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 17th, 2023. 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 2023 earnings conference call. On the line with me today are Brian Cornell, Chair 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 first quarter performance, along with 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, including those described in this morning's press release and 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 priorities for the second quarter and remainder of the year.

Brian? Thanks, John, and good morning, everyone. In the first quarter, our team's discipline and dedication to staying in step with our guests drove results that met or exceeded the expectations we set at our financial community meeting back in February. Q1 total sales increased 0.5%, reflecting flat comparable sales at the midpoint of our guidance range, combined with the benefit of sales in new locations. Profitability for the quarter was ahead of expectations. We came into the year clear-eyed about what consumers are facing with persistent inflation and rising interest rates. And we were determined to build on the trust our guests have had in Target by unifying as a team to deliver affordable joy each and every day. As consumers and businesses navigate a third straight year of dynamic challenges. We knew this year would demand agility and teamwork, and the ability to flex across our multi-category portfolio, as we emphasized the categories our guests need most now. Well, our team did all of that in Q1, taking another step forward on our long-term growth trajectory. I might point to three unbroken years of traffic growth as a proof point. In the first quarter, Corporate traffic grew 0.9%, even as consumers were becoming more cautious in their overall shopping behavior. That's a healthy indication of the trust, loyalty, and relevance we've created, especially given how much and how frequently consumers and the world's circumstances have changed over those 12 straight quarters of traffic growth. Very few others can point to anything like that. This growth in guest engagement is the product of deliberate investment, we've been making for many years. In all we do, we put the guests at the center, listening carefully to them and finding innovative ways to make their lives easier, more convenient, and more joyful. And here again, both the balance of our multi-category portfolio and the flexibility of our Storrs' Hub model are helping us stay in step with our guests. The mix of in-store shopping has been growing for well over a year now, as consumers have become increasingly comfortable in public places. This has led them to choose more in-store visits, causing in-store sales growth to outpace digital in the first quarter, both this year and a year ago. Notably, even within the digital channel, our same-day services, which rely entirely on our stores, expanded more than 5% during the quarter. As usual, this increase was led by our drive-up service, which saw growth in the high single digits. as more and more of our guests embrace the speed, convenience, and reliability it provides. In total for the quarter, more than 97% of our sales were fulfilled by our stores. As it did throughout last year, pressure from inflation and rising interest rates affected the mix of retail spending in Q1, with a further softening in discretionary categories in the March and April timeframe. This coincided with a deterioration in consumer confidence reflecting recent events such as the banking crisis that emerged in March. These continued signs of caution among consumers have reinforced why we entered this year with a conservative inventory position. And as Michael will cover in more detail, we maintain that cautious stance throughout the first quarter and feel good about our current positioning in light of the trends we've been seeing. But, as Christina will highlight in a few minutes, our cautious posture has not reduced our commitment to offering fresh, on-trend merchandise throughout the year. We know that newness is a critical element of what our guests expect when they shop with us. And even if they manage their household budgets and make disciplined buying choices, our guests continue to respond when we offer the right combination of newness, trend-right fashion, and affordability. That's what we mean when we talk about affordable joy. It's something that's core to our brand. and a key differentiator in the marketplace. Beyond macroeconomic challenges, we continue to contend with significant headwinds caused by inventory shrink, building on a worsening trend that emerged last year. While shrink can be driven by multiple factors, theft and organized retail crime are increasingly urgent issues, impacting the team and our guests and other retailers. The problem affects all of us, limiting product availability, creating a less convenient shopping experience, and putting our team and guests in harm's way. The unfortunate fact is, violent incidents are increasing at our stores and across the entire retail industry. And when products are stolen, simply put, they're no longer available for our guests who depend on them. And left unchecked, theft and organized retail crime degrade the communities we call home. As we work to address the problem, The safety of our guests and our team members will always be our primary concern. As a result, we are engaged in a variety of mitigation efforts, which begin with significant resource investments to protect our team and our guests. In addition, we're installing fixtures to protect merchandise and adjusting our assortment in affected stores. Beyond safety concerns, worsening shrink rates are putting significant pressure on our financial results. More specifically, Based on the results we've seen so far this year, we expect that shrink will reduce our profitability by more than half a billion dollars compared with last year. And while we're doing all we can to address the problem, it's an industry and community issue that can't be solved by a single retailer. That's why we're actively collaborating with legislators, law enforcement, and retail industry partners to advocate for public policy solutions to combat organized retail crime. As we communicate with those partners, we emphasize that we're focused on keeping our stores open in the markets where problems are occurring. Our stores create jobs, serve local shoppers, and act as critical hubs in communities across the country, and will continue to do everything in our power to keep our doors open. At the same time, we'll be closely monitoring the safety of our team and guests, as well as the financial impact to our business as we determine the right path forward at Target. Even as we navigate through multiple short-term challenges, we remain focused on making targets stronger and better for all our stakeholders over the long term. Right now, our team is rallying around a focus on retail fundamentals to ensure we're staying reliable and affordable for our guests, and that we're translating key points of difference, like our physical proximity to the vast majority of U.S. shoppers and our emphasis on a joyful guest experience. into unmatched ease and inspiration for our guests as we continue to grow and scale. We're also intently focused on creating easier and more efficient ways for our team to deliver on our strategy and fuel our ongoing growth ambitions. Underpinning all of this is our continued commitment to disciplined, return-based investments that will benefit stakeholders both today and well into the future. This goes well beyond our physical capital. As John will outline, we'll continue to make important investments in our team. This begins, of course, by building on the robust investments in wages and benefits we've made in recent years. Because of those past investments, today we offer a starting wage range of $15 to $24 across the country. We've significantly enhanced the health and wellness benefits we provide, and tens of thousands of our team members are enrolled in our industry-leading debt-free college educational program. But our efforts extend well beyond the wages we pay and the benefits we offer. We are committed to building a culture of growth, providing our team with strong foundational learning, enhancing their skills, and preparing them to excel not just at their current role, but their next role on the target team as they continue to build a rewarding career with us. I want to close my remarks by thanking our team. Nothing is more energizing than the time I spend with them. from visits to our stores and distribution centers across the country to the time I recently spent with our headquarter team in Bangalore, India. Our team is proud to work at Target, and they show that pride through their actions every day, all in support of our guests. I'm proud to work alongside them, and it's a privilege to represent their efforts in venues like these. With that, I'll turn the call over to Christina.