TARGET CORPORATION Executive Overview
While our business was materially affected by the COVID-19 pandemic, resulting in significantly higher sales and profits in 2020, the pandemic highlighted the importance of our multi-category portfolio and our decision to put our stores at the center of our strategy. In 2020, we continued 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. We have done this through an investment strategy focused on:
Elevating the Shopping Experiences and Winning with High-Touch Service
•We remodeled 132 stores during 2020. •We opened 30 new stores, including 29 additional small format stores in key urban markets and on college campuses. •We invested significantly in our team, including a$15 /hour minimum hourly wage for US team members, recognition bonuses, and certain other benefits in light of the COVID-19 pandemic. •We made significant investments in the health and safety of team members and guests. Curation at Scale •We continued the steady stream of newness and exclusives across our assortment and continued to introduce new owned brands. We expanded the assortment of our Food & Beverage owned brand, Good & GatherTM, which launched in 2019 and has become our largest selling food brand. •We announced a partnership with Ulta Beauty under which we will operate Ulta Beauty atTarget , a shop-in-shop experience debuting on Target.com and in more than 100Target locations beginning in 2021, with plans to scale to hundreds more over time.
Delivering Ease and Convenience through Same-Day Services
•We expanded our digital fulfillment capabilities, including fresh and frozen Food & Beverage products added to Order Pickup and Drive Up. During 2020, over 50 percent of our comparable digital sales growth was driven by same-day fulfillment options: Order Pickup, Drive Up, and delivery via Shipt.
Financial Summary
2020 included the following notable items:
•GAAP diluted earnings per share were$8.64 . •Adjusted diluted earnings per share were$9.42 . •Total revenue increased 19.8 percent, driven by an increase in comparable sales. •Comparable sales increased 19.3 percent, driven by a 15.0 percent increase in average transaction amount. •Comparable store originated sales grew 7.2 percent. •Comparable digital originated sales increased 145 percent. •Operating income of$6.5 billion was 40.4 percent higher than the comparable prior-year period. •We repurchased$1.77 billion of debt before its maturity at a market value of$2.25 billion , resulting in a loss of$512 million .
Sales were
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
EXECUTIVE OVERVIEW & FINANCIAL SUMMARY Index to Financial Statements
Earnings Per Share From Percent Change
Continuing Operations 2020 2019 2018 2020/2019 2019/2018
GAAP diluted earnings per share $ 8.64 $ 6.34 $ 5.50 36.3 % 15.4 %
Adjustments 0.78 0.05 (0.10)
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 23 . 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 30, 2021 , after-tax ROIC was 23.5 percent, compared with 16.0 percent for the trailing twelve months endedFebruary 1, 2020 . The calculation of ROIC is provided on page 24 . COVID-19 OnMarch 11, 2020 , theWorld Health Organization declared the novel coronavirus disease (COVID-19) a pandemic, and onMarch 13, 2020 ,the United States declared a national emergency. The rapid development and fluidity of this situation limits our ability to predict the ultimate impact of COVID-19 on our business, financial condition and financial performance, which has been and could continue to be material. States and local governments have taken various measures in response to COVID-19, including mandating the closure of certain businesses and encouraging or requiring citizens to avoid large gatherings. We have implemented numerous safety measures to protect our guests and team members - such as mandating face masks for all team members and guests in our stores, more rigorous cleaning processes, providing disposable face masks, gloves and thermometers for team members, installing distancing markers at stores, limiting guest levels within our stores, and installing partitions at all stores. To date, virtually all of our stores, digital channels, and distribution centers have remained open. As the pandemic has evolved, we have experienced unusually strong sales, as guests rely onTarget for essential items like food, medicine, cleaning products, and household stock-up items, as well as merchandise associated with guests spending more time at home. Underlying this trend, we saw significant volatility in our sales mix, including both category and channel sales mix and same-day fulfillment options. •During the first quarter, comparable sales increased 10.8 percent, reflecting a 0.9 percent increase in store originated comparable sales and a 141 percent increase in digitally originated comparable sales. The quarter began with strength across our multi-category portfolio, followed by a shift to strong comparable sales growth in our Food & Beverage and Beauty & Household Essentials core merchandising categories and significant comparable sales declines in Apparel & Accessories. Comparable sales in Apparel & Accessories recovered notably beginning mid-April. •During the second through fourth quarters, comparable sales increased 21.7 percent, reflecting store originated comparable sales growth of 9.1 percent, and an increase in digitally originated comparable sales of 146 percent. Comparable sales growth was strong across our multi-category portfolio, with slightly higher growth in lower-margin categories. For the year endedJanuary 30, 2021 , gross margin was negatively impacted by changes in both our category and channel sales mix. Additionally, gross margin reflects the portion of investments in pay and benefits classified within Cost of Sales. Exceptionally low clearance and promotional markdown rates partially offset these pressures. Our SG&A expenses include significant incremental costs related to investments in pay and benefits for store team members, the spikes in merchandise volume in stores and the supply chain, incremental safety and cleaning supplies, and the impact of additional team member hours dedicated to more rigorous cleaning routines in our facilities. From an SG&A expense rate perspective, these incremental costs were more than offset by cost leverage resulting from exceptionally strong sales growth.
To support our team and minimize potential disruptions in their work to serve our guests, we modified our plans for some of our strategic initiatives, including our previously announced remodel program. We completed 132 remodels
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table ofContents
FINANCIAL SUMMARY & ANALYSIS OF OPERATIONS Index to Financial Statements
in 2020, down from the previous expectation of approximately 300. Similarly, we opened 29 new small format stores in 2020, rather than the 36 previously announced.
During the first quarter 2020, we issued$2.5 billion of 5-year and 10-year notes in an effort to increase our cash on hand. Additionally, we entered into a$900 million 364-day credit facility, increasing our total undrawn committed credit facilities to$3.4 billion . Our operating performance during the second and third quarters of 2020 and financial position allowed us to repurchase$1.77 billion of debt before its maturity at a market value of$2.25 billion in October 2020 and terminate the 364-day credit facility in November 2020. Note 17 to the Consolidated Financial Statements and the Liquidity and Capital Resources section provide additional information.
Sale of
InFebruary 2021 , we soldDermstore LLC (Dermstore ) for approximately$350 million , subject to working capital and other closing adjustments. We expect to recognize a pre-tax gain in excess of$300 million in the first quarter of 2021.Dermstore represented less than 1 percent of our consolidated revenues, operating income and net assets.
Analysis of Results of Operations
Summary of Operating Income Percent Change (dollars in millions) 2020 2019 2018 2020/2019 2019/2018 Sales$ 92,400 $ 77,130 $ 74,433 19.8 % 3.6 % Other revenue 1,161 982 923 18.2 6.3 Total revenue 93,561 78,112 75,356 19.8 3.7 Cost of sales 66,177 54,864 53,299 20.6 2.9 SG&A expenses 18,615 16,233 15,723 14.7 3.2 Depreciation and amortization (exclusive of depreciation included in cost of sales) 2,230 2,357 2,224 (5.4) 6.0 Operating income$ 6,539 $ 4,658 $ 4,110 40.4 % 13.3 % Rate Analysis 2020 2019 2018 Gross margin rate 28.4 % 28.9 % 28.4 % SG&A expense rate 19.9 20.8 20.9
Depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate
2.4 3.0 3.0
Operating income margin rate 7.0 6.0 5.5
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 the year endedFebruary 1, 2020 , as compared to the year ended February 2, 2019, is included in Part II , Item 7 , MD&A to our Annual Report on Form 10-K for the fiscal year endedFebruary 1, 2020 .
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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 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 (traffic) and the amount spent each visit (average
transaction amount).
The increase in 2020 sales compared to 2019 is due to a 19.3 percent comparable
sales increase and the contribution from new stores. The COVID-19 pandemic has
affected the amount and mix of sales across channels and categories.
Comparable Sales 2020 2019 2018
Comparable sales change 19.3 % 3.4 % 5.0 %
Drivers of change in comparable sales
Number of transactions 3.7 2.7 5.0
Average transaction amount 15.0 0.7 0.1
Contribution to Comparable Sales Change 2020 2019 2018
Stores originated channel comparable sales change 7.2 % 1.4 % 3.2 % Contribution from digitally originated sales to comparable sales
12.1 1.9 1.8
Total comparable sales change 19.3 % 3.4 % 5.0 %
Note: Amounts may not foot due to rounding.
Sales by Channel 2020 2019 2018
Stores originated 82.1 % 91.2 % 92.9 %
Digitally originated 17.9 8.8 7.1
Total 100 % 100 % 100 %
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ANALYSIS OF OPERATIONS Index to Financial Statements
Sales by Product Category 2020 2019 2018
Apparel and accessories 16 % 19 % 18 %
Beauty and household essentials 26 27 26
Food and beverage 20 19 20
Hardlines 18 16 17
Home furnishings and décor 20 19 19
Total 100 % 100 % 100 %
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 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 2020 2019 2018
Target Debit Card 12.3 % 12.6 % 13.0 %
Target Credit Cards 9.2 10.7 10.9
Total RedCard Penetration 21.5 % 23.3 % 23.8 %
Note: Amounts may not foot due to rounding.
Gross Margin Rate
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Our gross margin rate was 28.4 percent in 2020 and 28.9 percent in 2019. This
decrease reflected increased digital fulfillment and supply chain costs
(stemming from unusually strong growth in digital volume combined with the
impact of higher pay and benefit costs classified within Cost of Sales) and the
impact of category sales mix, as sales growth was strongest in lower-margin
categories. The decrease was partially offset by the net impact of merchandising
actions, most notably the benefit of exceptionally low clearance and promotional
markdown rates.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF OPERATIONS Index to Financial Statements
Selling, General and Administrative (SG&A) Expense Rate
Our SG&A expense rate was 19.9 percent in 2020 and 20.8 percent in 2019. Incremental team member pay and benefits and investments to protect the health and safety of guests represented approximately$1.5 billion of the$2.4 billion increase in SG&A expenses for the year endedJanuary 30, 2021 , compared with the prior-year periods. From a rate perspective, these increased costs were more than offset by leverage resulting from strong revenue growth. Store Data Change in Number of Stores 2020 2019 Beginning store count 1,868 1,844 Opened 30 26 Closed (1) (2) Ending store count 1,897 1,868 Number of Stores and Number of Stores Retail Square Feet (a) Retail Square Feet January 30, 2021 February 1, 2020 January 30, 2021 February 1, 2020 170,000 or more sq. ft. 273 272 48,798 48,619 50,000 to 169,999 sq. ft. 1,509 1,505 189,508 189,227 49,999 or less sq. ft. 115 91 3,342 2,670 Total 1,897 1,868 241,648 240,516
(a)In thousands, reflects total square feet less office, distribution center, and vacant space.
Other Performance Factors Net Interest Expense
Net interest expense from continuing operations was
Provision for Income Taxes
Our 2020 effective income tax rate from continuing operations was 21.2 percent compared with 22.0 percent in 2019. The effective tax rate for 2020 reflects a larger rate benefit from discrete items, primarily related to share-based payments and resolution of certain income tax matters, partially offset by the rate impact of higher earnings, compared with the prior year.
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 2020 2019 2018 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 $ 8.64 $ 6.34 $ 5.50
Adjustments
Loss on debt extinguishment $ 512 $ 379 $ 0.75 $ 10 $ 8 $ 0.01 $ - $ - $ -
Loss on investment (a) 19 14 0.03 41 31 0.06 - - -
Tax Act (b) - - - - - - - (36) (0.07)
Other (c) 28 20 0.04 (17) (13) (0.02) - - -
Other income tax matters (d) - (21) (0.04) - - - - (18) (0.03)
Adjusted diluted earnings per
share from continuing operations $ 9.42 $ 6.39 $ 5.39
Note: Amounts may not foot due to rounding.
(a)Represents a loss on our investment in Casper Sleep Inc. (Casper ), which is
not core to our continuing operations.
(b)Represents discrete items related to the Tax Act. Refer to Note 19 to the
Financial Statements.
(c)For 2020, includes store damage and inventory losses related to civil unrest,
net of insurance recoveries. For 2019, represents insurance recoveries related
to the 2013 data breach.
(d)Represents benefits from the resolution of certain income tax matters
unrelated to current period operations.
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) 2020 2019 2018 2020/2019 2019/2018
Net earnings from continuing operations
33.6 % 11.6 %
+ Provision for income taxes 1,178 921 746 27.9 23.4
+ Net interest expense 977 477 461 105.1 3.3
EBIT $ 6,523 $ 4,667 $ 4,137 39.8 % 12.8 %
+ Total depreciation and amortization
(a) 2,485 2,604 2,474 (4.6) 5.3
EBITDA $ 9,008 $ 7,271 $ 6,611 23.9 % 10.0 %
(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 30, 2021 February 1, 2020
Operating income $ 6,539 $ 4,658
+ Net other income / (expense) (16) 9
EBIT 6,523 4,667
+ Operating lease interest (a) 87 86
- Income taxes (b) 1,404 1,045
Net operating profit after taxes $ 5,206 $ 3,708
January 30, February 1, February 2,
Denominator 2021 2020 2019
Current portion of long-term debt and other
borrowings $ 1,144 + Noncurrent portion of long-term debt 11,536 11,338 10,223 + Shareholders' investment 14,440 11,833 11,297 + Operating lease liabilities (c) 2,429 2,475 2,170 - Cash and cash equivalents 8,511 2,577 1,556 Invested capital$ 21,038 $ 23,230 $ 23,186 Average invested capital (d)$ 22,134 $ 23,208
After-tax return on invested capital 23.5 % 16.0 %
(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 21.2 percent and 22.0 percent for the trailing twelve months endedJanuary 30, 2021 , andFebruary 1, 2020 , respectively. For the trailing twelve months endedJanuary 30, 2021 , andFebruary 1, 2020 , includes tax effect of$1.4 billion and$1.0 billion , respectively, related to EBIT, and$18 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. In response to COVID-19, we suspended our share repurchase program inMarch 2020 . InNovember 2020 , we lifted the share repurchase suspension and, inFebruary 2021 , began repurchasing shares. We believe our sources of liquidity will continue to be adequate to maintain operations, finance anticipated expansion and strategic initiatives, fund debt maturities, pay dividends, and execute purchases under our share repurchase program for the foreseeable future. We continue to anticipate ample access to commercial paper and long-term financing. Our period-end cash and cash equivalents balance increased to$8.5 billion from$2.6 billion in 2019. Our cash and cash equivalents balance includes short-term investments of$7.6 billion and$1.8 billion as ofJanuary 30, 2021 , andFebruary 1, 2020 , 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
Operating cash flow provided by continuing operations was$10.5 billion in 2020 compared with$7.1 billion in 2019. The increase reflects stronger operating performance combined with higher payables leverage during 2020 due to increased inventory turnover driven by strong sales, compared with 2019. Additionally, operating cash flows for 2020 reflect increased payroll-related liabilities, including the deferral of employer social security tax payments and higher incentive compensation.
Inventory
Year-end inventory was
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF FINANCIAL CONDITION Index to Financial StatementsCapital Expenditures
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Capital expenditures decreased in 2020 from the prior year as we modified plans
for some of our strategic initiatives, including store remodels and new store
openings, as a result of COVID-19. We have completed over 800 remodels since the
launch of the current program in 2017, including 132 in 2020. We expect to
complete 150 full-store remodels and open 30 to 40 new stores during 2021.
In addition to these cash investments, we entered into leases related to new
stores in 2020, 2019, and 2018 with total future minimum lease payments of $764
million , $669 million , and $473 million , respectively, and new leases related to
our supply chain with total future minimum lease payments of $442 million , $185
million , and $11 million , respectively.
We expect capital expenditures in 2021 of approximately $4.0 billion to support
remodels, new stores, and supply chain projects to add replenishment capacity
and modernize the network, including sortation centers. Beyond full-store
remodels, we will invest in optimizing front-end space in our highest-volume
locations, increasing the efficiency of our Pickup and Drive Up services, as
well as the build-out of Ulta Beauty shop-in-shops. We also expect to continue
to invest in new store and supply chain leases.
Dividends
We paid dividends totaling$1.3 billion ($2.68 per share) in 2020 and$1.3 billion ($2.60 per share) in 2019, a per share increase of 3.1 percent. We declared dividends totaling$1.4 billion ($2.70 per share) in 2020 and$1.3 billion ($2.62 per share) in 2019, a per share increase of 3.1 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 2020 and 2019 we returned$609 million and$1.5 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 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 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 30, 2021 , 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 2020, we funded our holiday sales period working capital needs through internally generated funds. In 2019, we funded our holiday sales period working capital needs through internally generated funds and the issuance of commercial paper. We have additional liquidity through a committed$2.5 billion revolving credit facility obtained through a group of banks, which expires inOctober 2023 . No balances were outstanding at any time during 2020 or 2019. 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 30, 2021 , 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.
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 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 & Finance 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$10.7 billion and$9.0 billion as ofJanuary 30, 2021 , andFebruary 1, 2020 , 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
ANALYSIS OF FINANCIAL CONDITION Index to Financial Statements
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 $504 million and $464 million as of
January 30, 2021 , and February 1, 2020 , 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 would be 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 $62 million , $23 million , and $92 million
in 2020, 2019, and 2018, respectively, which are described further in Note
1 1 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$510 million and$465 million as ofJanuary 30, 2021 , andFebruary 1, 2020 , 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$25 million in 2020. 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. Liabilities for uncertain tax positions, including interest and penalties, were$193 million and$188 million as ofJanuary 30, 2021 , andFebruary 1, 2020 , respectively. We believe the resolution of these matters will not have a material adverse impact on 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 2020 expected long-term rate of return on plan assets of 6.10 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$40 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
NEW ACCOUNTING PRONOUNCEMENTS & FORWARD-LOOKING Index to Financial
STATEMENTS Statements
Our benefit obligation and related expense will fluctuate with changes in
interest rates. A 1 percentage point decrease to the weighted average discount
rate would increase annual expense by
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 may 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.
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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MANAGEMENT'S DISCUSSION AND ANALYSIS Table of Contents
QUANTITATIVE AND QUALITATIVE DISCLOSURES Index to Financial Statements
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