Target Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation 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 1 on your telephone. As a reminder, this conference is being recorded Wednesday, August 21st, 2024. 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 2024 earnings conference call. On the line with me today are Brian Cornell, Chair and Chief Executive Officer, Rick Gomez, Chief Commercial Officer, and Michael Fidelke, Chief Operating Officer and Chief Financial Officer. In a few moments, Brian, Rick, and Michael will provide their insights on our second quarter performance, along with our outlook and priorities for the third quarter and 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 will be 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 second quarter and his priorities for the third quarter and beyond. Brian?

Thanks, John, and good morning, everyone. I'd like to start my remarks today by welcoming Rick Gomes to this call, following his recent move into the role of Chief Commercial Officer. This change was one of several we announced in June, including Christina Hennington's move into the role of Chief Strategy and Growth Officer and Lisa Roth's transition into the role of Chief Merchandising Officer of Food, Essentials, and Beauty. Lisa has done a fantastic job leading our marketing team, and I've asked her to remain in that role until early 2025. This will provide adequate time for us to complete an external search for her successor before Lisa brings her impressive commercial leadership experience back into the merchandising team. These changes follow our January announcement that Michael would move into the pivotal role of our Chief Operating Officer. Michael took on the CFO role just before the pandemic, and he's done an outstanding job leading the company through a period of unprecedented growth and volatility. The search for Michael's replacement as CFO is ongoing, and I share Michael's excitement for the time when he's able to fully focus on his new role leading all of our operational functions. And of course, we were pleased this month to welcome Amy Tu into the role of Chief Legal and Compliance Officer. During her career, Amy has served in key leadership roles for several Fortune 100 companies, and I'm excited to welcome her to the Target team. Amy is taking the place of Don Lew on our team as he prepares for his retirement. I want to pause and thank Don for his many years of thoughtful and conscientious service to Target and our stakeholders. He is an outstanding leader who has served as a trusted partner to me, to our board, and our entire leadership team during his tenure here at Target. All of these changes on our team are just the latest evidence of our focus on developing enterprise leaders, ones who go well beyond subject matter expertise to develop strong leadership skills with a foundation based on a comprehensive understanding of our business and how we fit into the broader landscape. And as you've seen from our second quarter results, the strength of our entire team was clearly evident in our financial performance, which came in well above our expectations. On the top line, we met our goal of returning to growth, but moved well beyond that baseline expectation. More specifically, our Q2 comparable sales grew 2% at the very top end of our guidance range. And on the bottom line for the quarter, our EPS, of $2.57 was well above the high end of our guidance, representing growth of more than 42% over last year. Among the drivers of our comp sales, we're pleased that our second quarter growth was driven entirely by traffic, reflecting the combined benefits of the multiple guest-focused initiatives we outlined in our financial community meeting back in March. It's also notable that our store and digital channels both saw growth in Q2. Our digital team has done an outstanding job of enhancing our digital experience, and that's showing through in our business results. We saw high single-digit growth in our digital comps in Q2, and even faster growth in same-day services, led by DriveUp and Target Circle 360, both of which grew in the low teens. Same-day services now account for more than two-thirds of our digital sales, with the biggest contribution from DriveUp, which generated sales of more than $2 billion in Q2 and more than $4 billion so far this year. Our balanced, multi-category merchandising assortment continues to resonate with our guests, as trends strengthened across the board in Q2. And we were particularly encouraged to see discretionary category trends improve for the fourth consecutive quarter. In apparel, comp sales grew by more than 3%, marking an improvement of more than 5 percentage points when compared with the first quarter. Our apparel team has done a fantastic job of incorporating great design, newness, and value throughout their assortment, most notably in our all-in-motion brand, which delivered growth in the low teens. Beauty was another standout as the category continued to gain share with comp growth of 9% in Q2, on top of double-digit growth a year ago. On the frequency side of our assortment, both our food and beverage and essential categories saw traffic growth in the quarter, as consumers are responding to our offerings in an environment where they're focused on value. Over the summer, we reduced our prices on about 5,000 frequently purchased items in many markets, and we saw an acceleration in both our unit and dollar sales trends in these businesses. We're also seeing continued momentum in our Target Circle loyalty platform, following its relaunch in the first quarter. With over 100 million members, we're always happy to welcome new guests who choose to join, and we added more than 2 million new members in the second quarter. But our aspirations go well beyond growing our membership base. We redesigned Target Circle with the goal of increasing engagement among existing members, and we've already realized the benefits. For example, during our July Target Circle week, about two-thirds of our transactions were made by Target Circle members. Beyond the direct benefit of guest engagement with the platform, Target Circle also helps us gain deep consumer insights, allowing us to extend more personal, customized offers through our Rondell advertising business. Rondell continues to experience rapid growth based on the joint value it creates for both our guests and our vendors. In the second quarter, Rundell delivered double-digit growth to the benefit of both gross margin and the other revenue line of our P&L. For the full year, Rundell is expected to grow in the high teens, on top of more than 20% growth in 2023. As we continue to survey consumers and monitor the external environment, our view remains largely the same, as we've been sharing for some time. Consumers have shown remarkable resilience in the face of multiple challenges over the last several years, and they remain resilient today. Given the significant headwinds they've faced with inflation over the last few years, consumers continue to focus on value as they work hard to manage their household budgets. And while they continue to turn out and shop around holidays and other seasonal moments, many are delaying purchases until the moment of need. Against that backdrop, our team continues to focus on providing unbeatable value for our guests. And of course, that starts with a focus on low everyday prices, including our recent price reductions on frequently purchased items. But our focus on value only begins with low prices. Whether we're highlighting compelling deals for our Target Circle members, offering an additional 5% savings to our Target Circle cardholders, designing and sourcing high-quality owned brands at compelling prices, We're delivering ease and convenience with drive-up and target circle 360. Our team is continually working to find more ways to deliver more value for our guests. As we look ahead, our team is focused on controlling what we can control. We're committed to staying on offense while maintaining an overall cautious outlook, a stance that has worked well for us over the last few quarters. Throughout the company, we're focused on retail fundamentals and strong executions. This includes our commitment to being in stock and reliable, even as we maintain a prudent inventory position. It also includes our focus on delivering speed and convenience in every fulfillment channel, while providing efficient and friendly service to our guests in every store, every day. We're also looking to build on the momentum we've been seeing in discretionary categories, where trends have already improved significantly, and we see much more opportunity ahead of us. We're focused on continued expansion of our operating margin rate as we move back towards and potentially beyond the 6% annual rate we were earning before the pandemic. We're committed to continued disciplined capital deployment. Following more than a year of hard work to strengthen our balance sheet, we were pleased to get back to share our purchases in the second quarter. And we expect to have continued capacity within our middle A ratings in Q3 and beyond. And of course, we're focused on continued investment in our team, in their training, development, pay, and benefits. To support our team, we're making smart investments in AI technology to make their work easier and more productive, enable them to serve our guests with even greater speed and efficiency. All these efforts are in support of our ultimate goal, to deepen the already strong relationship we've established with our guests. While it was fantastic to see top-line growth in the second quarter, it was even more gratifying that it was driven by traffic, as more guests choose to make more trips to Target following unprecedented growth during the pandemic. Altogether, over the first six months of 2024, our guests have already made nearly 1 billion trips to Target, a number that's grown by more than 20% since 2019. We're grateful for the underlying trust and engagement behind every one of those transactions. And our entire team is focused on delivering continued traffic growth over time. So now, before I turn the call over to Rick, I want to pause and thank our team. Back at our financial community meeting in March, I described how they were united in their commitment to moving from go time to grow time. And they've certainly delivered, and more. In an environment where consumers continue to make meaningful trade-offs, Our Q2 results demonstrate the power that comes from the right combination of newness, seasonal relevance, and compelling value. Well, that's great to see the team isn't pausing to celebrate. Rather, they're leaning in as they focus on building additional momentum in the back half of the year and beyond. Our team is the best in retail. They're guest-focused, and they love to win together. And they're just getting started. With that, I'll welcome Rick to his first earnings call.