Analysis of Results of Operations

Total revenues for the three and nine months ended November 1, 2008 were $15,114 million and $45,388 million, respectively, compared with $14,835 million and $43,496 million, respectively, for the same periods last year, an increase of 1.9 percent and 4.4 percent, respectively.

Net earnings for the three and nine months ended November 1, 2008 were $369 million, or $0.49 per share, and $1,605 million and $2.06 per share, respectively, compared with $483 million, or $0.56 per share, and $1,821 million and $2.11 per share, respectively, for the same periods last year. All earnings per share figures refer to diluted earnings per share.

As described in Notes 1 and 12, we changed our reportable business segments in the first quarter of 2008. Additionally, as described in Note 3, we changed our cost classification policy with respect to certain supply chain costs.

Retail Segment



Retail Segment Results            Three Months Ended       Nine Months Ended
                                    Nov. 1,    Nov. 3,     Nov. 1,    Nov. 3,
(millions)                             2008       2007        2008       2007
Sales                           $    14,588   $ 14,342   $  43,861   $ 42,132
Cost of sales                        10,130     10,035      30,332     29,147
Gross margin                          4,458      4,307      13,529     12,985
SG&A expenses (a)                     3,221      3,167       9,361      9,052
EBITDA                                1,237      1,140       4,168      3,933
Depreciation and amortization           465        425       1,339      1,213
EBIT                            $       772   $    715   $   2,829   $  2,720

EBITDA is earnings before interest expense, income taxes, depreciation and amortization.

EBIT is earnings before interest expense and income taxes.

(a) New account and loyalty rewards redeemed by our guests reduce reported sales. Our Retail Segment charges the cost of these discounts to our Credit Card Segment, and the reimbursements of $24 million and $75 million for the three and nine months ended November 1, 2008, respectively, and $24 million and $73 million for the three and nine months ended November 3, 2007, respectively, are recorded as a reduction to SG&A expenses within the Retail Segment.

Retail Segment Rate Analysis                  Three Months Ended     Nine Months Ended
                                               Nov. 1,    Nov. 3,    Nov. 1,   Nov. 3,
                                                  2008       2007       2008      2007
Gross margin rate                                30.6%      30.0%      30.8%     30.8%
SG&A expense rate                                22.1%      22.1%      21.3%     21.5%
EBITDA margin rate                                8.5%       7.9%       9.5%      9.3%
Depreciation and amortization expense rate        3.2%       3.0%       3.1%      2.9%
EBIT margin rate                                  5.3%       5.0%       6.4%      6.5%

Sales

Sales include merchandise sales, net of expected returns, from our stores and our online business, as well as gift card breakage. Total sales for the Retail Segment for the quarter were $14,588 million, compared with $14,342 million for the same period a year ago, an increase of 1.7% percent. For the nine month period ending November 1, 2008, total sales for the Retail Segment were $43,861 million, compared with $42,132 million for the same period a year ago, an increase of 4.1 percent. Total sales growth in the Retail Segment was positively impacted by our new stores, somewhat offset by a decline in comparable-store sales.

Comparable-store sales is a measure that indicates the performance of our existing stores by measuring the growth in sales for such stores for a period over the comparable, prior-year period of equivalent length. The method of calculating comparable store sales varies across the retail industry. As a result, our calculation of comparable store sales is not necessarily comparable to similarly titled measures reported by other companies.

Comparable-store sales are sales from our online business and sales from general merchandise and SuperTarget stores open longer than one year, including:

†              sales from stores that have been remodeled or expanded while
remaining open

†              sales from stores that have been relocated to new buildings of

Comparable-store sales do not include:

† sales from general merchandise stores that have been converted, or relocated within the same trade area, to a SuperTarget store format

† sales from stores that were intentionally closed to be remodeled, expanded or reconstructed

Comparable-Store Sales                      Three Months Ended        Nine Months Ended
                                             Nov. 1,     Nov. 3,     Nov. 1,     Nov. 3,
                                                2008        2007        2008        2007
Comparable-store sales                        (3.3)%        3.7%      (1.5)%        4.3%
Effect of transactions on comparable
store sales:
Number of transactions                        (3.6)%        1.3%      (2.5)%        1.0%
Average transaction amount                     0.3 %        2.5%       1.0 %        3.0%
Units per transaction                         (1.5)%        0.9%      (1.3)%        1.1%
Dollars per unit                               1.8 %        1.6%       2.3 %        1.9%

In fiscal 2008, the decline in comparable store sales was driven by a decline in the number of transactions, partially offset by an increase in average transaction amount, which reflects the effect of a decrease in number of units per transaction partially offset by higher dollars per unit within the transactions.

Transaction-level metrics are influenced by a broad array of macroeconomic, competitive and consumer behavioral factors, and comparable-store sales rates are impacted by transfer of sales to new stores.

Gross Margin Rate

Gross margin rate represents gross margin (sales less cost of sales) as a percentage of sales. See Note 3 for a description of expenses included in cost of sales. In the third quarter of 2008, our gross margin rate was 30.6 percent compared with 30.0 percent in the same period last year, driven by increases in gross margin rates within categories that benefitted the rate (approximately 1.0 percent), partially offset by the mix impact of faster sales growth in lower margin rate categories (approximately 0.4 percent). Rate improvement within categories during the quarter was driven partly by an array of inventory control initiatives that minimized markdowns and by a favorable supply chain expense rate (0.2 percent), about half of which was driven by improved workers compensation expenses. For the nine months ended November 1, 2008, our gross margin rate was 30.8 percent, unchanged from the same period last year. While our year-to-date gross margin rate was flat, we experienced increases in gross margin rates within categories that benefitted the rate (approximately 0.6 percent) that were entirely offset by the mix impact of faster sales growth in lower margin rate categories (approximately 0.6 percent). The same factors that drove changes in our quarterly gross margin rate affected our year-to-date gross margin rate, except that the changes in sales mix on the gross margin rate fully offset the factors driving rate improvements within merchandise categories.

Selling, General and Administrative Expense Rate

Our selling, general and administrative (SG&A) expense rate represents SG&A expenses as a percentage of sales. See Note 3 for a description of expenses included in SG&A expense. SG&A expenses exclude depreciation and amortization. In the third quarter of 2008 and 2007, our SG&A expense rate was 22.1 percent. For the nine months ended November 1, 2008, our SG&A rate was 21.3 percent compared with 21.5 percent in the same period last year. We were able to achieve these essentially flat expense rates due to continued productivity gains in our stores and disciplined control of expenses across the company.

Depreciation and Amortization Expense Rate

Our depreciation and amortization expense rate represents depreciation and amortization expense as a percentage of sales. In the third quarter of 2008, our depreciation and amortization expense rate was 3.2 percent compared with 3.0 percent for the same period last year. For the nine months ended November 1, 2008, our depreciation and amortization expense rate was 3.1 percent compared with 2.9 percent for the same period last year. The rate unfavorability resulted from sales growing at a slower pace than capital expenditures.

Store Data



During the quarter, we opened 45 new stores, including 37 general merchandise
stores (28 net of store closings) and 8 SuperTarget stores.



Number of Stores and
Retail                         Number of Stores                  Retail Square Feet (a)
Square Feet             Nov. 1,     Feb. 2,     Nov. 3,     Nov. 1,     Feb. 2,     Nov. 3,
                           2008        2008        2007        2008        2008        2007
Target general
merchandise stores        1,445       1,381       1,381     180,200     170,858     170,518
SuperTarget stores          239         210         210      42,220      37,087      37,022
Total                     1,684       1,591       1,591     222,420     207,945     207,540

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

Credit Card Segment

We offer credit to qualified guests through our REDcard products, the Target Visa and the Target Card. Our credit card program strategically supports our core retail operations and remains an important contributor to our overall profitability. Our credit card revenues are comprised of finance charges, late fees and other revenues. The substantial majority of credit card receivables earn finance charge revenues at rates tied to the Prime Rate. In addition, we receive fees from merchants who accept the Target Visa credit card.

Credit Card Segment Results                  Three Months Ended           Nine Months Ended
                                              Nov. 1,      Nov. 3,       Nov. 1,      Nov. 3,
(millions)                                       2008         2007          2008         2007
Finance charge revenue                     $      366    $     334    $    1,060    $     935
Late fees and other revenue                       123          113           352          311
Third party merchant fees                          37           46           115          118
Total revenues                                    526          493         1,527        1,364
Bad debt expense                                  314          130           751          311
Operations and marketing expenses (a)             113          116           347          335
Depreciation and amortization                       4            4            13           12
Total expenses                                    431          250         1,111          658
EBIT                                               95          243           416          706
Interest expense on nonrecourse debt
collateralized
by credit card receivables                         60           41           126           98
Segment profitability                      $       35    $     202    $      290    $     608
Average receivables funded by Target
(b)                                        $    3,272    $   4,479    $    4,392    $   4,612
Segment pretax ROIC (c)                          4.3%        18.0%          8.8%        17.6%

(a) New account and loyalty rewards redeemed by our guests reduce reported sales. Our Retail Segment charges the cost of these discounts to our Credit Card Segment, and the reimbursements of $24 million and $75 million for the three and nine months ended November 1, 2008, respectively, and $24 million and $73 million for the three and nine months ended November 3, 2007, respectively, are recorded as an increase to Operations and Marketing expenses within the Credit Card Segment.

(b) Amounts represent the portion of average credit card receivables funded by Target. These amounts exclude $5,473 million and $4,176 million for the three and nine months ended November 1, 2008, respectively, and $2,845 million and $2,296 million for the three and nine months ended November 3, 2007, respectively, of receivables funded by nonrecourse debt collateralized by credit card receivables.

(c) ROIC is return on invested capital, and this rate equals our segment profitability divided by average receivables funded by Target, expressed as an annualized rate.

Spread Analysis - Total               Three Months Ended                   Three Months Ended
Portfolio                                Nov. 1, 2008                         Nov. 3, 2007
                                            Yield                                 Yield
                                         Amount       Annualized               Amount    Annualized
                                  (in millions)             Rate        (in millions)          Rate
EBIT                          $              95             4.3%  (b) $           243         13.3%  (b)
LIBOR (a)                                                   3.1%                               5.3%
Spread to LIBOR (c)           $              27             1.2%  (b) $           146          8.0%  (b)

(a) Balance-weighted one-month LIBOR

(b) As a percentage of average receivables

(c) Spread to LIBOR is a metric used to analyze the performance of our total credit card portfolio because the vast majority of our portfolio earns finance charge revenue at rates tied to the Prime Rate, and the interest rate on all nonrecourse debt securitized by credit card receivables is tied to LIBOR.

Spread Analysis - Total             Nine Months Ended                  Nine Months Ended
Portfolio                             Nov. 1, 2008                       Nov. 3, 2007
                                          Yield                              Yield
                                       Amount    Annualized               Amount    Annualized
                                (in millions)          Rate        (in millions)          Rate
EBIT                          $           416          6.5%  (b) $           706         13.6%  (b)
LIBOR (a)                                              2.8%                               5.3%

(a) Balance-weighted one-month LIBOR

(b) As a percentage of average receivables

(c) Spread to LIBOR is a metric used to analyze the performance of our total credit card portfolio because the vast majority of our portfolio earns finance charge revenue at rates tied to the Prime Rate, and the interest rate on all nonrecourse debt securitized by credit card receivables is tied to LIBOR.

We measure the performance of our overall credit card receivables portfolio by calculating the dollar spread to LIBOR at the portfolio level. Our primary measure of profitability in our Credit Card Segment is the EBIT generated by our total credit card receivables portfolio less the interest expense on nonrecourse debt collateralized by credit card receivables. We analyze this measure of profit in light of the amount of capital Target has invested in our credit card receivables. At the portfolio level, the decline in dollar spread to LIBOR is almost entirely due to increased bad debt expense, resulting from higher current period write-offs and additions to the reserve for anticipated future write-offs of current receivables. In addition, our Credit Card Segment profitability was also affected by finance charge yield pressure from the impact of reductions in the prime rate and higher interest expense resulting from increased third-party funding of our receivables in 2008, as compared with 2007.

Receivables Rollforward Analysis             Three Months Ended           Nine Months Ended
                                              Nov. 1,      Nov. 3,       Nov. 1,      Nov. 3,
(millions)                                       2008         2007          2008         2007
Beginning receivables                      $    8,641    $   6,906    $    8,624    $   6,711
Charges at Target                                 955        1,062         2,923        3,053
Charges at third parties                        2,082        2,615         6,488        6,706
Payments                                       (3,221 )     (3,299 )     (10,209 )     (9,848 )
Other                                             307          368           938        1,030
Period-end receivables                     $    8,764    $   7,652    $    8,764    $   7,652
Average receivables                        $    8,745    $   7,324    $    8,568    $   6,908
Accounts with three or more payments
(60+ days) past due as a percentage of
period-end receivables                           5.6%         3.8%          5.6%         3.8%
Accounts with four or more payments
(90+ days) past due as a percentage of
period-end receivables                           3.8%         2.6%          3.8%         2.6%

Allowance for Doubtful Accounts              Three Months Ended         Nine Months Ended
                                             Nov. 1,      Nov. 3,      Nov. 1,      Nov. 3,
(millions)                                      2008         2007         2008         2007
Allowance at beginning of period           $     661    $     509    $     570    $     517
Bad debt provision                               314          130          751          311
Net write-offs                                  (210 )       (107 )       (556 )       (296 )
Allowance at end of period                 $     765    $     532    $     765    $     532
As a percentage of period-end
receivables                                     8.7%         7.0%         8.7%         7.0%
Net write-offs as a percentage of
average receivables
(annualized)                                    9.6%         5.8%         8.7%         5.7%

Average receivables in the third quarter increased 19.4 percent to approximately $8,745 million from approximately $7,324 million at the end of the 2007 third quarter. Average receivables in the nine months ended November 1, 2008 increased 24.0 percent to approximately $8,568 million from approximately $6,908 million in the nine months ended November 3, 2007.

In part, the growth in receivables is the annualized impact from last year's product change from proprietary Target Cards to Target Visa cards for a group of higher credit-quality Target Card Guests. A product change to a Target Visa card generally results in a higher receivables balance because it can be used for purchases outside of Target stores and has a higher credit limit. Accounts converted from a Target Card to a Target Visa accounted for approximately 15 percentage points of the growth in average receivables. The remainder of the growth was primarily due to lower payment rates on accounts, offset by lower charge activity across all segments of the portfolio.

As a result of domestic economic conditions and the related impact on the performance of the overall portfolio, including increased bad debt expense and growth of past due receivable amounts from prior period levels, we have adjusted our risk management controls on portfolio underwriting, including decreasing the number of new accounts that are opened, decreasing the average credit lines associated with the accounts, and engaging in proactive collection activities.

Other Performance Factors

Net interest expense was $234 million and $652 million, for the three and nine month periods ended November 1, 2008, respectively, a $58 million and $185 million increase from the three and nine months ended November 3, 2007, reflecting significantly higher debt balances supporting capital investment, share repurchase and the receivables portfolio, partially offset by lower average debt portfolio interest rates.

Our effective tax rate for the third quarter of 2008 was 41.7 percent compared with 38.1 percent for the third quarter of 2007. The increase in the effective rate between benchmark periods primarily resulted from negative capital market returns on company owned life insurance investments. We use these investments to economically hedge market risk in our deferred compensation plans. Returns on company owned life insurance investments are not taxable. In the third quarter of 2008, we incurred losses related to capital market returns from company owned life insurance investments as compared to gains from these investments in the third quarter of 2007. The losses in the third quarter of 2008 resulted in a lower amount of non-taxable income than in the third quarter of 2007. This resulted in a higher effective tax rate for the third quarter of 2008 as compared to the third quarter of 2007. Future periods' tax rates will be directly affected by capital market returns in those periods. The year-to-date effective tax rate slightly decreased to 38.1 percent in 2008 from 38.5 percent in 2007.

Accumulated other comprehensive income/(loss) may be adversely impacted at the end of our fiscal year as a result of the non-cash remeasurement of the plan assets and benefit obligations required under SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)." The impact is dependent on the fair value determination of plan assets and benefit obligations at the measurement date.

Analysis of Financial Condition

Liquidity and Capital Resources

Our financial condition remains strong. In assessing our financial condition, we consider factors such as cash flows provided by operations, capital expenditures and debt service obligations. We continue to fund our growth

through a combination of internally-generated funds and debt financing, including notes payable under our commercial paper program. We funded our 2008 peak sales season working capital needs through our commercial paper program, consistent with prior years and without any funding disruptions. Notes payable under our commercial paper program totaled $1,382 million and $578 million at November 1, 2008 and November 3, 2007, respectively.

Gross credit card receivables at quarter end were $8,764 million compared with $7,652 million at the end of the third quarter 2007, an increase of 14.5 percent. Inventory at quarter end was $9,050 million compared with $8,746 million at the end of third quarter 2007, an increase of 3.5 percent, reflecting the natural increase required to support additional square footage and sales growth.

Capital expenditures for the nine months ended November 1, 2008 were $2,827 million, compared with $3,418 million for the same period a year ago. This decrease was driven by lower capital expenditures for new stores, remodels and technology-related assets. In light of the current operating environment, we have fewer opportunities to productively invest capital and have reduced our forecasted capital expenditures for 2009 to levels below prior periods.

During the quarter ended November 1, 2008, we repurchased 2.5 million shares of our common stock. The cash investment of $140 million ($54.93 per share) related to these shares was a prior period outlay. Since the inception of our current share repurchase program, which began in the fourth quarter of 2007, we have repurchased 93.3 million shares of our common stock, for a total cash investment of $4,826 million ($51.70 per share). Refer to Note 10 for additional information.

In light of our current business outlook, in November 2008 we announced a temporary suspension of open-market share repurchase program.

As described in Note 6, we sold a 47 percent undivided interest in our credit card receivables for approximately $3.6 billion during the second quarter of 2008.

Outlook for Fiscal Year 2008

The increasing financial challenges and economic uncertainty facing U.S. households as well as increased competitive pressure are expected to continue to negatively influence our performance for the remainder of the 2008 fiscal year.

In our Retail Segment, our sales performance in the fourth quarter is expected to be adversely impacted by the current economic environment and a compressed holiday season due to fewer days between Thanksgiving and Christmas. Despite conservative inventory management and tight expense control, this weak sales outlook is expected to pressure fourth quarter gross margin and expense rates and result in a moderate decline in fourth quarter operating margin rate from 2007. It is our expectation that comparable-store sales in the fourth quarter will be lower than the third quarter, and the range of possible outcomes is broad.

In our Credit Card Segment, we expect to end the year with receivables up to 10 percent higher than 2007, reflecting typical seasonal growth and the annualization of last year's product change. We expect our fourth quarter annualized net write-off rate to be in the range of 10 to 11 percent, resulting in a full-year net write-off rate slightly above 9 percent. As the full benefit of terms changes are realized in the fourth quarter, our key overall measure of portfolio performance, spread to LIBOR, and our key measure at the segment level, pre-tax ROIC, are anticipated to be around or slightly above our third quarter levels.

We expect that there will continue to be variability between our individual quarterly and full-year effective tax rates as tax uncertainties arise and are resolved. For the full year 2008, we expect an effective tax rate in the range of 38.0 to 38.5 percent.

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 forward-looking statements in this report include:
the anticipated impact of new accounting pronouncements; the adequacy of our reserves in light of the expected outcome of litigation and tax uncertainties; the impact to accumulated other comprehensive income / (loss) for the remeasurement of plan assets and benefit obligations; the amortization of hedged debt valuation adjustments; for our Retail Segment, our outlook for sales, . . .