Target Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation first quarter earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will invite you to participate in a question and answer session. At the close of prepared remarks, we will open the queue for the Q&A session. At that time, if you have a question, You will need to press star 1 on your telephone. As a reminder, this conference is being recorded Wednesday, May 20, 2020. I would now like to turn the conference over to Mr. John Hulbert, Vice President, Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining us on our first quarter 2020 earnings conference call. On the line with me today are Brian Cornell, Chairman and Chief Executive Officer, John Mulligan, Chief Operating Officer, and Michael Fiddelke, Chief Financial Officer. In a few moments, Brian, John, and Michael will provide their perspective on the first quarter and our continued focus on our guests and our team as we navigate through the current environment. Following their remarks, we'll open the phone lines for a question and answer session. This morning, we're joined on this conference call by investors and others who are listening to our comments via webcast. Following the call, Michael and I will be available to answer your follow-up questions. And finally, as a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, the most important of which are described in our most recently filed 10-K and the 8-K we furnished this morning. Also in these remarks, we refer to non-GAAP financial measures, including adjusted earnings per share. Reconciliations of all non-GAAP numbers to the most directly comparable GAAP number are included in this morning's press release, which is posted on our investor relations website. With that, I'll turn it over to Brian for his thoughts on the first quarter and the short-term and longer-term implications for our business.

Brian? Thanks, John, and good morning, everyone. We appreciate that you've joined us on this morning's call, and we hope that you, your family, and friends are safe and healthy. It goes without saying that But this quarter was unlike anything we've seen in our company's long history. And while we didn't establish another all-time record for this quarter's EPS, I have never been more proud of our performance. Over the last few years, we built a strategy and operating model that's designed to generate strong performance in a wide variety of environments. And the first quarter demonstrated the strength of that model. Unprecedented volatility within the quarter presented the most extreme test of our business and operations that I could have imagined. And in that environment, we drove industry-leading growth with a total comp sales increase of 10.8% and digital comp growth of more than 140%. As I reflect on all that's transpired since the quarter began in February, there were two key factors in our success. Our strategy of positioning stores as fulfillment hubs and our unbelievable team When guests began flocking to our stores to stock up, our team was ready. And when digital demand exploded as guests began to shelter in place, our teams have the tools, processes, and capability to flex to meet that shift in demand. But it goes well beyond processes and tools because our team's efforts on behalf of our guests and communities have been monumental. The pride our team has shown and their willingness and ability to deliver essential products and services to our guests Thank you for joining us. Thanks for joining us. We have teams at headquarters, stores, and throughout the supply chain who are relentlessly focused on our guests and who place a premium on agility and adaptability. And with a strong balance sheet and a business model that generates robust cash flow, we have the financial flexibility to handle difficult times like this, allowing us to fund investments in the safety of our guests and our teams. while serving a critical role in communities as a trusted essential retailer. Given our unique assortment and comprehensive suite of fulfillment options, we could see firsthand as our guest mindset rapidly evolved during the first quarter. While it already feels like years ago, during the first three weeks of February, we experienced a relatively normal mix of sales across merchandising assortment and a typical mix of sales between our stores and digital channels. Towards the end of February, we saw an acceleration in traffic and sales, particularly in our stores. However, we continued to see a lot of cross-shopping into more discretionary categories when the guests made trips to stock up on food and essentials. Around the middle of March, the mix of guest purchases became much more narrowly focused on food, beverages, and household essentials, and we began seeing much softer trends in discretionary categories, most notably in apparel. In addition, as shelter-in-place rules were adopted across the country, guests began to pull back on store trips, and we saw a dramatic surge in digital traffic and sales. We also began seeing higher demand for products oriented around staying at home, including home office products, video games, puzzles, and board games, along with the housewares and kitchenware in our home assortment. And finally, around the middle of April, We experienced a rapid increase in traffic and sales in our stores and a broad surge in sales in more discretionary categories, including apparel, which persisted throughout the end of the month. The surge in stores occurred while our digital growth continued at unprecedented rates of 2 to 300 percent above last year. As a result, over the last couple of weeks of April, we saw some of the strongest comparable sales growth we've experienced in our history. When you put all these chapters together and look at the first quarter in total, our comparable sales grew nearly 11%, with a wide range of performance across categories, as guests changed their shopping pattern in response to the crisis. Among our five core merchandising categories, we saw the strongest performance in hard lines, which grew comparable sales by well over 20%. Growth was particularly strong in electronics, where comps grew more than 45%, reflecting high demand for video games and home office items. Essentials and Beauty saw high teen comp growth, while comps in food and beverage grew by more than 20%, as guests trusted Target for both their stock of trips and their everyday needs. In Home, we saw high single-digit comp growth, led by Kitchen, which saw comp growth in excess of 25%. And in Apparel, first quarter comp sales declined about 20%, reflecting soft sales in late March into early April, followed by a resumption of growth in the last two weeks of April. As we evaluate these category trends relative to overall U.S. retail, and on a category-by-category basis, we are seeing unprecedented share gains across every measure. Clearly, in portions of our business, share statistics reflect the fact that non-essential retailers across the country have remained largely closed. And, even though we compete with them, We sincerely look forward to the day when our retail colleagues can reopen. After all, a healthy retail sector is critical to the overall health of the U.S. economy. And, of course, employees of our competitors often shop at Target too. More fundamentally, we believe recent share numbers reflect the trust that our guests have placed in our stores, our digital capabilities, our team, and our brand. In particular, as our teams have risen to meet our guests' needs and deliver friendly, reliable service During this unprecedented time, we believe that our guest level of trust has only become deeper throughout this crisis. From a channel perspective, first quarter store sales grew about 1%, while digital comp sales increased by 141%. Of course, these quarterly numbers mask how quickly trends changed within the quarter. Specifically, we began the quarter with a relatively normal February, in which we saw overall comp growth of 3.8%, and digital comp growth of 33% and ended in April which saw total company comp growth of more than 16% and a jaw-dropping 282% increase in digital comp sales. I want to pause and comment on that April digital performance for a moment because I suspect that many of you might have wondered whether our operations could sustain such a strong increase for an entire month. After all, to put this volume into perspective, On an average day in April, our operations were fulfilling many more items and orders than last year's Cyber Monday, a day for which we had planned months ahead of time. In contrast, this unprecedented surge in volume was completely unexpected at the beginning of the quarter, and it ramped up from normal trends in a matter of weeks. And by design, it was our stores that enabled this surge in digital volume, fulfilling more than 80% of our digital sales in April. Even more impressive, within our April digital sales growth of just over $1.1 billion compared with last year, store fulfillment accounted for more than $950 million of that growth, as both our stain-based services and shipments to gas homes saw significant increases. How was this accomplished? John will provide more details in a few minutes, but I'd reiterate that it comes down to two factors. Our strategy of using our stores as hubs. and the ability of our team to quickly pivot to meet shifting demand. And while we incurred extra costs to accommodate this incredible surge in digital fulfillment, we expect to gain a long-term benefit in terms of guest loyalty. During the first quarter, more than 5 million guests shopped on Target.com for the first time, with more than 2 million of those guests making their first drive-up trip. And because of the amazing flexibility our team We saw consistently strong levels of satisfaction with the Target.com shopping experience, even in the face of crushing increase in demand. So now I want to turn to our focus going forward, which isn't going to change. We continue to focus on serving our guests while taking steps to provide for their safety. And we'll continue to focus on our teams, investing in their safety and their well-being, while working to remove obstacles and allow them to serve guests during this critical time. Throughout this evolving crisis, we have continually adapted our operations and processes to enhance guest and team member safety. Looking ahead, we'll continue to quickly adapt to changes in the environment and emerging guidance from the CDC and other authorities. Already during the first quarter, we took numerous steps to protect our guests, ship shoppers, and our team members, including enhanced cleaning standards, providing personal protective equipment to our team members and ship shoppers, Installing plexiglass dividers at checkout and implementing metering protocols in our stores were appropriate. For our team, we rolled out a wellness checklist for them to perform before each shift and provided free thermometers to team members who needed them. We also invested hundreds of millions of dollars in extra pay and benefits for our team, adding $2 to their hourly wage, investing in enhanced backup daycare options across the country, and offering enhanced paid leave for team members with vulnerable health conditions. Consistent with our longstanding commitment to the communities where we live and work, we donated personal protective equipment to over 50 healthcare organizations and shared tools and expertise with government partners and other businesses to help protect healthcare workers and assist other businesses in reopening and operating safely. In addition, we recently announced our foundation's biggest single donation in company history, Thank you for joining us. for our team through the end of June. We initially announced these temporary changes the end of April, and last month we announced we were extending them through May. And today, even as the country is starting to talk about how things will look when we get back to normal, our teams continue to face unprecedented challenges as they serve families in their communities. As a result, we're proud to support our amazing team members as they navigate through these challenging times. In terms of our financial expectations, Michael will offer his perspective in a few minutes, but we're maintaining our recent suspension of financial guidance. From today's perspective, the one thing that seems most certain is continued volatility. And whenever possible, we're building flexibility into our plans and commitments. But let me be clear. The expectation of continued volatility in the external environment doesn't translate to a lack of confidence about our future. If there's one thing our team and operators have demonstrated, Thank you for joining us today. and Trust among our guests. So, as I turn the call over to John, I want to once again offer my thanks to the entire Target team, from headquarters to our operations and offices around the world. I've never been part of a stronger team, and I share your pride in the essential role that Target is playing in the lives of our guests. Thank you for your inspiring efforts every day. John?