Target 2006 Annual Report Download - page 47

result when changes in the market value of the hedged debt are not completely offset by changes in the
market value of the interest rate swap. There was no ineffectiveness recognized in 2006, 2005, or 2004
related to these instruments. Further information related to interest rate swaps is disclosed in Note 21.
During 2006, we entered into an interest rate forward contract in order to offset a portion of our
exposure to our workers’ compensation and general liability obligations, which are recorded on a
discounted basis. This instrument has not been designated as an accounting hedge.
Nearly all of our inventory purchases are in U.S. dollars; therefore, we have immaterial foreign
currency hedging activities.
Additionally, see the description of our prepaid forward contracts in Note 27.
2. Revenues
Our retail stores record revenue at the point of sale. Sales from our on-line business include shipping
revenue and are recorded upon delivery to the guest. Total revenues do not include sales tax as we consider
ourselves a pass through conduit for collecting and remitting sales taxes. Generally, guests may return
merchandise within 90 days of purchase. Revenues are recognized net of expected returns, which we
estimate using historical return patterns. Commissions earned on sales generated by leased departments
are included within sales and were $15 million in 2006, $14 million in 2005 and $14 million in 2004.
Revenue from gift card sales is recognized upon redemption of the gift card. Our gift cards do not have
expiration dates. Based on historical redemption rates, a small and relatively stable percentage of gift cards
will never be redeemed, referred to as ‘‘breakage.’’ Estimated breakage revenue is recognized over a
period of time in proportion to actual gift card redemptions and was immaterial in 2006, 2005 and 2004.
Credit card revenues are recognized according to the contractual provisions of each applicable credit
card agreement. When accounts are written-off, uncollected finance charges and late fees are recorded as
a reduction of credit card revenues. Target retail store sales charged to our credit cards totaled
$3,961 million, $3,655 million and $3,269 million in 2006, 2005, and 2004, respectively. We offer new
account discounts and rewards programs on our REDcard products. These discounts are redeemable only
on purchases made at Target. The discounts associated with our REDcard products are included as
reductions in sales in our Consolidated Statements of Operations and were $104 million, $97 million and
$80 million in 2006, 2005 and 2004, respectively.
3. Cost of Sales and Selling, General and Administrative Expenses
The following illustrates the primary costs classified in each major expense category:
Cost of Sales Selling, General and Administrative Expenses
Total cost of products sold including: Compensation and benefit costs including:
• Freight expenses associated with moving • Stores
merchandise from our vendors to our • Headquarters, including buying and
distribution centers and our retail stores, and merchandising
among our distribution and retail facilities • Distribution operations
• Vendor income that is not reimbursement of Occupancy and operating costs of retail,
specific, incremental and identifiable costs distribution and headquarters facilities
Inventory shrink Advertising, offset by vendor income that is a
Markdowns reimbursement of specific, incremental and
Shipping and handling expenses identifiable costs
Terms cash discount Pre-opening costs of stores and other facilities
Other administrative costs
The classification of these expenses varies across the retail industry.
Compensation, benefits and other expenses for buying, merchandising and distribution operations
classified in selling, general and administrative expenses were approximately $1,274 million,
$1,133 million and $980 million for 2006, 2005 and 2004, respectively.
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PART II