UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended October 28, 2006

Commission File Number 1-6049

®

TARGET CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 612/304-6073

Former name, former address and former fiscal year, if changed since last report: N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.               Yes  x   No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer  x   Accelerated filer  o   Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes  o   No  x

Indicate the number of shares outstanding of each of issuer’s classes of common stock, as of the latest practicable date.

November 29, 2006: 858,887,468 shares outstanding of common stock, par value $.0833.

TARGET CORPORATION

TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION

See accompanying Notes to Consolidated Financial Statements.

* The January 28, 2006 Consolidated Statement of Financial Position is condensed from the audited consolidated financial statement.

See accompanying Notes to Consolidated Financial Statements.

Dividends declared per share were $.12 and $.10 for the thirteen weeks ended October 28, 2006 and October 29, 2005, respectively, and $.34 and $.28 for the thirty-nine weeks ended October 28, 2006 and October 29, 2005, respectively.

Total Comprehensive Income was $506 million and $435 million, respectively, for the thirteen weeks ended October 28, 2006 and October 29, 2005, respectively, and $1,469 million for the thirty-nine weeks ended October 29, 2005.

See accompanying Notes to Consolidated Financial Statements.

Amounts presented herein are on a cash basis and therefore may differ from those shown in other sections of this Form 10-Q.

Noncash transactions:  During the thirty-nine weeks ended October 28, 2006, we repurchased 1.2 million of our common shares through the settlement of prepaid forward contracts, which had an aggregate market value of $66 million at their respective settlement dates.

See accompanying Notes to Consolidated Financial Statements.

1.  Accounting Policies

The accompanying unaudited consolidated financial statements should be read in conjunction with the financial statement disclosures contained in our 2005 Annual Report to Shareholders.  The same accounting policies are followed in preparing quarterly financial data as are followed in preparing annual data. In the opinion of management, all adjustments necessary for a fair statement of quarterly operating results are reflected herein and are of a normal, recurring nature.

Due to the seasonal nature of the retail industry, quarterly revenues, expenses, earnings and cash flows are not necessarily indicative of the results that may be expected for the full year.

We operate as a single business segment.

2.  New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” – an interpretation of FASB Statement No. 109 (FIN 48).  FIN 48 prescribes the financial statement recognition and measurement criteria for tax positions taken in a tax return, clarifies when tax benefits should be recorded and how they should be classified in financial statements, and requires certain disclosures of uncertain tax matters.  FIN 48 is effective at the beginning of fiscal 2007. We are presently evaluating the impact of FIN 48 on our results of operations and financial position.

In September 2006, the SEC staff published Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”  SAB No. 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements.  SAB No. 108 offers a special “one-time” transition provision for correcting certain prior year misstatements that were uncorrected as of the beginning of the fiscal year of adoption.  SAB No. 108 is effective for fiscal years ending after November 15, 2006.  The adoption of this statement is not expected to have a material impact on our consolidated net earnings, cash flows or financial position.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (SFAS) No. 157 “Fair Value Measurement.”  SFAS No. 157 provides a definition of fair value, provides guidance for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007.  The adoption of this statement is not expected to have a material impact on our consolidated net earnings, cash flows or financial position.

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (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).”  This statement requires a company to fully recognize the over-funded or under-funded status of its postretirement benefit plan(s) as an asset or liability in the financial statements.  In addition, the statement eliminates the use of a measurement date that is different than the date of the entity’s year-end financial statements.  The transition date for recognition of an asset or liability related to the funded status of an entity’s plan(s) is effective for fiscal years ending after December 15, 2006.  The transition date for the measurement date requirement is effective for fiscal years ending after December 15, 2008.  Despite the fact that our plans are fully funded, we expect that the adoption of this statement will require a reduction in our prepaid pension asset by an amount in the range of $360 to $385 million, with a corresponding reduction to shareholders’ investment, net of tax, in the range of $220 to $235 million.  The related adjustment to our recorded postretirement healthcare liability is expected to be less than $25 million, with a corresponding reduction to shareholders’ investment of less than $15 million.  These adjustments would not affect our debt compliance covenants or other contractual agreements.  Plan asset returns, changes in interest rates or other factors could have a significant effect on the adjustment ultimately recorded.

In September 2006, the FASB’s Emerging Issues Task Force reached a consensus on Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (EITF 06-4).  EITF 06-4 provides guidance on the accounting for arrangements in which the company has agreed to share a portion of the value of the insurance policy with the employee.  This guidance requires an employer to record a postretirement benefit, in accordance with FASB Statement No. 106 “Employers’ Accounting for Postretirement Benefits Other Than Pensions” or APB Opinion No.12, “Omnibus Opinion-1967,” if there is an agreement by the employer to share a portion of the proceeds of a life insurance policy with the employee during the postretirement period.  This guidance is effective for reporting periods beginning after December 15, 2007.  We are in the process of assessing the impact, if any, that this new guidance will have on our results of operations and financial position.

In September 2006, the FASB’s Emerging Issues Task Force reached a consensus on Issue No. 06-5, “Accounting for Purchases of Life Insurance–Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance” (EITF 06-5).  EITF 06-5 provides guidance on how an entity should determine the amount that could be realized under an insurance contract at the balance sheet date.  This guidance requires that the cash surrender value and any additional amounts provided by the contractual terms of the life insurance policy that are realizable at the balance sheet date should be considered in determining the amount that could be realized.  This guidance is effective for reporting periods beginning after December 15, 2006.  We do not believe that that the adoption of EITF 06-5 will have a material impact on our results of operations and financial position.

3.  Earnings per Share

Basic earnings per share (EPS) is net earnings divided by the weighted average number of common shares outstanding during the period.  Diluted EPS includes the incremental shares assumed to be issued upon the exercise of stock options and shares assumed to be issued under performance share arrangements.

Our diluted EPS calculation excludes shares related to stock options for which the effect would have been antidilutive.  The number of stock options excluded from the calculation of the weighted average shares for diluted EPS because their effects were antidilutive was approximately 4.4 million and 17 thousand at  October 28, 2006 and October 29, 2005, respectively.

4.  Accounts Receivable

Accounts receivable are recorded net of an allowance for expected losses. The allowance, recognized in an amount equal to the anticipated future write-offs, includes an estimate of future write-offs of existing balances associated with the mandated increase in minimum monthly payments for certain guests.  The allowance at October 28, 2006 was $514 million, compared to $451 million at January 28, 2006 and $417 million at October 29, 2005.  We estimate future write-offs based on delinquencies, risk scores, aging trends, industry risk trends and our historical experience.  Substantially all accounts continue to accrue finance charges until they are written off.  Accounts are written off when they become 180 days past due.

5.  Contingencies

The terms of a significant portion of the Visa/MasterCard antitrust litigation settlement were finalized during the third quarter of 2005.  Consequently, we recorded a $27 million, or $.02 per share, gain in the third quarter of 2005 for our share of the proceeds, which we received during the second quarter of 2006.  We also expect to receive an additional, smaller payment; however, the amount and timing of that payment are not certain at this time.  Accordingly, no additional gain was recorded at October 28, 2006.

We are exposed to claims and litigation arising in the ordinary course of business and use various methods to resolve these matters in a manner that we believe serves the best interest of our shareholders and other constituents. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities.  We do not believe that any of the currently identified claims or litigated matters will have a material adverse impact on our results of operations, cash flows or financial condition.

6.  Long-term Debt and Derivatives

We obtain short-term financing throughout the year under our commercial paper program, which gives rise to a form of notes payable.  At October 28, 2006, notes payable outstanding under this program totaled $955 million, and this amount is included in current portion of long-term debt and notes payable on the Consolidated Statement of Financial Position.  At October 29, 2005, notes payable outstanding under this program totaled $925 million and were included in long-term debt on the Consolidated Statement of Financial Position. There were no amounts outstanding under our commercial paper program at January 28, 2006.

On September 15, 2006, Target Receivables Corporation issued $500 million of Variable Funding Certificates (Certificates) backed by credit card receivables through the Target Credit Card Master Trust.  The Certificates have a two-year term, with principal repayment occurring during the second year, and a floating interest rate determined monthly.  The Certificates are prepayable.  At October 28, 2006, the outstanding amount of the Certificates was $500 million.  Of the amount outstanding, $42 million is classified within Current Portion of Long-Term Debt and Notes Payable and $458 million is classified within Long-Term Debt.

Our derivative instruments are primarily interest rate swaps which hedge the fair value of certain debt by effectively converting interest from a fixed rate to a floating rate. These instruments qualify for hedge accounting, and the associated assets and liabilities are recorded in the Consolidated Statements of Financial Position.  The changes in market value of an interest rate swap, as well as the offsetting change in market value of the hedged debt, are recognized within earnings in the current period. No ineffectiveness was recognized related to these instruments during the thirteen and thirty-nine week periods ended October 28, 2006 and October 29, 2005.

At October 28, 2006, January 28, 2006 and October 29, 2005, interest rate swaps were outstanding in notional amounts totaling $3.7 billion, $3.3 billion and $3.3 billion, respectively. At October 28, 2006, the market value of outstanding interest rate swaps and net unamortized gains / (losses) from terminated interest rate swaps was $5 million, compared to $(21) million at January 28, 2006 and $(22) million at October 29, 2005.

7.  Share-Based Compensation

Share-based compensation transactions are accounted for in accordance with the provisions of SFAS No. 123(R), “Share-Based Payment.”  We estimate the fair value of all share-based awards on the date of grant, which we define as the date the award is approved by our Board of Directors (or management with appropriate delegated authority).  The substantial majority of granted awards are nonqualified stock options that vest annually in equal amounts over a four-year period, and all stock options have an exercise price equal to the fair market value of our common stock on the date of grant.  Generally, we recognize compensation expense for awards on a straight-line basis over the four-year vesting period.  However, in certain circumstances under our share-based compensation plans, we allow for the vesting of employee awards to continue post-employment.  Accordingly, for awards granted subsequent to our adoption of SFAS No. 123(R) and to the extent the employee met certain age and service requirements on the date of grant, we accelerate expense recognition, such that the value of the award is fully expensed over the employee’s minimum service period, instead of over the explicit vesting period.  Awards granted prior to the adoption of SFAS No. 123(R) continue to be expensed over the explicit vesting period.  Total compensation expense related to share-based awards was $25 million and $64 million, respectively, for the thirteen and thirty-nine weeks ended October 28, 2006, and $11 million and $68 million, respectively, for the thirteen and thirty-nine weeks ended October 29, 2005.

8.  Pension, Postretirement Health Care and Other Benefits

We have a qualified defined benefit pension plan covering all U.S. employees who meet age and service requirements. We also have unfunded nonqualified pension plans for employees with qualified plan compensation restrictions. Benefits are provided based on years of service and employee compensation. Upon retirement, employees also become eligible for certain health care benefits if they meet minimum age and service requirements and agree to contribute a portion of the cost.  Net pension expense and postretirement health care expense consisted of the following:

We maintain nonqualified, unfunded deferred compensation plans for approximately 4,300 current and retired employees whose participation in our 401(k) plan is limited by statute or regulation.  These employees choose from a menu of crediting rate alternatives, which are the same as the investment choices in our 401(k) plan, including Target common stock.  We credit an additional 2 percent per year to the accounts of active employees, in part to recognize the risks inherent to their participation in a plan of this nature.  We also maintain a nonqualified, unfunded deferred compensation plan, covering fewer than 100 participants which was frozen during 1996, in which deferred compensation earns returns tied to market levels of interest rates plus an additional 6 percent return as determined by the plan’s terms.  We control some of our risk of offering the nonqualified plans through investing in vehicles, including prepaid forward contracts in our own common stock, which offset a substantial portion of our economic exposure to the returns of these plans.  These investment vehicles are general corporate assets and are marked-to-market with the related gains and losses recognized in the Consolidated Statements of Operations in the period they occur. For the thirty-nine weeks ended October 28, 2006, we invested approximately $119 million in such investment instruments, and these investments are included in the Consolidated Statement of Cash Flows within other investing activities.

9.  Repurchase of Stock

In the third quarter, we repurchased a total of 1.2 million shares of our common stock, for a total cash investment of $59 million ($48.86 per share), under a $5 billion program, which began in 2004.  Substantially all of the shares reacquired in the quarter were delivered under forward contracts that settled during the quarter, which had an aggregate market value of $66 million at their respective settlement dates.  These contracts are among the investment vehicles used to reduce our economic exposure related to our nonqualified deferred compensation plans.  For the thirty-nine week period ended October 28, 2006, we repurchased, through open market transactions and settled forward contracts, 19.1 million shares of our common stock, for a total cash investment of $959 million ($50.19 per share).  Since the inception of this share repurchase program, we have repurchased a total of 70.7 million shares of our common stock, for a total cash investment of $3,432 million ($48.56 per share). In addition, at October 28, 2006, we held long positions in prepaid forward contracts for 3.1 million shares of our common stock, for a total cash investment of $140 million, or $45.28 per share.  We expect to continue to execute our share repurchase program primarily in open market transactions, subject to market conditions, and to complete the total program by year-end 2008, or sooner.

10.  Cost of Sales and Selling, General and Administrative (SG&A) Expenses

The following table illustrates the primary costs classified in each major expense category:

The classification of these expenses varies across the retail industry.

Compensation, benefits, and other expenses for buying, merchandising, and distribution operations classified in selling, general and administrative expenses were approximately $315 million and $281 million for the thirteen weeks ended October 28, 2006 and October 29, 2005, respectively, and $917 million and $824 million for the thirty-nine weeks ended October 28, 2006 and October 29, 2005, respectively.

Analysis of Results of Operations

Net earnings for the thirteen and thirty-nine weeks ended October 28, 2006 were $506 million, or $.59 per share, and $1,668 million, or $1.92 per share, respectively, compared with $435 million, or $.49 per share, and $1,469 million, or $1.65 per share, respectively, for the same periods last year.  All earnings per share figures refer to diluted earnings per share.

Revenues and Comparable-Store Sales

Sales include merchandise sales, net of expected returns, from our stores and our on-line business, as well as gift card breakage.  Total revenues include sales and net credit card revenues.  Total revenues do not include sales tax as we consider ourselves a pass-through conduit for collecting and remitting sales taxes.  Total revenues for the quarter increased 11.2 percent to $13,570 million, compared with $12,206 million for the same period a year ago. For the thirty-nine week period ending October 28, 2006, total revenues increased 11.5 percent to $39,780 million, compared to $35,673 million for the same period a year ago.  Our revenue growth was due to the contribution from new store expansion, a 4.6 percent and 4.8 percent comparable-store sales increase for the quarter and year-to-date periods, respectively, as well as growth in net credit card revenues.  Comparable-store sales are sales from stores open longer than one year, including stores that have relocated and general merchandise stores that have been remodeled. Comparable-store sales do not include sales from general merchandise stores that have been converted, or relocated and converted, to a SuperTarget store format in the past year, sales from stores that were intentionally closed to be remodeled or sales from our on-line business.  The method of calculating comparable-store sales varies across the retail industry.

Gross Margin Rate

Gross margin rate represents gross margin (sales less cost of sales) as a percent of sales.  Cost of sales includes purchases, net of discounts, markdowns, inventory shrink, and other costs associated with our merchandise, as well as all freight to move merchandise and vendor income that is not reimbursement of specific, incremental and identifiable costs.  In the third quarter of 2006, our overall gross margin rate increased to 32.4 percent from 32.3 percent when compared to the same period last year.  For the thirty-nine week period ending October 28, 2006, our overall gross margin rate has remained essentially unchanged at approximately 32.5 percent.  Within our gross margin rate for both the third quarter and year-to-date, we have experienced an increase in markup, which has been offset by an increase in markdowns.  Additionally, our year-to-date gross margin rate has benefited from an improved shrinkage rate.  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 the cost of raw materials and freight and competitive influences.  Markdowns are the reduction in the original or previous price of retail merchandise.  Factors that affect markdowns include inventory management and competitive influences.  The definition and method of calculating markup, markdowns and gross margin vary across the retail industry.

Selling, General and Administrative Expense Rate

Our selling, general and administrative (SG&A) expense rate represents compensation and benefits costs, occupancy and operating costs of retail, distribution, and headquarters facilities, advertising expenses, facilities pre-opening costs and other administrative costs as a percent of sales.  SG&A expenses exclude depreciation and amortization and expenses associated with our credit card operations, which are reflected separately in our Consolidated Statements of Operations. In the third quarter of 2006, our SG&A expense rate increased to 24.0 percent from 23.5 percent in the same period last year.  Approximately one-half of this increase is attributable to the $27 million Visa/Mastercard settlement that reduced SG&A expense in 2005, which is partially offset by favorable workers compensation expense in the current year.  For the thirty-nine weeks ended October 28, 2006, our SG&A expense rate increased to 23.4 percent from 22.9 percent in the same period last year.  This increase is primarily due to the timing of facilities pre-opening costs and higher store payroll costs.

Other Performance Factors

During the first quarter of 2006, we adjusted the period over which we amortize leasehold acquisition costs to match the expected terms for individual leases, which resulted in a cumulative benefit to depreciation expense in the first quarter and first nine months of 2006 of approximately $28 million.

In the thirteen and thirty-nine week periods ended October 28, 2006, net interest expense was $149 million and $421 million, respectively, representing a $31 million and $82 million increase from the thirteen and thirty-nine week periods ended October 29, 2005. The increase for the thirteen and thirty-nine week periods ended October 28, 2006 relates primarily to growth in the cost of funding our credit card operations.

The effective income tax rate for the third quarter of 2006 decreased to 37.4 percent from 39.0 percent for the third quarter of 2005, primarily due to the favorable impact that higher capital market returns had on certain book/tax differences, partially offset by tax rate changes in several states.  The year-to-date effective tax rate has decreased to 37.9 percent in 2006 from 38.2 percent in 2005 due to the favorable impact that higher capital market returns had on certain book/tax differences and the favorable resolution of various income tax matters in 2006.

Credit Card Contribution

Our credit card program strategically supports our core retail operation and remains an important contributor to our overall profitability.  Credit card contribution to earnings before taxes (EBT) was as follows:

Credit Card Contribution to EBT