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 18th, 2021. I would now like to turn the conference over to Mr. John Holbert, Vice President, Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining us on our second quarter 2021 earnings conference call. On the line with me today are Brian Cornell, Chairman and Chief Executive Officer, Christina Hennington, Chief Growth Officer, John Mulligan, Chief Operating Officer, and Michael Fidelke, Chief Financial Officer. In a few moments, Brian, Christina, John, and Michael will provide their perspective on our second quarter performance and our outlook and priorities for the third quarter and beyond. 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. 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. 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 his perspective on our outlook. Brian?

Thanks, John, and good morning, everyone. Our second quarter performance showed that Target's leadership position is stronger than it's ever been, fueled by a one-of-a-kind strategy, resilient operations, and a passionate world-class team. As you know, we've been investing for years to build the durable model that's in place today, one that puts our guests first, and leverages all of our assets and capabilities to serve their evolving wants and needs. After years of investment and effort in building this model, it's clear that we've only begun to scratch the surface of what's possible over time. In the second quarter, our business continued to perform and grow on both the top and bottom lines, even as we comped over record performance a year ago. Of course, seeing growth on top of growth is nothing new, our business was already delivering consistent increases in sales and profitability in the years leading up to the pandemic. This was followed by a dramatic acceleration in 2020 and this year's continued growth. In the second quarter, Target's comparable sales increased 8.9%, on top of a record 24.3% growth a year ago. As a result, second quarter total sales have expanded more than 36%. or more than $6.6 billion over the last two years. On the bottom line, we earned second quarter adjusted EPS of $3.64, up nearly 8% compared with last year, and double our performance two years ago. As we described last quarter, guests have emerged from a year in which digital was the primary growth driver, and they're now returning to our stores and groves. As a result, The majority of our second quarter growth was driven by the source channel, where comps grew 8.7%, on top of 10.9% a year ago. In addition, traffic accounted for more than 100% of our second quarter growth, in contrast to a year ago when guests were limiting time out of their homes and the bulk of our growth was coming from bigger transactions. Comparable digital sales grew 10% in the second quarter, building on the record growth of 195% last year. The digital channel continues to be led by our same-day services, in-store pickup, drive-up, and shift, which together grew 55% this year, on top of more than 270% last year. Given their rapid expansion, same-day services now account for well over half of our digital sales. Among those same-day options, drive-up has quickly grown to be the largest accounting for more sales than pickup and ship combined. To put it in dollar terms, over the last two years, second quarter sales through drive-up alone have increased by nearly $1.4 billion. And for the spring season, they've expanded by double that amount. Beyond our fulfillment options, we continue to benefit from our unique multi-category assortment, which is perfectly positioned to serve our guests' evolving wants and needs. As a result, Comp sales in all five of our core categories expanded in the second quarter, on top of strong growth a year ago. As expected, apparel continued to lead the way, as our guests continued to respond to newness and style across both our own and national brands throughout the assortment. Also as expected, we saw more moderate growth in our hard lines and home categories this year, as they expanded on top of really strong comparisons from a year ago. And notably, we continue to benefit from impressive performance across our less discretionary food and beverage and essential categories. These categories have consistently delivered strong growth and market share gains, both in 2020 and again this year. I'll let Christina provide more details in a few minutes. When we talk with many of you about what's driving target performance, we often hear the question, what's the one thing that's been the key? The honest answer to that question, we can't point to any one thing. Rather, it's been everything, working together, that's driven our performance. This includes our supply chain work, which has positioned our stores as supplement hubs, while transforming the way we replenish store inventory. Then, there's our rollout of same-day services, which began more than five years ago with in-store pickup, followed by the nationwide rollout of drive-up and ship beginning in 2018. And there's the refreshment of our own brands, which began in 2016 with the rollout of Cat and Jack, followed by dozens of new own brands over the last five years. At the same time, we've expanded our partnerships with premium national brands, including Disney, Levi's, and Apple. And most recently, this month's opening of more than 100 Ulta Beauty shop and shops. Across our store portfolio, we began testing small formats in 2014. And we now have more than 140 of these productive neighborhood locations across the country. We've also remodeled more than half a chain over the last four years, transforming the shopping environment while optimizing the layout in support of our same-day services. And we've reinvented our store operating model, focusing on enhanced service and subject matter expertise in key categories while investing in visual merchandising across our network. Then there's Target Circle, which launched in 2019 and now has more than 100 million members, providing a new connection with our guests while offering meaningful rewards. And of course, we've made multiple investments in our team, including the attainment of our goal to bring Target's nationwide starting wage up to $15 or more. This was certainly an important milestone, but far from the end of the journey. Just a few weeks ago, We announced an investment of more than $75 million to provide $200 recognition bonuses to all of our frontline, hourly, full-time, and part-time team members across our stores, distribution centers, and contact centers. I've said it many times before, but I can't say it enough. Our team is a lifeblood of Target, and our success begins and ends with them. I want to thank each of them and every one of them across the world for everything they do to make Target such a special place to shop and a great place to work and build a rewarding career. And today, given the profitable growth that comes from all of these efforts, we can continue to invest in making our business even stronger and more durable over time. In June, we were incredibly excited to launch Target Forward, an ambitious new sustainability strategy grounded in a vision to co-create an equitable and regenerative future with our guests, partners, and communities. Target Forward is centered around three critical ambitions, to design and elevate sustainable brands, innovate to eliminate waste, and accelerate opportunity and equity. This bold initiative is the beginning of the new chapter for how we'll define sustainability, positioned our business for long-term growth and resiliency, and build on our rich legacy of corporate responsibility and sustainable practices. As part of these efforts, in early August, we announced that this fall, Target will be rolling out an industry-leading program to provide debt-free educational assistance for all of our U.S.-based full-time and part-time team members. This program will provide access to more than 250 business-aligned programs including historical black colleges and universities, along with institutions serving the Hispanic community. In total, we plan to spend $200 million to offer this benefit over the next four years, serving as a meaningful example of how we're investing to promote opportunity and equity in our communities, beginning with our own team. So now, before I turn the call over to Christina, I want to acknowledge the likelihood that the second half of the year will continue to be volatile, particularly in light of the ongoing uncertainty surrounding the Delta variant. Of course, safety remains our number one priority. As evident in the way we operate our stores and our ongoing investments to encourage vaccinations by making them easy and accessible for both our team and our guests. In terms of our business, the last 18 months have proven, beyond a doubt, the flexibility and resilience of both our team and our business model. And while sales and stores have been soaring so far this year, our operations and team have demonstrated how they can pivot seamlessly between stores and digital commerce based on how our guests choose to shop. I also want to emphasize that as proud as we are of what we've already accomplished, we see many more productive opportunities to invest in continued growth. And I also want to acknowledge the continued high level of execution we've been seeing across all of our teams. As John will outline in more detail, despite unusually high volatility for well over a year now, the target team has been consistently setting the industry standard in terms of execution, despite multiple challenges in the external environment. Our team continues to embrace every challenge as one aligned target team, taking care of each other as they focus on serving our guests. I am truly inspired by their work and grateful to share the outstanding performance they're delivering quarter after quarter, year after year. With that, I'll turn the call over to Christina.