Target - 10-Q quarterly report FY

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended May 5, 2007

Commission File Number 1-6049

TARGET CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 612/304-6073

Former name, former address and former fiscal year, if changed since last report: N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer  x   Accelerated filer  o  Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o   No  x

Indicate the number of shares outstanding of each of registrant’s classes of common stock, as of the latest practicable date. Total shares of Common Stock, par value $.0833, outstanding at May 30, 2007 were 851,488,525.

TARGET CORPORATION

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Consolidated Statements of Operations

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Financial Position

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Cash Flows

Amounts presented herein are on a cash basis and therefore may differ from those shown in other sections of this Form 10-Q. Consistent with the provisions of Statement of Financial Accounting Standards (SFAS) No. 95, “Statement of Cash Flows,” cash flows related to accounts receivable are classified as either an operating activity or an investing activity, depending on their origin.

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Shareholders’ Investment

Dividends declared per share were $.12 and $.10 for the quarters ended May 5, 2007 and April 29, 2006 and $.46 for the fiscal year ended Feburary 3, 2007.

See accompanying Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements

1.  Accounting Policies

The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statement disclosures contained in our 2006 Form 10-K. The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. In the opinion of management, all adjustments necessary for a fair statement of quarterly operating results are reflected herein and are of a normal, recurring nature.

Due to the seasonal nature of our business, quarterly revenues, expenses, earnings and cash flows are not necessarily indicative of the results that may be expected for the full year.

We operate as a single business segment.

2.  New Accounting Pronouncements

Current adoptions

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS 158). SFAS 158 requires sponsors of defined benefit pension and other postretirement benefit plans (collectively postretirement benefit plans) to recognize the funded status of their postretirement benefit plans in the statement of financial position, measure the fair value of plan assets and benefit obligations as of the date of the fiscal year-end statement of financial position and provide additional disclosures. We adopted the recognition and disclosure provisions of SFAS 158 during 2006. We adopted the SFAS 158 measurement date provision at the beginning of the first quarter of 2007, and the details of our adoption of this provision are described in Note 10.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes the financial statement recognition and measurement criteria for tax positions taken in a tax return, clarifies when tax benefits should be recorded and how they should be classified in financial statements and requires certain disclosures of uncertain tax matters. We adopted the provisions of FIN 48 at the beginning of the first quarter of 2007, and the details of our adoption of FIN 48 are described in Note 8.

At the beginning of the first quarter of 2007, we adopted the FASB’s Emerging Issues Task Force Issue No. 06-5, “Accounting for Purchases of Life Insurance–Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” and recorded a $4 million increase to noncurrent other assets, with a corresponding increase to retained earnings of $4 million.

Future adoptions

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (SFAS 157). SFAS 157 defines fair value, provides guidance for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 will be effective at the beginning of fiscal 2008. We are presently evaluating the impact of the adoption of SFAS 157 on our results of operations and financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 will be effective at the beginning of fiscal 2008. We are presently evaluating the impact of the adoption of SFAS 159 on our results of operations and financial position.

7.  Debt and Derivative Financial Instruments

We obtain short-term financing throughout the year under our commercial paper program, a form of notes payable. There were no amounts outstanding under our commercial paper program at May 5, 2007 or April 29, 2006.

On April 12, 2007, we entered into a five-year $2 billion unsecured revolving credit facility with a group of banks. The new facility replaced our existing credit agreement and is scheduled to expire in April 2012. The credit agreement contains one financial covenant requiring us to maintain a specified leverage ratio. We are, and expect to remain, in compliance with this covenant. No balances were outstanding at any time during 2007 or 2006 under this agreement or the previously existing credit facility.

On April 25, 2007, Target Receivables Corporation amended its Variable Funding Certificates (Certificates), which are backed by credit card receivables through the Target Credit Card Master Trust.  The program has a five-year initial revolving period from the date of amendment, with principal repayment occurring monthly throughout the sixth year, and allows for varying amounts of outstanding principal balances up to $1 billion.  The Certificates have a floating interest rate that is determined monthly.  At May 5, 2007, the outstanding amount of the Certificates was $1 billion and was classified within long-term debt.

On May 1, 2007, we issued $1 billion of long-term debt at 5.375% that matures in May 2017. Proceeds from this issuance were used for general corporate purposes. Concurrent with the issuance of this debt, we entered into two interest rate swaps with a combined notional amount of $600 million, under which we pay a variable rate over time in exchange for receiving a fixed rate. These swaps have been designated as fair value hedges.

Our derivative instruments are primarily interest rate swaps that hedge the fair value of certain debt by effectively converting interest from a fixed rate to a floating rate. These instruments qualify for hedge accounting, and the associated assets and liabilities are recorded in the Consolidated Statements of Financial Position. The changes in market value of an interest rate swap, as well as the offsetting change in market value of the hedged debt, are recognized within earnings in the current period. Ineffectiveness would 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 related to these instruments during the quarters ended May 5, 2007 and April 29, 2006. At May 5, 2007, February 3, 2007 and April 29, 2006, interest rate swaps were outstanding in notional amounts totaling $4.3 billion, $3.7 billion and $3.3 billion, respectively. The market value of outstanding interest rate swaps and net unamortized gains (losses) from terminated interest rate swaps was $17 million, $(7) million and $(50) million at May 5, 2007, February 3, 2007 and April 29, 2006, respectively.

8.  Income Taxes

We file a U.S. federal income tax return and income tax returns in various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 1998.

We adopted the provisions of FIN 48 on February 4, 2007. As a result of the adoption of FIN 48, we recorded a $19 million decrease to retained earnings. As of February 4, 2007, total unrecognized tax benefits were $379 million, and accrued penalties and interest totaled $98 million. If the company were to prevail on all unrecognized tax benefits recorded, approximately $204 million of the $379 million reserve would benefit the effective tax rate with the remaining $175 million representing temporary differences or amounts for which offsetting benefits are available in a different taxing jurisdiction. In addition, the impact of penalties and interest would also benefit the effective tax rate. Interest and penalties associated with unrecognized tax benefits are recorded within income tax expense.

On a quarterly and annual basis, we accrue for the effects of open uncertain tax positions and the related potential penalties and interest. There were no material adjustments to our recorded liability for unrecognized tax benefits during the first quarter of 2007, other than those made in connection with the adoption of FIN 48 that are described above.

It is reasonably possible that the amount of the unrecognized tax benefit with respect to certain of our unrecognized tax positions will increase or decrease during the next 12 months; however, we do not expect the change to have a significant effect on our results of operations or our financial position.

9.  Share Repurchase

For the quarter ended May 5, 2007, we repurchased 9.2 million shares of our common stock, for a total cash investment of $549 million ($59.79 per share), through open market transactions. Since the inception of our share repurchase program that began in 2004, we have repurchased 80.2 million shares of our common stock, for a total cash investment of $3,999 million ($49.84 per share). In addition, at May 5, 2007, we held long positions in prepaid forward contracts for 2.8 million shares of our common stock, for a total cash investment of $130 million, or $45.54 per share. We expect to continue to execute our share repurchase program primarily in open market transactions, subject to market conditions, and to complete the total program by year-end 2008, or sooner.

10.  Pension, Postretirement Health Care and Other Benefits

We have qualified defined benefit pension plans covering all U.S. employees who meet age and service requirements. We also have unfunded nonqualified pension plans for team members with qualified plan compensation restrictions. Benefits are provided based on years of service and team member compensation. Upon retirement, team members also become eligible for certain health care benefits if they meet minimum age and service requirements and agree to contribute a portion of the cost.

As described in Note 2, we adopted the SFAS 158 measurement provision in the first quarter 2007. As a result, we recorded a $16 million decrease to retained earnings, a $54 million increase to accumulated other comprehensive income, a $65 million increase to other non-current assets, a $3 million increase to other non-current liabilities and a $24 million decrease to deferred income taxes.

Net pension expense and postretirement health care expense consisted of the following:

We also maintain nonqualified, unfunded deferred compensation plans for approximately 4,900 current and retired team members whose participation in our 401(k) plan is limited by statute or regulation. These team members choose from a menu of crediting rate alternatives that are the same as the investment choices in our 401(k) plan, including Target common stock. We credit an additional 2 percent per year to the accounts of all active participants who are not executive officers, in part to recognize the risks inherent to their participation in a plan of this nature. We also maintain a nonqualified, unfunded deferred compensation plan that was frozen during 1996, covering 15 current and 49 retired participants. In this plan, deferred compensation earns returns tied to market levels of interest rates plus an additional 6 percent return, with a minimum of 12 percent and a maximum of 20 percent, as determined by the plan’s terms.

We control some of our risk of offering the nonqualified plans through investing in vehicles, including prepaid forward contracts in our own common stock, that offset a substantial portion of our economic exposure to the returns of these plans. These investment vehicles are general corporate assets and are marked-to-market with the related gains and losses recognized in the Consolidated Statements of Operations in the period they occur. The total change in fair value of contracts indexed to our own common stock recorded in earnings for the quarters ended May 5, 2007 and April 29, 2006 was a pre-tax loss of $9 million and $2 million, respectively. For the quarters ended May 5, 2007 and April 29, 2006, we invested approximately $8 million and $10 million, respectively, in such investment instruments, and these investments are included in the Consolidated Statement of Cash Flows within other investing activities. The counterparty to these contracts has the discretion to deliver Target common stock or cash to us at the settlement dates. At times, adjusting our position in these investment vehicles includes repurchasing shares of Target common stock, including shares delivered by counterparties when settling the forward contracts.

Other Performance Factors

During the first quarter of 2006, we adjusted the period over which we amortize leasehold acquisition costs to match the expected terms for individual leases, resulting in a $28 million cumulative benefit to depreciation expense in the first quarter of 2006.

In the quarter ended May 5, 2007, net interest expense was $136 million, a $5 million increase from the quarter ended April 29, 2006. This increase related primarily to higher average debt balances, including the debt to fund growth in our accounts receivable.

Our effective income tax rate for the first quarter of 2007 was 38.8 percent compared to 37.5 percent for the first quarter of 2006. This increase was primarily due to the recognition of unfavorable discrete state income tax items in the first quarter of 2007 compared to recognition of favorable discrete state income tax items in the first quarter of 2006.

Credit Card Contribution

We offer credit to qualified guests through our REDcard products, the Target Visa and the Target Card. Our credit card program strategically supports our core retail operations and remains an important contributor to our overall profitability. Our credit card revenues are comprised of finance charges, late fees and other revenues. In addition, we receive fees from merchants who accept the Target Visa credit card. Effective February 2007, we redefined Credit Card Contribution to Earnings Before Taxes (EBT) to exclude intra-company merchant fees and include the effect of new account and loyalty rewards discounts as expenses of our credit card programs. We have reclassified prior period amounts to conform to the current year disclosure. These changes were made to better facilitate comparison of our credit card results against the performance of other bank card portfolios and to better facilitate comparison of our core retail operations against other retailers who have sold their credit card portfolios to third parties. These reclassifications had no effect on our Consolidated Statements of Operations.

Credit Card Contribution to EBT

Our credit card operations are allocated a portion of consolidated interest expense based on estimated funding costs for average net accounts receivable and other financial services assets. Our allocation methodology assumes that 90 percent of the sum of average net receivables and other financial services assets are debt-financed with a mix of fixed rate and variable rate debt in proportion to the mix of fixed and variable rate financial services assets. The majority of our credit card portfolio earns interest at variable rates; thus, the majority of the interest allocation to the credit card business is at rates that are determined based upon our approximate marginal variable rate cost of borrowed funds.

In the first quarter of 2007, our net credit card revenues increased primarily due to an 11.0 percent increase in average receivables. In the quarter ended May 5, 2007, our credit card contribution to EBT was $143 million, a 20.6 percent increase over the same period last year.

Analysis of Financial Condition

Liquidity and Capital Resources

Our financial condition remains strong. In assessing our financial condition, we consider factors such as cash flows provided by operations, capital expenditures and debt service obligations. We continue to fund our growth and execute our share repurchase program through a combination of internally-generated funds and debt financing.

Gross receivables were $6,510 million compared to $5,844 million, an increase of 11.4 percent over the first quarter of last year. This growth was driven by increased issuance and usage of the Target Visa credit card. Inventory increased $357 million, or 5.9 percent, over the first quarter of last year, reflecting the natural increase required to support additional square footage and comparable-store sales growth. The growth in inventory was partially funded by an increase in accounts payable over the same period.

Capital expenditures for the quarter ended May 5, 2007 were $1,183 million, compared to $884 million for the same period a year ago. This increase is primarily attributable to investments in new stores.

During the first quarter of 2007, Target Receivables Corporation amended its Variable Funding Certificates (Certificates), which are backed by credit card receivables through the Target Credit Card Master Trust.  The program has a five-year initial revolving period from the date of the amendment, with principal repayment occurring monthly during the sixth year, and allows for varying amounts of outstanding principal balances up to $1 billion.  At May 5, 2007, the outstanding amount of the Certificates was $1 billion and was classified within long-term debt. As described in Note 7, we also issued $1 billion of long-term debt during the first quarter 2007. Concurrent with the debt issuance, we entered into two interest rate swaps with a combined notional amount of $600 million, under which we pay a variable rate over time in exchange for receiving a fixed rate. These swaps have been designated as fair value hedges.

During the first quarter of 2007, we entered into a five-year $2 billion unsecured revolving credit facility with a group of banks. The new facility replaced our existing credit agreement and is scheduled to expire in April 2012. The credit agreement contains one financial covenant requiring us to maintain a specified leverage ratio. We are, and expect to remain, in compliance with this covenant. No balances were outstanding at any time during 2007 or 2006 under this agreement or the previously existing credit facility.

As disclosed in Note 8, we have recorded liabilities associated with uncertain tax positions of $477 million, including interest and penalties, at February 4, 2007. This liability will result in cash payments to tax authorities; however, we are not able to make reasonably reliable estimates of the period or amounts of cash settlements.  For this reason, we have not included this liability in a table of contractual obligations and have not updated the table that was presented in our 2006 Form 10-K.

Store Data

During the quarter, we opened a total of 15 new stores. Net of relocations and closings, these openings included seven general merchandise stores and five SuperTarget stores. At May 5, 2007, February 3, 2007 and April 29, 2006, our number of stores and retail square feet were as follows:

*  In thousands, reflects total square feet, less office, distribution center and vacant space.

Outlook for Fiscal Year 2007

For the fiscal year 2007, a 52-week year following a 53-week year, we believe that Target will deliver a low double-digit percentage increase in earnings per share, reflecting contributions from both our core retail and our credit card operations. We expect our growth in earnings per share to be stronger in the first half of the year than the second half of the year.

We expect to deliver a high single-digit percent increase in revenues, reflecting continued new store expansion, a mid-single-digit percent increase in comparable-store sales, and the contribution of continued growth in our credit card revenues. We also expect to deliver a high single-digit percent increase in earnings before interest and taxes (EBIT), resulting in stable EBIT margin. For the full year, both our consolidated gross margin rate and our SG&A expense rate are expected to be in line with our 2006 percentages. We expect our effective tax rate to rise modestly from our 2006 rate of 38.0 percent. We expect to leverage our growth in EBIT to achieve a low double-digit percent increase in 2007 earnings per share through continued share repurchases.

Forward-Looking Statements

This report contains forward-looking statements regarding our performance, financial position, liquidity and adequacy of capital resources. Forward-looking statements are typically accompanied by the words “expect,” “may,” “could,” “believe,” “would,” “might,” “anticipates,” or words of similar import. The forward-looking statements in this report include the anticipated impact of new and proposed accounting pronouncements, the expected outcome of pending and threatened litigation, the expected resolution of tax uncertainties, our expectations with respect to our share repurchase program and our outlook in fiscal 2007. Forward-looking statements are based on our current assumptions and expectations and are subject to certain risks and uncertainties that could cause actual results to differ materially from those 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, 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 Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended February 3, 2007, which contains additional important factors that may cause actual results to differ materially from those predicted in the forward-looking statements.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in our primary risk exposures or management of market risks from those disclosed in our Form 10-K for the fiscal year ended February 3, 2007.

Item 4.  Controls and Procedures.

As of the end of the period covered by this quarterly report, we conducted an evaluation, under supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (Exchange Act). Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the Securities and Exchange Commission (SEC) under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, 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 functions, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.

For a description of legal proceedings see Note 6.

The American Jobs Creation Act of 2004 requires SEC registrants to disclose if they have been required to pay certain penalties for failing to disclose to the Internal Revenue Service their participation in listed transactions. We have not been required to pay any of the penalties set forth in Section 6707A(e)(2) of the Internal Revenue Code.

Item 1A.  Risk Factors.

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended February 3, 2007.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

The following table presents information with respect to purchases of Target common stock made during the quarters ended May 5, 2007, by Target or any “affiliated purchaser” of Target, as defined in Rule 10b-18(a)(3) under the Exchange Act.

(a)  In June 2004, our Board of Directors authorized the repurchase of $3 billion of our common stock. In November 2005, our Board of Directors increased the aggregate authorization by $2 billion, for a total authorization of $5 billion. We expect to continue to execute this share repurchase program primarily in open market transactions, subject to market conditions. We expect to complete the total program by fiscal year-end 2008 or sooner. Since the inception of this share repurchase program, we have repurchased a total of 80.2 million shares of our common stock for a total cash investment of $3,999 million ($49.84 per share).

(b)  In addition to shares purchased under our share repurchase program, we acquire shares of common stock held by team members who wish to tender owned shares to satisfy the exercise price on stock option exercises or tax withholding on equity awards as part of our long-term incentive plans. For the quarter ended May 5, 2007, 2,388 shares were acquired at an average price of $62.81 pursuant to our long-term incentive plans.

(c)  Includes shares reacquired upon settlement of prepaid forward contracts. For the quarter ended May 5, 2007, no shares were reacquired through these contracts. At May 5, 2007, we held long positions in prepaid forward contracts for 2.8 million shares of our common stock, for a total cash investment of $130 million, or $45.54 per share.

Item 3.  Defaults Upon Senior Securities.

Not applicable.

Item 4.  Submission of Matters to a Vote of Security Holders.

Item 5.  Other Information.

Not applicable.

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EXHIBIT INDEX