Financial News Release

Target Reports Third Quarter 2017 Earnings
11/15/17
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Comparable sales and EPS near the high end of expectations

  • Third quarter comparable traffic grew 1.4 percent. Comparable sales increased 0.9 percent.
  • Third quarter GAAP EPS from continuing operations of $0.87 and Adjusted EPS1 of $0.91 were near the upper-end of the guidance range of $0.75 to $0.95.
  • Comparable digital channel sales increased 24 percent, on top of 26 percent growth in third quarter 2016.
  • In the third quarter, Target devoted $847 million to capital investment, paid dividends of $339 million, and returned $171 million through share repurchases.
  • For additional media materials, please visit: https://corporate.target.com/article/2017/11/q3-2017-earnings

MINNEAPOLIS--(BUSINESS WIRE)--Nov. 15, 2017-- Target Corporation (NYSE: TGT) today reported a third quarter 2017 comparable sales increase of 0.9 percent and GAAP earnings per share (EPS) from continuing operations of $0.87, a decrease of 17.7 percent from third quarter 2016. Third quarter adjusted earnings per share from continuing operations (Adjusted EPS) were $0.91, a decrease of 13.1 percent from third quarter 2016. The attached tables provide a reconciliation of non-GAAP to GAAP measures. All earnings per share figures refer to diluted EPS.

 

1 Adjusted EPS, a non-GAAP financial measure, excludes the impact of certain discretely managed items. See the “Miscellaneous” section of this release, as well as the tables of this release, for additional information about the items that have been excluded from Adjusted EPS.

 

“We’re very pleased with Target’s third quarter performance, including traffic and sales growth that demonstrate we’re building on the progress we saw in the first half of the year,” said Brian Cornell, chairman and chief executive officer of Target Corporation. “The investments we’re making in our business will help Target drive long-term success and ensure we’re well positioned to deliver for guests in the all-important holiday season. Our assortment now includes thousands of new items from the eight exclusive brands we’ve launched throughout 2017, including Hearth and Hand with Magnolia, our new home goods partnership with Chip and Joanna Gaines. Guests this holiday season will experience elevated in-store service reflecting our investments in wages, training and additional hours for our team, and they’ll find more value than ever before through a combination of being priced right daily and offering impressive deals. While we expect the fourth-quarter environment to be highly competitive, we are very confident in our holiday season plans.”

Fourth Quarter and Fiscal 2017 Guidance
Target expects fourth quarter 2017 comparable sales growth of flat to two percent. That performance would translate into full-year 2017 comparable sales growth of flat to one percent.

For fourth quarter 2017, the Company expects GAAP EPS from continuing operations and Adjusted EPS of $1.05 to $1.25. For full-year 2017, the Company now expects GAAP EPS from continuing operations of $4.38 to $4.58 and Adjusted EPS of $4.40 to $4.60, compared with prior guidance of $4.35 to $4.55 for GAAP EPS from continuing operations and $4.34 to $4.54 for Adjusted EPS. The 2 cent difference between expected full-year GAAP EPS from continuing operations and Adjusted EPS is driven by the expected net impact of debt-retirement costs and tax benefits.

Fourth quarter and full-year 2017 GAAP EPS from continuing operations may include the impact of additional discrete items which will be excluded in calculating Adjusted EPS. The Company is not currently aware of any such discrete items.

The Company announced today that it plans to issue a post-holiday financial update on Tuesday, January 9, 2018.

Segment Results
Third quarter 2017 sales increased 1.4 percent to $16.7 billion from $16.4 billion last year, reflecting a 0.9 percent comparable sales increase combined with the benefit from sales in non-mature stores. Comparable digital channel sales grew 24 percent and contributed 0.8 percentage points to comparable sales growth. Segment earnings before interest expense and income taxes (EBIT), which is Target’s measure of segment profit, were $869 million in third quarter 2017, a decrease of 17.8 percent from $1,057 million in third quarter 2016.

Third quarter EBIT margin rate was 5.2 percent, compared with 6.4 percent in 2016. Third quarter gross margin rate2 was 29.7 percent, compared with 29.8 percent in 2016, reflecting pressure from digital fulfillment costs and the Company’s pricing and promotion efforts, partially offset by cost savings. Third quarter SG&A expense rate was 21.1 percent in 2017, compared with 20.3 percent in 2016, driven by higher compensation costs, reflecting a year-over-year increase in team member incentives combined with the impact of investments in store team member hours and wage rates. This was partially offset by the benefit from the timing of some expenses and our ongoing cost-savings efforts.

Interest Expense and Taxes from Continuing Operations
The Company’s third quarter 2017 net interest expense was $254 million, compared with $142 million last year. The increase was driven by a $123 million charge related to the early retirement of debt in third quarter 2017, partially offset by the benefit of lower average debt balances.

Third quarter 2017 effective income tax rate from continuing operations was 22.3 percent compared with 33.8 percent last year. The decrease was primarily due to the net tax effect of the Company’s global sourcing operations, the resolution of other income tax matters and the effect of lower pretax earnings.

 

2 Beginning in the second quarter of 2017, we reclassified supply chain-related depreciation expense into cost of sales and out of depreciation and amortization on our Consolidated Statements of Operations. Prior year amounts have been reclassified to reflect this change. Updated financials for the thirteen quarters prior to this change have been posted on our Investor Relations website at investors.target.com.

 

Capital Returned to Shareholders
In third quarter 2017, the Company returned $510 million to shareholders, which consisted of:

  • Dividends of $339 million, compared with $345 million in third quarter 2016.
  • Share repurchases totaling $171 million, including an accelerated share repurchase (ASR) agreement that retired 2.8 million shares of common stock at an average price of $57.78, for a total investment of $161 million. Final settlement of the ASR occurred in November, and 0.3 million of the 2.8 million shares repurchased through the ASR were delivered in November.

As of the end of third quarter 2017, including the $161 million repurchased under the ASR, the Company had approximately $4 billion of remaining capacity under its current $5 billion share repurchase program.

For the trailing twelve months through third quarter 2017, after-tax return on invested capital (ROIC) was 13.7 percent, compared with 16.3 percent for the twelve months through third quarter 2016. Excluding the net gain on the sale of the pharmacy and clinic businesses, ROIC for the trailing twelve months through third quarter 2016 was 14.3 percent. The year-over-year decline in third quarter 2017 primarily reflected the impact of lower profits, partially offset by the benefit of lower working capital. See the “Reconciliation of Non-GAAP Financial Measures” section of this release for additional information about the Company’s ROIC calculation.

Conference Call Details
Target will webcast its third quarter earnings conference call at 7:00 a.m. CST today. Investors and the media are invited to listen to the call at investors.target.com (hover over “company” then click on “events & presentations” in the “investors” column). A telephone replay of the call will be available beginning at approximately 10:30 a.m. CST today through the end of business on November 17, 2017. The replay number is 866-393-0868.

Miscellaneous
Statements in this release regarding fourth quarter and full-year 2017 earnings per share and comparable sales guidance are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to risks and uncertainties which could cause the Company’s actual results to differ materially. The most important risks and uncertainties are described in Item 1A of the Company’s Form 10-K for the fiscal year ended Jan. 28, 2017. Forward-looking statements speak only as of the date they are made, and the Company does not undertake any obligation to update any forward-looking statement.

In addition to the GAAP results provided in this release, the Company provides Adjusted EPS, consolidated earnings from continuing operations before interest expense and income taxes (EBIT), and earnings from continuing operations before interest, taxes, depreciation and amortization (EBITDA) for the three and nine-month periods ended October 28, 2017 and October 29, 2016, respectively. The Company also provides ROIC for the twelve-month periods ended October 28, 2017 and October 29, 2016, 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 the Company and its competitors. Adjusted EPS, 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 (GAAP). Management believes Adjusted EPS is useful in providing period-to-period comparisons of the results of the Company’s ongoing retail operations. Management believes consolidated EBIT and EBITDA are useful in providing meaningful information about our operational efficiency compared to our competitors by excluding the impact of differences in tax jurisdictions and structures, debt levels and, for EBITDA, capital investment. Management believes ROIC is useful in assessing the effectiveness of its capital allocation over time. The most comparable GAAP measure for adjusted diluted EPS is diluted EPS from continuing operations. The most comparable GAAP measure for consolidated EBIT and EBITDA is net earnings from continuing operations. The most comparable GAAP measure for capitalized operating lease obligations and operating lease interest is total rent expense. These non-GAAP numbers should not be considered in isolation or as a substitution for analysis of the Company’s results as reported under GAAP. Other companies may calculate Adjusted EPS, consolidated EBIT, EBITDA and ROIC differently than the Company does, limiting the usefulness of the measure for comparisons with other companies.

About Target
Minneapolis-based Target Corporation (NYSE: TGT) serves guests at 1,834 stores and at Target.com. Since 1946, Target has given 5 percent of its profit to communities, which today equals millions of dollars a week. For more information, visit Target.com/Pressroom. For a behind-the-scenes look at Target, visit Target.com/abullseyeview or follow @TargetNews on Twitter.

TARGET CORPORATION

       
 

Consolidated Statements of Operations

Three Months Ended Nine Months Ended
(millions, except per share data) October 28,   October 29, October 28,   October 29,
(unaudited)   2017   2016   Change   2017   2016   Change
Sales $ 16,667 $ 16,441 1.4 % $ 49,113 $ 48,805 0.6 %
Cost of sales (a)   11,712     11,536     1.5     34,330     33,957     1.1  
Gross margin 4,955 4,905 1.0 14,783 14,848 (0.4 )
Selling, general and administrative expenses 3,512 3,339 5.2 10,027 9,741 2.9
Depreciation and amortization (exclusive of depreciation included in cost of sales) (a)   574     505     13.7     1,596     1,486     7.4  
Earnings from continuing operations before interest expense and income taxes 869 1,061 (18.1 ) 3,160 3,621 (12.7 )
Net interest expense   254     142     79.1     532     864     (38.4 )
Earnings from continuing operations before income taxes 615 919 (33.1 ) 2,628 2,757 (4.7 )
Provision for income taxes   137     311     (55.8 )   802     910     (11.9 )
Net earnings from continuing operations 478 608 (21.5 ) 1,826 1,847 (1.1 )
Discontinued operations, net of tax   2             7     73      
Net earnings   $ 480     $ 608     (21.0 )%   $ 1,833     $ 1,920     (4.5 )%
Basic earnings per share
Continuing operations $ 0.88 $ 1.07 (17.8 )% $ 3.33 $ 3.16 5.2 %
Discontinued operations               0.01     0.12      
Net earnings per share   $ 0.88     $ 1.07     (17.3 )%   $ 3.34     $ 3.29     1.6 %
Diluted earnings per share
Continuing operations $ 0.87 $ 1.06 (17.7 )% $ 3.31 $ 3.14 5.4 %
Discontinued operations               0.01     0.12      
Net earnings per share   $ 0.88     $ 1.06     (17.1 )%   $ 3.32     $ 3.26     1.8 %
Weighted average common shares outstanding
Basic 544.5 570.1 (4.5 )% 548.7 583.5 (6.0 )%
Dilutive impact of share-based awards   3.4     4.7     0   3.1     5.0      
Diluted   547.9     574.8     (4.7 )%   551.8     588.5     (6.2 )%
Antidilutive shares   4.5     0.2         4.1     0.1      
Dividends declared per share   $ 0.62     $ 0.60     3.3 %   $ 1.84     $ 1.76     4.5 %

Note: Per share amounts may not foot due to rounding.
(a) Refer to the Segment Results section for information about a reclassification of supply chain-related depreciation expense to cost of sales.

Subject to reclassification

TARGET CORPORATION

     
 

Consolidated Statements of Financial Position

October 28, January 28, October 29,
(millions) (unaudited)   2017   2017   2016
Assets
Cash and cash equivalents $ 2,725 $ 2,512 $ 1,231
Inventory 10,586 8,309 10,057
Assets of discontinued operations 6 69 62
Other current assets   1,392     1,100     1,492  
Total current assets 14,709 11,990 12,842
Property and equipment
Land 6,087 6,106 6,106
Buildings and improvements 28,310 27,611 27,518
Fixtures and equipment 5,548 5,503 5,467
Computer hardware and software 2,658 2,651 2,538
Construction-in-progress 389 200 219
Accumulated depreciation   (17,880 )   (17,413 )   (16,946 )
Property and equipment, net 25,112 24,658 24,902
Noncurrent assets of discontinued operations 9 12 17
Other noncurrent assets   878     771     842  
Total assets   $ 40,708     $ 37,431     $ 38,603  
Liabilities and shareholders’ investment
Accounts payable $ 9,986 $ 7,252 $ 8,250
Accrued and other current liabilities 4,036 3,737 3,662
Current portion of long-term debt and other borrowings   1,354     1,718     729  
Total current liabilities 15,376 12,707 12,641
Long-term debt and other borrowings 11,277 11,031 12,097
Deferred income taxes 944 861 920
Liabilities of discontinued operations 11 19 19
Other noncurrent liabilities   1,963     1,860     1,857  
Total noncurrent liabilities 14,195 13,771 14,893
Shareholders’ investment
Common stock 45 46 47
Additional paid-in capital 5,762 5,661 5,598
Retained earnings 5,940 5,884 6,031
Accumulated other comprehensive loss   (610 )   (638 )   (607 )
Total shareholders’ investment   11,137     10,953     11,069  
Total liabilities and shareholders’ investment   $ 40,708     $ 37,431     $ 38,603  

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.

Subject to reclassification

TARGET CORPORATION

 
 

Consolidated Statements of Cash Flows

   
Nine Months Ended
October 28,   October 29,
(millions) (unaudited)   2017   2016
Operating activities
Net earnings $ 1,833 $ 1,920
Earnings from discontinued operations, net of tax   7     73  
Net earnings from continuing operations 1,826 1,847
Adjustments to reconcile net earnings to cash provided by operations
Depreciation and amortization 1,784 1,686
Share-based compensation expense 81 85
Deferred income taxes 37 83
Loss on debt extinguishment 123 422
Noncash losses / (gains) and other, net 189 (5 )
Changes in operating accounts
Inventory (2,277 ) (1,455 )
Other assets (89 ) (14 )
Accounts payable 2,738 832
Accrued and other liabilities   2     (711 )
Cash provided by operating activities—continuing operations 4,414 2,770
Cash provided by operating activities—discontinued operations   75     111  
Cash provided by operations   4,489     2,881  
Investing activities
Expenditures for property and equipment (2,049 ) (1,184 )
Proceeds from disposal of property and equipment 27 23
Other investments   (62 )   23  
Cash required for investing activities   (2,084 )   (1,138 )
Financing activities
Change in commercial paper, net 89
Additions to long-term debt 739 1,977
Reductions of long-term debt (1,087 ) (2,625 )
Dividends paid (1,001 ) (1,011 )
Repurchase of stock (757 ) (3,034 )
Prepayment of accelerated share repurchase (111 ) (120 )
Stock option exercises   25     166  
Cash required for financing activities   (2,192 )   (4,558 )
Net increase / (decrease) in cash and cash equivalents 213 (2,815 )
Cash and cash equivalents at beginning of period   2,512     4,046  
Cash and cash equivalents at end of period   $ 2,725     $ 1,231  
 

Subject to reclassification

TARGET CORPORATION

       

Segment Results

               
Three Months Ended Nine Months Ended
October 28,   October 29, October 28,   October 29,
(millions) (unaudited)   2017   2016   Change   2017   2016   Change
Sales $ 16,667 $ 16,441 1.4 % $ 49,113 $ 48,805 0.6 %
Cost of sales (a)   11,712   11,536   1.5     34,330   33,957   1.1  
Gross margin 4,955 4,905 1.0 14,783 14,848 (0.4 )
SG&A expenses (b) 3,512 3,343 5.1 10,027 9,741 2.9
Depreciation and amortization (exclusive of depreciation included in cost of sales) (a)   574   505   13.7     1,596   1,486   7.4  
EBIT   $ 869   $ 1,057   (17.8 )%   $ 3,160   $ 3,621   (12.7 )%

(a) 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, EBIT, net earnings or earnings per share.
(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.

         
  Three Months Ended   Nine Months Ended
Rate Analysis October 28,   October 29, October 28,   October 29,
(unaudited)   2017   2016   2017   2016
Gross margin rate (a) 29.7 % 29.8 % 30.1 % 30.4 %
SG&A expense rate 21.1 20.3 20.4 20.0
Depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate (a) 3.4 3.1 3.2 3.0
EBIT margin rate   5.2     6.4     6.4     7.4  

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.

         
  Three Months Ended   Nine Months Ended
Sales by Channel October 28,   October 29, October 28,   October 29,
(unaudited)   2017   2016   2017   2016
Stores 95.7 % 96.5 % 95.7 % 96.5 %
Digital   4.3     3.5     4.3     3.5  
Total   100 %   100 %   100 %   100 %
         
  Three Months Ended   Nine Months Ended
Comparable Sales October 28,   October 29, October 28,   October 29,
(unaudited)   2017   2016   2017   2016
Comparable sales change 0.9 % (0.2 )% 0.3 % %
Drivers of change in comparable sales
Number of transactions 1.4 (1.2 ) 0.9 (1.0 )
Average transaction amount   (0.5 )   1.0     (0.6 )   1.0  

Note: Amounts may not foot due to rounding.

         
Contribution to Comparable Sales Change

(unaudited)

  Three Months Ended   Nine Months Ended
 

October 28,
2017

  October 29,
2016
  October 28,
2017
  October 29,
2016
Stores channel comparable sales change %   (1.0 )% (0.6 )%   (0.7 )%
Digital channel contribution to comparable sales change   0.8     0.7     0.9     0.6  
Total comparable sales change   0.9 %   (0.2 )%   0.3 %   %

Note: Amounts may not foot due to rounding.

         
  Three Months Ended   Nine Months Ended

REDcard Penetration
(unaudited)

  October 28,
2017
  October 29,
2016
  October 28,
2017
  October 29,
2016
Target Debit Card 12.9 %   12.9 % 13.1 %   12.9 %
Target Credit Cards   11.4     11.4     11.3     11.0  
Total REDcard Penetration   24.2 %   24.3 %   24.4 %   23.9 %

Note: Amounts may not foot due to rounding.

         

Number of Stores and Retail Square Feet
(unaudited)

  Number of Stores   Retail Square Feet (a)
  October 28,
2017
  January 28,
2017
  October 29,
2016
  October 28,
2017
  January 28,
2017
  October 29,
2016
170,000 or more sq. ft. 276   276   278 49,326   49,328   49,685
50,000 to 169,999 sq. ft. 1,508 1,504 1,503 190,038 189,620 189,496
49,999 or less sq. ft.   44   22   19   1,268   554   464
Total   1,828   1,802   1,800   240,632   239,502   239,645

(a) In thousands, reflects total square feet less office, distribution center, and vacant space.

Subject to reclassification

TARGET CORPORATION

Reconciliation of Non-GAAP Financial Measures

To provide additional transparency, we have disclosed non-GAAP adjusted diluted earnings per share from continuing operations (Adjusted EPS). This metric excludes certain items 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 (GAAP). 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, limiting the usefulness of the measure for comparisons with other companies.

         
  Three Months Ended  
October 28, 2017   October 29, 2016
 

Net of

  Per Share   Net of   Per Share
(millions, except per share data) (unaudited)   Pretax  

Tax

  Amounts   Pretax   Tax   Amounts   Change
GAAP diluted earnings per share from continuing operations $ 0.87 $ 1.06 (17.7 )%
Adjustments
Loss on early retirement of debt $ 123 $ 75 $ 0.14 $ $ $
Pharmacy Transaction-related costs (a) (4 ) (3 )
Income tax matters (b)     (55 )   (0.10 )       (5 )   (0.01 )    
Adjusted diluted earnings per share from continuing operations           $ 0.91             $ 1.04     (13.1 )%
         
Nine Months Ended
October 28, 2017 October 29, 2016
Net of Per Share Net of Per Share
(millions, except per share data) (unaudited)   Pretax   Tax   Amounts   Pretax   Tax   Amounts   Change
GAAP diluted earnings per share from continuing operations $ 3.31 $ 3.14 5.4 %
Adjustments
Loss on early retirement of debt $ 123 $ 75 $ 0.14 $ 422 $ 257 $ 0.44
Pharmacy Transaction-related costs (a)
Income tax matters (b)     (56 )   (0.10 )       (8 )   (0.01 )    
Adjusted diluted earnings per share from continuing operations           $ 3.34             $ 3.56     (6.2 )%

Note: Amounts may not foot due to rounding.
(a) Represents items related to the December 2015 sale of our pharmacy and clinic businesses to CVS (Pharmacy Transaction).
(b) Represents income from income tax matters not related to current period operations. For the three and nine months ended October 28, 2017, primarily represents prior-period discrete tax benefits related to our global sourcing operations.

We have presented consolidated earnings from continuing operations before interest expense and income taxes (EBIT) and earnings before interest, taxes, depreciation and amortization (EBITDA), non-GAAP financial measures, because we believe they provide investors with meaningful information about our operational efficiency compared to our competitors by excluding the impact of differences in tax jurisdictions and structures, debt levels, and for EBITDA, capital investment. These measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States (GAAP). The most comparable GAAP measure is net earnings from continuing operations. Consolidated EBIT and EBITDA should not be considered in isolation or as a substitution for analysis of our results as reported under GAAP. Other companies may calculate consolidated EBIT and EBITDA differently, limiting the usefulness of the measure for comparisons with other companies.

                 
EBIT and EBITDA   Three Months Ended     Nine Months Ended  
October 28,   October 29, October 28,   October 29,
(millions) (unaudited)   2017   2016   Change   2017   2016   Change
Net earnings from continuing operations $ 478 $ 608 (21.5 )% $ 1,826 $ 1,847 (1.1 )%
+ Provision for income taxes 137 311 (55.8 ) 802 910 (11.9 )
+ Net interest expense   254   142   79.1     532   864   (38.4 )
EBIT 869 1,061 (18.1 ) 3,160 3,621 (12.7 )
+ Total depreciation and amortization (a)   633   570   11.1     1,784   1,686   5.8  
EBITDA   $ 1,502   $ 1,631   (7.9 )%   $ 4,944   $ 5,307   (6.8 )%

(a) Represents total depreciation and amortization, including amounts classified within depreciation and amortization and within cost of sales on our Consolidated Statements of Operations.

We have also disclosed after-tax return on invested capital from 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, limiting the usefulness of the measure for comparisons with other companies.

 
After-Tax Return on Invested Capital
     
Numerator   Trailing Twelve Months
October 28,   October 29,
(dollars in millions) (unaudited)   2017   2016
Earnings from continuing operations before interest expense and income taxes $ 4,508 $ 5,790
+ Operating lease interest (a)(b)   78     72
Adjusted earnings from continuing operations before interest expense and income taxes 4,586 5,862
- Income taxes (c)   1,420     1,849
Net operating profit after taxes   $ 3,166     $ 4,013
             
Denominator   October 28,   October 29,   October 31,
(dollars in millions) (unaudited)   2017   2016   2015
Current portion of long-term debt and other borrowings $ 1,354 $ 729 $ 825
+ Noncurrent portion of long-term debt 11,277 12,097 11,887
+ Shareholders' equity 11,137 11,069 13,256
+ Capitalized operating lease obligations (b)(d) 1,298 1,192 1,503
- Cash and cash equivalents 2,725 1,231 1,977
- Net assets of discontinued operations   4     60     197
Invested capital   $ 22,337     $ 23,796     $ 25,298
Average invested capital (e)   $ 23,067     $ 24,547  
                 
After-tax return on invested capital (f)   13.7 %   16.3 %    

(a) Represents the add-back to operating income to reflect the hypothetical interest expense we would incur if the property under our operating leases were owned or accounted for as capital 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 31.0 percent and 31.5 percent for the trailing twelve months ended October 28, 2017 and October 29, 2016, respectively. For the trailing twelve months ended October 28, 2017 and October 29, 2016, includes tax effect of $1,396 million and $1,826 million, respectively, related to EBIT and $24 million and $23 million, respectively, related to operating lease interest.
(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 comparable prior period.
(f) Excluding the net gain on the Pharmacy Transaction, ROIC was 14.3 percent for the trailing twelve months ended October 29, 2016.

Capitalized operating lease obligations and operating lease interest are not in accordance with, or an alternative for, GAAP. 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
October 28,   October 29,   October 31,
(dollars in millions) (unaudited)   2017   2016   2015
Total rent expense $ 162 $ 149 $ 188
Capitalized operating lease obligations (total rent expense x 8) 1,298 1,192 1,503
Operating lease interest (capitalized operating lease obligations x 6%)   78     72     n/a
 

Subject to reclassification

Source: Target Corporation

Target Corporation
John Hulbert, Investors, 612-761-6627
or
Erin Conroy, Media, 612-761-5928
or
Target Media Hotline, 612-696-3400