Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation Fourth Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, February 26, 2014. I would now like to turn the conference over to Mr. Gregg Steinhafel, Chairman, President and Chief Executive Officer. Please go ahead.

Good morning, and welcome to our 2013 fourth quarter earnings conference call. On the line with me today are Kathee Tesija, Executive Vice President of Merchandising; and John Mulligan, Executive Vice President and Chief Financial Officer. This morning, I'll provide a high-level summary of our fourth quarter results and strategic priorities for the year ahead. Then, Kathee will discuss category results, guest insights and the holiday season. And finally, John will provide more detail on our financial performance, along with our financial outlook for 2014. 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 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 the 8-K we filed this morning. 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. Target's fourth quarter financial results reflect better-than-expected U.S. segment's performance through the first 3 weeks of the holiday season, followed by meaningfully softer results following our December 19 announcement that criminals had gained access to guest payment card data in our U.S. stores. In total, fourth quarter comparable sales decreased 2.5%, consistent with our updated guidance in January. Throughout the quarter, our team managed the business extremely well, adjusting both inventory and expenses to match the rapidly changing pace of sales. As a result, our U.S. operations generated fourth quarter adjusted…

Thanks, Gregg. In our last conference call, we outlined our plans for the holiday season and mentioned that fourth quarter sales were on track through the first half of November. As we progressed through Black Friday week and the first 2 weeks of December, guests continued to respond to our promotions and sales ran ahead of our plan. Following the data breach announcement and the rapid change in the pace of our sales, the team reacted quickly, making nimble adjustments to minimize excess inventory. This quick response allowed us to end the year with a clean inventory position and while our fourth quarter gross margin rate reflected the additional clearance activity resulting from the sales slowdown, our team did a great job minimizing the impact. As we built our holiday plans, our goal was to cut through the clutter and reach our guests with compelling offers on exciting merchandise. Specifically, we aligned our weekly deals and events so guests were receiving a clearer message across all channels. And because our guests are budget-conscious and love to find deals, we intentionally layered promotions across our circular, Cartwheel and our catalogs to provide unbeatable value. We used our direct channels to drive urgency at key points in the season and we offered more broad, attention-getting promotions, like 40% off sweaters. Consistent with past years, we featured hot deals on key items, but attracted more attention by offering deeper discounts on fewer items and we were very pleased with the guest response. For the quarter overall, our nondiscretionary categories generally saw the strongest sales performance. However, among our more discretionary categories, Electronics saw an increase in fourth quarter comparable sales, led by mobile phones, tablets and video game hardware and software. We also saw relative strength in our Sporting Goods and Housewares categories.…

Thanks, Kathee. Our fourth quarter financial results reflect strong efforts by our team to handle separate challenges in both our U.S. and Canadian segments. In the U.S., comparable sales declined 2.5%, consistent with the updated guidance we provided in our January press release. This sales performance reflects a 5.5% decline in transactions, partially offset by an increase in average ticket. Prior to the announcement of the data breach, fourth quarter comparable sales were running positive, reflecting the success of our holiday merchandising and marketing plan. Immediately, following news of the breach, sales turned meaningfully negative, but began to recover in January. And while it's impossible to measure precisely, we believe we would have seen even more improvement, had there not been extreme weather across much of the country. Fourth quarter sales penetration on our REDcards was 20.9%, up 5.4 percentage points from a year ago. While the rate of increase slowed down following the breach, year-over-year penetration continued to grow hundreds of basis points through the end of the quarter. Fourth quarter U.S. EBITDA and EBIT margin rates were down more than a percentage point from last year's rates, which we were revised to reflect combined results from our former U.S. Retail and Credit Card segments. These profit margins were below our expectations going into the quarter, driven almost entirely by gross margin rate, which declined about 20 basis points from 1 year ago. This performance reflects about 20 basis points of benefit from this year's change in vendor payments, offset by higher-than-expected markdowns, related to the 10% off weekend we offered prior to Christmas, as well as the impact of clearance markdowns at the end of the holiday season. Margin mix was somewhat less favorable than in the recent quarters, driven by strong sales in Electronics. While below our…

[Operator Instructions] Your first question comes from the line of Sean Naughton with Piper Jaffray.

I guess, on the same-store sales trends for February, being down in that 0% to 2% range, probably a little bit better than people expected, I guess, just over time, Target has been on an aggressive campaign to drive frequency with REDcard and remodeling more stores towards food. But given that PFresh is maturing here and the credit breach could curb some of the willingness to sign up for REDcard and online taking a bigger portion of the retail landscape, how should we think about some of the big initiatives or the big picture initiatives to drive same-store sales trends in 2014 and beyond?

Sean, I think a lot of the things that I talked about today with products, as well as with in-store experience and our mobile experience, those are really the key things for us to help drive people to shop at Target beyond the Food that you talked about and of course, the REDcard.

Okay. And then just on the Food, I guess, aspect of things, how are you on the in-stocks in that particular category? Are you happy with the products we have out there on the shelves today?

Yes, in-stocks have been rock solid for quite some time and in terms of products, I would tell you that we're always making adjustments to what we carry in stores. We learn what's selling and what trends are picking up steam, things like organics and better-for-you products. So that's a never-ending thing that we work on.

Okay. Great. And just one last thing, you mentioned the online and the flexible fulfillment. I think that all of those can now be viewed online, which is great for the consumer. But when do you think -- or is it going to be possible for all of those products for buying online and picking up in-store?

We are expanding the assortment right now. I don't have a date for you in terms of when we'll get our whole assortment up online. And right now, we're focusing on the most popular items and categories. So we recently added pets, for example, and we'll just continue to expand as we learn more and more about that program.

Our next question comes from the line of Matthew Fassler with Goldman Sachs.

I've got 2 questions, and the first relates to inventory. I know you've cleared a lot of inventory in Canada. Your year-on-year number is still, across the corporation, across the enterprise, is still up quite substantially, relative to sales. So if you could comment on sort of the composition of that inventory and your thought process for its impact on margin going forward?

Sure. Inventory, up about 10% year-over-year and you could roughly think about that split about equally between Canada and the U.S. Canada, obviously, we're just in a different place than we were 1 year ago. We build inventories all year as we opened stores. I would tell you in Canada, we feel much, much better. We feel very good about the progress we made in the fourth quarter, clearing excess inventory. The average inventory per store in Canada from the beginning of the quarter to the end of the quarter went down about 30%. So we still have some lingering issues in Q1 with some long lead receipts, but feel very good about the inventory there. In the U.S., I would tell you, the merchant team did an outstanding job reacting to the change in sales and our inventories are in excellent shape. This is the time of year where, in February, we are changing lots of things in the store. And frankly, depending when you snap the line, for year end, relative to our receipts, we see inventory move around a little bit. If you go back over the past couple of years, our inventory per store in the U.S. is up about 3% versus 2 years ago. So this is really more timing than anything else and we feel very good about the inventory position.

That's very helpful. And then my follow-up relates to capital allocation and specifically to buyback. I know that you alluded to the company's desire to maintain its current credit rating and that you spoke about resuming buybacks as the year progressed, presuming that you're on plan. I just want to talk about what your thought process is for contingencies, and that based on the numbers we've looked at, it seems like you're a long way from coming close to the edge on your current credit ratings. So what would it take for you not to do that $1 billion to $2 billion? It seems like that should be well within your financial capacity, even if, frankly, the numbers are a bit light of your current guide.

Well, we should go offline and review where you are -- where you think we are versus our credit rating and where we think we are versus our credit rating. We've actually run pretty close to our credit rating not just last year, which was even higher, but for the past several years. So our view is that we think we can do, given our plans, between $1 billion and $2 billion. We need to see our business results improve over the next couple of quarters. We're starting to see that in February, as we alluded to. And then also, get a little bit of a view into what the potential costs are that may be coming our way as a result of the breach. But given all of that, we still think somewhere in $1 billion to $2 billion, beginning probably in the back half of the year, for the year makes sense.

And just finally, I know you're not going to quantify the cost of the breach, but it sounds like, in thinking about the capacity to buyback stock, you have somewhere internally a sense of that number that would enable you to pursue that course?

We -- as we said, it's not estimable at this time what the potential cost of the breach is. And given where we are in the process, it'd be inappropriate for me to speculate.

Your next question comes from line of Greg Melich with ICI (sic) [ISI] Group.

I had a couple of questions. Just a quick follow-up on the breach costs. You showed a net -- you got some insurance payments from the breach costs that you had. Is that a -- should we expect that -- or do you have any insurance for these potential costs whatever they may be? Or is that sort of a one-off in the quarter? And then I have a follow-up.

Just to be clear, that was insurance receivables. So we haven't actually received payment, but we feel pretty -- we feel very likely to receive payment for a portion of the expenses we incurred in the fourth quarter. What we can say about insurance right now is at this point, we think there's $44 million of insurance that we'll receive and to the extent that number changes, we'll be back to you to provide more information.

Okay, great. Then bigger picture on REDcard and traffic. I mean, if traffic was down 5.5% in the quarter. Presumably, post the breach, it was down, pick a number, like 7% or 8%. Is it fair to say that traffic has recovered back to what it was in January and February or where we are now? And how is REDcard seasoning? Those people have now had it for 3 or 4 years. How are those people behaving following the breach?

Yes, on traffic, your view of what happened post the breach is pretty accurate. And we have seen traffic continued to improve and firm up and definitely throughout February, we've seen traffic firm up. And as we said, sales have improved and a big part of that has been traffic. On the REDcard, what we've seen -- and Kathee talked about this a little bit, in our core guests, REDcard guests, they have continued to shop with us and we've seen very strong sales from that. REDcard penetration continues to grow meaningfully, hundreds of basis points year-over-year. And to the extent we're not growing where we used to, that's driven by new accounts. So the guests who have REDcards continue to shop our stores.

So it's more of the penetration growth from new people signing up or from people that signed up shopping more?

As has been the case over the past couple of years, the penetration growth comes from new accounts.

Your next question comes from the line of Matt Nemer with Wells Fargo Securities.

I'm just wondering if you could provide a little more color on the comp spread that you're seeing between states that have been severely impacted by weather and some of your warmer weather states?

Great question, Matt. And it's -- analyzing weather isn't a perfect science. I would tell you when we see -- in the Midwest, in the Northeast, when we've see these weather patterns go across the country, the spread is significant between the 2. But ultimately, as that passes, we see them restabilize and everything come back to normal. But the difference while it is going on is pretty dramatic. It's in single digits difference, but it would be high-single digits.

Okay. And then secondly, as you -- you gave some great detail on your investments in digital and e-commerce this year, as you enable Click and Collect and fulfillment from store, are there any significant investments you need to make in terms of inventory accuracy in the store? And could you just give us maybe a bit of color on how that's running in terms of being able to pick up in store?

We're always working on inventory accuracy and that is a combination of how we use our systems, as well as the processes in-store. And so it's been less of an issue to date. As we get into some of the additional categories, things like Beauty where there's a lot of SKUs, we've got to make sure that the accuracy is there. I will tell you, Apparel, while we've had good results there, it's a little bit harder partly accuracy, but partly being able to find the exact size when it's not in a planogrammed environment. So there are a few challenges for us to figure out. But overall, I would tell you that our guest response has been very positive and the survey comments that they hand back to us, they really love the service. So yes, we will keep working on accuracy to make sure that we can fulfill as many orders as possible. But so far, we're very pleased.

Okay. And then lastly, your SG&A per foot in the U.S. was down pretty substantially in the fourth quarter versus the last few years. How should we think about SG&A per foot on a full year basis for '14 in the U.S.? Should it -- is that a number that can keep relatively flat? Or is there just some inherent inflation there that we should expect?

First, the comparison to last year, we have to be a little bit careful. There's a 53rd week in there that's a relatively low-volume week, which creates a little bit of distortion year-over-year. But I think, as I said, we continue to work very hard on store productivity, ensuring that we're driving great guest experience and in-stocks, but also improving our productivity. And then all of the expense optimization efforts continue to go on. And some portion of that will fall to the bottom line, some portion of that goes to gross margin and some portion of that gets reinvested in the business as we invest in multi-channel technology supply chain. But I think flat to up slightly is probably about the best way to think about it.

Your next question comes from the line of Bob Drbul with Nomura.

I just had a couple of questions. First, on -- did you give a number on the online business in terms of the increase that you had in the fourth quarter?

We didn't give a number, but I'll tell you, it was very positive, above the industry and slightly above 20%.

But like the rest of the business, it was impacted by the breach as well.

Okay. Okay. And then when you look at the full year, at your plan, you gave a lot of details. In terms of, like the sales recovery that you have, what are the key factors that give you the comfort and confidence in the recovery over this year, as you plan the earnings and sales trajectory?

Well, it's -- from our perspective, we've got to up our game on all fronts. It starts with delivering great content, great in-stocks, our team is more engaged than ever from a service standpoint, both on the sales floor and at the lanes. And we're going to deliver, as Kathee said, just some eye-popping irresistible deals, so we're going to really up the ante as it relates to making a statement on our unbeatable pricing proposition, which we have. I mean, we price match the competition and we run our circulars and with our 5% REDcard Rewards program, our pricing -- our value proposition is unbeatable. So we're just going to call greater attention to that and selectively, we're going to go out and be more aggressive in that regards. And so it's the combination of all of those elements.

And then on the gross margin outlook for Canada, can you just talk about the mix assumptions in there and sort of -- also like the ramp from where you finished fourth quarter to get to that 30% number for the year?

Sure. Mix in Canada continues to be stronger in Apparel and home. And we expect that to moderate through time. We ultimately think the mix there will be stronger than what we see in the U.S. But a lot like our high-volume stores in the U.S., our urban stores in the U.S. we see a higher mix of home and Apparel sales. That will moderate through time because we want to drive the frequency categories. That's what we're working on the team in Canada. Ultimately if they're successful in driving conversion in commodities, Grocery, Food, all those categories, we'll see that mix moderate. I think we'll see margin -- we except to see some volatility, Q1, for instance the margin rate won't be at 30%, but it will be a significantly improved from the 4.4% we recorded in the fourth quarter. So we'll make progress and you should expect to see that throughout the year, and of course, back in fourth quarter next year, we'll be down a little bit from that 30% as is typical in our U.S. business given that time of year.

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

A couple of random questions. So could you perhaps breakout how much was the explicit impact of the 10% off deal that you did after the breach and right ahead of Christmas?

Chris, we don't break out promotions individually. It was a big-time of the year and the number was relatively large. But in the big scheme of the fourth quarter, I would tell you it's not material.

Okay. And then on the cost savings side, I guess how much of the $1 billion is done so far? And what has been the big drivers this year that have taken those costs out?

There's $200 million that we recorded in 2014. We'll annualize on that -- oh, '13, excuse me. We'll annualize on that next year. And the savings came from all over the corporation. There were savings in gross margin around transportation expenses, that will grow again in 2014. There were savings, really it's hard to pin it down. It was literally across the entire organization where we looked at things. We looked at how we sourced product and aligning our non-retail product that we sourced and serviced it and making that look more like we do in merchandising and we saw significant savings there from our sourcing. There's more to do there and we'll see that grow in 2014 as well. But as Gregg said, it was literally across the entire organization where we were focused on stopping things that we didn't need to do. If we need to do them, improving productivity.

And then one last one. How would have the -- if you had chip technology in your stores, this past year, how would the breach outcomes change? Would it have stopped the actual theft of the Credit Card data? Or would it have stopped the personal information disclosure?

The chip technology makes it such that using the account numbers without the card becomes very much more difficult. And so the desire to obtain those card numbers goes down significantly. What we've seen in other countries that have adopted chip technology is fraud rates go down dramatically for in-store transactions. And I think in the U.K. or Europe, I can't remember exactly, down like 60% once chip technology was enabled. And so the desire -- those account numbers just become less desirable.

But didn't the breach actually come from systems internally, not necessarily coming from the card readers?

You know what, Chris, we're in the middle of an investigation and we can't talk about the specifics. We continue to learn. There'll be learnings that come out of that investigation and from those learnings, we'll take action. And that's about what we can say today.

Okay. Well that concludes Target's Fourth Quarter 2013 Earnings Conference Call. Thank you, all, for your participation.

Again, thank you for your participation. This does conclude today's conference call. You may now disconnect.