Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation Second Quarter Earnings Release Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will invite you to participate in a question-and-answer session. At the close of prepared remarks, we will open the queue for the Q&A session. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, August 21, 2024. 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 2024 earnings conference call. On the line with me today are Brian Cornell, Chair and Chief Executive Officer; Rick Gomez, Chief Commercial Officer; and Michael Fiddelke, Chief Operating Officer and Chief Financial Officer. In a few moments, Brian, Rick, and Michael will provide their insights on our second quarter performance along with our outlook and priorities for the third quarter and remainder of the year. 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 will be 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, including those described in this morning's earnings press release and 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 second quarter and his priorities for the third quarter and beyond. Brian?

Thanks, John, and good morning, everyone. I'd like to start my remarks today by welcoming Rick Gomez to this call, following his recent move into the role of Chief Commercial Officer. This change was one of several we announced in June, including Christina Hennington's move into the role of Chief Strategy and Growth Officer, and Lisa Roath's transition into the role of Chief Merchandising Officer of Food, Essentials, and Beauty. Lisa has done a fantastic job leading our marketing team, and I've asked her to remain in that role until early 2025. This will provide adequate time for us to complete an external search for her successor, before Lisa brings her impressive commercial leadership experience back into the merchandising team. These changes follow our January announcement that Michael would move into the pivotal role of our Chief Operating Officer. Michael took on the CFO role just before the pandemic, and he's done an outstanding job leading the company through a period of unprecedented growth and volatility. The search for Michael's replacement as CFO is ongoing, and I share Michael's excitement for the time when he's able to fully focus on his new role leading all of our operational functions. And, of course, we were pleased this month to welcome Amy Tu into the role of Chief Legal and Compliance Officer. During her career, Amy has served in key leadership roles for several Fortune 100 companies, and I'm excited to welcome her to the Target team. Amy is taking the place of Don Liu on our team as he prepares for his retirement. I want to pause and thank Don for his many years of thoughtful and conscientious service to Target and our stakeholders. He is an outstanding leader who has served as a trusted partner to me, to our Board,…

Thanks, Brian, and good morning, everyone. I'm excited to be joining this call today, and I'm looking forward to meeting many of you over time. Before we unpack our second quarter results, I'd like to spend some time sharing my priorities as I step into this role, many of which should sound very familiar. First, I want to reinforce the importance of the areas that Christina was focused on. Affordability, newness, seasonal relevance, and ease. These are mission critical. Under Christina's leadership over the years, we've built an incredible foundation which we can build upon. I've also worked with the team on three additional principles to govern how we work. First, we'll focus on simplifying processes end-to-end, including how our teams work together as well as with our external partners, with the goal of driving efficiencies and streamlining how work gets done. We should also be relentless in our pursuit of creativity, bringing innovative ideas to market that are original, inspiring, and unmistakably Target. And finally, we shouldn't be just guest-led, we should be consumer obsessed. We'll do this by consistently listening to what consumers want and need and then working hard to deliver for them. Next, I'll turn to our view of the consumer, which as you heard from Brian, has remained largely unchanged for some time. American families continue to deal with a lot. These pressures are clearly weighing on them, and they're looking for a refuge from the everyday stress that they're feeling. And yet while the economic data remains mixed, we see a consumer that is still willing and able to spend. Yes, they're still being choiceful. Yes, they're budget conscious. And yes, they're hunting for deals and everyday value. But they're also willing to shop when they find that right combination of fashion and newness…

Thanks, Rick. I'd like to join Brian in welcoming you to your first earnings call. I'm excited about all of the long-term growth opportunities we have in front of us as we work together to deliver more for our guests, for our team and for our shareholders. As Brian mentioned, I'm temporarily wearing two hats right now as I continue in the CFO role while preparing to fully move in the COO role. And while I'm looking forward to the day when I'm only wearing the COO hat, I'm privileged to be surrounded by exceptionally talented leaders and teams that are operating with a guest-first long-term focus that's fueling our results. Every day, I see their commitment to caring, growing and winning together. Whether I walking a store, a distribution center or the halls in our headquarters, there is no doubt in my mind that our team members are the number one reason that Target is such a special place to work. As we've been highlighting for some time, the operations team is focused on reinforcing retail fundamentals following an extended period of unprecedented volatility that began more than four years ago. While this effort encompasses many processes and metrics, nothing is more important than staying in stock and being reliable for our guests. And while our in-stock measures have been improving rapidly for some time now, we're going to continue our work to improve them even more. In the second quarter, total out of stocks were more than 500 basis points lower than a year ago. Also important, out of stocks on our top items in Q2, the ones with the highest unit velocity, were more than 50% lower than total out of stocks and also better than a year ago. Notably, these out-of-stock measures would have been even…

Thanks, Michael. Before we turn to your questions, I want to spend a minute on a concept we've touched on before, which is the way we uniquely leverage the power of hand in our business. The recent Target is so unique, and why we've developed such a special bond with consumers is because we offer something different than everyone else in the marketplace. We offer great prices, convenience, compelling promotions and a great shopping experience. Our nearly 2,000 stores are accessible to the vast majority of the US population, and we have a comprehensive suite of fast and convenient digital fulfillment options. For a destination in discretionary categories like Apparel, Home and Hardlines; in frequency categories, like Essentials and Food & Beverage 'and in Beauty, which perfectly straddles both, we offer a broad range of items, serve as a convenient one-stop shop and we're well known for curating our merchandise assortment. We are a style leader. We're known for celebrating seasonal moments and we offer reliability on everyday wants and needs. When we're at our best, we achieve a proper balance between all of those aspects or go-to-market strategy, and the second quarter was a textbook example of Target being Target. I'm incredibly proud of our team for delivering better-than-expected results in an environment where consumers are facing multiple challenges. Knowing there's more work to be done, our team is on their front foot and ready to deliver more for our guests in the third quarter and beyond. Our team's positive energy is contagious, and I look forward to working with them as they continue to move Target forward in the quarters and years ahead. So with that, we'll move to Q&A. Rick, Michael and I will be happy to take your questions.

[Operator Instructions] Our first question comes from Kate McShane with Goldman Sachs. You may go ahead.

Good morning. Thanks for taking our questions. You mentioned that you haven't seen a notable change in the consumer versus what you've seen year-to-date. Can you help us understand or reconcile your ability to get to the high end of guidance range for quarter two, maintain the guidance range for Q3, but also flagged that you are likely to get to the lower end for the same-store sales guidance range for the year?

Thanks for the question, Kate. I think the headline is at the start of your question, we see a consumer that's largely consistent with how we would have described the consumer over the last couple of quarters. Consumer that's been resilient overall in their spending and flat in spite of significant inflation over the last couple of years, a consumer that's choiceful. And so our combination of getting newness and value right in the second quarter led to the performance that was at the top end of our expectations. As we look at the balance of the year, we've got more of the year in front of us than is behind us, and we think it's prudent to take a measured review against the kind of consumer behaviors we'll be watching over the balance of the year. But importantly, that guidance is still centered on growth. We expect to continue to grow in Q3. We expect to have a growth story for the year. And you can see us playing offense appropriately against that goal, but being measured in our outlook. We think that's the right way to position the business.

Kate, just to build on Michael's comments. I think in this environment, where there is so much consumer uncertainty, we're taking the appropriate approach to guidance in the third quarter. But as you heard from Rick and from Michael, we're continuing to play to win, and we feel very good about how we're prepared for the big seasonal moments. We're in back-to-school right now and back to college. We're excited about Halloween. And Rick and his team are planning for some unique moments during the holiday season. So I don't want anyone to be confused with what we think is the appropriate outlook for the third quarter, but the fact that we're going to continue to play offense. We're going to look to drive traffic into our stores and visit to our site, and make sure we deliver great value along with newness for our guests throughout the season.

Thank you.

Thank you. Our next question is from Rupesh Parikh with Oppenheimer. You may go ahead.

Good morning. Thanks for taking my question. Also, congrats on a nice quarter. So, I just wanted to go back to the operating margin performance during the quarter. We saw a very strong delivery during the quarter. How do you feel about the sustainability of the improvement and then over time getting back to that 6% plus margins on an annual basis?

Yeah, thanks for the question, Rupesh. As we laid out at the start of the year, this year was going to be about progress to that better margin performance over time, and two quarters in, I just can't thank the team enough for their work to put us solidly on the path of the improvement that we laid out for the year. If you unpacked the quarter, I hit on some of this in my remarks, but it always starts with the top line. So, to grow the top line at a 2% comp, to see a category like apparel, so we like the margins in apparel, to see that category return to growth helped us from a mix perspective. Great work by the team to continue to find efficiency within the business. And we expected a more promotional environment this year. We've certainly seen that so far, but you can see the strength on the margin line due to the team's really hard work to continue to squeeze efficiencies out of the business in ways big and small. And we're pleased with the progress we're making on shrink. Now, there's some noise quarter to quarter about how that will come through. So I tried to unpack some of those details in my prepared remarks. But the net punchline there is we're ahead of where we expected to be in terms of progress on shrink too. So all of that's adding up to an earnings result we're certainly pleased with. And our work going forward will be to continue that momentum in Q3 and Q4.

Rupesh, I’d just amplify a couple of the comments that you've heard us make over the last few quarters and really recognize the focus the team's placed on retail fundamentals. Michael talked about the progress in reliability, improving our in-stocks. Rick's talked about the improvement in value and the commitments we've made to making sure we provide value to our guests, no matter where they're shopping and how they're shopping. And I think that focus on controlling the things we can control is really helping us improve our operating margin performance. But the team has been very focused on retail fundamentals, execution each and every day both from a physical standpoint and a digital standpoint. And I think you're seeing the benefits of that pay off.

Great. Thank you. I'll pass it along.

Thank you. Our next question is from Chris Horvers with JPMorgan. You may go ahead.

Thanks. Good morning. My first question is, can you talk more specifically about what drove the strength in the merchandise margin strategies in the second quarter? And what are you embedding in the back-half in terms of sustainability?

Yeah, thanks for the question, Chris. There's a lot that goes into that margin line on any quarter. And so the headlines are some we've touched on a little bit already. We've definitely seen a more promotional environment. But against that backdrop, the teams have worked hard to find efficiencies within the business. And that can show up in ways big and small. To give a tangible example, one of the things that we've continued to see progress with is -- the most expensive thing we do in fulfilling product is shipping a brown box, and we've seen significant improvement in the cost per unit of that activity, as teams have worked to better align inventory with where we see demand. So we have to split shipments frequently. And the core productivity within those processes, big improvements in our stores team, delivering that product more efficiently as we pick and pack in the stores, and so that work adds up. And the teams have been at it for multiple quarters now, and we're seeing it pay off.

Understood. And then on the top line, I was just curious how you forecast the business. Obviously, the consumer has been a lot more volatile, a lot more event-driven. There seems like there was some pause in the back half July. As you plan the business, do you look at seasonal revenues building off the second quarter? Are you looking at stacks? Are you looking at trends versus 2019? Just some insight there in terms of how you forecast the business.

Chris, I think you've covered many of the things we look at on an ongoing basis. And I think we factored all those different variables into our outlook for the period and the quarter.

Thanks very much.

Thanks, Chris.

Thank you. Our next question is from Simeon Gutman with Morgan Stanley. You may go ahead.

Hi. Good morning, everyone. I wanted to ask on a near-term question first. Sounds like comps June and July were relatively steady. And I don't know if -- you've talked about product for back-to-school. Curious about how the consumer is behaving. And then connected to it, any expectation when discretionary comps may inflect a positive?

Simeon, as we sit here today, obviously, we're in the heart of back-to-school season, kind of the early chapters of back to college. And as Rick talked about, excited about the upcoming Halloween season. I think as we sit here today, we feel well prepared for those big seasonal moments, and we'll continue to make sure we lean in with a great physical and digital experience.

Maybe one follow-up. Can I ask about price investments, the 5,000 items that have been lowered if, one, I assume you're pleased with some of the elasticity. Does it make you think about price positioning broadly? Are there opportunities to enhance the price position in other places? Thanks.

I think we sit here today, we feel really good about the way the consumers reacted to the price investments we've made on those 5,000 frequently purchased items, but it really goes beyond those investments. If you're a Target Circle member, you're getting personalized offers every time you shop. If you're using a Target Circle card, you have the opportunity for that 5% discount. If you're taking advantage of the amazing value we provide through our own brands, that's just one more way to find value when you're shopping with Target. So, it's really a bundle of all those things that we do each and every day to strengthen the relationship we have with the guests and provide them with the value they're looking for in this economic environment.

Thank you.

Thank you.

Thank you. Our next question comes from Robby Ohmes with Bank of America. You may go ahead.

Hey, good morning and a outstanding quarter. I was hoping, maybe from Brian or others, you could talk about a couple things. Target Circle penetration. It hasn't been going up. Is that expected to change? And also same day delivery is still, I guess, Target Circle 360 as you call it, is still not growing as fast as Drive Up. Is that expected to change? And would changing these things potentially be a sales driver? And then is there any margin implication from that on the offset?

Robby, you've got three or four questions there. I'm going to let Michael start, and I'll pick it up from there.

Yeah. Importantly, Robby, I'll kind of take your second point first. We're really pleased with our Circle 360 same-day delivery business, both it and Drive Up grew in the low teens. And so we've seen some acceleration in that business on the heels of our relaunch of Circle, and so we're encouraged by that. And importantly, for both of those services, we've talked about this before, but I think it warrants a reemphasis. The thing we see when people engage with Drive Up and with Circle 360 same-day delivery is they spend meaningfully more at Target in total, and their in-store shopping actually increases after they become users of those services. And so, we continue to watch that relationship closely and growth of those services means growth in our share of wallet with the consumers that use those services. Speaking to Circle more specifically, and I believe your question was focused on Circle card penetration, we see that opportunity over time with the relaunch of Circle to bring some investment back to growing our card business. One of the things that, that relaunch of Circle provides is it brings the core base Circle program, where guests can find incredible value through the personalized offers that they receive every day; with the Circle card program, where you can save an extra 5% if you're a Circle card member; with Circle 360 program, if you want the best of Target brought to your doorstep. And the integration of those programs, we think, provides a good jumping off point over time to continue to reinvigorate the Circle card business, but that's going to be a journey of quarters and years.

Robby, just to clarify a couple of points. From a base Circle program standpoint, we did note that while we start with a base of over 100 million members, during the July Circle Week, we saw 2 million new members join the brand. You talked about Drive Up and Target Circle 360. And Drive Up has been a very sticky service for us and just continues to grow. And during the second quarter, we saw a Drive Up grow over 14%, and a nice acceleration in Target Circle 360 same-day delivery of almost 14%. So, we see tremendous opportunity to continue to expand our Target Circle 360 program. But I'd really highlight Drive Up has been a stellar performance for us for many years now and just continues to grow. It was a $2 billion business for us in the second quarter. And I think, Michael, year-to-date is almost $4 billion. So it's been a really important service that we know our guest appreciates. But to Michael's point, we know they're a Drive Up user, they're going to spend time in a Target store, and we really like that combination.

Sounds great. Thanks, Brian.

Thank you. Our next question is from Ed Kelly with Wells Fargo. You may go ahead.

Yeah, hi. Good morning. I was hoping that you could provide a little bit more detail on discretionary comps. Still negative here. What do you think is happening with market share at this point? And then maybe can you talk a bit about when you think that category in total, may inflect positively?

Ed, I'm going to let Rick talk about some of the trends we're seeing in discretionary categories. He talked about the strength in Apparel and some of those subsets within Apparel, but we're also seeing green shoots in other areas. And we certainly think that over time in categories like Home, led by Kitchen, as these purchase cycles become ones that need to be replaced, you're going to see some strength in those categories. But Rick, why don't you walk through some of the trends you're seeing in discretionary categories.

Sure. I'd be happy to give a little color commentary to the trends and what's driving those trends. And what we're seeing in discretionary is when we offer on-trend stylish product at a great price, the consumer responds. And we're seeing that in Apparel. Apparel delivered a 3% comp. So real bright spots was All in Motion performance brand, where the team did a fantastic job on fabrication, colors, fit. $25 leggings with a fan favorite and really demonstrated the power of fashion combined with affordability. Beyond that, Beauty is also a standout, where we see news really resonating with the guests. I mentioned in the comments, but it's really exciting to see the success of Blake Lively's new hair care line, Blake Brown. We just launched it a few weeks ago, and it is already the most successful hair care launch that we have ever had a Target. And I think this is another great example of the consumer is willing to buy when they find that right combination of on-trend, stylish product at an affordable price. And even in other businesses, I use Home as an example, consumers want to freshen up their home. They want to freshen up their look, but they need to do it on a budget. So where we see growth is things like candles, decorative accessories, throw pillows. We're seeing growth there because we're offering an inexpensive way to freshen up the look of your home. So again, it goes back to delivering stylish on-trend product at a great price.

And I'll give you one of my favorite examples from earlier this year, and it's a collaboration we had with our partners at Authentic Brands, leveraging the Prince brand. And while that brand has been known for tenants throughout the years, we brought the Prince category and the Prince brand into pickleball, with great new apparel, accessories and rackets. And we've created a destination and target for all things pickleball. We know families across the country are enjoying that sport. It fits very nicely with our all-family position. And it's just one more example of when Target is Target. When we bring great design that's on trend at a great value, we see the guests reacting really positively. So you'll see Rick and his team continue to make sure that we're bringing that combination of design and on trend, great value, great newness into those categories to continue to spark greater demand. Operator, we have time for one final question today.

Thank you. Our final question comes from Corey Tarlowe with Jefferies. You may go ahead.

Good morning, and thank you so much for taking my questions. I was wondering if you talk a little bit about your expectations for longer-term mix of Food & Beverage over time. That's a category where you've continued to grow over the last several years, specifically since the pandemic, especially as you've widened the assortment and the number of items that you've carried in that category. So, we’d be really curious to hear your thoughts around the long-term trajectory for that business over time.

Corey, I'm happy to start, and I'm going to turn it over to Rick who, obviously, was leading our Food & Beverage business. We think we have significant opportunity for growth in that space, led by the unique combination, again, of great national brand partnerships and some really strong owned brands that are connected with the consumer. So we think we're still in the early days of building out our Food business. But, Rick, you've got so much experience in the space, why don't you share some of your thoughts?

I'd be happy to offer a little colored commentary on the Food & Beverage business. And as Brian said, we believe there is continued runway for the business to deliver growth, driven by a few things. The first is continued emphasis on affordability. As we talked about, the 5,000 price reductions across everyday items was incredibly well received. We'll continue to lean into value on our Food & Beverage business, not just through everyday pricing, but also through personalized promotions on Circle, as well as with our own brand portfolio, which offers incredible value. The second thing that we’ll continue to lean in to drive growth for Food & Beverage will be newness. Just going into the fall season, right now, we have a ton of new products coming, over 150 new and owned brand products, over 500 new national brand products. Leveraging those flavors that everybody loves for the fall. I'm talking about Pumpkin Spice, Apple, Pecan Pie, that will continue to fuel growth. And then the last opportunity to continue to drive growth in our Food & Beverage business is around ease and convenience. Consumers have a lot on their plate, and they're looking for simple solutions, and we're very excited about the continued growth that we're seeing on both Drive Up as well as same-day delivery, which is achieving double-digit growth in Q2, and we continue to see runway on that going forward.

Operator, that concludes our second quarter conference call. I appreciate everyone joining us, and we look forward to talking to you again soon.