Target’s debt structure obligations

Your friend, Liz, loves to shop at Target and is now interested in investing in the company. Tom, another friend, has told her that Target’s debt structure is risky with obligations of nearly 74% of total assets. Liz sees that debt on the balance sheet is 65% of total assets and is confused by Tom’s comment. Write an explanation to Liz discussing the debt structure of Target and why Tom thinks Target is risky. Be sure to explain clearly what information appears on financial statements, as well as what information does not appear directly on the financial statements. Use the information below in your discussion.

At fiscal year-end February 2, 2008, Target Corporation had the following assets and liabilities on its balance sheet (in millions):

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Current   liabilities

$11,782

 

Long-term   debt

15,126

 

Other   liabilities

2,345

 

Total   assets

44,560

Target reported the following information on leases in the notes to the financial statements:

Total rent expense was $165 million in 2007, $158 million in 2006, and $154 million in 2005, including percentage rent expense of $5 million in 2007, 2006, and 2005. Most long-term leases include one or more options to renew, with renewal terms that can extend the lease term to more than 50 years. Certain leases also include options to purchase the leased property.

Future minimum lease payments required under non-cancellable lease agreements existing at February 2, 2008, were:

 

Future Minimum Lease Payments (in   Millions)

Operating Leases

Capital Leases

 

2008

$ 239

$  12

 

2009

187

16

 

2010

173

16

 

2011

129

16

 

2010

123

17

 

After 2010

2, 843

155

 

Total future minimum lease   payments

$3694 (a)

$232

 

Less: Interest (b)

(105)

 

Present value of minimum capital   lease payments

$127 (c)

(a) Total contractual lease payments include $1,721 million related to options to extend lease terms that are reasonably assured of being exercised, and also include $98 million of legally binding minimum lease payments for stores that will open in 2008 or later.
(b) Calculated using the interest rate at inception of each lease.
(c) Includes current portion of $4 million.

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