Washington, D.C. 20549

For the quarterly period ended October 28, 2017

Commission File Number 1-6049

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x No  o

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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 $0.0833, outstanding at November 14, 2017 were 543,572,649.

TARGET CORPORATION

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Note: Per share amounts may not foot due to rounding. 

(a) Refer to Note 3 for information about a reclassification of supply chain-related depreciation expense to cost of sales.

See accompanying Notes to Consolidated Financial Statements.

See accompanying Notes to Consolidated Financial Statements.

Common Stock Authorized 6,000,000,000 shares, $.0833 par value; 543,913,318 , 556,156,228 and 563,676,785 shares issued and outstanding at October 28, 2017 , January 28, 2017 and October 29, 2016 , respectively.

Preferred Stock Authorized 5,000,000 shares, $.01 par value; no shares were issued or outstanding during any period presented.

See accompanying Notes to Consolidated Financial Statements.

See accompanying Notes to Consolidated Financial Statements.

See accompanying Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements (unaudited)

1. Accounting Policies

These financial statements should be read in conjunction with the financial statement disclosures in our 2016 Form 10-K.

We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature. Certain prior-year amounts have been reclassified to conform to the current year presentation. Note 3 provides more information about a reclassification of supply chain-related depreciation expense to cost of sales. Unless otherwise noted, amounts presented within the Notes to Consolidated Financial Statements refer to our continuing operations.

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.

2. Revenues

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). We plan to adopt the standard in the first quarter of fiscal 2018 using the full retrospective approach. We do not expect the standard to materially affect our consolidated net earnings, financial position, or cash flows. We expect minor changes to the timing of recognition of revenues related to promotional gift cards.

We are nearly complete with our evaluation of the impact the standard has on our determination of whether we act as principal or agent in certain vendor arrangements where the purchase and sale of inventory are virtually simultaneous. We record revenue and related costs on a gross basis for the vast majority of these arrangements, which represent approximately 3 percent of our consolidated sales. We expect to conclude that we should continue to record these transactions on a gross basis.

We expect to present certain other income streams, including credit card profit sharing income, in an other revenue line on our Consolidated Statements of Operations upon adoption.

3 . Cost of Sales and Selling, General and Administrative Expenses

Beginning in the second quarter of 2017, we reclassified supply chain-related depreciation expense to cost of sales whereas it was previously included in depreciation and amortization on our Consolidated Statements of Operations. We reclassified prior year amounts to reflect this change. This reclassification increased cost of sales by $60 million and $189 million for the three and nine months ended October 28, 2017, respectively, and $65 million and $200 million for the three and nine months ended October 29, 2016, respectively, with equal and offsetting decreases to depreciation and amortization. This reclassification had no impact on sales, earnings before interest expense and income taxes, net earnings or earnings per share.

The following table illustrates the primary items classified in each major expense category:

4. Fair Value Measurements

Fair value measurements are reported in one of three levels reflecting the valuation techniques used to determine fair value.

(a) Amounts may be subject to tax if repatriated.

(b) See Note 8 for additional information on interest rate swaps.

(a) The carrying amounts of certain other current assets, accounts payable, and certain accrued and other current liabilities approximate fair value due to their short-term nature.

(b) The carrying amount and estimated fair value of debt exclude unamortized swap valuation adjustments and capital lease obligations.

5. Cash and Cash Equivalents

Cash equivalents include highly liquid investments with an original maturity of three months or less from the time of purchase. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions, which typically settle in 5 days or less.

(a) Amounts may be subject to tax if repatriated.

6. Property and Equipment

We review long-lived assets for impairment when events or changes in circumstances-such as a decision to relocate or close a store or distribution center, make significant software changes or discontinue projects-indicate that the asset's carrying value may not be recoverable. We recognized impairment losses of $1 million and $89 million during the three and nine months ended October 28, 2017 , respectively, primarily resulting from planned or completed store closures and supply chain changes for the nine month period. Storm-related write-offs of property and equipment, net of insurance recoveries, were immaterial. We recognized impairment losses of $9 million and $37 million during the three and nine months ended October 29, 2016 , respectively, primarily resulting from planned or completed store closures. The impairments are recorded in selling, general and administrative expense on the Consolidated Statements of Operations and are included in segment results.

7. Notes Payable and Long-Term Debt

In October 2017, we issued unsecured fixed rate debt of $750 million at 3.9% that matures in November 2047. During the three months ended October 28, 2017, we repurchased $344 million of debt before its maturity at a market value of $463 million . We recognized a loss on early retirement of approximately $123 million , which was recorded in net interest expense in our Consolidated Statements of Operations.

In May 2017, we used cash on hand to repay $598 million of debt at its maturity.

In April 2016, we issued unsecured fixed rate debt of $1 billion at 2.5% that matures in April 2026 and $1 billion at 3.625% that matures in April 2046. During the first and second quarter of 2016, we repurchased $565 million and $824 million of debt, respectively, before its maturity at a market value of $820 million and $981 million , respectively. We recognized a loss on early retirement of approximately $261 million and $161 million in first and second quarter of 2016, respectively, which was recorded in net interest expense in our Consolidated Statements of Operations.

We obtain short-term financing from time to time under our commercial paper program, a form of notes payable. No balances were outstanding at any time during the nine months ended October 28, 2017 . For the three and nine months ended October 29, 2016 , the maximum amount outstanding was $89 million and the average daily amounts outstanding were $3 million and $1 million , respectively, at a weighted average annual interest rate of 0.43 percent . At October 29, 2016, $89 million was outstanding.

8. Derivative Financial Instruments

Our derivative instruments primarily consist of interest rate swaps, which we use to mitigate interest rate risk. As a result of our use of derivative instruments, we have counterparty credit exposure to large global financial institutions. We monitor this concentration of counterparty credit risk on an ongoing basis. See Note 4 for a description of the fair value measurement of our derivative instruments and their classification on the Consolidated Statements of Financial Position.

As of October 28, 2017 and October 29, 2016 , interest rate swaps with notional amounts totaling $1,000 million were designated fair value hedges. No ineffectiveness was recognized during the three and nine months ended October 28, 2017 or October 29, 2016 .

As of October 28, 2017 and October 29, 2016 , one interest rate swap with a notional amount of $250 million was not designated a fair value hedge because it was de-designated concurrent with the repurchase of debt during the first half of 2016.

We recorded income of $2 million and $8 million during the three and nine months ended October 28, 2017 , respectively, and $5 million and $21 million during the three and nine months ended October 29, 2016 , respectively, within net interest expense on our Consolidated Statements of Operations related to periodic payments, valuation adjustments, and amortization of gains or losses on our interest rate swaps.

9. Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

We must adopt the standard no later than the first quarter of 2019, which begins on February 3, 2019. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.

We plan to adopt the standard in the first quarter of 2018. We will take advantage of the transition package of practical expedients permitted within the new standard, which among other things, allows us to carryforward the historical lease classification. In addition, we are electing the hindsight practical expedient to determine the reasonably certain lease term for existing leases. While lease classification will remain unchanged, hindsight will result in generally shorter accounting lease terms and useful lives of the corresponding leasehold improvements. We will make an accounting policy election that will keep leases with an initial term of 12 months or less off of the balance sheet and will result in recognizing those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term.

While we are continuing to assess all potential impacts of the standard, we expect total liabilities to increase by $1.3 - $1.5 billion , with an offsetting increase to leased assets of $1.2 - $1.4 billion as of the date of adoption. The difference between these amounts will be recorded as an adjustment to retained earnings. We do not believe the standard will materially affect our consolidated net earnings. These estimates - based on our current lease portfolio - may change as we continue to evaluate the new standard and as we implement a new lease accounting information system. The estimates could also change due to changes in the lease portfolio, which could include (a) lease volume, (b) lease commencement dates, and (c) renewal option and lease termination expectations. We will update our estimates each quarter as changes occur.

We do not believe the new standard will have a notable impact on our liquidity. The standard will have no impact on our debt-covenant compliance under our current agreements.

10. Income Taxes

(a) For the three months ended October 28, 2017, the income tax rate decreased  11.5% compared with the three months ended October 29, 2016. Benefits from our global sourcing operations drove 9.6 percentage points of the decline ( 3.7 percentage points of which is due to lower earnings before income taxes). This includes  $55 million of prior-period discrete tax benefits primarily related to our global sourcing operations. For the nine months ended October 28, 2017, the income tax rate decreased 2.5% compared with the nine months ended October 29, 2016. Benefits from our global sourcing operations drove 2.7 percentage points of rate decline. This includes $56 million of prior-period discrete tax benefits primarily related to our global sourcing operations.

11. Share Repurchase

Note: Accelerated share repurchase (ASR) activity in 2017 and 2016 is omitted because the transactions were not fully settled as of October 28, 2017 and October 29, 2016.

During the third quarter of 2017, we entered into an ASR to repurchase $150 to $250 million of our common stock under the existing $5 billion share repurchase program. Under the agreement, we prepaid $250 million and received an initial delivery of 2.5 million shares, which were retired, resulting in a $139 million reduction to shareholders' investment. As of October 28, 2017, $11 million is included in the Consolidated Statement of Financial Position as an additional reduction to shareholders' investment because the minimum repurchase will be $150 million . The remaining $100 million is included in other current assets. The ASR is not accounted for as a derivative instrument.

In November 2017, the ASR settled. We received an additional 0.3 million shares, which were retired, and $89 million for the remaining amount not settled in shares. In total, we repurchased 2.8 million shares under the ASR for a total cash investment of $161 million ( $57.78 per share).

During the third quarter of 2016, we entered into an ASR to repurchase $250 to $350 million of our common stock. Under the agreement, we prepaid $350 million and received an initial delivery of 3.4 million shares, which were retired, resulting in a $230 million reduction to shareholders' investment. As of October 29, 2016, $20 million was included in the Consolidated Statement of Financial Position as an additional reduction to shareholders' investment because the minimum repurchase was $250 million . The remaining $100 million was included in other current assets. The ASR was not accounted for as a derivative instrument.

In November 2016, the ASR settled. We received an additional 1.3 million shares, which were retired, and $36 million for the remaining amount not settled in shares. In total, we repurchased 4.6 million shares under the ASR for a total cash investment of $314 million ( $67.67 per share).

12. Pension Benefits

We provide pension plan benefits to certain eligible team members.

In March 2017, the FASB issued ASU 2017-07,  Compensation – Retirement Benefits (Topic 715) , which requires employers to disaggregate and present separately the current service cost component from the other components of net benefit cost within the Consolidated Statement of Operations. We plan to adopt the standard in the first quarter of fiscal 2018. We expect to reclassify the other components of net benefit cost to an other income and expense line on our Consolidated Statements of Operations upon adoption.

13. Accumulated Other Comprehensive (Loss) / Income

(a) Represents amortization of gains and losses on cash flow hedges, net of $2 million of taxes.

(b) Represents amortization of pension and other benefit liabilities, net of $15 million of taxes.

14. Segment Reporting

Our segment measure of profit (segment earnings before interest expense and income taxes) is used by management to evaluate performance and make operating decisions. We operate as a single segment that includes all of our continuing operations, which are designed to enable guests to purchase products seamlessly in stores or through our digital channels. Virtually all of our consolidated revenues are generated in the United States. The vast majority of our long–lived assets are located within the United States.

Note: Amounts may not foot due to rounding.

(a) Refer to Note 3 for information about the impact of a reclassification of supply chain-related depreciation expense.

(b) Represents items related to the December 2015 sale of our former pharmacy and clinic businesses to CVS (Pharmacy Transaction).

(c) The sum of segment SG&A expenses and Pharmacy Transaction-related costs equal consolidated SG&A expenses.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

Third quarter 2017 includes the following notable items:

Sales were $16,667 million for the three months ended October 28, 2017 , an increase of $226 million or 1.4 percent from the same period in the prior year. During the third quarter of 2017, Hurricanes Harvey and Irma caused widespread damage in Texas and Florida and resulted in temporary closure of some of our stores. The net sales impact and storm-related costs, net of insurance recoveries, was immaterial. Operating cash flow provided by continuing operations was $4,414 million and $2,770 million for the nine months ended October 28, 2017 and October 29, 2016 , respectively. The operating cash flow increase is primarily due to increased payables leverage driven by changes in vendor payment terms during the nine months ended October 28, 2017, compared to the nine months ended October 29, 2016. The operating cash flow increase is also partially due to the payment of approximately $500 million of taxes during the first quarter of 2016, primarily related to the December 2015 sale of our pharmacy and clinic businesses (Pharmacy Transaction). These increases were partially offset by a larger inventory increase during the nine months ended October 28, 2017 compared to the nine months ended October 29, 2016, due to an earlier increase for the holiday season.

Note: Amounts may not foot due to rounding. Adjusted diluted earnings per share from continuing operations (Adjusted EPS), a non-GAAP metric, excludes the impact of certain items not related to our routine retail operations. Management believes that Adjusted EPS is meaningful to provide period-to-period comparisons of our operating results. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 18.

We report after-tax return on invested capital (ROIC) from continuing operations because we believe ROIC provides a meaningful measure of the effectiveness of our capital allocation over time. For the trailing twelve months ended October 28, 2017 , ROIC was 13.7 percent, compared with 16.3 percent for the trailing twelve months ended October 29, 2016 . Excluding the net gain on the Pharmacy Transaction, ROIC was 14.3 percent for the trailing twelve months ended October 29, 2016 . A reconciliation of ROIC is provided on page 20.

Analysis of Results of Operations

Segment Results

Note: See Note 14 of our Financial Statements for a reconciliation of our segment results to earnings before income taxes.

(a) Refer to Note 3 of the Financial Statements for information about a reclassification of supply chain-related depreciation expense to cost of sales.

(b) SG&A expenses include $170 million and $512 million net profit-sharing income under our credit card program agreement for the three and nine months ended October 28, 2017 , respectively, and $168 million and $489 million for the three and nine months ended October 29, 2016 , respectively.

Note: Rate analysis metrics are computed by dividing the applicable amount by sales.

(a) Reclassifying supply chain-related depreciation expense to cost of sales reduced the gross margin and depreciation and amortization rates by 0.4 percentage points for all periods presented.

Sales

Sales include all merchandise sales, net of expected returns, and gift card breakage. Digital channel sales include all sales initiated through mobile applications and our conventional websites. Digital channel sales may be fulfilled through our distribution centers, our vendors, or our stores.

(a) For all periods presented, pet supplies, which represented approximately 2 percent of total sales, has been reclassified from food and beverage to household essentials.

Comparable sales is a measure that highlights the performance of our stores and digital channels by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales include all sales, except sales from stores open less than 13 months, digital acquisitions we have owned less than 13 months, stores that have been closed, and digital acquisitions that we no longer operate. Comparable sales measures vary across the retail industry. As a result, our comparable sales calculation is not necessarily comparable to similarly titled measures reported by other companies.

Note: Amounts may not foot due to rounding.

Note: Amounts may not foot due to rounding.

The collective interaction of a broad array of macroeconomic, competitive, and consumer behavioral factors, as well as sales mix, and transfer of sales to new stores makes further analysis of sales metrics infeasible.

We monitor the percentage of sales that are paid for using REDcards (REDcard Penetration) because our internal analysis has indicated that a meaningful portion of the incremental purchases on REDcards are also incremental sales for Target. Guests receive a 5 percent discount on virtually all purchases when they use a REDcard at Target.

Note: Amounts may not foot due to rounding.

Gross Margin Rate

For the three and nine months ended October 28, 2017 , our gross margin rate was 29.7 percent and 30.1 percent, respectively, compared with 29.8 percent and 30.4 percent in the comparable periods last year. For the three and nine months ended October 28, 2017, the decrease was primarily due to increased digital fulfillment costs. The rate was also affected by other items, including benefits from cost savings initiatives, partially offset by the net impacts of our efforts to improve pricing and promotions.

Selling, General, and Administrative Expense Rate

For the three and nine months ended October 28, 2017 , our SG&A expense rate was 21.1 percent and 20.4 percent, respectively, compared to 20.3 percent and 20.0 percent in the comparable periods last year. The increase was primarily due to higher compensation due to both bonus expense and store wages, partially offset by cost savings driven by efficiency in our technology operations and, for the third quarter, timing of marketing campaigns.

Depreciation and Amortization Expense Rate

For the three and nine months ended October 28, 2017 , our depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate was 3.4 percent and 3.2 percent, respectively, compared to 3.1 percent and 3.0 percent in the comparable periods last year. These increases were primarily due to higher accelerated depreciation for planned store remodels.

Store Data