Target 2007 Annual Report Download - page 39

projected. We caution that the forward-looking statements are qualified by the risks and challenges posed by
increased competition (including the effects of competitor liquidation activities), shifting consumer demand,
changing consumer credit markets, changing wages, health care and other benefit costs, shifting capital
markets and general economic conditions, hiring and retaining effective team members, sourcing
merchandise from domestic and international vendors, investing in new business strategies, changes in the
political or regulatory environment, the outbreak of war or pandemics and other significant national and
international events, and other risks and uncertainties. As a result, although we believe there is a reasonable
basis for the forward-looking statements, you should not place undue reliance on those statements. You are
encouraged to review Exhibit (99)A to this Form 10-K, which contains additional important factors that may
cause actual results to differ materially from those predicted in the forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk results primarily from interest rate changes on our debt obligations and on
our credit card receivables, the majority of which are assessed finance charges at a prime-based floating rate.
To manage our net interest margin, we generally maintain levels of floating-rate debt to generate similar
changes in net interest expense as finance charge revenues fluctuate. Our degree of floating asset and liability
matching may vary over time and vary in different interest rate environments. At February 2, 2008, our level of
floating-rate credit card assets exceeded our level of net floating-rate debt obligations by approximately
$1.4 billion. As a result, based on our balance sheet position at February 2, 2008, the annualized effect of a
one percentage point decrease in floating interest rates on our interest rate swap agreements and other
floating rate debt obligations, net of our floating rate credit card assets and marketable securities, would be to
decrease earnings before income taxes by approximately $14 million. See further description in Note 20 and
Note 29.
We record our general liability and workers’ compensation liabilities at net present value; therefore, these
liabilities fluctuate with changes in interest rates. Periodically and in certain interest rate environments, we
economically hedge a portion of our exposure to these interest rate changes by entering into interest rate
forward contracts that partially mitigate the effects of interest rate changes. Based on our balance sheet
position at February 2, 2008, the annualized effect of a one percentage point decrease in interest rates would
be to decrease earnings before income taxes by approximately $16 million.
In addition, we are exposed to fluctuations of market returns on our qualified defined benefit pension and
nonqualified defined contribution plans. The annualized effect of a one percentage point decrease in the
return on pension plan assets would decrease plan assets by $22 million at February 2, 2008. The resulting
impact on net pension expense would be calculated consistent with the provisions of SFAS No. 87,
‘‘Employers’ Accounting for Pensions.’’ The value of our pension liabilities is inversely related to changes in
interest rates. To protect against declines in interest rates we hold high-quality, long-duration bonds and
interest rate swaps in our pension plan trust. At year end, we had hedged approximately 50 percent of the
interest rate exposure of our funded status. See further description in Note 27.
As more fully described in Note 13 and Note 26, we are exposed to market returns on accumulated team
member balances in our nonqualified, unfunded deferred compensation plans. We control our risk of offering
the nonqualified plans by making investments in life insurance contracts and prepaid forward contracts on our
own common stock that offset a substantial portion of our economic exposure to the returns on these plans.
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 exposure)
would not be significant.
We do not have significant direct exposure to foreign currency rates as all of our stores are located in the
United States, and the vast majority of imported merchandise is purchased in U.S. dollars.
Overall, there have been no material changes in our primary risk exposures or management of market
risks since the prior year.
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PART II