Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation Fourth Quarter and Year-End Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, February 24, 2016. 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 fourth quarter 2015 earnings conference call. We apologize for the delay. We were informed that some people were having trouble accessing our webcast and we delayed in order to make sure that they could access this call along with everyone else. On the line with me today are Brian Cornell, Chairman and Chief Executive Officer; John Mulligan, Chief Operating Officer; and Cathy Smith, Chief Financial Officer. This morning, Brian will discuss our fourth quarter performance, including results across our merchandise categories. Then John will provide an update on our efforts to improve in-stocks and build our supply chain capabilities. And finally, Cathy will offer 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 the call, Cathy and I will be available 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 our GAAP total rent expense are included in this morning's press release, which is posted on our Investor Relations website. Finally, one note, given that we're hosting our financial community meeting next week, our remarks today will focus on Target's fourth quarter performance and our guidance for the first quarter and full year 2016. At next week's meeting, we will provide insights into our strategy and priorities and how they will drive our financial performance in 2016 and beyond. As a result, we are shortening today's call to 45 minutes, and we'll look forward to spending another couple hours with all of you, either online or in person, at next week's meeting in New York. With that, I'll turn it over to Brian for his comments on the fourth quarter and the holiday season. Brian?

Thanks, John, and good morning, everyone. As we look back at both the fourth quarter and the year, we are very pleased with the progress we made throughout 2015. Traffic increased in all 4 quarters, and the team delivered on our comparable sales and operating margin rate goals by driving rapid growth in our signature categories. And our full year adjusted earnings per share of $4.69 was above the top of the range we provided last March, keeping us on track to deliver our longer-term financial goals. In the fourth quarter, our business generated adjusted earnings per share of $1.52, up $0.03 from a very strong performance in the fourth quarter of 2014. Comp sales grew 1.9% in the fourth quarter, building on a 3.8% increase in last year's fourth quarter. Target's great store experience, unique items at an unbeatable value and broad, simple promotions resonated with our guests and drove this growth. Transactions, our measure of traffic, increased for the fifth quarter in a row, up 1.3% in the fourth quarter, reflecting growth in all of our selling channels. Digital sales increased an industry-leading 34% in the fourth quarter, on top of 36% growth in the fourth quarter of last year. Strong Black Friday and Cyber Monday weeks drove this increase. In fact, after setting a new digital daily sales record in the week of Black Friday, we shattered all previous records on Cyber Monday. Our offer was broad and simple, 15% off everything on our site, and the guest response was exceptionally strong. Our holiday season merchandising and marketing plans were focused on delivering broad, simple and compelling offers, like our 10 Days of Deals, Black Friday doorbusters and the site-wide offer on Cyber Monday and the bounce-back coupon we offered to guests in our stores on Black…

Thanks, Brian, and good morning, everyone. Today, I'm going to provide you with a brief update on our work to improve operations, and I'll provide more detail about our strategy and future plans at the meeting next week. Our work to reduce out-of-stocks is continuing to pay off as metrics improved sequentially from the third quarter and even more dramatically when compared with the fourth quarter a year ago. Specifically, for the fourth quarter in total, out-of-stock metrics were 20% better than last year. And notably, by the end of the quarter, Target's out-of-stock metrics were 40% better than a year ago as the improvements we've implemented allowed for a faster post-holiday recovery this year. We saw out-of-stock improvements across every category in the fourth quarter. As I mentioned in the last conference call, our work has been focused primarily on essential items for which reliability is particularly important for our guests, and I'm really happy with our progress. For the set of focused items we've designated in essentials, our out-of-stock metrics are better than we have ever measured. While this progress is exciting, I'm even more pleased with -- that this improvement has been accomplished through systematic and therefore sustainable changes. In other words, this isn't an example of temporarily adding resources to work around systems and processes. Rather, this is a case of making improvements to those systems and processes to support a sustainable improvement in performance. Because upstream variability in the supply chain hampers our ability to keep our stores in stock and provide tight shipping windows to our guests, a key pillar of the team's work is focused on improving freight flow through the supply chain. As part of this effort, the team has created smart, systematic rules governing safety stock in distribution centers and they…

Thanks, John, and hello, everyone. As Brian mentioned earlier, we are really pleased that our team delivered strong traffic and sales growth in the fourth quarter. Our financial results continue to validate the strategic changes we've made, confirming that we are focused on what's most important to our guests. Our fourth quarter adjusted earnings per share of $1.52 was well within our guidance range and up $0.03 from last year's very strong performance. Fourth quarter GAAP EPS from continuing operations of $2.31 was $0.79 above adjusted EPS, reflecting the $620 million pretax gain on the sale of our pharmacy business to CVS Health. Comparable sales grew 1.9% in the fourth quarter on top of a 3.8% increase in 2014. Traffic was the primary driver of our comp growth, up 1.3%, building on a really strong 3.2% increase last year. This quarter marked our fifth straight quarter of traffic growth, and we are committed to driving continued traffic growth in 2016 and beyond. As I mentioned last quarter, results in our fourth quarter 2014 reflected a bounce-back from the impact of the breach in the fourth quarter of 2013. However, even on a 3-year stacked basis, our traffic was stronger in this year's fourth quarter than earlier in the year, demonstrating continued momentum from the strategic changes we've implemented. One note. Fourth quarter reported sales were down a little less than 1% from last year, reflecting our comp sales increase, offset by the impact of the sale of the pharmacy business, which closed in mid-December. Digital sales grew 34% in the fourth quarter, and we saw the most dramatic increases in the Black Friday and Cyber Monday weeks. These increases were driven by our simple, broad and compelling offers, and as John mentioned, our flexible fulfillment capabilities played a key role…

Thanks, Cathy. Before we take your questions, I thought it would be helpful to cover our agenda for next week. In New York next Wednesday, I'll open the meeting with an update on our strategic priorities and the initiatives for 2016. Then John will provide deeper insights into the work his team's doing to transform supply chain and their efforts to drive operational excellence across the enterprise. And finally, Cathy will provide insights into how we expect to continue to deliver on the long-term financial algorithm we laid out last year. Following the presentations, we'll have a Q&A session with all 3 speakers, along with several other members of our leadership team who will be attending this meeting. At last year's meeting, I outlined our enterprise priorities and told you that I hoped it would remain consistent for years. So here's the spoiler alert. Our priorities today remain consistent with a year ago. We made progress, but we have a lot more to do. And our tactics will always be evolving, but this year's results demonstrate we're focused on the right work. At this year's meeting, we plan to show you how we're getting even closer to our guests, gaining a deeper understanding of their wants and needs and how Target fits into their daily lives. We also plan to show you why we're so excited about all the new products we've developed for this year. And for those of you who will be with us in New York, you'll see vignettes showcasing newly developed products across multiple categories, including our incredible new Kids brand, Pillowfort. So whether you plan to be with us in New York next week or listening to our webcast, we hope you'll join us to gain a deeper understanding of our strategic and financial plans going forward and why we're so excited about the prospects in 2016. With that, we'll conclude our prepared remarks, and now Cathy, John and I will be happy to respond to your questions.

[Operator Instructions] Your first question comes from the line of Kate McShane with Citi.

Can you hear me?

We can now.

Okay. Great. My first question is on CVS. You had mentioned in your prepared comments that you've already converted some of the pharmacies. And I know it's early days, but I wondered if you could provide any detail on if you've noticed any notable changes in traffic in those particular stores. And just how disruptive is the rebranding across the chain over the next 6 months?

Yes. Well, it's still very early, and we'll be tracking this carefully over the next few months. John Mulligan was actually down in the Charlotte market just a few weeks ago where we've rebranded some of the very first CVS pharmacies inside of Target. So John, why don't I let you share some of your impressions?

Yes, I think, overall, I don't think the rebranding will be a significant disruption for the store or the technology changes that are going to go on. As we walked the store, it looked fantastic. The CVS brand looks great. I think they've done good job, great job between our team and theirs, tying it into the total Target store environment. When we did this, we spoke a lot about the tools that CVS would bring not only to our guests but to our teams. The teams were certainly excited about the tools that CVS is bringing to them to help them do their job, so that they can focus more fully on guest service, so we're very excited about that. And we're excited to see, like Brian said, as we go along later in the year, we'll see more marketing to talk about the relationship of the 2 companies and also see the reaction of our guests as those capabilities are made more front-and-center for them as well.

Yes. I'd only add, we've been working for months and months now with our colleagues at CVS to make sure this is a very smooth transition, and the plans we have in place will minimize the impact on the guests. So we're very excited about what this brings to Target, what it brings to our guests and to our shareholders and expect it would be a very seamless transition over the next 6 months.

Your next question comes from the line of Michael Lasser with UBS.

A 2-parter. Number one is on the promotional activity. Can you give us a sense for how much you think that impacted the sales for the quarter, and how is that going to influence your promotional posture moving forward? And then the second part of my question is on some of the stats, very helpful stats that Mr. Mulligan provided on the in-stocks, how much do you think that the increase in in-stocks helped in the fourth quarter?

Yes. Why don't I start by talking about the promotional environment? And we approach every year recognizing that the fourth quarter, this holiday season, is a very important time of the year for us and it's going to be a very promotional environment. And as we sit here today, we really believe our playbook that we rolled out during the holiday drove traffic to our stores, drove traffic to our site, allowed us to accelerate our comp performance. And remember, we were comping a very strong Q4 from 2014. So we felt very good about the effectiveness of our promotions. They were broad, they were very simple, and they worked both in-store and online. So we feel great about the performance during the holiday where our signature categories performed well. We've worked with Nielsen and NPD to look at market share performance and clearly recognize that we gained market share as a by-product of our playbook in the fourth quarter. So we feel very good about our approach. But to your question about the future, we're always setting back and analyzing promotional effectiveness, looking back at our playbook. And as we plan for next year, we'll continue to enhance and refine and make sure that we have very broad, very simple and very effective offers that continue to drive traffic and profitably grow our sales. John, you want to talk about the impact of in-stocks?

Yes, I think we certainly can analyze, triangulate around the sales impact of in-stocks, but that would be providing you very rough estimates. What I think is much more important, when you talk about essential categories, ultimately, this is about the guest trusting that you will have the merchandise they want when they come in our stores. If a new mom takes her baby out in 10-degree weather for diapers and formula, you better have diapers and formula in your store. And so really, it's about the trust that they have in the Target brand to always deliver wherever and whenever they want. And over time, there is no doubt in our minds that, that will drive sales growth for the long term.

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

I'd like to talk for a moment about the SG&A line and just to put in context the cost cuts that you announced at last year's meeting, I guess, about $1.5 billion annualized. Talk about where we are in recognizing those and just thinking about the expense performance that you had against that. And as part of that, if you could address whether there's any incipient wage pressure that you've noted in the market would be very helpful.

Yes -- go ahead, John.

Matt, I'll start out and I'll let Cathy and John also build on it. But as we talked about last year, we had a very clear multiyear plan. We targeted over $2 billion of savings. And in 2015, we've made very good progress against that plan. We're on or ahead of all of the key metrics that we're tracking, and we expect that to continue as we go forward. So John and Cathy are working across the organization to make sure that those initiatives stay in place. And as John continues to build his team and we bring people like Anu Gupta on board to focus on operational excellence, we expect to find even greater opportunities for further improvement. So I think we're well positioned today. I feel very good about the progress we've made to drive productivity across the organization, and you should expect that to continue in 2016 and beyond.

Yes, I'll just add on a little bit. With regards to our performance with SG&A, the beauty of what we're seeing with the plan we laid out last year is we're delivering upon it, but we're also recognizing how we can reinvest back in the business on the priorities that matter to our guests. And so if you think about our investment in visual merchandise leaders, that's a great example. 1,400 stores now have someone who is an expert at helping to showcase the categories that matter most to our guests. And so we're seeing the ability as we save on one line, we can invest in other areas in our business. And you had asked about wage pressure. I'm going to just put a plug in. We believe in having the best team in retail, and that has always been a differentiator for Target and we believe more today than ever that, that is going to be a differentiator, is that it's our wonderful team member engagement with our guests every single day, any way they interact with them. So we're going to be competitive in wage. We always assess it market by market and because we believe in fielding that best team in retail.

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

I just wanted to ask a little more detail on the guidance, Cathy, that you outlined. If you think about all of 2016, how much buyback is there or isn't there in that guidance? And also, how should we think about CVS impacting the guidance, however you want to frame it, in terms of you mentioned sales but also margin, like should we expect a certain margin benefit if it's 50 to 70 bps up in the first quarter? Is that a good run rate for the year? Or how should we think of it?

Yes, so Greg, thank you. First off, I'm going to put a plug in to say that we look forward to seeing you next week because we'll obviously unpack a little bit more of it then. But with regards to the share repurchase comment, in our guidance, we did assume a consistent level of share repurchase like we've been talking. However, we're also sitting -- we're ending the year with a pretty heavy cash position because we closed the transaction late in December. And so you'll see us provide additional color into that, but we -- but suffice it to say, it'll be at the level of this year or higher and we've included that in our EPS guidance of $5.20 to $5.40.

And on the margins for the year?

Yes. So as we've said, it obviously was an impact on sales but very little on the aggregate EBITDA line, which is what we've said longer-term.

So your full year guidance assumes some slight EBITDA margin increase it seems?

Yes, yes.

Right.

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

Just on Q4, the gross margin was just a little bit lighter than I think consensus when we modeled [ph] that. Like can you provide just a little more detail on the variances or puts and takes in gross margin versus the internal plan that you had? Or was that 50 basis point decline kind of in line with your expectations?

Sean, as we think about our performance in the fourth quarter, it's played out pretty much as expected. And we know that fourth quarter's going to be very promotional, very competitive. We certainly saw the guest respond very positively to our offers, and that drove great traffic. It allowed us to build market share in our signature categories, and I think it positioned us well for 2016. So as we sit here, there's a lot of variables that go into building our plans for a quarter like the fourth quarter, but we're very pleased with the way our plans drove traffic to our stores, visits to our site, allowed us to accelerate comps on top of a very strong quarter last year, and we saw very broad increases across many of our signature categories as we reported. So I think our plans were in line with our expectation for the quarter.

Okay, great. And then just real quick, a follow-up for just on how you're thinking about 2016. Just from getting a number of questions about how you feel about cost of goods sold. Where -- are you seeing any inflation or deflation potentially in some of those categories? And specifically in Food, how is that playing through on the P&L right now?

Yes, Sean, again a number of puts and takes as we look at the impact of changes in currency and cost of goods. But it's all baked into our outlook for next year, and I think we approach 2016 with a lot of confidence that we've got great plans in place, terrific momentum. And as you'll see next week at the conference, the team's done a terrific job in building some exciting new brands that we'll showcase next week and we're already seeing some really positive responses from our guests to our new Kids line to look forward. So we're excited about 2016 and we look forward to seeing you next week.

Your last question comes from the line of Simeon Gutman with Morgan Stanley.

A quick question. There was a, I guess, a follow-up on something, just the top line versus gross margin trade-off. First, I take it you're pleased with the outcome. I recognize it's very difficult to optimize. But can you tell us, maybe at least the growth you saw in digital, was that existing customers versus new? I'm trying to gauge the stickiness of some of the customers that came to you in the fourth quarter.

Yes, we're going to spend a lot more time unpacking this next week, but we recognize that today, our Target guest interfaces with the brand in a number of different ways. Sometimes, they're in our stores. Sometimes, they're shopping online. We certainly heard many times, because of some of the proprietary items that we offer during the fourth quarter, they were shopping online, but as John referenced, quickly coming to our stores to pick up those items. So we felt really good about the way the guest responded to our offers during the fourth quarter. And a great combination of in-store traffic, more guests than ever before clicking and collecting items in our store and then the fact that we were able to leverage our stores, this year over 460, where we were shipping from stores to our guests' homes, that overall package came together really effectively throughout the holidays. So we feel as if we had a winning strategy in the holidays. It drove great comps on top of a very strong performance last year. And you and many of the others that are on the call have asked me repeatedly throughout 2015, would we be able to comp the 3.8% increase in 2014? Well, hopefully, we answered that question. We answered it with strong momentum, and we were able to see both strong performance in our stores and we delivered industry-leading performance online. So we feel really good about the way we're exiting Q4 and well positioned for 2016 and beyond. So we're looking forward to seeing all of you next week in New York, and thanks for your patience this morning. I know we started a few minutes late, but hopefully, it was worth your time, and we look forward to seeing you again next Wednesday. So thank you.

This concludes today's conference call. You may now disconnect.