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 25, 2015. I would now like to turn the conference over to Mr. John Hulbert, Vice President, Investor Relations. Please go ahead, sir.

Good morning, everyone. Thank you for joining us on our Fourth Quarter 2014 Earnings Conference Call. Sorry about the technical difficulties that delayed us a couple of minutes there. On the line with me today are Brian Cornell, Chairman and Chief Executive Officer; John Mulligan, Chief Financial Officer; and Kathee Tesija, Chief Merchandising and Supply Chain Officer. This morning, Brian will discuss our fourth quarter performance and our priorities going forward and Kathee will provide insights into holiday and fourth quarter results across our merchandise categories. And finally, John will provide more detail on our fourth quarter and full year financial performance. 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. Also, 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. Finally, given that we're hosting our Financial Community Meeting in New York next week, our remarks today will focus on Target's fourth quarter performance and our guidance for the first quarter of 2015. At next week's meeting, we will describe in detail our longer-term expectations, including full year 2015 financial performance. As a result, we are shortening today's call to 45 minutes, and we look forward to spending another 2.5 hours with all of you next week. With that, I'll turn it over to Brian for his comments in the fourth quarter and holiday season. Brian?

Thanks, John, and good morning to all of you. Appreciate your patience this morning. We are very pleased with our fourth quarter financial results, which we announced earlier this morning. Our fourth quarter adjusted EPS of $1.50 was 14.9% higher than last year and above the high end of the updated range we provided in our January 15 press release. Our fourth quarter comparable sales increase of 3.8% was also stronger than the updated guidance we provided in January as we saw unexpected strength in our store channel sales in the last 2 weeks of the quarter. And of course, when we look back at our point of view going into the fourth quarter, comparable sales growth turned out to be nearly double our original expectations, as our combination of products, promotions, holiday marketing, fulfillment capability and in-store execution drove profitable growth in an intensely promotional environment. We are pleased that comps in all 3 months of the quarter were positive, and November's strength was particularly notable given that we were annualizing a strong increase in November 2013. We're also pleased that traffic was the primary driver of our fourth quarter growth as well as the fact that the digital channel growth contributed nearly a full percentage point to our fourth quarter comparable sales increase. Our fourth quarter gross margin performance was also very strong with a favorable mix reflecting strength in signature categories. Our merchant team did an outstanding job managing inventory flow, benefiting both in-stock and gross margin, which was particularly challenging this quarter in light of the slowdown in productivity at the West Coast ports. Once again, our store team did an outstanding job of managing core costs in the fourth quarter, delivering productivity improvements along with outstanding service to our guests. As I've mentioned to many…

Thanks, Brian. Across the U.S. Retail landscape, this year's holiday shopping season began earlier and ended later than ever before. This lengthening of the season reinforced the pattern we've seen for well over a decade, where we saw the strongest sales in the early and late portions of the season and experienced a period of softness in the middle. Specifically, throughout November, our comparable sales performance, including the Black Friday weekend, was very strong on both a 1-year and 2-year basis, driven by strong promotions throughout the month combined with in-store events and Cartwheel daily deals. In December, following the characteristic lull that we've seen for more than a decade, we saw a very strong surge in traffic and sales in the days leading up to and after Christmas. And in January, we continued to see unexpected strong results throughout the month. As Brian mentioned, we saw particularly strong trends in fourth quarter sales in our signature categories, specifically health care, Beauty, Apparel and Home all grew faster than our overall sales. Within Apparel, results were strongest in Baby and Kids, and Home comps were led by Domestics and Seasonal items. In Hardlines, our Toy category had a fantastic quarter, recording a double-digit increase in comparable sales driven by a strong lineup of Target exclusive items throughout the assortment. Average retails were up across all of our categories as guests were trading up within assortments, and we saw strong regular price sell-throughs in Seasonal and markdown-sensitive categories. Digital channel growth also contributed to the growth in the average retail, particularly in Home and Apparel, both of which saw digital channel penetration growth of more than a percentage point in the fourth quarter. Throughout the holiday season, we were very pleased with the performance of our fourth quarter limited-time partnerships with…

Thanks, Kathee. Our first quarter financial results were stronger than expected driven by better-than-expected sales performance in the U.S. Our adjusted EPS of $1.50 is better than the high end of the guidance provided in our January 15 update and about $0.11 better than our expectations for U.S. performance at the beginning of the quarter. Fourth quarter diluted EPS from continuing operations was $1.49, about $0.01 lower than adjusted EPS driven by a combined $0.02 of dilution from the reduction of the beneficial interest asset combined with net data breach expenses, partially offset by the benefit from the resolution of income tax matters. Fourth quarter GAAP EPS losses of $4.10 reflected $5.59 in losses from discontinued Canadian operations. Our fourth quarter comparable sales increase of 3.8% was above the guidance of around 3% that we provided in our January update and nearly double the 2% growth we expected at the beginning of the quarter. More than all of the sales outperformance in the last few weeks of the quarter was in our stores as digital channel sales came in a bit softer than expected in those last few weeks, reflecting a slowdown in demand sales growth as we annualized over promotions from a year ago combined with returns, which came in somewhat higher than expected. Even so, digital channel sales increased a robust 36% in the fourth quarter on top of a very strong increase in the fourth quarter of 2013. And as Brian mentioned, digital channel growth delivered about 90 basis points of our fourth quarter comparable sales increase, up from a 60-basis-point contribution in the third quarter. U.S. REDcard penetration of 21.1% was about 20 basis points ahead of last year and in line with our expectations. As I mentioned last quarter, based on trends in new accounts,…

[Operator Instructions] Your first question comes from Simon (sic) [Simeon] Gutman from Morgan Stanley.

It's Simeon Gutman. First question on gross margin for John or for Brian. It was quite solid in the fourth quarter. Last year, you had a little pressure but not nearly as much as, I guess, we all expected given some of the discounting. So can you talk about what drove the expansion year-over-year in this year's fourth quarter?

Sure. I'll start. I'm sure Kathee will jump in, but I think overall what you have heard is there's certainly some savings relative to last year with the clearance activity that went on, but I think much more important to that is you saw the acceleration of what we -- the signature categories, Home, Apparel, Style, Kids, many of those with margin rates well in excess of our average margin rate. And I think for the first time -- Kathee and I couldn't even remember the last time where both Home and Apparel out-comped the company. So we really saw a very strong mix in the quarter delivered by the product in the stores.

Yes. So on top of the mix, I would also say that regular-priced sell-through was very high. So less on clearance or markdown and more at full retail, which also contributed.

Okay. And just one follow-up. I'm sure this will get addressed next week. But can you just tell us what the average wage for full-time associates and/or part-time associates are at Target?

We don't disclose the average wage for our team members. What I would tell you is the store's team has always been a point of differentiation for Target, and we've always prided ourselves and believe we have the best team in retail. And so very focused on ensuring we have competitive wages and that we're developing our team members. We're all the time assessing the marketplace to determine competitive wages and making adjustments, and we feel very confident that we'll be paying the teams appropriately. I think importantly, if you look at our team leaders, 60% of them came from team members. So development is a really big part of what we offer to our team as they progress. Overall, as we look at some of the announcements that's been made in the marketplace and the minimum wage legislations act really hasn't changed our view of the quarter or the year really at all and won't be material changes to us.

To really build on that, I'm sure we're going to receive this question again next week. But to John's point, our goal is to make sure we have the very best team in retail. And we're going to continue to invest in their development and make sure that from a marketplace standpoint, we're very competitive with the wages we provide. So I've been very pleased to learn that over 60% of our team leaders actually started as part-time hourly employees. That development is critically important. It allows us to attract terrific team members. And as John stated, we do not expect to see any material change next year.

Your next question is from Matt Nemer from Wells Fargo Securities.

I want to follow up on that last comment around wages. Brian, can you just provide some context around how much opportunity you think there is to reduce complexity and improve efficiency in case you needed to respond to wages or you wanted to respond?

Well, it's certainly going to be an area that we'll highlight next week, and I think you've captured it really, really well. Our focus right now throughout the organization is to reduce complexity, simplify the way we work, the way we operate each and every day, continue to empower our team members to make the right decisions that are going to impact the business. We want to create an organization that's much more agile, that moves with much -- increased pace as we go forward, and we deliver the right innovation and product that our guest is looking for. So it is a significant area of focus for us. We're going to talk about it in great detail, but we think it's going to be a very important part of our strategy going forward. It's going to fuel the key growth priorities that we've been talking about and we'll go through in great detail next week. But our goal is to make sure we eliminate complexity at Target, we simplify our operating model, we empower our team members and create an environment where we're agile, we're taking advantage of marketplace opportunities and we're bringing products and services to market that respond to the needs of our guests.

And then just a quick follow-up on the higher online return rates. Do you think that's primarily a function of the free shipping offer? Is it more prevalent in certain categories? And is it related at all to error rates?

Actually, the return rates were higher than our expectation, but they were essentially right-on last year. We had seen some improvement throughout most of the year, and they basically just returned to last year. So not a material change, just a little bit different than our expectation for the last couple of weeks.

Your next question is from Scott Mushkin from Wolfe Research.

The first thing I wanted to poke at was frequency. Brian, you mentioned that you were real pleased with the frequency going up in the quarter. Is that a focus for the company to drive frequency to the stores? And kind of maybe as a preview how -- what -- how do you get it done?

Scott, while there's certainly a number of critically important metrics as we look at the business going forward, I can tell you that the entire leadership team has prioritized, one, increasing traffic to our stores; and two, visits to our sites. Those are critically important as we go forward. So we're going to do that by executing many of the priorities that we outlined today. We certainly want to make sure we're building the right digital and, importantly, mobile capabilities that drive greater visits to our site and build greater engagement with our guests, not only when they're shopping at home, but also when they're shopping inside of our stores. And Cartwheel is a great example of how we've used digital to drive greater engagement. I am really pleased, and Kathee highlighted the fact that our signature categories drove our growth in the fourth quarter. And it's critically important that while we're in the early stages, we're already seeing the guests react well to our focus on Style, on Baby and Kids and importantly, Wellness. And the fact that health care and Beauty and Home and Apparel outpaced our overall performance in the fourth quarter is a sign that we're connecting with the guest, and we're certainly driving more of the traffic because of these great new offerings in-store. So our focus on elevating signature categories, we think, brings our guests back to Target more often. They're going to be coming back in to see what's new. And Kathee and her team have a great lineup in 2015 of new, exciting products, coupled with an improvement in our in-store experience and merchandising. So those elements are critically important. We think localization allows us to build a more meaningful relationship with the guest, which will result in more traffic and more visits. And certainly, as we expand our smaller format, both CityTarget and TargetExpress, it's a way for us to engage the guest in these urban settings that are critically important. So all of those are focused on making sure we build greater engagement, but the metrics that are going to be important for us is to ensure it results in more traffic like it did in the fourth quarter and more visits to our site. So we're pleased with Q4. Lots of work in front of us, but I felt very good as did the entire leadership team that our comp increase of 3.8% in the fourth quarter was primarily driven by traffic. And our industry-leading growth in digital, it was certainly going to be fueled by more visits and better conversion from our site.

That's perfect. And I just have one quick follow-up. I have a ton of questions, but I'm just going to do one quick follow-up to what you said, Brian. You didn't mention, although Kathee did, she mentioned Food. How do you think of Food in context to traffic, and then I'll yield.

Scott, I think you already know the answer to that. We're going to talk about this specifically next week. Food is very important to our guests, and they've confirmed that with us as we've gone back and researched the Food category through the eyes of the guest recently. We all know food trips drive traffic, and we want to make sure we complement our signature categories with guests that are coming to us for the great food products we can curate. We recognize we have a lot of work to do in Food. And Kathee and I were recently out in the market together. We spent several days visiting our stores, looking at competitive food retailers as we begin to build our reinvention plans for Food. But as Kathee will talk about next week, we recognize we need to make changes to our assortment. "Made to Matter" and some of the changes we're making right now in our assortment that deliver more organic, natural, gluten-free items, critically important to the guest and we also recognize we have to change the in-store experience and really make sure our Food and Grocery merchandising complements the great experience we create at Target. So a critically important area of opportunity. We won't get there overnight. It'll be a multiyear transition, but Food is going to play a very important role in complementing our other signature categories and making sure we drive traffic to our stores and to our site.

Your next question is from Matthew Fassler from Goldman Sachs.

If you could frame some of the marketing and technology spending in the fourth quarter, just let us know what that was directed towards. And I know you're holding back to some degree on '15 guidance, but were some of those initiatives that you would expect to persist through the upcoming year?

Matt, we'll certainly go through much more of this next week. I think if you were to look at the changes we made from a marketing standpoint in the fourth quarter, the big change would have been a significant increase in our digital support of our brand. So as we continue to make sure we're connecting with our guests, we're connecting with them the way they're looking to connect with the Target brand, digital is going to play an increasingly important role. And we were very pleased with our overall marketing in the fourth quarter. We had some outstanding creative on air. It received very positive response from the guests and we complemented that with a very strong digital campaign. So I felt, and the team felt, very good about the progress we made from a marketing standpoint in the fourth quarter. We had creative that broke through the clutter, connected with our guests, drove traffic to our stores. We complemented that with really impactful digital and online communication, and tied that back in with great in-store marketing. So you'll see more of that as we go forward into 2015, and we'll take you through a lot more of the investments and the plans we have when we see you next week.

Your next question is from Sean Naughton from Piper Jaffray.

I just wanted to follow up on the Food question, and then specifically inside of the fresh component of the business. This was supposed to be a big part of driving transaction to the store over the long term. Could you just maybe give us a little bit on where Target is with its fresh offering today? How is it evolving? And are you happy with the performance of the sales and margins on this segment of the business?

Yes, Sean, we're going to talk about Food in much more depth next week, but fresh is a very important part of Food, not only traffic and number of trips for our guests but just in terms of what's important to them in terms of wellness. Fresh food plays a very important part. And as Brian said, we've got a lot of work to do here. So both in SuperTarget as well as in PFresh format, and it centers around our assortments, how fresh the product is and ways that we can improve upon that, the presentation, showing abundance in that great product. So we have a lot of work to do but critically important to us because our guests have said they want to be able to eat better, both natural and organic. We see it in our results today, and we know that there's much, much more opportunity.

Okay. And then maybe as a follow-up here. Just on the inflation front, can you just give us an idea of how inflation trended maybe across the store in the quarter and your expectations kind of in the near and medium term?

Sure. Lots of variability across categories as is always the case. We saw some inflation in Food. We saw some -- a lot of deflation in Electronics like we always do, but if you look across the entirety of our business, essentially flat to last year. So no net impact to the business from inflation in aggregate. But as I said, lots of variability within that.

Your next question is from Michael Lasser from UBS.

As you look back at the fourth quarter, can you dimension what do you think the -- well, how the performance was driven by your own initiatives, the easy comparison versus last year and just an improving macro environment due in part to the lower fuel prices. If there's any way you could potentially quantify that, I think it would be really helpful.

Michael, let me start. I'll let Kathee and John jump in. I think you've certainly identified some of the big levers. And I think as we sit here today, we recognize that the consumer confidence has certainly improved. Lower gas prices certainly helping the industry overall. We did have some favorable overlaps, certainly, as we overlapped the breach. But I also think we made significant strides from a merchandising standpoint, from a marketing standpoint and we continue to deliver great execution and service inside the stores. And when you look at the 2-year stack, we had a very challenging November, a very strong November from 2013 that we overlapped and saw growth. Now that, to me, was a sign that not only was the consumer healthier, but they were choosing to spend their dollars in Target stores. And they came back in December, as Kathee alluded to. We had a very strong close to the holiday season. But importantly, we felt really good about traffic and our performance in January, particularly in the last 2 weeks of the quarter. So a combination of we certainly did have some issues from last year that we were overlapping. The consumer, we do believe, is healthier, and we're pleased that they're spending in our stores, both in our stores and online, but I also think we made significant strides from a merchandising standpoint. We had terrific marketing and a great digital connection with our guests. We were able to leverage both an improved in-store experience, the convenience of shopping online and picking up in store, and we had industry-leading online sales. And we leveraged our stores to help make sure that we fulfilled the needs of our guest. So I think the combination of all those elements added up to a very solid quarter.

The only thing that I would add to that is just that a lot of that focus came in our signature categories, which is why you saw our growth there in particular. So major investments in product, both quality as well as aesthetic and number of SKUs, newness that we brought to the market. The marketing reinforced that, and that was very well received by our guests and then coupled with presentation, both online with enhancements in our app, in our desktop site and the presentation in our store driven by focus on signature categories really helped drive our growth.

That's helpful. The follow-up question I had is are there any particular call outs you can offer about the strength in the last 2 weeks of the quarter? It just strikes us as interesting, and we're curious about what drove that strength?

I think we continue to see gift card redemption. We intentionally -- we had a significant gift card promotion on Black Friday that was very successful. We saw all of those come back in January. I think that helped, and we saw continued strength in the product in Home and Apparel, very strong sales in Home and Apparel, and I think that was an element of it as well and I think it's a combination of both.

And our wellness business is healthy. As we turned the corner into the new year, we saw that continue. So the trade-up that we have seen during Christmas, we saw continue into January, which is just guest choice for products in our discretionary category. So I think lots of things drove it.

Yes, Michael, I think -- well summarized. I would put 4 elements on the list. John talked about gift cards. I think that was very important, and we certainly saw our guests come back to Target with gift cards after the holidays and through January. Our focus on wellness, certainly well received by the guests. We had great newness in our stores to start the new year and our store teams did a terrific job of recovering after the holidays and we offered our guests a very strong in-store shopping experience. So a lot of the basics, but our gift card plans were well executed. We saw the guests come back in January. Our focus on wellness, that important signature category, well received. We've brought newness into the stores to start the year, and our store teams did a terrific job of recovering after a very busy Christmas holiday season.

Your next question is from Greg Melich from Evercore ISI.

That's great. I had a couple of follow-ups. It'd be great to know, you said the signature categories did well. Do you have the actual numbers like which ones were better than that the -- by category for Food and wellness, et cetera?

Well, Health & Beauty were both very strong. So in the health category, that's spread across many categories. I talked about "Made to Matter," I talked about better-for-you products in Food, but it was also in our health business. In our Style business, both Beauty was strong as well as in Apparel. It was driven really by Kids and by Baby. And in Home, it was Domestics and Seasonal products. And then in Kids, we had an incredible season in toys with a double-digit comp. We really were pleased with the overall holiday.

Yes, I think as we mentioned earlier in the call, Wellness, Home, Apparel, all comped in excess of the 3.8% we reported for the quarter. So strength across all those categories. And to win in the fourth quarter, you have to win in Toys. Well, our team won in Toys. And showing a double-digit comp was critically important. So we felt very good about the early progress in those signature categories, and we'll build off of that momentum as we go into 2015.

And maybe a follow-up on that momentum and seeing the traffic get back to -- up 3%. When you look out to your first quarter, that 2% expectation, do you expect traffic to be half of that comp or positive in the first quarter? Or what's built in your expectation?

Well, I think Brian hit on it earlier, right? We're continuing to drive for positive traffic. I think positive in the store and growing digital online. That's part of our guidance.

Great. And then, John, maybe a quick follow-up on SG&A. It looked like, and I could be backing the math out wrong here, but SG&A dollars in the fourth quarter accelerated to maybe 4% or 5% growth. Was there anything that caused that in particular?

Yes, I think, like we said, it was a little bit of de-leveraging. There was some marketing expense we talked about in November moved from November into -- or from Q3 into Q4. As Brian said, we made some investments in marketing. The other elements were ongoing all year. We had some technology, and then the thing that really drove a lot of it relative to the other quarters was incentive expense. We clearly outdelivered our expectations, and that will be reflected in our incentive expense.

Okay. Thanks for joining us today. That's going to conclude our Fourth Quarter 2014 Earnings Conference Call. We appreciate everyone's participation today, and we really look forward to seeing you next week in New York City. So thank you again.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. At this time, you may now disconnect.