ Net interest expense 421 977 477 (56.9) 105.1
EBIT $ 9,328 $ 6,523 $ 4,667 43.0 % 39.8 %
+ Total depreciation and amortization
(a) 2,642 2,485 2,604 6.3 (4.6)
EBITDA $ 11,970 $ 9,008 $ 7,271 32.9 % 23.9 %
(a)Represents total depreciation and amortization, including amounts classified within Depreciation and Amortization and within Cost of Sales.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES Index to Financial Statements
We have also disclosed after-tax ROIC, which is a ratio based on GAAP information, with the exception of the add-back of operating lease interest to operating income. 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.
After-Tax Return on
(dollars in millions)
Trailing Twelve Months
Numerator January 29, 2022 January 30, 2021
Operating income $ 8,946 $ 6,539
+ Net other income / (expense) 382 (16)
EBIT 9,328 6,523
+ Operating lease interest (a) 87 87
- Income taxes (b) 2,073 1,404
Net operating profit after taxes $ 7,342 $ 5,206
January 29, January 30, February 1,
Denominator 2022 2021 2020
Current portion of long-term debt and other
borrowings $ 171 + Noncurrent portion of long-term debt 13,549 11,536 11,338 + Shareholders' investment 12,827 14,440 11,833 + Operating lease liabilities (c) 2,747 2,429 2,475 - Cash and cash equivalents 5,911 8,511 2,577 Invested capital$ 23,383 $ 21,038 $ 23,230 Average invested capital (d)$ 22,210
After-tax return on invested capital 33.1 % 23.5 %
(a)Represents the add-back to operating income driven by the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as finance leases. Calculated using the discount rate for each lease and recorded as a component of rent expense within SG&A Expenses. Operating lease interest is added back to operating income in the ROIC calculation to control for differences in capital structure between us and our competitors. (b)Calculated using the effective tax rates for continuing operations, which were 22.0 percent and 21.2 percent for the trailing twelve months endedJanuary 29, 2022 , andJanuary 30, 2021 , respectively. For the trailing twelve months endedJanuary 29, 2022 , andJanuary 30, 2021 , includes tax effect of$2.1 billion and$1.4 billion , respectively, related to EBIT, and$19 million and$18 million , respectively, related to operating lease interest. (c)Total short-term and long-term operating lease liabilities included within Accrued and Other Current Liabilities and Noncurrent Operating Lease Liabilities, respectively. (d)Average based on the invested capital at the end of the current period and the invested capital at the end of the comparable prior period.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF FINANCIAL CONDITION Index to Financial StatementsAnalysis of Financial Condition
Liquidity and Capital Resources
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. Our year-end cash and cash equivalents balance decreased to$5.9 billion from$8.5 billion in 2020. Our cash and cash equivalents balance includes short-term investments of$5.0 billion and$7.6 billion as ofJanuary 29, 2022 , andJanuary 30, 2021 , 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.
Operating Cash Flows
Cash flows provided by operating activities were$8.6 billion in 2021 compared with$10.5 billion in 2020. For 2021, operating cash flows reflect stronger operating results, offset by increased inventory investment and lower accounts payable leverage, compared with 2020. Additionally, operating cash flows for 2021 reflect a$1.0 billion increase in income tax payments.
Inventory
Year-end inventory was$13.9 billion , compared with$10.7 billion in 2020. The increase in inventory levels reflect our efforts to align inventory with sales trends, and elevated in-transit inventory related to import supply chain delays.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF FINANCIAL CONDITION Index to Financial StatementsCapital Expenditures
[[Image Removed: tgt-20220129_g14.jpg]]Note: Amounts may not foot due to rounding.
Capital expenditures increased in 2021 from the prior year as we invested in our strategic initiatives, including store remodels, some of which were delayed in 2020, new store openings, and supply chain projects. Beyond full-store remodels, we invested in optimizing front-end space in high-volume locations to increase the efficiency of our Same-Day Services, and built-out about 100 Ulta Beauty shop-in-shops. We have completed over 900 full-store remodels since the launch of the current program in 2017, including 145 in 2021. In addition to these cash investments, we entered into leases related to new stores in 2021, 2020, and 2019 with total future minimum lease payments of$401 million ,$764 million , and$669 million , respectively, and new leases related to our supply chain with total future minimum lease payments of$226 million ,$442 million , and$185 million , respectively. We expect capital expenditures in 2022 of approximately$4.0 billion to$5.0 billion to support remodels, new stores, and supply chain projects. Supply chain projects will add replenishment capacity and modernize our network, including the use of sortation centers to enhance our last-mile delivery capabilities. We expect to complete approximately 200 full-store remodels, open 25 to 30 new stores, and add more than 250 Ulta Beauty shop-in-shops during 2022. Additionally, we will continue to invest in optimizing front-end space. We also expect to continue to invest in new store and supply chain leases.
Dividends
We paid dividends totaling$1.5 billion ($3.16 per share) in 2021 and$1.3 billion ($2.68 per share) in 2020, a per share increase of 17.9 percent. We declared dividends totaling$1.7 billion ($3.38 per share) in 2021 and$1.4 billion ($2.70 per share) in 2020, a per share increase of 25.2 percent. 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 Repurchases
During 2021 and 2020 we returned$7.2 billion and$609 million , respectively, to shareholders through share repurchase. See Part II , Item 5 , Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Annual Report on Form 10-K and Note 21 to the Financial Statements for more information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF FINANCIAL CONDITION Index to Financial Statements
Subsequent to year-end, we entered into an accelerated share repurchase
arrangement to repurchase up to $2.75 billion of our common stock. Under the
agreement, we paid $2.75 billion and received an initial delivery of 8.9 million
shares, subject to a final settlement of cash or additional shares in the second
quarter of 2022.
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 January 29, 2022 , 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 long-term debt rating from A- to A during
2021.
In 2021, we issued
In 2021, we obtained a committed$3.0 billion unsecured revolving credit facility that will expire inOctober 2026 . This new facility replaced our$2.5 billion unsecured revolving credit facility that was set to expire inOctober 2023 . No balances were outstanding under either credit facility at any time during 2021 or 2020. 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 ofJanuary 29, 2022 , 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 non-investment 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 non-investment grade.
Note 16 to the Financial Statements provides additional information.
Future Cash Requirements
We enter into contractual obligations in the ordinary course of business that
may require future cash payments. Such obligations include, but are not limited
to, purchase commitments, debt service, leasing arrangements, and liabilities
related to deferred compensation and pensions. The Notes to the
Consolidated Financial Statements provide additional information.
We believe our sources of liquidity, namely operating cash flows, credit
facility capacity, and access to capital markets, will continue to be adequate
to meet our contractual obligations, working capital and capital expenditure
requirements, finance anticipated expansion and strategic initiatives, fund debt
maturities, pay dividends, and execute purchases under our share repurchase
program for the foreseeable future.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF FINANCIAL CONDITION Index to Financial StatementsCritical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. In the Notes to the Consolidated Financial Statements , we describe the significant accounting policies used in preparing the consolidated financial statements. Our management has discussed the development, selection, and disclosure of our critical accounting estimates with theAudit & Risk Committee of our Board of Directors. The following items require significant estimation or judgment: Inventory and cost of sales: The vast majority of our inventory is accounted for under the retail inventory accounting method using the last-in, first-out method (LIFO). Our inventory is valued at the lower of LIFO cost or market. We reduce inventory for estimated losses related to shrink and markdowns. Our shrink estimate is based on historical losses verified by physical inventory counts. Historically, our actual physical inventory count results have shown our estimates to be reliable. Market adjustments for markdowns are recorded when the salability of the merchandise has diminished. Salability can be impacted by consumer preferences and seasonality, among other factors. We believe the risk of inventory obsolescence is largely mitigated because our inventory typically turns in less than three months. Inventory was$13.9 billion and$10.7 billion as ofJanuary 29, 2022 , andJanuary 30, 2021 , respectively, and is further described in Note 10 to the Financial Statements. Vendor income: We receive various forms of consideration from our vendors (vendor income), principally earned as a result of volume rebates, markdown allowances, promotions, and advertising allowances. Substantially all vendor income is recorded as a reduction of cost of sales. Vendor income earned can vary based on a number of factors, including purchase volumes, sales volumes, and our pricing and promotion strategies. We establish a receivable for vendor income that is earned but not yet received. Based on historical trending and data, this receivable is computed by forecasting vendor income collections and estimating the amount earned. The majority of the year-end vendor income receivables are collected within the following fiscal quarter, and we do not believe there is a reasonable likelihood that the assumptions used in our estimate will change significantly. Historically, adjustments to our vendor income receivable have not been material. Vendor income receivable was$518 million and$504 million as ofJanuary 29, 2022 , andJanuary 30, 2021 , respectively. Vendor income is described further in Note 6 to the Financial Statements. Long-lived assets: Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The evaluation is performed primarily at the store level. An impairment loss is recognized when estimated undiscounted future cash flows from the operation and/or eventual disposition of the asset or asset group is less than its carrying amount, and is measured as the excess of its carrying amount over fair value. We estimate fair value by obtaining market appraisals, obtaining valuations from third-party brokers, or using other valuation techniques. We recorded impairments of$87 million ,$62 million , and$23 million in 2021, 2020, and 2019, respectively, which are described further in Note 12 to the Financial Statements. Insurance/self-insurance: We retain a substantial portion of the risk related to certain general liability, workers' compensation, property loss, and team member medical and dental claims. However, we maintain stop-loss coverage to limit the exposure related to certain risks. Liabilities associated with these losses include estimates of both claims filed and losses incurred but not yet reported. We use actuarial methods which consider a number of factors to estimate our ultimate cost of losses. General liability and workers' compensation liabilities are recorded based on our estimate of their net present value; other liabilities referred to above are not discounted. Our workers' compensation and general liability accrual was$519 million and$510 million as ofJanuary 29, 2022 , andJanuary 30, 2021 , respectively. We believe that the amounts accrued are appropriate; however, our liabilities could be significantly affected if future occurrences or loss developments differ from our assumptions. For example, a 5 percent increase or decrease in average claim costs would have impacted our self-insurance expense by$26 million in 2021. Historically, adjustments to our estimates have not been material. Refer to Part II , Item 7A , Quantitative and Qualitative Disclosures About Market Risk , for further disclosure of the market risks associated with these exposures. We maintain insurance coverage to limit our exposure to certain events, including network security matters.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF FINANCIAL CONDITION & NEW ACCOUNTING Index to Financial
PRONOUNCEMENTS Statements
Income taxes: We pay income taxes based on the tax statutes, regulations, and
case law of the various jurisdictions in which we operate. Significant judgment
is required in determining the timing and amounts of deductible and taxable
items, and in evaluating the ultimate resolution of tax matters in dispute with
tax authorities. The benefits of uncertain tax positions are recorded in our
financial statements only after determining it is likely the uncertain tax
positions would withstand challenge by taxing authorities. We periodically
reassess these probabilities and record any changes in the financial statements
as appropriate. Liabilities for uncertain tax positions, including interest and
penalties, were $138 million and $193 million as of January 29, 2022 , and
January 30, 2021 , respectively. We believe the resolution of these matters will
not materially affect our consolidated financial statements. Income taxes are
described further in Note 19 to the Financial Statements.
Pension accounting: We maintain a funded qualified defined benefit pension
plan, as well as nonqualified and international pension plans that are generally
unfunded, for certain current and retired team members. The costs for these
plans are determined based on actuarial calculations using the assumptions
described in the following paragraphs. Eligibility and the level of benefits
vary depending on each team member's full-time or part-time status, date of
hire, age, length of service, and/or compensation. The benefit obligation and
related expense for these plans are determined based on actuarial calculations
using assumptions about the expected long-term rate of return, the discount
rate, compensation growth rates, mortality, and retirement age. These
assumptions, with adjustments made for any significant plan or participant
changes, are used to determine the period-end benefit obligation and establish
expense for the next year.
Our 2021 expected long-term rate of return on plan assets of 5.80 percent was
determined by the portfolio composition, historical long-term investment
performance, and current market conditions. A 1 percentage point decrease in our
expected long-term rate of return would increase annual expense by $41 million .
The discount rate used to determine benefit obligations is adjusted annually
based on the interest rate for long-term high-quality corporate bonds, using
yields for maturities that are in line with the duration of our pension
liabilities. Our benefit obligation and related expense will fluctuate with
changes in interest rates. A 1 percentage point decrease in the weighted average
discount rate would increase annual expense by $62 million .
Based on our experience, we use a graduated compensation growth schedule that
assumes higher compensation growth for younger, shorter-service pension-eligible
team members than it does for older, longer-service pension-eligible team
members.
Pension benefits are further described in Note 24 to the Financial Statements.
Legal and other contingencies: We believe the accruals recorded in our consolidated financial statements properly reflect loss exposures that are both probable and reasonably estimable. We do not believe any of the currently identified claims or litigation will materially affect our results of operations, cash flows, or financial condition. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, it may cause a material adverse impact on the results of operations, cash flows, or financial condition for the period in which the ruling occurs, or future periods. Refer to Note 15 to the Financial Statements for further information on contingencies.
New Accounting Pronouncements
We do not expect that any recently issued accounting pronouncements will have a material effect on our financial statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
FORWARD LOOKING STATEMENTS & QUANTITATIVE AND Index to Financial
QUALITATIVE DISCLOSURES Statements
Forward-Looking Statements
This report contains forward-looking statements, which are based on our current
assumptions and expectations. These statements are typically accompanied by the
words "expect," "may," "could," "believe," "would," "might," "anticipates," or
similar words. The principal forward-looking statements in this report include:
our financial performance, statements regarding the adequacy of and costs
associated with our sources of liquidity, the funding of debt maturities, the
continued execution of our share repurchase program, our expected capital
expenditures and new lease commitments, the expected compliance with debt
covenants, the expected impact of new accounting pronouncements, our intentions
regarding future dividends, contributions and payments related to our pension
plan, the expected return on plan assets, the expected timing and recognition of
compensation expenses, the effects of macroeconomic conditions, the adequacy of
our reserves for general liability, workers' compensation and property loss, the
expected outcome of, and adequacy of our reserves for claims, litigation, and
the resolution of tax matters, our expectations regarding our contractual
obligations, liabilities, and vendor income, the expected ability to recognize
deferred tax assets and liabilities and the timing of such recognition, the
expected impact of changes in information technology systems, future responses
to and effects of the COVID-19 pandemic, and changes in our assumptions and
expectations.
All such forward-looking statements are intended to enjoy the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, as amended. Although we believe there is a
reasonable basis for the forward-looking statements, our actual results could be
materially different. The most important factors which could cause our actual
results to differ from our forward-looking statements are set forth on our
description of risk factors included in Part I , Item 1A , Risk
Factors to this Form 10-K, which should be read in conjunction with the
forward-looking statements in this report. Forward-looking statements speak only
as of the date they are made, and we do not undertake any obligation to update
any forward-looking statement.
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