GWU Target Data Breach Accounting for Contingent Liabilities Questions

1000 Nicollet Mall
Minneapolis, MN 55403
612.304.6073
Target.com
Visit our online Annual Report
at Target.com/annualreport.
2013 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended February 1, 2014
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from
to
Commission file number 1-6049
TARGET CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota
(State or other jurisdiction of
incorporation or organization)
1000 Nicollet Mall, Minneapolis, Minnesota
(Address of principal executive offices)
41-0215170
(I.R.S. Employer
Identification No.)
55403
(Zip Code)
Registrant’s telephone number, including area code: 612/304-6073
Securities Registered Pursuant To Section 12(B) Of The Act:
Title of Each Class
Common Stock, par value $0.0833 per share
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their
obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
No
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files. Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company
(as defined in Rule 12b-2 of the Act).
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting
company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
Smaller reporting company
No
Aggregate market value of the voting stock held by non-affiliates of the registrant on August 3, 2013 was $45,036,171,526, based on the closing
price of $71.50 per share of Common Stock as reported on the New York Stock Exchange Composite Index.
Indicate the number of shares outstanding of each of registrant’s classes of Common Stock, as of the latest practicable date. Total shares of Common
Stock, par value $0.0833, outstanding at March 10, 2014 were 633,174,692.
DOCUMENTS INCORPORATED BY REFERENCE
1.
Portions of Target’s Proxy Statement to be filed on or about April 28, 2014 are incorporated into Part III.
TABLE OF CONTENTS
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 4A
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Item 15
Signatures
Exhibit Index
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
2
5
10
11
12
12
12
14
16
16
31
33
65
65
65
Directors, Executive Officers and Corporate Governance
Executive Compensation
65
66
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
66
66
66
Exhibits and Financial Statement Schedules
Exhibit 12 – Computations of Ratios of Earnings to Fixed Charges for each of the Five Years in the Period
Ended February 1, 2014
67
71
72
74
1
Item 1.
Business
PART I
General
Target Corporation (Target, the Corporation or the Company) was incorporated in Minnesota in 1902. We offer our
customers, referred to as “guests,” both everyday essentials and fashionable, differentiated merchandise at discounted
prices. Our ability to deliver a preferred shopping experience to our guests is supported by our strong supply chain
and technology infrastructure, a devotion to innovation that is ingrained in our organization and culture, and our
disciplined approach to managing our business and investing in future growth.
We operate as two reportable segments: U.S. and Canadian. Our U.S. Segment includes all of our U.S. retail operations,
which are designed to enable guests to purchase products seamlessly in stores, online or through mobile devices.
The U.S. Segment also includes our credit card servicing activities and certain centralized operating and corporate
activities not allocated to our Canadian Segment. Our Canadian Segment includes all of our Canadian retail operations,
including 124 stores opened during 2013. We currently do not have a digital sales channel within our Canadian Segment.
Prior to the first quarter of 2013, we operated a U.S. Credit Card Segment that offered credit to qualified guests through
our branded credit cards: the Target Credit Card and the Target Visa Credit Card. In the first quarter of 2013, we sold
our U.S. consumer credit card portfolio, and TD Bank Group (TD) now underwrites, funds and owns Target Credit Card
and Target Visa consumer receivables in the U.S. We perform account servicing and primary marketing functions and
earn a substantial portion of the profits generated by the portfolio. Following the sale of our U.S. consumer credit card
portfolio to TD, we combined our historical U.S. Retail Segment and U.S. Credit Card Segment into one U.S. Segment.
Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 6
of the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data, for more
information on the credit card receivables transaction and segment change.
Data Breach
During the fourth quarter of 2013, we experienced a data breach in which an intruder stole certain payment card
and other guest information from our network (the Data Breach). For further information about the Data Breach, see
Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Financial Highlights
For information about our fiscal years, see Item 8, Financial Statements and Supplemental Data – Note 1, Summary
of Accounting Policies, of this Annual Report on Form 10-K.
For information on key financial highlights and segment financial information, see the items referenced in Item 6,
Selected Financial Data, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of
Operations and Item 8, Financial Statements and Supplemental Data — Note 28, Segment Reporting, of this Annual
Report on Form 10-K.
Seasonality
A larger share of annual revenues and earnings traditionally occurs in the fourth quarter because it includes the peak
sales period from Thanksgiving to the end of December.
Merchandise
We sell a wide assortment of general merchandise and food. Our general merchandise and CityTarget stores offer an
edited food assortment, including perishables, dry grocery, dairy and frozen items, while our SuperTarget stores offer
a full line of food items comparable to traditional supermarkets. Our digital channels include a wide assortment of
general merchandise, including many items found in our stores and a complementary assortment, such as extended
sizes and colors, that are only sold online.
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A significant portion of our sales is from national brand merchandise. Approximately one-third of 2013 sales related to
our owned and exclusive brands, including but not limited to the following:
Owned Brands
Archer Farms®
Simply Balanced™
Boots & Barkley®
CHEFS®
Circo®
Embark®
Gilligan & O’Malley®
Market Pantry®
Merona®
Room Essentials®
Smith & Hawken®
Spritz™
Sutton & Dodge®
Threshold™
up & up®
Wine Cube®
Xhilaration®
Exclusive Brands
Assets® by Sarah Blakely
C9 by Champion®
Carlton®
Chefmate®
Cherokee®
Converse® One Star®
dENiZEN™ from Levi’s®
Fieldcrest®
Genuine Kids from OshKosh®
Giada De Laurentiis™ for Target®
Harajuku Mini for Target®
Just One You made by Carter’s
Kid Made Modern®
Kitchen Essentials® from Calphalon®
Liz Lange® for Target
Mossimo Supply Company®
Nate Berkus for Target®
Nick & Nora®
Shaun White
Simply Shabby Chic®
Sonia Kashuk®
Thomas O’Brien®
We also sell merchandise through periodic exclusive design and creative partnerships, and also generate revenue
from in-store amenities such as Target Café, Target Clinic, Target Pharmacy and Target Photo, and leased or licensed
departments such as Target Optical, Pizza Hut, Portrait Studio and Starbucks.
Distribution
The vast majority of merchandise is distributed to our stores through our network of 40 distribution centers, 37 in the
United States and 3 in Canada. General merchandise is shipped to and from our distribution centers by common
carriers. Certain food items and other merchandise is shipped directly to our stores in the U.S. and Canada by vendors
or third party distributors.
Employees
At February 1, 2014, we employed approximately 366,000 full-time, part-time and seasonal employees, referred to as
“team members.” During our peak sales period from Thanksgiving to the end of December, our employment levels
peaked at approximately 416,000 team members. We offer a broad range of company-paid benefits to our team
members. Eligibility for, and the level of, these benefits varies, depending on team members’ full-time or part-time
status, compensation level, date of hire and/or length of service. These company-paid benefits include a pension plan,
401(k) plan, medical and dental plans, a retiree medical plan, disability insurance, paid vacation, tuition reimbursement,
various team member assistance programs, life insurance and merchandise discounts. We believe our team member
relations are good.
Working Capital
Our working capital needs are greater in the months leading up to our peak sales period from Thanksgiving to the end
of December, which we typically finance with cash flow provided by operations and short-term borrowings. Additional
details are provided in the Liquidity and Capital Resources section in Item 7, Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
Effective inventory management is key to our ongoing success. We use various techniques including demand
forecasting and planning and various forms of replenishment management. We achieve effective inventory
management by being in-stock in core product offerings, maintaining positive vendor relationships, and carefully
planning inventory levels for seasonal and apparel items to minimize markdowns.
3
Competition
We compete with traditional and off-price general merchandise retailers, apparel retailers, internet retailers, wholesale
clubs, category specific retailers, drug stores, supermarkets and other forms of retail commerce. Our ability to positively
differentiate ourselves from other retailers and provide a compelling value proposition largely determine our competitive
position within the retail industry.
Intellectual Property
Our brand image is a critical element of our business strategy. Our principal trademarks, including Target, SuperTarget
and our “Bullseye Design,” have been registered with the U.S. Patent and Trademark Office. We also seek to obtain
and preserve intellectual property protection for our owned brands.
Geographic Information
The vast majority of our revenues are generated within the United States. During 2013, a modest percentage of our
revenues were generated in Canada. The vast majority of our long-lived assets are located within the United States
and Canada.
Available Information
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge at
www.Target.com/Investors as soon as reasonably practicable after we file such material with, or furnish it to, the U.S.
Securities and Exchange Commission (SEC). Our Corporate Governance Guidelines, Business Conduct Guide,
Corporate Responsibility Report and the position descriptions for our Board of Directors and Board committees are
also available free of charge in print upon request or at www.Target.com/Investors.
4
Item 1A.
Risk Factors
Our business is subject to many risks. Set forth below are the most significant risks that we face.
If we are unable to positively differentiate ourselves from other retailers, our results of operations could be
adversely affected.
The retail business is highly competitive. In the past we have been able to compete successfully by differentiating our
guests’ shopping experience by creating an attractive value proposition through a careful combination of price,
merchandise assortment, convenience, guest service, loyalty programs and marketing efforts. Our ability to create a
personalized guest experience through the collection and use of guest data is increasingly important to our ability to
differentiate from other retailers. Guest perceptions regarding the cleanliness and safety of our stores, the functionality
and reliability of our digital channels, our in-stock levels and other factors also affect our ability to compete. No single
competitive factor is dominant, and actions by our competitors on any of these factors could have an adverse effect
on our sales, gross margins and expenses.
We sell many products under our owned and exclusive brands. These brands are an important part of our business
because they differentiate us from other retailers, generally carry higher margins than equivalent national brand products
and represent a significant portion of our overall sales. If one or more of these brands experiences a loss of consumer
acceptance or confidence, our sales and gross margins could be adversely affected.
The continuing migration and evolution of retailing to online and mobile channels has increased our challenges in
differentiating ourselves from other retailers. In particular, consumers are able to quickly and conveniently comparison
shop with digital tools, which can lead to decisions based solely on price. We work with our vendors to offer unique
and distinctive merchandise, and encourage our guests to shop with confidence with our price match policy. Failure
to effectively execute in these efforts, actions by our competitors in response to these efforts or failures of our vendors
to manage their own channels and content could hurt our ability to differentiate ourselves from other retailers and, as
a result, have an adverse effect on sales, gross margins and expenses.
Our continued success is substantially dependent on positive perceptions of Target which, if eroded, could
adversely affect our business and our relationships with our guests and team members.
We believe that one of the reasons our guests prefer to shop at Target and our team members choose Target as a
place of employment is the reputation we have built over many years for serving our four primary constituencies:
guests, team members, the communities in which we operate, and shareholders. To be successful in the future, we
must continue to preserve, grow and leverage the value of Target’s reputation. Reputational value is based in large
part on perceptions. While reputations may take decades to build, any negative incidents can quickly erode trust and
confidence, particularly if they result in adverse mainstream and social media publicity, governmental investigations
or litigation. Those types of incidents could have an adverse impact on perceptions and lead to tangible adverse effects
on our business, including consumer boycotts, lost sales, loss of new store development opportunities, or team member
retention and recruiting difficulties. For example, we experienced weaker than expected U.S. Segment sales following
the announcement of the Data Breach and are unable to determine whether there will be a long-term impact to our
relationship with our guests and whether we will need to engage in significant promotional or other activities to regain
their trust.
If we are unable to successfully develop and maintain a relevant and reliable multichannel experience for our
guests, our sales, results of operations and reputation could be adversely affected.
Our business has evolved from an in-store experience to interaction with guests across multiple channels (in-store,
online, mobile and social media, among others). Our guests are using computers, tablets, mobile phones and other
devices to shop in our stores and online and provide feedback and public commentary about all aspects of our business.
We currently provide full and mobile versions of our website (Target.com), applications for mobile phones and tablets
and interact with our guests through social media. Multichannel retailing is rapidly evolving and we must keep pace
with changing guest expectations and new developments and technology investments by our competitors. If we are
unable to attract and retain team members or contract with third parties having the specialized skills needed to support
our multichannel efforts, implement improvements to our guest-facing technology in a timely manner, or provide a
convenient and consistent experience for our guests regardless of the ultimate sales channel, our ability to compete
and our results of operations could be adversely affected. In addition, if Target.com and our other guest-facing
technology systems do not appeal to our guests or reliably function as designed, we may experience a loss of guest
5
confidence, lost sales or be exposed to fraudulent purchases, which, if significant, could adversely affect our reputation
and results of operations.
If we fail to anticipate and respond quickly to changing consumer preferences, our sales, gross margins and
profitability could suffer.
A substantial part of our business is dependent on our ability to make trend-right decisions and effectively manage
our inventory in a broad range of merchandise categories, including apparel, home décor, seasonal offerings, food
and other merchandise. Failure to accurately predict constantly changing consumer tastes, preferences, spending
patterns and other lifestyle decisions, and personalize our offerings to our guests may result in lost sales, spoilage
and increased inventory markdowns, which would lead to a deterioration in our results of operations by hurting our
sales, gross margins and profitability.
Our earnings are highly susceptible to the state of macroeconomic conditions and consumer confidence in
the United States.
Most of our stores and all of our digital sales are in the United States, making our results highly dependent on U.S.
consumer confidence and the health of the U.S. economy. In addition, a significant portion of our total sales is derived
from stores located in five states: California, Texas, Florida, Minnesota and Illinois, resulting in further dependence on
local economic conditions in these states. Deterioration in macroeconomic conditions or consumer confidence could
negatively affect our business in many ways, including slowing sales growth or reduction in overall sales, and reducing
gross margins. These same considerations impact the success of our credit card program. Even though we no longer
own a consumer credit card receivables portfolio, we share in the economic performance of the credit card program
with TD. Deterioration in macroeconomic conditions could adversely affect the volume of new credit accounts, the
amount of credit card program balances and the ability of credit card holders to pay their balances. These conditions
could result in us receiving lower profit-sharing payments.
We rely on a large, global and changing workforce of Target team members, contractors and temporary staffing.
If we do not effectively manage our workforce and the concentration of work in certain global locations, our
labor costs and results of operations could be adversely affected.
With approximately 366,000 team members, our workforce costs represent our largest operating expense, and our
business is dependent on our ability to attract, train and retain the appropriate mix of qualified team members, contractors
and temporary staffing. Many team members are in entry-level or part-time positions with historically high turnover
rates. Our ability to meet our labor needs while controlling our costs is subject to external factors such as unemployment
levels, prevailing wage rates, collective bargaining efforts, health care and other benefit costs and changing
demographics. If we are unable to attract and retain adequate numbers and an appropriate mix of qualified team
members, contractors and temporary staffing, our operations, guest service levels and support functions could suffer.
Those factors, together with increasing wage and benefit costs, could adversely affect our results of operations. As of
March 14, 2014, none of our team members were working under collective bargaining agreements. We are periodically
subject to labor organizing efforts. If we become subject to one or more collective bargaining agreements in the future,
it could adversely affect our labor costs and how we operate our business.
We have a concentration of support functions located in India where there has been greater political, financial,
environmental and health instability than the United States. An extended disruption of our operations in India could
adversely affect certain operations supporting stability and maintenance of our digital channels and information
technology development.
If our capital investments in technology, new stores and remodeling existing stores do not achieve appropriate
returns, our competitive position, financial condition and results of operations may be adversely affected.
Our business is becoming increasingly reliant on technology investments and the returns on these investments are
less predictable than building new stores and remodeling existing stores. We are currently making, and will continue
to make, significant technology investments to support our multichannel efforts, implement improvements to our
guest-facing technology and transform our information processes and computer systems to more efficiently run our
business and remain competitive and relevant to our guests. These technology initiatives might not provide the
anticipated benefits or may provide them on a delayed schedule or at a higher cost. We must monitor and choose the
right investments and implement them at the right pace. Targeting the wrong opportunities, failing to make the best
6
investments, or making an investment commitment significantly above or below our needs could result in the loss of
our competitive position and adversely impact our financial condition or results of operations.
In addition, our growth also depends, in part, on our ability to build new stores and remodel existing stores in a manner
that achieves appropriate returns on our capital investment. We compete with other retailers and businesses for suitable
locations for our stores. Many of our expected new store sites are located in fully developed markets, which are
generally more time-consuming and expensive undertakings than expansion into undeveloped suburban and ex-urban
markets.
Interruptions in our supply chain or increased commodity prices and supply chain costs could adversely
affect our gross margins, expenses and results of operations.
We are dependent on our vendors to supply merchandise in a timely and efficient manner. If a vendor fails to deliver
on its commitments, whether due to financial difficulties or other reasons, we could experience merchandise out-ofstocks that could lead to lost sales. In addition, a large portion of our merchandise is sourced, directly or indirectly,
from outside the United States, with China as our single largest source. Political or financial instability, trade restrictions,
the outbreak of pandemics, labor unrest, transport capacity and costs, port security, weather conditions, natural
disasters or other events that could slow port activities and affect foreign trade are beyond our control and could disrupt
our supply of merchandise and/or adversely affect our results of operations. In addition, changes in the costs of
procuring commodities used in our merchandise or the costs related to our supply chain, including vendor costs, labor,
fuel, tariffs, currency exchange rates and supply chain transparency initiatives, could have an adverse effect on gross
margins, expenses and results of operations.
Failure to address product safety concerns could adversely affect our sales and results of operations.
If our merchandise offerings, including food, drug and children’s products, do not meet applicable safety standards or
our guests’ expectations regarding safety, we could experience lost sales and increased costs and be exposed to legal
and reputational risk. All of our vendors must comply with applicable product safety laws, and we are dependent on
them to ensure that the products we buy comply with all safety standards. Events that give rise to actual, potential or
perceived product safety concerns, including food or drug contamination, could expose us to government enforcement
action or private litigation and result in costly product recalls and other liabilities. In addition, negative guest perceptions
regarding the safety of the products we sell could cause our guests to seek alternative sources for their needs, resulting
in lost sales. In those circumstances, it may be difficult and costly for us to regain the confidence of our guests.
The data breach we experienced in 2013 has resulted in government inquiries and private litigation, and if our
efforts to protect the security of information about our guests and team members are unsuccessful, future
issues may result in additional costly government enforcement actions and private litigation and our sales
and reputation could suffer.
The nature of our business involves the receipt and storage of information about our guests and team members. We
have a program in place to detect and respond to data security incidents. However, because the techniques used to
obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult
to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive
measures. In addition, hardware, software or applications we develop or procure from third parties may contain defects
in design or manufacture or other problems that could unexpectedly compromise information security. Unauthorized
parties may also attempt to gain access to our systems or facilities through fraud, trickery or other forms of deceiving
our team members, contractors and temporary staff. Until the fourth quarter of 2013, all incidents we experienced were
insignificant. The Data Breach we experienced was significant and went undetected for several weeks. We experienced
weaker than expected U.S. Segment sales immediately following the announcement of the Data Breach, and we are
currently facing more than 80 civil lawsuits filed on behalf of guests, payment card issuing banks and shareholders.
In addition, state and federal agencies, including State Attorneys General, the Federal Trade Commission and the
SEC, are investigating events related to the Data Breach, including how it occurred, its consequences and our
responses. Those claims and investigations may have an adverse effect on how we operate our business and our
results of operations.
If we experience additional significant data security breaches or fail to detect and appropriately respond to significant
data security breaches, we could be exposed to additional government enforcement actions and private litigation. In
addition, our guests could further lose confidence in our ability to protect their information, which could cause them to
discontinue using our REDcards or pharmacy services, or stop shopping with us altogether.
7
Our failure to comply with federal, state, local and international laws, or changes in these laws could increase
our costs, reduce our margins and lower our sales.
Our business is subject to a wide array of laws and regulations in the United States, Canada and other countries in
which we operate. Significant workforce-related legislative changes could increase our expenses and adversely affect
our operations. Examples of possible workforce-related legislative changes include changes to an employer’s obligation
to recognize collective bargaining units, the process by which collective bargaining agreements are negotiated or
imposed, minimum wage requirements, and health care mandates. In addition, changes in the regulatory environment
affecting Medicare reimbursements, privacy and information security, product safety, supply chain transparency, or
environmental protection, among others, could cause our expenses to increase without an ability to pass through any
increased expenses through higher prices. For example, we are currently facing government inquiries related to the
Data Breach that may result in the imposition of fines or other penalties. In addition, any legislative or regulatory
changes adopted in reaction to the recent retail-industry data breaches could increase or accelerate our compliance
costs. Also, our pharmacy and clinic operations are governed by various regulations, and a significant change in, or
our noncompliance with, these regulations could have a material adverse effect on our compliance costs and results
of operations. In addition, if we fail to comply with other applicable laws and regulations, including wage and hour
laws, the Foreign Corrupt Practices Act and local anti-bribery laws, we could be subject to legal risk, including
government enforcement action and class action civil litigation, which could adversely affect our results of operations
by increasing our costs, reducing our margins and lowering our sales.
Weather conditions where our stores are located may impact consumer shopping patterns, which alone or
together with natural disasters, particularly in areas where our sales are concentrated, could adversely affect
our results of operations.
Uncharacteristic or significant weather conditions can affect consumer shopping patterns, particularly in apparel and
seasonal items, which could lead to lost sales or greater than expected markdowns and adversely affect our shortterm results of operations. In addition, our three largest states by total sales are California, Texas and Florida, areas
where natural disasters are more prevalent. Natural disasters in those states or in other areas where our sales are
concentrated could result in significant physical damage to or closure of one or more of our stores or distribution
centers, and cause delays in the distribution of merchandise from our vendors to our distribution centers and stores,
which could adversely affect our results of operations by increasing our costs and lowering our sales.
Changes in our effective income tax rate could adversely affect our net income.
A number of factors influence our effective income tax rate, including changes in tax law, tax treaties, interpretation of
existing laws, and our ability to sustain our reporting positions on examination. Changes in any of those factors could
change our effective tax rate, which could adversely affect our net income. In addition, our operations outside of the
United States may cause greater volatility in our effective tax rate.
If we are unable to access the capital markets or obtain bank credit, our financial position, liquidity and results
of operations could suffer.
We are dependent on a stable, liquid and well-functioning financial system to fund our operations and capital
investments. In particular, we have historically relied on the public debt markets to fund portions of our capital
investments and the commercial paper market and bank credit facilities to fund seasonal needs for working capital.
Our continued access to these markets depends on multiple factors including the condition of debt capital markets,
our operating performance and maintaining strong debt ratings. If rating agencies lower our credit ratings, it could
adversely impact our ability to access the debt markets, our cost of funds and other terms for new debt issuances.
Each of the credit rating agencies reviews its rating periodically, and there is no guarantee our current credit rating will
remain the same. In addition, we use a variety of derivative products to manage our exposure to market risk, principally
interest rate and equity price fluctuations. Disruptions or turmoil in the financial markets could reduce our ability to
meet our capital requirements or fund our working capital needs, and lead to losses on derivative positions resulting
from counterparty failures, which could adversely affect our financial position and results of operations.
A significant disruption in our computer systems and our inability to adequately maintain and update those
systems could adversely affect our operations and our ability to maintain guest confidence.
We rely extensively on our computer systems to manage inventory, process guest transactions, manage guest data,
communicate with our vendors and other third parties, service REDcard accounts and summarize and analyze results,
and on continued and unimpeded access to the internet to use our computer systems. Our systems are subject to
8
damage or interruption from power outages, telecommunications failures, computer viruses and malicious attacks,
security breaches and catastrophic events. If our systems are damaged or fail to function properly, we may incur
substantial repair or replacement costs, experience data loss and impediments to our ability to manage inventories or
process guest transactions, and encounter lost guest confidence, which could adversely affect our results of operations.
The Data Breach we experienced negatively impacted our ability to timely handle customer inquiries, and we
experienced weaker than expected U.S. Segment sales following the announcement of the Data Breach.
We continually make significant technology investments that will help maintain and update our existing computer
systems. Implementing significant system changes increases the risk of computer system disruption. Additionally, the
potential problems and interruptions associated with implementing technology initiatives could disrupt or reduce our
operational efficiency, and could impact the guest experience and guest confidence.
If we do not positively differentiate the Target experience and appeal to our new Canadian guests, our financial
results could be adversely affected.
In fiscal 2013 we opened 124 Target stores in Canada, which was our first retail store expansion outside of the United
States. Our initial sales and operating results in Canada have not met our initial expectations. Improving our sales in
Canada is contingent on our ability to deploy new marketing programs that positively differentiate us from other retailers
in Canada, and achieve market acceptance by Canadian guests. In addition, our sales and operating results in Canada
are dependent on our ability to manage our inventory to offer the expected assortment of merchandise to our Canadian
guests while avoiding overstock situations, and general macroeconomic conditions in Canada. If we do not effectively
execute our marketing program and manage our inventory in Canada, our financial results could be adversely affected.
A disruption in relationships with third parties who provide us services in connection with certain aspects of
our business could adversely affect our operations.
We rely on third parties to support a variety of business functions, including our Canadian supply chain, portions of
our technology development and systems, our multichannel platforms and distribution network operations, credit and
debit card transaction processing, and extensions of credit for our 5% REDcard Rewards loyalty program. If we are
unable to contract with third parties having the specialized skills needed to support those strategies or integrate their
products and services with our business, or if those third parties fail to meet our performance standards and
expectations, including with respect to data security, our reputation, sales and results of operations could be adversely
affected. In addition, we could face increased costs associated with finding replacement providers or hiring new team
members to provide these services in-house.
We experienced a significant data security breach in the fourth quarter of fiscal 2013 and are not yet able to
determine the full extent of its impact and the impact of government investigations and private litigation on
our results of operations, which could be material.
The Data Breach we experienced involved the theft of certain payment card and guest information through unauthorized
access to our network. Our investigation of the matter is ongoing, and it is possible that we will identify additional
information that was accessed or stolen, which could materially worsen the losses and reputational damage we have
experienced. For example, when the intrusion was initially identified, we thought the information stolen was limited to
payment card information, but later discovered that other guest information was also stolen.
We are currently subject to a number of governmental investigations and private litigation and other claims relating to
the Data Breach, and in the future we may be subject to additional investigations and claims of this sort. These
investigations and claims could have a material adverse impact on our results of operations or profitability. Our financial
liability arising from such investigations and claims will depend on many factors, one of which is whether, at the time
of the Data Breach, the portion of our network that handles payment card data was in compliance with applicable
payment card industry standards. While that portion of our network was determined to be compliant by an independent
third-party assessor in the fall of 2013, we expect the forensic investigator working on behalf of the payment card
networks to claim that we were not in compliance. Another factor is whether, and if so to what extent, any fraud losses
or other expenses experienced by cardholders, card issuers and/or the payment card networks on or with respect to
the payment card accounts affected by the Data Breach can be properly attributed to the Data Breach and whether,
and if so to what extent, it would in any event be our legal responsibility. In addition, the governmental agencies
investigating the Data Breach may seek to impose on us fines and/or other monetary relief and/or injunctive relief that
could materially increase our data security costs, adversely impact how we operate our network and collect and use
guest information, and put us at a competitive disadvantage with other retailers.
9
Finally, we believe that the greatest risk to our business arising out of the Data Breach is the negative impact on our
reputation and loss of confidence of our guests, as well as the possibility of decreased participation in our REDcards
Rewards loyalty program which our internal analysis has indicated drives meaningful incremental sales. We
experienced weaker than expected U.S. Segment sales after the announcement of the Data Breach, but are unable
to determine whether there will be a long-term impact to our relationship with our guests or whether we will need to
engage in significant promotional or other activities to regain their trust, which could have a material adverse impact
on our results of operations or profitability.
Item 1B.
Unresolved Staff Comments
Not applicable.
10
Item 2.
Properties
U.S. Stores at
February 1, 2014
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Canadian Stores at
February 1, 2014
Alberta
British Columbia
Manitoba
New Brunswick
Newfoundland and
Labrador
Northwest Territories
Nova Scotia
Stores
22
3
47
9
262
41
20
3
1
123
54
4
6
91
33
22
19
14
16
5
38
36
59
75
6
36
Retail Sq. Ft.
(in thousands)
3,150
504
6,264
1,165
34,718
6,215
2,672
440
179
17,345
7,398
695
664
12,514
4,377
3,015
2,577
1,660
2,246
630
4,938
4,734
7,057
10,777
743
4,736
Stores
14
18
4
3
Retail Sq. Ft.
(in thousands)
1,633
2,047
457
320
2
—
4
216
—
443
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Stores
7
14
19
9
43
10
69
48
4
64
16
19
64
4
19
5
32
149
13
—
57
36
6
39
2
Retail Sq. Ft.
(in thousands)
780
2,006
2,461
1,148
5,701
1,185
9,437
6,360
554
8,002
2,285
2,280
8,384
517
2,359
580
4,114
20,976
1,953
—
7,650
4,194
755
4,773
187
Total
1,793
240,054
Nunavut
Ontario
Prince Edward Island
Quebec
Stores
—
50
1
25
Retail Sq. Ft.
(in thousands)
—
5,772
106
2,876
Saskatchewan
Yukon
3
—
319
—
Total
124
14,189
11
U.S. Stores and Distribution Centers at February 1, 2014
Owned
Leased
Owned buildings on leased land
Total
(a)
Distribution
Centers (a)
31
6
—
37
Stores
—
124
124
Distribution
Centers (a)
3
—
3
The 37 distribution centers have a total of 50,111 thousand square feet.
Canadian Stores and Distribution Centers at February 1, 2014
Owned
Leased
Total
(a)
Stores
1,535
91
167
1,793
The 3 distribution centers have a total of 3,963 thousand square feet.
We own our corporate headquarters buildings located in and around Minneapolis, Minnesota, and we lease and own
additional office space in Minneapolis and elsewhere in the United States. We lease our Canadian headquarters in
Mississauga, Ontario. Our international sourcing operations include 22 office locations in 14 countries, all of which are
leased. We also lease office space in Bangalore, India, where we operate various support functions. Our properties
are in good condition, well maintained, and suitable to carry on our business.
For additional information on our properties, see the Capital Expenditures section in Item 7, Management’s Discussion
and Analysis of Financial Condition and Results of Operations and Notes 12 and 20 of the Notes to Consolidated
Financial Statements included in Item 8, Financial Statements and Supplementary Data.
Item 3.
Legal Proceedings
No response is required under Item 103 of Regulation S-K, which requires disclosure of legal proceedings that are
material, based on an analysis of the probability and magnitude of the outcome. For a description of other legal
proceedings, including a discussion of litigation and government inquiries related to the Data Breach we
experienced in the fourth quarter of fiscal 2013 in which certain payment card and guest information was stolen
through unauthorized access to our network, see Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations and Note 17 of the Notes to Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 4A.
Executive Officers
Executive officers are elected by, and serve at the pleasure of, the Board of Directors. There is neither a family
relationship between any of the officers named and any other executive officer or member of the Board of Directors,
nor any arrangement or understanding pursuant to which any person was selected as an officer.
12
Name
Timothy R. Baer
Anthony S. Fisher
John D. Griffith
Jeffrey J. Jones II
Title and Business Experience
Executive Vice President, General Counsel and Corporate Secretary since March
2007.
President, Target Canada since January 2011. Vice President, Merchandise
Operations from February 2010 to January 2011. Divisional Merchandise Manager,
Toys and Sporting Goods, from June 2008 to January 2010.
Executive Vice President, Property Development since February 2005.
Executive Vice President and Chief Marketing Officer since April 2012. Partner and
President of McKinney Ventures LLC from March 2006 to March 2012.
Jodeen A. Kozlak
Executive Vice President, Human Resources since March 2007.
John J. Mulligan
Executive Vice President and Chief Financial Officer since April 2012. Senior Vice
President, Treasury, Accounting and Operations from February 2010 to April 2012.
Vice President, Pay and Benefits from February 2007 to February 2010.
Tina M. Schiel
Executive Vice President, Stores since January 2011. Senior Vice President, New
Business Development from February 2010 to January 2011. Senior Vice President,
Stores from February 2001 to February 2010.
Gregg W. Steinhafel Chairman of the Board, President and Chief Executive Officer since February 2009.
President and Chief Executive Officer since May 2008. Director since January 2007.
President since August 1999.
Kathryn A. Tesija
Executive Vice President, Merchandising and Supply Chain since October 2012.
Executive Vice President, Merchandising from May 2008 to September 2012.
Laysha L. Ward
President, Community Relations and Target Foundation since July 2008.
Age
53
39
52
46
50
48
48
59
51
46
13
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is listed on the New York Stock Exchange under the symbol “TGT.” We are authorized to issue up
to 6,000,000,000 shares of common stock, par value $0.0833, and up to 5,000,000 shares of preferred stock, par
value $0.01. At March 10, 2014, there were 15,875 shareholders of record. Dividends declared per share and the high
and low closing common stock price for each fiscal quarter during 2013 and 2012 are disclosed in Note 29 of the Notes
to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data.
In January 2012, our Board of Directors authorized the repurchase of $5 billion of our common stock, with no stated
expiration for the share repurchase program. We have repurchased 49.1 million shares of our common stock under
this program for a total cash investment of $3.1 billion ($62.99 average price per share).
The table below presents Target common stock purchases made during the three months ended February 1, 2014 by
Target, as defined in Rule 10b-18(a)(3) under the Exchange Act.
Period
November 3, 2013 through
November 30, 2013
December 1, 2013 through January
4, 2014
January 5, 2014 through
February 1, 2014
(a)
(b)
14
Total Number
Average
of Shares
Price Paid
Purchased (a)(b) per Share (a)(b)
Total Number of
Dollar Value of
Shares Purchased
Shares that May
as Part of the
Yet Be Purchased
Current Program (a) Under the Program
2,406 $
—
49,148,329 $
1,904,324,394
18,310
—
49,148,329
1,904,324,394
147,537
168,253 $
—
—
49,148,329
49,148,329 $
1,904,324,394
1,904,324,394
The table above includes shares reacquired upon settlement of prepaid forward contracts. At February 1, 2014, we held asset positions
in prepaid forward contracts for 1 million shares of our common stock, for a total cash investment of $63 million, or an average per share
price of $48.83. No shares were reacquired under such contracts during the fourth quarter. Refer to Notes 23 and 25 of the Notes to
Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data for further details of these
contracts.
The number of shares above includes shares of common stock reacquired from team members who tendered owned shares to satisfy
the tax withholding on equity awards as part of our long-term incentive plans or to satisfy the exercise price on stock option exercises.
For the three months ended February 1, 2014,168,253 shares were reacquired at an weighted average per share price of $61.91
pursuant to our long-term incentive plan.
Wal-Mart Stores Inc
Walgreen Co
SUPERVALU INC.
Wal-Mart Stores Inc
Walgreen Co
Comparison of Cumulative Five Year Total Return
300
250
Target
S&P 500 Index
Current Peer Group
Previous Peer Group
Dollars
200
150
100
50
0
2009
Target
S&P 500 Index
Previous Peer Group
Current Peer Group
2010
2011
2012
2013
2014
Fiscal Years Ended
January 31, January 30, January 29, January 28, February 2, February 1,
2009
2010
2011
2012
2013
2014
167.08 $
$
100.00 $
179.93 $
169.27 $
211.54 $
200.64
133.14
100.00
161.44
170.04
199.98
240.58
128.10
100.00
146.82
163.21
205.64
247.92
128.46
100.00
147.71
164.25
207.23
249.77
The graph above compares the cumulative total shareholder return on our common stock for the last five fiscal years
Prepared by S&P C
with (i) the cumulative total return on the S&P 500 Index, (ii) the peer group used in previous filings consisting of 15
online, general merchandise, department store, food and specialty retailers, which are large and meaningful competitors
(Amazon.com, Best Buy, Costco, CVS Caremark, Home Depot, J. C. Penney, Kohl’s, Kroger, Lowe’s, Macy’s, Safeway,
Sears, Supervalu, Walgreens and Walmart) (Previous Peer Group), and (iii) a new peer group consisting of the
companies in the Previous Peer Group excluding Supervalu. The change in peer groups was made to be consistent
with the retail peer group used for our definitive Proxy Statement to be filed on or about April 28, 2014.
Both peer groups are weighted by the market capitalization of each component company. The graph assumes the
investment of $100 in Target common stock, the S&P 500 Index, the Previous Peer Group and the Current Peer Group
on January 31, 2009, and reinvestment of all dividends.
15
Item 6.
Selected Financial Data
(millions, except per share data)
Financial Results:
$
Total revenues (b)
Net earnings
Per Share:
Basic earnings per share
Diluted earnings per share
Cash dividends declared per share
Financial Position:
Total assets
Long-term debt, including current portion
2013
As of or for the Year Ended
2012
2011
2010
(a)
2009
2008
72,596 $
1,971
73,301 $
2,999
69,865 $
2,929
67,390 $
2,920
65,357 $
2,488
64,948
2,214
3.10
3.07
1.65
4.57
4.52
1.38
4.31
4.28
1.15
4.03
4.00
0.92
3.31
3.30
0.67
2.87
2.86
0.62
44,553
13,782
48,163
17,648
46,630
17,483
43,705
15,726
44,533
16,814
44,106
18,752
Note: This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of
Operations, included in Item 7 of this Report, and our consolidated financial statements and notes thereto, included in Item 8 of this Report.
(a)
Consisted of 53 weeks.
(b)
For 2013, total revenues include sales generated by our U.S. and Canadian retail operations. For 2012 and prior, total revenues include
sales generated by our U.S. retail operations and credit card revenues.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Fiscal 2013 included the following notable items:
•
•
•
•
•
•
GAAP earnings per share were $3.07, including dilution of $1.13 related to the Canadian Segment.
Adjusted earnings per share were $4.38 on a comparable sales decrease of 0.4 percent.
We paid dividends of $1,006 million and repurchased 21.9 million of our shares for $1,474 million.
We opened 124 stores in Canada, marking the biggest single-year store opening cycle in the Company’s history
and first year of international retail operations.
We completed the sale of our U.S. consumer credit card portfolio to TD in March 2013 and recognized a gain of
$391 million.
We used $1.4 billion of the net proceeds received from the sale of our U.S. consumer credit card portfolio to
repurchase, at market value, $970 million of debt.
Sales were $72,596 million for 2013, an increase of $636 million or 0.9 percent from the prior year. Consolidated
earnings before interest expense and income taxes for 2013 decreased by $1,142 million or 21.3 percent from 2012
to $4,229 million. Cash flow provided by operations was $6,520 million, $5,325 million and $5,434 million for 2013,
2012 and 2011, respectively. In connection with the sale of our U.S. credit card receivables, we received cash of $5.7
billion. Of this amount, $2.7 billion is included in cash flow provided by operations and $3.0 billion is included in cash
flow provided by investing activities.
Earnings Per Share
GAAP diluted earnings per share
Adjustments
Adjusted diluted earnings per share
$
$
2013
3.07 $
1.31
4.38 $
2012 (a)
4.52 $
0.24
4.76 $
2011
4.28
0.13
4.41
Percent Change
2013/2012
2012/2011
(32.1)%
5.6%
(8.0)%
7.9%
Note: We have disclosed adjusted diluted earnings per share (“Adjusted EPS”), a non-GAAP metric, which excludes the impact of certain matters
not related to our routine retail operations, including the impact of our Canadian market entry. Management believes that Adjusted EPS is meaningful
in order to provide period-to-period comparisons of our operating results. A reconciliation of non-GAAP financial measures to GAAP measures is
provided on page 25.
(a)
Consisted of 53 weeks.
16
Data Breach
Description of Event
As previously disclosed, we experienced a data breach in which an intruder stole certain payment card and other guest
information from our network (the Data Breach). Based on our investigation to date, we believe that the intruder
accessed and stole payment card data from approximately 40 million credit and debit card accounts of guests who
shopped at our U.S. stores between November 27 and December 15, 2013, through malware installed on our pointof-sale system in our U.S. stores. On December 15, we removed the malware from virtually all registers in our U.S.
stores. Payment card data used in transactions made by 56 additional guests in the period between December 16 and
December 17 was stolen prior to our disabling malware on one additional register that was disconnected from our
system when we completed the initial malware removal on December 15. In addition, the intruder stole certain guest
information, including names, mailing addresses, phone numbers or email addresses, for up to 70 million individuals.
Our investigation of the matter is ongoing, and we are supporting law enforcement efforts to identify the responsible
parties.
Expenses Incurred and Amounts Accrued
In the fourth quarter of 2013, we recorded $61 million of pretax Data Breach-related expenses, and expected insurance
proceeds of $44 million, for net expenses of $17 million ($11 million after tax), or $0.02 per diluted share. These
expenses were included in our Consolidated Statements of Operations as Selling, General and Administrative Expenses
(SG&A), but were not part of our segment results. Expenses include costs to investigate the Data Breach, provide
credit-monitoring services to our guests, increase staffing in our call centers, and procure legal and other professional
services.
The $61 million of fourth quarter expenses also includes an accrual related to the expected payment card networks’
claims by reason of the Data Breach. The ultimate amount of these claims will likely include amounts for incremental
counterfeit fraud losses and non-ordinary course operating expenses (such as card reissuance costs) that the payment
card networks believe they or their issuing banks have incurred. In order for us to have liability for such claims, we
believe that a court would have to find among other things that (1) at the time of the Data Breach the portion of our
network that handles payment card data was noncompliant with applicable data security standards in a manner that
contributed to the Data Breach, and (2) the network operating rules around reimbursement of operating costs and
counterfeit fraud losses are enforceable. While an independent third-party assessor found the portion of our network
that handles payment card data to be compliant with applicable data security standards in the fall of 2013, we expect
the forensic investigator working on behalf of the payment card networks nonetheless to claim that we were not in
compliance with those standards at the time of the Data Breach. We base that expectation on our understanding that,
in cases like ours where prior to a data breach the entity suffering the breach had been found by an independent thirdparty assessor to be fully compliant with those standards, the network-approved forensic investigator nonetheless
regularly claims that the breached entity was not in fact compliant with those standards. As a result, we believe it is
probable that the payment card networks will make claims against us. We expect to dispute the payment card networks’
anticipated claims, and we think it is likely that our disputes would lead to settlement negotiations consistent with the
experience of other entities that have suffered similar payment card breaches. We believe such negotiations would
effect a combined settlement of both the payment card networks’ counterfeit fraud loss allegations and their nonordinary course operating expense allegations. We based our year-end accrual on the expectation of reaching
negotiated settlements of the payment card networks’ anticipated claims and not on any determination that it is probable
we would be found liable on these claims were they to be litigated. Currently, we can only reasonably estimate a loss
associated with settlements of the networks’ expected claims for non-ordinary course operating expenses. The yearend accrual does not include any amounts associated with the networks’ expected claims for alleged incremental
counterfeit fraud losses because the loss associated with settling such claims, while probable in our judgment, is not
reasonably estimable, in part because we have not yet received third-party fraud reporting from the payment card
networks. We are not able to reasonably estimate a range of possible losses in excess of the year-end accrual related
to the expected settlement of the payment card networks’ claims because the investigation into the matter is ongoing
and there are significant factual and legal issues to be resolved. We believe that the ultimate amount paid on payment
card network claims could be material to our results of operations in future periods.
17
Litigation and Governmental Investigations
In addition, more than 80 actions have been filed in courts in many states and other claims have been or may be
asserted against us on behalf of guests, payment card issuing banks, shareholders or others seeking damages or
other related relief, allegedly arising out of the Data Breach. State and federal agencies, including the State Attorneys
General, the Federal Trade Commission and the SEC are investigating events related to the Data Breach, including
how it occurred, its consequences and our responses. Although we are cooperating in these investigations, we may
be subject to fines or other obligations, which may have an adverse effect on how we operate our business and our
results of operations. While a loss from these matters is reasonably possible, we cannot reasonably estimate a range
of possible losses because our investigation into the matter is ongoing, the proceedings remain in the early stages,
alleged damages have not been specified, there is uncertainty as to the likelihood of a class or classes being certified
or the ultimate size of any class if certified, and there are significant factual and legal issues to be resolved. Further,
we do not believe that a loss from these matters is probable; therefore, we have not recorded a loss contingency
liability for litigation, claims and governmental investigations in the fourth quarter. See Note 17 of the Notes to
Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data.
Future Costs
We expect to incur significant investigation, legal and professional services expenses associated with the Data Breach
in future periods. We will recognize these expenses as services are received. We also expect to incur additional
expenses associated with incremental fraud and reissuance costs on Target REDcards.
Insurance Coverage
To limit our exposure to Data Breach losses, we maintain $100 million of network-security insurance coverage, above
a $10 million deductible. This coverage and certain other insurance coverage may reduce our exposure. We will pursue
recoveries to the maximum extent available under the policies. As of February 1, 2014, we have recorded a $44 million
receivable for costs we believe are reimbursable and probable of recovery under our insurance coverage, which
partially offsets the $61 million of expense relating to the Data Breach.
Future Capital Investments
We plan to accelerate a previously planned investment of approximately $100 million to equip our proprietary REDcards
and all of our U.S. store card readers with chip-enabled smart-card technology by the first quarter of 2015.
In addition, we may accelerate or make additional investments in our information technology systems, but we are
unable to estimate such investments because the nature and scope has not yet been determined. We do not expect
such amounts to be material to any fiscal period.
Effect on Sales and Guest Loyalty
We believe the Data Breach adversely affected our fourth quarter U.S. Segment sales. Prior to our December 19,
2013 announcement of the Data Breach, our U.S. Segment fourth quarter comparable sales were positive, followed
by meaningfully negative comparable sales results following the announcement. Comparable sales began to recover
in January 2014. The collective interaction of year-over-year changes in the retail calendar (e.g., the number of days
between Thanksgiving and Christmas), combined with the broad array of competitive, consumer behavioral and weather
factors makes any quantification of the precise impact of the Data Breach on sales infeasible.
Fourth quarter sales penetration on our REDcards was 20.9 percent, up 5.4 percentage points from 2012. While the
rate of increase slowed following the Data Breach, year-over-year penetration continued to grow.
We know our guests’ confidence in Target and the broader U.S. payment system has been shaken. We are committed
to, and actively engaged in, activities to restore their confidence. We cannot predict the length or extent of any ongoing
impact to sales.
Credit Card Receivables Transaction
In March 2013, we sold our entire U.S. consumer credit card portfolio to TD and recognized a gain of $391 million.
This transaction was accounted for as a sale, and the receivables are no longer reported in our Consolidated Statements
of Financial Position. Consideration received included cash of $5.7 billion, equal to the gross (par) value of the
18
outstanding receivables at the time of closing, and a $225 million beneficial interest asset. The beneficial interest
asset effectively represents a receivable for the present value of future profit-sharing we expect to receive on the
receivables sold. Based on historical payment patterns, we estimate that the beneficial interest asset will be reduced
over a four-year period following the sale, with larger reductions in the early years. As of February 1, 2014, a $127
million beneficial interest asset remained. Concurrent with the sale of the portfolio, we repaid the nonrecourse debt
collateralized by credit card receivables (2006/2007 Series Variable Funding Certificate) at par of $1.5 billion, resulting
in net cash proceeds of $4.2 billion.
TD now underwrites, funds and owns Target Credit Card and Target Visa consumer receivables in the U.S. TD controls
risk management policies and oversees regulatory compliance, and we perform account servicing and primary
marketing functions. We earn a substantial portion of the profits generated by the Target Credit Card and Target Visa
portfolios. Income from the TD profit-sharing arrangement and our related account servicing expenses are classified
within SG&A expenses in the U.S. Segment.
Beginning with the first quarter of 2013, we no longer report a U.S. Credit Card Segment.
Analysis of Results of Operations
U.S. Segment
U.S. Segment Results
(dollars in millions)
Sales
Cost of sales
Gross margin
SG&A expenses (b)
EBITDA
Depreciation and amortization
EBIT
$
$
2013
71,279 $
50,039
21,240
14,285
6,955
1,996
4,959 $
(a)
2012
71,960 $
50,568
21,392
13,759
7,633
2,044
5,589 $
2011
68,466
47,860
20,606
13,079
7,527
2,084
5,443
Percent Change
2013/2012
2012/2011
(0.9)%
5.1%
(1.0)
5.7
(0.7)
3.8
3.8
5.2
(8.9)
1.4
(2.4)
(1.9)
(11.3)%
2.7%
Note: Prior period segment results have been revised to reflect the combination of our historical U.S. Retail Segment and U.S. Credit Card
Segment into one U.S. Segment. Quarterly and full-year historical information for the three most recently completed years reflecting the results
for the U.S. Segment and Canadian Segment are attached as Exhibit (99) to our current report on Form 8-K filed April 16, 2013.
Note: See Note 28 to our Consolidated Financial Statements for a reconciliation of our segment results to earnings before income taxes.
(a)
Consisted of 53 weeks.
(b)
SG&A includes credit card revenues and expenses for all periods presented prior to the March 2013 sale of our U.S. consumer credit
card portfolio to TD. For 2013, SG&A also includes $653 million of profit-sharing income from the arrangement with TD.
U.S. Segment Rate Analysis
Twelve Months Ended February 2, 2013
Twelve Months
Ended
February 1,
2014
U.S. Segment,
as revised
Gross margin rate
29.8%
29.7%
SG&A expense rate
20.0
19.1
(0.8)
EBITDA margin rate
9.8
10.6
Depreciation and amortization
expense rate
2.8
EBIT margin rate
7.0
Impact of
Historical U.S.
Credit Card
Segment(a)
2013 U.S. Segment Change vs. 2012
Historical
U.S. Retail
Segment
U.S. Segment,
as revised
Historical
U.S. Retail
Segment
29.7%
0.1pp
0.1pp
19.9
0.9
0.1
0.8
9.8
(0.8)
—
2.8
—
2.8
—
—
7.8
0.8
7.0
(0.8)
—
— pp
19
U.S. Segment Rate Analysis
Twelve Months Ended January 28, 2012
Twelve Months
Ended
February 2,
2013
U.S. Segment,
as revised
Gross margin rate
29.7%
30.1%
SG&A expense rate
19.1
19.1
(1.0)
EBITDA margin rate
10.6
11.0
1.0
Depreciation and amortization
expense rate
2.8
3.0
EBIT margin rate
7.8
8.0
Impact of
Historical U.S.
Credit Card
Segment(a)
2012 U.S. Segment Change vs. 2011
Historical
U.S. Retail
Segment
U.S. Segment,
as revised
Historical
U.S. Retail
Segment
30.1%
(0.4)pp
(0.4)pp
20.1
—
(1.0)
10.0
(0.4)
0.6
—
3.0
(0.2)
(0.2)
1.0
7.0
(0.2)
0.8
— pp
Rate analysis metrics are computed by dividing the applicable amount by sales.
(a)
Represents the impact of combining the historical U.S. Credit Card Segment and the U.S. Retail Segment into one U.S. Segment.
Compared with the historical U.S. Retail Segment results for the same period, segment results, as revised, reflect lower SG&A rates and
increased EBIT and EBITDA margin rates resulting from the inclusion of credit card profits, net of expenses, within SG&A compared with
historical U.S. Segment results for the same period.
Sales
Sales include merchandise sales, net of expected returns, and gift card breakage. Refer to Note 2 of the Notes to
Consolidated Financial Statements for a definition of gift card breakage. The decrease in sales in 2013 reflects the
impact of an additional week in 2012 and a decline in comparable sales, partially offset by the contribution from new
stores. Sales growth in 2012 resulted from higher comparable sales, the contribution from new stores and a
1.7 percentage point benefit from an additional week in the fiscal year. Inflation did not materially affect sales in any
period presented.
Comparable sales is a measure that highlights the performance of our existing stores and digital sales by measuring
the change in sales for a period over the comparable, prior-year period of equivalent length. The method of calculating
comparable sales varies across the retail industry. As a result, our comparable sales calculation is not necessarily
comparable to similarly titled measures reported by other companies. Comparable sales include all sales, except sales
from stores open less than thirteen months.
Comparable Sales
Comparable sales change
Drivers of change in comparable sales:
Number of transactions
Average transaction amount
Selling price per unit
Units per transaction
U.S. Sales by Product Category
(a)
Household essentials
Hardlines (b)
Apparel and accessories (c)
Food and pet supplies (d)
Home furnishings and décor (e)
Total
(a)
(b)
20
2013
(0.4)%
2012
2.7%
2011
3.0%
(2.7)%
2.3 %
1.6 %
0.7 %
0.5%
2.3%
1.3%
1.0%
0.4%
2.6%
0.3%
2.3%
Percentage of Sales
2013
2012
25%
25%
18
18
19
19
21
20
17
18
100%
100%
2011
25%
19
19
19
18
100%
Includes pharmacy, beauty, personal care, baby care, cleaning and paper products.
Includes electronics (including video game hardware and software), music, movies, books, computer software, sporting goods and toys.
(c)
(d)
(e)
Includes apparel for women, men, boys, girls, toddlers, infants and newborns, as well as intimate apparel, jewelry, accessories and shoes.
Includes dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, produce and pet supplies.
Includes furniture, lighting, kitchenware, small appliances, home décor, bed and bath, home improvement, automotive and seasonal
merchandise such as patio furniture and holiday décor.
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.
Credit is offered by TD to qualified guests through Target-branded credit cards: the Target Credit Card and the Target
Visa Credit Card (Target Credit Cards). Additionally, we offer a branded proprietary Target Debit Card. Collectively, we
refer to these products as REDcards®. Guests receive a 5 percent discount on virtually all purchases when they use
a REDcard at Target. We monitor the percentage of sales 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.
REDcard Penetration
Target Credit Cards
Target Debit Card
Total store REDcard Penetration
2013
9.3%
9.9
19.3%
2012
7.9%
5.7
13.6%
2011
6.8%
2.5
9.3%
Note: The sum of Target Credit Cards and Target Debit Card penetration may not equal Total store REDcard Penetration due to rounding.
Gross Margin Rate
Our gross margin rate was 29.8 percent in 2013, 29.7 percent in 2012 and 30.1 percent in 2011. The 2013 increase
is primarily the result of a change in vendor contracts regarding payments received in support of marketing programs.
Increases to the rate were offset by our integrated growth strategies of our 5 percent REDcard Rewards loyalty program
and our store remodel program.
The 2013 change to certain merchandise vendor contracts resulted in more vendor consideration being recognized
as a reduction of our cost of sales rather than a reduction of SG&A. This change increased our gross margin rate for
2013, with an equal and offsetting increase in our SG&A rate, and has no impact on EBITDA or EBIT margin rates.
21
Selling, General and Administrative Expense Rate
(a)
Represents revised U.S. Segment results.
Our SG&A expense rate was 20.0 percent in 2013, and 19.1 percent in both 2012 and 2011. The increase in 2013
resulted from a smaller contribution from our credit card portfolio, investments in technology and supply chain in support
of multichannel initiatives, changes in merchandise vendor contracts described on the previous page, and other
increases. Increases were partially offset by the benefit from our company-wide expense optimization efforts and
favorable incentive compensation and store hourly payroll. During 2012, investments in technology and supply chain
were offset by improvements in store hourly payroll and disciplined expense management across the Company.
Store Data
Change in Number of Stores
Beginning store count
Opened
Closed
Relocated
Ending store count
Number of stores remodeled during the year
Number of Stores and
Retail Square Feet
Target general merchandise stores
Expanded food assortment stores
SuperTarget stores
CityTarget stores
Total
(a)
22
2013
1,778
19
(4)
—
1,793
100
Number of Stores
February 1,
2014
289
1,245
251
8
1,793
February 2,
2013
391
1,131
251
5
1,778
In thousands, reflects total square feet less office, distribution center and vacant space.
2012
1,763
23
(5)
(3)
1,778
252
Retail Square Feet (a)
February 1,
2014
33,843
160,891
44,500
820
240,054
February 2,
2013
46,584
146,249
44,500
514
237,847
Canadian Segment
Canadian Segment Results
(dollars in millions)
Sales
Cost of sales
Gross margin
SG&A expenses
EBITDA
Depreciation and amortization
EBIT
$
$
2013
1,317 $
1,121
196
910
(714)
227
(941) $
2012
— $
—
—
272
(272)
97
(369) $
2011
—
—
—
74
(74)
48
(122)
Canadian Segment Rate Analysis
Gross margin rate
SG&A expense rate
EBITDA margin rate
Depreciation and amortization expense rate
EBIT margin rate
Percent Change
2013/2012
2012/2011
n/a
n/a
n/a
n/a
n/a
n/a
234.9
268.7
162.6
268.7
133.6
103.2
155.0%
203.5%
2013
14.9%
69.1
(54.2)
17.3
(71.5)
Note: Rate analysis metrics are computed by dividing the applicable amount by sales.
Due to the start-up nature of our Canadian Segment, the rates above may not be indicative of future results.
Sales
Sales include merchandise sales, net of expected returns, and gift card breakage. Refer to Note 2 of the Notes to
Consolidated Financial Statements for a definition of gift card breakage.
We opened 124 Canadian Target general merchandise stores during 2013 with 14.2 million total retail square feet.
Canadian sales of $1,317 million represent a partial year of operation, with approximately 55 percent of the stores
opened during the first half of the year, 20 percent during the third quarter and the remaining 25 percent during the
fourth quarter.
Credit is offered to guests by Royal Bank of Canada (RBC) through our co-branded credit card: the Target RBC
MasterCard. Additionally, we offer a proprietary Target Debit Card. Consistent with our branded payment products in
the U.S., these payment products are referred to as REDcards. Guests receive a 5 percent discount on virtually all
purchases when they use a REDcard at Target.
REDcard Penetration
Target Credit Cards
Target Debit Card
Total store REDcard Penetration
2013
1.4%
1.5
2.9%
Gross Margin Rate
The gross margin rate of 14.9 percent reflects efforts to clear excess inventory following lower than anticipated sales
and supply chain start-up challenges.
Selling, General and Administrative Expense Rate
In addition to operating expenses during 2013, our Canadian Segment SG&A expense for 2013, 2012 and 2011
included start-up costs including compensation, benefits and third-party service expenses.
23
Other Performance Factors
Consolidated Selling, General and Administrative Expenses
In addition to our selling, general and administrative expenses recorded within our segments, we recorded certain
other expenses during 2013. These expenses included a $23 million workforce-reduction charge primarily related to
severance and benefits costs, a $22 million charge related to part-time team member health benefit changes, $19
million in impairment charges related to certain parcels of undeveloped land, and $17 million of Data Breach-related
costs, net of expected insurance proceeds. Additional information about these items is provided within the
Reconciliation of Non-GAAP Financial Measures to GAAP Measures on page 25.
Net Interest Expense
Net interest expense was $1,126 million in 2013. This increase of 47.7 percent, or $364 million, from 2012 was due
to a $445 million loss on early retirement of debt in 2013, partially offset by the benefit from 2013 debt reductions.
Net interest expense was $762 million for 2012. This decrease of 12.0 percent, or $104 million, from 2011 was primarily
due to an $87 million loss on early retirement of debt in 2011.
Provision for Income Taxes
Our effective income tax rate increased to 36.5 percent in 2013, from 34.9 percent in 2012, which was driven by the
net effect of increased losses related to Canadian operations combined with a lower year-over-year benefit from the
favorable resolution of various income tax matters. The resolution of various income tax matters reduced tax expense
by $16 million and $58 million in 2013 and 2012, respectively. A tax rate reconciliation is provided in Note 21 to our
Consolidated Financial Statements.
Our effective income tax rate increased to 34.9 percent in 2012, from 34.3 percent in 2011, primarily due to a lower
benefit associated with the favorable resolution of various income tax matters, combined with the effect of increased
losses related to Canadian operations. Various income tax matters were resolved in 2012 and 2011 which reduced
tax expense by $58 million and $85 million, respectively.
24
Reconciliation of Non-GAAP Financial Measures to GAAP Measures
To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share, which excludes
the impact of our 2013 Canadian market entry, the gain on receivables transaction, favorable resolution of various
income tax matters, the loss on early retirement of debt and other matters presented below. We believe this information
is useful in providing period-to-period comparisons of the results of our U.S. operations. This measure is not in
accordance with, or an alternative for, generally accepted accounting principles in the United States. The most
comparable GAAP measure is diluted earnings per share. Non-GAAP adjusted EPS should not be considered in
isolation or as a substitution for analysis of our results as reported under GAAP. Other companies may calculate nonGAAP adjusted EPS differently than we do, limiting the usefulness of the measure for comparisons with other
companies.
2013
(millions, except per share data)
Net of
Tax
Pretax
GAAP diluted earnings per share
2012
Per
Share
Amounts
$
3.07
$
1.13
Net of
Tax
Pretax
2011
Per
Share
Amounts
$
4.52
$
0.48
Net of
Tax
Pretax
Per
Share
Amounts
$
4.28
$
0.17
Adjustments
Total Canadian losses (a)
$ 1,018
$
723
$
447
$
315
$
166
$
119
Loss on early retirement of debt
445
270
0.42
—
—
—
87
55
0.08
Gain on receivables transaction (b)
(391)
(247)
(0.38)
(152)
(97)
(0.15)
—
—
—
Reduction of beneficial interest asset
98
61
0.09
—
—
—
—
—
—
Other (c)
64
40
0.06
—
—
—
—
—
—
Data Breach related costs, net of
insurance receivable (d)
17
11
0.02
—
—
—
—
—
—
Resolution of income tax matters
—
(16)
(0.03)
—
(58)
(0.09)
—
(85)
(0.12)
Adjusted diluted earnings per share
$
4.38
$
4.76
$
4.41
Note: A non-GAAP financial measures summary is provided on page 16. The sum of the non-GAAP adjustments may not equal the total adjustment
amounts due to rounding.
(a)
Total Canadian losses include interest expense of $77 million, $78 million and $44 million for 2013, 2012 and 2011, respectively.
(b)
2013 adjustment represents consideration received in the first quarter from the sale of our U.S. credit card receivables in excess of the recorded
amount of the receivables. Consideration included a beneficial interest asset of $225 million. The 2012 adjustment represents the gain on receivables
held for sale.
(c)
Other includes a $23 million workforce-reduction charge primarily related to severance and benefits costs, a $22 million charge related to parttime team member health benefit changes and $19 million in impairment charges related to certain parcels of undeveloped land.
(d)
For 2013, we recorded $61 million of pretax Data Breach-related expenses, and expected insurance proceeds of $44 million, for net pretax
expenses of $17 million.
Analysis of Financial Condition
Liquidity and Capital Resources
Our period-end cash and cash equivalents balance was $695 million compared with $784 million in 2012. Short-term
investments (highly liquid investments with an original maturity of three months or less from the time of purchase) of
$3 million and $130 million were included in cash and cash equivalents at the end of 2013 and 2012, 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.
Cash Flows
Our 2013 operations were funded by both internally generated funds and proceeds from the sale of our consumer
credit card receivables portfolio. Cash flow provided by operations was $6,520 million in 2013 compared with $5,325
million in 2012. Our cash flows, combined with our prior year-end cash position, allowed us to pay current debt maturities,
invest in the business, pay dividends and repurchase shares under our share repurchase program.
Concurrent with the sale of our U.S. credit card portfolio described in Note 6 of the Notes to Consolidated Financial
Statements included in Item 8, Financial Statements and Supplementary Data, we repaid the nonrecourse debt
collateralized by credit card receivables (2006/2007 Series Variable Funding Certificate) at par of $1.5 billion. Also
25
during the first quarter of 2013, we used $1.4 billion of the net proceeds received from the sale to repurchase, at market
value, $970 million of debt. We have applied additional proceeds from the sale to reduce our debt and repurchase
shares.
Year-end inventory levels increased from $7,903 million in 2012 to $8,766 million in 2013, about half of which was for
our 2013 Canadian market entry. Accounts payable increased by $627 million, or 8.9 percent over the same period.
Share Repurchases
During the first quarter of 2012, we completed a $10 billion share repurchase program authorized by our Board of
Directors in November 2007, and began repurchasing shares under a new $5 billion program authorized by our Board
of Directors in January 2012. During 2013, we repurchased 21.9 million shares of our common stock for a total
investment of $1,474 million ($67.41 per share). We did not repurchase any shares during the second half of 2013
due to our performance and desire to maintain our strong investment grade credit ratings. During 2012, we repurchased
32.2 million shares of our common stock for a total investment of $1,900 million ($58.96 per share).
Dividends
We paid dividends totaling $1,006 million in 2013 and $869 million in 2012, for an increase of 15.8 percent. We declared
dividends totaling $1,051 million ($1.65 per share) in 2013, for an increase of 16.4 percent over 2012. We declared
dividends totaling $903 million ($1.38 per share) in 2012, an increase of 16.2 percent over 2011. 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.
Short-term and Long-term Financing
Our financing strategy is to ensure liquidity and access to capital markets, to manage our net exposure to floating
interest rate volatility and to maintain a balanced spectrum of debt maturities. 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 debt ratings. As of February 1,
2014, our credit ratings were as follows:
Credit Ratings
Long-term debt
Commercial paper
Moody’s
A2
P-1
Standard and Poor’s
A+
A-1
Fitch
AF2
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 credit rating agency reviews its rating periodically and there is no
guarantee our current credit ratings will remain the same as described above. Our Standard and Poor’s rating currently
carries a negative outlook, and we believe that our recent operating performance may cause Standard and Poor’s to
lower their long-term debt rating by one level.
As a measure of our financial condition, we monitor our interest coverage ratio, representing the ratio of pretax earnings
before fixed charges to fixed charges. Fixed charges include interest expense and the interest portion of rent expense.
Our interest coverage ratio was 4.7x in 2013, 6.1x in 2012 and 5.9x in 2011. Refer to Exhibit (12) for a description of
how the gain on sale of our U.S. credit card receivable portfolio and loss on early retirement of debt affected the 2013
calculation.
In 2013, we funded our peak sales season working capital needs through internally generated funds and the issuance
of commercial paper. In 2012, we funded our peak sales season working capital needs through internally generated
funds.
26
Commercial Paper
(dollars in millions)
Maximum daily amount outstanding during the year
Average amount outstanding during the year
Amount outstanding at year-end
Weighted average interest rate
$
2013
1,465 $
408
80
0.13%
2012
970 $
120
970
0.16%
2011
1,211
244
—
0.11%
We have additional liquidity through a committed $2.25 billion revolving credit facility obtained in October 2011, which
was amended during 2013 to extend the expiration date to October 2018. No balances were outstanding at any time
during 2013 or 2012 under this facility.
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, at February 1, 2014, no notes or debentures contained provisions requiring
acceleration of payment upon a debt 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 debt ratings are either reduced and the resulting rating is non-investment grade, or our long-term debt ratings
are placed on watch for possible reduction and those ratings are subsequently reduced and the resulting rating is noninvestment grade.
We believe our sources of liquidity will continue to be adequate to maintain operations, finance anticipated expansion
and strategic initiatives, fund obligations incurred as a result of the Data Breach and any related future technology
enhancements, pay dividends and continue purchases under our share repurchase program for the foreseeable future.
We continue to anticipate ample access to commercial paper and long-term financing.
Capital Expenditures
Capital Expenditures
2013
2012
2011
(millions)
U.S. Canada
Total
U.S. Canada
Total
Total
New stores
$ 536 $ 1,451 $ 1,987 $ 673 $
417 $ 1,090 $ 2,058
Store remodels and expansions
281
—
281
690
—
690
1,289
1,069
Information technology, distribution and other
116 1,185
982
515 1,497
1,021
Total
$ 1,886 $ 1,567 $ 3,453 $ 2,345 $
932 $ 3,277 $ 4,368
Capital expenditures increased in 2013 from the prior year due to Canadian expenditures in advance of 2013 store
openings, partially offset by fewer remodels and new stores in the U.S . The decrease in capital expenditures in 2012
from the prior year was primarily driven by the 2011 purchase of Zellers leases in Canada and fewer 2012 U.S. store
remodels, partially offset by continued investment in new stores in the U.S. and Canada and technology and
multichannel investments. We expect approximately $2.4 to $2.7 billion of capital expenditures in 2014, reflecting an
estimated $2.1 to $2.3 billion in our U.S. Segment, including the previously discussed acceleration of our investment
in chip-enabled smart card technology, and approximately $0.3 to $0.4 billion in our Canadian Segment.
27
Commitments and Contingencies
Contractual Obligations as of
February 1, 2014
(millions)
Recorded contractual obligations:
Long-term debt (a)
Capital lease obligations (b)
Real estate liabilities (c)
Deferred compensation (d)
Tax contingencies (e)
Loss contingencies (f)
Unrecorded contractual obligations:
Interest payments – long-term debt
Operating leases (b)
Real estate obligations (g)
Purchase obligations (h)
Future contributions to retirement plans (i)
Contractual obligations
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Total
Payments Due by Period
Less than
1-3
3-5
1 Year
Years
Years
$ 11,708 $
5,313
144
522
—
—
1,001 $
204
144
46
—
—
778 $
390
—
99
—
—
8,618
4,103
305
1,317
—
$ 32,030 $
590
187
289
828
—
3,289 $
1,145
359
16
301
—
3,088 $
2,453 $
307
—
111
—
—
After 5
Years
7,476
4,412
—
266
—
—
917
5,966
330
3,227
—
—
61
127
—
—
4,179 $ 21,474
Represents principal payments only, and excludes any fair market value adjustments recorded in long-term debt under derivative and hedge
accounting rules. See Note 18 of the Notes to Consolidated Financial Statements for further information.
Total contractual lease payments include $3,740 million and $2,105 million of capital and operating lease payments, respectively, related
to options to extend the lease term that are reasonably assured of being exercised. These payments also include $80 million and $135 million
of legally binding minimum lease payments for stores that are expected to open in 2014 or later for capital and operating leases, respectively.
Capital lease obligations include interest. See Note 20 of the Notes to Consolidated Financial Statements for further information.
Real estate liabilities include costs incurred but not paid related to the construction or remodeling of real estate and facilities.
Deferred compensation obligations include commitments related to our nonqualified deferred compensation plans. The timing of deferred
compensation payouts is estimated based on payments currently made to former employees and retirees, forecasted investment returns,
and the projected timing of future retirements.
Estimated tax contingencies of $241 million, including interest and penalties, are not included in the table above because we are not able
to make reasonably reliable estimates of the period of cash settlement. See Note 21 of the Notes to Consolidated Financial Statements for
further information.
Estimated loss contingencies, including those related to the Data Breach, are not included in the table above because we are not able to
make reasonably reliable estimates of the period of cash settlement. See Note 17 of the Notes to Consolidated Financial Statements for
further information.
Real estate obligations include commitments for the purchase, construction or remodeling of real estate and facilities.
Purchase obligations include all legally binding contracts such as firm minimum commitments for inventory purchases, merchandise royalties,
equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. (Note: we expect to
extend certain merchandise contracts during the first quarter of 2014, which could increase our minimum purchase commitment by
approximately $1,500 million.) We issue inventory purchase orders in the normal course of business, which represent authorizations to
purchase that are cancelable by their terms. We do not consider purchase orders to be firm inventory commitments; therefore, they are
excluded from the table above. If we choose to cancel a purchase order, we may be obligated to reimburse the vendor for unrecoverable
outlays incurred prior to cancellation. We also issue trade letters of credit in the ordinary course of business, which are excluded from this
table as these obligations are conditioned on terms of the letter of credit being met.
We have not included obligations under our pension and postretirement health care benefit plans in the contractual obligations table above
because no additional amounts are required to be funded as of February 1, 2014. Our historical practice regarding these plans has been
to contribute amounts necessary to satisfy minimum pension funding requirements, plus periodic discretionary amounts determined to be
appropriate.
Off Balance Sheet Arrangements: Other than the unrecorded contractual obligations above, we do not have any
arrangements or relationships with entities that are not consolidated into the financial statements.
Critical Accounting Estimates
Our analysis of operations and financial condition is based on our consolidated financial statements prepared in
accordance with GAAP. Preparation of these consolidated financial statements requires us to make estimates and
assumptions affecting the reported amounts of assets and liabilities at the date of the consolidated financial statements,
reported amounts of revenues and expenses during the reporting period and related disclosures of contingent assets
28
and liabilities. In the Notes to Consolidated Financial Statements, we describe the significant accounting policies used
in preparing the consolidated financial statements. Our estimates are evaluated on an ongoing basis and are drawn
from historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual
results could differ under other assumptions or conditions. However, we do not believe there is a reasonable likelihood
that there will be a material change in future estimates or assumptions. Our senior management has discussed the
development and selection of our critical accounting estimates with the Audit Committee of our Board of Directors.
The following items in our consolidated financial statements require significant estimation or judgment:
Inventory and cost of sales: We use the retail inventory method to account for the majority of our inventory and the
related cost of sales. Under this method, inventory is stated at cost using the last-in, first-out (LIFO) method as
determined by applying a cost-to-retail ratio to each merchandise grouping’s ending retail value. The cost of our
inventory includes the amount we pay to our suppliers to acquire inventory, freight costs incurred in connection with
the delivery of product to our distribution centers and stores, and import costs, reduced by vendor income and cash
discounts. The majority of our distribution center operating costs, including compensation and benefits, are expensed
to cost of sales in the period incurred. Since inventory value is adjusted regularly to reflect market conditions, our
inventory methodology reflects the lower of 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. Markdowns designated for clearance
activity are recorded when the salability of the merchandise has diminished. Inventory is at risk of obsolescence if
economic conditions change, including changing consumer demand, guest preferences, changing consumer credit
markets or increasing competition. We believe these risks are largely mitigated because our inventory typically turns
in less than three months. Inventory was $8,766 million and $7,903 million at February 1, 2014 and February 2, 2013,
respectively, and is further described in Note 10 of the Notes to Consolidated Financial Statements.
Vendor income receivable: Cost of sales and SG&A expenses are partially offset by various forms of consideration
received from our vendors. This “vendor income” is earned for a variety of vendor-sponsored programs, such as volume
rebates, markdown allowances, promotions and advertising allowances, as well as for our compliance programs. We
establish a receivable for the vendor income that is earned but not yet received. Based on the agreements in place,
this receivable is computed by estimating when we have completed our performance and when the amount is earned.
The majority of all 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 $555 million and
$621 million at February 1, 2014 and February 2, 2013, respectively, and is described further in Note 4 of the Notes
to Consolidated 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 at the lowest level of identifiable
cash flows independent of other assets. An impairment loss would be recognized when estimated undiscounted future
cash flows from the operation and/or disposition of the assets are less than their carrying amount. Measurement of
an impairment loss would be based on the excess of the carrying amount of the asset group over its fair value. Fair
value is measured using discounted cash flows or independent opinions of value, as appropriate. We recorded
impairments of $77 million, $37 million and $43 million in 2013, 2012 and 2011, respectively, and are described further
in Note 12. As of February 1, 2014, a 10 percent decrease in the fair value of assets we intend to sell or close would
result in additional impairment of $7 million in 2013. Historically, we have not realized material losses upon sale of
long-lived assets.
Insurance/self-insurance: We retain a substantial portion of the risk related to certain general liability, worker…

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