Throughout our history, Target Corporation has achieved success by combining innovation and discipline, marrying financial strength and thoughtful planning to operational agility, and balancing our investment in long-term growth with our ability to deliver near-term earnings. In 2001, these core principles again guided our overall strategy and performance.

• We continued to leverage our trend leadership, differentiate our merchandising, and offer compelling value throughout our assortments to satisfy our guests’ needs and exceed their expectations. We intensified our focus on being in-stock and provided greater shopping convenience as we increased both our physical and on-line presence.

• To expand our market share, enhance our Target, Mervyn’s and Marshall Field’s brands, and strengthen our infrastructure, we strategically invested $3.2 billion of capital during the past year in new store construction, remodeling, and more sophisticated technology and distribution capabilities.

• Consistent with our high standards of performance, we further harnessed the power within our proprietary credit card operations and successfully launched Target Visa on a national basis. This represents the first mass-scale application of smart card technology in the U.S. and we are confident it will further deepen relationships with our guests, drive merchandise sales, and increase near-term and long-term profitability.

• And importantly, we again demonstrated our ability to create value for our shareholders. Despite heightened competitive and economic challenges in fiscal 2001, our EPS before unusual items rose 12.4 percent to $1.56 ($1.50 including unusual items), and we generated a total return to shareholders — measured in share price appreciation and dividend income — of 18 percent, well in excess of the returns for both the S&P 500 and the S&P Retail index.

As we look to 2002 and beyond, we remain confident in our strategy, and believe that Target Corporation is well-positioned to achieve profitable growth well into the future.

Outside of merchandising, our commitment to innovation is perhaps less visible, but no less important in building guest loyalty and enhancing profitability. For example, in the mid 1990s, Target became the first discount retailer to offer a proprietary store-brand credit card with our launch of the Target Guest Card. And in 2001, we further differentiated Target’s brand and again demonstrated bold leadership with the national introduction of our Target Visa smart card. Later this year, following the installation of thousands of chip readers in our Target stores, we expect to begin offering merchandise promotions that are tailored to individual guests’ tastes. These efforts, in conjunction with successful credit card programs at both Mervyn’s and Marshall Field’s, strengthen our bond with our guests and contribute meaningfully to our annual revenue and earnings growth.

The Internet also presents innovative opportunities for us to enhance our relationships with our guests and drive incremental sales and operating efficiencies. In 2001, we entered into an agreement with Amazon.com that leverages Target’s merchandising and marketing expertise with Amazon’s on-line dominance, superior technology and fulfillment capability. Through this partnership, our guests will be able to enjoy purchasing items from Target’s differentiated assortment while using Amazon’s state-of-the-art shopping features at two on-line stores. We believe this alliance positions us to capture a greater share of web-based retail commerce and will help propel our growth as the Internet’s role in retailing evolves.

We are also more frequently using the Internet as a platform for improving communications and facilitating commerce with our business partners. By strategically employing existing technology and applications, we have meaningfully reduced our cost of goods and services in key areas and we have improved our in-stock levels and markdown rate through better inventory management and information flow.

As our company has developed and gained a national presence, our strategic perspective on future growth has also progressed. In recent years, we have become increasingly flexible in our site selection and store design — without compromising our Target brand or our financial disciplines. Additionally, to serve more guests, gain greater market share and generate incremental profits, we have pursued opportunities for expansion in even our most highly penetrated states such as Minnesota, Indiana and Arizona. By successfully replicating our guest experience in more unique locations and more mature markets, we have significantly expanded our growth horizons. In 2001, through a combination of 61 total (44 net) new Target discount stores and 32 SuperTargets, we increased our net square footage by nearly 11 percent, or 12 million square feet. In 2002, we plan to accelerate this square footage growth, adding approximately 12 percent, net, to Target’s existing base. This more rapid pace of growth is primarily attributable to more than 25 fully-prototype Target stores in locations that were formerly Montgomery Ward or Bradlees sites. In addition, our 2002 store opening program essentially doubles our current number of multi-level stores and includes over 30 new SuperTarget locations, representing almost 40 percent of the net increase in annual square footage.

Discipline is equally important in ensuring our brand consistency. It means we are uncompromising in our store housekeeping standards — including bright lights, wide, uncluttered aisles, and clean floors. It also means that we maintain high expectations for “Fast, Fun and Friendly” service — selecting and training exceptional team members, assisting our guests throughout the store and minimizing the amount of time our guests spend waiting in line to check-out. To protect our brand in existing stores, we adhere to a strict remodel schedule and routinely invest millions of dollars per store to incorporate design elements from our newest prototype.

Discipline also plays a role in our ability to satisfy our guests’ expectations for merchandise excitement and value, and for in-stock reliability. It helps us avoid complacency and preserves our competitive advantage. Reflecting our fundamental mission as an upscale discount store, we remain vigilant in offering attractive prices, receptive to fostering new design partnerships and focused on managing inventories to meet our guests’ demand and to optimize sales and markdowns.

Finally, our disciplined culture is instrumental in our ability to generate average annual earnings per share growth of 15 percent or more over time and deliver superior returns to our shareholders. Almost a century ago, Nelson Dayton, one of this corporation’s early leaders, said, “Thrift in a time of prosperity buys advantage in a time of adversity.” We believe this statement still has relevance for us today.

As we look to the future, we continue to challenge ourselves to be premier in every facet of our business — to be the best for our guests, our team members, our communities and our shareholders. We believe that the principles and strategies that have guided us and contributed to our success for decades will continue to guide us and fuel our growth for many years to come.

Sincerely,

Bob Ulrich,
Chairman and Chief Executive Officer