Target Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation third 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, November 15th, 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 third 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 moments, Brian, Christina, John, and Michael will provide their insights on our third quarter performance, along with our outlook and priorities for the fourth quarter. 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 earnings press release and 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 third quarter and his priorities for the remainder of the year.

Brian? Thanks, John. For many years now, we have focused on building a durable business model that allows us to meet guests where they are, developing and enhancing the right tools and capabilities while investing heavily in our team, all in the service of providing an affordable, easy, and joyful guest experience. And the flexibility of our multi-category model has served us incredibly well over the last few years. delivering unprecedented growth in both traffic and sales. Today, our business generates well over $100 billion in annual revenue, and it's successfully navigating through a very challenging environment as consumers continue to rebalance their spending between goods and experiences and make tough choices in the face of persistent inflation. Even as our P&L is being impacted by multiple top-line and bottom-line challenges, including soft industry trends in discretionary categories, moderating inflation rates in essentials and food and beverage, and higher inventory shrink, we've seen a meaningful improvement in profitability compared with last year. More specifically, our EPS through the first three quarters of 2023 was more than 40% higher than last year and more than 26% higher than in 2019. Importantly, even beyond this year's rapid progress, We believe we have a significant opportunity to grow both the top line and bottom line in the years ahead. So even as we remain cautious in our near-term outlook, we're not standing still. We're playing the long game, investing in our stores, our supply chain, our team, our digital capabilities, and our assortment to provide the newness, value, and convenience our guests want for this holiday season and beyond. At the heart of it all, is our focus on being our guest's happy place and delivering the joyful shopping experience that makes Target, Target. In the third quarter, Target's comparable sales were down 4.9%, in line with our expectations. Consistent with prior quarters and overall industry trends, discretionary categories were the driver of this decline, partially offset by net sales growth in our frequency categories. Between sales channels, store comp trends were somewhat stronger than in the digital channel. Among our digital fulfillment capabilities, same-day services saw high single-digit comp growth, led by drive-up, which expanded 12%. Strength in these services was offset by continued softness in brown box delivery, which is most affected by the pullback in discretionary categories. On the bottom line, our third quarter EPS of $2.10 was well above our expectations. and more than 36% ahead of last year. This increase reflected the continued benefit of lower freight costs, disciplined inventory management by our team, favorable category and channel mix, and the continued benefit of our work to enhance efficiency, which offset multiple pressures throughout our business. This is outstanding profit performance in the face of a very challenging environment, and I want to thank our entire team for their tireless efforts in support of our guests, our business, and each other. As you know, one of our top priorities this year was to rebuild our profitability, following the unique challenges we faced in 2022. And while there's lots more work ahead of us, I'm really pleased with the progress the team has delivered so far this year. At the same time, I want to make it clear, we are not satisfied with the top-line trends we've been seeing. Our number one priority is to get back to sustainable growth in both traffic and sales, and we're committed to investing in long-term initiatives to deliver this growth. As we assess the external environment, it's clear that consumers have been remarkably resilient. Yet at the same time, our research indicates that themes like uncertainty, caution, managing my time and budget, and focusing on essentials while still finding ways to celebrate are all top of mind. Overall, consumers are still spending, but pressures like higher interest rates, the resumption of student loan repayments, Increased credit card debt and reduced savings rates have left them with less discretionary income, forcing them to make trade-offs in their family budgets. For example, this year we've seen more and more consumers delaying their spending until the last moment. Guests who previously bought sweatshirts or denim in August or September are deciding to wait until the weather turns cold before making a purchase. This is a clear indication of the pressures they're facing. as they work to stretch their budgets until the next paycheck. Consistent with these pressures, as we look at recent trends across the retail industry, dollar sales are being driven by higher prices, with consumers buying fewer units per trip. In fact, overall unit demand across the industry has been down 2 to 4 percent in recent quarters, and the industry has experienced seven consecutive quarters of declines in discretionary dollars and units. While we're happy to see inflation rates moderating this year, if you compare industry pricing in key categories back to 2020, food at home pricing for families has increased 25% overall, and in some areas, up to 30%. And if you're a parent raising a baby, you're facing increases of more than 30% on baby food and formula, too. And that's in addition to persistent increases in a variety of other categories. When you layer on the impact of higher energy prices, it all puts pressure on discretionary spending. As a result, this holiday season, we're focusing on highlighting the amazing value we've always provided in our end caps, promotions, and the price points we feature in our marketing. As we built our plans for this holiday season, we maintained our cautious inventory positioning and marked down sensitive categories. This provides our team the necessary flexibility to quickly adjust to volatile trends. something that has served us well all year. But I want to be crystal clear. That does not mean we're backing off on newness. While we're cautious about the size of our inventory commitments, we're leaning into the amount of innovation featured in our assortment. And after several years in which our vendors were focused on raising production volumes in the face of unprecedented demand, we're encouraged by the focus on newness and innovation we're seeing from them. And as I've mentioned, Throughout this holiday season, we'll be focused on highlighting value, helping families to celebrate the joy of the season in a way that fits their budget. Beyond our assortment, as we work to provide a great guest experience, we've enhanced our training of retail fundamentals for our teams. This is an important shift after years of operating in an environment that was anything but normal. After all, given the large number of team members we've hired over the last few years, A meaningful number of them have never experienced ordinary sales trends. As we've said many times, investments in our team are the most important ones we make, and today we remain on our front foot, investing to ensure they can deliver a joyful, industry-leading shopping experience. This holiday season, we'll be supplementing our existing team by hiring nearly 100,000 seasonal team members to meet expected demand and ensure we can deliver a joyful shopping experience. So now, as I get ready to hand the call over to Christina, I think it would be useful to pause and assess how this year has progressed in comparison to our expectations. As a reminder, at the beginning of this year, we said we were expecting a challenging environment, with a sales guidance range centered around flat comparable sales. In terms of profitability, we said we expected to grow our full-year operating income by $1 billion or more, with an expected EPS range of $7.75 to $8.75. So today, with three quarters of the year behind us, top-line trends have obviously been tougher than expected, and we're firmly focused on getting back to growth. But the story on profitability has been very different. Through the first three quarters of this year, we have already grown operating income by more than a billion dollars compared with last year, despite unexpected headwinds from higher-than-expected shrink and softer-than-expected sales. We're encouraged with this performance against a challenging backdrop, which demonstrates the resilience of both our team and our business. I'm incredibly proud to be a member of this great team and excited about the growth we're positioned to deliver in the years ahead. Now, I'll turn the call over to Christina.