Ladies and gentlemen, thank you for standing by. Welcome to Target Corporation's Third Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Thursday, November 15, 2012. I would now like to turn the conference over to Mr. Gregg Steinhafel, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, and welcome to our 2012 Third Quarter Earnings Conference Call. On the line with me today are Kathy Tesija, Executive Vice President, Merchandising and Supply Chain; and John Mulligan, Executive Vice President and Chief Financial Officer. This morning, I'll provide an overview of our third quarter results and highlight some of our enterprise strategic priorities, and Kathy will discuss category results, guest insights and upcoming initiatives. And finally, John will provide more detail on our third quarter financial performance, along with our outlook for the remainder of 2012. Following John's remarks, we'll open the phone lines for a question-and-answer session. As a reminder, we're joined on this conference call by investors and others who are listening to our comments today via webcast. Following this conference call, John Hulbert and John Mulligan will be available throughout the day to answer any follow-up questions you may have. Also, as a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, the most important of which are described in our SEC filings. Finally, in these remarks, we refer to adjusted earnings per share, which is a non-GAAP financial measure. A reconciliation to our GAAP results is included in this morning's press release posted on our Investor Relations website. We're very pleased with Target's third quarter financial performance, which we announced earlier this morning. Our U.S. operations generated adjusted earnings per share of $0.90, above the midpoint of our guidance and 4.3% above last year's very strong performance. Our third quarter GAAP earnings per share increased 17.6% to $0.96, as dilution related to our Canadian segment investments was more than offset by favorable tax items and a gain on the pending sale of our receivables portfolio. Our U.S. Retail segment generated third quarter comparable-store sales…

Thanks, Gregg. We are pleased with both the pace and mix of our third quarter sales. As expected, comps were strongest in less discretionary categories, with particular strength in Food and Health & Beauty. In more discretionary categories, comparable-store sales in Home led the way, most notably in seasonal categories and Housewares. Comps in Apparel were up slightly, with the strongest results in Men's Apparel and Performance Activewear. In Hardlines, comps were down slightly overall, with the strongest performance in Sporting Goods and the softest performance in Electronics, which continued to reflect mature product cycles in several key categories. Strengthen in Back-to-School and Back-to-College categories was a key driver of our third quarter sales results. This year's comprehensive marketing campaigns drove guest awareness, and our in-store navigation and signing streamlined and simplified shopping trips for our guests. As Gregg mentioned, we're very excited about initial results in our new CityTarget stores. Traffic has been very strong, and guest feedback has been overwhelmingly positive. Initial research indicates that the typical guest in this new urban format is younger and more affluent than we see on average across the chain. And as expected, these stores are attracting many new guests. We continue to make significant investments in our online and mobile platforms, both to improve the performance of our existing site and mobile applications, and to test and inform future opportunities. Throughout the year, our teams have been focused on ensuring site stability and enhancing our search and navigation capabilities. More recently, we've improved our speed of checkout, order flow and fulfillment. As a result, our online guest survey scores are much higher than a year ago, and our mobile apps continue to receive industry accolades. And importantly, we believe we are well prepared for the upcoming launch of the Target Neiman…

Thanks, Kathy. Even though we were cycling over our strongest quarterly performance in 2011, this year's third quarter results reflected strong profitable growth. Retail sales were in line with our guidance, and profitability was near the high end of our expectations, with a superb execution across each of our business segments. Specifically, we generated third quarter adjusted EPS of $0.90, compared with an expected range of $0.83 to $0.93 going into the quarter. Third quarter GAAP EPS was $0.96, reflecting $0.13 of dilution related to our Canadian segment, offset by a $0.15 gain due to the pending sale of our Credit Card portfolio, along with $0.04 of good news from a resolution of income tax matters. In our U.S. Retail segment, comparable store sales increased 2.9%, consistent with our guidance for the quarter. This comp was slightly slower than our second quarter performance, but on a 2-year basis, our third quarter comp accelerated slightly. Similar to last quarter, comparable store sales were primarily driven by an increase in average ticket, combined with a traffic increase of 0.5%. Penetration of sales on our credit and debit cards was 14% in the third quarter, up more than 400 basis points from a year ago. As Gregg mentioned, this program shows no signs of slowing down and continues to drive meaningful incremental traffic and sales. Profitability in the U.S. Retail segment was somewhat better than expected. Our third quarter EBIT margin rate was flat to last year, and our EBITDA margin rate was down only slightly, even as we compared against very strong prior-year performance. Recall that for the year, our plan was to generally maintain our full year EBITDA and EBIT margins flat to last year. And our results for the first 9 months show that we're right on track to meet…

As Kathy, John and I have all indicated this morning, we're very pleased with our team's performance and the financial results we delivered in the third quarter. While we recognize that the fourth quarter and the holiday season are always intensely competitive, we are excited about the plans we have in place, confident in our team's ability to execute and optimistic about our ability to capture our fair share of our guests' hearts and wallets. Now Kathy, John and I will be happy to respond to your questions.

[Operator Instructions] Your first question comes from the line of Deborah Weinswig with Citi.

Starting on the top line, could you just talk about the impact of either inflation or deflation and what you're seeing in terms of either Food or Apparel at this point in the game?

Deb, this is John. I don't think we're seeing really any material impact from the top line due to inflation in any of our categories -- specific categories across the store. And certainly, as we would aggregate that across the store, as has been the case for the past several years, in aggregate, inflation impact is immaterial to our results.

Okay. And then as we're looking at SG&A, should we expect tech investments that are expensed to stay at the same run rate that was experienced in the third quarter?

Yes, I think that's pretty reasonable. We continue to invest meaningfully in technology across the enterprise. And as we've said, we're also investing now in multi-channel initiatives across the enterprise and specifically around dotcom. But like I just said in the fourth quarter outlook, we expect to leverage SG&A expense in the fourth quarter despite those investments ongoing.

Okay. And then as your online performance continues to improve, how do you think about the halo effect from the stores and leverage that? And then any thoughts on buying online and shipping to the store?

You know, Deb, we do think that there is a halo effect when our site is performing well. As you know, guests do a lot of research online, but then they want to come into stores and purchase. And of course, there's a lot of people who come into the store, see the product and perhaps want a different color that we offer online. So after looking at the product, decide to still order through target.com because they want something that we offer that's different online. So we see sales going back and forth between the 2 all the time, which does make those channels blur quite a bit. But I think the health of our site certainly impacts the health of our stores. And I'm sorry, what was your -- the second part of your...

Buy online, ship to store.

Buy online, ship to store. At this point, we are not offering that service to our guests. But it is something that we've been talking about.

Your next question comes from the line of Colin McGranahan with Bernstein.

Just wanted to focus on the REDcard a little bit. It looks like the penetration, the year-on-year increase in penetration, was actually accelerating a little bit and with Kansas City at 20%, it certainly suggests there's a lot of upside potential. What do you think is driving that? I've noticed that there's certainly a bigger push behind marketing the program. And is there any difference in the recent, let's say, 400- to 500-basis-point penetration of the newer cardholders or what you're seeing in Kansas City? Any difference in their behavior in terms of incremental spend, in terms of the FICO score, in terms of anything relative to the first, let's say, 10% to 12% penetration?

Well, we'll try to answer all 6 of those questions in order. I think you hit it right on the head, we are seeing the performance of the REDcards continue to accelerate, and we've seen that both in Kansas City and in the U.S., and our penetration continue to increase. I think the big driver, and we've talked about this a couple of times this year, continues to be the debit card. The debit card continues to grow roughly at about 3 accounts for every one account of credit, and that has been kind of the secret sauce in the significant growth. As far as performance of the card, we continue to see both either a debit or a credit card, once they're opened, more than a 50% increase in sales on average at a household level. So the performance remains very similar to what we've seen for the past couple of years, both in Kansas City and in the broader -- in our entire store base. And I'm trying to think what else, what else you asked, Colin?

I think that was it. But if 20% was the stretch goal, what's the stretch stretch goal now?

Hard to say. I think 20%, I think we said about -- if you'd have asked us a year ago, we would've said we thought 20% was the top. Obviously, with Kansas City hitting that for a period of time, and as we said, that will come back here in the fourth quarter just due to the dynamics of the quarter, we'd expect the company to be there next year, and we think there's just a very long runway here. We think the product is an outstanding offer. Clearly, our guests are starting to understand it. The store teams are doing a great job as they communicate with our guests, helping them understand both the credit and the debit offering. So you wrap that all together, and we think there's a long runway here.

Yes, we haven't -- we see no reason to establish an upside benchmark at this point. And I would just add from -- in addition to what John said, our guests really love this because Target is their favorite store or a favorite store of theirs to shop to begin with. And this is a very powerful, immediate and simple program. I mean, they -- we have a lot of our guests that spend thousands of dollars, and that 5% savings, along with the other bets [ph], is a meaningful savings to them. And you don't have to accumulate points or anything. And the debit card in particular has been very, very successful. So those shoppers who are coming to Target on a very regular basis can save a lot of money throughout the course of the year. So it's very understandable why they like this program so much.

Okay. And then second question for Kathy. Neiman Marcus, what's your expectation for cross shopping that customer who comes in for the relatively limited 50 items? And can you tell us at all what the dollar value of the inventory was in Neiman Marcus products?

We do think that there will be a lot of cross shopping, Colin, as we've seen with other limited-time partnerships that we've had, but we think particularly this time of the year, the guest is coming in to buy gifts, maybe some self gifting, but also gifts for people on their list. And Target is a great place to get gifts of all type. And so we think they'll come in for Neiman Marcus, but we do think that they will shop the rest of the store, and there will be some impact. In terms of the inventory and the dollar amount, we don't disclose what we buy or sell on these limited partnerships. But we are very excited about it.

And it will be our biggest event, our biggest partnership event that we've ever conducted at a great time of year as well.

Your next question comes from the line of Mark Miller with William Blair.

On the new Holiday Price Match, what's your expectation for the portion of transactions that might have this price match? Is this low single digits? And then given that price transparency is here to stay, might you consider doing this as a full-time measure?

Yes, this is Gregg. We don't see a lot of price match activity in our stores. We've been price matching for a long time. Our value proposition is so good day in and day out, and our circular price offering is so good that we don't expect this to be meaningful. So it will be in the -- we expect in the single digits. And we'll take a look and evaluate this post-holiday to determine what our plan is going forward. We haven't made any decisions as it relates to that at this point in time and really want to get through the have the period and regroup and assess the campaigns to determine how to address 2013.

Okay. And then I may have missed it, but can you give us a sense for how you're tracking in November? And what is the comp range expected for fourth quarter?

As you might expect, the beginning of the month was a little bit choppy, certainly with Sandy on the East Coast, the election, a few things going on. But we feel really good about the guidance we gave for November of a low and more important than that, we feel really good about the quarter, the 2% to 3% comp that we just talked about for the quarter.

So much of the -- I mean, we have 2 weeks down, 11 weeks in front of us, and we have so much of the business concentrated in that Thanksgiving weekend and in the 10 days before holidays, so that the vast majority of the holiday season is in front of us at this particular point in time. So we're excited about it. We've got a great plan. Our stores are ready, our teams are ready. We've got a great value offering and some really inspiring merchandise. So we believe we'll profitably take market share this holiday season.

Your next question comes from the line of Mark Wiltamuth with Morgan Stanley.

On the Credit Card, you mentioned you're going to retain a majority of the profits. What are we going to see there in terms of reporting moving forward and just a little perspective there?

Yes, we did say the majority of the profits. I think as we indicated, when we made the announcement, ultimately, we will report, as everyone else does once they no longer own the assets, we'll report the net impact, the income less the expenses that we incur for servicing those assets in SG&A within our Retail segment. So that's our plan going forward.

Okay. And just for Canada, as we start to look forward there, when do you expect to give us an outlook on the dilution we could expect for 2013? And then what's the arc there? As you start with the sales, are you expecting kind of weak margins to start? And how do we think about the progression once it gets going?

Yes, we'll -- we're working on detailed plans for both Canada and the U.S. business both, and we'll walk you guys through our exact plans financially when we do the fourth quarter conference call. I think importantly for Canada, probably the most important thing is that the Q4 of next year is when we have said we'll move from dilution to accretion. So our focus is on getting profitable in Q4 2013, and we feel good about that right now. I think when the stores open up, there's a lot of variables there. We said for a long time, we have a better idea of where the stores will be in year 2 or year 3 than we do in year 1. Lots of volatility, we'll certainly see a surge early, and then we'll settle in and we'll refine as we go along, both our merchandising assortment and how we operate those stores. So I think we would expect to see sales and margins we will -- we do expect to see both sales and margins improve as we go along. But by that, I don't mean you should be looking quarter-over-quarter. This will take us a couple of years to refine our operating model in Canada.

Your next question comes from the line of Chris Horvers with JPMorgan.

I wanted to follow up on the Neiman question. Gregg, you mentioned that it's the biggest event ever. Am I correct that it's bigger than Missoni was last September? I thought you had about 150 products, so that sounds like you're expecting to have more inventory of a smaller assortment here?

Well, it will be substantially larger than Missoni, but this is more tightly edited in terms of the number of items that we have. So the commitment behind each item will be substantially more than any event that we've ever done. And given the time of year that it is and the fact that these will make great holiday gifts, the inventory on a per-item basis is something that we've never supported in the past. Missoni and some of other ones have had hundreds of SKUs, as you know, and this has a much more narrowly-defined assortment base.

Perfect. So you're not selling out in day 1.5 this time?

Well, we're hopeful that this is our biggest success yet, but we're not making any predictions as it relates to the sell-through timetable. Like any event of this magnitude, there are going to be some items that sell through very, very quickly and other items that will take a little bit longer to sell through. But overall, we look at the entire assortment, we look at the portfolio of designers, and we think across the board, there's something for everyone. So we think it's going to be successful across the board. It's just a matter of how you want to gauge success, is it hours, or days, or possibly a week, which might be a stretch.

Perfect. Then one follow-up. On the grocery side, grocery comps moderated in October. And so I was just wondering if you could help us with how much of that was moderation of price inflation versus cycling the hump of the PFresh opens last year? And what do you think is sort of a sustainable comp is in that category, assuming inflation doesn't really go anywhere from here?

I think as we look at October, we think very little to do really with inflation in that category. We think the majority of what we saw in October was cycling over what was, by far, our largest PFresh remodel program in one cycle last year. As we think about grocery going forward, mid to high comps seem reasonable for us for a run rate as we look ahead here.

Your next question comes from the line of Greg Melich with ISI Group.

John, a question on leverage and then on online for Gregg or Kathy. On leverage, ex credit, it seems like you should be a little under 2x debt-to-EBITDA versus 2.5x now. Is that where -- well is my math is right; and two, is that where you want to run the business long term, or should we assume it goes up a little bit above 2x again?

Your math is pretty correct, Greg, and I think that's about the range that you'll see us operate in. As we've said, we want to maintain the current credit ratings that we're at, and we believe as we talk to the agencies, and we'll go back and talk to them again, obviously, once all the dust settles from the receivables transactions, but we believe that's about the right range where we'll continue to operate.

And then -- that's helpful. And second on online, I mean, last year, that was an area where you were down, and I know that was a disappointment. I'm just curious in this year's fourth quarter guidance, what do you expect from online sales growth? And linked to that, how much is REDcard penetration in terms of online sales? I imagine it's quite higher than the 14%.

Yes, first, as it relates to the impact on the comp, as we said last year, when it was not helpful, it wasn't material. And this year, while we do believe it will be helpful to the comp, it won't be a material portion of it. And I think you're exactly right, the REDcard penetration online is higher than we see in the stores. And as you might expect, in certain categories, it is significantly higher than we see in the stores, given the 5% off plus the free shipping online, you don't have to let your mind wander too far to think about categories where the penetration is probably pretty significant.

Your next question comes from the line of Peter Benedict with Robert Baird.

A couple of questions. John, first of all, just on the tax rate. We've consistently seen some benefits here for the last several quarters. So I'm just curious, as you think about the fourth quarter, maybe some parameters around how you think the tax rate is going to come in? And then secondly, on inventory, you mentioned that there was less outside the stores. Is that something -- is that a structural change that we should be thinking about, or something that was just a bit more unique to this period?

Sure. On the tax rate, I'll take that, and then let Kathy talk about inventory. We have seen several, what we have characterized as onetime events over the past several years, and they have been truly onetime as we have settled many discrete tax matters. I think for fourth quarter, we'd expect to see rates similar to what we saw last year. The caveat I'll put on that is that with Canada, with our dilution growing meaningfully year-over-year, the rate in Canada is much lower than we see in the U.S. and that, of course, puts -- when we have losses, puts pressure on our consolidated tax rates, so some impact related to that, but nothing material.

And on the inventory side, the team has done really an incredible job of managing our inventory, both to be in stock but at the same time optimizing the supply chain to make sure that we're keeping that as tight as we possibly can. A lot of the improvement that we're seeing is just indicative of what's happening right now in our business. So first of all, better management of our receipts in Toys and Home. There's some timing shifts in some gift-giving categories like Electronics. But then as we talked about in the last call as well, longer term, we continue to really succeed in moving a portion of our base inventory out of our distribution centers and our store backrooms and getting it onto the sales floor, which is a huge win for us because that's where guests can shop it. So we continue to work on those initiatives.

Your next question comes from the line of Charles Grom with Deutsche Bank.

Not to be too near-term focused, but did I hear you, Gregg, earlier that even with the Sandy impact and the choppiness that you saw, you still feel good about November comps up low single digits?

Well, we feel that for the quarter, we're going to be within the range that we have described and how we have characterized November. So much of November comes around the Thanksgiving weekend, and that's ahead of us yet. So we still feel good where our plans are for the month and for the quarter.

Okay, great. And then beginning of the year, I believe you guys stated the intention to do about $1.5 billion in buyback -- $1.5 billion in buyback. You didn't really do much here in the third quarter. So I was wondering as why, and I guess if you still feel good about that $1.5 billion target for the year?

Yes, I think we actually said $1.5 billion or more. And I think the key is, and you see this in the third quarter in other areas, is we don't do that just on autopilot. I think as we saw, the stock price went up pretty aggressively in third quarter. We always pause to see where the market's really going to land and make sure that we're buying at a reasonable pace for the year. We still think $1.5 billion or more is a reasonable range for us to end in.

Okay. And then -- and last my question, just to circle up on the Canada topic. A couple of years back, Doug talked about the dilution before you started to make money in that segment, to be about $1. It looks like this year, with last year, will be about $0.62 of dilution. So should we think about the first 3 quarters of next year being about $0.38 of dilution to make up that $1, or is there something different that's changed?

Well, as we -- as I said a little bit earlier, we haven't provided any guidance on 2013 yet. I think if you look back, you'd find that Doug used the words "For example" when he talked about that. But I think more important than that, as I said, we'll be back in about 3 months to give you our detailed view of what we think will happen in Canada over the next 4 months. And you kind of hit on it there subtlety, but again, I go back to, I think, Q4 is the key date for next year when we move from dilution to accretion.

Your next question comes from the line of Sean Naughton with Piper Jaffray.

Maybe Kathy, just a question on the merchandise. In terms of Apparel, you mentioned Men's and Performance as relatively strong in the quarter. And given the comp that you produced in that category, implies maybe a little bit weaker trends in Women's and Kids. Was it more in the fashion, basics or seasonal and anything you can help to do to reinvigorate the growth in those 2 areas for the fourth quarter?

You're correct, our strongest performance were in Men's and our Performance Activewear, which is -- Activewear has been strong really all year, both because it's a great trend in Apparel right now, but also given the quality and the value that we offer in C9, it's been really an exceptional performer. I think the weakness in Kids and ready-to-wear, or relative weakness, I think is mostly driven by seasonal. We saw some really good strength in sort of our better must-have product. But we are still waiting for weather to break in most of the country, and we have a lot of seasonal apparel, both in Kids and in ready-to-wear in particular, which is still off to a slower start. But I do feel great about the holiday season. Our sweaters are starting to sell and some of the other seasonal product that we have in ready-to-wear. So I think our assortment looks good. It's -- we'll see here in the next few weeks.

Okay, fair enough. And then I guess, secondly, a question for John. You had mentioned that the SG&A was up a little bit from higher expenses in technology and multi-channel, but should leverage that in Q4. I guess, is this primarily associated with sales from that extra week that you're getting that leverage, or -- and should we expect a higher comp leverage point potentially on SG&A on the U.S. business for the foreseeable future as you make these investments in technology?

Yes, it would start on Q3. I think the other thing I would remark upon relative to Q3, is last year in Q3, we leveraged 40 basis points of SG&A. So when we talked about the quarter at the beginning, at the end in our second quarter conference call, we actually expected to delever a bit more than we did. So we're pretty pleased with our expense discipline across the company in the third quarter. For the fourth quarter, certainly, a small element of that is related to the 53rd week. But frankly, most of the expense leverage that comes in the 53rd week is across depreciation and amortization because of the way we expense that. And that's where most of the benefit comes as you might expect. Most of our expenses happen in the 53rd week just like anyone -- any other week. Benefits, payroll, which is obviously our biggest expense across the enterprise, property taxes, that all happens just like normal. So that's the primary benefit. Going forward, we've said that we expect to maintain our EBITDA margin rates. And so we expect to overcome gross margin rate compression with SG&A leverage and to do so at a 3 comp. So nothing's really changed in our formula. We expect to accommodate the investments we're making in multi-channel and technology, both within our capital plan and our SG&A plan going forward.

Your next question comes from line of Dan Binder with Jefferies.

On the -- just wanted to follow up on the Apparel question. If we look at what you've been doing with your different partnerships, they're very interesting, they create buzz. I'm curious, in order to get the comp maybe moving up a little bit in Apparel, is there any hope of doing something a little bit more permanent with any of these partnerships? And do you think that your price and value proposition is right?

We feel that having limited time partnerships with designers is the best place for us to be because it allows us to capitalize on current trends in the marketplace and designers who are up and coming, and we've had a great response to that. And throughout the course of the year, our Apparel business has been really solid. So I do think that our price-value relationship is very good. This is an awkward time of the year given how much seasonal product that we have in Apparel and waiting for that weather to break and guests to get really interested in seasonal product, is always sort of a timing issue. But when you look throughout the course of the whole year, our Apparel business has been very solid, and I think it will continue to be solid.

And if I could follow up, last year, I believe on the third quarter call, you had commented about your competitor's layaway program maybe having an impact on you. I'm curious, they started it earlier this year, they actually quantified it today about how much they thought it was extra. We didn't really hear much from you on that. Do you think it had any impact on your business?

I don't think our guests, based on our research, is that interested in layaway. They are interested in great prices every day. So I think our value equation is really important to them, couple that with our Holiday Price Match, which gives them confidence to buy any time during the holiday season and know that if it appears at a lower price from Target or anyone else later in the season, that they can get that price matched, as well as we've talked about with our debit and credit card, getting 5% off, I think that's really critical to our guests, much more so than layaway.

Our final question comes from the line of Matt Nemer with Wells Fargo Securities.

Two quick questions. First, just a follow-up on price match. Although there's not a high usage rate for that, do your focus -- does your focus group research show that having it in place improves loyalty or conversion in the store? And when it is used, is there any disruption to checkout?

We don't conduct the price match policy at the checkout. We conduct it at the service desk. And our whole strategy is about delivering a great experience and having our guests have confidence in our pricing, our value proposition, day in and day out is rock solid. On ad, we meet or beat the competition, 5% REDcard reward on top of, or in conjunction with our Price Match Guarantee, is a winning combination and unbeatable in the marketplace. So it's very strong, it's very compelling, and we're just -- we're excited about it because the value proposition is so good.

And then lastly, I realize there's some runway ahead of us here. But how are you thinking about the 5.3% compare in Q1 early next year? Are there any specific plans in place to comp that in addition to the ongoing benefit of 5%, PFresh and other initiatives?

Well, I think as we said, we haven't provided any specific guidance. But I guess, I would point to Q3 this quarter. We cycled against very strong results this quarter, a 4.3 comp, profit rates, EBITDA and EBIT margin rates were very strong for the quarter, and we just produced another very strong quarter. Obviously, last spring and first quarter, and we talked about in the conference call, it was the perfect storm of good things all happened. We had the right merchandise in our stores, weather was great and people felt great about shopping. So we have some strong business to cycle. But we'll be back to talk about what we intend to produce for results in Q1 in about 3 months.

Okay. Well that concludes Target's Third Quarter 2012 Earnings Conference Call. Thank you all for your participation.

Thank you for participating in today's conference call. You may now disconnect.