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 2022, in support of our enterprise strategy described in Item 1 on page 2 of this Form 10-K, we •Expanded our supply chain capacity and digital fulfillment capabilities, including adding one new distribution center and six new sortation centers to support our growth and commitment to fast delivery times, while helping our teams work more efficiently and managing our shipping costs; •Fulfilled over50 percent of our digital sales through 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 and exclusive brands, including fashion forward brands Future CollectiveTM and Houston White xTarget ; •Completed 140 full store remodels and invested in hundreds of other stores through projects to increase efficiency of our Same-Day Services, build-out and open Ulta Beauty shop-in-shops, and expand Apple andDisney experiences; •Opened 23 new stores, including a new larger-footprint store with reimagined design elements and additional stores in key urban markets and on college campuses; •Invested in our team through our updated starting wage range, expanded access to health care benefits, and our debt-free education assistance program; •Offered compelling promotions, attractive every day price points on key items, and free and easy payment and fulfillment options, including our new RedCard Reloadable Account, which provides all the benefits of our RedCard program without the need for a credit check or an existing bank account; and •LaunchedTarget Zero, a collection of products designed to reduce waste and make it easier to shop sustainably, and completed retrofitting our first store designed to be net zero energy, located inVista, California .
Financial Summary
2022 included the following notable items:
•GAAP diluted earnings per share were$5.98 . •Adjusted diluted earnings per share were$6.02 . •Total revenue increased 2.9 percent, reflecting total sales growth of 2.8 percent and a 9.8 percent increase in other revenue. •Comparable sales increased 2.2 percent, driven by a 2.1 percent increase in traffic. •Comparable store originated sales grew 2.4 percent. •Comparable digitally originated sales increased 1.5 percent. •Operating income of$3.8 billion was 57.0 percent lower than the comparable prior-year period. See Business Environment below for additional information. Sales were$107.6 billion for 2022, an increase of$3.0 billion , or 2.8 percent, from the prior year. Operating cash flow was$4.0 billion for 2022, a decrease of$(4.6) billion , or (53.4) percent, from$8.6 billion for 2021. The drivers of the operating cash flow decrease are described on page 27 .
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table ofContents
FINANCIAL SUMMARY & ANALYSIS OF OPERATIONS Index to Financial Statements
Earnings Per Share Percent Change
2022 2021 2020 2022/2021 2021/2020
GAAP diluted earnings per share $ 5.98 $ 14.10 $ 8.64 (57.6) % 63.1 %
Adjustments 0.03 (0.53) 0.78
Adjusted diluted earnings per share
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 24 . 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 endedJanuary 28, 2023 , after-tax ROIC was 12.6 percent, compared with 33.1 percent for the trailing twelve months endedJanuary 29, 2022 . The calculation of ROIC is provided on page 26 .
Business Environment
Following the onset of the COVID-19 pandemic in 2020, we experienced strong comparable sales growth and significant volatility in our category and channel mix, which continued through 2021, along with 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 led to industry-wideU.S. port and ground transportation delays. In response to the rising guest demand and supply chain constraints, we took various actions, including ordering merchandise earlier, securing ocean freight routes, adding incremental holding capacity nearU.S. ports, and increasing use of air transport for certain merchandise. Some of these supply chain disruptions and resulting actions resulted in increased costs. In 2022, our comparable sales growth slowed significantly, reflecting sales decreases in our Discretionary categories (Apparel & Accessories, Hardlines, and Home Furnishings & Decor) that substantially offset growth in our Frequency categories (Beauty & Household Essentials and Food & Beverage). In response to this shift in demand, we took several actions to address our inventory position and create additional flexibility in a rapidly changing environment, including increasing promotional and clearance markdowns, removing excess inventory, and cancelling purchase orders. In addition, during the second half of 2022, port congestion, shipping container availability, and other supply chain pressures improved. This resulted in some inventory arriving earlier than anticipated, which resulted in increased costs of managing elevated inventory levels and an increased working capital investment. These factors, net of the impact of retail price increases taken to address merchandise and freight cost inflation, resulted in decreased profitability compared to the prior year. The Gross Margin Rate analysis on page 23 and Inventory section on page 27 provide additional information. Sale of Dermstore InFebruary 2021 , we soldDermstore LLC (Dermstore ) for$356 million in cash and recognized a$335 million pretax gain, which is included in Net Other (Income) / Expense.Dermstore represented less than 1 percent of our consolidated revenues, operating income and net assets.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF OPERATIONS Index to Financial Statements
Analysis of Results of Operations
Summary of Operating Income Percent Change (dollars in millions) 2022 2021 2020 2022/2021 2021/2020 Sales$ 107,588 $ 104,611 $ 92,400 2.8 % 13.2 % Other revenue 1,532 1,394 1,161 9.8 20.2 Total revenue 109,120 106,005 93,561 2.9 13.3 Cost of sales 82,229 74,963 66,177 9.7 13.3 SG&A expenses 20,658 19,752 18,615 4.6 6.1 Depreciation and amortization (exclusive of depreciation included in cost of sales) 2,385 2,344 2,230 1.8 5.1 Operating income$ 3,848 $ 8,946 $ 6,539 (57.0) % 36.8 % Rate Analysis 2022 2021 2020 Gross margin rate 23.6 % 28.3 % 28.4 % SG&A expense rate 18.9 18.6 19.9
Depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate
2.2 2.2 2.4
Operating income margin rate 3.5 8.4 7.0
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 Analysis of Results of Operations and Analysis of Financial Condition for 2021, as compared to 2020, is included in Part II, Item 7, MD&A to our Annual Report on Form 10-K for the year ended January 29, 2022. Sales Sales include all merchandise sales, net of expected returns, and our estimate of gift card breakage. Note 3 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 2022 2021 2020 Comparable sales change 2.2 % 12.7 % 19.3 % Drivers of change in comparable sales Number of transactions (traffic) 2.1 12.3 3.7 Average transaction amount 0.1 0.4 15.0TARGET CORPORATION [[Image Removed: tgt-20230128_g2.jpg]] 2022 Form 10-K 21
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF OPERATIONS Index to Financial Statements
Comparable Sales by Channel 2022 2021 2020
Stores originated comparable sales change 2.4 % 11.0 % 7.2 %
Digitally originated comparable sales change 1.5 20.8 144.7
Sales by Channel 2022 2021 2020
Stores originated 81.4 % 81.1 % 82.1 %
Digitally originated 18.6 18.9 17.9
Total 100 % 100 % 100 %
Sales by Fulfillment Channel 2022 2021 2020
Stores 96.7 % 96.4 % 96.0 %
Other 3.3 3.6 4.0
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.
Part I, Item 1 , Business of this Form 10-K and Note 3 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 throughTarget -branded credit cards: theTarget Credit Card and theTarget MasterCard Credit Card (Target Credit Cards). Additionally, we offer a branded proprietaryTarget Debit Card and RedCard Reloadable Account. Collectively, we refer to these products as RedCards™. Guests receive a 5 percent discount on virtually all purchases when they use a RedCard atTarget . 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 forTarget . For the years endedJanuary 28, 2023 ,January 29, 2022 , andJanuary 30, 2021 , total RedCard Penetration was 19.8 percent, 20.5 percent, and 21.5 percent, respectively.TARGET CORPORATION [[Image Removed: tgt-20230128_g2.jpg]] 2022 Form 10-K 22
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF OPERATIONS Index to Financial Statements
Gross Margin Rate
[[Image Removed: tgt-20230128_g13.jpg]]
Our gross margin rate was 23.6 percent in 2022 and 28.3 percent in 2021. This
decrease reflected the net impact of
•merchandising pressure, including
•higher clearance and promotional markdown rates, including the impact of
inventory impairments and other actions taken in our Discretionary categories;
and
•higher merchandise and freight costs, partially offset by the benefit of retail
price increases;
•supply chain pressure related to increased compensation and headcount in our
distribution centers, investments in new facilities, and costs of managing
excess inventory;
•higher inventory shrink; 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 18.9 percent in 2022, compared with 18.6 percent in 2021, reflecting the net impact of cost increases across our business, including investments in hourly team member wages, partially offset by lower incentive compensation in 2022 compared to the prior year. Store Data Change in Number of Stores 2022 2021 Beginning store count 1,926 1,897 Opened 23 32 Closed (1) (3) Ending store count 1,948 1,926 Number of Stores and Number of Stores Retail Square Feet (a) Retail Square Feet January 28, 2023 January 29, 2022 January 28, 2023 January 29, 2022 170,000 or more sq. ft. 274 274 48,985 49,071 50,000 to 169,999 sq. ft. 1,527 1,516 191,241 190,205 49,999 or less sq. ft. 147 136 4,358 4,008 Total 1,948 1,926 244,584 243,284 (a)In thousands; reflects total square feet less office, distribution center, and vacant space.TARGET CORPORATION [[Image Removed: tgt-20230128_g2.jpg]] 2022 Form 10-K 23
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF OPERATIONS Index to Financial Statements
Other Performance Factors
Net Interest Expense
Net interest expense was $478 million for 2022, compared with $421 million for
2021. The increase in net interest expense was primarily due to higher average
debt and commercial paper levels in 2022 compared with 2021.
Net Other (Income) / Expense
Net Other (Income) / Expense was$(48) million and$(382) million for 2022 and 2021, respectively. 2021 included the$335 million gain on theFebruary 2021 sale ofDermstore . Provision for Income Taxes Our 2022 effective income tax rate was 18.7 percent compared with 22.0 percent in 2021. The decrease reflects lower pretax earnings in the current year and the impacts of discrete tax benefits. Our effective tax rate is generally more volatile at lower amounts of pretax income because the impact of discrete, deductible and nondeductible tax items and credits is greater.
Note 18 to the Financial Statements provides additional information.
Reconciliation of Non-GAAP Financial Measures to GAAP Measures
To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share (Adjusted EPS). This metric excludes certain items presented below. We believe this information is useful in providing period-to-period comparisons of the results of our operations. This measure is not in accordance with, or an alternative to, generally accepted accounting principles in theU.S. (GAAP). The most comparable GAAP measure is diluted earnings per share. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported in accordance with GAAP. Other companies may calculate Adjusted EPS differently than we do, limiting the usefulness of the measure for comparisons with other companies. Reconciliation of Non-GAAP Adjusted EPS 2022 2021 2020 (millions, except per share Per Share Per Share Per Share data) Pretax Net of Tax Amounts Pretax Net of Tax Amounts Pretax Net of Tax Amounts GAAP diluted earnings per share$ 5.98 $ 14.10 $ 8.64 Adjustments Gain on Dermstore Sale $ - $ - $ -$ (335) $ (269) $ (0.55) $ - $ - $ - Loss on debt extinguishment - - - - - - 512 379 0.75 Loss on investment (a) - - - - - - 19 14 0.03 Other (b) 20 15 0.03 9 7 0.01 28 20 0.04 Income tax matters (c) - - - - - - - (21) (0.04) Adjusted diluted earnings per share$ 6.02 $ 13.56 $ 9.42 Note: Amounts may not foot due to rounding. (a)Represents a loss on our investment inCasper Sleep Inc. , which is not core to our 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 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. EBIT and EBITDA Percent Change (dollars in millions) 2022 2021 2020 2022/2021 2021/2020 Net earnings$ 2,780 $ 6,946 $ 4,368 (60.0) % 59.0 % + Provision for income taxes 638 1,961 1,178 (67.5) 66.5 + Net interest expense 478 421 977 13.4 (56.9) EBIT$ 3,896 $ 9,328 $ 6,523 (58.2) % 43.0 % + Total depreciation and amortization (a) 2,700 2,642 2,485 2.2 6.3 EBITDA$ 6,596 $ 11,970 $ 9,008 (44.9) % 32.9 %
(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 28, 2023 January 29, 2022
Operating income $ 3,848 $ 8,946
+ Net other income / (expense) 48 382
EBIT 3,896 9,328
+ Operating lease interest (a) 93 87
- Income taxes (b) 744 2,073
Net operating profit after taxes $ 3,245 $ 7,342
January 28, January 29, January 30,
Denominator 2023 2022 2021
Current portion of long-term debt and other
borrowings $ 130 + Noncurrent portion of long-term debt 16,009 13,549 11,536 + Shareholders' investment 11,232 12,827 14,440 + Operating lease liabilities (c) 2,934 2,747 2,429 - Cash and cash equivalents 2,229 5,911 8,511 Invested capital$ 28,076 $ 23,383 $ 21,038 Average invested capital (d)$ 25,729
After-tax return on invested capital 12.6 % 33.1 %
(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, which were 18.7 percent and 22.0 percent for the trailing twelve months endedJanuary 28, 2023 , andJanuary 29, 2022 , respectively. For the trailing twelve months endedJanuary 28, 2023 , andJanuary 29, 2022 , includes tax effect of$0.7 billion and$2.1 billion , respectively, related to EBIT, and$17 million and$19 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$2.2 billion from$5.9 billion in 2021. Our cash and cash equivalents balance includes short-term investments of$1.3 billion and$5.0 billion as ofJanuary 28, 2023 , andJanuary 29, 2022 , 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$4.0 billion in 2022 compared with$8.6 billion in 2021. For 2022, operating cash flows decreased as a result of lower earnings and lower accounts payable leverage, partially offset by decreased inventory investment, compared with 2021.
Inventory
Year-end inventory was$13.5 billion , compared with$13.9 billion in 2021. The decrease in inventory levels primarily reflects the following: •decreased in-transit and late-arriving inventory as lead times improved, •investments in our inventory position in our Frequency categories, offsetting reductions in our Discretionary categories, and •increases in unit costs across all of our categories. The Business Environment section on page 20 provides additional information.TARGET CORPORATION [[Image Removed: tgt-20230128_g2.jpg]] 2022 Form 10-K 27
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF FINANCIAL CONDITION Index to Financial StatementsCapital Expenditures
[[Image Removed: tgt-20230128_g14.jpg]]Note: Amounts may not foot due to rounding.
Capital expenditures increased in 2022 from the prior year as we invested in our strategic initiatives, including an increase in investments in both stores and in our supply chain. The increase also reflects the impact of inflation on these 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 and opened approximately 250 Ulta Beauty shop-in-shops. We have completed over 1,000 full-store remodels since the launch of the current program in 2017, including 140 in 2022. In addition to these cash investments, we entered into leases related to new stores in 2022, 2021, and 2020 with total future minimum lease payments of$319 million ,$401 million , and$764 million , respectively, and new leases related to our supply chain with total future minimum lease payments of$1.6 billion ,$226 million , and$442 million , respectively. We expect capital expenditures in 2023 of approximately$4.0 billion to$5.0 billion to support full-store remodels and other existing store investments, 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 70 full-store remodels, open about 20 new stores, and add additional Ulta Beauty shop-in-shops during 2023. 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$1.8 billion ($3.96 per share) in 2022 and$1.5 billion ($3.16 per share) in 2021, a per share increase of 25.3 percent. We declared dividends totaling$1.9 billion ($4.14 per share) in 2022 and$1.7 billion ($3.38 per share) in 2021, a per share increase of 22.5 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 2022 and 2021 we returned$2.6 billion and$7.2 billion , 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 20 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 StatementsFinancing
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 ofJanuary 28, 2023 , 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.
In 2022, we issued
In 2022, we obtained a new committed$1.0 billion 364-day unsecured revolving credit facility that will expire inOctober 2023 . We also extended our existing committed$3.0 billion unsecured revolving credit facility, which now expires inOctober 2027 . No balances were outstanding under either credit facility at any time during 2022 or 2021. Most of our long-term debt obligations contain covenants related to secured debt levels. In addition to a secured debt level covenant, our credit facilities also contain a debt leverage covenant. We are, and expect to remain, in compliance with these covenants. Additionally, as ofJanuary 28, 2023 , 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 15 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.
Critical 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:TARGET CORPORATION [[Image Removed: tgt-20230128_g2.jpg]] 2022 Form 10-K 29
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF FINANCIAL CONDITION Index to Financial Statements
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 $13.5 billion and $13.9 billion
as of January 28, 2023 , and January 29, 2022 , respectively, and is further
described in Note 9 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 $526 million and $518 million as of
January 28, 2023 , and January 29, 2022 , respectively. Vendor income is described
further in Note 5 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 $66 million , $87 million , and $62 million
in 2022, 2021, and 2020, respectively, which are described further in Note
11 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 $560 million and $519 million as
of January 28, 2023 , and January 29, 2022 , 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 $28 million in 2022. 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.
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. Gross uncertain tax positions, including interest and penalties,
were $241 million and $138 million as of January 28, 2023 , and January 29, 2022 ,
respectively. We believe the resolution of these matters will not materially
affect our consolidated financial statements. Income taxes are described further
in Note 18 to the Financial Statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF FINANCIAL CONDITION & NEW ACCOUNTING Index to Financial
PRONOUNCEMENTS 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 2022 expected long-term rate of return on plan assets of 5.60 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 $42 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 $59 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 23 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 14 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
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, the expected contributions and payments related to our pension plan,
the expected return on plan assets, the expected timing and recognition of
compensation expenses, 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, our expectations regarding arrangements with
our partners, 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 in 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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