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 18th, 2022. 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 first quarter 2022 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 first quarter performance and our outlook and priorities for the second quarter and beyond. 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. 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 his perspective on our outlook. Brian?

Thanks, John, and good morning, everyone. Our first quarter results demonstrate the underlying strength of the relationship we built with our guests at a time when our team is working through multiple cost pressures affecting our business. As expected, our business continued to grow in the first quarter, on top of huge gains a year ago, underlying the resilience of both the consumer and and the ability of our team to serve them. However, through a host of factors, this growth was challenged by unusually high costs, resulting in profitability well below where we expect it to be and where we expect to operate over time. First quarter comparable sales grew by 3.3%, on top of 23% growth a year ago. This marked our 20th consecutive quarter of comparable sales increases. 11 of those quarters were before the pandemic, followed by the rapid acceleration we saw in 2020. We're also encouraged that traffic continues to fuel our growth, increasing nearly 4% in the quarter on top of 17% growth a year ago. Our first quarter gross margin rate was well below our expectations, reflecting a combination of factors that proved to be very different than expected. driven by a rapidly shifting macro backdrop and changing consumer behavior. More specifically, we saw much higher than expected freight and transportation costs and a more dramatic change in our sales mix than we anticipated. This resulted in excess inventory, much of it in bulky categories, which put additional strain on an already stretched supply chain. Christina, John, and Michael will share more details shortly. And while we have a lot of work ahead of us to restore profitability to the level where we expect to operate over time, I want to thank the team for maintaining their laser focus on the guest experience. We've spent years growing Target's relationship with our guests, which is fueling the traffic and sales growth we're seeing today. In sustaining that guest focus, we're confident we'll see deeper loyalty and profitable sales growth in the years ahead. Among our sales channels, first quarter comps were balanced between stored and digital, as each increased a little more than 3%. Within our digital channel, growth continues to be led by our same-day services and drive-up with the pickup, which delivered growth in the mid-teens this year on top of more than 100% growth a year ago. Since Q1 of 2019, prior to the pandemic, first quarter sales have grown more than 40%, or just over $7.4 billion. Broke it down by channel, store sales accounted for about $4.1 billion of this increase, while visual sales drove another $3.3 billion, having expanded by more than 260% over that time. From a category perspective, we continue to benefit from a balanced, multi-category portfolio, which allows us to flexibly serve our guests as their wants and needs change. More specifically, in the first quarter, we continue to see strong growth and market share gains in food and beverage and essential categories. We also benefited from double-digit comp growth in beauty, reflecting our ongoing work to enhance presentation, assortment, and service, including our new and expanding partnership with Ulta Beauty. The results of this partnership have exceeded our initial expectations, driving higher productivity and sales in both the beauty area and adjacent categories in the store where we've added an Ulta Beauty experience. In our other three core merchandise categories, apparel, home, and hard lines, we saw a rapid slowdown in the year-over-year sales trends beginning in March, when we began to analyze the impact of last year's stimulus payments. While we anticipated a post-stimulus slowdown in these categories, and we expected consumers to continue refocusing their spending away from goods and into services, we didn't anticipate the magnitude of that shift. As I mentioned earlier, this led us to carry too much inventory particularly in bulky categories, including kitchen appliances, TVs, and outdoor furniture. And with very little slack capacity after two years of unprecedented growth, we faced elevated costs to store and then began right-sizing our inventory position. Nevertheless, we're still seeing healthy overall spending by our guests, even as their spending continues to evolve. Notably, we continue to see meaningful spending surges around holidays, including Easter and April. and Mother's Day a couple of weeks ago. Also notable in comparing this year's weekly sales of pre-pandemic levels at the beginning of 2019, we're actually seeing stronger three-year growth trends in recent weeks compared with the beginning of the first quarter, even in categories where we saw a rapid slowdown on a one-year basis. These encouraging longer-term growth trends demonstrate the continued resilience of the American consumer and the trends they place as targets. even as they face multiple challenges. Not surprisingly, when we talk to our guests, they often express their concerns about a host of rapidly changing conditions, ranging from geopolitics to the high and persistent inflation they've been experiencing, particularly in food and energy. At the same time, guests are focused on getting back to many of the habits and behaviors they suspended during the heart of the pandemic, including travel, out-of-home activities, and social gatherings. And importantly, Even as the mix of what they're buying continues to evolve, their spending capacity continues to benefit from elevated saving rates, high employment, and healthy wage growth. So, as we continually adapt our offering to best serve our guests in a rapidly changing environment, today we're focused more than ever on providing value across our multi-category assortment. We're sending options that are affordable and accessible to a broad and diverse base of guests. across a wide range of household incomes. And even as we face multiple cost pressures, our team is working tirelessly to maintain prices wherever possible. But of course, while it's always the last lever we fold, external conditions led us to raise prices across a broad set of items in multiple categories. But as you've clearly seen in recent quarters, overall costs have been rising much faster than retail prices, resulting in year-over-year declines in our gross margin rates. While we're not happy about the near-term pressure this causes on the profit line, we strongly believe these decisions will benefit our business over time. And as we carefully monitor our prices and quality stacked up versus the competition, our guests are telling us they appreciate the value and experience we're providing. More importantly, our guests are showing their appreciation with more footsteps in our stores and more requests on our site, resulting in continued traffic and sales growth on top of record growth a year ago. As we look ahead, we'll maintain this focus on value, helping them to save time and money in a rapidly evolving environment. For those who are focused on driving fewer miles in response to record high gas prices, our broad and immediate merchandise assortment, combined with our low prices, offers a smart way to save time and miles by consolidating shopping trips. Of course, for guests who are looking for money-saving options, when they're shopping for their families, our $30 billion portfolio of home brands offer outstanding quality and savings across every one of our merchandising categories. And because saving time is valuable in any environment, we're continuing to invest in expanding the scope of our reliable and convenient same-day services, including our drive-up and in-store pickup services, which we offer to our guests at no charge. Just as we design our merchandise portfolio to flexibly serve our guests our operations have managed to extreme volatility over the last few years. Rapid growth amounting to tens of billions of dollars combined with unprecedented shift in demand across categories, channels, and services has created a host of challenges for our team, which they've handled with incredible energy and focus. And while we entered this year hopeful that volatility would begin to moderate, we've experienced the extreme opposite in Q1, and we don't see current conditions improving right away. In the face of this volatility, our team continues to focus on the guest experience, working to ensure that anything our team is handling behind the scenes doesn't affect what our guests see and feel. So as we look ahead, it's clear that many of these pressures will persist in future quarters, but that hasn't affected our long-term plans and expectations, including our confidence in the ability of our business to grow mid-single digits and maintain an operating margin of 8% or higher over time. In the meantime, even as we navigate to restore profitability from the impact of these short-term challenges, we're continuing to invest in projects designed to deliver continued profitable long-term growth. Our business model and team have proven their ability to successfully navigate through extreme volatility, and we're confident our business will emerge even stronger from these challenges we're facing today. Just as our investments in early 2017 were followed by profitable growth in later years, we're confident The decisions we're making today combine with our investments in future growth will pay off handsomely over time. With that, I'll turn it over to Christina.