Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation Second Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, August 19, 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, and thank you for joining us on our Second Quarter 2015 Earnings Conference Call. On the line with me today are Brian Cornell, Chairman and Chief Executive Officer; John Mulligan, currently our Chief Financial Officer, who has been promoted to Chief Operating Officer effective September 1; and Cathy Smith, who has been named Chief Financial Officer effective September 1. This morning, Brian will discuss our second quarter performance, including results across our merchandise categories, and plans for the third quarter and remainder of the year. Then Cathy will provide her perspective as she prepares to join the team as Chief Financial Officer next month. And finally, John will offer more detail on our second quarter financial performance and discuss our outlook for the third quarter and 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 the 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 and return on invested capital, which is a ratio based on GAAP information with the exception of adjustments made to capitalized operating leases. Reconciliations to our GAAP EPS and to our GAAP total rent expense are included in this morning's press release, which is posted on our Investor Relations website. With that, I'll turn it over to Brian for his perspective on our second quarter performance. Brian?

Thanks, John, and good morning to all of you. We are very pleased with our second quarter financial results, which we announced earlier this morning. Our second quarter adjusted EPS of $1.22 is 20.6% higher than last year and $0.08 above the high end of the guidance range we provided at the beginning of the quarter. We are also pleased that once again this quarter, we were able to grow traffic and sales, both in stores and in digital channels, even as we were cycling over a very promotional second quarter from last year. Our second quarter comparable sales increase of 2.4% was just ahead of our first quarter performance and consistent with our expectations. Notably, about 2/3 of this comp increase was driven by growth in traffic combined with a smaller increase in average ticket. Second quarter digital sales grew 30% from a year ago, slightly below our expectations as we compared against very intense digital channel promotions last year. Digital growth contributed about 60 basis points to our comp sales growth this quarter. Our second quarter gross margin rate was 0.5% higher than last year as we continue to benefit from favorable merchandise mix and the comparison over last year's promotional markdowns. On the SG&A expense line, we had an unexpectedly strong quarter as we benefited from discipline throughout the organization, along with the impact of expense timing, as John will cover in a few minutes. With these results, we continue to benefit from very strong cash generation by our core business, which enabled us to return a combined $1 billion to our shareholders in the second quarter through dividends and share repurchase. As we've outlined in the last several quarters, we're working to define clear roles for each of our merchandise categories and devoting resources to growing…

Thanks, Brian, and good morning, everyone. Like Brian, I have long admired Target as a retailer and an iconic brand and a great American company. During my career, I've had the opportunity to view Target through the lens of a competitor and of course, a guest. And now I'm really excited and humbled to have the opportunity to join the team as we work to transform how we serve guests while preserving what consumers love about this brand. While I won't start working here until next month, I've really enjoyed getting to know the leadership team, and I've had the opportunity to meet with many of the members of the finance team this week. Target's success comes from many things. Beyond the iconic brand, the company has an impressive array of owned and exclusive brands. As a guest and someone who loves retail, I am constantly impressed by Target's ability to deliver new, trendy, high-quality items at amazingly low prices. And I just know there are incredible product design, develop and sourcing teams behind those items. In addition, I appreciate that Target has just at 1,800 well-maintained, great-looking stores in convenient locations, delivering a great shopping experience, and near and dear to every CFO's hearts, we have a healthy balance sheet, which, when combined with our strong cash flow generation, creates ample capacity to fund robust investment in growth and the return of billions of dollars to shareholders annually through dividends and share repurchases. And lastly, Target is full of passionate team members who work tirelessly to serve our guests every day and who are proud of their Target. Let me tell you a brief story. As I was exploring the possibility of joining this amazing company, I wanted to move beyond the familiar experience of shopping at my Target. So I dedicated a couple of weeks to visit more than 55 stores across 10 states, and I dragged my family along for most of the ride. I spoke to guests in every store I visited, and I can tell you that they are clearly demanding enthusiasts. They love Target, and they enjoyed sharing their personal stories about why they choose to shop with us. Before I close, I want to say that I'm looking forward to reconnecting with those of you I know and getting to know those of you I don't. I plan to spend my first few months with the team immersing myself in the business to ensure I have a detailed understanding of where we've been, where we are today and where we need to go in the future. With that foundation, I look forward to meeting you and hearing your perspective. Now I'll turn it over to John, who will share his insights on our second quarter financial performance and our outlook for the third quarter and beyond. John?

Thanks, Cathy, and hello, everyone. We are really pleased with our second quarter results as virtually every line on the P&L came in at/or better than our expectations. Compared with our guidance going into the quarter, overall comparable sales were in line with expectations, but the mix of store sales was a bit stronger than expected. Second quarter gross margin performance also met our expectations, but SG&A expense performance was much better than planned, reflecting our continued efforts to control costs, along with the impact of a timing change in marketing expense. As a result, our second quarter adjusted EPS was $1.22, $0.08 above the high end of the guidance range provided at the beginning of the quarter. Second quarter EPS from continuing operations was $1.21, $0.01 lower than adjusted EPS as pretax restructuring costs and breach-related expenses, worth $0.01 each, were partially offset by a $0.01 benefit from the favorable resolution of income tax matters. Second quarter GAAP EPS of $1.18 reflects a $0.03 loss on discontinued Canadian operations compared with a $0.25 loss on Canadian operations last year. This year's Canada losses were consistent with our expectations as an increase in our pool for estimated probable losses, primarily guarantee of leases, was offset by an adjustment to the tax benefit from the company's investment loss in Canada. Our second quarter comparable sales increase of 2.4% was just ahead of our first quarter performance and consistent with our guidance at the beginning of the quarter. Within the quarter, comps were strongest in May and June. However, this year's monthly pattern was the mirror image of last year's second quarter when the comp growth was strongest in July, which featured the most intense promotions in the quarter. As a result, on a 2-year basis, monthly comp trends were very consistent…

[Operator Instructions] Your first question will come from the line of Oliver Chen with Cowen and Company.

Brian, as you've been so successful in this journey as traffic's come back to the stores, just a bigger-picture question. How do you think your priorities have kind of dynamically changed throughout the year? And where would you say Target is in terms of customers coming back to the store versus increasing customer spend? And John, I just had a question related to the comp guidance as well.

Oliver, overall, I think we're making really good progress against our key strategic initiatives that we've been talking about for a year now. The change we announced this week is to make sure that we elevate our focus on execution and really ensuring operational excellence throughout the organization. And so I am so excited about John stepping into this new role to make sure that we complement the focus we placed upon creating strategic clarity with a recommitment to operational execution. And I think the combination of those 2 elements is critical to continuing to drive traffic, make sure we delight the guest, see an improvement in our Net Promoter Scores and make sure that both in-store and online, we're continuing to see an acceleration in traffic and visits to our site. So I think we're making very good progress right now. I think that's showing up in the results we delivered this quarter. But we're not satisfied. And we know we've got more work to do to ensure that we do meet the needs of the guests every time they shop, and critically important in meeting those needs is to make sure that we provide a great in-store experience and dramatically improve our in-stock conditions, particularly around core essentials. So I think very good progress, I think this is an excellent quarter where the entire team performed well, but we know we've got more work to do and we want to make sure, both in-store and online, we deliver a consistently great experience for the guest.

And on John, I just had a question. On the comp guidance, would you expect this to be pretty broken out between traffic or ticket? Or do you think it's going to be more traffic-led? And as you do embark on the opportunity in supply chain, what are you highlighting as the lower-hanging fruit in terms of timing? And I was just curious about the categories that you see the most opportunity for when you think about further advancing your supply chain.

So on the comp guidance, we don't break out traffic and ticket. But I would tell you, from a -- just a business perspective, we're very focused on driving traffic over time. Ultimately, we have to bring people in our stores, we need to bring people to the site, on to mobile devices. And so that's a key driver for us for our sales as we continue to move forward. Related to the supply chain, there is -- the team has done a great job responding to the needs of the organization over time to develop more flexible ways to meet the needs of our guests and really fulfill on-demand shopping. I think we're just at a point now where we need to step back and build broader capabilities across the entirety of the supply chain as we continue to expand the way we want to serve our guests. So there's not one particular area of the company or one particular part of the business that we're completely focused on. Absent, I would tell you, as I said, and you heard from Brian, in-stocks are a key priority, and then specifically, being sure day-to-day, in every store, we're in-stock on essentials. That's a key priority for our guests. We hear it from them. It's a key focus for the team. And we have teams working on improving those in-stocks across our essential categories today and that will be a focus as we go forward.

Oliver, if I can build on that because as we talk about improving our focus on operational and executional initiatives, I go back to some conversations we've had in the past. I absolutely believe we have the best team in retail. Our store operations, Tina and her team do a sensational job. But one of the things that John will be focused on is ensuring we simplify the work and we make it much easier for them to execute each day and take care of the guest. So we want to complement a very strong store leadership team that does a sensational job each and every day, executing store-by-store, by simplifying some of the work, by making sure that we push work upstream and allow them to focus even more on the store experience and the service we provide our guest.

Your next question will come from the line of Matt Nemer with Wells Fargo.

John, congrats on your new role, and Cathy, it's nice to have you back in the retail sector. First, I was wondering to what extent you're using price to drive the 3x growth in signature categories. Can you comment on what the growth in gross profit dollars for those categories has been like?

Yes, Matt, I would tell you that the improvements we're seeing is really driven by mix, and as we've talked about, we've invested heavily in ensuring we're on trend, we're bringing great quality to the guest, we're accentuating our position in key categories. We were really pleased during the quarter to see how well we connected with sub-cats like swim. We've seen really strong performance in ready-to-wear and most recently, a very positive response to the changes we've made in denim. So the improvements we're seeing in those categories are really driven by great quality, following the trend curves, bringing great style and fashion to our guest, and it has not been driven by a reliance on pricing.

Okay. That's helpful. And then secondly, your comments regarding the supply chain being stretched, I realize that the analysis is just starting or in the early days. But do you believe that there's a significant reinvestment required in the supply chain in terms of either DCs or SCs or something else?

No. Matt, we're in a place where we have, we believe, just great, great assets across the supply chain, great distribution centers, great upstream distribution centers, food distribution centers, fulfillment centers and of course, the stores. I think we said over the past couple of years, our focus of our investment has been supply chain and technology in support of becoming an on-demand company. That will continue to be the case. We're going to continue to invest in technology and supply chain. But the physical assets side, we feel really, really good about.

Okay. That's great news. And then if I could just sneak one more in. The early Back-to-School strength and the marketing shift, is that fully embedded into the Q3 comp guide?

It is, and it would be. And we are seeing a very positive start to Back-to-School and Back-to-College.

Your next question will come from the line of David Schick with Stifel.

Wondering if you could give us a few more examples, concrete examples of how you're driving that localization success in Chicago, categories or items, and separately, if you could talk a little bit about digital approach outside of your own platform. So we've seen it and we've heard from you what you're doing, and that's exciting and driving growth, but we've seen a little bit of your outreach to bloggers and how you're working with them. If you could talk about the full view of how you're thinking about digital outside of the Target headquarters, that would be helpful as well.

Sure. David, let me start with localization. And as I've said during the last couple of calls, this is still a very nascent effort for us. We're in one market, a handful of stores in Chicago. But we've really been focusing on a handful of areas where we recognize we need to change our assortment, change our presentation, be more relevant and really recognize the needs and the demographics of these local markets. So there's a handful of categories I might lift up. One, craft beer, and really making sure that in a category like craft beer, we have locally relevant items and we recognize that even in a market like Chicago, those need to be tailored neighborhood-by-neighborhood. So we've looked at specialty foods, we've looked at categories like craft beer. We've looked at categories like patio and grills and recognizing that in the suburbs of Chicago, we can offer and should have in store large patio sets, 5-burner grills. But for our stores located in more of the urban neighborhoods of Chicago, we need bistro tables and we need 2-burner grills because those guests are living in condos and apartments, they've got small patios, and we need to make sure we tailor our assortment and our presentation to recognize their needs and to make sure we're more locally relevant. So we're certainly spending a lot of time looking at food, and as we think about the food reinvention, a lot of this is going to be driven by making sure we have locally relevant brands, those hometown favorites, and also in broader categories like patio and furniture, making sure that we're matching up our assortment in store with the needs of that local guest. So a lot of additional work for us to do, but we're really pleased with…

Your next question will come from the line of Scott Mushkin with Wolfe Research.

Welcome, Cathy, and congratulations, John. Looking forward to working with you guys in your new capacity as we move forward. The stock obviously was up a lot earlier today. So it's kind of rolled over. And I think it's the sales line that people may be a little concerned about, the 1% to 2% guidance for the third quarter. But I'd also really look out over time, SG&A saves obviously tapered down, and so as you look out to '16 and '17, getting the sales line moving is going to be more important here. I know, Brian, you pointed to some things like the signature categories, but I was wondering, what else gives you confidence? We actually have a lot of confidence because we are -- focus groups are saying to us that people are really responding to what you guys are doing. But in your words, what gives you the confidence we can see sales trend higher over time?

Well, I think it starts, Scott, with the reaction we've seen from the guests to some of the changes we've made in signature categories. And when I think about in today's marketplace, Apparel growing at 4% or 5%, the changes we've seen and the reaction we've seen from the guests to our Home offering, the fact that within Kids, Toys growing this quarter at 12% and while again still in the early stages, the reaction to some of the changes we're making in our Food assortment, the reaction the guest is taking to Made to Matter or Wellness initiatives, gives me a tremendous amount of confidence that as we continue to bring great design, fashion, quality and excitement to our signature categories and combine that with the opportunity to reinvent food, to bring the right assortment that meets the needs of our guest, that to me is the magic to unlock sustainable sales growth at Target and make sure we're driving traffic to our stores, more visits to our site. And it gets back fundamentally, Scott, I believe, we win and we'll continue to grow by combining a great store experience, the convenience of allowing our guest to order online and pick up in our stores whenever they want and also being able to ship directly to their homes and using our stores as flexible fulfillment centers to make sure that response is a quick one. So I'm very optimistic about the future. I think you're starting to see that embedded in the results, and the results in signature categories is very encouraging for us. We're getting great feedback from the guest. As I think about the third quarter, we expect plaid to be a really exciting initiative and the buzz that we're seeing already is really positive. So we've got work to do on Food, but when we reinvent Food and get the assortment right there and improve the presentation, I think that gives us all great confidence that we're going to continue to drive traffic to our stores and that's going to convert to really solid and sustainable comps.

All right. That's perfect. And then maybe just -- I hate to be this short-term focused, but the question I get all the time as we look at the fourth quarter, we're going to be going over a pretty, pretty significant comp from last year. How should we think about that? I mean, a lot of people look at stacks. I mean, you guys look at stacks. Or how do you think you wish to start framing the fourth quarter and maybe your thought there?

I think we can all drive ourselves crazy doing 2-year, 3-year, 5-year stacks, whatever you want. But in this case, I do think the 2-year stack is important. We have continued to see our 2-year stacks improve. If you do last year's Q4 against the previous Q4, the average there is about -- or the number there is about a 1 3. So we expect to cycle past that this Q4. And we've seen putting our -- putting the implied guidance, you guys can do a rough number around that. Putting that against last year's comp will be an acceleration of our 2-year stack. And so we feel good about that, and I think to the points Brian just made, part of it is we need to continue to grow. We feel confident we're going to continue to grow and comp against whatever it is we delivered in the prior year, and we feel good about doing that. We feel great about our fourth quarter plans. We're cognizant that, that's an intensely competitive time of year. We'll be very promotional. We're not going to get beat on promotions, and we'll be in the game. And we feel really good about what we'll offer the guests in Q4.

Yes, and Scott, obviously, we'll update our guidance for the fourth quarter at a later date. But trust me, we are spending a tremendous amount of time evaluating our plans week-by-week in the fourth quarter. I spent time just yesterday with our team going through our fourth quarter plans, our merchandising plans, our marketing plans, how we're going to approach the key holiday periods. And to me, it's all about making sure we've got the right content, we've got to have great product, we certainly know we need to make sure we're winning from a promotional standpoint. But then we've got to make sure we surround the guest with a great experience and really iconic marketing. And I think we're going to combine a great in-store with an online experience and be very competitive and well prepared for the fourth quarter.

Your next question will come from the line of Matt McClintock with Barclays.

Congratulations, both John and Cathy, on the new roles. I was just wondering if we could focus just -- I know we focused -- we've talked a lot about the significant categories. You've talked a lot about supply chain. But can we focus on -- and you've also talked about Food. Can you focus a little bit on Electronics? Continued weakness there. Clearly, the industry itself is a little bit challenged. But a lot of consumer interest in new products in that category, especially as we go into the holiday season. This upcoming holiday season, you're talking about the fourth quarter. Maybe dive a little bit into what you're doing there and that specific category to maybe try to gain market share in what is a challenged category.

Yes, so Matt, I'm not going to go through the details of our plans. We'll kind of maintain that powder for the fourth quarter, but we're certainly looking at newness in Electronics. We're looking at categories where we think we're uniquely positioned to win, so working very closely with our suppliers to ensure that we have the right newness, that we're ready with the right presentation. I think there's a lot of exciting things in the pipeline. We certainly think as we continue to focus on Wellness that wearable technology is a space where we can and will win. But we also recognize right now that many of those categories are waiting for new innovation, and we're working closely with our key suppliers to make sure that we're going to be bringing that innovation to the guests and featuring it throughout the fourth quarter.

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

Two quick ones. First, on the digital side, obviously, impressive growth, 30%. I think the longer-term plan is closer to 40%. So curious, 2 things. One, what kind of gets that channel growing faster in the next couple of years? And related to that, a number of large retailers out there are opening up dedicated e-commerce fulfillment centers. I don't believe you guys have those. Is that something that makes sense for Target as you think out over the next few years?

I'll take the first -- second one first and then let Brian comment on the growth. I think on our supply chain for the digital channel, we actually have 6 dedicated fulfillment centers, and we think the combination of fulfillment centers with our existing regional distribution centers and along with the stores gives us all the capability we need. And then you'll see us continuing to grow the store channel, our regional distribution channel, all 3 of those channels as ways to fulfill depending on the product and how quickly the guest wants it.

Yes. And Peter, I'll step back and just talk about some of the fundamentals. We've got to continue to make sure we build awareness. We've got to make sure that as our guest engages with us digitally, we make it really easy, we make it easy to find product, an easy checkout experience. We believe that "available to promise," which we'll roll out this fall, will give our guest the confidence that they know where the product is and when it will arrive for them, either in a store for them to pick up or being available directly to their home. So we're focused on making sure that we provide not only a great in-store but a great digital experience, and we've got to make sure that we continue to make our site easy to work with, and more and more that's the mobile interchange that we've got to make sure is easy for our guest to find product and check out. We want to give them the confidence that when they order, they know it's "available to promise," and we're going to have it there for them when they need it. And to the point John made, we don't need to be building upstream DCs, we're going to continue to convert more of our stores and as we go into the fourth quarter, close to 450, that will act as flexible fulfillment centers to make sure that we can quickly and efficiently get product to the guest. So those fundamentals are critically important as we think about driving industry-leading growth.

Okay. That's helpful. And sorry, am I bad on that DC question. And then quickly over to SG&A. I think you guys had outlined $1.5 billion over the next couple of years in savings, $500 million maybe coming this year. Where are you trending towards those savings? And how are those savings kind of corporate versus in-store? I'm just curious, kind of how like store-level payroll dollars compare today versus, let's say, a year ago.

Yes, so we're right on track with the savings. We've got programs identified to deliver the entirety of the $2 billion, the $1.5 billion in SG&A, plus the cost of goods savings. So we feel really good about that. We're on track for our commitment for this year as well. One of the things we talked about when we first announced this, and we've talked about it in a great detail in the company, is the stores are already productive. And if we're going to take hours out of the store, it will be because we eliminate work, or to the point Brian made earlier, move work upstream into the distribution centers. And so we're not focused on taking hours out of the store. We are focused on taking work out and we haven't -- we're in the process of working through that. That's a little bit longer lead process than some of the other things we've done. But we're very focused on essentially freeing up those hours in the store and then we'll decide do we need them for improved guest service or how we'll utilize them. But in fact, we've -- there's a couple of areas where we have invested hours back into the store as we put in the whole merchandising sets. And as we put in mannequins, we've realized the need for dedicated store team members who can merchandise those displays and make them look great all the time. So that's an area where we've invested back into the store.

Your final question will come from the line of Greg Melich with Evercore ISI.

So Cathy, welcome. John, I can't let you get promoted without hitting you with a finance question. So how much did credit help? You said credit, I think, was a benefit in the core of the profit share. How much did that help in the quarter? And linked to that, how should we think about SG&A dollar growth? I mean, it sounds like third quarter will be up 1 to 2 with the comp, but it was flat in the second quarter. What's the normal run rate there now?

Yes, good questions. On the credit side, the benefit, it was up, but not meaningful, and it was less than -- I'd say less than half a penny of improvement versus last year, so very, very small. We're pleased it was up given that, as we said, payment rates continue to go up. And so we're seeing the portfolio continue to shrink, so clearly, a portion of where the gas dollars are going, at least from our perspective. SG&A, through time, we'd expect to lever SG&A, go up over the long term here, go up modestly, slower than sales growth. I think we've said, we're going to take -- continue to take expense out, but we also said that the majority of that expense will likely get reinvested. So I wouldn't count on big, big, big reductions in our SG&A over time. There will places where we have to add back expense to meet the needs of our guests I just talked about in the new stores. So modestly slower than sales growth over the long term would be what I'd say.

Well, great, thank you. And for all of you, that concludes our Second Quarter Earnings Conference Call, and I really appreciate you joining us today. So thank you.