Target Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation Third 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 the prepared remarks, we will open the queue Good morning, everyone, and thank you for joining us on our third 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 third quarter and our priorities as we move into the holiday season. Following the 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. 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 filing. 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.

Brian? Thanks, John, and good morning, everyone. Before I move to our third quarter results, I want to acknowledge our team. In an incredibly challenging environment, they have stayed focused on our guests, looked out for each other, and built on the purpose and a clear set of priorities we've had in place for several years. making Target an even more relevant and responsive company for the millions of families we serve every week. The pandemic has presented new challenges for all of us and our team has successfully navigated every one of them. They've stayed laser focused on safety, agility, and reliability as they seamlessly adapted to abrupt changes in guest needs and shopping patterns. They've handled supply constraints and essential categories while chasing inventory in long lead time categories that are experiencing explosive growth. They've been a calming presence and a friendly face to our guests who are creating normalcy at a time when hardly anything feels that way. And our team members have passionately played an active, positive role in our communities during an incredibly turbulent year. With a deepening level of trust our guests are placing in our team and our brand, We've continued to see very strong business results. Third quarter sales grew nearly $4 billion over the last year, bringing our year-to-date growth to more than $10 billion. This unprecedented growth, both in the quarter and the year, has been driven by meaningful share gains across every one of our core categories, as guests increasingly rely on Target to reliably and safely serve their wants and needs. Based on the cost leverage driven by steeply higher sales, our business continues to deliver impressive bottom line performance, despite the outside investments we've been making in our team, safety, and digital fulfillment. Our third quarter adjusted EPS of $2.79 established another record high for the company and was up more than 100% from last year. Third quarter comparable sales increased 20.7%. reflecting 4.5% traffic growth combined with an increase in average ticket of more than 15%. Since the pandemic began in March, we've experienced a meaningful acceleration in basket growth, both in stores and online, as guests have consolidated their shopping into much larger trips. Across channels, our store comps grew nearly 10%, while our digital comp sales grew 155%. contributing nearly 11 percentage points to the company comp. Within digital, we continue to see the strongest growth in our same-day services, pickup, drive-up, and ship, which together grew more than 200% in the quarter. These services are fast, convenient, reliable, and contactless, which explains why they continue to generate very high levels of guest satisfaction. All our financial reporting counts these same-day orders as digital, These services are entirely enabled by our stores. Specifically, same-day orders are fulfilled by our store teams, along with ship shoppers, who rely on store inventory and systems to deliver to the front of our stores, our parking lots, or against front doors, within a couple of hours of receiving an order. Beyond same-day services, well over half of our packages we ship to guest homes are also fulfilled from our stores, providing speed to our guests All together, between same day services and packages shipped to our guests, about 75% of our third quarter digital sales were fulfilled by our stores. And of course, if you add that onto our conventional store sales of more than $18 billion, you can see that more than 95% of our total third quarter sales were fulfilled by our stores. This Stores as Hub model is the foundational element of our strategic plan we announced at the beginning of 2017, just over three years ago. Our performance for the first three quarters of 2020, which includes digital sales growth of nearly $6.5 billion and a store sales increase of more than $3.5 billion, is the direct result of our Stores as Hub strategy combined with the tireless work of our team to bring it to life. In terms of the cadence of our business throughout the quarter, we began with mid-teen comp growth in August. This reflected a slow start to the back-to-school season, as many school districts across the country began their year in distance learning mode. However, sales trends in back-to-school, back-to-college, and our overall business strengthened in September, driving comp growth in the mid-20% range for the month overall. Comp growth settled back to approximately 20%, consistent with our comp growth for the full quarter. Across our core merchandise categories, third quarter growth was strongest in hard lines, which saw comp growth in the mid 30% range. Within hard lines, results were strongest in electronics, which grew more than 50%, driven by particular strengths in computer software, video games, portable electronics, and office equipment. Within our style categories, Results were strongest in home, which saw comp growth in the mid-20% range, with the strongest growth in decor and kitchen. Comp sales and apparel grew by nearly 10%, led by results in intimate and sleepwear, as well as men's apparel. Consistent with the second quarter, both our essentials and beauty and food and beverage categories saw third quarter comp growth in the high teens. In essentials and beauty, we saw strength across the entire portfolios. with the strongest results in paper and text. Similarly, in food and beverage, we saw broad-based growth with a particular strength in adult beverages and dry groceries. Following our announcement in the second quarter, this was the first full quarter in which our starting wage was $15 or higher across the country, up from $13 a year ago. The attainment of this milestone was the culmination of a commitment we first announced in the fall of 2017. Our team has always been a key differentiator for our stores and our brand, and this $15 commitment was intended to attract, reward, and retain top talent for what has long been the best team in retail. Beyond our longer-term goal to raise Target's starting wage, this year we've also focused on recognizing our team's outside efforts during these extraordinary times. Specifically, we have awarded four separate recognition bonuses so far in 2020. Most recently, in October, we awarded $200 to each of our frontline team members in support of our plan to invest more than $1 billion in our team for the year. As we built our plans for the fourth quarter, our team focused first on flexibility and agility. Knowing how volatile and unpredictable the external environment continues to be, We focused on leveraging target strengths, including the emotional connection between our brands and our guests, and the convenience and speed of our stores and submodels. We're focused on listening to our guests to understand what they're experiencing, and they've told us that safety is one of their top concerns. So, on top of our goal to be the easiest place to shop, we're committed to being the safest place to shop as well. In support of that goal, We've implemented a number of technology improvements to make shopping at Target more contact-free. These include an enhancement to our self-service lanes, which means guests no longer need to use the hand scanner to pay with their wallet function in our app. We've made changes to DriveUp that eliminate the need for a team member to scan a guest's phone when they deliver an order. We've rolled out a new capability on Target.com, allowing guests to check in advance to see whether we're currently metering traffic in their store, and allow them to reserve a spot in line before leaving home. In addition, we've altered our promotional cadence to avoid events that typically cause crowds, and we announced that we'll be closed on Thanksgiving and open at the regular time on Black Friday. Rather than concentrating holiday deals around Thanksgiving and Black Friday, We've spread our Black Friday offers throughout the entire month of November, with weekly promotions spread across different categories throughout the month. And, in the spirit of transparency and trust, we've assured our guests that if they see any of our Black Friday items for a lower price later in the season, we'll happily make up the difference to our extended price match policy. To minimize lines, we've added more than 1,000 mobile checkout devices across the chains, Allow our team members to help guests check out anywhere in the store. We've also added thousands of gift items eligible for same-day fulfillment. And we're entering the holiday season with more than double the number of drive-up parking spaces compared with a year ago. In addition, we've added fresh, refrigerated, and frozen items to our pickup and drive-up assortment in more than 1,600 locations across the country, making this the first holiday season in which guests from coast to coast can use these convenient services to pick up everything they need for a holiday meal. We're also continuing to expand the number of our merchandise categories available through our ship service, most recently adding kids and adult apparel. This change provides a new contactless option for guests to shop these categories and have them delivered to their front doors in as little as an hour. While many things will be different this year, our guests have told us that they still plan to celebrate the holidays and we know they'll be looking at Target for some holiday magic. That's why we're so excited about our recently announced partnership with FAO Schwartz. New for this holiday season, Target and FAO Schwartz have collaborated on an exclusive 70-piece toy collection with many items priced under $20. This collection will be available at Target stores nationwide on Target.com and the flagship FAO Schwartz store in New York City. Beyond this unique collection, this holiday we've created our biggest ever list of top toys, including more than 600 exclusive items, which will feature at an incredible value all season long. In decor, we're focused on bringing Target's brand promise to life by offering value and quality, with hundreds of ornaments priced at $3, $5, and $10. On Target.com, more and more of our guests are shopping for decor using see it in your space technology. which makes our digital shopping experience more inspiring than ever. This feature allows guests to visualize what Christmas trees will look like in their home as they prepare to decorate for the holidays. Guests who utilize this 3D rendering feature are two times more likely to purchase the tree compared with an average digital guest. In speaking with our guests, we know that finding the right gift can be a source of stress during the holidays. So this year, to make it easier than ever for our guests to share the joy, We've expanded our gifting assortment, including items for even the toughest individual on their list. With many items priced at $15 or less, we are offering incredible value, making it easier to celebrate the season with family and friends. And while the holiday season is top of mind right now, we shouldn't forget that the fourth quarter also includes a full month after the holiday. We're planning to kick off the new year on a positive note, with a focus on wellness and nutrition, new exclusives in beauty, and the introduction of seamless t-shirts, fleece, and performance bottoms to celebrate the one-year anniversary of our new activewear brand, Fall in Motion. And speaking of beauty, we couldn't be more excited about our new long-term strategic partnership with Ulta Beauty, which we announced last week. Because it embodies both style and frequency, the beauty category is ideally suited to our strategies and it's been one of our strongest growing categories over the last few years. This new partnership will help us to build on that success providing our guests access to dozens of new beauty brands nationwide with elevated service and presentation in select store locations. We plan to open the first 100 Ulta Beauty shops and shops later in 2021 with the potential to open hundreds more in years beyond. So now before I close Thank you for joining us today. As I get ready to turn the call over to John, I want to come back where I started and acknowledge our amazing team. When I arrived at Target a little more than six years ago, I already knew that Target is an academy company, a place that attracts and develops the level of talent that's the envy of other companies. That was already true before I arrived, and I couldn't be more proud of the team's investments we've made in recent years. Investments intended to cement Target's position as an inclusive home for top talent. What I didn't appreciate until I became immersed with this team is the warmth of the culture and the team's sincere desire for Target to play a positive role in the world. This desire often shows through in our marketing and our assortment, and you can certainly see it in our stores. But for those of us who have the privilege of working with every part of this team, we see it every day behind the scenes, even So, I'll close with a simple thank you to this team for your passion to make Target a welcoming place for all families and a great place to work for everyone on the team. With that, I'll turn the call over to John for an update on our operations and plans for the holiday season. John?