10-Q 1 tgt-20150502x10xq.htm 10-Q
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 2, 2015
Commission File Number 1-6049

TARGET CORPORATION
(Exact name of registrant as specified in its charter)

Minnesota |  | 41-0215170
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
1000 Nicollet Mall, Minneapolis, Minnesota |  | 55403
(Address of principal executive offices) |  | (Zip Code)

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, 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 Smaller Reporting company 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 $0.0833, outstanding at May 22, 2015 were 638,491,711.

TARGET CORPORATION
TABLE OF CONTENTS

PART I | FINANCIAL INFORMATION |
Item 1. | Financial Statements |
| Consolidated Statements of Operations | 1
| Consolidated Statements of Comprehensive Income | 2
| Consolidated Statements of Financial Position | 3
| Consolidated Statements of Cash Flows | 4
| Consolidated Statements of Shareholders’ Investment | 5
| Notes to Consolidated Financial Statements | 6
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 22
Item 4. | Controls and Procedures | 22
PART II | OTHER INFORMATION |
Item 1. | Legal Proceedings | 24
Item 1A. | Risk Factors | 24
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 24
Item 3. | Defaults Upon Senior Securities | 24
Item 4. | Mine Safety Disclosures | 24
Item 5. | Other Information | 25
Item 6. | Exhibits | 25
Signature |  | 26
Exhibit Index |  | 27

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

Consolidated Statements of Operations |  |  |
| Three Months Ended
(millions, except per share data) (unaudited) | May 2, 2015 |  |  | May 3, 2014 |
Sales | $ | 17,119 |  |  | $ | 16,657 |
Cost of sales | 11,911 |  |  | 11,748 |
Selling, general and administrative expenses | 3,514 |  |  | 3,376 |
Depreciation and amortization | 540 |  |  | 511 |
Earnings from continuing operations before interest expense and income taxes | 1,154 |  |  | 1,022 |
Net interest expense | 155 |  |  | 152 |
Earnings from continuing operations before income taxes | 999 |  |  | 870 |
Provision for income taxes | 348 |  |  | 299 |
Net earnings from continuing operations | 651 |  |  | 571 |
Discontinued operations, net of tax | (16 | ) |  | (153 | )
Net earnings | $ | 635 |  |  | $ | 418 |
Basic earnings per share |  |  |
Continuing operations | $ | 1.02 |  |  | $ | 0.90 |
Discontinued operations | (0.03 | ) |  | (0.24 | )
Net earnings per share | $ | 0.99 |  |  | $ | 0.66 |
Diluted earnings per share |  |  |
Continuing operations | $ | 1.01 |  |  | $ | 0.89 |
Discontinued operations | (0.03 | ) |  | (0.24 | )
Net earnings per share | $ | 0.98 |  |  | $ | 0.66 |
Weighted average common shares outstanding |  |  |
Basic | 640.9 |  |  | 633.3 |
Dilutive impact of share-based awards | 5.5 |  |  | 4.9 |
Diluted | 646.4 |  |  | 638.2 |
Antidilutive shares | — |  |  | 5.3 |

See accompanying Notes to Consolidated Financial Statements.
1

Consolidated Statements of Comprehensive Income |
| Three Months Ended
(millions) (unaudited) | May 2, 2015 |  |  | May 3, 2014 |
Net earnings | $ | 635 |  |  | $ | 418 |
Other comprehensive income, net of tax |  |  |  |  |
Pension and other benefit liabilities, net of taxes of $71 and $4 | 109 |  |  | 7 |
Currency translation adjustment and cash flow hedges, net of taxes of $0 and $1 | — |  |  | 62 |
Other comprehensive income | 109 |  |  | 69 |
Comprehensive income | $ | 744 |  |  | $ | 487 |

See accompanying Notes to Consolidated Financial Statements.
2

Consolidated Statements of Financial Position |  |  |  |  |  |  |  |
(millions) | May 2, 2015 |  |  | January 31, 2015 |  |  | May 3, 2014 |
Assets | (unaudited) |  |  |  |  |  | (unaudited) |
Cash and cash equivalents, including short term investments of $2,073, $1,520 and $3 | $ | 2,768 |  |  | $ | 2,210 |  |  | $ | 677 |
Inventory | 8,610 |  |  | 8,790 |  |  | 7,905 |
Assets of discontinued operations | 148 |  |  | 1,333 |  |  | 718 |
Other current assets | 1,672 |  |  | 1,754 |  |  | 1,723 |
Total current assets | 13,198 |  |  | 14,087 |  |  | 11,023 |
Property and equipment |  |  |  |  |  |  |  |
Land | 6,135 |  |  | 6,127 |  |  | 6,146 |
Buildings and improvements | 26,636 |  |  | 26,614 |  |  | 25,991 |
Fixtures and equipment | 5,011 |  |  | 5,346 |  |  | 4,909 |
Computer hardware and software | 2,395 |  |  | 2,553 |  |  | 2,138 |
Construction-in-progress | 576 |  |  | 424 |  |  | 906 |
Accumulated depreciation | (14,975 | ) |  | (15,106 | ) |  | (13,756 | )
Property and equipment, net | 25,778 |  |  | 25,958 |  |  | 26,334 |
Noncurrent assets of discontinued operations | 458 |  |  | 442 |  |  | 5,605 |
Other noncurrent assets | 1,012 |  |  | 917 |  |  | 1,080 |
Total assets | $ | 40,446 |  |  | $ | 41,404 |  |  | $ | 44,042 |
Liabilities and shareholders’ investment |  |  |  |  |  |  |  |
Accounts payable | $ | 6,799 |  |  | $ | 7,759 |  |  | $ | 6,519 |
Accrued and other current liabilities | 3,673 |  |  | 3,783 |  |  | 3,626 |
Current portion of long-term debt and other borrowings | 112 |  |  | 91 |  |  | 1,466 |
Liabilities of discontinued operations | 64 |  |  | 103 |  |  | 429 |
Total current liabilities | 10,648 |  |  | 11,736 |  |  | 12,040 |
Long-term debt and other borrowings | 12,654 |  |  | 12,705 |  |  | 11,391 |
Deferred income taxes | 1,359 |  |  | 1,321 |  |  | 1,300 |
Noncurrent liabilities of discontinued operations | 207 |  |  | 193 |  |  | 1,321 |
Other noncurrent liabilities | 1,404 |  |  | 1,452 |  |  | 1,504 |
Total noncurrent liabilities | 15,624 |  |  | 15,671 |  |  | 15,516 |
Shareholders’ investment |  |  |  |  |  |  |  |
Common stock | 53 |  |  | 53 |  |  | 53 |
Additional paid-in capital | 5,170 |  |  | 4,899 |  |  | 4,512 |
Retained earnings | 9,441 |  |  | 9,644 |  |  | 12,743 |
Accumulated other comprehensive loss |  |  |  |  |  |  |  |
Pension and other benefit liabilities | (452 | ) |  | (561 | ) |  | (415 | )
Currency translation adjustment and cash flow hedges | (38 | ) |  | (38 | ) |  | (407 | )
Total shareholders’ investment | 14,174 |  |  | 13,997 |  |  | 16,486 |
Total liabilities and shareholders’ investment | $ | 40,446 |  |  | $ | 41,404 |  |  | $ | 44,042 |

Common Stock Authorized 6,000,000,000 shares, $.0833 par value; 638,408,643, 640,213,987 and 633,613,396 shares issued and outstanding at May 2, 2015, January 31, 2015 and May 3, 2014, respectively.
Preferred Stock Authorized 5,000,000 shares, $.01 par value; no shares were issued or outstanding at May 2, 2015, January 31, 2015 or May 3, 2014.
See accompanying Notes to Consolidated Financial Statements.
3

Consolidated Statements of Cash Flows |  |  |
| Three Months Ended
(millions) (unaudited) | May 2, 2015 |  |  | May 3, 2014 |
Operating activities |  |  |  |  |
Net earnings | $ | 635 |  |  | $ | 418 |
Losses from discontinued operations, net of tax | (16 | ) |  | (153 | )
Net earnings from continuing operations | 651 |  |  | 571 |
Adjustments to reconcile net earnings to cash provided by operations: |  |  |  |  |
Depreciation and amortization | 540 |  |  | 511 |
Share-based compensation expense | 26 |  |  | 20 |
Deferred income taxes | 18 |  |  | (37 | )
Noncash (gains)/losses and other, net | (70 | ) |  | (13 | )
Changes in operating accounts: |  |  |  |
Inventory | 180 |  |  | 372 |
Other assets | 138 |  |  | 127 |
Accounts payable and accrued liabilities | (766 | ) |  | (736 | )
Cash provided by operating activities—continuing operations | 717 |  |  | 815 |
Cash provided by/ (required for) operating activities—discontinued operations | 834 |  |  | (295 | )
Cash provided by operations | 1,551 |  |  | 520 |
Investing activities |  |  |  |  |
Expenditures for property and equipment | (352 | ) |  | (471 | )
Proceeds from disposal of property and equipment | 6 |  |  | 5 |
Other investments | 21 |  |  | 18 |
Cash required for investing activities—continuing operations | (325 | ) |  | (448 | )
Cash provided by/ (required for) investing activities—discontinued operations | 19 |  |  | (90 | )
Cash required for investing activities | (306 | ) |  | (538 | )
Financing activities |  |  |  |  |
Change in commercial paper, net | — |  |  | 306 |
Reductions of long-term debt | (14 | ) |  | (31 | )
Dividends paid | (333 | ) |  | (272 | )
Repurchase of stock | (477 | ) |  | — |
Prepayment of accelerated share repurchase | (120 | ) |  | — |
Stock option exercises and related tax benefit | 257 |  |  | 26 |
Cash (required for)/ provided by financing activities | (687 | ) |  | 29 |
Effect of exchange rate changes on cash and cash equivalents | — |  |  | 9 |
Net increase in cash and cash equivalents | 558 |  |  | 20 |
Cash and cash equivalents at beginning of period (a) | 2,210 |  |  | 695 |
Cash and cash equivalents at end of period (b) | $ | 2,768 |  |  | $ | 715 |

(a) Includes cash of our discontinued operations of $25 million for the three months ended May 3, 2014.
(b) Includes cash of our discontinued operations of $37 million for the three months ended May 3, 2014.
See accompanying Notes to Consolidated Financial Statements.
4

Consolidated Statements of Shareholders’ Investment
| Common |  |  | Stock |  |  | Additional |  |  |  |  |  | Accumulated Other |  |  |  |
| Stock |  |  | Par |  |  | Paid-in |  |  | Retained |  |  | Comprehensive |  |  |  |
(millions, except per share data) | Shares |  |  | Value |  |  | Capital |  |  | Earnings |  |  | Income/(Loss) |  |  | Total |
February 1, 2014 | 632.9 |  |  | $ | 53 |  |  | $ | 4,470 |  |  | $ | 12,599 |  |  | $ | (891 | ) |  | $ | 16,231 |
Net earnings | — |  |  | — |  |  | — |  |  | (1,636 | ) |  | — |  |  | (1,636 | )
Other comprehensive income | — |  |  | — |  |  | — |  |  | — |  |  | 292 |  |  | 292 |
Dividends declared | — |  |  | — |  |  | — |  |  | (1,273 | ) |  | — |  |  | (1,273 | )
Repurchase of stock | (0.8 | ) |  | — |  |  | — |  |  | (46 | ) |  | — |  |  | (46 | )
Stock options and awards | 8.1 |  |  | — |  |  | 429 |  |  | — |  |  | — |  |  | 429 |
January 31, 2015 | 640.2 |  |  | $ | 53 |  |  | $ | 4,899 |  |  | $ | 9,644 |  |  | $ | (599 | ) |  | $ | 13,997 |
(unaudited) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net earnings | — |  |  | — |  |  | — |  |  | 635 |  |  | — |  |  | 635 |
Other comprehensive income | — |  |  | — |  |  | — |  |  | — |  |  | 109 |  |  | 109 |
Dividends declared | — |  |  | — |  |  | — |  |  | (335 | ) |  | — |  |  | (335 | )
Repurchase of stock | (5.9 | ) |  | — |  |  | — |  |  | (483 | ) |  | — |  |  | (483 | )
Stock to be received upon settlement of ASR | — |  |  | — |  |  | — |  |  | (20 | ) |  | — |  |  | (20 | )
Stock options and awards | 4.1 |  |  | — |  |  | 271 |  |  | — |  |  | — |  |  | 271 |
May 2, 2015 | 638.4 |  |  | $ | 53 |  |  | $ | 5,170 |  |  | $ | 9,441 |  |  | $ | (490 | ) |  | $ | 14,174 |

We declared $0.52 and $0.43 per share dividends for the three months ended May 2, 2015 and May 3, 2014, respectively, and $1.99 for the fiscal year ended January 31, 2015.
See accompanying Notes to Consolidated Financial Statements.
5

Notes to Consolidated Financial Statements (unaudited)
1. Accounting Policies
These financial statements should be read in conjunction with the financial statement disclosures in our 2014 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. 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. Canada Exit
Background
On January 15, 2015, Target Canada Co. and certain other wholly owned subsidiaries of Target (collectively Canada Subsidiaries), comprising substantially all of our Canadian operations and our historical Canadian Segment, filed for protection (the Filing) under the Companies' Creditors Arrangement Act (CCAA) with the Ontario Superior Court of Justice in Toronto (the Court) and were deconsolidated. The Canada Subsidiaries are executing a liquidation process. As of May 2, 2015, all stores have been closed.

Loss on Discontinued Operations (millions) | Three Months Ended
May 2, 2015 |  | May 3, 2014 |
Sales | $ | — |  | $ | 393 |
Cost of sales | — |  | 319 |
SG&A expenses | — |  | 218 |
Depreciation and amortization | — |  | 67 |
Interest expense | — |  | 19 |
Pretax loss from operations | — |  | (230 | )
Pretax exit costs (a) | (34 | ) | — |
Income taxes | 18 |  | 77 |
Loss on discontinued operations | $ | (16 | ) | $ | (153 | )

(a) The pretax exit costs primarily related to our ongoing support of the liquidation process, other professional fees, and a $4 million payment to the Canadian employee trust.
Recorded Assets and Liabilities

Assets and Liabilities of Discontinued Operations (millions)
| May 2, 2015 |  | January 31, 2015 |  |  |  | May 3, 2014 |
Income tax benefit | $ | 264 |  | $ | 1,430 |  |  | Inventory | $ | 544 |
Receivables from Canada Subsidiaries | 342 |  | 326 |  |  | Property and equipment, net | 5,025 |
Receivables under the debtor-in-possession credit facility | — |  | 19 |  |  | Other | 754 |
Total assets | $ | 606 |  | $ | 1,775 |  |  | Total assets | $ | 6,323 |
|  |  |  | Capital lease obligations | $ | 1,233 |
Accrued liabilities | $ | 271 |  | $ | 296 |  |  | Accounts payable and other liabilities | 517 |
Total liabilities | $ | 271 |  | $ | 296 |  |  | Total liabilities | $ | 1,750 |

Accrued liabilities include estimated probable losses related to claims that may be asserted against us, primarily under guarantees of certain leases. The beneficiaries of those guarantees may seek damages or other related relief as a result of our exit from Canada.
6

Our probable loss estimate is based on the expectation that claims will be asserted against us and negotiated settlements will be reached, and not on any determination that it is probable we would be found liable were these claims to be litigated. Our estimates involve significant judgment and are based on currently available information, an assessment of the validity of certain claims and estimated payments by the Canada Subsidiaries. We are not able to reasonably estimate a range of possible losses in excess of the year-end accrual because there are significant factual and legal issues to be resolved. We believe that it is reasonably possible that future changes to our estimates of loss and the ultimate amount paid on these claims could be material to our results of operations in future periods. Any such losses would be reported in discontinued operations.
DIP Financing
In conjunction with the Filing, the Court approved Target's agreement to provide a debtor-in-possession credit facility (the DIP facility) to the Canada Subsidiaries, which provides for borrowings under the facility up to $175 million. As of January 31, 2015, there was $19 million drawn and outstanding under the DIP facility, which was fully repaid in the first quarter of 2015. No amounts were drawn on the facility during the first quarter of 2015, and we do not expect any additional amounts to be drawn under the facility before it expires.
Income Taxes
During the fourth quarter of 2014, we recognized a tax benefit of $1,627 million in discontinued operations. The majority of this tax benefit has been received in the first quarter of 2015, and we expect to use substantially all of the remainder to reduce our 2015 estimated tax payments.
3. Restructuring Initiatives
In March 2015, we announced a headquarters workforce reduction intended to increase organizational effectiveness and provide cost savings that can be reinvested in our growth initiatives. As a result, we recorded $103 million of severance and other benefits-related charges within SG&A in the first quarter of 2015. The vast majority of these expenses will require cash expenditures by the end of the second quarter of 2015. These costs were not included in our segment results.

First Quarter Restructuring Costs (millions) | 2015 |
Severance | $ | 99 |
Pension and other | 4 |
Total | $ | 103 |

Accruals for restructuring costs are included in other current liabilities as of May 2, 2015 as follows:

Restructuring-Related Liabilities (millions) | Severance |  | Pension and Other |  | Total |
Restructuring liability as of January 31, 2015 | $ | — |  | $ | — |  | $ | — |
Charges during period | 99 |  | 4 |  | 103 |
Paid or otherwise settled | (28 | ) | (4 | ) | (32 | )
Restructuring liability as of May 2, 2015 | $ | 71 |  | $ | — |  | $ | 71 |

7

4. Fair Value Measurements
Fair value measurements are reported in one of three levels based on the lowest level of significant input used: Level 1 (unadjusted quoted prices in active markets); Level 2 (observable market inputs, other than quoted prices included in Level 1); and Level 3 (unobservable inputs that cannot be corroborated by observable market data).

Fair Value Measurements - Recurring Basis |  | Fair Value at
(millions) | Pricing Category | May 2, 2015 |  |  | January 31, 2015 |  |  | May 3, 2014 |
Assets |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  |  |  |  |  |  |  |
Short-term investments | Level 1 | $ | 2,073 |  |  | $ | 1,520 |  |  | $ | 3 |
Other current assets |  |  |  |  |  |  |  |  |
Interest rate swaps(a) | Level 2 | — |  |  | — |  |  | 1 |
Prepaid forward contracts | Level 1 | 35 |  |  | 38 |  |  | 80 |
Beneficial interest asset | Level 3 | 35 |  |  | 43 |  |  | 62 |
Other noncurrent assets |  |  |  |  |  |  |  |  |
Interest rate swaps(a) | Level 2 | 46 |  |  | 65 |  |  | 56 |
Company-owned life insurance investments(b) | Level 2 | 332 |  |  | 322 |  |  | 313 |
Beneficial interest asset | Level 3 | 25 |  |  | 31 |  |  | 46 |
Liabilities |  |  |  |  |  |  |  |  |
Other noncurrent liabilities |  |  |  |  |  |  |  |  |
Interest rate swaps(a) | Level 2 | 20 |  |  | 24 |  |  | 35 |

(a) See Note 7 for additional information on interest rate swaps.
(b) Company-owned life insurance investments consist of equity index funds and fixed income assets. Amounts are presented net of nonrecourse loans that are secured by some of these policies. These loan amounts totaled $781 million at May 2, 2015, $773 million at January 31, 2015 and $800 million at May 3, 2014.

Significant Financial Instruments not Measured at Fair Value (a) (millions) | May 2, 2015 |  | January 31, 2015 |  | May 3, 2014
Carrying Amount |  | Fair Value |  |  | Carrying Amount |  | Fair Value |  |  | Carrying Amount |  | Fair Value |
Debt (b) | $ | 11,947 |  | $ | 13,542 |  |  | $ | 11,946 |  | $ | 14,089 |  |  | $ | 12,064 |  | $ | 13,721 |

(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. Notes Payable and Long-Term Debt
We obtain short-term financing from time to time under our commercial paper program, a form of notes payable.

Commercial Paper | Three Months Ended
(dollars in millions) | May 2, 2015 |  |  | May 3, 2014 |
Maximum daily amount outstanding during the period | $ | — |  |  | $ | 590 |
Average daily amount outstanding during the period | — |  |  | 279 |
Amount outstanding at period-end | — |  |  | 386 |
Weighted average interest rate | — | % |  | 0.10 | %

8

6. Data Breach
In the fourth quarter of 2013, we experienced a data breach in which an intruder stole certain payment card and other guest information from our network (the Data Breach). Based on our investigation, we believe that the intruder installed malware on our point-of-sale system in our U.S. stores and stole payment card data from up to approximately 40 million credit and debit card accounts of guests who shopped at our U.S. stores between November 27 and December 17, 2013. In addition, the intruder stole certain guest information, including names, mailing addresses, phone numbers or email addresses, for up to 70 million individuals.
Data Breach Related Accruals
Each of the four major payment card networks has made a written claim against us regarding the Data Breach, either directly or through our acquiring banks. During the first quarter of 2015, we entered into a settlement agreement with MasterCard which was conditioned on the acceptance by issuers of at least 90 percent of the eligible MasterCard accounts by May 20, 2015. The issuers of the minimum percentage of eligible MasterCard accounts did not accept their alternative recovery offers by the deadline. We expect to dispute the claims that have been or may be made against us by the payment card networks regarding the Data Breach, including claims by MasterCard, and we think it is probable that our disputes would lead to settlement negotiations. We believe such negotiations would effect a combined settlement of the payment card networks' counterfeit fraud loss allegations and their non-ordinary course operating expense allegations.
In addition, more than 100 actions were filed in courts in many states on behalf of guests, payment card issuing banks, and shareholders, seeking damages or other related relief allegedly arising out of the Data Breach. The federal court actions (the “MDL Actions”) have been consolidated in the U.S. District Court for the District of Minnesota (“MDL Court”) pursuant to the rules governing multidistrict litigation and one remaining state court action has been stayed. In March 2015, Target entered into a Settlement Agreement that, upon approval of the MDL Court, will resolve and dismiss the claims asserted in the MDL Actions on behalf of a class of guests whose information was compromised in the Data Breach. Pursuant to the Settlement Agreement, Target has agreed to pay $10 million to class member guests, certain administrative costs associated with the settlement, and attorneys’ fees and expenses to class counsel as the Court may award. The claims asserted by payment card issuing banks and shareholders in the MDL Actions remain pending. One action was filed in Canada relating to the Data Breach. That action was dismissed, but is being appealed. State and federal agencies, including State Attorneys General, the Federal Trade Commission and the SEC, are investigating events related to the Data Breach, including how it occurred, its consequences and our responses.
Our accrual for estimated probable losses for what we believe to be the vast majority of actual and potential Data Breach related claims is based on the expectation of reaching negotiated settlements, and not on any determination that it is probable we would be found liable for the losses we have accrued were these claims to be litigated. Given the varying stages of claims and related proceedings, and the inherent uncertainty surrounding them, our estimates involve significant judgment and are based on currently available information, historical precedents and an assessment of the validity of certain claims. Our estimates may change as new information becomes available, and although we do not believe it is probable, it is reasonably possible that we may incur a material loss in excess of the amount accrued. We are not able to estimate the amount of such reasonably possible excess loss exposure at this time because many of the matters are in the early stages, alleged damages have not been specified, and there are significant factual and legal issues to be resolved.
9

Expenses Incurred and Amounts Accrued

Data Breach Balance Sheet Rollforward (millions) | Liabilities |  |  | Insurance Receivable |
Balance at February 1, 2014 | $ | 61 |  |  | $ | 44 |
Expenses incurred/insurance receivable recorded (a) | 26 |  |  | 8 |
Payments made/received | (35 | ) |  | (13 | )
Balance at May 3, 2014 | 52 |  |  | 39 |
Expenses incurred/insurance receivable recorded (a) | 165 |  |  | 38 |
Payments made/received | (46 | ) |  | (17 | )
Balance at January 31, 2015 | 171 |  |  | 60 |
Expenses incurred/insurance receivable recorded (a) | 3 |  |  | — |
Payments made/received | (7 | ) |  | (5 | )
Balance at May 2, 2015 | 167 |  |  | 55 |

(a) Includes expenditures and accruals for Data Breach-related costs and expected insurance recoveries as discussed below.
We recorded $3 million and $26 million of pretax Data Breach-related expenses during the three months ended May 2, 2015 and May 3, 2014, respectively, partially offset by expected insurance recoveries of $8 million during the three months ended May 3, 2014. These expenses primarily related to legal and other professional services and were included in our Consolidated Statements of Operations as Selling, General and Administrative Expenses (SG&A), but were not part of our segment results.
Since the Data Breach, we have incurred $256 million of cumulative expenses, partially offset by expected insurance recoveries of $90 million, for net cumulative expenses of $166 million.
Insurance Coverage
To limit our exposure to losses relating to Data Breach and other claims, we maintain $100 million of network-security insurance coverage, above a $10 million deductible and with a $50 million sublimit for settlements with the payment card networks. This coverage, and certain other customary business-insurance coverage, has reduced our exposure related to the Data Breach. We will pursue recoveries to the maximum extent available under the policies. Since the Data Breach, we have received $35 million from our network-security insurance carriers of the $90 million accrued.
7. Derivative Financial Instruments
Our derivative instruments primarily consist of interest rate swaps, which are used 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 May 2, 2015, three swaps were designated as fair value hedges. In March 2014, we entered into an interest rate swap with a notional amount of $250 million, under which we pay a variable rate and receive a fixed rate. Including this swap, we had two swaps designated as fair value hedges at May 3, 2014. No ineffectiveness was recognized during the three months ended May 2, 2015 or May 3, 2014.
Periodic payments, valuation adjustments and amortization of gains or losses on our derivative contracts had the following effect on our Consolidated Statements of Operations:

Derivative Contracts - Effect on Results of Operations (millions) | Three Months Ended
Type of Contract |  | Classification of (Income)/Expense | May 2, 2015 |  |  | May 3, 2014 |
Interest rate swaps |  | Net interest expense | $ | (9 | ) |  | $ | (5 | )

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The amount remaining on unamortized hedged debt valuation gains from terminated or de-designated interest rate swaps that will be amortized into earnings over the remaining lives of the underlying debt totaled $29 million, $34 million and $48 million, at May 2, 2015, January 31, 2015 and May 3, 2014, respectively.
8. Share Repurchase
We repurchase shares primarily through open market transactions under a $5 billion share repurchase program authorized by our Board of Directors in January 2012.
During the first quarter of 2015, we entered into an accelerated share repurchase agreement (ASR) to repurchase $200 to $300 million of our common stock under the existing share repurchase program. Under the agreement, we prepaid $300 million and received an initial delivery of 2.2 million shares, which were retired, resulting in a $180 million reduction to shareholders' investment. Because the minimum repurchase will be $200 million, as of May 2, 2015, $20 million is included as an additional reduction to shareholders' investment and $100 million is included in other current assets in the Consolidated Statement of Financial Position. The ASR is not accounted for as a derivative instrument.
In May 2015, the contract was settled and we received an additional 1.1 million shares, which were retired, and $35 million for the remaining amount not settled in shares. We repurchased a total of 3.3 million shares under the ASR for a total cash investment of $265 million ($80.74 per share).

Share Repurchases (excluding ASR) | Three Months Ended
(millions, except per share data) | May 2, 2015 (a) |  | May 3, 2014 |
Total number of shares purchased | 3.7 |  | — |
Average price paid per share | $ | 80.85 |  | $ | — |
Total investment | $ | 300 |  | $ | — |

Note: Accelerated share repurchase activity is omitted because the transaction was not fully settled as of May 2, 2015.
(a) Includes 0.1 million shares delivered upon the noncash settlement of prepaid contracts which had an original cash investment of $3 million and an aggregate market value at their settlement dates of $7 million. These contracts are among the investment vehicles used to reduce our economic exposure related to our nonqualified deferred compensation plans. Note 9 provides the details of our positions in prepaid forward contracts.
9. Pension, Postretirement Health Care and Other Benefits
Pension and Postretirement Health Care Benefits
We provide qualified defined benefit pension plans, unfunded nonqualified pension plans and certain postretirement health care benefits to eligible team members.

Net Pension and Postretirement Health Care Benefits Expense | Pension Benefits |  | Postretirement Health Care Benefits
| Three Months Ended |  | Three Months Ended
(millions) | May 2, 2015 |  |  | May 3, 2014 |  |  | May 2, 2015 |  |  | May 3, 2014 |
Service cost | $ | 28 |  |  | $ | 28 |  |  | $ | 1 |  |  | $ | 1 |
Interest cost | 38 |  |  | 38 |  |  | — |  |  | 1 |
Expected return on assets | (65 | ) |  | (58 | ) |  | — |  |  | — |
Amortization of losses | 23 |  |  | 16 |  |  | 1 |  |  | 1 |
Amortization of prior service cost | (3 | ) |  | (3 | ) |  | (4 | ) |  | (4 | )
Settlement charges | 2 |  |  | — |  |  | — |  |  | — |
Total | $ | 23 |  |  | $ | 21 |  |  | $ | (2 | ) |  | $ | (1 | )

As a result of the restructuring initiatives discussed in Note 3, we remeasured the assets and liabilities of our largest pension plan as of March 9, 2015. The remeasurement resulted in a $208 million reduction to the projected benefit obligation, primarily resulting
11

from a 41 basis point increase in the discount rate used, and a $47 million reduction of plan assets. Subsequent to the remeasurement, the pension plan was overfunded, with plan assets of $3,725 million exceeding the projected benefit obligation of $3,604 million. We expect this remeasurement will reduce 2015 pension expense by $26 million, $3 million of which was recognized during the first quarter.
Other Benefits
We offer unfunded nonqualified deferred compensation plans to certain team members. We mitigate some of our risk of these plans through investing in vehicles, including company-owned life insurance and 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 for contracts indexed to our own common stock recognized in earnings was pretax income of $3 million and $7 million for the three months ended May 2, 2015 and May 3, 2014, respectively. During the three months ended May 2, 2015 and May 3, 2014, we made no investments in prepaid forward contracts in our own common stock. Adjusting our position in these investment vehicles may involve repurchasing shares of Target common stock when settling the forward contracts as described in Note 8. The settlement dates of these instruments are regularly renegotiated with the counterparty.

Prepaid Forward Contracts on Target Common Stock (millions, except per share data) | Number of Shares |  | Contractual Price Paid per Share |  | Contractual Fair Value |  | Total Cash Investment |
May 2, 2015 | 0.4 |  | $ | 41.13 |  | $ | 35 |  | $ | 18 |
January 31, 2015 | 0.5 |  | $ | 41.11 |  | $ | 38 |  | $ | 21 |
May 3, 2014 | 1.3 |  | $ | 48.81 |  | $ | 80 |  | $ | 63 |

10. Accumulated Other Comprehensive Income

(millions) | Cash Flow Hedges |  |  | Currency Translation Adjustment |  |  | Pension and Other Benefits |  |  | Total |
February 1, 2014 | $ | (25 | ) |  | $ | (444 | ) |  | $ | (422 | ) |  | $ | (891 | )
Other comprehensive income before reclassifications | — |  |  | 61 |  |  | — |  |  | 61 |
Amounts reclassified from AOCI | 1 |  | (a) | — |  |  | 7 |  | (b) | 8 |
May 3, 2014 | $ | (24 | ) |  | $ | (383 | ) |  | $ | (415 | ) |  | $ | (822 | )

January 31, 2015 | $ | (22 | ) |  | $ | (16 | ) |  | $ | (561 | ) |  | $ | (599 | )
Other comprehensive (loss)/income before reclassifications | — |  |  | (1 | ) |  | 99 |  |  | 98 |
Amounts reclassified from AOCI | 1 |  | (a) | — |  |  | 10 |  | (b) | 11 |
May 2, 2015 | $ | (21 | ) |  | $ | (17 | ) |  | $ | (452 | ) |  | $ | (490 | )

(a) Represents gains and losses on cash flow hedges, net of $1 million of taxes for both three months ended May 2, 2015 and May 3, 2014, which is recorded in net interest expense on the Consolidated Statements of Operations.
(b) Represents amortization of pension and other benefit liabilities, net of $7 million and $4 million of taxes for the three months ended May 2, 2015 and May 3, 2014, respectively.
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11. Segment Reporting
Our segment measure of profit 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, online or through mobile devices.

Business Segment Results | Three Months Ended
(millions) | May 2, 2015 |  |  | May 3, 2014 |
Sales | $ | 17,119 |  |  | $ | 16,657 |
Cost of sales | 11,911 |  |  | 11,748 |
Gross margin | 5,208 |  |  | 4,909 |
Selling, general and administrative expenses (a)(e) | 3,407 |  |  | 3,345 |
Depreciation and amortization | 540 |  |  | 511 |
Segment profit | $ | 1,261 |  |  | $ | 1,053 |
Restructuring costs (b)(e) | (103 | ) |  | — |
Data Breach related costs (c)(e) | (3 | ) |  | (18 | )
Card brand conversion costs (d)(e) | — |  |  | (13 | )
Earnings from continuing operations before interest expense and income taxes | 1,154 |  |  | 1,022 |
Net interest expense | 155 |  |  | 152 |
Earnings from continuing operations before income taxes | $ | 999 |  |  | $ | 870 |

Note: Amounts may not foot due to rounding.
(a) Beginning with the first quarter of 2015, segment EBIT includes the impact of the reduction of the the beneficial interest asset. For comparison purposes, prior year segment EBIT has been revised.
(b) Refer to Note 3 for more information on restructuring costs.
(c) Refer to Note 6 for more information on Data Breach related costs.
(d) Expense related to converting co-branded card program to MasterCard.
(e) The sum of segment SG&A expenses, restructuring costs, Data Breach related costs and card brand conversion costs equal consolidated SG&A expenses.

Reconciliation of Segment Assets to Total Assets (millions) | May 2, 2015 |  |  | January 31, 2015 |  |  | May 3, 2014 |
Segment assets | $ | 39,785 |  |  | $ | 39,569 |  |  | $ | 37,680 |
Assets of discontinued operations | 606 |  |  | 1,775 |  |  | 6,323 |
Unallocated assets (a) | 55 |  |  | 60 |  |  | 39 |
Total assets | $ | 40,446 |  |  | $ | 41,404 |  |  | $ | 44,042 |

(a) Represents the insurance receivable related to the Data Breach.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
First quarter 2015 includes the following notable items:

• | GAAP earnings per share were $0.98, including dilution of $(0.03) related to discontinued operations.

• | Adjusted earnings per share from continuing operations were $1.10.

• | First quarter comparable sales grew 2.3 percent, driven by growth in both transactions and basket size.

• | Digital channel sales increased by 37.8 percent, contributing 0.8 percentage points to comparable sales growth.

• | We returned cash through share repurchase for the first time since the second quarter of 2013, with purchases of $562 million in shares of common stock in the first quarter. Including dividends, we returned $895 million to shareholders in the first quarter, more than 140% of net income.

Sales were $17,119 million for the three months ended May 2, 2015, an increase of $462 million or 2.8 percent from the same period in the prior year. Operating cash flow provided by continuing operations was $717 million and $815 million for the three months ended May 2, 2015 and May 3, 2014, respectively.

Earnings Per Share from Continuing Operations | Three Months Ended |  |  |
| May 2, 2015 |  |  | May 3, 2014 |  |  | Change |
GAAP diluted earnings per share | $ | 1.01 |  |  | $ | 0.89 |  |  | 12.6 | %
Adjustments | 0.10 |  |  | 0.03 |  |  |
Adjusted diluted earnings per share | $ | 1.10 |  |  | $ | 0.92 |  |  | 19.6 | %

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 matters not related to our routine retail operations and the impact of our discontinued Canadian 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 19.
Beginning this quarter, we are reporting after-tax return on invested capital (ROIC) for continuing operations. We believe ROIC provides a meaningful measure of the effectiveness of our capital allocation over time. For the trailing twelve months ended May 2, 2015, ROIC was 12.5 percent, compared with 11.9 percent for the twelve months ended May 3, 2014. A reconciliation of ROIC is provided on page 20.
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Analysis of Results of Operations
Segment Results

| Three Months Ended |  |  |
(dollars in millions) | May 2, 2015 |  |  | May 3, 2014 |  |  | Percent Change |
Sales | $ | 17,119 |  |  | $ | 16,657 |  |  | 2.8 | %
Cost of sales | 11,911 |  |  | 11,748 |  |  | 1.4 |
Gross margin | 5,208 |  |  | 4,909 |  |  | 6.1 |
SG&A expenses (a) | 3,407 |  |  | 3,345 |  |  | 1.9 |
EBITDA | 1,801 |  |  | 1,564 |  |  | 15.1 |
Depreciation and amortization | 540 |  |  | 511 |  |  | 5.5 |
EBIT | $ | 1,261 |  |  | $ | 1,053 |  |  | 19.7 | %

Note: We operate as a single segment which includes all of our continuing operations, excluding net interest expense, Data Breach related costs and certain other expenses which are discretely managed. Our segment operations are designed to enable guests to purchase products seamlessly in stores, online or through mobile devices. Beginning with the first quarter of 2015, segment EBIT includes the impact of the reduction of the beneficial interest asset. For comparison purposes, prior year segment EBIT has been revised. See Note 11 of our Financial Statements for a reconciliation of our segment results to earnings before income taxes.
(a) For the three months ended May 2, 2015 and May 3, 2014, SG&A includes $152 million and $149 million, respectively, of net profit-sharing income under our credit card program agreement.

Rate Analysis | Three Months Ended
| May 2, 2015 |  |  | May 3, 2014 |
Gross margin rate | 30.4 | % |  | 29.5 | %
SG&A expense rate | 19.9 |  |  | 20.1 |
EBITDA margin rate | 10.5 |  |  | 9.4 |
Depreciation and amortization expense rate | 3.2 |  |  | 3.1 |
EBIT margin rate | 7.4 |  |  | 6.3 |

Note: Rate analysis metrics are computed by dividing the applicable amount by sales.
Sales
Sales include merchandise sales, net of expected returns, from our stores and digital channels, and gift card breakage. Digital channel sales include all sales initiated through mobile applications and our conventional websites, including those of acquired entities from the date of acquisition. Digital channel sales may be fulfilled through our distribution centers or our stores.

Sales by Channel | Three Months Ended
| May 2, 2015 |  |  | May 3, 2014 |
Stores | 97.2 | % |  | 97.9 | %
Digital | 2.8 |  |  | 2.1 |
Total | 100 | % |  | 100 | %

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Sales by Product Category | Three Months Ended
| May 2, 2015 |  |  | May 3, 2014 |
Household essentials | 28 | % |  | 27 | %
Hardlines | 14 |  |  | 15 |
Apparel and accessories | 20 |  |  | 19 |
Food and pet supplies | 22 |  |  | 23 |
Home furnishings and décor | 16 |  |  | 16 |
Total | 100 | % |  | 100 | %

Comparable sales is a measure that highlights the performance of our existing stores and digital channel sales 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. 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.

Comparable Sales | Three Months Ended
| May 2, 2015 |  |  | May 3, 2014 |
Comparable sales change | 2.3 | % |  | (0.3 | )%
Drivers of change in comparable sales |  |  |  |  |
Number of transactions | 0.9 |  |  | (2.3 | )
Average transaction amount | 1.4 |  |  | 2.1 |
Selling price per unit | 5.1 |  |  | 1.8 |
Units per transaction | (3.6 | ) |  | 0.3 |

Note: Amounts may not foot due to rounding.

Contribution to Comparable Sales Change | Three Months Ended
| May 2, 2015 |  |  | May 3, 2014 |
Stores channel comparable sales change | 1.5 | % |  | (0.7 | )%
Digital channel contribution to comparable sales change | 0.8 |  |  | 0.5 |
Total comparable sales change | 2.3 | % |  | (0.3 | )%

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, with the remainder representing a shift in tender type. Guests receive a 5 percent discount on virtually all purchases when they use a REDcard at Target.

REDcard Penetration | Three Months Ended
| May 2, 2015 |  |  | May 3, 2014 |
Target Debit Card | 12.0 | % |  | 11.3 | %
Target Credit Cards | 9.4 |  |  | 9.1 |
Total REDcard Penetration | 21.5 | % |  | 20.4 | %

Note: Amounts may not foot due to rounding.
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Gross Margin Rate
For the three months ended May 2, 2015, our gross margin rate was 30.4 percent compared with 29.5 percent in the comparable period last year. The increase was primarily due to lower promotional activity relative to the highly promotional period in 2014 following the Data Breach, a favorable category sales mix and lower clearance markdowns, partially offset by the impact of increased digital channel sales mix.
Selling, General and Administrative Expense Rate
For the three months ended May 2, 2015, our SG&A expense rate was 19.9 percent, decreasing from 20.1 percent in the comparable period last year. The decrease primarily resulted from cost savings initiatives, partially offset by investments in technology.
Store Data

Change in Number of Stores | Three Months Ended
| May 2, 2015 |  |  | May 3, 2014 |
Beginning store count | 1,790 |  |  | 1,793 |
Opened | 5 |  |  | 4 |
Closed | — |  |  | (8 | )
Ending store count | 1,795 |  |  | 1,789 |
Number of stores remodeled during the period | — |  |  | 13 |

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Number of Stores and Retail Square Feet | Number of Stores |  | Retail Square Feet(a)
May 2, 2015 |  |  | January 31, 2015 |  |  | May 3, 2014 |  |  | May 2, 2015 |  |  | January 31, 2015 |  |  | May 3, 2014 |
Expanded food assortment stores | 1,295 |  |  | 1,292 |  |  | 1,261 |  |  | 167,437 |  |  | 167,026 |  |  | 162,954 |
SuperTarget stores | 249 |  |  | 249 |  |  | 249 |  |  | 44,151 |  |  | 44,151 |  |  | 44,152 |
General merchandise stores | 240 |  |  | 240 |  |  | 271 |  |  | 27,945 |  |  | 27,945 |  |  | 31,618 |
CityTarget stores | 8 |  |  | 8 |  |  | 8 |  |  | 820 |  |  | 820 |  |  | 820 |
TargetExpress stores | 3 |  |  | 1 |  |  | — |  |  | 61 |  |  | 21 |  |  | — |
Total | 1,795 |  |  | 1,790 |  |  | 1,789 |  |  | 240,414 |  |  | 239,963 |  |  | 239,544 |

(a) In thousands; reflects total square feet, less office, distribution center and vacant space.
Other Performance Factors
Consolidated Selling, General and Administrative Expenses
In addition to segment selling, general and administrative expenses, we recorded certain other expenses during the three months ended May 2, 2015 and May 3, 2014. For the three months ended May 2, 2015, these expenses included $103 million of restructuring costs and $3 million of Data Breach-related costs. For the three months ended May 3, 2014, these expenses included $18 million of Data Breach-related costs, net of expected insurance proceeds, and $13 million of costs related to plans to convert existing co-branded REDcards to MasterCard co-branded chip-and-PIN cards in 2015 to support the accelerated transition to chip-and-PIN-enabled REDcards. Additional information about these items is provided within the Reconciliation of Non-GAAP Financial Measures to GAAP Measures on page 19.
Net Interest Expense
Net interest expense from continuing operations was $155 million for the three months ended May 2, 2015, compared to $152 million for the three months ended May 3, 2014.
Provision for Income Taxes
Our effective income tax rate from continuing operations for the three months ended May 2, 2015 was 34.8 percent compared with 34.4 percent for the three months ended May 3, 2014. The increase was due to a variety of factors, none of which was individually significant.
Discontinued Operations
See Note 2 of the Financial Statements for information regarding our Canada exit.
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Reconciliation of Non-GAAP Financial Measures to GAAP Measures
To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share from continuing operations (Adjusted EPS). This metric excludes restructuring costs, net expenses related to the 2013 data breach and other matters presented below. We believe this information is useful in providing period-to-period comparisons of the results of our continuing operations. This measure is not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The most comparable GAAP measure is diluted earnings per share from continuing operations. Adjusted EPS should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP. Other companies may calculate Adjusted EPS differently than we do, limiting the usefulness of the measure for comparisons with other companies. Prior year amounts have been revised to present Adjusted EPS on a continuing operations basis.

Adjusted EPS |  | Three Months Ended
|  | May 2, 2015 |  | May 3, 2014
(millions, except per share data) |  | Pretax |  |  | Net of Tax |  |  | Per Share Amounts |  |  | Pretax |  |  | Net of Tax |  |  | Per Share Amounts |
GAAP diluted earnings per share from continuing operations |  |  |  |  |  | $ | 1.01 |  |  |  |  |  |  | $ | 0.89 |
Adjustments |  |  |  |  |  |  |  |  |  |  |  |
Restructuring costs (a) |  | $ | 103 |  |  | $ | 64 |  |  | $ | 0.10 |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Data Breach-related costs (b) |  | 3 |  |  | $ | 2 |  |  | $ | — |  |  | 18 |  |  | 11 |  |  | 0.02 |
Card brand conversion costs (c) |  | — |  |  | — |  |  | — |  |  | 13 |  |  | 8 |  |  | 0.01 |
Resolution of income tax matters |  | — |  |  | (3 | ) |  | — |  |  | — |  |  | (1 | ) |  | — |
Adjusted diluted earnings per share from continuing operations |  |  |  |  |  | $ | 1.10 |  |  |  |  |  |  | $ | 0.92 |

Note: Amounts may not foot due to rounding. Beginning with the first quarter 2015, we no longer exclude the reduction of the beneficial interest asset from Adjusted EPS because it is no longer meaningful. For comparison purposes, prior year Adjusted EPS has been revised.
(a) Refer to Note 3 in the Financial Statements for more information on restructuring costs.
(b) Refer to Note 6 in the Financial Statements for more information on Data Breach related costs.
(c) Expense related to converting the co-branded REDcard program to MasterCard.
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We have also disclosed after-tax return on invested capital for continuing operations (ROIC), which is a ratio based on GAAP information, with the exception of adjustments made to capitalize operating leases. Operating leases are capitalized as part of the ROIC calculation to control for differences in capital structure between us and our competitors. We believe this metric provides a meaningful measure of the effectiveness of our capital allocation over time. Other companies may calculate ROIC differently than we do, limiting the usefulness of the measure for comparisons with other companies.

After-Tax Return on Invested Capital |  |
Numerator |  | Trailing Twelve Months |  |
(dollars in millions) (unaudited) |  | May 2, 2015 |  |  | May 3, 2014 |  |  |
Earnings from continuing operations before interest expense and income taxes |  | $ | 4,667 |  |  | $ | 4,579 |  |  |
+ Operating lease interest (a)(b) |  | 90 |  |  | 95 |  |  |
Adjusted earnings from continuing operations before interest expense and income taxes |  | 4,756 |  |  | 4,674 |  |  |
- Income taxes (c) |  | 1,575 |  |  | 1,604 |  |  |
Net operating profit after taxes |  | $ | 3,181 |  |  | $ | 3,070 |  |  |

Denominator (dollars in millions) (unaudited) |  | May 2, 2015 |  |  | May 3, 2014 |  |  | May 4, 2013 |
Current portion of long-term debt and other borrowings |  | $ | 112 |  |  | $ | 1,466 |  |  | $ | 522 |
+ Noncurrent portion of long-term debt |  | 12,654 |  |  | 11,391 |  |  | 12,389 |
+ Shareholders' equity |  | 14,174 |  |  | 16,486 |  |  | 16,520 |
+ Capitalized operating lease obligations (b)(d) |  | 1,495 |  |  | 1,587 |  |  | 1,668 |
- Cash and cash equivalents |  | 2,768 |  |  | 677 |  |  | 1,798 |
- Net assets of discontinued operations |  | 335 |  |  | 4,573 |  |  | 3,412 |
Invested capital |  | $ | 25,332 |  |  | $ | 25,680 |  |  | $ | 25,890 |
Average invested capital (e) |  | $ | 25,506 |  |  | $ | 25,785 |  |  |

After-tax return on invested capital |  | 12.5 | % |  | 11.9 | % |  |

(a) Represents the add-back to operating income driven by the hypothetical capitalization of our operating leases, using eight times our trailing twelve months rent expense and an estimated interest rate of six percent.
(b) See the following Reconciliation of Capitalized Operating Leases table for the adjustments to our GAAP total rent expense to obtain the hypothetical capitalization of operating leases and related operating lease interest.
(c) Calculated using the effective tax rate for continuing operations, which was 33.1% and 34.3% for the trailing twelve months ended May 2, 2015 and May 3, 2014.
(d) Calculated as eight times our trailing twelve months rent expense.
(e) Average based on the invested capital at the end of the current period and the invested capital at the end of the prior period.
Capitalized operating lease obligations and operating lease interest are not in accordance with, or an alternative for, generally accepted accounting principles in the United States. The most comparable GAAP measure is total rent expense. Capitalized operating lease obligations and operating lease interest should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP.

Reconciliation of Capitalized Operating Leases |  | Trailing Twelve Months
(dollars in millions) (unaudited) |  | May 2, 2015 |  |  | May 3, 2014 |  |  | May 4, 2013 |
Total rent expense |  | $ | 187 |  |  | $ | 199 |  |  | $ | 209 |
Capitalized operating lease obligations (Total rent expense x 8) |  | 1,495 |  |  | 1,587 |  |  | 1,668 |
Operating lease interest (Capitalized operating lease obligations x 6%) |  | 90 |  |  | 95 |  |  | n/a |

20

Analysis of Financial Condition
Liquidity and Capital Resources
Our cash and cash equivalents balance was $2,768 million at May 2, 2015 compared with $677 million for the same period in 2014. Our investment policy is designed to preserve principal and liquidity of our short-term investments. This policy allows investments in large money market funds or in highly rated direct short-term instruments that mature in 60 days or less. We also place certain dollar limits on our investments in individual funds or instruments.
Cash Flows
Operations during the first three months of 2015 were funded by internally generated funds. Operating cash flow provided by continuing operations was $717 million for the three months ended May 2, 2015 compared with $815 million for the same period in 2014. These cash flows, combined with our prior year-end cash position, allowed us to invest in the business, pay dividends and resume repurchasing shares under our share repurchase program.
Share Repurchases
During the three months ended May 2, 2015, we repurchased 3.7 million shares of our common stock for a total investment of $300 million ($80.85 per share), not including the $300 million prepayment under the accelerated share repurchase agreement described in Note 8 of the Financial Statements. We did not repurchase any shares during the three months ended May 3, 2014.
Dividends
We paid dividends totaling $333 million ($0.52 per share) and $272 million ($0.43 per share)for the three months ended May 2, 2015 and May 3, 2014, respectively, a per share increase of 20.9 percent. We declared dividends totaling $335 million ($0.52 per share) in first quarter 2015, a per share increase of 20.9 percent over the $274 million ($0.43 per share) of declared dividends during the first quarter of 2014. We have paid dividends every quarter since our 1967 initial public offering, and it is our intent to continue to do so in the future.
Short-term and Long-term Financing
Our financing strategy is to ensure liquidity and access to capital markets, to manage our net exposure to floating interest rate volatility and to maintain a balanced spectrum of debt maturities. Within these parameters, we seek to minimize our borrowing costs. Our ability to access the long-term debt and commercial paper markets has provided us with ample sources of liquidity. Our continued access to these markets depends on multiple factors including the condition of debt capital markets, our operating performance and maintaining strong credit ratings. As of May 2, 2015 our credit ratings were as follows:

Credit Ratings | Moody’s | Standard and Poor’s | Fitch
Long-term debt | A2 | A | A-
Commercial paper | P-1 | A-1 | F2

If our credit ratings were lowered, our ability to access the debt markets and our cost of funds and other terms for new debt issuances could be adversely impacted. Each of the credit rating agencies reviews its rating periodically and there is no guarantee our current credit ratings will remain the same as described above. Standard and Poor's lowered our long-term debt rating from A+ to A during the first quarter of 2014, but maintained our A-1 commercial paper rating.
As a measure of our financial condition, we monitor our ratio of pretax earnings from continuing operations before fixed charges to fixed charges. Fixed charges include interest expense and the interest portion of rent expense. For the first three months of 2015 our ratio of earnings from continuing operations to fixed charges was 7.29 x compared with 6.41 x for the first three months of 2014. See Exhibit (12) for a description of how the gain on sale of our U.S. credit card receivables portfolio and loss on early retirement of debt affected the 2014, 2013 and 2012 calculations.
We have additional liquidity through a committed $2.25 billion revolving credit facility that expires in October 2018. No balances were outstanding at any time during 2015 or 2014.
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Most of our long-term debt obligations contain covenants related to secured debt levels. In addition to a secured debt level covenant, our credit facility also contains a debt leverage covenant. We are, and expect to remain, in compliance with these covenants. Additionally, at May 2, 2015, no notes or debentures contained provisions requiring acceleration of payment upon a debt rating downgrade, except that certain outstanding notes allow the note holders to put the notes to us if within a matter of months of each other we experience both (i) a change in control; and (ii) our long-term debt ratings are either reduced and the resulting rating is non-investment grade, or our long-term debt ratings are placed on watch for possible reduction and those ratings are subsequently reduced and the resulting rating is noninvestment grade.
We believe our sources of liquidity will continue to be adequate to maintain operations, finance anticipated expansion and strategic initiatives, fund obligations incurred as a result of our exit from Canada, fund obligations incurred as a result of the Data Breach and any related future technology enhancements, pay dividends and execute purchases under our share repurchase program for the foreseeable future. We continue to anticipate ample access to commercial paper and long-term financing.
Contractual Obligations and Commitments
Our 2014 Form 10-K included a summary of contractual obligations and commitments as of January 31, 2015. During the three months ended May 2, 2015, there were no material changes outside the ordinary course of business.
New Accounting Pronouncements
We do not expect any recently issued accounting pronouncements will have a material effect on our financial statements.
Forward-Looking Statements
This report contains forward-looking statements, which are based on our current assumptions and expectations. These statements are typically accompanied by the words “expect,” “may,” “could,” “believe,” “would,” “might,” “anticipates,” or words of similar import. The principal forward-looking statements in this report include: Our financial performance; statements regarding the adequacy of and costs associated with our sources of liquidity, the process, timing and effects of discontinuing our Canadian operations, the expected ability to recognize deferred tax assets and liabilities and the timing of such recognition, including net operating loss carryforwards and tax benefits related to discontinuing our Canadian operations, expected future borrowing under the DIP facility, the expected benefits and timing of cash disbursements related to restructuring initiatives, our future share repurchases, our expected capital expenditures, the expected compliance with debt covenants, the expected impact of new accounting pronouncements, our intentions regarding future dividends, the expected outcome of, and adequacy of our reserves for, investigations, inquiries, claims and litigation, including those related to the Data Breach and discontinuing our Canadian operations, expected insurance recoveries, our adoption of chip-and-PIN technology, and the amount and timing of expense reduction resulting from remeasurement of our pension plan.
All such forward-looking statements are intended to enjoy the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, as amended. Although we believe there is a reasonable basis for the forward-looking statements, our actual results could be materially different. The most important factors which could cause our actual results to differ from our forward-looking statements are set forth on our description of risk factors in Item 1A of our Form 10-K for the fiscal year ended January 31, 2015, which should be read in conjunction with the forward-looking statements in this report. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update any forward-looking statement.
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 January 31, 2015.
Item 4. Controls and Procedures
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the first quarter of 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Evaluation of Disclosure 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following governmental enforcement proceedings relating to environmental matters are reported pursuant to instruction 5(C) of Item 103 of Regulation S-K because they involve potential monetary sanctions in excess of $100,000:
On February 27, 2015, California Attorney General sent us a letter alleging, based on a series of compliance checks, that we have not achieved compliance with California’s environmental laws and the provisions of the injunction that was part of a settlement reached in January 27, 2011. The settlement was approved by the Alameda County Superior Court and judgment was entered on March 2, 2011. No specific relief has been sought to date.
For a description of other legal proceedings, including a discussion of litigation and government inquiries related to the Data Breach, see Part 1, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 6 of the Notes to Consolidated Financial Statements included in Part 1, Item 1, Financial Statements.
Item 1A. Risk Factors
There have been no material changes to the risk factors described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In January 2012, our Board of Directors authorized the repurchase of $5 billion of our common stock. There is no stated expiration for the share repurchase program. The table below presents information with respect to Target common stock purchases made during the three months ended May 2, 2015, by Target or any "affiliated purchaser" of Target, as defined in Rule 10b-18(a)(3) under the Exchange Act.

Period | Total Number of Shares Purchased (a) |  |  | Average Price Paid per Share (a) |  |  | Total Number of Shares Purchased as Part of the Current Program (a) |  |  | Dollar Value of Shares that May Yet Be Purchased Under the Program |  |
February 1, 2015 through February 28, 2015 |  |  |  |  |  |  |  |
Open market and privately negotiated purchases | — |  |  | — |  |  | — |  |  | $ | 1,862,860,655 |  |
March 1, 2015 through April 4, 2015 |  |  |  |  |  |  |  |
Open market and privately negotiated purchases | 1,824,328 |  |  | 78.56 |  |  | 1,824,328 |  |  | 1,719,534,509 |  |
April 5, 2015 through May 2, 2015 |  |  |  |  |  |  |  |
Open market and privately negotiated purchases | 1,886,191 |  |  | 83.06 |  |  | 1,886,191 |  |  | 1,562,859,653 |  |
April 2015 ASR (b) | 2,200,000 |  |  | TBD |  |  | 2,200,000 |  |  | 1,262,859,653 |  |
Total | 5,910,519 |  |  | TBD |  |  | 5,910,519 |  |  | $ | 1,262,859,653 |  | (b)

(a) The table above includes shares reacquired upon the noncash settlement of prepaid forward contracts. At May 2, 2015, we held asset positions in prepaid forward contracts for 0.4 million shares of our common stock, for a total cash investment of $18.2 million, or an average per share price of $41.13. During the first quarter, 0.1 million shares were reacquired under such contracts. Refer to Note 9 of the Financial Statements for further details of these contracts.
(b) In May 2015, the contract was settled and we received an additional 1.1 million shares, which were retired, and $35 million for the remaining amount not settled in shares. The $35 million, in addition to the amount reflected in the table, is available under the program. We repurchased a total of 3.3 million shares under the ASR for total cash investment of $265 million, or an average per share price of $80.74. Refer to Note 8 of the Financial Statements for further details about our ASR contract.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Other Information
Not applicable.
Item 6. Exhibits

(3)A |  | Amended and Restated Articles of Incorporation (as amended through June 9, 2010)(1)
(3)B |  | By-laws (as amended through September 9, 2009)(2)
(10)II | s | First Amendment dated February 24, 2015 to Credit Card Program Agreement among Target Corporation, Target Enterprise, Inc. and TD Bank USA, N.A.
(12) |  | Statements of Computations of Ratios of Earnings to Fixed Charges
(31)A |  | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31)B |  | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(32)A |  | Certification of the Chief Executive Officer As Adopted Pursuant to 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(32)B |  | Certification of the Chief Financial Officer As Adopted Pursuant to 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS |  | XBRL Instance Document
101.SCH |  | XBRL Taxonomy Extension Schema
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase
101.LAB |  | XBRL Taxonomy Extension Label Linkbase
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase

s Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities and Exchange Commission.
(1) Incorporated by reference to Exhibit (3)A to the Registrant’s Form 8-K Report filed June 10, 2010.
(2) Incorporated by reference to Exhibit (3)B to the Registrant’s Form 8-K Report filed September 10, 2009.
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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.

| TARGET CORPORATION
Dated: May 28, 2015 | By: | /s/ John J. Mulligan
|  | John J. Mulligan
|  | Executive Vice President,
|  | Chief Financial Officer and
|  | Chief Accounting Officer
|  | (Duly Authorized Officer and
|  | Principal Financial Officer)

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EXHIBIT INDEX

Exhibit |  | Description |  | Manner of Filing
(3)A |  | Amended and Restated Articles of Incorporation (as amended through June 9, 2010) |  | Incorporated by Reference
(3)B |  | By-Laws (as amended through September 9, 2009) |  | Incorporated by Reference
(10)II |  | First Amendment dated February 24, 2015 to Credit Card Program Agreement among Target Corporation, Target Enterprise, Inc. and TD Bank USA, N.A. |  | Filed Electronically
(12) |  | Statements of Computations of Ratios of Earnings to Fixed Charges |  | Filed Electronically
(31)A |  | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  | Filed Electronically
(31)B |  | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  | Filed Electronically
(32)A |  | Certification of the Chief Executive Officer As Adopted Pursuant to 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Filed Electronically
(32)B |  | Certification of the Chief Financial Officer As Adopted Pursuant to 18 U.S.C. Section 1350 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |  | Filed Electronically
101.INS |  | XBRL Instance Document |  | Filed Electronically
101.SCH |  | XBRL Taxonomy Extension Schema |  | Filed Electronically
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase |  | Filed Electronically
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase |  | Filed Electronically
101.LAB |  | XBRL Taxonomy Extension Label Linkbase |  | Filed Electronically
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase |  | Filed Electronically

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