Target Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation second 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, August 19, 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 second 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 second 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 SEC filings. 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 quarter and our focus going forward.

Thanks, John, and good morning, everyone. Today, we're sharing second quarter results that are, by virtually any measure, exceptional. But I want to say at the outset that what's most extraordinary of all is the environment in which we generated those results. The incredible resilience of our team, the way they've risen first to the pandemic, then to social trauma touched off in May here in Minneapolis. is unlike anything I've seen or am likely to see again in my career. And I say in all humility that it has been a huge privilege to work alongside this team in this moment. The results we reported this morning are truly unprecedented. On the top line, we delivered second quarter comparable sales growth of 24.3%, the strongest we've ever reported. Equally remarkable, on the bottom line, we generated adjusted EPS of $3.38, a new record high, and strong enough to offset the significant profit headwind we faced in the first quarter. These results are a testament to our team and their passion for our guests and the increasing trust our guests are placing in our brand. Our performance also reflects the meaningful investments we've made in recent years. Building a business model that is durable enough Thank you for joining us today. We encountered multiple abrupt changes in shopping patterns throughout the first quarter, both across categories and channels. Near the end of that quarter, we returned to growth in our store sales and once again saw growth in categories like apparel. This improved sense of balance in both channel and category mix continued through the second quarter. And we didn't see the dramatic swings we experienced in the first quarter. In terms of channel mix, we saw very healthy growth across the board. with store-origin and comparable sales growing 10.9% and digital comp sales up nearly 200%. It's worth pausing to acknowledge that at just under 11%, this store-only comp stacks up as one of the best in our history. And yet, it happened at a time when American consumers are adopting digital shopping like never before. In addition, as I've mentioned in previous calls, channel numbers don't tell the full story. Thank you for joining us today. It aligns with our merchandising approach, which is based on curation, both in our stores and online assortments. As a result, the majority of our digital demand is driven by items that are already available in our stores, which positions us to efficiently rely on those locations to fulfill the demand. Among our store-enabled digital fulfillment options, we continue to see the most rapid growth in our same-day offerings, in-store pickup, drive-up, and shipped. These services offer speed, reliability, convenience, and value to our guests. Their digital capability is enhanced by human interaction, even though they're contactless. This explains why they generate some of the highest levels of satisfaction of anything we provide. Together, our same-day services saw more than 270% comp growth in the second quarter, outpacing overall digital growth. Among these services, we saw the fastest growth in drive-up, We also saw incredible growth in target sales fulfilled by shift, which were up more than 350%. However, even though we have offered pickup in all of our locations for more than five years, in-store pickup sales increased more than 60% in the quarter. Across all five of our core merchandising categories, we delivered very strong share gains in the quarter, driven by the acceleration in our discretionary businesses. Thank you for joining us. Thank you for joining us. Domestics, and Kitchenware. Beauty also saw healthy acceleration, doubling its first quarter growth rate to more than 20% in the second quarter. Our less discretionary food and beverage and essentials categories each saw second quarter comp sales growth of about 20%. For both categories, this was slightly slower than we saw in the first quarter, which was marked by dramatic stock-up shopping as the pandemic emerged. At a time when every retailer is facing increased uncertainty, and unforeseen challenges, we have chosen to continue investing in our business and particularly in our team. Following hundreds of millions of dollars in team investments in the first quarter, in June, we announced that beginning July 5th, we would permanently raise our starting wage for US team members to $15 per hour. Additionally, we announced a one-time bonus of $200 to our frontline store and distribution center hourly workers in recognition of their efforts throughout this extraordinary year. We also announced free access to virtual doctor visits for all team members through the end of the year, regardless of whether they currently subscribe to a target health care plan. And we announced additional extensions of our 30-day paid leave for vulnerable team members and free backup care for family members. As I've mentioned before, the return on these team investments may be hard to quantify in a spreadsheet, but I am confident that they have been among the most important investments we've made over the last few years. In late May into June, our team had to navigate the challenges presented by the killing of George Floyd and the civil unrest that it sparked nationwide. While we all experienced the heartbreak caused by the murder itself, our initial focus was on the safety of our team. As a result, in areas affected by unrest, we closed locations or reduced operating hours affecting hundreds of our stores across the country. Most of these stores were able to safely resume normal operations in a matter of a few days but a handful of locations sustained more significant damage. All but two of those stores have already reopened and we're hoping to have those locations reopened by the end of the year. Through it all, I'm happy and grateful to say that none of our team experienced physical harm through the unrest. But beyond physical safety, our team is passionately demanding equity and justice for our black colleagues and guests. We are united in that passion and committed to supporting our team while playing an active role in addressing the persistent racial injustices that have sparked protests around the world. Beyond our team's volunteer efforts across the country, we have dedicated $10 million, half from corporate giving and half from our foundation, towards Twin City rapid response needs, local rebuilding efforts, and national social justice initiatives. We've also formed a committee called REACH consisting of senior leaders who have come together based on their experience and expertise Together, they represent a broad enterprise view, and their work is focused on advancing racial equity for our black team members and guests across all areas of Target's business. To deliver the most impact across our business, REACH is aligned around four key areas of focus, team, guests, communities, and civic engagement and public policy. With their help, we're putting our influence to work in our hometown and in the country, bringing together our team, our neighbors, Other businesses and community partners to determine actions and resources that will move us towards a more inclusive, equitable, and just society. Now, let's turn to our plans for the third quarter and beyond. Our research tells us that guests still want to celebrate seasons and holidays, even as they acknowledge that things will be different in this new environment. To help our guests adapt to these changes, we're building flexibility into our merchandising and operations. to allow our guests to celebrate the season in new ways. Knowing that many parents across the country are still facing uncertainty about whether their children will be attending school in person or virtually, we'll be featuring our back-to-school assortment for an extended period this year, allowing parents to delay shopping until they have more certainty on their school district plans. In back-to-college markets, we'll be moving in-store shopping events outside into our parking lots and highlighting contactless options like drive-up. Across the chain, we'll be promoting the Wallet feature within the Target app as a fast, contactless alternative to paying with a physical card. And for Halloween, we'll continue to feature costumes and decor to celebrate this season, but we'll be adjusting our candy merchandising in anticipation of a reduction in trick-or-treating this year. In addition, we'll be giving away surprise boo bags to our drive-up guests in October, featuring surprises along with tips and suggestions for celebrating the season. Also this fall, we'll roll out the third and final phase of our Good & Gather assortment, adding more than 600 items to bring the total number of items to nearly 2,000. The Good & Gather brand is clearly resonating with our guests and delivering on our food and beverage vision to enhance the Target experience by making it easy for families to discover the joy of food. We launched this new flagship brand less than a year ago, and it has already generated more than $1 billion in sales. With the momentum from this new brand, our own brand food and beverage business has been growing more than 30% so far this year, significantly outpacing the market and growing market share. Beyond Good & Gather, we continue to benefit from an unmatched portfolio of owned and exclusive brands that spans our entire assortment. Together, these brands, whose sales have outgrown national brands so far this year, Offer gets quality and style at an unmatched value while enhancing targets differentiation and delivering attractive gross margin rates. In June, we launched Casa Luna, a collection of more than 700 quality bedding and bath items featuring elevated natural and sustainable materials like linen, hemp, silk, cashmere, all at an amazing value. And of course, it was only in January that we launched our new activewear brand, All In Motion. and the timing couldn't have been better. All in Motion was designed with a commitment to quality, sustainability and inclusivity at incredible Target prices. As guests across the country have moved to working from home, they've embraced the quality, comfort and value provided by this new brand, driving sales well beyond our original expectations. Also this quarter, Target Circle will be celebrating its one-year anniversary of its national rollout. At more than 75 million members, Circle has exceeded our expectations in its first year. To celebrate, we'll be highlighting Circle in our marketing, with a focus on driving acquisition and engagement in advance of the fourth quarter shopping season. And finally, as we look ahead to the fourth quarter, we're focusing first on guest and team member safety, developing plans to reduce crowds and spread out demand throughout the season. Specifically, we'll be spreading our best-priced holiday offers over a longer time frame, Beginning in October, so guests can shop safely and conveniently without worrying about missing out on deals that usually come only late in the season. We've also announced that we'll be closing stores on Thanksgiving, sending a clear signal to guests that they won't need to stand in line and crowd into stores to get a great deal. In addition, we'll be making thousands of additional items available via same-day services this holiday season, including more gifts, essentials, and everything in between. In addition, as John will describe in more detail, we'll offer fresh and frozen grocery items via order pickup and drive up at more than 1,500 Target stores this fall. As I said in the beginning, I'm incredibly proud of our team and the performance they've delivered on behalf of our guests. As we focus on transforming our business over the last few years, we began with a focus on our guests and how we could better serve them by leveraging our strengths. We emerged from that effort with a durable business model. Differentiated from our competitors and designed to perform in a variety of environments. When we contemplated the range of environments we might face, I don't think anyone could claim that they knew what we'd be facing today. Yet in the face of unprecedented changes in the environment, our business is doing what it's designed to do. It's delivering convenience, reliability, safety, and value. Driving increased engagement and trust among our guests. It's supporting and rewarding our team, the best team in retail. Thank you for joining us today. As we said in our last call, we have never been more confident in our differentiated strategy and our long-term potential. Throughout this crisis, we have deepened our relationship with American consumers and introduced millions of them to our digital fulfillment services. As a result, we've seen unprecedented growth in market share, a trend that we expect to continue. With a strong business and deep financial strength, we feel well prepared to weather any near-term economic headwinds and continue to serve and delight our guests. Our team is ready and eager to seize the opportunity in front of us. Now, I'll turn the call over to John, who will provide an update on operations and our plans going forward. John?