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 20th, 2024. I would now like to turn the conference over to Mr. John Hulbert, Vice President, Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining us on our third quarter 2024 earnings conference call. On the line with me today are Brian Cornell, Chair and Chief Executive Officer, Rick Gomez, Chief Commercial Officer, Michael Fidelke, Chief Operating Officer, and Jim Lee, Chief Financial Officer. In a few moments, Brian, Rick, Michael, and Jim will provide their insights on our third quarter performance, along with 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, Jim 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 quarter and his priorities for the fourth quarter and beyond.

Brian? Thanks, John, and good morning, everyone. I want to start my remarks today by welcoming Jim Lee to his first conference call as Target CFO. Jim recently joined our team from PepsiCo, where he gained a wealth of experience in numerous positions throughout their business. Since he arrived here in September, Jim's been learning our business, and I've been incredibly impressed with his ability to synthesize large amounts of data, drill into what's most important, generate innovative solutions when presented with problems, and then take quick action to address them. I'm confident you'll enjoy getting to know Jim in the years ahead, just as I have over the last several months. I also want to thank Michael, for stepping up and occupying two important roles during the CFO search process. He did an incredible job leading both the finance and operations teams over the first half of the year. And I know both of those teams are grateful for his leadership. And of course, I want to thank the entire Target team for their leadership in successfully navigating through a difficult environment this quarter, a period that included a number of performance highlights. and which also presented multiple challenges across our business. Because of our team's dedication to serving our guests and their focus on delivering newness and strong value, we saw healthy growth in traffic throughout the quarter, even as we encountered some macro headwinds that caused our EPS to be lower than expected. Despite these headwinds, we're encouraged that operating income has grown 6.7% through the first three quarters of the year. We're highly confident in our proven long-term strategy and in our ability to move beyond this current volatility. And importantly, we're continuing to make the right investments in our business that will help us deliver profitable growth in the years ahead. Among the drivers of our comp sales, traffic grew a healthy 2.4% this quarter, representing well over 10 million incremental transactions compared with last year. This growth in traffic was mostly offset by a decline in average tickets, as consumers continue to spend cautiously, most notably in discretionary categories. Overall, our third quarter comp sales increased 0.3%, near the bottom of our expected range. As you know, we focus on traffic as a key indicator of guest engagement, and the growth we've been seeing is a validation of our guest-focused strategies and our team's commitment to delivering newness, value, and a differentiated experience. We continue to measure year-over-year increases in guest service scores, and we're really pleased with the response to thousands of price reductions we introduced earlier this year, which we're extending with another 2,000 more as we enter the holiday season. We've also seen strong results in the digital channel, which grew by nearly 11% this quarter. Among our digital services, we saw nearly 20% growth in our same-day delivery, powered by Target Circle 360. As more guests learn about it, and respond to the value and convenience this service offers. We also saw double-digit growth in drive-up this quarter, which accounted for more than $2 billion in our Q3 sales. We also saw healthy growth in our ship-to-home business in Q3, as guests responded to the changes we've made to streamline the shopping experience, increase speed and reliability, and lower our costs by moving more of our shipments through sortation centers. At the category level, we've seen persistent strength in beauty, which saw a comp increase of more than 6% in the quarter, while our frequency businesses delivered solid growth in bulk traffic and sales. And we're pleased with our relative performance versus the market in apparel, even with a small sales decline in the environment where we saw slow sales of cold-weather apparel across the industry. Our other two discretionary businesses, Home and Hardlines, saw continued softness in Q3, as consumers continue to spend cautiously in these categories. When we assess the consumer and macro environment, we're seeing many of the same themes that have defined the environment for some time. Consumers tell us their budgets remain stretched and they're shopping carefully as they work to overcome the cumulative impact of multiple years of price inflation. They're becoming increasingly resourceful in their shopping behaviors, waiting to buy until the last moment of need, focusing on deals and then stocking up when they find them. As a result, we're seeing a stronger response to promotions than we've seen in some time. Yet, consumers are still willing to spend when they find the right combination of newness and value, and they'll continue to celebrate important seasonal moments throughout the year. Because they've worked hard to control their day-to-day spending, consumers sometimes allow themselves to splurge a little bit when they find the right item or the right seasonal moment arrives. As Michael will highlight in more detail, our supply chain faced some unique challenges related to the East Coast and Gulfport strikes. In order to protect our in-stocks and ensure we're ready for Q4, our team changed the timing of certain shipments and directed a portion of our receipts to other ports. Receipt timing changes and the impact of softer than expected sales in discretionary categories resulted in elevated levels of inventory earlier than in a typical year, leading to higher than expected costs in our supply chain. While we weren't pleased with this cost pressure, we are confident we took the right steps to safeguard our reliability. as our team's decisive actions protected Q3 in-stocks while supporting our Q4 merchandising plans. Beyond the headwinds in our supply chain, we also faced some unexpected pressure in health care and general liability expenses this quarter, which Jim will outline in a few minutes. Another Q3 highlight was our most recent Target Circle Week in early October. Guests are responding to the changes we've incorporated into this program, and they appreciate the value it provides at every level. We enrolled nearly 3 million new Target Circle members this quarter, and we'll continue making long-term investments in this loyalty program with a focus on reaching new members and driving incremental engagement among our existing base. Beyond the profitable traffic and sales we see from Target Circle, this program also helps us learn more about our guests and their preferences, which in turn helps to fuel our Rondell ad business. Rondell delivered mid-teen growth in Q3, benefiting both our total revenue and gross margin rate, while driving deeper connections among our guests, the target brand, and our vendors. In a few minutes, Rick will highlight our merchandising and marketing plans for the holiday season. And while we're really excited about them, we're also focused on controlling what we can control and planning the business cautiously, given the volatility we've been seeing. While we aren't happy about the reduction in our outlook for the remainder of the year, we believe we're managing our business appropriately. And we're helping our teams stay agile and ready to respond if we see our business accelerate. And our Q4 plan is focused on ending this year with an inventory position that will best position our business going into 2025. Importantly, we're still confident in our long-term strategy. Traffic growth shows that we're winning with our guests and we're making the long-term investments that have delivered strong performance over decades. This includes capital investments in our existing stores, in full remodels, smaller refreshes, and layout changes to increase the efficiency of our same-day services. We're investing in our digital experience, in our website, app, and our full menu of fulfillment capabilities to become even more reliable and convenient for our guests. We're investing in our new store program, based on strong performance of this year's openings and our robust pipeline of new locations planned for 2025. We're making smart investments in technology, including AI, to allow our team to do more for our guests more quickly. We're investing in our own brand portfolio, which delivers a unique combination of style and value that differentiates our assortment from everyone else in the marketplace. We're delivering value through our investments in lower everyday prices, in the deals we offer to our Target Circle members, and the compelling promotions we'll deliver throughout the holiday season. And we're continuing to invest in our team to ensure they can deliver a differentiated, joyful, target guest experience across every channel, every day, throughout the year. With Thanksgiving right around the corner, I want to pause and acknowledge the efforts of my fellow team members, most notably in our stores and supply chain facilities, who've been spending months preparing for our busiest season of the year. Throughout the company, our team members bring enormous energy to their work, But in the fourth quarter, they shift into an even higher gear. I want to thank them for everything they do to make Target, Target. Now, I'll turn the call over to Rick.