March 31, 2014 Volume XL, Issue III Target Corporation NYSE: TGT

Dow Jones Indus: 16,457.66 S&P 500: 1,872.34 Russell 2000: 1,173.04 Trigger: No Index Component: S&P 500 Type of Situation: Business Value, Consumer Franchise

Price: $ 60.51 Shares Outstanding (MM): 632.3 Fully Diluted (MM): 638.1 Average Daily Volume (MM): 6.9 Market Cap (MM): $ 38,260 Enterprise Value (MM): $ 51,367 Percentage Closely Held: Insiders < 1%

52-Week High/Low: $ 73.50/54.66 5-Year High/Low: $ 73.50/36.68

Trailing Twelve Months Price/Earnings: 19.7x Price/Stated Book Value: 2.4x Overview Net Debt (MM): $ 13,086 Target Corporation (“TGT” or “the Company”) is Upside to Estimate of a significant player within the retail industry. The Intrinsic Value: 37% Company has a long and impressive history of growth. As of the most recent fiscal year (FY 2013 ended in Dividend: $ 1.72 February 2014), the Company’s revenue reached Yield: 2.8% $72 billion and its store base consisted of 1,917 locations across the United States (1,793 stores) and Net Revenue Per Share: Canada (124 stores) with over 250 million square feet 2013: $ 113.1 of total retail space. Its record is further enhanced by a 2012: $ 110.5 history of returning capital to shareholders. TGT has 2011: $ 102.1 paid a dividend to its shareholders every year since its 2010: $ 92.3 1967 IPO, and the dividend has consistently grown over time. Earnings Per Share: However, the Company’s recent results have 2013: $ 3.07 been less impressive. TGT’s challenges have included 2012: $ 4.52 a well publicized breach of consumer data, its entrance 2011: $ 4.28 into the Canadian market, and a less robust growth

trajectory as the firm has matured into a larger Fiscal Year Ends: February 1 organization. After being a very strong performer during Company Address: 1000 Nicollet Mall past decades, TGT shares have remained fairly Minneapolis, WI 55403 stagnant during recent years (the stock has been flat Telephone: 612-304-6073 since early 2007). CEO: Gregg W. Steinhafel Clearly, TGT has become an out of favor stock. Clients of Boyar Asset Management, Inc. do not own shares of Target However, there should be reasons for investor optimism Corporation common stock. during the coming years in our view. We believe Analysts employed by Boyar’s Intrinsic Value Research LLC own shares of Target Corporation common stock. substantial EPS growth should be attainable for the firm within the next 2-3 years. Customer concerns pertaining

- 21 - Target Corporation to the recent data breach should eventually diminish, and the firm’s Canadian expansion should finally begin to bear fruit. Moreover, free cash flow should also be positioned for significant growth during the next 2-3 years, making dividend growth and share repurchases increasingly likely going forward.

TGT has set ambitious goals for itself. Management has set an objective of $8.00 in EPS by FY 2017, roughly double the profit earned during recent years. We believe substantial EPS growth should be attainable for the firm within the next 2-3 years. However, for the purposes of valuation, we do not assume the $8.00 EPS goal is achieved within management’s time frame. Assuming TGT can trade at a multiple of 7.0x EV/EBITDA (consistent with its trading range during recent years), and applying that to our FY 2016 projections produces an $83 per share estimate of intrinsic value. This estimated valuation implies total return potential of 40% relative to the stock’s current valuation, and could prove to be conservative from a longer-term point of view.

From our perspective, TGT is an out of favor stock that offers a very favorable risk: reward scenario for long-term investors. Assuming the economic environment is not prohibitively challenging, the Company should be well positioned for significant growth in earnings and cash flow going forward. Moreover, TGT should benefit from a solid financial position, coherent strategy, and capable management team. Near-term, we believe the Company’s owned real estate assets (roughly equivalent to TGT’s current market value based on conservative projections) and additional return of capital to shareholders should provide valuation support for the stock.

Background & Business Description Target Corporation has a long and impressive history. Its track record is characterized by strong and relatively consistent growth as the firm has evolved from a small enterprise to a multi-billion dollar concern. TGT’s roots trace back to the early 1900s when George Dayton opened a dry goods store in downtown Minneapolis. The firm was named Dayton Company for much of its early history, and the Target store concept was launched by Dayton in the early 1960s. Both Dayton and Target expanded to markets outside of Minnesota during the 20th century, and Dayton completed its IPO in 1967 (the firm was still managed by George Dayton’s descendants). After being managed in a fairly conservative manner for several generations, Dayton began to pursue a more aggressive growth strategy, supported by both internal investment and M&A. Significant acquisitions included Detroit-based J.L. Hudson & Company (1969), and California-based Mervyn’s (1978). The organization eventually renamed itself Dayton-Hudson, but Target stores had become the firm’s largest sales contributor by 1975. By the early 1980s, the Dayton family had become less involved in the organization’s day-to-day management, but Company expansion efforts continued, further driven by the acquisition of Marshall Field’s in 1990 (a well known Chicago-based retailer). By the early 1990s, the Target concept had established a national presence. The 1990s was a very eventful decade for Target, a period that included the launch of its superstore concept, the launch of its credit card, and the creation of the “Expect More. Pay Less.” brand identity. Dayton-Hudson was ultimately renamed Target Corporation in 2000, reflecting the increasing prominence of the Target concept within the organization.

By 2001, Target had over 1,000 stores in 47 states across the country. The 2000s was a period of both growth and transition for TGT. It elected to sell both Marshall Field’s and Mervyn’s in 2004, and by 2005 TGT had reached annual sales of over $50 billion and net income of over $2 billion. During the 2007-2010 period activist investor Bill Ackman accumulated a stake in TGT shares. Among his primary proposals was a spin-off of TGT’s real estate into a REIT. However, the measure was opposed by management since it potentially put the Company’s credit rating at risk, and Ackman ultimately sold his stake in the firm after an unsuccessful proxy battle. Target’s expansion and growth has moderated during recent years given the firm’s increased size and market penetration. However, a recent entrance into the Canadian market has been a key focus of Company investment. Target acquired 135 leases from Canadian retailer Zeller’s (owned by Hudson Bay) in 2011 for a final net price of $1.6 billion. By FY 2013, Target had completely divested its credit card operations (sold to TD Bank, TGT no longer viewed it as a core business).

As of the most recent fiscal year (FY 2013 ended in February 2014), the Company’s revenue reached $72 billion and its store base consisted of 1,917 locations across the United States (1,793 stores) and Canada (124 stores) with over 250 million square feet of total retail space. It employs over 360,000 people (all non-union), and its operations are supported by a network of 40 distribution centers across the United States and Canada. Like most retailers, TGT experiences heightened sales during the year-end holiday season, and it often adds temporary staff to respond to the increased sales and traffic. Target offers a diverse range of

- 22 - Target Corporation products, and has bolstered its presence in the food category during recent years. As part of its strategy to expand its product line and maintain market relevance, TGT has renovated over 1,100 of its stores. Sales are derived from the following product categories: Household Essentials (25%), Food and Pet Supplies (20%), Apparel and Accessories (19%), Hardlines (18%), and Home Furnishings/Décor (18%). The Company offers a diverse range of brands, and approximately one-third of sales in FY 2013 were derived from brands that are owned or exclusively provided by TGT. Importantly, this helps to distinguish TGT’s product line from its competitors, and the Company earns higher margins on these products relative to outside, national brands. The following table provides additional insight regarding the Company’s recent operating performance.

FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 Net sales growth 1% 3% 4% 5% (1%) Gross margin 32.6% 32.2% 31.5% 31.0% 29.5% Operating margin 7.2% 7.8% 7.6% 7.3% 5.8% ROE 17.1% 18.9% 18.7% 18.1% 12.1% Store count (year-end) 1,740 1,750 1,763 1,778 1,917

Management The executive team at Target consists of a roster of experienced individuals, with many years spent at both Target and other retail industry firms. Although Company operations have faced a few challenges most recently (launch in Canada, a high profile customer data breach, etc.), we believe TGT’s management team is a strategic strength for the Company that should make significant growth in sales and profits attainable during the coming years. It warrants mention that TGT’s Chief Information Officer did resign from the firm earlier this year, likely related to the consumer data breach in late 2013. The Company is also hiring new staff to bolster areas such as compliance and risk assurance, and it has retained outside consultants to evaluate its systems infrastructure.

Executive Officers Age Background Greg Steinhafel, Chairman & CEO 59 Named CEO in 2008, joined Target in 1979 Anthony Fisher, President of Target Canada 38 Joined Target in 1999, background in merchandising Jeffrey Jones, Executive V.P. & CMO 45 Joined Target in 2012, former Gap executive John Mulligan, Executive V.P. & CFO 47 Target employee since 1996, appointed CFO in 2012

Recent Developments Consumer Data Breach Impacts Target In December of 2013, TGT confirmed that the security of its U.S. payments system had been breached. Specifically, outside parties were able to achieve unauthorized access to consumer data pertaining to debit and credit card transactions completed within its U.S. stores (via malware installed on TGT’s point-of-sale system, later removed by the Company). The Company estimated that 40 million individuals could have had their credit and debit card data compromised, and 70 million individuals could have had personal information compromised (names, contact information, etc.). This intrusion occurred during the November 27 to December 17 period (the heart of the holiday shopping season). To help alleviate consumer concerns, TGT offered affected customers one year of free credit monitoring and theft protection services. Not surprisingly, this issue received considerable media attention, and presented an unwelcomed challenge to the Company during an operationally crucial period. This well publicized development had significant ramifications for TGT on multiple levels. From an expense perspective, TGT recorded $61 million of pre-tax expenses during 4Q-FY2013 related to the data breach ($11 million after-tax impact net of insurance proceeds, or $0.02 per share). Additional expenses are likely during the coming quarters, and have not been precisely quantified by the Company at this stage (TGT’s $100 million of network-security insurance coverage should mitigate these expenses to some degree). TGT is also accelerating other previously announced projects related to its IT infrastructure to further bolster the integrity of its payments system. Clearly, these expenses could be material to TGT’s earnings and cash flow during the upcoming quarters. However, we believe the greater concern is the potential impact of this issue on the overall consumer perception of the TGT brand, and the resulting impact via potential declines in sales and

- 23 - Target Corporation traffic. It is evident that this issue materially impacted fiscal 4Q-2013 results (discussed in more detail later in this report), and some lingering concerns about TGT’s data security could remain during the coming quarters. However, we believe it is premature to conclude that this event has materially damaged TGT’s brand, competitive position, or potential earnings power from a long-term perspective. Assuming this type of incident does not reoccur at TGT for the foreseeable future, consumer perceptions should ultimately recover as the Company continues to rectify its data security and proves to the marketplace that its stores remain a desirable shopping destination. Unfortunately, breaches of consumer data have become more prevalent during recent years across the economy, and are not isolated to this particular incident. Within the past year, retailers such as Neiman Marcus and Sally Beauty have also acknowledged theft of customer information.

Target Reports Weak Comparisons in Fourth Quarter As many investors had already anticipated, 4Q-2013 proved to be a challenging period for the Company as TGT dealt with the fallout from the consumer data breach. The firm reported adjusted 4Q EPS of $1.30, down 21% on a year over year basis. Overall sales were approximately 4% lower compared to 4Q-2012, and sales within the U.S. market decreased over 6%. Within the U.S., same store sales declined 2.5% (earnings and sales were consistent with revised guidance issued in early January), reflecting reduced traffic and transactions related to the data breach. It warrants mention that comparable same store sales had been trending positively prior to the announcement of the data breach on December 19th. Not surprisingly, the Company’s margins came under pressure during the quarter as weak sales trends necessitated promotional pricing in order to stimulate traffic and clear inventory. The Company’s 4Q EBITDA margin came in at 9.2% within its U.S. operations, representing a decrease of 120 basis points from the year ago period. Gross margin pressure within the Canadian operation occurred due to inventory-driven markdowns, but the $0.40 EPS dilution from this market was actually better than recent guidance. The firm continued to return capital to shareholders via its dividend during fiscal 4Q-2013, but the firm elected to suspend share repurchase activity during the period in order to maintain its strong financial position. The poor results were basically in-line with expectations and had already been factored into the stock’s valuation (shares had declined 10% between January 1st and the earnings announcement on February 26th). In conjunction with the earnings release, management provided adjusted EPS guidance of $0.60-$0.75 for fiscal 1Q-2014, and adjusted EPS guidance of $3.85-$4.15 for the full year.

Staying Relevant in a Changing Industry Operating within the retail industry has always been a challenging proposition. The sector can be highly competitive, and market conditions can be very sensitive to broader economic trends. Given these considerations, it is crucial that investors identify firms with a strong record of operational success, supported by a capable management team and a solid financial position. In our view, TGT has established a track record that exhibits an ability to navigate this challenging industry. However, TGT and its peers must constantly adjust their strategies in order to maintain a competitive advantage within this evolving marketplace. Although competitive pricing is a prerequisite for retail success, that factor alone cannot ensure long-term market viability. Establishing and maintaining a strong and relevant brand identity is a key driver of differentiation within this sector. In the case of Target, its motto of “Expect More. Pay Less.” helps to summarize its brand identity and overall strategic approach. TGT does not employ a strategy primarily focused on pricing (such as Wal-Mart for example). Rather the Company attempts to offer a value proposition to its customers, in which a relevant and competitively priced product line is delivered via an enjoyable and convenient shopping experience. Historically, TGT has effectively executed this strategy. Yet, several industry developments have made future strategic execution an ongoing challenge for TGT and its competitors.

Over the past 10-15 years, the emergence of e-commerce has been among the most important developments within retail. According to the U.S. Census Bureau, total e-commerce sales in 2013 were over $263 billion, and accounted for 7% of sales during 4Q-2013. The Internet has begun to permeate all aspects of the consumer experience. Its relevance extends well beyond the well-publicized practice of “showrooming,” defined by the Oxford dictionary as “the practice of visiting a store or stores in order to examine a product before buying it online at a lower price.” The practice is further enabled by the increased usage of mobile devices such as web-enabled smartphones (for a more detailed analysis of showrooming, please see our Bed Bath & Beyond report in the February 2014 issue of Asset Analysis Focus). Customers now use the Internet to research products, comparison shop, and provide feedback on past purchases. According to a report by Forrester Research, by 2017 approximately 60% of all U.S. retail sales will involve the Internet to some degree (research, transactions, etc.). Accordingly retailers must adopt an “omni-channel” approach that responds to these

- 24 - Target Corporation consumer needs via multiple distribution platforms. An omni-channel strategy requires significant capabilities that involve meaningful investment in areas such as technology, distribution, and order fulfillment. As an example, TGT launched “Cartwheel by Target” in 2013 to adapt to the increasing role mobile devices play within the shopping experience. Cartwheel allows customers to access additional discounts and coupons via smartphone, and it can be integrated with a customer’s Facebook account. Cartwheel has already acquired 5 million users, and coupon redemption rates are 10 times higher relative to other channels.

As the recent data breach illustrates, TGT’s general technological capabilities had been lacking in some regards. The Company continues to make efforts to build its IT infrastructure and building its omni-channel capabilities has been part of this ongoing initiative. During recent years, annual IT-related capital spending has been running above $1 billion (averaging about 30% of total firm-wide cap-ex during the past 3 years). TGT could experience some expense pressures in the near-term as not all IT spending is typically capitalized. Progress is being made, but it has been a gradual process. In fact, TGT had been outsourcing operation of its website to Amazon up until 2011 (a strategy employed by several other firms). TGT’s new and improved omni- channel reach now allow customers to order from various locations (store, Internet, etc.) and select the delivery method that is most convenient for them (home delivery, pick-up from store location, etc.). Target’s online sales have been growing at double-digit rates during recent years, but it is still a modest contributor to overall sales (less than 5%).

However, industry relevance includes other factors beyond competitive pricing and omni-channel capabilities. Maintaining a product line that responds to customer needs is a key driver of a retailer’s competitive position. In the case of TGT, it has assembled a mix of both internal/exclusive products paired with well- recognized national brands (owned and exclusive brands now account for a third of overall sales). Moreover, TGT has made significant adjustments to its mix of product categories in order to maintain relevance within the marketplace. In particular, TGT has placed an increased emphasis on food and other consumables as a means of driving traffic, capturing greater share of a customer’s overall purchases, and staying competitive with the product offerings of its competitors. During recent years the Company’s “PFresh” initiative has been central to this strategy. This measure aims to bolster TGT’s grocery offerings at both new stores and recently renovated existing stores (SSS grew 3% during FY 2012 and 2013 for PFresh stores). Over the past 3 years, TGT has allocated over $2.2 billion in total capital expenditures toward store remodels and expansions (about 20% of total capital spending during the period). As a result of these efforts, consumable products have grown from 34% of sales in FY 2007 to 46% of sales in FY 2013. However, this shift does have negative ramifications from an overall profitability perspective. As seen in the table in the Background and Business Description section, TGT’s overall gross margin has been showing signs of modest erosion during recent years. This margin pressure should be offset by higher traffic to some extent, but this shift may represent a negative development for long-term margins, made unavoidable by the necessity to maintain a competitive and relevant product line.

Growth Initiatives & Future Earnings Power TGT has a history of impressive growth, largely driven by store expansion across the U.S. market. As recently as the 2005-2010 period, EPS was increasing at a CAGR of close to 10%. However, the more recent comparisons have been less robust. Clearly, TGT’s growth trajectory within the U.S. market has entered a more mature stage. Moreover, the firm’s recent financial results have reflected a Company in a transitional phase, illustrated by significant developments such as the divestiture of its credit card business, investments in U.S. store renovations, and the Canadian expansion. Although TGT has faced its share of challenges, we do not believe recent results are representative of the Company’s long-term earnings power. During the coming years, several growth-oriented initiatives should begin to bear fruit, and EPS should be poised for substantial improvement. Management has an objective of $8.00 in EPS by 2017, an ambitious goal that represents roughly a double in Company profits compared to levels achieved in recent years. In our view, it is not clear that $8.00 in EPS will be achievable within management’s specified time frame. Nevertheless, significant growth should be very attainable during the coming years. In particular, the expansion into Canada should become a meaningful contributor to profit growth, and should translate to improved profits and operating leverage. Store expansion in the U.S. and additional growth beyond the Zellar’s locations in Canada will likely be modest in the near-term as the firm focuses on executing existing initiatives (10-15 new stores planned for FY 2014 in the U.S.). Additionally, initiatives such as the REDcard rewards program and City Target should provide growth opportunities in the U.S. market (combined with the previously discussed renovations and expanded product line for existing stores). Lastly, it warrants mention that TGT has ongoing cost reduction efforts across the

- 25 - Target Corporation organization that have shown meaningful progress. TGT realized $200 million in annualized savings during the most recent fiscal year, and this figure is expected to reach $1 billion by 2015 (translating to an annual EPS gain of over $1.00). By our estimate, TGT should be capable of achieving EPS of at least $6.40 by FY 2016, implying EBITDA of approximately $8.8 billion (growth of nearly 40% relative to recent years).

The Company’s expansion into Canada has been a key focus of TGT management during recent years, and financial results should begin to benefit going forward. In order to establish critical mass in the Canadian market within a short period of time, TGT departed from its historical emphasis on organic growth and opted to acquire 135 leases from Canadian retailer Zeller’s (owned by Hudson Bay) in 2011 for a final net price of $1.6 billion. The locations acquired are roughly 100,000 square feet on average, smaller than the typical TGT store in the United States. As of the end of FY 2013, TGT operated 124 stores and 3 distribution centers across Canada. Although TGT’s presence in the Canadian market is still at an early stage, the Company enjoys relatively high brand recognition among Canadian consumers, many of whom have visited TGT stores in the U.S. previously. As operational challenges of the initial launch are addressed, communicating TGT’s marketing message across Canada will likely receive increasing emphasis. Costs associated with the Canadian expansion have been an ongoing drag on TGT’s earnings and cash flow. As recently as 4Q-2013, the Canadian operations reduced TGT’s overall EPS by approximately $0.40. Management has set a goal of $0.80 in EPS and $6 billion in revenue from its Canadian operations by 2017 (management projects Canadian store count to increase from 124 to 150 during this period). The performance of TGT’s Canadian stores has fallen short of initial expectations according to management. In our view, this likely reflects a need to adjust TGT’s product line, pricing and inventory in order to better respond to Canadian consumers, and this should be a fixable problem. Customer concerns pertaining to data security likely served to complicate store performance as well, and such concerns should gradually abate over time assuming no additional incidents occur.

Another growth driver is the expanding REDcard rewards program. The program allows approved TGT customers to receive a 5% discount on all store purchases (via debit card or credit card, no annual fee), as well as free shipping on purchases made from the Company’s web site. This initiative was initially launched in the Kansas City market in 2009, and was launched Company-wide in 2010 (now offered in Canada as well). REDcard transactions reached a 20% penetration rate in the U.S. market as of the most recent quarter. Additional penetration seems likely, as the rate in the Kansas City market (site of the initial launch) has reached 25% (see following chart). The purpose of the program is to attract and retain a loyal and desirable customer base while also driving traffic, number of store visits, and a greater share of its customers’ purchases. Management has indicated that customers that become REDcard holders usually increase purchases at TGT stores by about 50% (thus more than offsetting the margin impact of the discount). Importantly, REDcard holders also possess an attractive credit profile, with FICO scores that exceed non-cardholding customers.

REDcard Penetration 2010-2013

Kansas City

National

Source: Company presentation

- 26 - Target Corporation

Although TGT has already built a meaningful presence across the U.S. market, many areas of the country have little or no exposure to the Target brand. In particular, TGT’s presence in urban markets within the United States has historically been minimal. TGT has been gradually rolling out a new concept to address this market, called “City Target.” These sites are somewhat smaller than typical Target stores (80,000-100,000 square feet, about 30% smaller than the average TGT store), and are located in urban areas with high population densities. Typically these locations have significantly higher traffic than the larger store formats, but transaction sizes tend to be somewhat lower. This concept was launched in 2012, and now accounts for 8 locations across select U.S. cities. Management has indicated that SSS growth for these sites is in high single-digits during the second year of operation. However, expansion of this concept will be gradual as management gains greater visibility on operating these types of locations. The Company is also developing a “Target Express” concept, a smaller location (15% of the typical store size), designed to reach other areas where a larger store is less appropriate.

Balance Sheet and Financial Position We believe TGT possesses a solid financial position, and that the near-term challenges associated with the customer data breach are unlikely to change that. As of the most recent quarter, TGT had net debt of approximately $13 billion, implying a net debt: capital ratio of approximately 44%. TGT possesses investment grade bond ratings (rated A by Standard & Poor’s), and management considers preservation of those ratings to be a strategic priority. The firm’s financial footing is further supported by TGT’s significant real estate holdings. TGT owns 80% of its store base (all owned stores are in the U.S.), in addition to 34 of its 37 distribution centers. The owned stores by themselves could be worth over $40 billion (roughly equivalent to the firm’s current market capitalization). This assumes a valuation of approximately $200 per square foot for TGT’s owned retail store space (consistent with industry transactions according to Real Capital Analytics). Given the conservative demeanor of TGT management, we believe these assets are unlikely to be monetized anytime in the near future. In fact, activist investor William Ackman had proposed (unsuccessfully) that TGT spin off its real estate holdings into a REIT (a proposal that was rebuffed by TGT). In 2008, Ackman had estimated TGT’s real estate holdings to be worth roughly $42 billion. The remaining stores and distribution centers are controlled via leases. As of the end of FY 2013, TGT disclosed total future minimum lease payments (both operating and capital leases) of $9.4 billion.

The Company’s strong financial footing is further illustrated by a well-established record of free cash flow generation. During recent years, TGT’s annual free cash flow has approximated $2 billion-$3 billion, implying a free cash flow yield of roughly 7%. However, it warrants mention that recent capital expenditures have been elevated due to the Company’s expansion into Canada. Starting in 2014, annual capital spending for the Canadian expansion is expected to decline by about $1 billion according to management (U.S. cap-ex is projected to be flat). As a result, $4 billion in annual free cash flow generation should once again be achievable during the coming years, more closely resembling levels prior to entrance into Canada (suggesting a normalized free cash flow yield closer to 10%). TGT has a long history of returning capital to shareholders via dividends and share repurchase (see following graph). Just over the past 5 years, TGT has returned nearly $12 billion to shareholders via dividends and share repurchase (representing over 30% of TGT’s current market value). TGT has paid a dividend to its shareholders every year since its 1967 IPO, and the dividend has consistently grown over time. The current annual dividend of $1.72 per share (2.8% dividend yield), is more than double the dividend paid by TGT just 5 years ago. Based on Company earnings expectations for the upcoming fiscal year, this implies a dividend payout ratio of about 43%. Dividends should be poised for additional growth during the coming years as EPS growth ramps up. Management has mentioned $3.00 in annual dividends by 2017 as an attainable goal assuming TGT meets its $8.00 EPS objective.

- 27 - Target Corporation

TGT: Dividends & Repurchases ($ billions)

$3,061 $2,744 $2,592 $2,467

$919

2009 2010 2011 2012 2013

We do not expect challenges related to the data breach to impact the dividend in any way, but is conceivable that share repurchases may be somewhat curtailed in the short-term. During FY 2013, TGT repurchased $1.5 billion of stock (all purchased during the first 2 quarters). Between 2007 and 2012, the Company reduced its share count at an average annual rate of 4.5%. As capital spending needs decline and greater visibility about the data breach is attained, we would expect meaningful buyback activity to eventually resume. Moreover, the near-term costs and uncertainty associated with the data breach should not impact TGT’s ability to finance any of its key initiatives or projects. TGT’s CEO addressed this issue during the most recent earnings conference call: “Importantly, because we are in a strong financial position, we expect to absorb any near term financial impacts while continuing to invest in projects that are key to our long-term success. Our company has a long history of innovation, disciplined management, and a strong long-term financial performance, and we are committed to upholding these principles which have sustained the company’s success for many decades.” – Target CEO Gregg Steinhafel, February 2014

Corporate Governance Insider ownership at TGT is relatively modest; directors and management currently own less than 1% of the total shares outstanding. However, the Company does utilize stock options and other incentives to help align management’s interests with long-term value creation for shareholders. Typically, 85-90% of compensation for TGT’s senior executives is variable (consisting of bonuses, options, and other stock ownership vehicles). The majority of variable compensation is long-term in nature (based on multi-year time frames), and is linked to metrics such as profit growth, market share, and stock appreciation. The Company has also established minimum stock ownership requirements for its senior management: 5x base salary for the CEO and 3x base salary for all other executives. As of the end of the most recent fiscal year, there were 18.7 million shares of potential future options grants (representing a potential 3% increase in the share base). Any potential repricing of stock options is subject to shareholder approval. Total share-based compensation expense has been in the $90 million-$110 million range during recent years. A committee of independent board members has oversight responsibility for executive compensation, and independent board members are also responsible for evaluating related-party transactions (there are no material related-party transactions disclosed by the firm).

As the following table depicts, TGT’s board consists of 12 directors (11 of these directors are independent). Although the Dayton family had significant involvement in the management of TGT’s predecessor companies, no founding family members are currently present on TGT’s board of directors or management team. All 12 directors are subject to annual election by shareholders. A majority of the directors have tenures of

- 28 - Target Corporation

5 years or more on the Target board. Overall, we regard TGT’s corporate governance practices as reasonable, and similar to other comparable, publicly traded companies.

TGT Board of Directors Board Member Independent Background Roxanne Austin  President, Austin Investment Advisors Douglas Baker  Chairman & CEO, Ecolab Calvin Darden  Chairman, Darden Development Group Henrique De Castro  Former COO, Yahoo! Inc. James Johnson  Founder & Principal, Johnson Capital Partners Mary Minnick  Partner, Lion Capital LLP Anne Mulcahy  Former Chairwoman & CEO of Xerox Derica Rice  CFO of Eli Lilly Kenneth Salazar  Former Senator & Secretary of the Interior Gregg Steinhafel Chairman & CEO, Target John Stumpf  Chairman & CEO, Wells Fargo Solomon Trujillo  Former CEO, Telstra Corp.

Valuation & Conclusion TGT stock had been a stellar performer during the 1990s, reflecting an impressive record of store expansion and profit growth. TGT’s valuation has also benefited from a shareholder-oriented management that has consistently returned capital to shareholders via dividends and buybacks. TGT shares appreciated from about $5 per share in the early 1990s to over $50 per share by 2005. However, appreciation has been more muted during recent years (shares are basically flat since early 2007). The less robust performance likely reflects the Company’s transition to a more mature organization with lower growth prospects. Recent performance has been further complicated by concerns pertaining to the customer data breach and the expansion into the Canadian market. TGT shares have declined by nearly 20% from its recent highs of last July, compared to a 12% advance by the S&P 500 during the same period. We believe assessing TGT’s value on a trailing 12-month basis is less meaningful at this stage given the recent impacts of the data breach and the Canadian expansion on the firm’s profitability. Rather, investors can more effectively gauge TGT’s value after accounting for the firm’s profit potential during the coming years.

TGT has set ambitious goals for itself. Management has set an objective of $8.00 in EPS by FY 2017, roughly double the profit earned during recent years. We believe substantial EPS growth should be attainable for the firm within the next 2-3 years. Customer concerns pertaining to the recent data breach should eventually diminish, and the firm’s Canadian expansion should finally begin to bear fruit. Although the Company’s increased exposure to consumables within its sales mix may be an ongoing issue from a margin perspective, overall Company margins should be poised for meaningful improvement as TGT gains greater operating leverage within its Canadian business. Moreover, initiatives such as REDcard rewards and City Target could provide additional boosts to profit growth during the coming years. However, for the purposes of valuation, we do not assume the $8.00 EPS goal is achieved within management’s time frame, but will prove to be a more extended process. Our estimates of EPS for fiscal years 2016 and 2017 are roughly $6.40 and $7.40, respectively, implying potential EBITDA of $8.5 billion-$9.5 billion within the next 2-3 years (about a 40% improvement relative to recent results). Based on our projections for FY 2016, TGT shares are currently trading at 5.5x EV/EBITDA and 9.5x EPS.

Assuming TGT can trade at a multiple of 7.0x EV/EBITDA (consistent with its trading range during recent years), and applying that to our FY 2016 projections produces an $83 per share estimate of intrinsic value (see following table). From a P/E perspective, this estimate implies a 13x multiple of our FY 2016 projections. This estimated valuation implies total return potential of 40% relative to the stock’s current valuation, and could prove to be conservative from a longer-term point of view. Assuming TGT can continue to approach its profit objectives in FY 2017 and beyond, an intrinsic value of at least $90 per share could eventually be achievable. Near-term, we believe the Company’s real estate assets (roughly equivalent to TGT’s current

- 29 - Target Corporation market value) and the prospects of additional dividend growth and share repurchases should provide valuation support for the stock. Importantly, free cash flow should also be positioned for significant growth during the next 2-3 years as elevated capital spending of recent years begins to revert to more typical levels.

TGT Estimate of Intrinsic Value FY 2016 Value ($MM) TGT @ 7.0x EV/EBITDA 62,301 Net Debt (4Q FY13) 13,087 Equity Value 48,944

Shares Outstanding (FY 2016) 590

Intrinsic Value Estimate Per Share $82.96

Upside from Current Price 37%

From our perspective, TGT is an out-of-favor stock that offers a very favorable risk: reward scenario for long-term investors. Assuming the economic environment is not prohibitively challenging, the Company should be well positioned for significant growth in earnings and cash flow going forward. Moreover, TGT should benefit from a solid financial position, coherent strategy, and capable management team. Clearly, the retail sector will continue to offer its share of challenges, but TGT has a history of operational success within this industry, and we do not believe the Company’s near-term challenges alter its strong competitive position. Overall we believe Target’s well known motto has become relevant for investors as well: “Expect More. Pay Less.”

Risks The Company’s primary risks include:  TGT’s recent customer data breach could result in higher than expected expenses, reduced sales and profits, or damage to consumer perception of the Target brand.  A general downturn in fundamentals for consumer activity or general economic conditions could cause TGT’s future trends in sales and profitability to come under pressure.  The further emergence of e-commerce competitors, and failure to address e-commerce issues could jeopardize TGT’s long-term profitability and competitive position within the industry.  The Company’s strong growth record and increased industry prominence could make future growth rates more modest relative to past years.  TGT’s launch into Canada could fall short of expectations, jeopardizing the Company’s long-term goals for sales and profits.  Increased exposure to the food category could negatively impact overall Company margins.  Weaker than expected financial performance could negatively TGT’s capacity to increase the dividend or repurchase shares in the future.

Analyst Certification Asset Analysis Focus certifies that the views expressed in this report accurately reflect the personal views of our analysts about the subject securities and issuers mentioned. We also certify that no part of our analysts’ compensation was, is, or will be, directly or indirectly, related to the specific views expressed in this report.

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TARGET CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ($ millions) ASSETS Feb. 1, 2014 Feb. 2, 2013 Cash and cash equivalents $ 695 $ 784 Credit card receivables, held for sale — 5,841 Inventory 8,766 7,903 Other current assets 2,112 1,860 Total current assets 11,573 16,388 Property and equipment Land 6,234 6,206 Buildings and improvements 30,356 28,653 Fixtures and equipment 5,583 5,362 Computer hardware and software 2,764 2,567 Construction-in-progress 843 1,176 Accumulated depreciation (14,402) (13,311) Property and equipment, net 31,378 30,653 Other noncurrent assets 1,602 1,122 TOTAL ASSETS $ 44,553 $ 48,163

LIABILITIES AND SHAREHOLDERS' INVESTMENT Accounts payable $ 7,683 $ 7,056 Accrued and other current liabilities 3,934 3,981 Current portion of long-term debt and other borrowings 1,160 2,994 Total current liabilities 12,777 14,031 Long-term debt and other borrowings 12,622 14,654 Deferred income taxes 1,433 1,311 Other noncurrent liabilities 1,490 1,609 Total noncurrent liabilities 15,545 17,574 Shareholders' investment Common stock 53 54 Additional paid-in capital 4,470 3,925 Retained earnings 12,599 13,155 Accumulated other comprehensive loss Pension and other benefit liabilities (422) (532) Currency translation adjustment and cash flow hedges (469) (44) TOTAL SHAREHOLDERS' INVESTMENT 16,231 16,558 TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 44,553 $ 48,163

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Disclaimers

Asset Analysis Focus is not an investment advisory bulletin, recommending the purchase or sale of any security. Rather it should be used as a guide in aiding the investment community to better understand the intrinsic worth of a corporation. The service is not intended to replace fundamental research, but should be used in conjunction with it. Additional information is available on request. The statistical and other information contained in this document has been obtained from official reports, current manuals and other sources which we believe reliable. While we cannot guarantee its entire accuracy or completeness, we believe it may be accepted as substantially correct. Boyar's Intrinsic Value Research LLC, its officers, directors and employees may at times have a position in any security mentioned herein. Boyar's Intrinsic Value Research LLC Copyright 2014.

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