Target 2015 Annual Report Download - page 45

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
•€€€Freight expenses associated with moving
€€€€merchandise from our vendors to our
€€€€distribution centers and our retail stores, and
€€€€among our distribution and retail facilities
•€€€Vendor income that is not reimbursement of
€€€€specific, incremental, and identifiable costs
Inventory shrink
Markdowns
Outbound shipping and handling expenses
€€€€associated with sales to our guests
Payment term cash discounts
Distribution center costs, including compensation
€€€€and benefits costs
Import costs
Compensation and benefit costs including
•€€€Stores
•€€€Headquarters
Occupancy and operating costs of retail and
€€€€headquarters facilities
Advertising, offset by vendor income that is a
€€€€reimbursement of specific, incremental, and
€€€€identifiable costs
Pre-opening costs of stores and other facilities
U.S. credit cards servicing expenses and profit
sharing
Litigation and defense costs and related insurance
recovery
Other administrative 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) 2015 2014 2013
Gross advertising costs $ 1,472 $ 1,647 $ 1,623
Vendor income 38 47 75
Net advertising costs $ 1,434 $ 1,600 $ 1,548
6. Pharmacies and Clinics Transaction
In December 2015, we closed the previously announced sale of our pharmacy and clinic businesses to CVS for cash
consideration of $1.9 billion, recognizing a gain of $620 million, and deferred income of $694 million. This transaction
was accounted for as a sale, and following the transaction, the inventory and other assets sold are no longer reported
in our Consolidated Statement of Financial Position.
CVS now operates the pharmacy and clinic businesses in our stores under a perpetual operating agreement. No profit
sharing arrangement exists, but CVS will make an ongoing annual, inflation-adjusted occupancy-related payment to
us, starting at $20 million to $25 million in the first year of the agreement that will be recorded as a reduction to SG&A
expense. The operating agreement may only be terminated by mutual consent of both parties, or by either party if
(i)€the other party suffers an adverse event that materially and adversely harms such other party’s goodwill or reputation
40