Executive Summary

Sales totaled $14,361 million and $14,302 million for the three months ended May 2, 2009 and May 3, 2008, respectively, an increase of 0.4 percent. Comparable-store sales (as defined below) in the first quarter of 2009 declined 3.7 percent from the same period last year. Credit card revenues were $472 million and $500 million for the three months ended May 2, 2009 and May 3, 2008, respectively, a decrease of 5.7 percent. The combination of retail and credit card operations produced earnings before interest expense and income taxes of $1,026 million for the three months ended May 2, 2009 and $1,158 million for the three months ended May 3, 2008, a decrease of 11.4 percent. Net earnings for the three months ended May 2, 2009 were $522 million, or $0.69 per share, compared with $602 million, or $0.74 per share for the same period last year. All earnings per

share figures refer to diluted earnings per share. Cash flow provided by operations was $999 million and $740 million for the three months ended May 2, 2009 and May 3, 2008, respectively. Additionally, we paid dividends of $121 million during the first quarter of 2009 compared to $115 million during the first quarter of 2008. We opened 27 new stores during the three months ended May 2, 2009, or 16 stores net of 6 relocations and 5 closings. During the three months ended May 3, 2008, we opened 26 new stores representing 22 stores net of 4 relocations.

Analysis of Results of Operations



Retail Segment



Retail Segment Results               Three Months Ended         Percent
(millions)                       May 2, 2009     May 3, 2008     Change
Sales                           $     14,361   $      14,302       0.4 %
Cost of sales                          9,936           9,898       0.4
Gross margin                           4,425           4,404       0.5
SG&A expenses (a)                      2,995           3,014      (0.6 )
EBITDA                                 1,430           1,390       2.8
Depreciation and amortization            468             431       8.6
EBIT                            $        962   $         959       0.3 %

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 $20 million for the three months ended May 2, 2009 and $24 million for the three months ended May 3, 2008 are recorded as a reduction to SG&A expenses within the Retail Segment.

Retail Segment Rate Analysis                     Three Months Ended
                                             May 2, 2009   May 3, 2008
Gross margin rate                                  30.8%         30.8%
SG&A expense rate                                  20.9%         21.1%
EBITDA margin rate                                 10.0%          9.7%
Depreciation and amortization expense rate          3.3%          3.0%
EBIT margin rate                                    6.7%          6.7%

Retail Segment 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 our online business, as well as gift card breakage. Total sales for the Retail Segment in the three months ended May 2, 2009 were $14,361 million, compared with $14,302 million for the same period a year ago, an increase of 0.4 percent. Growth in total sales resulted from sales from newly opened stores, offset by lower 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 comparable-store sales calculation 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 the same format within the same trade area, in which the new store opens at about the same time as the old store closes

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
                                                  May 2,      May 3,
                                                    2009        2008
Comparable-store sales                            (3.7)%      (0.7)%
Drivers of changes in comparable-store sales:
Number of transactions                            (1.3)%      (1.8)%
Average transaction amount                        (2.4)%       1.1 %
Units per transaction                             (3.2)%      (0.8)%
Selling price per unit                             0.8 %       1.9 %

The comparable-store sales increases or decreases above are calculated by comparing sales in fiscal year periods with comparable prior fiscal year periods of equivalent length.

Transaction-level metrics are influenced by a broad array of macroeconomic, competitive and consumer behavioral factors, and comparable-store sales rates are negatively 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 in Form 10-K for the fiscal year ended January 31, 2009 for a description of expenses included in cost of sales. Markup is the difference between an item's cost and its retail price (expressed as a percentage of its retail price). Factors that affect markup include vendor offerings and negotiations, vendor income, sourcing strategies, market forces like raw material and freight costs, and competitive influences. Markdowns are the reduction in the original or previous price of retail merchandise. Factors that affect markdowns include inventory management, competitive influences and economic conditions.

For the three months ended May 2, 2009, our consolidated gross margin rate was 30.8 percent, consistent with 30.8 percent in the same period last year. Our 2009 gross margin rate was adversely affected by sales mix; sales in merchandise categories that yield lower gross margin rates (generally non-discretionary product categories of consumables and commodities) outpaced sales in our higher margin apparel and home merchandise categories. The impact of sales mix on the gross margin rate was an approximate 0.8 percentage point reduction. This mix impact was offset, in total, by favorable markup and markdown rate performance and favorable supply chain expense rates.

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 in Form 10-K for the fiscal year ended January 31, 2009 for a description of expenses included in SG&A expenses. SG&A expenses exclude depreciation and amortization, as well as expenses associated with our credit card operations, which are reflected separately in our Consolidated Statements of Operations.

For the three months ended May 2, 2009, SG&A expense rate was 20.9 percent, compared with 21.1 percent for the same period last year. Favorability in SG&A expense rate was driven by sustained productivity gains in our stores, an approximate 0.2 percentage point reduction, and year-over-year expense favorability related to timing of certain expenditures, an approximate 0.3 percentage point reduction. This favorability was partially offset by an approximate 0.2 percentage point increase in other operational expenses.

Depreciation and Amortization Expense Rate

Our depreciation and amortization expense rate represents depreciation and amortization expense as a percentage of sales. For the three months ended May 2, 2009, our depreciation and amortization expense rate was 3.3 percent compared to 3.0 percent for the same period last year. The rate unfavorability was due to growth of these expenses in line with our historical capital investment, compared with modest sales growth in the quarter.

Store Data

During the three months ended May 2, 2009, we opened 27 new stores, including 21 general merchandise stores (10 net of store closings) and 6 SuperTarget stores. During the three months ended May 3, 2008, we opened 26 new stores, including 18 general merchandise stores (14 net of store closings) and 8 SuperTarget stores.

Number of Stores and
Retail                            Number of Stores                 Retail Square Feet (a)
Square Feet                 May 2,    Jan. 31,     May 3,       May 2,    Jan. 31,      May 3,
                             2009        2009       2008         2009        2009        2008
Target general
merchandise stores          1,453       1,443      1,395      182,087     180,321     173,015
SuperTarget stores            245         239        218       43,385      42,267      38,514
Total                       1,698       1,682      1,613      225,472     222,588     211,529

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

Credit Card Segment



Credit card revenues are comprised of finance charges, late fees and other
revenues, and third party merchant fees, or the amounts received from merchants
who accept the Target Visa credit card.



Credit Card Segment Results                  Three Months Ended                        Three Months Ended
                                                May 2, 2009                               May 3, 2008
                                          Amount             Annualized             Amount             Annualized
(millions)                            (in millions)           Rate(d)           (in millions)           Rate(d)
Finance charge revenue             $        355                  16.3 %      $        354                  16.8 %
Late fees and other revenue                  87                   4.0                 108                   5.1
Third party merchant fees                    30                   1.4                  38                   1.8
Total revenues                              472                  21.7                 500                  23.7
Bad debt expense                            296                  13.6                 181                   8.5
Operations and marketing
expenses (a)                                107                   4.9                 116                   5.5
Depreciation and amortization                 4                   0.2                   4                   0.2
Total expenses                              407                  18.7                 301                  14.3
EBIT                                         65                   3.0                 199                   9.4
Interest expense on nonrecourse
debt collateralized by credit
card receivables                            26                                        18
Segment profit                     $         39                              $        181
Average gross credit card
receivables funded by Target
(b)                                $      3,200                              $      6,267

(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 $20 million for the three months ended May 2, 2009 and $24 million for the three months ended May 3, 2008 are recorded as an increase to Operations and marketing expenses within the Credit Card Segment.

(b) Amounts represent the portion of average gross credit card receivables funded by the Corporation. These amounts exclude $5,496 million for the three months ended May 2, 2009 and $2,180 million for the three months ended May 3, 2008 of receivables funded by nonrecourse debt collateralized by credit card receivables.

(c) ROIC is return on invested capital, and this rate equals our segment profit divided by average gross credit card receivables funded by the Corporation, expressed as an annualized rate.

(d) As an annualized percentage of average gross credit card receivables.

Spread Analysis - Total              Three Months Ended                   Three Months Ended
Portfolio                               May 2, 2009                          May 3, 2008
                                         Amount    Annualized                Amount    Annualized
                                  (in millions)          Rate         (in millions)          Rate
EBIT                          $              65          3.0%   (b) $           199          9.4%   (b)
LIBOR (a)                                                0.5%                                2.9%
Spread to LIBOR (c)           $              54          2.5%   (b) $           138          6.5%   (b)

(a) Balance-weighted one-month LIBOR

(b) As a percentage of average gross credit card 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 earned 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.

Our primary measure of profit 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 we have invested in our credit card receivables. In addition, we measure the performance of our overall credit card receivables portfolio by calculating the dollar spread to LIBOR at the portfolio level. This metric approximates the overall financial performance of the entire credit card portfolio we manage by measuring the difference between EBIT earned on the portfolio and a hypothetical benchmark rate financing cost applied to the entire portfolio. For the 2009 first quarter, the vast majority of our portfolio accrued 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 implemented a terms change to our portfolio, effective in April 2009, that establishes a minimum annual percentage rate (APR) applied to cardholder account balances. Under this terms change, finance charges will accrue at a fixed APR if the benchmark Prime Rate is less than 6%; if the Prime Rate is greater than 6%, finance charges will accrue at the benchmark Prime Rate, plus a spread.

Credit card segment profit in the quarter declined to $39 million from $181 million last year as a result of a decline in the spread to LIBOR earned on the overall portfolio, and as a result of other factors, including a 49 percent reduction in Target's investment in this segment's average gross credit card receivables. Segment revenues were $472 million, a decrease of $28 million, or 5.7 percent, from the same period last year. On a rate basis, revenue yield (segment revenues as an annualized percentage of average gross credit card receivables) decreased two percentage points. This negative pressure on revenue yield was primarily due to a reduction in the Prime Rate index used to determine finance charge rates in the portfolio, offset by the positive impact of terms changes implemented in 2008, and higher year-over-year levels of finance charge and late fee revenue write-offs as well as lower external sales volume contributing to the decline in third party merchant fees . Segment expenses were $407 million, an increase of $106 million, or 35.1 percent, from the same period last year, driven by an increase in bad debt expense of $116 million. The increase in bad debt expense resulted from the increase in our annualized incurred net write-off rate from 7.6 percent for the three months ended May 3, 2008 to 13.9 percent for the three months ended May 2, 2009 reflecting the weakened consumer credit environment that developed over the last twelve months.

Receivables Rollforward Analysis                                  Three Months Ended
                                                               May 2,
(millions)                                                      2009         May 3, 2008
Beginning gross credit card receivables                     $   9,094       $     8,624
Charges at Target                                                 804               946
Charges at third parties                                        1,664             2,148
Payments                                                       (3,261 )          (3,629 )
Other                                                             156               331
Period-end gross credit card receivables                    $   8,457       $     8,420
Average gross credit card receivables                       $   8,697       $     8,447
Accounts with three or more payments (60+ days) past due
as a percentage of period-end gross credit card
receivables                                                       6.1 %             4.2 %
Accounts with four or more payments (90+ days) past due
as a percentage of period-end gross credit card
receivables                                                       4.4 %             2.9 %

Allowance for Doubtful Accounts                                  Three Months Ended
(millions)                                                   May 2, 2009      May 3, 2008
Allowance at beginning of period                            $      1,010    $         570
Bad debt provision                                                   296              181
Net write-offs(a)                                                   (301 )           (161 )
Allowance at end of period                                  $      1,005    $         590
As a percentage of period-end gross credit card
receivables                                                        11.9%                7 .0%
Net write-offs as a percentage of average gross credit
card receivables (annualized)                                      13.9%                7 .6%

(a) Net write-offs include the principal amount of losses (excluding accrued and unpaid finance charges) less current period principal recoveries.

Our period-end gross credit card receivables at May 2, 2009 were $8,457 million compared with $8,420 million at May 3, 2008, an increase of 0.4 percent. Average gross credit card receivables for the three months ended May 2, 2009 increased 3.0 percent compared with the same period last year. This growth was driven by the impact of industry-wide declines in payment rates, offset in part by a reduction in charge activity resulting from reductions in card usage by our guests, and from risk management and underwriting initiatives that have significantly reduced available credit lines for higher-risk cardholders.

Other Performance Factors

Net Interest Expense

Net interest expense was $202 million for the three months ended May 2, 2009, increasing 0.6 percent, or $1 million from the same period last year, reflecting higher average debt balances offset by a lower average portfolio interest rate. The comparative increase in debt balances is primarily attributable to capital expenditures and prior years' share repurchases, and the current period's average portfolio net interest rate was 0.8 percentage points lower than the prior period.

Provision for Income Taxes

Our effective income tax rate was 36.7 percent for the three months ended May 2, 2009 compared with 37.1 percent for the three months ended May 3, 2008. The decrease between the two periods was primarily due to higher capital market returns on investments used to economically hedge the market risk in deferred compensation plans. Gains and losses from these investments are not taxable. The current period's effective income tax rate was also affected by a decrease in the amount of reserves recorded for tax uncertainties.

Workforce Reduction

In 2008, we recorded a $47 million charge related to workforce reduction actions, approximately $21 million of which related to actions announced in January 2009 affecting our headquarters population. This charge was comprised of severance and benefit costs of $37 million and other expenses of $10 million and was recorded as a component of SG&A expenses in our Consolidated Statements of Operations. At the end of 2008, the remaining liability balance was approximately $31 million.

During the three months ended May 2, 2009, we recorded additional charges of $8 million relating to these actions as affected team members provided additional required services, and we made cash payments of $30 million. At May 2, 2009, the remaining liability balance was approximately $9 million.

Analysis of Financial Condition

Liquidity and Capital Resources

Historically, we have funded our operations and growth through internally generated funds and, if needed, debt financing. Cash flow provided by operations was $999 million for the three months ended May 2, 2009 compared with $740 million for the same period last year.

Our average gross credit card receivables for the three months ended May 2, 2009 were $8,697 million compared with $8,447 million for the three months ended May 3, 2008, an increase of 3.0 percent. This growth was driven by the impact of industry-wide declines in payment rates, offset in part by a reduction in charge activity resulting from risk management and underwriting initiatives that significantly reduced credit lines and from notable reductions in card usage.

Inventory levels increased $156 million, or 2.3 percent from May 3, 2008 to May 2, 2009, reflecting increased inventory levels required to support comparatively higher retail square footage. Accounts payable increased by 0.8 percent over the same period.

Capital expenditures for the three months ended May 2, 2009 were $540 million, compared with $950 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 slightly over $2 billion.

During the three months ended May 2, 2009 and through settlement of prepaid forward contracts, we repurchased 0.7 million shares of our common stock for a total cash investment of $21.5 million ($30.09 per share), of which $12.4 million was outlaid prior to that period. During the three months ended May 3, 2008, we repurchased 30.5 million shares of our common stock for a total cash investment of $1,573 million ($51.55 per share), of which $139 million was outlaid prior to that period. Of the repurchases during the three months ended May 3, 2008, 10 million shares were acquired through the exercise of call options.

We declared dividends totaling $121 million ($0.16 per share) during the three months ended May 2, 2009, an increase of 9.1 percent over the same period last year. We have paid dividends every quarter since our first dividend was declared following our 1967 initial public offering, and it is our intent to continue to do so in the future.

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.

Maintaining strong investment-grade debt ratings is a key part of our financing strategy. Our current debt ratings are as follows:

Debt Ratings                 Moody's   Standard and Poor's   Fitch
Long-term debt                    A2                    A+       A
Commercial paper                 P-1                   A-1      F1
Securitized receivables(a)       Aaa                    AA     n/a

(a) These rated securitized receivables exclude the interest in our credit card receivables sold to JPMC.

An additional source of liquidity is available to us through a committed $2 billion unsecured revolving credit facility obtained through a group of banks in April 2007, which will expire in April 2012. No balances were outstanding at any time during 2009 or 2008 under this credit facility.

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, 2009, 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 non-investment grade.

New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" (SFAS
141(R)), which changes the accounting for business combinations and their effects on the financial statements. In April 2009, the FASB issued FSP
141(R)-1, which amends the accounting for contingencies acquired in a business combination. SFAS 141(R), as amended, will generally only impact the accounting for future business combinations and therefore adoption has no current impact on our consolidated net earnings, cash flows or financial position.

In December 2007, the FASB issued SFAS No. 160, "Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51" (SFAS 160). SFAS 160 requires entities to report non-controlling interests in subsidiaries as equity in their consolidated financial statements. We adopted SFAS 160 at the beginning of fiscal 2009 and the adoption had no . . .