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, 2020. 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 2020 earnings conference call. On the line with me today are Brian Cornell, Chairman and Chief Executive Officer; John Mulligan, Chief Operating Officer; and Michael Fiddelke, Chief Financial Officer. In a few moments, Brian, John and Michael will provide their perspective on the second quarter and our continued focus on our guests and our team as we navigate through the current environment. Following their remarks, we'll open the phone lines for a question-and-answer session. This morning, we're joined on this conference call by investors and others who are listening to our comments via webcast. Following the call, Michael and I will be available to answer your follow-up questions. And finally, 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 non-GAAP financial measures, including adjusted earnings per share. Reconciliations of all non-GAAP numbers to the most directly comparable GAAP number 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 thoughts on the quarter and our focus going forward. Brian?

Thanks, John, and good morning, everyone. Today, we're sharing second quarter results that are, by virtually any measure, exceptional. But I want to say at the outset that what's most extraordinary of all is the environment in which we generated those results. The incredible resilience of our team, the way they've risen first to the pandemic, then to social trauma touched off in May here in Minneapolis is unlike anything I've seen or I'm likely to see again in my career. And I say in all humility that it has been a huge privilege to work alongside this team in this moment. The results we reported this morning are truly unprecedented. On the top line, we delivered second quarter comparable sales growth of 24.3%, the strongest we've ever reported. Equally remarkable on the bottom line, we generated adjusted EPS of $3.38, a new record high and strong enough to offset the significant profit headwind we faced in the first quarter. These results are a testament to our team and their passion for our guests and the increasing trust our guests are placing in our brand. Our performance also reflects the meaningful investments we've made in recent years, building a business model that is durable enough to perform in any environment, incorporating flexibility in both our merchandise assortment and the fulfillment options we offer to our guests, while articulating a unified purpose to help all families discover the joy of everyday life. In our last earnings call, we described how our business and operations adapted quickly and seamlessly to rapid changes in consumer behavior. As our guests reacted to the implications of the emerging pandemic, we encountered multiple abrupt changes in shopping patterns throughout the first quarter, both across categories and channels. Near the end of that quarter, we returned to…

Thanks, Brian. If the overall theme of our first quarter was unexpected change and rapid adjustment, in the second quarter, it was an increasing sense of normalcy. I will quickly say things today are far from the old normal. In fact, hardly anything feels the same today as it did 6 months ago. And while second quarter trends were much less volatile than the first quarter, the team still had to navigate through a great deal of variability, something they've done exceptionally well throughout this crisis. But at this point, the team has gained significant experience with new routines, all centered around safety, and we've returned to many of the routines we paused during the first quarter. Now that our new cleaning routines are fully established, they are operating successfully in a run-state condition. We continually hear from our guests that safety is even more important than ever, and they appreciate that cleanliness and safety are visible priorities for our team across every aspect of what we do. In late April, we began accepting in-store returns again, following a 5-week pause. Soon after, in May, we began a phased reopening of the Starbucks locations in our stores. As the quarter progressed, many other activities resumed, including a steady reintroduction of the Weekly Ad in select markets and a resumption of a more normal cadence for handling clearance, promotions and merchandise transitions. In our Super Target locations, we initiated a contactless form of sampling in June, along with a phased-in plan to resume deli and bakery production. Across the chain, we reintroduced product samples into our pickup and Drive Up bags and began moving store hours back to their pre-pandemic levels. After opening 3 new store locations in March, we took a pause in our new store projects as uncertainty from…

Thanks, John, and good morning, everyone. While aspects of our second quarter performance could hardly have looked any more different than the first quarter, many of the themes we covered 3 months ago remain true today. Guests are consolidating trips and increasingly turning to Target as the flexibility of our assortment and fulfillment options make us a convenient one-stop shop. We're continuing to invest hundreds of millions of dollars in paying benefits for our team and in new measures to enhance safety and cleanliness in our stores. We're seeing unprecedented market share gains across our multi-category assortment and in virtually every week. And we're focused on financial strength and flexibility as we look ahead given continued volatility and uncertainty in this environment. As Brian mentioned, our second quarter comp sales growth of 24.3% is the highest we've ever reported. Total sales grew 24.8%, reflecting 0.5 point of benefit from new and nonmature stores. Among the drivers of our comp growth, comparable traffic grew 4.6%, while average basket grew 18.8%, reflecting trip consolidation in both our stores and digital channels. Across those channels, store-originated comp sales grew 10.9%, meaning stores growth alone matched our total comp sales growth in the first quarter. On top of those store sales, digitally originated comp sales grew 195%, contributing another 13.4 percentage points to our total comp growth. Within digital, we continue to see the fastest growth in our same-day services, in-store pickup, Drive Up and Shipt, which together grew 273% over last year. As John mentioned, these services have much lower unit costs compared with the orders we ship to our guests, helping us to control costs even as our digital sales continue to explode. Our second quarter gross margin rate of 30.9% was about 30 basis points higher than last year. Among the…

Thanks, Michael. Before we move to your questions, I want to pause and thank everyone on the call today for listening in and for your continued engagement in our business. For those of you who've been on these calls for a while, I think you'd agree it's been quite a journey. In fact, when you look back at our release and remarks from the second quarter 5 years ago, you can quickly see how far we've come. In the second quarter 2015, we reported healthy growth in our earnings per share, with both GAAP and adjusted EPS expanding to just over $1.20 or more than $2 lower than the quarter we just reported. Digital sales grew 30% and accounted for just under 3% of our total sales compared with just over 17% this year. Five years ago, after-tax ROIC expanded 2 full percentage points to 13.3%, nearly 4 percentage points lower than the 17.2% we just reported. Among the priorities we covered in this call 5 years ago, becoming a leader in digital, having just introduced our ship-from-store capability, defining our category roles and reasserting our authority in style categories like apparel and home, and ramping up our test of the small-format stores in dense urban areas. Also in the quarter 5 years ago, we sold our pharmacy business to CVS and announced that John Mulligan will become the company's first Chief Operating Officer with a goal of modernizing our supply chain and operations. As in every upward journey, our progress over the last 5 years has not been a straight line. Along the way, we reached some plateaus and sometimes even lost some altitude before resuming the climb. That's why it's sometimes helpful to look back over a longer distance to get a true picture of the progress. But unlike the ascent of a mountain, our journey will not end up with a climb back down. Success will be defined by further growth with a constant eye on what consumers want and need. To meet those ever changing needs, we'll need to continue to reinvent ourselves, changing our operations along the way. Yet, some things will sustain over the longer term, like our culture, values and our team's commitment to one another. These strengths have defined this great company for decades, and our commitment to maintaining them has never been stronger. With that, we'll move to Q&A. John, Michael and I will be happy to take your questions.

[Operator Instructions] Our first question is from Karen Short with Barclays.

Congratulations on a great quarter. I want to -- I don't want to take away from the success of the quarter because it obviously was outstanding. But I do want to focus on gross margin. Because I know while it's impossible to predict what things will like look on the top line, I think we probably have a pretty good handle on SG&A in terms of how that will look, obviously, depending on sales. But gross margin kind of in the back half seems to be a little more of a wildcard. So wondering if you could talk about that a little bit and I think in the context of that 180 basis points in rate benefits from lower markdowns. Because presumably, you had marked down things. And you pre-marked down in 1Q, and you're benefiting from that in 2Q. So we really have to look at the back half without that 180 basis points. And then I had one other quick follow-up.

Michael, why don't you start?

Sure, Karen. And maybe I'll start by saying, I empathize with those of you on this call trying to extract trends from our Q1 and Q2 margin rates. You can see the underlying volatility of the business if you pick apart those trends in Q1 and Q2. To focus for a second on where we've been, I actually think it's useful to zoom out and look at the year-to-date trends. If you unpack margin on a year-to-date basis, we've got just over 1 point of pressure from the accelerated growth in digital and supply chain investments and have just over 1 point of pressure in category mix. And you've got a wide variety of movement across the markdown front: some of the markdowns we took in Q1 were lower and then the benefit of more sales at reg price in Q2. And an example of that, Karen, is really, if you think about how -- the sell-through we're getting given our strong sales, we're taking a lot less product to clearance at the end of the season than we would typically. And so that's an example of one of those drivers of favorability that contributes to the 180 basis points of good news in Q2. Those will be key levers as we look ahead going forward. But like we said before, predicting them is an exercise in imprecision at this point.

Okay. That's helpful. And then you gave us, obviously, a lot of color on your digital and fulfillment capabilities. But I was wondering if you could just give a little more color on the new 10 million customers that you've gained. Anything you could point to on demographics, behavior, ticket type of behavior relative to your more regular customers?

John, anything else you want to add?

Yes. Karen, I'd say, the great thing is, is that from a behavior perspective, they behave just like the rest of our guests. When we convert someone to a Drive Up order, historically, we've seen them become more engaged with Target, see 30% more sales. That's exactly what we see with this 10%. Probably more encouraging from our perspective is that from a repeat purchase perspective, we've seen that increase. 7-day repeat purchases are higher than we have seen historically. 90-day repeat purchases on digital are higher than we have seen historically. So it appears that, at least to start with, they're much more engaged with us. And we know that the deeper they get engaged, the more they use our services, that the more they will be engaged and the more they will use our services. So from our perspective, very encouraging results as those guests have come on to Target.com.

And Karen, the only thing I would add is we continue to see the most valuable and profitable guest to Target is the guest that uses all of our channels. And we continue to see stickiness as store guests discovers Drive Up or discovers the benefits of Shipt and also digital guests that are now coming into our stores because of the investments we've made and the trust we're building. So we'll continue to report more about those new guests in quarters to come. But certainly, we're very excited about what that means to our future.

The next question is from Edward Kelly with Wells Fargo.

I was just curious on the August comp, obviously, impressive results quarter-to-date given stimulus rolling off Back-to-School. I was hoping that you could provide a little bit of category color in terms of what you're seeing in August. And then as it relates to Back-to-School, I guess, what are your thoughts on how the season is going to end up? I mean obviously, we're getting off to a late start in a lot of areas. Just curious as to what you think the impact to the comp will end up being this quarter?

Ed, why don't I start. And I commented earlier today that our August comps are off to a very solid start with low to mid-teen growth at this point in the month, and it's been broad-based. So we're continuing to see the kind of performance we saw in the second quarter continue into Q3: strength in food and Essentials, continued strength in electronics, continued to strength in home. And certainly, we've seen some adjustments in categories that are very school related as consumers look for greater certainty around when they're going to start the back-to-school season. But I think, again, the most important indicator right now, as I look at our August performance, is the consistent market share growth that we're seeing across our entire portfolio. And each and every week, as we look at IRI and NPD performance, we continue to see a lot of green boxes and continue to pick up market share across the board and across our entire multi-category portfolio. Obviously, we're all looking at Back-to-School and Back-to-College trends. And each and every day, there's new information. As we sit here today, and I think the number is there's something close to 56 million students in the K-12 bracket that are waiting to go back to school. And as of this week, it looks like well over 60% will start school remotely. And we'll look for more information. We don't know if those students will be welcomed back into a classroom in September or October. Many may wait actually until January. So we've made the decision to be flexible. And we'll extend the season and extend our assortment because we know at some point in time those students will need backpacks and uniforms. They're going to need school supplies, so we've got to make sure that we continue to flex. And I think it's been the hallmark of our performance throughout the first 2 quarters of this year, our ability to stay agile, stay flexible, meet the needs of the new environment, and we'll continue to take that approach with back-to-school season and with the back-to-college environment as well.

And then maybe just to follow up quickly. I had some comments around holiday and sort of stretching out holiday. Maybe just a little bit more color on what you're looking to do there. Do you think shopping patterns, consumer-wise and traffic, will actually follow that? Just a little bit more color in terms of how you're thinking about holiday at this point.

Ed, we do think it's going to be a longer holiday shopping season. We're certainly preparing to start earlier than ever before in the October period. We're going to make some big changes. We announced recently that we'll be closed on Thanksgiving. And we certainly expect it's going to be a different rhythm to the shopping season. Obviously, we're going to put a big premium on ease and convenience, delivering great value, but we'll emphasize safety. And we'll also make sure that our guests knows that those top items and that great value is going to be available throughout the season and give them the option of shopping, obviously, in a well-managed, safe Target store or taking advantage of our same-day fulfillment options to give them the certainty that they can get those great gifts, those great items whenever they want. So we think it's going to be an extended holiday shopping season. We think it plays well to our multi-category portfolio and the flexibility of our stores and our convenient same-day offerings. So we'll prepare for a very different holiday season. We'll have to stay nimble. We'll have to adjust. But again, I think the team has demonstrated the flexibility and the adaptability to this new environment, and we expect to continue to build market share and delight our guests throughout the holiday season.

The next question is from Paul Trussell with Deutsche Bank.

Congrats on stellar results. The -- reflecting on your omnichannel business, first, just curious of the cadence of the channel mix. Just interested in seeing if there was an acceleration of in-store taking any moderation of the digital sale as the quarter progressed and economies reopened? And then second is, obviously, the same-day services are quite robust. I'm just curious what are some of the learnings that you have over the last few months as it relates to Order Pick Up, Drive Up and Shipt. And how are these businesses, therefore, evolving and improving from these learnings?

So Paul, why don't I start. And I'll go back to our comments during our first quarter call. We certainly saw, literally starting in the middle of April, a resurgence of traffic to our stores, and that certainly continued in the second quarter. I commented earlier today when I was speaking with CNBC that despite the tremendous top line growth of 24.3% and digital growing at almost 200% during the quarter, the real star of our performance was the performance we saw in stores, where our store comps were up 10.9% despite an environment where we've seen unprecedented digital shopping. So we certainly saw that guests returning to stores throughout the second quarter, and that was consistent from May into June and July. And we continue to see guests shop our stores. And I think the investments we've made in safety, the investments we've made in our team, the investments we've been making for years and years, putting capital into remodeling our stores and creating a great shopping environment, that's certainly connecting with the guest during the pandemic. So we continue to see very strong store traffic. We saw excellent traffic overall during the quarter, up almost 5%. And John can comment on some of the learnings from our same-day fulfillment. I would tell you, I think the biggest learning is just how adaptable and flexible our teams have been and how quickly they've responded to a surge in something like Drive Up that grew over 700% during the quarter alone.

Yes. Paul, I think Brian hit right on. Probably the core learning is the ability of our team to be incredibly agile. And we went in a matter of weeks from normal digital sales to volumes that exceeded Q4 last year for many weeks in a row. So the ability of our teams to do that very quickly where typically, planning for Q4 takes us several months. We have a detailed plan. But the teams understood what we were doing, how they needed to execute, we -- the tools that the store teams have built to help them execute proved very scalable and very efficient. And so our ability to do that was outstanding. The other side of that, I would say, again, to point to how well the teams executed while taking care of the guests in store, as Brian pointed out, our NPS scores remained very, very high the entire time. Drive Up growing over 700% and still having an NPS score in excess of 80 is just outstanding work by our teams. I think the last thing that had kind of changed our thoughts on the thing we've worried about -- only worried being not quite the right word, but thought about a lot is the stores are busy in Q4 serving guests in store. And so how do we continue to balance that with our fulfillment? And what we've seen over the past 3 months is that's not a problem as long as we give them the right tools, staff the stores appropriately, we can take care of running a 10 comp in the stores and running a 20 comp on digital, both of those together. And so we feel really good about the model we've built and the team has built over the past several years, and I think that's probably the biggest learning over the past 3 months.

Yes. Paul, I'd add only one other detail. And I think it's a tribute to John's leadership and the quality of the store and supply chain teams. In Q1, we noted that we had turned off our plans to expand pickup and Drive Up to include fresh and frozen food and beverage products. We've turned that back on. And the team recognized that, that was very important to our guests. It was going to continue to be important as we went into the second half of the year. And despite the unprecedented same-day growth and the demand we've seen for Drive Up and pickup, the team has put that back on the road map, and we're now expanding that across the country. And to me, that just points to the further upside opportunity we have with our same-day services. So again, a big tribute to the team, the leadership they provided to recognize that, that was going to be important to our guests. And as opposed to waiting until 2021, we're going to get that back on our road map and begin to stand up those capabilities in the second half of the year. And I think that's going to be just one more aspect that will be appreciated by our guests when they shop Target in the third and fourth quarter.

The next question is from Matt McClintock with Raymond James.

May I also say congrats to the broader Target team, outstanding execution this quarter and, honestly, all year.

Thank you, Matt.

John, my question actually is for you. I want to take the supply chain from a different angle. You did talk that you're in discussions with vendors right now. You mentioned that some categories have had some out-of-stocks probably because they're just longer lead time categories. I'm not really sure. But I want to -- given the massive volatility in your sales, as Michael talked about, how are your thoughts changing or evolving towards demand forecasting? And how are you thinking about just sourcing in general from those vendors that maybe have long lead times in manufacturing themselves?

Well, it's a good question. And I would start in a place where demand forecasting is difficult right now, both for us -- and we import a lot of our goods, as you know, directly and from -- for our vendors who have long lead times as well. I think the thing we're working on with them is, we would call it joint business planning, just being sure we're both aligned and that we've built flexibility and agility into what we want to do. There are ways. You can set up sourcing strategies. We do this where we get an initial set order, and then we have very quick ways we can chase into demand through other avenues if we need to. So -- and then the same is true domestically. For our vendors that are continuing to build capacities, who have us on allocation, having conversations with them about what we see in demand and what demand we're leaving on the table because we perhaps don't have the inventory we need. So to me, this is mostly about conversations and then agility and being flexible when we see the data coming in because it is moving rapidly. And we know when we -- and we talk about it. When we write down a forecast, the only thing we know is that it is wrong. And so how we adjust to that as we see the data coming in is the most important thing.

And I'd only add if we had Christina or Jill or Steph on the call right now, they would talk to you about the changes we've made in assortment, and in many cases, SKU optimization, learning how to do more with less. And we've partnered closely with some of our key vendors to make sure that we're focused on getting the top-selling items into our store and into our system. And we've made some adjustments in SKU rationalization along the way. So I think out of the pandemic, I think we've learned that we can do a lot more with fewer SKUs in certain categories. We've got to focus on the most important items that are in demand with our guests. So we're continuing to learn along the way, and I think we'll become even more efficient going forward.

The next question is from Oliver Chen with Cowen.

Congratulations. Regarding the assortment, it's all been performing so excellently. What do you see as opportunities ahead in the assortment? What are you most focused on in terms of areas that we'll see further innovation? And I would also just love your take on Target Circle and the next step in that program as well as your thoughts around the marketplace model and the -- on the e-commerce platform?

Oliver, you've got quite a few questions in the queue. And I'll start, and I'll certainly let Michael and John also jump in. I think as we think about our strategy from an assortment standpoint, I'll go back to something we've talked about for years now. We're at our best when we're a curator and balancing a curated assortment of our own brands and great national brands. And I think you'll continue to see that focus from Target going forward. And as I think about the work and the great work that our merchants have done, it all comes down to being great curators. And they've done that both with our in-store and our online assortment, and I think that is a huge point of difference for us. It served us well. It allows us to meet the growing demand in the digital channel because those items that we're fulfilling the same day are largely coming out of our core store assortment. So you'll see us focus on being great curators. As we think about something like Target Plus, we're also taking a very different approach. We're inviting people in. It's an invitation-only platform. And we want to make sure that even in that environment, we're constantly curating, making sure we're delivering the right extension for our assortment and for our guests. So we'll continue to take a very different path, focused on curation in this environment, both with our physical assortment and digital assortment. And we think that's a hallmark of what makes Target such a unique company, and it really complements our multi-category assortment. Oliver, on the Target Circle front, we noted that we now have over 75 million members in Target Circle. And obviously, going forward, it's another opportunity for us to deepen our relationship with the guests, to make sure we're even more relevant in their lives and that we continue to enhance the trust that I think we've gained throughout the pandemic. So we're very excited about the opportunity. And I think about the 10 million new digital guests that we've invited in over the last few months, 75 million and growing Target Circle members, it's just one more way for us to continue to meet the needs and delight the guests who shop Target each and every week.

Our last question is from Michael Lasser with UBS.

So would you attribute all of the slowdown that you've seen in August to the Back-to-School categories? Or would any of it be attributed to some of the enhanced unemployment benefits going away as well? And the question really gets at the heart of once we get past the back-to-school season, shouldn't you see your sales accelerate? And then I have a follow-up.

Mike, honestly, we're watching it carefully and a lot of conversation around the impact of stimulus, what this means going forward. We certainly hope there's a second round of stimulus for small businesses and American consumers. But as we look at our trends right now, I think it's largely adjustments in some of the Back-to-School categories. But we continue to see strength across our portfolio. We continue to see strength in our stores and our digital channels. We continue to grow market share and see momentum within our business. So we'll watch it carefully. Obviously, as Michael and John have stated several times, it's a very challenging environment for us to provide guidance. We've got the pandemic in front of us. We've got uncertainty about Back-to-School, Back-to-College, the state of the economy. We do have an election coming up in November. So lots of different dynamics that we have to try to sort through, and we're putting a premium on being really responsive and really flexible. But it's just hard for us to provide an outlook beyond a couple of weeks at a time.

My follow-up question is that you provided a lot of helpful statistics about how the average unit cost to fulfill an online order is now 30% below last year, yet the -- because the digital growth is so strong, that led to 130 basis points of gross margin pressure. So if we assume that some of the incremental sales that you're generating right now recede when consumers go back to traveling and eating out, and yet consumers have really gravitated to these digital fulfillment options like in-store pickup and Drive Up, and those stick around and that digital penetration remains where it is, should we think that this gross margin pressure of about 100, 130 basis point sticks? Or do you have offsets on the horizon that can reduce that pressure?

I can take that one, Michael. I think that the -- well, we don't know exactly what those numbers will look like for the back half of the year, and so I'm not going to attempt to predict those. I think what you see in the first half of the year is the durability of the model overall. And as you've heard us say many times, that growth in digital is way bigger to us than just the sales or profit on that one digital transaction because it deepens our relationship with the guest, and that pays off in spending in aggregate. And I think you can see evidence of how that flows through the durability of the model even in the first half of this year amidst all the volatility. If you would have told me before this year that digital would be up over -- almost 200% on the year, and that we would have had a point or more of pressure in gross margin from category mix, but that our operating income rate would be within 30 basis points of the year prior, I'd have taken that outcome in a heartbeat. And so I think that just shows how if you zoom out from the specifics of just one digital transaction, you get a sense of the durability of the model in total.

Yes. Michael, I'll just finish up and perhaps to wrap up the call. Well, I think all of us on the call, and I know our entire Target team is looking forward to the day when the pandemic is behind us, when we're spending time with family and friends, we're traveling again, kids are back in school. One of the things that I think will stick around for us is the consumer who's going to continue to consolidate their purchases, is going to appreciate value, is going to look for a safe shopping environment. And we know digital is going to be critically important. And I think what's going to stick around for us is the growth we've seen in market share, the relationship we've built with the consumer during the pandemic and the growing trust that we've formed with the guest who shops our stores or shops with us online each and every day. So we're excited about the future. And I think sitting here with Michael and John, we've never felt better about the prospects for the company. And we've certainly advanced our digital maturity by several years. But I think we've really matured our overall operating capabilities during the pandemic. And I think that's going to provide returns for us for years and years to come. So operator, with that, that completes our second quarter call. I really appreciate all of you for joining us today and your continued support. So thank you, and stay well.