Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation 2021 First Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, May 19, 2021. 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 first quarter 2021 earnings conference call. On the line with me today are: Brian Cornell, Chairman and Chief Executive Officer; Christina Hennington, Chief Growth Officer; John Mulligan, Chief Operating Officer; and Michael Fiddelke, Chief Financial Officer. In a few moments, Brian, Christina, John and Michael will provide their perspective on the first quarter and their thoughts on our outlook for the second quarter and beyond. Following your 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 most recently filed 10-K. 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 first quarter and his perspective on our outlook. Brian?

Thanks, John, and good morning, everyone. The first quarter felt like a first step towards a post-pandemic world. And our team and operating model continues to walk alongside our guests and communities, serving them well through another chapter of growth and healing. From our unique mix of categories, to our unmatched set of fulfillment options, our business is delivering what consumers want and need each and every day. The results we delivered in Q1 are nothing short of outstanding. Comparable sales grew by nearly 23%, making our fourth consecutive quarter in which comp sales grew more than 20%. Maintaining that pace this quarter was especially notable, given that we were comping over double-digit growth a year ago. Over the last 2 years, comp sales have grown about 36%. And total sales expanded by $6.5 billion in the first quarter alone. This year's sales growth reflected more than $1 billion in market share gains, a clear signal of how relevant guests find our experience even though they have many more shopping options available compared with this time last year. In a quarter featuring many things to celebrate, I'm most proud of the performance of our stores. With vaccinations rolling out across the country and consumers increasingly comfortable venturing out, we've seen an enthusiastic return to in-store shopping. Guests are happy to come back to our stores because they love the environment we've created and invested in over time. As a result, our store comp sales increased 18% in Q1, driven almost entirely by higher traffic and accounting for the vast majority of our growth. Contrast that to a year ago when the channel mix of our business was changing rapidly, with guests leaning heavily into our digital fulfillment options, essentially our same-day services in the midst of a nationwide lockdown. A…

Thanks, Brian. As we enter 2021, we knew it would be a year like no other. That's because we're coming off of 2020, which was, by far, the most unusual year any of us have ever experienced. As such, we knew there'd be a wide range of potential outcomes for our sales, both by category and in total. And so far, with one quarter behind us, results have been extremely positive across every dimension. In the face of this strength, we've seen an incredible response from our teams across the board, from our stores, to our merchants, to the supply chain, who've all worked together in service of our guests. While there are many ways to measure the impact of those efforts, guest loyalty and market share are the 2 most important measures of success in this volatile time. Consequently, it's incredibly gratifying to see that across every one of our guest segments in the first quarter, we measured an increase in average trips per guest and a larger average basket. This led to more than $1 billion of additional market share in the quarter, on top of $1 billion gain a year ago. In terms of category performance, we saw the strongest growth in our Apparel business, which delivered comp growth in the low 60% range. As Brian mentioned, we saw a temporary dip in apparel sales last year, when first quarter comps were down around 20%. Following this year's strong increase, first quarter apparel sales have grown approximately 29% over the last 2 years. Home also delivered incredible growth with an increase in the mid-30% range, on top of a high single-digit increase a year ago. Within Home, growth was strong across the board, with the most robust performance in our decorative home and seasonal businesses. Hardlines also…

Thanks, Christina. At our Financial Community Meeting earlier this year, we detailed how last year's $15 billion in sales growth was more than we grew over the prior 11 years. And as you've seen today, trends are not slowing down, as we added another $4.5 billion of sales in the first quarter. Given this continued rapid growth and the opportunities still ahead of us, the operations team is focused on building capacity and enhancing processes to create and enable Target's continued growth. That work starts in our supply chain, where we've outlined our plans to add 4 new regional distribution centers by the end of 2022, with the first 2 buildings slated to open later this year. These new buildings located in Chicago and New Jersey are set to go live in the next several months, creating additional capacity for the network in total, while enhancing service levels in high-volume markets that continue to grow. More specifically, once these buildings are operating at scale, they'll meaningfully shorten lead times to nearby stores, improving in-stock levels, while reducing the need for safety stock in those locations. Beyond the capacity we're adding with these new buildings, we're also investing in updated fixtures to create additional capacity across our current network. These changes are highly capital efficient, involving a small amount of capital to open up a substantial amount of incremental capacity within the network, equivalent to the addition of about 1.5 new distribution centers. And as we told you at our meeting in March, we're pleased with the initial results from our new sortation center in Minneapolis. As a result, we have plans to build up to 5 more of these facilities in 2021, with additional openings planned for 2022 and beyond. We're opening these centers, which are smaller than an average…

Thanks, John. When I think about the underlying themes of our recent performance, the most dominant one by far has been the unprecedented growth and share gains we've seen over the last 5 quarters. On the P&L, the leverage resulting from growth has more than offset all of the unique headwinds we faced over this challenging period, resulting in really strong performance. Target's total sales grew 23.3% in the first quarter, reflecting comp growth of 22.9%. Given last year's double-digit growth, first quarter sales have expanded more than 37% over the last 2 years, driven almost entirely by higher comps. Unlike last year, when consumers were consolidating trips and shopping less often, this year's comp growth was driven primarily by a traffic increase of more than 17% combined with a 5% increase in average ticket. As Brian mentioned, store comps were the growth engine this year, while digital was the primary driver in Q1 2020. As such, over the last 2 years, both our stores and digital channels have expanded their first quarter sales by more than $3 billion. This balance highlights the relevance and complementary nature of both channels in serving our guest needs. Our first quarter gross margin rate of 30% was 490 basis points ahead of last year when we faced a number of temporary headwinds, including markdowns and other costs to rightsize our apparel inventory. Compared with 2019, this year's first quarter gross margin rate was about 40 basis points higher, which is notable given that digital sales penetration more than doubled in that time, from 7.1% in 2019 to more than 18% this year. In terms of the year-over-year gross margin drivers, mix had a positive impact of about 150 basis points, reflecting the dramatic increase in apparel sales and continued strength in our home…

Before we move to your questions, I want to pause and acknowledge again the role our team plays in the outstanding results we delivered this quarter. I'm thankful for their continued focus on our guests, focus on operational excellence and passion for our brand. I also want to acknowledge the challenges facing our India headquarter team, along with our team members who have family there, given the recent surge in COVID-19 cases. We have been carefully monitoring conditions on the ground and providing extra support to our team during this difficult time to ensure they can take care of themselves and their families. We've also funded $500,000 donation to UNICEF set to increase access to option treatment in hospitals across the country and bring testing resources to the hardest hit communities. We're hopeful that conditions there will continue to improve. So now as we get ready to move to your questions, I want to underscore the confidence you've heard throughout our remarks today. Coming off an unbelievable year in 2020, we had a lot of confidence as we entered 2021, but our first quarter results came in far ahead of our baseline expectations. With the macro and consumer backdrop that's been surprisingly positive, we've seen remarkable momentum in our performance, even as we started to comp over the period of peak increases a year ago. The flexibility of our category mix and fulfillment options, combined with an agile, energetic and engaged team, continue to resonate with our guests, driving double-digit traffic growth and an increase in average tickets in the first quarter. But as you've often heard me say, we shouldn't confuse performance with potential. So even after more than a year of unprecedented growth, we're seeing focus and leaning into the opportunities ahead of us, making investments to build on an already strong foundation. With these investments, I'm confident that our business model and outstanding team will continue to raise the bar on an already best-in-class retail experience, resulting in even stronger loyalty and guest engagement over time. With that, we'll turn to Q&A. Christina, John, Michael and I will be happy to take your questions.

[Operator Instructions] Our first question is from Bob Drbul with Guggenheim.

Congratulations. Great job, Brian. The question that I have is when you look at the mix of -- especially on the apparel side, can you talk about any new brands that you're excited about? You've done a great job with the private brand piece. And I think as you move through the year, any expectations that you have just on that mix and some of the margin implications around that category would be great.

Well, why don't I let Christina spend some time talking about what we're seeing with categories, some of the highlights between our own brands and national brands. Obviously, Christina highlighted the fact that despite our overall robust performance in the quarter, owned brands grew by 36%, a record performance for us. So we're clearly seeing great performance in both our own brands and national brands. But Christina, why don't you build on some of what we're seeing in the different categories?

Absolutely. Bob, thanks for the question. As Brian was just sharing, we really are excited about the strength across the board. Apparel was certainly a stand out in this quarter with growing over 60%, and that came from a range of brands in every segment of the business. But the reality is the 3 trends that I talked about in my prepared remarks are benefiting our multi-category approach across the board: joy at Home and the opportunity to celebrate everything that brings the guests to their home, eating, being with their families, and the investments that they've made over time in their home; health and well-being, the opportunities that our guests are taking to invest in proactive health care and fitness at home and activewear. And then the newer and more emerging trend is really style and mobility. As guests are going out, they are looking for a fresh look. So our newest collections of dresses by Christopher John Rogers, Alexis and Rixo couldn't have been more perfectly timed to really help guests look their best in what they're wearing and certainly also across their beauty trends.

And the next question is from Paul Trussell with Deutsche Bank.

Outstanding results. Congratulations to the team. I guess my question is on, first, same-day services, which obviously continues to really showcase robust growth. I'm just wondering if you can talk a little bit more about how the business has evolved. What are the additional learnings? And what are the actions that have been taken to really improve efficiency and profitability of that particular business and service?

Well, Paul, thanks again for joining us this morning. Why don't we let John Mulligan talk about some of the progress we've made from a same-day fulfillment standpoint.

Paul, it's good to talk to you. As you know well, we've talked about stores as hubs now for going on 4 years. And we have always said, we like it for a couple of reasons: One, great guest service; and two, better economics. Same-day services are that on steroids. They have much better economics than shipping something to someone's home because, as we've talked about, the shipping expense is the biggest part of delivering something to someone's home. So if we take that out of the equation, then we end up with economics that are much closer to the store transaction. The thing we love about all of the same-day services, pick up, Drive-Up and ship, all of them continue to grow faster than our overall digital growth, and we continue to find ways to improve them, as you said. Part of that is investing in technology for our teams, improving their sort paths and improving how they pick. We've done a great deal of process work to break things apart, to make it simpler for our teams to execute. We've done things to help them find items in the store so that we don't end up with what we call, INFs, or items not found. And then we continue to invest in helping them physically. And that's a big focus for us this year and will be over the next couple of years. In the case of Drive-Up, which as we've talked about a couple of times, Brian talked about and I talked about, has been our fastest-growing same-day service since -- basically since we started it. It also has our highest NPS score, so guests love it. We let you decide when you want to come. We don't force you into a time slot. And then our team brings it out to you in 2 minutes or less. So our guests absolutely love that. And you'll see us invest in making that easier for our team, building capacity on the front end of the store. Over the past year, we've rolled out adding temperature control products to Drive-Up. And so you'll see us have refrigeration and freezers to the front end of the store, all behind the wall so that our guests don't see that, but making it much easier for our teams to execute. And then much safer, we'll make it much easier for them to walk out to cars, protect them from the environment a little bit. So all of that experience continues to improve as well. So every year, our team comes up with multiple ways to continue to improve the service, first and foremost, for the guest, and then on the back end, improve things for our team so they can execute it easier as we continue to grow. So we see a lot more opportunity for us. And as I said, that will be a big part of our capital investment over the next several years.

John, the only thing I might add is as we saw our guests turn to same-day services during the pandemic using pickup and Drive-Up and ship, we expect those services to be very sticky over time. And certainly, I think we've matured the awareness and the use of those same-day services by 2, 3, if not 4 years. And certainly, as we go into the back half of the year and during the holiday season, I think we're going to continue to see our guests turn to ship and Drive-Up and pick up. That's just an easy and convenient way to shop at Target.

Just a quick follow-up for Michael. Obviously, you're really showcasing a lot of confidence in the trajectory of the business, given the outlook provided for the balance of the year. Maybe just a little bit more detail on how we should think about gross margins and SG&A for what's clearly going to be a really healthy operating margin rate in 2Q and the second half.

Yes. Sure, Paul. Thanks for the question. And I touched on this a bit in my remarks, but if I had to summarize our profit story, it goes back to the scale benefits we see when we have growth. And our plan for the back part of the year is to see growth on top of some of the strongest quarters in Target's history last year. So we would expect that leave to -- to lead to improving profit rates on a year-over-year basis. And there's still a wide range of where those numbers might ultimately land, and we'll continue to refine our point of view as the year progresses. But scale is a wonderful thing. And we've seen impressive growth over last year, and we expect more to come in the balance of this year.

The next question is from Karen Short with Barclays.

I'll add my congratulations to a great quarter. I wanted to just ask a little bit about share gains. And obviously, we know the categories, and you're gaining share across all categories. But I wanted to see if you could give a little bit more color on share gains by demographic, and which demographics you think you're gaining the most share from. And then I had a follow-up to that last question that was asked.

Karen, thanks again for joining us today. And I appreciate the question on market share. As you look at our business, and I think you know our Target guests and our Target shopper, we're appealing to all demographics. And we've had over -- now well over 30 million guests who shop us every week. Most of America shops at Target. And I think as we look at it, we're picking up share across all these various cohorts. So it's not one consumer, it's all of the guests who are shopping Target and as they return to our stores, shopping multiple categories. And I think that's the magic behind our performance, is that great combination of in-store experience, the ease and convenience of digital, but that multi-category portfolio and that unique combination of our own brands and curated national brands, we appeal to a broad group of consumers in different cohorts. And we're picking up share across all of these different areas.

Okay. And then just on inventory growth. Obviously, your inventory growth was very strong this quarter, which is impressive given the freight issues, but -- and the port issues. But maybe some color on that growth in general, and how you think about the balance of actually wanting more markdowns in 2021 versus 2020, and how we should think about that in the context gross margin?

Michael, why don't you start? And then we can provide some additional color as Christina talks about our inventory positions.

Sure. Well, first off, Karen, we feel really good about our inventory position heading into the second quarter. And you can see we're up on a year-over-year basis, and we should be given the growth in sales that we've seen and continue to expect. When it comes to markdowns through the balance of the year, we've talked about this a little bit previously, we were sold through in a lot of seasons last year, and that's not optimal for us. We don't want to look at empty shelves at the end of a seasonal set. And so with our anticipation for growth in the remainder of this year, we'll be buying appropriately to that. And hopefully, that means we've got fuller shelves at the end of a season. And with that, will come some clearance markdowns, there will be a little bit of a drag on markdown rates on a year-over-year basis if I had to guess. But I would welcome a little bit of that rate drag because it means that we're full and in stock for the guests throughout the season.

The next question is from Chris Horvers with JPMorgan.

So a couple of questions on guidance. My first question is, in the second quarter, Michael, why couldn't you reach 10% or at least be close to that? You did a 9.8% in 1Q. Sales volumes look to be similar. Is it less rich mix performance? Or perhaps you're putting in some caution around potential promotions and clearance?

Sure, Chris. Thanks for the question. Well, we would expect, like I said in my remarks, the second quarter to be far ahead of the 2-year ago performance, likely not as high as last year. But there's still a broad range around that outcome. And so we'll see as the quarter plays out exactly where we land. Worth noting, and I touched on this as well, there's some factors unique to the quarter. We've got a $110 million headwind from the way our returns reserve calendarizes between Q1 and Q2. And the second thing is, we're investing, and we'll continue to invest in the team and in-store payroll to make sure we're staffed and in stock to support the sales we expect to come. And our teams have done just an incredible job this year providing such great guest experience. And we want to make sure we're investing to continue to support that and to support growth.

Understood. And then as you think about the gross margin, can you talk about the puts and takes of this year versus 2019? Obviously, you have a higher e-commerce mix. But you would think that sort of the mix of the business by category could be richer. And you also have pretty lean inventories against a strong demand backdrop.

Yes. So maybe I'll speak to actuals and unpack the first quarter just a little bit versus 2 years ago. If you look at kind of versus our 2019 performance, we saw markdown efficiency. And we've talked about that, lower levels of promotional and clearance markdown rates in 2019. On a 2-year basis, mix is actually about 40 basis points of a drag in the first quarter. And also, on a 2-year basis, you can see digital and supply chain pressure of a shade over 1 point given the growth in the digital business and the impact that, that has to rate. And so those are familiar drivers we've talked about over time. Where those drivers land for the balance of the year will dictate where margin ultimately falls.

The next question is from Scott Mushkin with R5 Capital.

I wanted to go into labor. Brian, I heard your comments today on CNBC about that it's kind of -- you're not really having a struggle getting labor. And I also heard you guys talk about enhanced service model. So I was wondering if you could talk about whether you guys believe you have a labor advantage and kind of what you're doing with your labor force to enhance the store experience.

Well, Scott, thanks for joining us. Why don't I start and then I'll let John build on my comments. But as I said earlier today, we've been investing in our team for many years now. And we took an industry-leading position with our starting minimum wage. We've continued to invest over the last year in the health and wellness and safety of our teams. And I think that's allowed us to build even deeper engagement with our teams and stores and our teams and supply chain. So I do think it gives us a competitive advantage. And I think the focus we place on our team, the care of our team, making sure we're investing in their training, their development, their growth, I think that's really provided us with a unique experience. And I think it's one of our competitive advantages in the marketplace. John?

Yes. Scott, just building on what Brian said. Basically, I think our thought has always been, the best way to staff our stores and our supply chain, frankly, is to limit turnover. And so let's invest in our team, give them a great experience. And you've seen us do that for several years now. We've invested in wages. We've invested in benefits. Just as importantly, we've invested in training to help upskill them. And then over the course of the past 1.5 years or so, we've invested in safety very overtly. And so as Brian said, engagement is very high. Turnover is down significantly relative to 2019. So we feel really good about where our store's at. And as turnover decreases, you get so many benefits, right? We get team members that know their jobs. We get team members that know their guests that are in their stores because they're in there weekly. They can engage with them. And this kind of gets to the service model where the idea is to engage with our guests, make them feel welcomed, and importantly, solve their problem. If they have an issue, solve it in the moment for them. And so you'll see us continue to do that. We're very encouraged by what we see. Our NPS scores across all of our services, including the in-store experience, are up over last year and up over 2019. So we're just getting started on this journey, but the early results are very encouraging. And I would just finish where Brian did. We -- you've heard us say for a long time, we have the best team in retail, and we absolutely believe that's the truth.

John and I had a review just yesterday with our store team leaders who look at turnover and retention rates, and we just continue to see stronger and stronger numbers. And back to the point that John had made. So the operating model changes we've made over the last few years, putting experts in place in areas like beauty and technology, those team members are really passionate about the work that they do, and they continue to learn and grow every day. And I think that focus on providing training and development opportunities, the expertise that we're providing in those key categories, that's going to continue to provide benefits to us over time.

The next question is from Kate McShane with Goldman Sachs.

I wondered if I could go back to the digital fulfillment questions that were asked earlier. I think you said costs were neutral. And I wondered, is it possible for how you're fulfilling to turn into a tailwind as you continue to drive more growth towards the same-day services and away from 2-day free ship? And then separately, you mentioned the sortation centers and the number you're opening this year. I wondered if you could talk to just the cost optimization from those sortation centers over the long term.

Sure. Thanks for the question, Kate. I can start, and then maybe John can provide more color on the sortation center work that we're doing. We didn't see pressure on the supply chain and digital line this quarter. That's due in part to the just incredible strength in our store business, with stores up 18% on a year-over-year basis. I get excited by the efficiency improvements I see us continue to make in our digital experience. John talked to some of those just a minute ago. But we can do a lot with the volumes that we've built over the last 2 years in some of those same-day services. And all of that volume translates to more efficiency opportunity as we can continue to squeeze down the per unit cost to fulfill. But I don't shy away from growth -- or from a drag on that line from a growing digital business. And the reason why is, when guests lean into digital, when we get more omnichannel guests, more guests using Drive-Up, more guests using same-day, even if that sale itself comes at a slightly lower rate, it does incredible things for the rest of our P&L because we see those guests spend more in total, about 30% more for a new Drive-Up or Shipt guest. And that's way more important than the little bit of rate drag we've seen over time from digital growth, and that's how we continue to think about it.

Yes. And on the sort centers, Kate, we remain pretty excited about this opportunity, but I would caution you that it's early days for us still. We're -- we always talk about crawl, walk, run. I'd say we're still firmly in crawl here in Minneapolis. And so we see a lot of opportunity in front of us. But the play here is a couple of things. And first of all, it's about capacity in the stores. So if we can sweep packages out of the stores more routinely than once a day, that frees up space, and that frees up space for us to pack additional products in the store. And that's an important thing for us. Then as we move downstream, the more granular sort is where we start to see potentially cost reductions as we can sort to provide to our carrier partners further downstream in their operations. And like we'd announced about a month ago, using the Deliv technology, creating local routes for local packages, we can get very efficient on delivery using Shipt and Shipt drivers. And so put all that together and our guest gets a great experience, we create more capacity. And we have the opportunity to continue to improve what we believe are already advantaged economics because of our stores-as-hub model. So more to come on all that. It's early days, but we remain pretty optimistic on all 3 of those fronts.

Our last question is from Joe Feldman with Telsey Advisory Group.

I wanted to ask you. You touched on it a little bit, I think, Christina, in the prepared remarks about back-to-school and being excited. And assuming we do have a more normal back-to-school and with this child tax credit coming, are you guys planning the back-to-school period in the second half any differently this year in terms of marketing or inventory levels maybe that you could share a little bit with us?

Yes. Joe, I'd be happy to talk about that. So we're very excited about what these life moments afford us in the back half. The opportunity for a little more "normalcy," it really creates opportunities for us to be relevant with our guests in many different ways. And so you think about back-to-school as a huge moment where the convenience of our assortment across a multi-category portfolio is already a preferred destination. But then you think about how that leads into opportunities in Halloween and Thanksgiving and the holidays, opportunities for our families to be together and celebrate, sometimes for the first time in almost 2 years. And so this is where the power of our assortment, and the gifting opportunities, the value equation that we offer and the resonance with our brand really shine. And so that means we're very excited about what the full outlook will be.

So Joe, thanks for that final question. It's a great place for us to wrap up. And hopefully, for all of you, you recognize the confidence we have in our business as we go forward, the execution that we're seeing across all of our different functions and the way we're focused on serving the guests. So I appreciate everyone joining us today. And operator, that concludes our first quarter earnings call. So thanks again for joining us.