Target Corporation

Good morning and welcome to our 2021 Financial Community Meeting. We're eager to share our insights on the extraordinary year that just passed, as well as our vision for what's next. But I couldn't start today without reflecting on the fact that a year ago at this time, the pandemic was just beginning to unfold. And in an effort to keep everyone safe and to limit travel, we decided to convert this meeting to a virtual format. While we miss hosting our in-person gatherings, It's prudent to stick with virtual presentations once again this year. But we're looking forward to resuming our live events, including this one and our annual shareholds meeting in 2022. As I look back over the past year, a year when so much care and compassion was called for, I see purpose coupled with capabilities as the essential enabler of our response. and the story of Target in 2020 is the story of a team that wanted nothing more than to take care of those around us, drawing on capabilities that were equal to that ambition after years of building and investment. So I want to start today by publicly recognizing and thanking our team. I'm incredibly proud of the resilience, empathy, care and concern they've shown for each other, our guests and communities through a very challenging 12 months and counting. None of what we'll share today would have happened without them. Even before the dramatic challenges of last year took hold, our team had been busy building the retail platform of tomorrow. But 2020 accelerated everything. And as such, our guests are already benefiting from and loving that platform today. At the heart of the platform was a belief that consumers would continue to flock to our stores For multi-category, one-stop shopping, a friendly, well-trained, and knowledgeable team, and joyful experiences. As we designed our strategy and invested accordingly, we relentlessly asked ourselves what products and services those stores should offer, where they should be located, how their operations should be tailored to meet neighborhood needs, and ultimately, how to make our stores work together with all of our other assets as one shopping platform that would keep guests turning to Target however they want to shop. In answering those questions, we did two things at once. We placed the physical store more firmly at the center of our omnichannel platform. And we created a durable, sustainable and scalable business model that puts Target on a road of our own. Our goal was to use our proximity. Nearly 1,900 stores within 10 miles of the vast majority of the U.S. consumers Thank you for joining us. When those threats emerged in 2020, we were ready. And without hesitation, millions of American families turned to Target like never before. That happened because of decisions we made four and five years ago. And today, Christina Hennington, our recently named Chief Growth Officer, along with John Mulligan and Michael Fiddelke, will join me in mapping out how our team's efforts in recent years created a new baseline from which we'll continue to climb higher for our guests. and here's what I hope you'll take away from our story. First, that our team's ability to act and react in 2020 was years in the making. Without our multi-year roadmap to develop new capabilities and bring them to scale, 2020 could have exposed essential gaps in our business model. Instead, it proved beyond a doubt the durability of our model and it signaled our potential for continued growth in years ahead. The second takeaway stems from a question I've heard frequently, especially in 2020. Brian, what's the secret to Target's growth trajectory? What you'll see in our presentation today is that the one thing that's driving our success is a focused commitment to several things, an integrated collection of strategies and capability that all work together, are very difficult to replicate, and ultimately make Target unique. Thank you for joining us. When we left that meeting, no one knew that COVID-19 would be declared a pandemic in the United States only a couple of weeks later. In hindsight, it's hard to believe that we only received one COVID-related question that day. But today, as we look back on 2020, the business highlights are clear. Our revenue during the year increased another $15 billion. We gained meaningful market share across all five of our merchandising categories, totaling about Our full year comparable sales were up more than 19%, with a store comp of more than 7% in a year when people were staying home to stay safe, and a digital comp of 145%. Standing at this meeting three or four years ago, it would have been hard for any of us, or any of you, to imagine digital penetration of 18% without a dramatic deterioration in our P&L. Yet today, we announced record-high, full-year adjusted EPS of $9.42. Importantly, we accomplished all of this while making huge incremental investments in our team's safety and well-being and completely re-outfitting our stores to keep our team and guests safe. Far from being a fluke, this performance is further proof that we've built a business model that is working as intended, one that puts Target and many more. We simply wouldn't have been able to satisfy the exploding guest demand for same-day services, represented by more than 600% growth in drive-up. Likewise, ship is an extraordinary capability that grew by more than 300% last year and will continue to grow as more guests recognize the power of having their purchases brought to their doorstep in as little as an hour. We've consistently invested in our merchandising strength, like our differentiated own-brand portfolio. are curated national brands, inspired limited time offering, and strategic relationships that run the gamut from web-only startups looking for omni-channel scale to premier partners like Disney, Apple, Levi's, and Ulta Beauty. We're continuously improving our physical and digital shopping experience, investing billions in store remodels, specialized store roles, and service training for our teams. while continuing to open up new small formats in urban centers, major college campuses, and iconic tourist destinations. Most importantly, we're continuing to invest in our team. Even before 2020's outsized incremental expenditures on team health and safety, Target was an employer of choice, an academy company for those looking for rewarding and purposeful careers. In addition to accelerating our $15 starting wage in 2020, We celebrated our team's exceptional efforts with five separate recognition bonuses, most recently in January, when we invested another $200 million to award each of our frontline team members $500. As we develop capabilities like Target Circle or acquire them like Shipt, we do so with a clear vision for how they'll work together in service of our guests. Ultimately, the value they create in our core business has to contribute to a retail offering that's greater than the sum of the parts. But when we look at these elements individually, it's strikingly clear how much value we've added in a very short time. In 2016, our digital transformation was only beginning. We weren't even a top 10 e-commerce provider. And we were just getting our same day services off the ground. Today, we have the most complete suite of same day fulfillment services in the industry. We're one of the leading e-commerce players. and for Click and Collect, same day services, we continue to deliver industry leading growth and dollar volume as well as net promoter scores over 80% despite record demand. In 2016, we had about 30 small format stores. Today, we have 140 and we'll add another 30 to 40 per year over the next several years. If these stores were a standalone chain, their revenue would rival that of fast growing chains with many more locations. In 2016, we launched Pillowfort and Cat & Jack, touching off our own brand reinvention that has since resulted in more than 30 new brands, with more on the way this year. By the time we gathered for this meeting last year, Cat & Jack and five other own brands were generating $1 billion or more apiece in annual sales, and that tally has continued to grow. We cleared 2020 with 10 of our own brands each generating $1 billion or more, and four of those crossed the $2 billion per year threshold. Any one of these brands alone would be a sizable retailer. And as you know, their contribution profits is outsized. Of course, owned and exclusive brands are just one component of our merchandising strategy, which is always drawn on curated national brands across our assortment. As we've expanded capabilities in recent years, we've also steadily built our roster of strategic partners. Levi's is an excellent example of how we can build upon a long-standing collaboration and help strategic partners catapult into new product categories. We started partnering with Levi's years ago on the Denison Denim brand, and that partnership grew to include Levi's Red Tab apparel and built out presents in hundreds of stores and on Target.com. Just this last Sunday, we launched the Levi's for Target collection, a limited-time offering of home goods. This is the first foray by Levi's into this category, and it's a great example of combining their strengths with ours, including our incredible sourcing and product design and development capabilities to forge new potential for both of our brands. Meanwhile, our team is also gearing up to introduce Ulta Beauty at Target to our stores in Target.com, starting with the first 100 stores later this year. From this initial batch, we'll test, we'll learn, and we'll expand to hundreds of additional locations over time. This partnership combines Ulta Beauty's unparalleled assortment, category expertise and guest loyalty with our large, high-growth, traffic-driving beauty business and the ease and convenience of our fulfillment services. Together, we'll be able to offer guests access to established, emerging and prestige beauty brands as well as expert beauty consultation in an industry-leading, omni-channel retail experience. As a standalone or isolated innovation, each of these elements I mentioned has something in common with the other. Each was advanced based on how it would complement our other assets and capabilities. And we tested each one with an eye towards scale. In fact, the ability to integrate and scale is a key component of our decision making. And to emphasize the critical importance of scalability, I simply think back to what we could have done in 2016, but didn't. At that time, Conventional wisdom held that the only way forward was for retailers to build capacity to send more packages to homes. Instead, we went our own way, built a fulfillment model with our guest's local store at the center, and took the initiative on same day. We could just as easily have constructed additional fulfillment centers and driven the shift to digital sales with more ship-to-home capacity. But as you know, the economics were terrible, and we wouldn't have been differentiated In short, we didn't see the textbook solution as scalable or as likely to do what we've done. Namely, set the groundwork for years of guest satisfaction and brand loyalty as represented by comments like this. Thank you for providing curbside pickup. It actually was the determining factor in me buying from Target instead of one of those online retailers. Or this. Or this. or this note from a guest who simply said, please always continue to do curbside pickup. It is such a help even outside of COVID. This is a wonderful service and I'll continue to choose Target for this very reason. So where do we go from here and how do we keep climbing from this strong new baseline? In the near term, we'll continue to generate incredible value by executing on our strategy. Throughout the pandemic, we built deep trust and loyalty with our guests who clearly prefer the ease and everyday inspiration of shopping at Target, along with our relentless commitment to the safety and cleanliness of our shopping environment. This is a decades-long commitment that was only emphasized by the pandemic, and it'll continue to be a differentiator in the months and years ahead. Our multi-category merchandise portfolio is a huge advantage, Thank you for joining us. But we'll also focus on better localizing our experience, applying learning from our small format expansion. And we'll continue to build skill in personalizing the experience, leveraging capabilities like Target Circle to better understand our guests and find new ways to engage and reward the 90 million members who have joined so far. To ensure we're continuously delivering great value and emphasizing everyday affordability, we'll stay laser focused on being price right daily. and on showcasing our value with clear messaging and relevant promotions. Importantly, we'll also double down on an approach to sustainability that builds on a rich legacy and company purpose. This includes decades of community relations, corporate responsibility and philanthropic leadership grounded in our 75 year track record of giving 5% of our pre-tax profits in the support of vibrant and inclusive communities. Our intent is to further use our size and scale to benefit people and the planet, building on the work we've done already to elevate our offering of sustainable brands, to create equity and opportunity in our communities, and to help protect the environment. High stakeholder expectations for corporate responsibility only increased in the pandemic and the 2020 demonstrations for social justice. And as we've seen for years, Sustainability builds resiliency in our operating model and fuels growth and innovation. So this is work that's important not just to our guests, our team members, our investors and our communities, but to ensuring our business model remains durable for years to come. The best predictor of whether we can follow through on our aspiration is a track record of taking care of our team, serving our guests and communities, and responsibly growing our business. and to give you a more detailed picture of how we'll continue to do that in the years ahead, I'll ask Christina, John and Michael to weigh in. Christina? Thanks, Brian.

Thank you so much for joining us. is an unprecedented event, challenging our team and our guests in ways we never could have imagined. But how we responded at Target, empowering our teams, moving quickly and leveraging the power of our multi-category assortment, that's Target at its best. In fact, that's Target better than I've ever seen us. So when I think about my new role in bringing together insights, strategy and innovation, plus planning, design, sourcing and buying functions, it's not about fixing anything. Thank you so much for joining us. Our suite of same-day fulfillment options was a game-changer, driving triple-digit growth in our digital sales. And regardless of whether our guests were strolling our aisles or scrolling on our app, we struck that balance between replenishment and discovery. Through the breadth of our assortment, along with a single view of inventory and teams leading across all channels, we were able to move with speed and agility, meeting guests' needs despite the fastest-changing environment we've ever faced. Thank you so much for joining us. One of the only constants last year was that no matter what happened, our guests turned to Target for help to meet functional needs to get through the pandemic and for inspiration and joy, especially around those key seasonal moments that took on added importance for so many people last year. So we never looked at our business from the perspective of a particular category. Instead, we shaped our business decisions around what was happening in the world. That's something will continue to guide us. because when we focus on what's happening in the lives of our guests, it's obvious what categories we need to flex to keep building on the trust they've placed in Target. Our multi-category assortment is a competitive advantage because it keeps Target relevant no matter what. But how we manage that assortment, the premium we place on curation, partnerships, and product design and development, that's what differentiates Target. Brian touched briefly on our billion and multi-billion dollar own brands. Our own brand portfolio, which spans all categories, is vital to the success of our business. It represents about one-third of our total sales and even more of our gross margin, which helps to sustain key enterprise investments. And Target's own brands continue to generate strong growth because of our approach to creating, designing, and maintaining these brands. They're not just private labels. Their brands are guests' trust. Their brands are guests' love. A great example of this is in the athleisure space. Even before athleisure became work-from-home apparel, this was a hot category, and it was an area where we had room to raise our game. So early in 2020, we launched All in Motion, and last month it became a billion-dollar brand. That didn't happen by chance. We were able to respond to this trend quickly and build a beloved brand because we invested in co-creating this brand with our guests. Our team talked to 15,000 people. We consulted with 65 fitness pros, and we had team members attend dozens of workout classes with our guests. That's the kind of work we put into Own Brands across our assortment in every category. So whether it's sweating through a spin class, or talking to parents and kids about how Cat and Jack can meet their needs, or taste testing every recipe in our Good & Gather assortment before we launch, we go the extra mile. resulting in brands our guests don't just buy because we offer them at a good price, but instead brands they love. Brands that are the reason why they're shopping at Target in the first place. And that work continues. This year we'll announce and launch several new owned brands in areas where we know Target can make a difference for our guests. This focus on making Target irresistible through our products and our experience also applies to how we work with our national brand partners. and it's an approach that has made Target a place where national brands thrive. You've heard about Levi's including the limited time home collection that just set and the Ulta Beauty at Target shops we're adding to our stores in Target.com this year. Those are great examples of what Target represents for our partners. Levi's is an iconic brand that for a long time had thrived largely in department store environments but as they began exploring new platforms they turned to Target. and Alta Beauty is an incredible leader in specialty beauty. Through our new partnership, we'll provide access to brands we know our guests love but previously had to go elsewhere to get. This kind of work is a big part of what makes Target special and we're not stopping there. Just last week, in fact, we began rolling out a dedicated Apple experience starting in 17 stores across the country and online. We're doubling the Apple footprint in these stores with new lighting fixtures and displays for Apple products including an extended assortment of accessories. We have a new dedicated Apple landing page on our digital channels and we'll offer our guests more expertise with Apple trained team members in these stores and enhanced product videos on our app and website. This is really exciting because we're taking the work we've done with Apple over the last 15 years and making it even better. Finally, I want to touch on a body of work that's incredibly important. The efforts underway to make Target more relevant and more welcoming for Black guests. Over the last few years, we've listened carefully to our multicultural guests as a whole, and we recognized there was an opportunity to do more for Black guests. So we've added more brands and products that we know they love. A great example is what we've done in the beauty space. With 50 black-owned and black-founded brands now available in our industry-leading assortment. But we're committed to doing even more in key categories through our own brands and partnerships, building on our progress to ensure that we're delivering on our purpose of helping all families discover the joy of everyday life. The retail landscape is never static, so the retailers that will win are the ones that have a durable business model, something we've built at Target. But just as important, the retailers that will be best positioned for the future are the ones with the closest connection to their customers and the ability to flex to meet their changing needs. That was critical to Target's success last year. And that obsession with listening to our guests, understanding the things that are shaping their world and meeting their needs for convenience and ease, inspiration and discovery across all channels is what has Target poised for continued growth in the years ahead. Thank you. And now I'll hand the meeting over to John. Thanks, Christina. And good morning, everyone.

While most people expect the operations guide to get right into the technical stuff, like capacity, throughput, and automation, and don't worry, I will get there, I'm going to start with our people, the target team. In a year when the flexibility and scalability of our operation was pressure tested, our team rose to the challenge, just like they always do. They were the connection between processes, technology, and physical assets that allow us to deliver safety, ease, reliability, and even a bit of joy during a year of uncertainty for our guests. of course the team wasn't starting from scratch as you heard already this morning we've been investing in them for years and building capabilities that would set them up to better serve our guests in any time let alone a global pandemic let me take you back for a minute to one of our favorite reference points it was early 2016 and target strategy was coming into focus after years of testing and listening to our guests we knew that betting on our stores an uncommon proposition at the time would be at the heart of a durable and scalable model Thank you. Thank you. Thank you. Fast forward to 2020, we were ready for the world to change, but only because of the years we'd spent laying the operational foundation. The story of how we navigated the twists and turns of 2020 starts with replenishment, because the whole operation relies on getting the right product to the right place at the right time. This last quarter, 95% of all sales, online and in person, were fulfilled by our stores, which is why it's critical they have enough of the inventory our guests want to buy. Without that piece, the operation simply stops. When the pandemic hit last spring, our guest shopping behaviors changed nearly overnight. We saw heavy stock-up trips, huge in-store surges, and then a quick shift to online shopping. To meet the needs of the guests, our supply chain had to turn on a dime. We sent hundreds more deliveries than we planned every day to replenish stores fast and often, flexibility we'd learned from opening dozens of small format stores. We prioritized the flow of essential inventory like paper towels and cleaning wipes to quickly send stores more of what they needed, not just what was planned. As we sold every paper product we had last March, we expedited everything we could from our vendor partners and secured greater allocations of additional inventory as they ramped up to produce more. In a normal year, we'd have spent months preparing for the traditional Q4 shopping spike. But in 2020, our peak season started in March. and after months of moving record volume, we'd become increasingly efficient in how we managed high levels of demand. So when the holidays actually did arrive, we leaned into what was already working. We sent more inventory to stores than ever to prepare for an earlier holiday rush. We front loaded those deliveries with the seasonal merchandise guests would expect so our stores would be stocked and ready. And we continued prioritizing essential products like cleaning supplies and health care items so we could keep meeting the pressing needs of our guests. The flexibility of our supply chain set up our stores to play an essential role in our communities. Because we could restock shelves quickly, guests could count on Target for what they needed, whether they came inside or shopped online. And when our digital business picked up last spring, our fulfillment operation went into high gear. Up to that point, our same day fulfillment services had already been rolled out nationwide. Millions of guests were loving them because they're fast and easy. We have always loved them because they're incredibly efficient. Without the shipping expense, these orders look much more like a store sale than a traditional online transaction, costing on average 90% less than if we'd shipped it from a warehouse. And at the start of 2020, our same-day sales were growing at a healthy clip. Come spring, when consumers saw the need for more contactless ways to shop, those services exploded, and we had the infrastructure in place to grow alongside demand. Brian gave you the full-year highlights on DriveUp, up more than 600%. and even Order Pickup, which has been around for years, still grew more than 70%. Beyond our pickup options, the delivery capability we have in Shipt became even more important. It filled the need for guests who wanted an online order, especially for perishable items, but also for so many other essentials across Target, brought right to their front doors. It offered more personalization, reliability and speed than they could get from a package shipment. And as a result, Shipt's Target sales grew more than 300%. Of course, we continued to ship online orders from the back of our local stores, saving 40% of the cost of shipping from a warehouse, an economic advantage for us as digital sales now account for even more of our total revenue. With third-party carriers fielding historic levels of volume, we worked closely with our partners to plan for capacity constraints and sent millions and millions of packages to guest doorsteps. But the popularity of our same-day services gave guests another option to shop from home, yet receive their orders faster, reliably, and on their own time. Guests had ship deliver when it matched their schedule, instead of guessing when a shipment would arrive. They drove through our pickup lanes when they were already out and about, no appointment required. This gave guests a flexibility they couldn't find anywhere else. The extraordinary growth of those services has shown just how much guests value that convenience, speed, and peace of mind, and the comfort they find in having a contactless option. In fact, we found that what we built to make Target the easiest place to shop had also set us up to be one of the safest. I've said countless times that a benefit of using our stores as hubs is our ability to ramp up in peak times and ramp back down based on demand. This last year, the stores ramped up and stayed there. In early spring, our stores were fulfilling more in a single day than they had in an entire week the year before. Day after day after day. At the same time, they were also continuing to support a safe and easy in-store experience, which also drove strong comps. As our digital business continued to pick up steam, our stores sustained that pace for months on end. Records were set and then broken again and again and again. But the years we spent building a rock-solid fulfillment capability in our stores prepared us to handle waves of volume without sacrificing the guest experience. Stores knew how to staff for peaks, train other store team members to pitch in when things got busy, and adjust storage space to hold more orders. Despite wild growth, Our net promoter scores that represent guest satisfaction stayed incredibly high. It's one thing for our teams to adjust to record volume, but it's even more impressive to do it while we enhance the services themselves. As digital demand surged, we simultaneously broadened the assortment to make even more of the store available for same-day fulfillment. We added apparel to ship's delivery offerings and tested adult beverage pickup in a handful of markets. Most notably, we added fresh and frozen grocery to drive up and order pickup. Although this expansion was already in the plan, we accelerated the rollout to go nationwide this summer, offering even more guests essential groceries through our contactless services. Importantly, we also adjusted the process to make our services even safer and more efficient. With drive-up and order pickup, guests now display a pin on their phones from a distance or through a car window, so teams can securely deliver the right order while staying farther apart. We gave additional store team members backup training and fulfillment. For example, when we temporarily closed our Starbucks cafes, we taught hundreds of baristas how to efficiently pick and pack an order. That allowed us to keep those team members on the schedule and build their skills, while also helping us manage high volumes during peak times. And we added thousands of drive-up parking spots so guests could get in and out even faster. At the same time, SHIP more than doubled its shopper network to increase the number of delivery windows it could offer to keep up with soaring demand. It's worth taking a minute to emphasize that using our stores to support digital demand is only possible because of the trust and collaboration across many teams at Target. It's not just a stores operation or a supply chain effort. It's the product of many teams strategizing around a common purpose to deliver for our guests. That one team mindset is what built the capabilities we have today and is what allowed us to adjust swiftly when the business accelerated unexpectedly. We built an operation to handle the healthy digital growth we expected through the middle of this decade. The only surprise was that we got there last year, much sooner than planned. Although we designed for that kind of flexibility and scale in the long run, our team hadn't planned for it to come all at once. And that's what makes their outstanding execution, with no advance warning, all the more remarkable. Advancing the business several years in a matter of months proved that our model is scalable and also proved we have the capacity to grow. I'd remind you of what I've shared in several of our past earnings calls. A reliable way to assess our store's throughput capacity is to look at the sales we do per square foot. And you can see that productivity has grown a lot over the last couple of years for our average stores but also for our top quartile. The fact that we continue to see more throughput in our highest performing stores shows the capacity we have across the rest of the chain for even more growth in the future. With all the expectations we have for our stores, the physical buildings themselves play a huge role in our strategy. We're as committed as ever to our years-long initiative to remodel stores with an inspirational, specialty store feel that makes shopping easy and convenient. At the beginning of last year, we'd started about 130 full-store remodels. In mid-March, to reduce distractions in our stores, we decided to complete the projects we'd started. Then we pivoted to more targeted improvements that emphasize safety, Like installing plexiglass dividers and reformatting our sales floor for greater distancing. The timing for our small format stores also shifted. After pausing construction in the spring, our teams accelerated the work through the summer and fall to finalize more than two dozen stores for new local guests. Despite stopping the work for part of the year, we still opened 29 small format stores, the most completed in one year to date. From the Las Vegas Strip to UC San Diego, our first store right on campus property, We tapped into new communities, and we continued expanding across markets like New York and L.A. With each one, Target brought a safe and essential shopping experience to even more guests, while positioning us to serve those neighborhoods for years to come. Our construction and store design teams also adjusted following the demonstrations for racial justice this summer. One of our Minneapolis stores required an entire rebuild. Without it, the local community had nowhere nearby to get essentials like baby formula and fresh food. So we partnered with local nonprofits to distribute needed supplies while putting plans in motion to reopen fast. We leaned on the expertise we developed remodeling stores and opening small formats to meet a community's needs. We listened to nearby residents, worked with local contractors, personalized the in-store experience, and reopened months later as a convenient shopping destination, but also as a better partner to the neighborhood. Take a look.