Target Corporation

and in light of the dramatic changes in shopping patterns we've seen both at Target and across the industry, we believe it's prudent to plan for a wide range of comparable sales outcomes in the fourth quarter that's centered around a low single-digit comp decline consistent with recent trends. Underlying the sales expectation, we're planning for softer discretionary category comps than we've seen the last two quarters, partially offset by the benefit of continued strong growth in our frequency businesses. If these sales trends persist, we'd see far less of a benefit from leverage on fixed expenses than we've seen so far this year. In addition, we'd expect greater markdown pressure from Q4 promotions, given the increase in price sensitivity our guests have shown recently and our commitment to end of the year with a clean inventory position, especially in those categories where trends have softened. And, as I mentioned, we're planning for additional pressure from inventory shrink, given the worsening trends that have emerged so far this year. Altogether, these expectations lead to a wide range for our expected Q4 operating margin rate, centered around 3%. The single most sensitive input to this profit projection is the level of demand for our discretionary businesses. If that demand improves from recent trends, we would expect fewer markdowns and would likely outperform our updated profit expectations. While if demand softened further, profit could see additional pressure. As we look beyond the holiday season, we're planning for a continued challenging environment as we move into next year. And as John and Brian already pointed out, we are fortunate to have a durable model that is well-positioned to continue serving our guests even in the toughest of times. In addition, we have a significant opportunity to harness efficiencies in support of our long-term growth and profit goals. At the end of 2019, our operations had been built to support a business that delivered $77 billion in sales that year. And our long-term algorithm at the time was anticipating low single-digit top-line growth in the years ahead. If things had played out that way, we might be looking at a total sales number in the low to mid $80 billion range this year. Instead, even in the midst of a very challenging environment, we're positioned to deliver total sales of well over $100 billion this year. So today, we have a compelling opportunity to look across our operations with an eye to simplifying and optimizing those operations for a more than $100 billion business. And today, as we look at the operations we have and where we think they can be, we believe there's a $2 to $3 billion savings opportunity over the next three years. To be clear, this isn't about slashing resources. And in particular, we're focused on continuing to invest in our team, which is our most valuable asset. As Brian said, we are in the initial stages of scoping this opportunity, and we expect to share detail on our progress at our 2023 Financial Community Meeting. In the meantime, I want to join Brian in wishing all of you a happy holiday season. And I want to pause and thank the entire Target team for making Target a great place to work and a store that's ready to bring joy to millions of our guests throughout this season and beyond. With that, I'll turn the call back over to Brian.

Before we turn to your questions, I want to relay a few thoughts that I shared with our target team earlier today. While the circumstances we're facing are difficult, and certainly not what anyone would wish for, we need to embrace the moment, focus on what we can control, and lean into our strengths. Because even as we face multiple challenges, all at the same time, we have an even longer list of strengths on our side. And there are quite a few headwinds. But we've shown time and time again that our strengths can overcome any challenge we face. We have nearly 2,000 well-located, well-maintained store locations. We have a rapidly growing set of own brands that are already generating more than $30 billion in annual sales. And we have a unique and growing list of national brand partners, including Starbucks, CVS Health, Levi's, Apple, Disney, and Ulta Beauty. Our unmatched product design, development, and sourcing capabilities allow us to offer an unbeatable combination of price, quality, design, and fashion throughout our own brand portfolio. We have a durable operating model and a balanced portfolio of merchandise categories, which allow us to pivot quickly in a rapidly changing environment. Our operations are profitable, generate robust cash flow, and are backed by a strong balance sheet that enables continued investment during lean times. And of course, we have a unique, amazing, passionate team that has only grown stronger over the last few years. So this morning, I've asked our team to focus on what they do best, moving with agility and responding to the environment in real time, delivering outstanding execution throughout the holiday season and beyond, and doing it all as one team, aligned in support of our guests and each other. While we'd all prefer to be operating in a more robust environment, today we have the opportunity and all the resources we need to continue playing offense while many others cannot. By harnessing the strength of our assets and our amazing team, I'm confident we'll continue to grow guest engagement and deliver compelling growth on both the top and bottom line over time. With that, we can move to Q&A. Now, Christina, John, Michael, and I will be happy to take your questions.

Thank you. We will now begin the question and answer session. To ask a question, please press star followed by one. To withdraw your request, press star 2. One moment for our first question. Our first question is from Chris Horvers with J.P. Morgan. You may go ahead.