Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

Fiscal 2017 (a 53-week year) included the following notable items:

•	GAAP earnings per share from continuing operations were $5.32, including discrete benefits related to the Tax Cuts and Jobs Act (the Tax Act).

•	Adjusted earnings per share were $4.71, which excludes discrete benefits related to the Tax Act and other items described on page 22.

•	Comparable sales increased 1.3 percent, driven by a 1.6 percent increase in traffic.

•	Comparable digital channel sales growth of 27 percent contributed 1.2 percentage points of comparable sales growth.

•	We returned $2.4 billion to shareholders through dividends and share repurchases.

•	We made several investments to improve and expand our delivery capabilities; most notably, we purchased Shipt, an online same-day delivery company, for approximately $550 million.

Sales were $71,879 million for 2017, an increase of $2,384 million or 3.4 percent from the prior year, due to a comparable sales increase of 1.3 percent, the extra week in 2017, and the contribution from new stores. Earnings from continuing operations before interest expense and income taxes in 2017 decreased by $657 million or 13.2 percent from 2016 to $4,312 million. The Analysis of Results of Operations discussion provides more information. Operating cash flow provided by continuing operations was $6,849 million for 2017, an increase of $1,520 million, or 28.5 percent from $5,329 million for 2016. Refer to the Cash Flows discussion within the Liquidity and Capital Resources section of MD&A on page 25 for additional information.

Earnings Per Share From Continuing Operations										Percent Change
2017 (a)			2016			2015			2017/2016		2016/2015
GAAP diluted earnings per share	$	5.32		$	4.58		$	5.25		16.2	%	(12.7	)%
Adjustments	(0.61		)	0.42			(0.56		)
Adjusted diluted earnings per share	$	4.71		$	5.01		$	4.69		(5.9	)%	6.7	%

Note: Amounts may not foot due to rounding. Adjusted diluted earnings per share from continuing operations (Adjusted EPS), a non-GAAP metric, excludes the impact of certain items not related to our routine retail operations. Management believes that Adjusted EPS is meaningful to provide period-to-period comparisons of our operating results. A reconciliation of non-GAAP financial measures to GAAP measures is provided on page 22.

(a) Consisted of 53 weeks.

We report after-tax return on invested capital (ROIC) from continuing operations because we believe ROIC provides a meaningful measure of our capital-allocation effectiveness over time. For the trailing twelve months ended February 3, 2018, ROIC was 15.9 percent, compared with 15.0 percent for the trailing twelve months ended January 28, 2017. Excluding the discrete impacts of the Tax Act, ROIC was 14.0 percent for the trailing twelve months ended February 3, 2018. A reconciliation of ROIC is provided on page 24.

Analysis of Results of Operations

Segment Results

										Percent Change
(dollars in millions)	2017 (a)			2016			2015 (b)			2017/2016		2016/2015
Sales	$	71,879		$	69,495		$	73,785		3.4	%	(5.8	)%
Cost of sales (c)	51,125			49,145			52,241			4.0		(5.9	)
Gross margin	20,754			20,350			21,544			2.0		(5.5	)
SG&A expenses (d)	14,248			13,360			14,448			6.6		(7.5	)
Depreciation and amortization (exclusive of depreciation included in cost of sales) (c)	2,194			2,025			1,969			8.4		2.8
EBIT	$	4,312		$	4,965		$	5,127		(13.2	)%	(3.2	)%

Note: See Note 30 of our Financial Statements for a reconciliation of our segment results to Earnings Before Income Taxes and more information about items recorded outside of segment SG&A.

(a)	Consisted of 53 weeks.

(b)	Sales and Cost of Sales include $3,815 million and $3,076 million, respectively, related to our former pharmacy and clinic businesses for 2015. The sale of these businesses had no notable impact on EBIT.

(c)	Refer to Note 3 of the Financial Statements for information about the reclassification of supply chain-related depreciation expense to Cost of Sales.

(d)	For 2017, 2016, and 2015, SG&A Expenses includes $694 million, $663 million, and $641 million, respectively, of net profit-sharing income under our credit card program agreement.

Rate Analysis	2017 (a)		2016		2015
Gross margin rate (b)	28.9	%	29.3	%	29.2	%
SG&A expense rate	19.8		19.2		19.6
Depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate (b)	3.1		2.9		2.7
EBIT margin rate (c)	6.0		7.1		6.9

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

(a)	Consisted of 53 weeks.

(b)	Reclassifying supply chain-related depreciation expense to Cost of Sales reduced the gross margin and depreciation and amortization rates by 0.3-0.4 percentage points for all periods presented.

(c)	Excluding sales of our former pharmacy and clinic businesses, EBIT margin rate was 7.3 percent for 2015.

Sales

Sales include all merchandise sales, net of expected returns, and gift card breakage. Note 2 of the Financial Statements provides a gift card "breakage" definition. Digital channel sales include all sales initiated through mobile applications and our websites. Digital channel sales may be fulfilled through our stores, our distribution centers, our vendors, or other delivery options, including store drive-up and delivery via our wholly own subsidiary, Shipt.

The increase in 2017 sales is due to a comparable sales increase of 1.3 percent, the extra week in 2017, and the contribution from new stores. The extra week contributed $1,167 million of sales, or 1.7 percentage points of increase over 2016. The decrease in 2016 sales compared to 2015 reflects a decrease of approximately $3,815 million due to the Pharmacy Transaction and a 0.5 percent comparable sales decrease, partially offset by the contribution from new stores. Inflation did not materially affect sales in any period presented.

Sales by Channel	2017		2016		2015 (a)
Stores	94.5	%	95.6	%	96.6	%
Digital	5.5		4.4		3.4
Total	100	%	100	%	100	%

(a)	Excluding sales of our former pharmacy and clinic businesses, stores and digital channels sales were 96.4 percent and 3.6 percent of total sales, respectively, for 2015.

Comparable sales is a measure that highlights the performance of our 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, digital acquisitions we have owned less than 13 months, stores that have been closed, and digital acquisitions that we no longer operate. We removed pharmacy and clinic sales from the 2015 sales amounts when calculating 2016 comparable sales. 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	2017		2016		2015
Comparable sales change	1.3	%	(0.5	)%	2.1	%
Drivers of change in comparable sales
Number of transactions	1.6		(0.8	)	1.3
Average transaction amount	(0.3	)	0.3		0.8

Contribution to Comparable Sales Change	2017		2016		2015
Stores channel comparable sales change	0.1	%	(1.5	)%	1.3	%
Digital channel contribution to comparable sales change	1.2		1.0		0.8
Total comparable sales change	1.3	%	(0.5	)%	2.1	%

Note: Amounts may not foot due to rounding.

Sales by Product Category	Percentage of Sales
	2017		2016		2015
Beauty and household essentials (a)(b)	23	%	24	%	28	%
Food and beverage (a)(c)	20		20		19
Apparel and accessories (d)	20		20		19
Home furnishings and décor (e)	19		19		17
Hardlines (f)	18		17		17
Total	100	%	100	%	100	%

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

(b)	Includes pharmacy, beauty, personal care, baby care, cleaning, paper products, and pet supplies. Pharmacy represented 5 percent of total sales in 2015.

(c)	Includes dry grocery, dairy, frozen food, beverages, candy, snacks, deli, bakery, meat, and produce.

(d)	Includes apparel for women, men, boys, girls, toddlers, infants and newborns, as well as intimate apparel, jewelry, accessories, and shoes.

(e)	Includes furniture, lighting, kitchenware, small appliances, home décor, bed and bath, home improvement, automotive, and seasonal merchandise such as patio furniture and holiday décor.

(f)	Includes electronics (including video game hardware and software), music, movies, books, computer software, sporting goods, and toys.

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.

TD offers credit to qualified guests through Target-branded credit cards: the Target Credit Card and the Target MasterCard Credit Card (Target Credit Cards). Additionally, we offer a branded proprietary Target Debit Card. Collectively, we refer to these products as REDcards®. Guests receive a 5 percent discount on virtually all purchases and free shipping when they use a REDcard. 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 incremental purchases on our REDcards are also incremental sales for Target.

REDcard Penetration	2017		2016		2015
Target Debit Card	13.0	%	12.8	%	12.1	%
Target Credit Cards	11.3		11.2		10.1
Total REDcard Penetration	24.3	%	24.0	%	22.3	%

Note: Excluding pharmacy and clinic sales, total REDcard penetration would have been 23.2 percent for 2015. The sum of Target Credit Cards and Target Debit Card penetration may not equal Total REDcard Penetration due to rounding.

Gross Margin Rate

Our gross margin rate was 28.9 percent in 2017, 29.3 percent in 2016, and 29.2 percent in 2015. The 2017 decrease was primarily due to increased digital fulfillment costs. Benefits from cost savings initiatives were offset by net investments in pricing and promotions.

The 2016 increase was primarily due to the Pharmacy Transaction and favorable category sales mix, partially offset by increased digital fulfillment costs. Cost of goods savings helped offset the impact of a competitive promotional environment.

Selling, General and Administrative Expense Rate

Our SG&A expense rate was 19.8 percent in 2017, 19.2 percent in 2016, and 19.6 percent in 2015. The increase in 2017 was primarily due to higher compensation costs, including both bonus expense and store wages, partially offset by cost savings primarily driven by efficiency in our technology operations.

The decrease in 2016 primarily resulted from the benefit of the Pharmacy Transaction and technology-related cost savings, partially offset by increased stores hourly payroll.

Depreciation and Amortization Expense Rate

Our depreciation and amortization (exclusive of depreciation included in cost of sales) expense rate was 3.1 percent in 2017, 2.9 percent in 2016, and 2.7 percent in 2015. The 2017 increase was primarily due to higher accelerated depreciation for planned store remodels, partially offset by the rate impact of the 53rd week of sales. The 2016 increase was due to the rate impact of lower sales in 2016 than 2015.

Store Data

Change in Number of Stores	2017		2016
Beginning store count	1,802		1,792
Opened	32		15
Closed	(12	)	(5	)
Ending store count	1,822		1,802

Number of Stores and Retail Square Feet	Number of Stores					Retail Square Feet (a)
February 3, 2018		January 28, 2017			February 3, 2018		January 28, 2017
170,000 or more sq. ft.	274		276			48,966		49,328
50,000 to 169,999 sq. ft.	1,500		1,504			189,030		189,620
49,999 or less sq. ft.	48		22			1,359		554
Total	1,822		1,802			239,355		239,502

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

Other Performance Factors

Other Selling, General and Administrative Expenses

We recorded $(4) million and $216 million of selling, general and administrative expenses outside of the segment during 2016 and 2015, respectively, because they relate to discretely managed matters. Additional information about these discretely managed items is provided within Note 30 of the Financial Statements.

Net Interest Expense

Net interest expense from continuing operations was $666 million, $1,004 million, and $607 million for 2017, 2016, and 2015, respectively. Net interest expense for 2017 and 2016 included losses on early retirement of debt of $123 million and $422 million, respectively.

Provision for Income Taxes

Our 2017 effective income tax rate from continuing operations decreased to 19.7 percent, from 32.7 percent in 2016, driven primarily by the impact of the Tax Act, which among other matters reduced the U.S. corporate income tax rate from 35 percent to 21 percent effective January 1, 2018.

The Tax Act reduced our 2017 income tax expense by $388 million, comprised of the following:

•	The new lower tax rate reduced tax expense by $36 million. Target’s U.S. federal statutory tax rate was 33.7 percent for 2017, which reflects a blended federal statutory rate of 35% for approximately 11 months and 21% for approximately 1 month.

•

We recognized a provisional net tax benefit of $352 million related to remeasurement of our net deferred tax liabilities, including $381 million of benefit from the new lower rate, partially offset by $29 million of deferred income tax expense from our foreign operations. In 2017, due to changes effected by the Tax Act and other reasons, we have not asserted indefinite reinvestment in our foreign operations.

Certain other provisions of the Tax Act not expected to have a material impact on net income are as follows:

•	Through 2022, the Tax Act allows companies to immediately deduct the cost of certain capital expenditures from taxable income instead of deducting the costs over time. This provision phases out over 2023-2027.

•	The Tax Act implements a territorial tax system and imposes a one-time repatriation tax on deemed repatriated accumulated foreign earnings as of December 31, 2017. The one-time repatriation tax did not materially affect our net tax expense because in the aggregate our foreign entities have an accumulated earnings deficit, driven by our discontinued operations.

•	Although the Tax Act generally eliminates U.S. federal income tax on dividends from foreign subsidiaries, it creates a new requirement that certain income referred to as global intangible low-taxed income earned by controlled foreign corporations must be included currently in the gross income of the entity's U.S. shareholder.

•	The Tax Act limits the deductibility of interest, executive compensation, and certain other expenses.

As described in Note 23 of the Financial Statements, certain aspects of our 2017 income tax provision related to the Tax Act amounts are provisional.

We expect a 2018 effective tax rate of 22 percent to 25 percent. We expect a corresponding 2018 operating cash flow benefit from the lower rate and, to a lesser degree, additional operating cash flow benefits from the immediate deductibility provision described above.

Our 2016 effective income tax rate from continuing operations increased to 32.7 percent, from 32.5 percent in 2015, driven primarily by the 2015 rate impact of the $112 million tax benefit from releasing the valuation allowance on a capital loss carryforward. This comparative rate impact was partially offset by $27 million of excess tax benefit in 2016 related to shared-based payments after the adoption of Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, and lower pretax earnings.

Note 23 of the Financial Statements provides additional information.

Discontinued Operations

See Note 7 of the Financial Statements for information about our Canada exit.

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 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 to, 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 than we do, limiting the usefulness of the measure for comparisons with other companies.

		2017 (a)												2016												2015
(millions, except per share data)		Pretax				Net of Tax				Per Share Amounts				Pretax				Net of Tax				Per Share Amounts				Pretax				Net of Tax				Per Share Amounts
GAAP diluted earnings per share from continuing operations										$	5.32											$	4.58											$	5.25
Adjustments
Tax Act (b)		$	—			$	(352	)		$	(0.64	)		$	—			$	—			$	—			$	—			$	—			$	—
Loss on early retirement of debt		123				75				0.14				422				257				0.44				—				—				—
Gain on sale (c)		—				—				—				—				—				—				(620		)		(487		)		(0.77		)
Restructuring costs (d)		—				—				—				—				—				—				138				87				0.14
Data breach-related costs, net of insurance (e)		(5		)		(3		)		(0.01		)		—				—				—				39				28				0.04
Other (f)		—				—				—				(4		)		(2		)		—				39				29				0.05
Resolution of income tax matters		—				(57		)		(0.10		)		—				(7		)		(0.01		)		—				(8		)		(0.01		)
Adjusted diluted earnings per share from continuing operations										$	4.71											$	5.01											$	4.69

Note: Amounts may not foot due to rounding.

(a) Consisted of 53 weeks.

(b)	Represents discrete items related to the Tax Act. Refer to the Provision for Income Taxes discussion within MD&A and Note 23 of the Financial Statements.

(c)	Refer to Note 6 of the Financial Statements.

(d)	Refer to Note 8 of the Financial Statements.

(e)	Represents amounts related to the 2013 data breach.

(f)	For 2016, represents items related to the Pharmacy Transaction. For 2015, represents impairments related to our decision to wind down certain noncore 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 that these measures provide 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, 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										Percent Change
(millions)	2017 (a)			2016			2015			2017/2016		2016/2015
Net earnings from continuing operations	$	2,928		$	2,669		$	3,321		9.7	%	(19.6	)%
+ Provision for income taxes	718			1,296			1,602			(44.7	)	(19.1	)
+ Net interest expense	666			1,004			607			(33.6	)	65.3
EBIT	4,312			4,969			5,530			(13.2	)	(10.1	)
+ Total depreciation and amortization (b)	2,445			2,298			2,213			6.4		3.8
EBITDA	$	6,757		$	7,267		$	7,743		(7.0	)%	(6.2	)%

(a) Consisted of 53 weeks.

(b)	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 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 across companies. This metric provides a measure of the effectiveness of our capital allocation over time. Other companies may calculate ROIC differently, limiting the usefulness of the measure.

After-Tax Return on Invested Capital
Numerator				Trailing Twelve Months
(dollars in millions)				February 3, 2018 (a)				January 28, 2017
Earnings from continuing operations before interest expense and income taxes				$	4,312			$	4,969
+ Operating lease interest (b)(c)				80				71
Adjusted earnings from continuing operations before interest expense and income taxes				4,392				5,040
- Income taxes (d)				864				1,648
Net operating profit after taxes				$	3,528			$	3,392

Denominator (dollars in millions)		February 3, 2018				January 28, 2017				January 30, 2016
Current portion of long-term debt and other borrowings		$	270			$	1,718			$	815
+ Noncurrent portion of long-term debt		11,317				11,031				11,945
+ Shareholders' equity		11,709				10,953				12,957
+ Capitalized operating lease obligations (c)(e)		1,339				1,187				1,457
- Cash and cash equivalents		2,643				2,512				4,046
- Net assets of discontinued operations (f)		2				62				226
Invested capital		$	21,990			$	22,315			$	22,902
Average invested capital (g)		$	22,152			$	22,608

After-tax return on invested capital		15.9	%	(d)	15.0	%

(a)	Consisted of 53 weeks.

(b)	Represents the add-back to operating income driven by 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.

(c)	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.

(d)

Calculated using the effective tax rates for continuing operations, which were 19.7 percent and 32.7 percent for the trailing twelve months ended February 3, 2018 and January 28, 2017, respectively. For the twelve months ended February 3, 2018 and January 28, 2017, includes tax effect of $848 million and $1,624 million, respectively, related to EBIT and $16 million and $23 million, respectively, related to operating lease interest. The effective tax rate for the trailing twelve months ended February 3, 2018 includes discrete tax benefits related to the Tax Act and the impact of the new lower U.S. corporate income tax rate. Excluding the discrete impacts of the Tax Act, ROIC was 14.0 percent for the trailing twelve months ended February 3, 2018.

(e)	Calculated as eight times our trailing twelve months rent expense.

(f)	Included in Other Assets and Liabilities on the Consolidated Statements of Financial Position.

(g)	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.

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
(dollars in millions)				February 3, 2018				January 28, 2017				January 30, 2016
Total rent expense				$	167			$	148			$	182
Capitalized operating lease obligations (total rent expense x 8)				1,339				1,187				1,457
Operating lease interest (capitalized operating lease obligations x 6%)				80				71				n/a

Our calculation of after-tax ROIC will change when we adopt ASU No. 2016-02, Leases in the first quarter of 2018, primarily resulting from replacing calculated operating lease obligations with GAAP operating lease obligations and an interest adjustment specific to the lease portfolio. We expect these changes to result in an ROIC decrease of approximately 0.2-0.5 percentage points for all periods presented. Refer to Note 22 to the Financial Statements for additional information.

Analysis of Financial Condition

Liquidity and Capital Resources

Our period-end cash and cash equivalents balance increased to $2,643 million from $2,512 million in 2016. As of February 3, 2018, $808 million of cash and cash equivalents were held at entities located outside the United States. There are no substantial taxes or restrictions to repatriate these holdings for domestic use. 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 dollar limits on our investments in individual funds or instruments.

Capital Allocation

We follow a disciplined and balanced approach to capital allocation based on the following priorities, ranked in order of importance: first, we fully invest in opportunities to profitably grow our business, create sustainable long-term value, and maintain our current operations and assets; second, we maintain a competitive quarterly dividend and seek to grow it annually; and finally, we return any excess cash to shareholders by repurchasing shares within the limits of our credit rating goals.

Operating Cash Flows

Operating cash flow provided by continuing operations was $6,849 million in 2017 compared with $5,329 million in 2016. The operating cash flow increase is due to increased payables leverage primarily driven by changes in vendor payment terms in 2017, partially offset by an inventory increase in 2017 compared to a decrease during 2016. The operating cash flow increase is also partially due to the payment of approximately $500 million of taxes during 2016 related to the Pharmacy Transaction.

Inventory

Year-end inventory was $8,657 million, compared with $8,309 million in 2016. We increased inventory in 2017 to support higher sales.

Capital Expenditures

(a) In addition to these cash investments, we entered into leases related to new stores in 2017, 2016, and 2015 with total future minimum lease payments of $438 million, $550 million, and $338 million, respectively.

Capital expenditures increased in 2017 from the prior year primarily due to increased investments in existing stores as we accelerated our current store remodel program. This investment acceleration follows an increase in 2016 as compared to 2015 due to increased remodels and guest experience enhancements. In 2016, these increases were partially offset by capital expenditure reductions driven by efficiency gains in technology.

We expect capital expenditures in 2018 to increase to approximately $3.5 billion as we accelerate the rate of store remodels, continue our current rate of small-format store openings, and continue to make supply chain investments. We also expect to continue our current rate of investment in store leases.

Dividends

We paid dividends totaling $1,338 million ($2.44 per share) in 2017 and $1,348 million ($2.32 per share) in 2016, a per share increase of 5.2 percent. We declared dividends totaling $1,356 million ($2.46 per share) in 2017, a per share increase of 4.2 percent over 2016. We declared dividends totaling $1,359 million ($2.36 per share) in 2016, a per share increase of 7.3 percent over 2015. 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.

Share Repurchases

During 2017, 2016, and 2015 we returned $1,026 million, $3,686 million, and $3,441 million, respectively, to shareholders through share repurchase. See Part II, Item 5 of this Annual Report on Form 10-K and Note 25 to the Financial Statements for more information.

Financing

Our financing strategy is to ensure liquidity and access to capital markets, to maintain a balanced spectrum of debt maturities, and to manage our net exposure to floating interest rate volatility. 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 February 3, 2018, 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, 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.

In 2017, we transitioned to longer payment terms with many of our suppliers. Because of these changes, we expect less variability in our working capital needs throughout the year as we continue to better match payables to inventory levels. In 2017, we funded our holiday sales period working capital needs through internally generated funds. In 2016, we funded our peak holiday sales period working capital needs through internally generated funds and the issuance of commercial paper.

We have additional liquidity through a committed $2.5 billion revolving credit facility obtained through a group of banks in October 2016. In October 2017, we extended this credit facility by one year to expire in October 2022. This unsecured revolving credit facility replaced a $2.25 billion unsecured revolving credit facility that was scheduled to expire in October 2018. No balances were outstanding under either credit facility at any time during 2017, 2016, or 2015.

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 February 3, 2018, no notes or debentures contained provisions requiring acceleration of payment upon a credit 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 credit ratings are either reduced and the resulting rating is non-investment grade, or our long-term credit ratings are placed on watch for possible reduction and those ratings are subsequently reduced and the resulting rating is non-investment grade.

Note 20 of the Financial Statements provides more information about financing activities.

We believe our sources of liquidity will continue to be adequate to maintain operations, finance anticipated expansion and strategic initiatives, fund debt maturities, 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.

Commitments and Contingencies

Contractual Obligations as of	Payments Due by Period
February 3, 2018				Less than			1-3			3-5			After 5
(millions)	Total			1 Year			Years			Years			Years
Recorded contractual obligations:
Long-term debt (a)	$	10,537		$	201		$	2,096		$	1,119		$	7,121
Capital lease obligations (b)	2,001			92			193			192			1,524
Deferred compensation (c)	543			53			102			97			291
Real estate liabilities (d)	114			114			—			—			—
Tax contingencies (e)	—			—			—			—			—
Unrecorded contractual obligations:
Interest payments – long-term debt	6,321			429			782			663			4,447
Operating leases (b)	4,153			227			460			439			3,027
Purchase obligations (f)	1,225			513			429			65			218
Real estate obligations (g)	602			602			—			—			—
Future contributions to retirement plans (h)	—			—			—			—			—
Contractual obligations	$	25,496		$	2,231		$	4,062		$	2,575		$	16,628

(a)	Represents principal payments only. See Note 20 of the Financial Statements for further information.

(b)	These payments also include $244 million and $386 million of legally binding minimum lease payments for stores that are expected to open in 2018 or later for capital and operating leases, respectively. See Note 22 of the Financial Statements for further information.

(c)	The timing of deferred compensation payouts is estimated based on payments currently made to former employees and retirees, forecasted investment returns, and the projected timing of future retirements.

(d)	Real estate liabilities include costs incurred but not paid related to the construction or remodeling of real estate and facilities.

(e)	Estimated tax contingencies of $363 million, including interest and penalties and primarily related to continuing operations, are not included in the table above because we are not able to make reasonably reliable estimates of the period of cash settlement. See Note 23 of the Financial Statements for further information.

(f)

Purchase obligations include all legally binding contracts such as firm minimum commitments for inventory purchases, merchandise royalties, equipment purchases, marketing-related contracts, software acquisition/license commitments, and service contracts. We issue inventory purchase orders in the normal course of business, which represent authorizations to purchase that are cancelable by their terms. We do not consider purchase orders to be firm inventory commitments; therefore, they are excluded from the table above. If we choose to cancel a purchase order, we may be obligated to reimburse the vendor for unrecoverable outlays incurred prior to cancellation. We also issue trade letters of credit in the ordinary course of business, which are excluded from this table as these obligations are conditioned on terms of the letter of credit being met.

(g)	Real estate obligations include commitments for the purchase, construction, or remodeling of real estate and facilities.

(h)	We have not included obligations under our pension plans in the contractual obligations table above because no additional amounts are required to be funded as of February 3, 2018. Our historical practice regarding these plans has been to contribute amounts necessary to satisfy minimum pension funding requirements, plus periodic discretionary amounts determined to be appropriate.

Off Balance Sheet Arrangements: Other than the unrecorded contractual obligations noted above, we do not have any arrangements or relationships with entities that are not consolidated into the financial statements.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. In the Notes to Consolidated Financial Statements, we describe the significant accounting policies used in preparing the consolidated financial statements. Our management has discussed the development, selection, and disclosure of our critical accounting estimates with the Audit & Finance Committee of our Board of Directors. The following items require significant estimation or judgment:

Inventory and cost of sales: Our inventory is valued at the lower of cost or market. We reduce inventory for estimated losses related to shrink and markdowns. Our shrink estimate is based on historical losses verified by physical inventory counts. Historically, our actual physical inventory count results have shown our estimates to be reliable. Market adjustments for markdowns are recorded when the salability of the merchandise has diminished. We believe the risk of inventory obsolescence is largely mitigated because our inventory typically turns in less than three months. Inventory was $8,657 million and $8,309 million at February 3, 2018 and January 28, 2017, respectively, and is further described in Note 12 of the Financial Statements.

Vendor income: We receive various forms of consideration from our vendors (vendor income), principally earned as a result of volume rebates, markdown allowances, promotions, and advertising allowances. Substantially all vendor income is recorded as a reduction of cost of sales.

We establish a receivable for vendor income that is earned but not yet received. Based on the agreements in place, this receivable is computed by estimating when we have completed our performance and when the amount is earned. The majority of the year-end vendor income receivables are collected within the following fiscal quarter, and we do not believe there is a reasonable likelihood that the assumptions used in our estimate will change significantly. Historically, adjustments to our vendor income receivable have not been material. Vendor income receivable was $416 million and $385 million at February 3, 2018 and January 28, 2017, respectively. Vendor income is described further in Note 4 of the Financial Statements.

Long-lived assets: Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows independent of other assets. An impairment loss would be recognized when estimated undiscounted future cash flows from the operation and/or disposition of the assets are less than their carrying amount. Measurement of an impairment loss would be based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using discounted cash flows or independent opinions of value, as appropriate. We recorded impairments of $91 million, $43 million, and $54 million in 2017, 2016, and 2015, respectively, which are described further in Note 14 of the Financial Statements.

Goodwill: We perform an impairment test of goodwill at least annually, and more frequently if events or circumstances occur that would indicate a reduced fair value in our reporting unit could exist. Typically, we perform a qualitative assessment in the fourth quarter of the fiscal year to determine if it is more likely than not that the carrying value of the goodwill exceeds the fair value of the goodwill. During our qualitative assessment we make significant estimates, assumptions, and judgments, including, but not limited to, the macroeconomic conditions, industry and market conditions, cost factors, including product and SG&A costs, overall financial performance of the Company, changes in our share price, and relevant company-specific events. If we determine that it is more likely than not that the carrying value of the goodwill exceeds the fair value of the goodwill, we perform the first step of the impairment process, which compares the fair value of the reporting unit to its carrying amount, including the goodwill. We have not been required to perform a quantitative analysis of goodwill in 2017 or 2016. We recorded a $12 million impairment of goodwill in 2015 related to the wind down of noncore operations.

Insurance/self-insurance: We retain a substantial portion of the risk related to certain general liability, workers' compensation, property loss, and team member medical and dental claims. However, we maintain stop-loss coverage to limit the exposure related to certain risks. Liabilities associated with these losses include estimates of both claims filed and losses incurred but not yet reported. We use actuarial methods which consider a number of factors to estimate our ultimate cost of losses. General liability and workers' compensation liabilities are recorded at our estimate of their net present value; other liabilities referred to above are not discounted. Our workers' compensation and general liability accrual was $419 million and $447 million at February 3, 2018 and January 28, 2017, respectively. We believe that the amounts accrued are appropriate; however, our liabilities could be significantly affected if future occurrences or loss developments differ from our assumptions. For example, a five percent increase or decrease in average claim costs would impact our self-insurance expense by $21 million in 2017. Historically, adjustments to our estimates have not been material. Refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for further disclosure of the market risks associated with these exposures. We maintain insurance coverage to limit our exposure to certain events, including network security matters.

Income taxes: We pay income taxes based on the tax statutes, regulations, and case law of the various jurisdictions in which we operate. Significant judgment is required in determining the timing and amounts of deductible and taxable items, and in evaluating the ultimate resolution of tax matters in dispute with tax authorities.

We recognized the income tax effects of the Tax Act in our 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the President signed the Tax Act into law. Note 23 of the Financial Statements provides additional information.

The benefits of uncertain tax positions are recorded in our financial statements only after determining it is likely the uncertain tax positions would withstand challenge by taxing authorities. We periodically reassess these probabilities and record any changes in the financial statements as appropriate. Liabilities for uncertain tax positions, including interest and penalties, were $363 million and $222 million at February 3, 2018 and January 28, 2017, respectively,

and primarily relate to continuing operations. We believe the resolution of these matters will not have a material adverse impact on our consolidated financial statements. Income taxes are described further in Note 23 of the Financial Statements.

Pension accounting: We maintain a funded qualified, defined benefit pension plan, as well as several smaller and unfunded nonqualified plans for certain current and retired team members. The costs for these plans are determined based on actuarial calculations using the assumptions described in the following paragraphs. Eligibility and the level of benefits varies depending on team members' full-time or part-time status, date of hire, age, and/or length of service. The benefit obligation and related expense for these plans are determined based on actuarial calculations using assumptions about the expected long-term rate of return, the discount rate, and compensation growth rates. The assumptions, with adjustments made for any significant plan or participant changes, are used to determine the period-end benefit obligation and establish expense for the next year.

Our 2017 expected long-term rate of return on plan assets of 6.55 percent is determined by the portfolio composition, historical long-term investment performance, and current market conditions. A one percentage point decrease in our expected long-term rate of return would increase annual expense by $38 million.

The discount rate used to determine benefit obligations is adjusted annually based on the interest rate for long-term high-quality corporate bonds, using yields for maturities that are in line with the duration of our pension liabilities. Our benefit obligation and related expense will fluctuate with changes in interest rates. A 0.5 percentage point decrease to the weighted average discount rate would increase annual expense by $31 million.

Based on our experience, we use a graduated compensation growth schedule that assumes higher compensation growth for younger, shorter-service pension-eligible team members than it does for older, longer-service pension-eligible team members.

Pension benefits are further described in Note 28 of the Financial Statements.

Legal and other contingencies: We believe the accruals recorded in our consolidated financial statements properly reflect loss exposures that are both probable and reasonably estimable. We do not believe any of the currently identified claims or litigation may materially affect our results of operations, cash flows, or financial condition. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, it may cause a material adverse impact on the results of operations, cash flows, or financial condition for the period in which the ruling occurs, or future periods. Refer to Note 19 of the Financial Statements for further information on contingencies.

New Accounting Pronouncements

Refer to Note 2, Note 22, Note 28, and Note 29 of the Financial Statements for a description of new accounting pronouncements related to revenues, leases, pension expense, and accumulated other comprehensive income, respectively. We do not expect any other 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 expected impact of the Pharmacy Transaction on our financial performance, the continued execution of our share repurchase program, our expected capital expenditures and new lease commitments, the impact of changes in the expected effective income tax rate on net income, including those resulting from the Tax Act, the impact of certain Tax Act provisions on our cash flows, the expected compliance with debt covenants, the expected impact and timing of adopting new accounting pronouncements, our intentions regarding future dividends, contributions and payments related to our pension plan, the expected returns on pension plan assets, the expected timing and recognition of compensation expenses, the effects of macroeconomic conditions, the adequacy of our reserves for general liability, workers' compensation and property loss, the expected outcome of, and adequacy of our reserves for investigations, inquiries, claims and litigation, expected changes to our contractual obligations and liabilities, the expected ability to recognize deferred tax assets and liabilities and the timing of such recognition, the resolution of tax matters, and changes in our assumptions and expectations.

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 to this Form 10-K, 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.