Target 2014 Annual Report Download - page 42

3. Cost of Sales and Selling, General and Administrative Expenses
The following table illustrates the primary items 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
distribution centers and our retail stores, and Occupancy and operating costs of retail and
among our distribution and retail facilities headquarters facilities
• Vendor income that is not reimbursement of Advertising, offset by vendor income that is a
specific, incremental and identifiable costs reimbursement of specific, incremental and
Inventory shrink identifiable costs
Markdowns Pre-opening costs of stores and other facilities
Outbound shipping and handling expenses U.S. credit cards servicing expenses and profit
associated with sales to our guests sharing
Payment term cash discounts Litigation and defense costs and related insurance
Distribution center costs, including compensation recovery
and benefits costs Other administrative costs
Import costs
Note:
The classification of these expenses varies across the retail industry.
4. Consideration Received from Vendors
We receive consideration for a variety of vendor-sponsored programs, such as volume rebates, markdown allowances,
promotions and advertising allowances and for our compliance programs, referred to as "vendor income." Vendor
income reduces either our inventory costs or SG&A expenses based on the provisions of the arrangement. Under our
compliance programs, vendors are charged for merchandise shipments that do not meet our requirements (violations),
such as late or incomplete shipments. These allowances are recorded when violations occur. Substantially all
consideration received is recorded as a reduction of cost of sales.
We establish a receivable for vendor income that is earned but not yet received. Based on provisions of the agreements
in place, this receivable is computed by estimating the amount earned when we have completed our performance.
We perform detailed analyses to determine the appropriate level of the receivable in the aggregate. The majority of
year-end receivables associated with these activities are collected within the following fiscal quarter. We have not
historically had significant write-offs for these receivables.
5. Advertising Costs
Advertising costs, which primarily consist of newspaper circulars, internet advertisements and media broadcast, are
expensed at first showing or distribution of the advertisement.
Advertising Costs
(millions) 2014 2013 2012
Gross advertising costs
Vendor income (a)
$ 1,647 $
47
1,623 $
75
1,620
231
Net advertising costs $ 1,600 $ 1,548 $ 1,389
(a)
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 advertising expenses.
6. Canada Exit
Background
On January 14, 2015, following a comprehensive assessment of Canadian operations, our Board of Directors approved
a plan to discontinue operating stores in Canada. As a result of this decision, on January 15, 2015, Target Canada
Co. and certain other wholly owned subsidiaries of Target (collectively Canada Subsidiaries), filed for protection under
the CCAA with the Court. The Canada Subsidiaries comprise substantially all of our Canadian operations and our
Canadian Segment. The Canada Subsidiaries have commenced an orderly liquidation process and stores will remain
37