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Growing by design.
TARGET CORPORATION ANNUAL REPORT 2005

Table of contents

  • Page 1
    Growing by design. TARGET CORPORATION ANNUAL REPORT 2005

  • Page 2
    ...'01 '02 '03 '04 '05 Earnings from Continuing Operations (millions) 2005 Growth %: 27.7% Five-year CAGR: 20.1% Diluted EPS 2005 Growth %: 31.0% Five-year CAGR: 20.7% CAGR: Compound Annual Growth Rate 02 Report to Shareholders 04 Business Review 16 Financial Review 42 Shareholder Information

  • Page 3
    ...it notes to ClearRx, which reflects our focus on innovation and embodies our "Expect More. Pay Less." brand promise. By infusing design into every guest's experience, we strive to strengthen our emotional tie with our guests and sustain our relevance in a highly competitive, fast-moving marketplace.

  • Page 4
    ... to add profitable new store locations at a disciplined pace, and invested in technology and infrastructure to improve our operating efficiency, speed and reliability. • We gained considerable market share through contributions from new stores and strong growth in comparable-store sales, and...

  • Page 5
    ... Target team members extends beyond the workplace to the communities where we all live and work. For the past 60 years, we have supported programs in education, the arts, social services and other vital partnerships that enrich the lives of our guests and team members. Today, our funding of national...

  • Page 6
    4 Design is inspired. captivating. useful. valuable. cool. exciting. necessary. utility. accessible. modern. challenging. mindful. bold. delicious.

  • Page 7
    ...guests over time. Expect More. Pay Less. Our "Expect More. Pay Less." brand promise highlights the importance of both differentiation and value at Target and reinforces our desire to maintain an appropriate balance between innovation and price. For example, our distinctive merchandise provides style...

  • Page 8
    ... specialty stores. Time to Play In-store and online, our new toy boutique contains a selection of highquality toys from well-respected U.S. and European brands, designed to entertain, educate and inspire imaginative play. GO International In partnership with internationally-renowned designers such...

  • Page 9
    ... overall food strategy and to our continued gains in market share and profitability. Reflecting Target's high standards of freshness, our distinctive packaging, exceptional value and careful brand management, Archer Farms, our premium quality brand, and Market Pantry, our national brand equivalent...

  • Page 10
    ... Strategic Growth Consistent with our historical performance, Target continues to deliver profitable market share increases through prudent investment in new general merchandise and SuperTarget stores, as well as growth in sales from existing stores. We maintain a disciplined pace of growth, adding...

  • Page 11
    ... service. In each case our guests are paramount in guiding our strategy and our execution. 22 new SuperTarget locations, bringing the total number of stores at year-end to 1,397. In 2006, we plan to open more than 100 total new stores, and by 2010 we expect to operate approximately 2,000 Target...

  • Page 12
    ...and nurtured the Target brand for decades, creating a logo that is widely recognized and a corporate image that is appreciated and trusted. Through our integrated strategic approach to merchandising, store experience, marketing and community involvement, we continue to seek opportunities to preserve...

  • Page 13
    ... our guests with superior quality, design and value, and underscores the spirit of innovation that permeates our entire company. In the Cards Within Target Financial Services, our strategy is thoughtfully conceived and carefully executed to reinforce our brand and support our retail operations. Our...

  • Page 14
    ...billion. Virtual Appeal Target.com naturally enhances Target's brand and complements our in-store merchandising and marketing strategies. The site's flexibility allows us to test new merchandise ideas economically, reach more guests with an expanded offering of products and services and increase our...

  • Page 15
    ... to our guests, and they contribute to our growth in sales and profitability. their nearest Target store; manage their Target credit card accounts; view our weekly circular; download SuperTarget coupons; search for new recipes; upload, store, share and print digital photos; create or update gift...

  • Page 16
    ... - strengthen the markets we serve and enhance the long-term health of our company. For example, we contribute more than $2 million each week to programs that benefit education, the arts, social services and other vital community partnerships. In 2005, a few of the programs Target championed were...

  • Page 17
    ... stores - with $10 from each sale going to support the Red Cross. Target embraces an innovative approach to philanthropy which involves more than writing a check. We often provide in-kind support of charitable organizations in areas where we have specific expertise and we encourage our team members...

  • Page 18
    ... millions) Total assets Capital expenditures Long-term debt Net debt (c) Shareholders' investment Financial Ratios: Revenues per square foot (d)(e) Comparable-store sales growth (e) Gross margin rate (% of sales) SG&A rate (% of sales) EBIT margin (% of revenue) Other: Common shares outstanding (in...

  • Page 19
    ... by our team members and investing to improve the quality of life in communities where we operate. In this way, we believe we will continue to achieve profitable market share growth and deliver superior shareholder value for many years to come. Management's Discussion and Analysis is based on our...

  • Page 20
    ...' compensation costs. In 2006, we expect our SG&A expense rate to be approximately equal to our 2005 rate. Credit Card Contribution We offer credit to qualified guests through our REDcard products, including the Target Visa and Target Card. Our credit card revenues are finance charges, late fees and...

  • Page 21
    ... and usage of the Target Visa credit card during 2005. Average receivables in 2005 increased 12.5 percent. Year-end inventory levels increased $454 million, or 8.4 percent, reflecting the natural increase required to support additional square footage, same-store sales growth and our strategic...

  • Page 22
    ...store expansion and remodel programs and the timing of investments in distribution center growth. Net property and equipment increased $2,178 million in 2005, following an increase of $1,707 million in 2004. Over the past five years, Target's net retail square footage has grown at a compound annual...

  • Page 23
    ... SFAS No. 87, "Employers' Accounting for Pensions." See further discussion in Note 28, pages 36-38. The annualized effect of a one percentage point change in market returns on our nonqualified defined contribution plans (inclusive of the effect of the investment vehicles used to manage our economic...

  • Page 24
    .... Pension and postretirement health care accounting We fund and maintain a qualified defined-benefit pension plan and maintain certain related non-qualified plans as well. We also maintain a postretirement health care plan for certain retired employees. The costs for these plans are calculated based...

  • Page 25
    ...long-term investment performance and current market conditions. The discount rate used to determine benefit obligations is adjusted annually based on the interest rate for long-term high-quality corporate bonds as of the measurement date (October 31) using yields for maturities that are in line with...

  • Page 26
    ... (millions, except per share data) Sales Net credit card revenues Total revenues Cost of sales Selling, general and administrative expenses Credit card expenses Depreciation and amortization Earnings from continuing operations before interest expense and income taxes Net interest expense Earnings...

  • Page 27
    ... STATEMENTS OF FINANCIAL POSITION (millions, except footnotes) Assets Cash and cash equivalents Accounts receivable, net Inventory Other current assets Total current assets Property and equipment Land Buildings and improvements Fixtures and equipment Computer hardware and software Construction-in...

  • Page 28
    ...from sale of discontinued operations Cash flow (required for) / provided by investing activities Financing activities Decrease in notes payable, net Additions to long-term debt Reductions of long-term debt Dividends paid Repurchase of stock Stock option exercises Share-based compensation tax benefit...

  • Page 29
    ... a total investment of $1,197 million ($51.88 per share). Junior Preferred Stock Rights In 2001, we declared a distribution of preferred share purchase rights which expire in September 2006. Terms of the plan provide for a distribution of one preferred share purchase right for each outstanding share...

  • Page 30
    ...1. Summary of Accounting Policies Organization Target Corporation (the Corporation or Target) operates large-format general merchandise discount stores in the United States. Our credit card operation represents an integral component of our core retail business. We also operate Target.com, an online...

  • Page 31
    ... an account is written-off, any uncollected finance charges or late fees are recorded as a reduction of net credit card revenues. Target retail store sales charged to our credit cards totaled $3,655 million, $3,269 million and $3,006 million in 2005, 2004 and 2003, respectively. 3. Cost of Sales and...

  • Page 32
    ...in the Trust assets that is held by Target National Bank, a wholly-owned subsidiary of Target which also services receivables. TRC uses the proceeds from the sale of debt securities and its share of collections on the receivables to pay the purchase price of the receivables to Target. The accounting...

  • Page 33
    ...year-end 2005 and 2004, respectively. 17. Accrued Liabilities January 28, January 29, 2006 2005 $ 506 366 294 1,027 $2,193 $ 422 287 214 710 $1,633 (millions) Prepaid pension expense Cash value of life insurance Goodwill and intangible assets Other Total (millions) Wages and benefits Taxes payable...

  • Page 34
    ... the weighted average stated interest rate as of year-end, including the impact of interest rate swaps. (b) The estimated fair value of total notes and debentures, using a discounted cash flow analysis based on our incremental interest rates for similar types of financial instruments, was $10,229...

  • Page 35
    ... sales over contractual levels. Total rent expense was $154 million in 2005, $240 million in 2004 and $150 million in 2003. Refer to Note 29, page 39 for discussion of the 2004 lease accounting adjustment. Certain leases require us to pay real estate taxes, insurance, maintenance and other operating...

  • Page 36
    ... benefits Accounts receivable valuation allowance Inventory Postretirement health care obligation Other January 28, January 29, 2006 2005 $ 399 217 167 1 39 151 974 Gross deferred tax liabilities Property and equipment Pension Deferred credit card income Other (1,080) (287) (103) (11) (1,481) Total...

  • Page 37
    ... in the following table. Volatility represents an average of market quotes for implied volatility of 5.5-year options on Target stock. The expected life is estimated based on analysis of options already exercised and any foreseeable trends or changes in behavior. The risk-free interest rate is an...

  • Page 38
    ... Health Care Benefits We have a qualified defined benefit pension plan covering all U.S. employees who meet age and service requirements. We also have unfunded non-qualified pension plans for employees with qualified plan compensation restrictions. Benefits are provided based on years of service...

  • Page 39
    ... Actual return on plan assets Employer contribution Benefits paid Fair value of plan assets at end of measurement period Funded status Unrecognized actuarial loss Unrecognized prior service cost Net amount recognized 2005 2004 Non-qualified Plans 2005 2004 Postretirement Health Care Benefits 2005...

  • Page 40
    ...used to determine net periodic benefit cost for years ended October 31: Postretirement Health Care Benefits 2005 5.75% n/a n/a 2004 6.25% n/a n/a Pension Benefits 2005 Discount rate Expected long-term rate of return on plan assets Average assumed rate of compensation increase 5.75% 8.00% 2.75% 2004...

  • Page 41
    ...were recorded in fourth quarter 2004. (b) Target adjusted its method of accounting for leases related to a specific category of owned store locations on leased land, which resulted in a non-cash adjustment, primarily attributable to an increase in the straight-line rent accrual, of $65 million ($.04...

  • Page 42
    ... consolidated statements of operations, cash flows and shareholders' investment for each of the three years in the period ended January 28, 2006, of Target Corporation and subsidiaries and our report dated March 29, 2006, expressed an unqualified opinion thereon. Minneapolis, Minnesota March 29...

  • Page 43
    ... Derek L. Jenkins Sr. Vice President, Store Support Susan D. Kahn Vice President, Investor Relations Tracy J. Kofski Vice President, Total Compensation Richard N. Maguire Senior Vice President, Merchandise Planning Dale Nitschke President, Target.com Tina M. Schiel Senior Vice President, Region...

  • Page 44
    ... name or address changes, dividend or tax questions, call Mellon Investor Services at 1-800-794-9871, access their website at www.melloninvestor.com, or write to: Mellon Investor Services P.O. Box 3315 South Hackensack, NJ 07606-1915 Direct Stock Purchase / Dividend Reinvestment Plan Mellon Investor...

  • Page 45
    ... Vermont Group Total Total 0 5 0 4 0 9 1,397 0 618 0 489 0 1,107 178,260 For purposes of this schedule, market share is defined as Target sales by state as a percentage of U.S. General Merchandise Store sales, including department stores, discount stores, supercenters and warehouse clubs. For...

  • Page 46
    1000 NICOLLET MALL MINNEAPOLIS, MN 55403 612.304.6073 TARGET.COM