Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation First Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, May 21, 2014. I would now like to turn the conference over to Mr. John Hulbert, Senior Director, Investor Communications. Please go ahead, sir.

Good morning, and thank you for joining us on our 2014 first quarter earnings conference call. On the line with me today are: John Mulligan, Interim President and Chief Executive Officer and Chief Financial Officer; and Kathee Tesija, Chief Merchandising and Supply Chain Officer. This morning, John will provide a high-level summary of our first quarter results and strategic priorities for the remainder of the year. Then Kathee will discuss results in the U.S. and Canada, guest insights and plans for the second quarter and beyond. And finally, John will provide more detail on our financial performance, along with our outlook for the second quarter and the full year. Following their 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 and I 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 EPS is included in this morning's press release posted on our Investor Relations website. With that, I'll turn it over to John for a review of the quarter and our priorities going forward. John?

Thanks, John. First off, today, I want to thank the Target team for their energy and commitment. The first quarter was unusually challenging as we worked hard to help our guests recover from the data breach. Because of the team's efforts, traffic and sales trends have improved substantially, and we're in a much better position today than we were just 3 months ago. Also, before I turn to the first quarter operating results, I want to briefly discuss the board's recent announcement of Gregg Steinhafel's departure and the initiation of a comprehensive internal and external search for a permanent replacement. I want to thank Gregg for all his contributions to Target over his 35-year career, and I'm humble to follow him into this role even on an interim basis. With the full support of the board, Kathee and I, along with the rest of the leadership team, have made it clear to the entire Target team that we are not going to wait for a permanent CEO to improve our operations and performance. We are already taking important steps, including management changes announced yesterday, to move the organization forward. This morning, we reported adjusted earnings per share of $0.70, above the midpoint of our guidance. This is the result of generally in line performance in both the U.S. and Canada, combined with a better-than-expected tax rate, driven by a variety of small matters none of which was individually significant. Our U.S. segment comparable sales decline of 0.3% was near the upper end of our guidance and reflects meaningful improvement from trends we are experiencing shortly after the breach. When we survey consumers, we increasingly hear that they have put the breach behind them and they're resuming their Target shopping habits. We're pleased with this progress and continuing to take steps…

Thanks, John. As John mentioned, we entered the first quarter during a tumultuous time for our U.S. business, as traffic and sales trends were still recovering from the meaningful declines we saw following the data breach. Our plan was clear: make Target irresistible to our guests with exciting content and compelling deals. Our efforts produced mixed results for the quarter, reflecting unfavorable weather in February, followed by the strongest results in March and weaker-than-expected Easter sales in April. In total, first quarter performance was meaningfully better than the fourth quarter, as comparable sales improved by more than 2 percentage points and comparable transactions improved even more. In our U.S. business, first quarter comparable sales were strongest in Hardlines, driven by a mid-single digit increase in Electronics, which continues to benefit from strong trends in mobile. Comparable sales in our less discretionary Food, Health & Beauty categories were slightly positive, while Home and Apparel saw small comp declines. With our digital channels, first quarter sales were strongest in Health & Beauty and Home. U.S. segment comparable traffic was down a little more than 2%, which was nearly offset by a healthy 2.1% increase in basket size. Within the average basket, we saw an increase in both units and average retail, reflecting our continued success in attracting guests to add more items to their carts and trade up to higher price points. First quarter digital visits were up more than 20% from a year ago, which, according to comScore, was the fastest growth among a group consisting of Target and 7 of our largest online competitors. The share of digital visits from a mobile, phone or a tablet continues to grow, and in the first quarter, almost 2/3 of our digital traffic was on one of these devices. Conversion rates on both…

Thanks, Kathee. As Kathee mentioned, our first quarter results were markedly better than our fourth quarter performance, specifically compared with the trends we were seeing late in the fourth quarter following the announcement of the data breach. In the U.S. segment, our comparable sales decline of 0.3% was near the high end of our guidance and flat to down 2%. Comparable traffic declined 2.3%, dramatically better than our late fourth quarter trends but well below where we should perform over time. Consistent with broader trends in the U.S. market, traffic in our stores has been declining, while transactions in our digital channels have been growing rapidly, particularly in mobile. However, given the relative size of these 2 channels of Target today, the mix effect of these opposing trends is driving a decline in overall transactions. The key to reversing this decline is clear: accelerate our digital capabilities and leverage assets across both our physical and digital channels to lead guests to choose us more often than they are today. The distinction between channels is increasingly unimportant because single transactions are already straddling both the physical and digital channels. Ultimately, we should be agnostic about which channels guests choose and enable them to interact with us where and when they want to, in our stores, digitally or preferably both. First quarter penetration in our REDcards was 20.4%, up 3.3 percentage points from last year. This is very healthy growth, but a couple of percentage points below rates we were seeing prior to the data breach. In the first quarter, as research showed that most consumers are putting the breach behind them, we ramped up REDcard offers to guests in our stores. And by the end of the quarter, we were making those offers with the same frequency as before the breach.…

[Operator Instructions] Your first question comes from the line of Matthew Fassler with Goldman Sachs.

Two questions. The first one, I want to ask, it's sort of a governance-related question. So answer it as you can. You talked about some of the company's initiatives and your key strategic direction in areas where you felt, perhaps, the company had fallen short. Were any of these areas themes where perhaps Gregg and the board or Gregg and the rest of the management team had a difference of opinion, such that your focus on them today would be different from what the firm's focused on them had been under his leadership?

Matt, all I can tell you is what we're focused on going forward, and we're focused -- Kathee and I and the whole leadership team have been talking to the team for the past couple of weeks about our focus is on driving the business forward, and we have 3 key objectives: drive sales and traffic in the U.S.; accelerate our operational improvement in Canada and, ultimately, our business performance; and then third, accelerate our transformation and get to be a leading omnichannel retailer in the U.S. And that's where we have the teams focused.

That's very helpful. And then my second question, just a quick one, on Canada. If you could try to help us frame the magnitude of inventory sort of left in the pipeline that you need to clear, maybe how much of a factor that was in the grosses in Q1? And whether that's -- whether you're cleaned up at that -- at this stage?

Matt, as you know, when sales get out of -- when sales aren't on expectation and inventories get a little heavy, they get lumpy. And so there's areas where we're a little bit heavier than we'd like, there's areas where we're a little bit lighter than we'd like, and we're working to, I'd say, balance all of the inventories. And a lot of it, frankly, will be dependent on do we meet our sales objectives. In the first quarter, a little bit light but not materially so. And if we continue to hit to our sales objectives, I think we'll see our inventory smooth out over the course of the year and be in a manageable position for the remainder of the year. I don't know if there's anything to add, Kathee.

Yes, the thing that I would add, Matt, is we're working on making sure that our forecasts are accurate, and then as we buy into them, that we've got chase and cancel plans built-in so that we're able to react in-season versus what we've done in this past year without any history and having to react at the end of the season to clear more. So we are still lumpy. We still have products to clear. But we're getting our arms around that forecast, and I think that will help us as we move through the year.

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

Just two questions. I guess, first, in terms of the search for a new CEO, is there like a reasonable timeframe that you think it can be resolved? And then the second question is on the share repurchase, you gave a lot of detail on it. Is it -- in terms of the second half confidence level, do you think that you will have better visibility? And what gives you that visibility around the cost of the breach in that third quarter? Just -- I'd like to better understand that situation.

Sure. On the first question on the CEO search, certainly, that's under the board's purview, and I would tell you, rather than focused on time, they're focused on getting the right individual to lead the company, as I said, to become an omnichannel retailer. So that's their focus, and the time will take as long as it's appropriate to get the right person. On the second one on share repurchase and specifically related to the potential breach liabilities, getting visibility to that in the second half of the year, there's a process that is agreed to within networks. They get some information from their forensics investigator and then they go through a process to evaluate incremental fraud where we may have potential liability. And then they come back to us after a period of time, and as we've looked at that historically, we've seen that that's taken several months and that's why we get to the third quarter. We don't have, frankly, Bob, a lot of visibility to that, but as I said, as we look at other incidents, that's what we've seen in the past for timing of when some of those potential liabilities may become more clear.

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

I had a couple of questions. John and Kathee, it sounds like growing that digital is a key focus right now and driving that faster. Could you help us understand where we start from, like what percentage of your sales or maybe some of the cross-shopping between REDcard members and how much they shop online, or maybe how those people season after they've had a REDcard a few years? And anything you have on that, I think, would be helpful.

Sure. I'll talk maybe a little bit about where we are today, and Kathee can talk about what we're doing to drive growth there. I mean, the sales in our business, somewhere between 2% and 3%, digital-channel originated, probably in the 2.5% range right now. REDcards, given the free shipping online, we have a lot of our REDcards guests shopping online, and I think we talked in the past, Greg, we have a very high penetration of online orders that we free-ship because of that REDcard. We think it's absolutely the right incentive or part of that loyalty package for REDcard, but it drives a very high penetration. And Kathee, you can talk about where we're going.

Yes, in terms of growth, Greg, mobile is where we're really focused and about 2/3 of our traffic right now comes from mobile. So we're really pleased with the results that we've seen there, not only in traffic, but also conversion. And we did improve conversion both on the site and on mobile, and in total -- and you know that mobile conversion is lower than site conversion, so that headwind from the mix is there but we still improved overall conversions. So we're happy with that. There's also a lot of new things that we're doing. Certainly, there's product introductions. I talked about the furniture a few minutes ago. There's always new stuff that we're adding on the site. We're expanding. We've got all -- almost all-store products online, now setup online, lots to be sold online. But now we're adding out in other areas where we should have a much larger selection and we think online is a place to do that, things like Apparel, Home, Beauty. In addition to that, there's a lot of services that we are adding that are doing really well. We talked about Buy Online, Pick Up in Store subscriptions has been really successful for us. We started last fall with about 150 SKUs, and in those items, our online sales were about 15% in subscriptions. So with no marketing and just beta on the site. So we've now got about 1,500 items, and by June, we'll have 5,000 items that will be available for subscriptions. When guests purchase those items, they will be able to get a 5% discount for signing up for subscriptions. So a lot of product and a lot of services that go with that to drive our growth.

That's great. And if I could follow up on the guidance. It sounds like it's really margin investment in Canada that has taken the guidance down, if I have summarized that right. You left the comp the same in the U.S. If we get back to that 0 to plus 2%, do you expect traffic to be positive at all as part of that guidance? Or do you think it could still be negative through the year?

Yes, I think if you mean for an annual number, getting to an annual positive traffic number, very difficult. We're working hard on increasing traffic for each of the quarters, and I think our benchmark is are we seeing continued improvement in traffic as we go sequentially? But for the full year, even if we just pick a number at random -- 1 comp, I don't think we'll see positive traffic for the year.

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

I'm just wondering on the digital transformation that you talked about, is there a target level of investment from both the P&L and a CapEx standpoint?

I don't think there's a target level of investment. I think, first, from a CapEx standpoint, our approach has been we're going to invest in all the investments the business needs to grow profitably and generate appropriate returns. The length of time over which those returns occur, we have a very long lead time as we think about capital investment. Stores have a very long return cycle. So we're used to making investments that pay back over a long period of time. From an expense standpoint, I think there, probably the biggest investment and where you'll see us accelerate is in speed and doing more testing and learning. And that's not just digital, but also in our store, just getting more activities out into the business that we're testing, we're modifying and adjusting and improving on. And if it doesn't work, pull it back and retreat from that and learn from the testing. I think the best example of that is Cartwheel. We put that out in beta. We knew there were things about the app that we didn't particularly like. Our guests let us know what they didn't like about the app. The team iterated and iterated. And 1 year later and, really, not with much marketing until more recently, we have 7 million users, and the app has evolved as our guests have provided us feedback. And as Kathee talked about, a lot of the merchandising initiatives in Baby and in Apparel and in Toys and in Electronics, that's the same approach we've taken, get it out in the stores, modify it, test it somewhere else, and modify it and then we'll move to scale. And so those are the investments we'll see in expense, and I don't think that it's limited by some false number of expense dollars we have to allocate toward it. It will be driven by the appropriateness of what we're testing.

Yes, the thing that I would add to that, Matt, the reason for getting more out -- and historically, we've tended to work on our newness until we felt we got it to an almost complete level and then we would put into pilot. The point now and John's point about Cartwheel and some of the in-store things that we're doing, we want to get in front of our guests very quickly, get their reaction to it so that we're fine-tuning it much more quickly and then able to move out to roll out at a much faster pace, with the products and the service that we know our guests will love.

Okay. Great. And then secondly, can you talk to the early-cycle stores versus the later-cycle stores in Canada? Anything you can share on the difference between the financial metrics in the various cohorts.

Yes, as we said, we continue to see improvement across the business into April as the guests data improved and our sales performance improved. And the early-cycle stores continue to be the best. And it's, again, almost in order down the sheet, cycle 1, cycle 2, cycle 3, cycle 4, cycle 5. So the earliest stores, the longer they've been open, they perform the better. But the good thing is all cycles on an upward path. We're not where we need to be and we're not where we need to be versus our expectations, but it's good to start to see some progress.

And I think the key to each of those cycles and improving them is getting this history under our belt, and now, we can forecast more accurately as we move forward. And as John said, we're very committed to accelerating our performance in Canada, and we think that it will continue to go by cycle as it has this past year.

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

Two questions. First, on online, and I guess, specifically, Amazon, it seems to continue to infringe on Target's everyday business and, increasingly, the consumable category. So I guess, the question is twofold: do you feel like that you're making good progress here on slowing the bleed of sales? And then secondly, have you seen any impact from the recent changes in your trends in markets where Amazon is now being forced to collect some sales tax online?

I'll take the second one and then Kathee can answer the first. I think on sales tax, we definitely see an impact when Amazon collects sales tax and, in particular, in states that have much higher sales taxes to begin with, where essentially the price differential is much more meaningful. And so we've definitely seen that impact as we've watch them collect sales taxes across the country. And Kathee, you can talk about the rest.

Yes, in terms of our online business, the part that I'm very encouraged about is that as comScore reports, when we look at traffic on our site versus the top 7 retailers, we led by far, and obviously, Amazon has a lot of traffic, but it was flat in the quarter and ours was up considerably. So I'm pleased with -- that the changes that we're making to this site, with the user experience and the added product that we're adding, is driving that guest behavior and that we're seeing the traffic. Clearly, Amazon is doing very well and they have in the consumables category a lot of business. We've been now ramping that up, starting with some more style-related consumable business. If you think Beauty, for example, you'll see us pushing forward there faster versus Grocery, which we're doing dry grocery now but we're not working on refrigerated and frozen at this point.

Understood. That's helpful. And then I guess, the second question on the logistics side of the organization. It sounds like you're having good success with the ship-from-store test and then Buy Online and Pick Up in Store, at 10% of the sales seems to be going relatively well. Can you talk about any of the longer-term P&L benefits from these initiatives, both maybe from a top line and a margin perspective?

At this point, I don't think we're ready to commit to what that will do from a financial perspective. Our main focus right now is what will most resonate with our guests, getting pilots out in beta so that we can learn and experience from them. Ultimately, we have to work to be profitable on all of those. But our main goal right now is sales-driven and understanding guest behavior so that we can then tailor the assortment to suit them and be profitable at it. I will tell you, I've been really pleased with some of these new initiatives and how rapidly our guest is responding to them. Store pickup is the biggest because it's now rolled out, but ship-from-store, which was really a Minneapolis team member test so far, we're going to be expanding that in June and make that guest-facing, having that $10 rush delivery in Boston, Minneapolis and Miami. And based on our team member response and the feedback that they gave us, I think that this will also resonate with our guests, so I'm really excited to see where that goes. And then later in the year, we're going to be adding standard shipping from 135 stores in about 38 markets, and that will allow faster delivery, not the express that I just talked about, but 1- to 2-day delivery and as well as provide access to the store assortment that you can't get right now on target.com. So lots of good things happening. Not yet ready to say what it means in terms of our sales or our profit.

And I think Kathee's exactly right, not ready to give a lot of guidance on sales, profit and how it will all work out. But I would tell you, broadly, regardless of where the profit margin rates end up, pushing incremental sales across our existing assets will be a very good thing for return on invested capital, and we're very excited about that. And with that, I think we have time for one more question.

Your final question comes from the line of Joe Feldman with Telsey Advisors Group.

A couple of quick things. I guess, I was curious as to, Kathee, the change in the organizational structure under you in merchandising. And like, I guess, what really prompted this now versus 6 months ago or next month or waiting for -- and a formal hire of a CEO in place?

Well, I think that the point is that we want to accelerate newness and innovation in this interim period. Here, we've talked about interim doesn't mean idle. We are approaching our business with as much passion and focus on improving results as we always have. And in terms of this structure, I think, as John mentioned, focusing on our top 3 priorities and having this merchant team really focused on the U.S. -- improving U.S. performance and leveraging deep functional expertise to be able to speed up that innovation and newness. So for example, putting all of our Style business together, both merchandising and design, all under Trish Adams; having our essentials and Hardlines business all under Jose Barra; having all inventory and all operations under Keri Jones; and then our omnichannel efforts all under Casey Carl, are really important to be able to leverage that expertise and move very quickly in improving our results.

Got it. And that makes a lot of sense. And if I could follow up, was this something that Gregg was reluctant to doing, and that -- did that have anything to do with the timing?

I'll just tell you that the board has been very supportive on these changes. We've talked at length about getting the right people in the right chair to be able to drive our performance. And we're really pleased with this structure and the people that we have leading these teams.

Got it. And then just the one last thing I wanted to ask, and I apologize if I missed it in the discussion today. But as far as the price investments go, where -- are they more in the consumables side, the discretionary side? Where are there areas you think you need to, I guess, make an investment?

As we've been focusing on irresistible deals for our guests, we've invested in both sides. I gave you the example of the Coke ad that we ran in, I think, it was in March, but we've also done broad categories on the want-side like the Ultimate Spring Break Sale or our Baby Sales. We're looking at really needs and wants, and how do we invest in both sides to be able to delight our guests. And we've had great success in both categories.

Well, that concludes our First Quarter 2014 Conference Call. Thank you, all, for your participation.

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