Target Corporation

Ladies and gentlemen, thank you for standing by. Welcome to Target Corporation's 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 one on your telephone. As a reminder, this conference is being recorded Wednesday, August 17, 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 second 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 minutes, Brian, Christina, John, and Michael will provide their perspective on our second quarter performance and our outlook and priorities for the remainder of the year. 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 the back half of the year.

Brian? Thanks, John, and good morning, everyone. Back in June, we announced that our team would be undertaking a bold effort to right-size our inventory position in the categories for which demand patterns have rapidly changed. While this decision had a meaningful short-term impact on our financial results, we strongly believe it was the best path forward. Consider the alternative. We could have held on to excess inventory and attempted to deal with it slowly, over multiple quarters or even years. While that might have reduced the near-term financial impact, it would have held back our business over time. Of course, this decision would have driven incremental costs to store and manage the excess inventory over a longer period. But, much more importantly, it would have degraded the guest experience. It would have cluttered our sales floors and hampered our ability to present new, fresh, and fashionable items, the ones our guests expect from Target. Just as importantly, the extra inventory would have presented an ongoing burden to our supply chain and store teams as they faced the distraction of working around it day after day. Instead of taking that passive position, our team chose a more decisive path, aggressively reducing the inventory we already owned and cutting back on receipts for the back half of the year. And today, with those decisions behind us, we're in a much better position as we head into the fall season. As you'll hear in more detail, we've meaningfully reduced our ownership and commitments in categories where we've seen softening demand. This has allowed us to strengthen our inventory position and in-stock position in the categories that are driving our growth, most notably in food and beverage, beauty, and essentials. Regarding the financial impact of those decisions, Michael will provide more details in a few minutes. But the high-level story is the vast majority the financial impact of these inventory actions is now behind us. This positions our business to deliver a meaningful improvement in operating margin rates in the fall season. However, beyond financial and operational outcomes, I'm focused on how our inventory actions will benefit our guests and our team. Regarding our guests, we're now positioned to continue driving engagement and growing traffic with a clean, safe, and uncluttered store experience and an assortment that highlights newness and supports growth. For our team, this quarter's inventory actions will enable them to focus on doing what they do best, providing a great guest experience while reducing the stress and distraction from overly crowded store backrooms and distribution facilities. After we announced the rightsizing effort at the beginning of June, I've heard from countless leaders across the company who wanted to relay their gratitude for the decision to move quickly and face the issue head on. In the same spirit, I want to pause and acknowledge the incredible effort of the entire Target team during a very challenging time for the economy, for our industry, and our business. Our success in reducing inventory was a result of unprecedented effort, coordination, and collaboration across multiple teams, from our US headquarters to our Target India headquarters, to our stores, distribution centers, transportation team, and sourcing offices around the world. And today, in the face of a very challenging backdrop, I'm proud of how our team and business model continue to serve our guests evolving needs. Everything we do, from the design of our operating model to the way we train our team, is done with a focus on better serving our guests. It's reflected in how we choose our assortment, where we curate a broad range of items, both in-store and online, from the stylish to the functional, incorporating quality and value throughout. It's also evident in how we design our store. and the digital shopping experience that make them easy, convenient, and inspirational, inviting guests to choose the right option every time they shop. All of these decisions make our business model more durable, allowing us to drive deeper guest engagement and grow traffic in every environment. Consistent with the shopping trends we've seen for more than a year, our second quarter comp increase of 2.6% was driven entirely by traffic, which expanded 2.7% this year. on top of double digit growth a year ago. With this increase, second quarter traffic has expanded by well over 20% since 2019. In raw numbers, that means in the second quarter alone, we've added more than 90 million guest visits over the last three years. These visits are a vivid demonstration of a deepening level of guest engagement resulting from multiple investments throughout our business. These investments include dozens of new stores and hundreds of remodels every year. They also include investments in our industry-leading same-day services, which have transformed our business in a short time. More specifically, three years ago in the second quarter of 2019, digital fulfillment accounted for just over 7% of total sales. In contrast, by the second quarter of this year, the same-day portion of our digital sales accounted for more than 10% of our total sales. This drove our total digital penetration up to almost 18%. more than doubling in only three years. Beyond our stores and fulfillment services, guests continue to respond to our investments in our own brand portfolio. This portfolio delivers more than $30 billion in annual sales and includes 12 brands that generate more than $1 billion each. At the same time, we're investing in new spaces and presentation for key national brand partners like Apple, Disney, and Levi's. And of course, we've been rapidly expanding the number of stores that feature an Ulta Beauty at Target, given the incremental traffic and sales they deliver. But nothing has been more important than the investments we've made in our team. These investments include the move to a starting hourly wage range of $15 to $24 across the country, enhanced health care and wellness benefits for a larger percentage of our team, the rollout of an industry-leading debt-free college educational plan, and our work to enhance the growth and development opportunities available to all of our team members and the team members of color in particular. As we look ahead to the back half of the year, the team is laser focused on delivering convenience, value, and joy at a time when our guests are facing multiple challenges. And while we've taken a cautious stance on our inventory commitments, we'll continue to lean into frequency categories where guest demand has been strong and where the markdown risks are very low. In addition, Given the ongoing pressure our guests are facing from inflation, we're leaning into value. This means we're focused on providing great everyday pricing and strong opening price points across every category, including in our own brands. At the same time, we hear from our guests that they're focused on celebrating the seasonal moments they missed over the last two years. As a result, we'll lean into those seasonal moments, helping our guests find ways to come together and celebrate with family and friends. Though we still have a lot of business ahead of us, we've seen an encouraging start to the back-to-school and back-to-college season, and our teams are already deep into their planning for the upcoming Halloween season, a time when we expect our guests will fully embrace trick-or-treating and scheduling parties to celebrate with family, friends, and neighbors. Given continued volatility in the external environment, we built our fall plans with a priority on flexibility and agility, and that's where our business model shines. More specifically, our multi-category portfolio stays relevant and drives trips across a wide range of wants and needs. In today's environment, that means our food and beverage category is front and center, having grown more than 50% or $1.8 billion since the second quarter of 2019. But regardless of whether a target run begins with a need for an item in food and beverage or household essentials, to see what's new in our beauty assortment, to pick up a toy for a birthday party, or a piece of luggage for an upcoming trip, our safe one-stop shopping experience provides an opportunity to sell items in every one of our categories on every guest visit. Beyond our assortment, our unique Storages of Operating model offers unmatched flexibility in how we can fulfill guest demand. Whether a guest wants to make a conventional in-store shopping trip, place a drive-up order, arrange a ship delivery, or simply have a box delivered to their front door, Stores can fulfill every one of those needs quickly and reliably, allowing our guests to choose what works best for them in that moment. And as Michael will outline in more detail, our strong balance sheet and robust cash generation support continued investments during tough times like these, investments in our long-term growth and market share. At a time when many others will be struggling just to survive, the ability to play offense and focus on the long-term makes us well-positioned to emerge from the current downturn even stronger than before. So as I get ready to turn the call over to Christina, I want to thank our team for their continued passion for serving our guests and each other. While the environment remains challenging, I'm inspired by the new and unique merchandise, seasonal offerings, and partnerships our team has planned for the back half of the year. And as I've traveled across the country to visit our stores and distribution centers, I've been inspired to hear how our team is energized and eager to serve our guests with energy, empathy, and care, bringing some daily joy at a time when our guests are dealing with multiple headwinds. This unshakable guest focus is one of the many reasons our unique team makes Target a great company, and I am privileged and grateful to serve with them. With that, I'll turn the call over to Christina.