The Target Corporation's Second Quarter Earnings Release Conference Call was held on Wednesday, August 16, 2023. On the call were John Hulbert, Vice President of Investor Relations, Brian Cornell, Chair and Chief Executive Officer, Christina Hennington, Chief Growth Officer, John Mulligan, Chief Operating Officer, and Michael Fiddelke, Chief Financial Officer. They discussed the second quarter performance, outlook, and priorities for the remainder of the year. The call was also webcasted and forward-looking statements were subject to risks and uncertainties. Non-GAAP financial measures were also discussed and reconciliations of the non-GAAP numbers to the most directly comparable GAAP numbers were included in the press release. Brian Cornell then began to discuss his thoughts on the second quarter and his priorities for the remainder of the year.

The team has shown remarkable resilience in the face of multiple headwinds, staying agile and flexible to serve their guests. They have a balanced multi-category assortment and a Stores as Hub model which allows them to quickly pivot to their guests' changing needs. They took important steps a year ago to adjust their inventory, allowing them to present fresh assortments and take advantage of share opportunities, leading to their recovery and profitability this year.

The team in Target's stores and supply chain responded quickly and efficiently to a softening of sales trends in the second quarter, allowing the company to exceed their profit expectations despite a shortfall in the top line. The quarter's operating income expanded by more than $800 million compared to a year ago, and their EPS was 50% higher than in 2019. On the top line, Q2 results were below expectations, but there was strong growth in frequency categories and in the Drive-Up service. The divergence of sales trends was driven by multiple cross currents affecting the U.S. consumer.

In the second quarter, Target faced the impact of inflation, an increase in spending on services, and the rollback of government efforts to support consumers, which put pressure on discretionary products. Additionally, team members experienced threats and aggression due to the Pride assortment, leading to the removal of certain items to ensure safety. Target is committed to staying close to their guests and their expectations, and to supporting a diverse team and heritage moments like Pride.

Target is focused on building assortments that are celebratory and joyous for pride and heritage months, while also addressing retail theft and organized retail crime. They have seen a 120% increase in theft incidents involving violence or threats of violence, so they are working with industry groups and community partners to promote safety for their store teams and guests. In order to prepare for the biggest seasons of the year, they have adjusted their guidance for the remainder of the year with a cautious planning approach. They are focused on delivering newness, quality and affordability, reinforced by a commitment to retail fundamentals.

Target is focusing on four key factors to keep consumers choosing to shop with them: being in stock, affordability, proximity, and an easy and inspiring experience. They will invest in their owned brands and national partnerships, deepen relationships with Target Circle members, and invest in physical assets such as store remodels, same-day services, and sortation centers. These investments will help them continue to grow and deliver meaningful savings.

Brian acknowledges the team's accomplishments in delivering growth despite the challenges they faced in recent quarters. He also acknowledges the team's agility in responding to the unexpected slowdown in top line sales trends, which has allowed them to provide an outstanding shopping experience while delivering better-than-expected profitability. Christina will now take over the call.

In the second quarter, comparable sales were down 5.4%, with frequency categories growing and essentials and beauty growing in the mid-single digits. Beauty saw double-digit growth and Ulta Beauty at Target more than doubled compared to the year before. Food & Beverage sales grew in the low single digits, and discretionary categories softened in the low double digits to mid-teens. Consumer confidence is beginning to recover from recent lows, but the team is maintaining a cautious outlook and focusing on affordability.

Target has seen healthy growth in its Entertainment and Home businesses, including exclusive offerings of Taylor Swift vinyl records and Chip and Joanna Gaines-exclusive colors of Stanley Tumblers and Cups. Target anticipated some headwinds in the second quarter, including a pullback in discretionary spending and a strong reaction to the Pride assortment. To continue to succeed, Target will need to stay close to its guests, execute on its retail fundamentals and invest in its assortments, services and experiences. Last year, Target Circle members asked for exclusive events, which they got in the form of Target Circle Week in July, which enrolled over 0.5 million new guests.

Target has partnered with Ulta Beauty to provide their guests with access to prestige beauty products, and have added Starbucks and return capabilities to their Drive-Up service. They have also collaborated with their vendor partners to secure exclusive items across multiple categories for the Barbie Movie and Disney's The Little Mermaid. Target is focusing on four key aspects to ensure a positive shopping experience for their guests: affordability, in-stock levels, proximity, and the overall shopping experience.

Target is offering deals and discounts for Back-to-School and Back-to-College, with school supplies starting at $0.25 and lunch boxes and graphic tees at $5. They are also launching new Good & Gather products and expanding their own brand portfolio with a facelift for Threshold and new kitchenware line.

Christina thanked the Target team for their performance and resilience in delivering a better-than-expected profitability despite the external environment. John added that the team got an assist from the leaner inventory position this year which allowed them to better manage multiple challenges. The team has also been focusing on retail fundamentals and working to enhance efficiency to increase profitability.

The supply chain is experiencing much more favorable conditions than a year ago, with shorter lead times and improved performance metrics. Flow centers have been opened in the last couple of years and have seen a 20% reduction in lead times, as well as improvements in in-stock levels and lower levels of backroom inventory. These flow centers are also being used to fulfill certain digital orders, leveraging the proximity, inventory and assets of the stores.

Stores are seeing improvements in in-stocks, with 17% lower inventory than a year ago, and have had better in-stocks on key seasonal programs. Sortation centers are delivering good results, with 70% of packages staying in the local market and delivery times being nearly 1.5 days shorter than the network average. 10 sortation centers are currently operating and 6 more are expected to open in the next few years, with 35 million packages expected to be processed in 2023. Store teams are focusing on reinforcing best practices that support retail fundamentals.

This year, Walmart has been investing in training and reporting to provide a great shopping experience. They have implemented a new rapid response process to help stores recover quickly when metrics decline. They have also rolled out Drive-Up returns and the ability to add a Starbucks order to a Drive-Up trip, using a test and iterate approach to ensure consistent execution.

Drive-Up returns have been successful and the average wait time is within three minutes. Starbucks is being rolled out at Drive-Up lanes nationwide by the end of October. Five new stores were opened in the second quarter, including the first offshore location since 2021, which is 132,000 square feet and features Starbucks, Ulta Beauty, CVS, Snack Bar, and 18 Drive-Up stalls. This new location had one of the strongest openings of the year and generated the second highest sales volume out of the most recent 175 stores opened.

John acknowledges the devastating wildfires that have impacted Maui and Hawaii, praising the efforts of the Target team to help those affected. He is proud of the team for staying focused on taking care of guests and each other, despite the challenges of the past four years. Michael then takes over the call, discussing the strength of the second quarter profit performance despite softer-than-expected sales, which gives them confidence that their strategy is sound and their business is positioned for continued progress.

In Q2, comparable sales were down 5.4%, reflecting a 4.8% decline in traffic due to a variety of factors such as lower inflation in food, beverages and essentials, reaction to the Pride assortment, and comparison over last year's clearance and promotional activity. Despite the unexpectedly soft sales, inventories remained well controlled, with balance sheet inventory 17% lower than a year ago. Discretionary inventory was down 25% at the end of Q2, partially offset by increases in frequency categories and strategic investments.

In the second quarter, Walmart saw a 5.5 percentage point increase in gross margin rate due to lower markdowns and other inventory-related costs, along with lower freight and transportation costs. SG&A expense rate was 1.7 percentage points higher than last year due to deleveraging impact of lower sales and higher costs. D&A expense rate was 20 basis points higher than last year. Walmart's Q2 operating margin rate was 4.8%, 4x higher than last year, and GAAP and adjusted EPS of $1.80 was significantly higher than last year.

This quarter saw a significant improvement in profitability due to the team's agility in the face of profit pressure from shrink. Capital deployment priorities include investing in the business, increasing the dividend, and returning excess cash through share repurchase. Capital expenditures for the year are expected to be between $4-5 billion, and the dividend was increased by 20%. No shares were repurchased in Q2 as the focus is on strengthening the balance sheet. Operating cash flow has improved significantly, generating $3.4 billion in cash through the first half of the year. Finally, the after-tax return on invested capital is a measure of the current profit performance in the context of long-term investments.

The company is expecting a mid-single-digit decline in comparable sales for the remainder of the year, which has caused them to adjust their bottom line guidance to a range of $7 to $8 for full year GAAP and adjusted EPS. For the third quarter, they are expecting a range of $1.20 to $1.60 on a wide range of comparable sales centered around a mid-single-digit decline. Despite this, they remain confident that they will benefit from their efficiency efforts and lean inventory position.

This paragraph discusses the unique circumstances of the company's quarterly EPS cadence this year, including the expected year-over-year comparisons between Q3 and Q4 due to the cadence of how shrink was recognized by quarter in the back half of last year. It also notes that 2023 is a 53-week accounting year, which will result in an extra week of sales and profits and increase operating margin leverage on the quarter.

Target has invested billions of dollars in modernizing their stores and building a unique Stores as Hub model to support digital fulfillment. They have also innovated to strengthen their Food and Beauty businesses and created industry-leading owned brands that generate more than $30 billion in annual sales. Target is confident in their long-term prospects and is poised for profitable growth in the years ahead.

Target has strengthened their portfolio of national brand partners, developed and launched their Roundel ad business, and built and launched Target Circle, which has quickly become one of the largest loyalty programs in the United States. They have also invested in their team, increasing their wages and benefits and providing pathways to career development and advancement. With these assets in place, Target is prepared to navigate any uncertainties they may face in the future. They are committed to listening to their guests and team and investing in capabilities that will best serve their guests.

Brian Cornell and Michael Fiddelke of Target discussed the early results of the back-to-school and back-to-college shopping season, noting that it has been off to a solid start and is expected to extend into September. They also indicated that they are focused on delivering a strong back half of the year and are pleased with the profit recovery seen in the second quarter. Rupesh Parikh asked if it was still possible to achieve a 6% operating margin rate by FY '24, to which Michael Fiddelke replied that they are focused on delivering a strong back half of the year.

Michael Fiddelke discussed the gross margins for the quarter, noting that the promotional environment was as expected. He noted that the five-plus point improvement in margin rate year-over-year was due to the team's cautious approach to inventory and their ability to react to sales trends with urgency.

The balance sheet shows that inventories have decreased by 17% and 25% in discretionary categories. The team is agile and the environment is rational. Consumer behavior has changed, with a rotation from goods to services, such as travel and leisure. The U.S. consumer is resilient due to the strong labor market, but is taking a cautious approach to discretionary spending in the goods sector.

Brian Cornell and Christina Hennington discussed opportunities for growth in the discretionary product assortment, particularly in the private label portfolio. They highlighted the success of the Food & Beverage and Essentials & Beauty portfolios, and discussed the importance of newness and innovation in the discretionary products. They mentioned the introduction of family tumblers and the relaunch of their own brand Threshold, with updated aesthetics and great price points.

Target is continuing to lean into different categories and taking advantage of opportunities to provide more to customers in one store. They are pleased with the improvement in traffic seen in July and have seen over 20% higher traffic compared to pre-pandemic levels. They will continue to lean into seasonal moments to drive traffic and engage customers.

Brian Cornell, CEO of Target, is asked how Target can recapture customers who are now shopping elsewhere. He responds by zooming out to look at the company's performance over several years and explains that Target will continue to provide great newness and affordability for guests, and that they will remain committed to inclusivity and bringing joy to all families that they serve. He also mentions that they will lean into big seasonal moments to meet the needs of guests.

The company has seen a significant increase in top line growth since the start of the pandemic, driven by an increase in trips and transactions. The company is continuing to invest in a great in-store experience, same-day services, and their own brand portfolio. In response to traffic declines and the goal of harvesting $2-3 billion of savings, the company is adjusting their labor and operating expenses and will provide an outlook on the back half of the year.

Brian Cornell discussed the team's flexibility and efficiency in the quarter, especially in regards to managing inventories, which has allowed them to become more efficient in their stores and distribution centers. Cornell also mentioned that this team is focused on managing costs and expenses well and that this work will continue to fuel efficiency in the coming quarters and years. Finally, Cornell was asked to comment on how the business is performing across their best, middle, and most occasional customers, and what can be gleaned from that in regards to recovery.

Brian Cornell and Christina Hennington discussed the insights they have regarding the different guests shopping their stores. Christina mentioned that Target Circle Week was their single largest ever, acquiring 500,000 plus guests, and their loyalty program already has 100 million members. Simeon Gutman asked if there was anything that could stand in the way of margin recovery if comps and signature categories recovered, to which Michael said they would answer back in the second half of the year.

Michael Fiddelke discussed several factors that could lead to positive comp growth and higher margins, including the pressure from shortage. Brian Cornell thanked the team for their efforts throughout the quarter, particularly the asset protection teams for their work in preventing organized retail crime. The call concluded with the team looking forward to talking to everyone later in the year.

This summary was generated with AI and may contain some inaccuracies.