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2013 Annual Report

Table of contents

  • Page 1
    2013 Annual Report

  • Page 2
    ... find out more about what's in store for the year ahead, please visit our online Annual Report at Target.com/annualreport. Financial Highlights Total Revenues IN MILLIONS (Note: 2012 was a 53-week year.) before interest EBIT (Earnings expense and income taxes) Net Earnings IN MILLIONS Diluted...

  • Page 3
    ... per square foot which is calculated using rolling 13 month average square feet and a rolling four quarters of average revenue. In 2012, revenue per square foot was calculated excluding the 53rd week in order to provide a more useful comparison to other years. Using total reported revenues for 2012...

  • Page 4
    ... 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 Commission file number 1-6049 to TARGET CORPORATION (Exact name of registrant as...

  • Page 5
    ... is a shell company (as defined in Rule 12b-2 of the Act). Yes 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...

  • Page 6
    ...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 Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of...

  • Page 7
    ... 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...

  • Page 8
    ... 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...

  • Page 9
    ... 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...

  • Page 10
    ...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...

  • Page 11
    ... 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...

  • Page 12
    ... 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...

  • Page 13
    ... 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...

  • Page 14
    ... 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...

  • Page 15
    ... 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...

  • Page 16
    ...20,976 1,953 - 7,650 4,194 755 4,773 187 240,054 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...

  • Page 17
    ...2014 Owned Leased Total (a) Stores - 124 124 Distribution Centers (a) 3 - 3 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...

  • Page 18
    ... 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...

  • Page 19
    ... 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. Dollar Value of Total Number of Shares...

  • Page 20
    ...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...

  • Page 21
    ... 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...

  • Page 22
    ... 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...

  • Page 23
    ... 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...

  • Page 24
    ..., 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...

  • Page 25
    ...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...

  • Page 26
    ... 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...

  • Page 27
    ... 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...

  • Page 28
    ... 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 Gross Margin Rate The...

  • Page 29
    ... 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...

  • Page 30
    ... 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...

  • Page 31
    ...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...

  • Page 32
    ... 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...

  • Page 33
    ... 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...

  • Page 34
    ... team member medical and dental claims. However, we maintain stop-loss coverage to limit the exposure related to certain risks. Liabilities associated with these losses include estimates of both claims filed and losses incurred but not yet reported. We use actuarial methods which consider a number...

  • Page 35
    ...care accounting: We maintain a funded qualified, defined benefit pension plan, as well as several smaller and unfunded nonqualified plans and a postretirement health care plan for certain current and retired team members. The costs for these plans are determined based on actuarial calculations using...

  • Page 36
    ...expected effective income tax rate on net income, the expected compliance with debt covenants, the expected impact of new accounting pronouncements, our intentions regarding future dividends, contributions and payments related to our pension and postretirement health care plans, the expected returns...

  • Page 37
    ... 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...

  • Page 38
    ...statements of financial position of Target Corporation and subsidiaries (the Corporation) as of February 1, 2014 and February 2, 2013, and the related consolidated statements of operations, comprehensive income, cash flows, and shareholders' investment for each of the three years in the period ended...

  • Page 39
    ...financial position of Target Corporation and subsidiaries as of February 1, 2014 and February 2, 2013, and the related consolidated statements of operations, comprehensive income, cash flows and shareholders' investment for each of the three years in the period ended February 1, 2014, and our report...

  • Page 40
    ... Statements of Operations (millions, except per share data) Sales Credit card revenues Total revenues Cost of sales Selling, general and administrative expenses Credit card expenses Depreciation and amortization Gain on receivables transaction Earnings before interest expense and income taxes...

  • Page 41
    ... translation adjustment and cash flow hedges, net of provision/ (benefit) for taxes of $11, $8 and $(11) Other comprehensive income/(loss) Comprehensive income $ See accompanying Notes to Consolidated Financial Statements. 2013 1,971 $ 2012 2,999 $ 2011 2,929 110 (425) (315) 1,656 $ 92 13...

  • Page 42
    ...558 48,163 (millions, except footnotes) Assets Cash and cash equivalents, including short-term investments of $3 and $130 Credit card receivables, held for sale Inventory Other current assets Total current assets Property and equipment Land Buildings and improvements Fixtures and equipment Computer...

  • Page 43
    ... long-term debt Dividends paid Repurchase of stock Stock option exercises and related tax benefit Other Cash required for financing activities Effect of exchange rate changes on cash and cash equivalents Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of period Cash...

  • Page 44
    ... declared Repurchase of stock Stock options and awards February 1, 2014 $ $ $ $ $ $ $ $ Total 15,487 2,929 (100) (777) (1,894) 176 15,821 2,999 105 (903) (1,903) 439 16,558 1,971 (315) (1,051) (1,478) 546 16,231 Dividends declared per share were $1.65, $1.38 and $1.15 in 2013, 2012 and...

  • Page 45
    ... of 53 weeks. Fiscal 2011 ended January 28, 2012, and consisted of 52 weeks. Fiscal 2014 will end January 31, 2015, and will consist of 52 weeks. Accounting policies Statements. 2. Revenues Our retail stores generally record revenue at the point of sale. Sales from our online and mobile applications...

  • Page 46
    ...76 1,668 $ 2012 1,653 $ 231 1,422 $ 2011 1,589 229 1,360 A 2013 change to certain merchandise vendor contracts resulted in more vendor funding being recognized as a reduction of our cost of sales rather than offsetting certain advertising expenses. 6. Credit Card Receivables Transaction In March...

  • Page 47
    ..., funds and owns Target Credit Card and Target Visa 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...

  • Page 48
    ... separate accounts that are valued based on market rates credited by the insurer. Beneficial interest asset - Valued using a cash-flow based economic-profit model, which includes inputs of the forecasted performance of the receivables portfolio and a market-based discount rate. Internal data is used...

  • Page 49
    ...-profit model using Level 3 inputs, including the forecasted performance of the portfolio and a market-based discount rate. We used internal data to forecast expected payment patterns and write-offs, revenue, and operating expenses (credit EBIT yield) related to the credit card portfolio. Refer...

  • Page 50
    ... 4,000 team members who have been designated highly compensated under the Internal Revenue Code and have given their consent to be insured. Amounts are presented net of loans that are secured by some of these policies. See Notes 8 and 19 for additional information relating to our interest rate swaps...

  • Page 51
    ... 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...

  • Page 52
    ...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...

  • Page 53
    ... 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. Other Contingencies We are exposed to other claims...

  • Page 54
    ... collateralized by credit card receivables (the 2006/2007 Series Variable Funding Certificate). We also used $1.4 billion of proceeds from the transaction to repurchase, at market value, an additional $970 million of debt during the first quarter of 2013. We periodically obtain short-term financing...

  • Page 55
    ... interest rate swaps that will be amortized into earnings over the remaining lives of the underlying debt totaled $52 million, $75 million and $111 million, at the end of 2013, 2012 and 2011, respectively. 20. Leases We lease certain retail locations, warehouses, distribution centers, office space...

  • Page 56
    ...to open in 2014 or later. Capital lease payments include $3,740 million related to options to extend lease terms that are reasonably assured of being exercised and also includes $80 million of legally binding minimum payments for stores opening in 2014 or later. Calculated using the interest rate at...

  • Page 57
    ... currently deductible 348 352 Self-insured benefits 231 249 Other 193 123 Allowance for doubtful accounts and lower of cost or fair value adjustment on credit card receivables held for sale - 67 Total gross deferred tax assets 1,675 1,517 Gross deferred tax liabilities: Property and equipment (2,062...

  • Page 58
    ... of 2012, we completed a $10 billion share repurchase program that was authorized by our Board of Directors in November 2007. Share Repurchases (millions, except per share data) Total number of shares purchased Average price paid per share Total investment $ $ 2013 21.9 67.41 $ 1,474 $ 2012 32...

  • Page 59
    ... price Intrinsic value Income tax benefit $ 2013 422 $ 197 77 2012 331 $ 139 55 2011 93 27 11 At February 1, 2014, there was $37 million of total unrecognized compensation expense related to nonvested stock options, which is expected to be recognized over a weighted average period of 1.1 years...

  • Page 60
    ... domestic market share change, return on invested capital and EPS growth. The fair value of performance share units is calculated based on the stock price on the date of grant. The weighted average grant date fair value for performance share units was $57.22, $58.61 and $48.63 in 2013, 2012 and...

  • Page 61
    ... and life-insurance proceeds received from company-owned life insurance policies and other investments used to economically hedge the cost of these plans. 26. Pension and Postretirement Health Care Plans We have qualified defined benefit pension plans covering team members who meet age and service...

  • Page 62
    ... return on plan assets Employer contributions Participant contributions Benefits paid Fair value of plan assets at end of period Benefit obligation at end of period Funded/(underfunded) status $ Pension Benefits Postretirement Qualified Plans Nonqualified Plans Health Care Benefits 2013 2012 2013...

  • Page 63
    ... Benefits 2013 2012 118 $ 121 $ 137 139 (235) (220) 103 103 (11) - 3 - 115 $ 143 $ 2011 117 $ 137 (206) 67 (2) - 113 $ Prior service cost amortization is determined using the straight-line method over the average remaining service period of team members expected to receive benefits under the plan...

  • Page 64
    ... rate of return on qualified plans' assets was 10.4 percent, 8.3 percent, 7.2 percent, and 9.2 percent for the 5year, 10-year, 15-year and 20-year time periods, respectively. The market-related value of plan assets, which is used in calculating expected return on assets in net periodic benefit cost...

  • Page 65
    ... investments. Level 3 Reconciliation Balance at Beginning of Period 283 $ 115 236 $ 122 (millions) 2012 Private equity funds $ Other 2013 Private equity funds $ Other (a) Actual Return on Plan Assets (a) Relating to Relating to Assets Still Held Assets Sold at the Reporting During the Date Period...

  • Page 66
    ... the investment vehicles is based on the value of the underlying assets owned by the fund minus applicable costs and liabilities, and then divided by the number of shares outstanding. Valued at the closing price reported on the major market on which the individual securities are traded. Valued using...

  • Page 67
    .... See Note 26 for additional information. 28. Segment Reporting Our segment measure of profit is used by management to evaluate the return on our investment and to make operating decisions. Business Segment Results (millions) Sales Cost of sales Selling, general and administrative expenses...

  • Page 68
    ... accounting policies for preparing quarterly and annual financial data. The table below summarizes quarterly results for 2013 and 2012: Quarterly Results (millions, except per share data) Sales Credit card revenues Total revenues Cost of sales Selling, general and administrative expenses Credit card...

  • Page 69
    ... Sales by Product Category (a) Household essentials Hardlines Apparel and accessories Food and pet supplies Home furnishings and décor Total (a) First Quarter 2013 27% 15 20 22 16 100% 2012 26% 16 20 21 17 100% Second Quarter 2013 27% 15 20 20 18 100% 2012 27% 15 20 20 18 100% Third Quarter 2013...

  • Page 70
    ... without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar...

  • Page 71
    ... Compensation Committee Report Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 12. The following sections of Target's Proxy Statement to be filed on or about April 28, 2014, are incorporated herein by reference: • Stock Ownership Information...

  • Page 72
    ... and Financial Statement Schedules The following information required under this item is filed as part of this report: a) Financial Statements Consolidated Statements of Operations for the Years Ended February 1, 2014, February 2, 2013 and January 28, 2012 Consolidated Statements of Comprehensive...

  • Page 73
    ... Term Disability Plan (as restated effective January 1, 2010 (19) Director Retirement Program (20) Target Corporation Deferred Compensation Trust Agreement (as amended and restated effective January 1, 2009) (21) Five-Year Credit Agreement dated as of October 14, 2011 among Target Corporation, Bank...

  • Page 74
    ... Performance Share Unit Agreement Form of Non-Employee Director Non-Qualified Stock Option Agreement (27) Form of Non-Employee Director Restricted Stock Unit Agreement (28) Form of Cash Retention Award (29) Credit Card Program Agreement dated October 22, 2012 among Target Corporation, Target...

  • Page 75
    ...10)R to Target's Form 10-K Report for the year ended February 2, 2013. Incorporated by reference to Exhibit (10)EE to Target's Form 8-K Report filed January 11, 2012. Incorporated by reference to Exhibit (10)V to Target's Form 10-K Report for year ended February 2, 2013. Incorporated by reference to...

  • Page 76
    .... TARGET CORPORATION By: Dated: March 14, 2014 John J. Mulligan Executive Vice President, Chief Financial Officer and Chief Accounting Officer _____ Pursuant to the requirements of the Securities Exchange Act of 1934, the report has been signed below by the following persons on behalf of Target...

  • Page 77
    ... 1, 2013) Target Corporation Officer Income Continuance Policy Statement (as amended and restated effective June 8, 2011) Target Corporation Executive Excess Long Term Disability Plan (as restated effective January 1, 2010) Director Retirement Program Manner of Filing Incorporated by Reference...

  • Page 78
    ... Non-Employee Director Restricted Stock Unit Agreement Form of Cash Retention Award Statements of Computations of Ratios of Earnings to Fixed Charges List of Subsidiaries Consent of Independent Registered Public Accounting Firm Powers of Attorney Certification of the Chief Executive Officer Pursuant...

  • Page 79
    Exhibit (12) TARGET CORPORATION Computations of Ratios of Earnings to Fixed Charges for each of the Five Years in the Period Ended February 1, 2014 Ratio of Earnings to Fixed Charges (dollars in millions) Earnings from continuing operations before income taxes Capitalized interest, net Adjusted ...

  • Page 80

  • Page 81
    ..., EMPLOYEE SAVINGS 401(K) AND PENSION PLANS STOCK EXCHANGE LISTING SHAREHOLDER ASSISTANCE State Street Bank and Trust Company Trading Symbol: TGT New York Stock Exchange. For assistance regarding individual stock records, lost certificates, name or address changes, dividend or tax questions, call...

  • Page 82
    ... Officer, and Chief Financial Officer Tina M. Schiel Chief Stores Officer Kathryn A. Tesija Chief Merchandising and Supply Chain Officer Laysha L. Ward President, Community Relations and Target Foundation OTHER OFFICERS Janna Adair-Potts Senior Vice President, Stores and Distribution, Target...