Q2 2020 Target Corp Earnings Call
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Thank you all for standing by for the target Conference call. Please continue to hold we will begin today's call momentarily again. Please continue to hold thank you.
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Haired remarks, we will open the Q4 the Q in a session at that time. If you have a question you will need to press star one on your telephone.
As a reminder, this conference is being recorded Wednesday August 19th 2020 I.
I would now like to turn the conference over to Mr., John Holbert, 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.
On the line with me today, or Brian Cornell, Chairman and Chief Executive Officer, John Mulligan, Chief operating Officer, and Michael Foot Alky, 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 mornings press release, which is posted on our Investor Relations website.
With that ill 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.
What's most extraordinary of all the environment in which we generated those results.
The incredible resilience of our team.
The way they've risen first of the pandemic.
Then the social comet touched off in May.
Peter in Minneapolis.
Is unlike anything I've seen or unlikely to see again in my career.
And I say and all humility that has been a huge privilege to work alongside this team in this moment.
The results we reported this morning are truly unprecedented.
On the topline, we delivered second quarter capital 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 face in the first quarter.
These results are a testament to our team and their passion for our guests and the increasing trust our gas replacing 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 offered to our guests while articulating a unified purpose to help all families discover the joy of everyday life.
And our last earnings call. We described how our business in operations adapted quickly and seamlessly to rapid changes in consumer behavior.
As our gas reacted to the implications of 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 growth and our store sales and once again saw growth in categories like apparel.
This improved since a balance in both channel and category mix continued through the second quarter.
And we Didnt see the dramatic swings we experienced in the first quarter.
In terms of channel mix, we saw very healthy growth across the board with store originally comparable sales growing 10.9%.
And digital comp sales up nearly 200%.
It's worth pausing to acknowledge that it just under 11%.
This store only comp snacks up as one of the best in our history.
And yet it happened at a time when American consumers are adopting digital shopping like never before.
In addition, as I've mentioned in previous calls channel numbers don't tell the full story because they don't measure the benefit of our work to position or stores is hubs at the center of our digital fulfillment.
When you look beneath the surface of the reported numbers you find that are stores actually drove more than 90% of our second quarter growth given that they enabled more than three quarters of our digital sales and an even higher percentage of our digital growth.
Store base fulfillment is uniquely suited our business model because the way it fits within our overall strategy.
In particular, it aligns with our merchandising approach, which is based on Curations, both in our stores and online Assortments as a result, the majority of our digital demand is driven by items that are already available in our stores, which positions us to efficiently rely on those locations to fulfill the demand.
Among our store enable digital fulfillment options, we continue to seize most rapid growth in our seem to offerings in store pickup drive up and shipped.
These services offer speed reliability convenience and value to our guests.
Their digital capabilities enhanced by human interaction.
Even though their contact list.
This explains why they generate some of the highest loads of satisfaction of anything we provide.
Together, our same day services saw more than 270 present comp growth in the second quarter outpacing overall digital growth.
Among these services, we saw the fastest growth and drive up which grew an astonishing 734%.
We also saw incredible growth and target sales of filled by shipped which were up more than 350%.
However, even though we'd have offered pickup in all of our locations for more than five years.
In store pickup sales increased more than 60% in the quarter.
Across all five of our core merchandising categories.
We delivered very strong share gains in the quarter driven by the acceleration in our discretionary businesses combined with continued strength in our frequency categories.
We mentioned in the first quarter that we'd already gained a year's worth of market share in the quarter alone.
Rather than slowing down our share gains accelerated in the second quarter.
And we gained double the dollars compared with the first quarter.
Bringing our year to date share gains to more than $5 billion.
Among our discretionary categories, we saw the most dramatic comp acceleration in apparel, which moved from a 20% decline in the first quarter to double digit growth in the second quarter.
Hardlines generally the strongest comp overall at more than 40%.
This was the result of an even stronger increase in electronics of more than 70%.
As gas continues to focus on office equipment.
Home electronics and gaming.
Not surprisingly.
Our guests heightened focus on staying at home was also evident in our home category.
We saw more than 30% growth.
With particular strength in the core domestics and kitchenware.
Beauty also saw healthy acceleration doubling its first quarter growth rate to more than 20% in the second quarter.
Our less discretionary food and beverage and essential categories. Each saw second quarter comp sales growth of about 20%.
For both categories. This was slightly slower than we saw in the first quarter, which was marked by dramatic stock of shopping as a pandemic converged.
At a time when every retailer spacing increased uncertainty and unforeseen challenges.
We have chosen to continue investing in our business and particularly in our team.
Following hundreds of millions of dollars and team investments in the first quarter in June we announced that beginning July Fiveth, we would criminally raise our starting wage for us team members to $15 per hour.
Additionally, we announced a onetime bonus of $200 to our frontline store and distribution center hourly workers in recognition of their efforts throughout this extraordinary year.
We also announced free access to virtual Doctor visits for all team members through the end of the year, regardless of whether they currently subscribe to a target healthcare plan.
And we announced additional extensions of our 30 day paid leave for vulnerable team members and free backup care for family members.
As I've mentioned before the return on these team investments maybe hard to quantify in a spreadsheet, but I am confident that they have been among the most important investments we've made over the last few years.
In late May into June our team headed navigate the challenges presented by the killing of George Floyd.
And the civil unrest that its spark nationwide.
While we all experienced the heartbreak caused by the murder itself. Our initial focus was on the safety of our team.
As a result in areas affected by unrest, we closed locations or reduced operating hours affecting hundreds of our stores across the country.
Most of these stores were able to safely resumed normal operations in a matter of a few days, but a handful of locations sustain more significant damage.
Although two of those stores have already reopened and we're hoping to have those locations reopened by the end of the year.
Through it all I am happy and grateful to say that none of our team experienced physical harm through the unrest.
But beyond fiscal safety, our team is potentially demanding equity and justice for our black colleagues and guests.
We are United and at passion and committed to supporting our team while playing an active role in addressing the persistent racial injustices that of spark protests around the world.
We and our teams volunteer efforts across the country, we have dedicated $10 million.
Half of corporate giving in half more foundation towards twin city rapid response needs.
Local rebuilding efforts and national social Justice initiatives.
We've also formed a committee called reach consisting of senior leaders, who have come together based on their experience and expertise.
Together they represent abroad enterprise view and their work is focused on advancing racial equity for our black team members and guests across all areas of targets business.
To deliver the most impact across our business reach is aligned around four key areas of focus team guests communities and citic engagement and public policy.
With their help.
We are putting our influence to work in our hometown and in the country bring together our team our neighbors.
Other businesses and community partners to determine actions and resources that will move us towards a more inclusive.
Equitable and just society.
Now, let's turn to our plans with third quarter and beyond.
Our research tells us that gets still want to celebrate seasons and holidays, even as they acknowledge that things will be different in this new environment.
To help our guests adapt to these changes were building flexibility into our merchandising and operations to allow our guest to celebrate the season in new ways.
Knowing that many parents across the country are still facing uncertainty about whether their children will be attending school in person were virtually.
We will be featuring our back to school assortment for an extended period this year, allowing parents to delay shopping insulated more certainty on their school district plants.
In back to college markets will be moving in store shopping events outside indoor parking lots and highlighting contract was options like drive up.
Across the chain will be promoting the wallet feature within the target App as a fast contact was alternative to paying with the physical card.
And for Halloween.
We will continue to feature constant in the core to celebrate the season.
It will be adjusting our candy merchandising in anticipation of a reduction in trick or treating this year.
In addition, we'll be giving away surprised blue bags to our dry gas in October featuring surprises along with tips and suggestions for celebrating the season.
Also this fall will roll out at the third and final phase are good and gather assortment, adding more than 600 items to bring the total number of items to nearly 2000.
We can gather brand is clearly resonating with our guests and delivering on our food and beverage vision.
To enhance the target experienced by making it easy for families to discover the joy food.
We launched this new flagship brand less than a year ago and is already generated more than $1 billion in sales.
With the momentum from this new brand our own brand food and beverage business has been growing more than 30%. So far this year significantly outpacing the market and growing market share.
The on good and gather we continue to benefit from an unmatched portfolio of owned and exclusive brands that spans our entire assortment.
Together these brands, who sales have outgrown national brands, so far this year.
Offer gets quality and style and an unmatched value, while enhancing targets differentiation and delivering attractive gross margin rates.
In June we launched Cataluna, a collection of more than 700 quality bedding and bath items, featuring elevated natural and sustainable materials like linen temp silk cashmere all at an amazing value.
And of course, it was only in January that we launched our new Activewear brand all in motion and the timing couldn't have been better.
All in motion was designed with a commitment to quality sustainability and inclusivity and incredible target prices.
As guests across the country have moved to working from home they've embraced the quality comfort and value provided by these new brand driving sales well beyond our original expectations.
Also this quarter target circle will be celebrating its one year anniversary of its national rollout.
At more than 75 million members circle has exceeded our expectations in its first year.
To celebrate will be highlighting circle in our marketing with a focus on driving acquisition and engagement in advance of the fourth quarter shopping season.
And finally as we look ahead to the fourth quarter, we're focusing first on guest and team member safety developing plans reduced crowds and spread out demand throughout the season.
Specifically, we will be spreading our best price holiday offers over a longer timeframe beginning in October so guest can shop safely and conveniently without worrying about missing out on deals that usually come only late in the season.
We've also announced that will be closing stores and Thanksgiving, sending a clear signal to guests that they won't need to stay in line and created a stores to get a great deal.
In addition, we'll be making thousands of additional items available via same day services. This holiday season, including more gifts essentially and everything in between.
In addition, as John will describe in more detail will offer fresh and frozen grocery items buyout order pickup and drive up at more than 1500 target stores. This fall.
As I said in the beginning I'm incredibly proud of our team and the performance they delivered on behalf of our guests.
As we focus on transforming our business over the last few years, we began with a focus on our guests and how we get better serve them by leveraging our strengths.
We emerged from that effort with the durable business model differentiated from our competitors and designed to perform in a variety of environments.
When we contemplated the range of environs, we might face I don't think anyone could claim that they knew what we'd be facing today.
Getting in the face of unprecedented changes in the environment. Our business is doing what is designed to do.
It's delivering convenience reliability safety and value.
Driving increased engagement and trust them on our guests.
Supporting and rewarding our team the best team in retail.
It's playing a positive role in the communities, where we live and work.
It's generating strong sustainable business results and the support of our shareholders.
And is accomplishing these results by relying on our stores when many others are walking away from their physical locations.
As we look ahead, we're prepared to navigate through a host of potential challenges, including the ongoing threat from the crude virus and economic headwinds, resulting from high levels unemployment.
Yes, as we said in our last call.
We have never been more confident in our differentiated strategy and our long term potential.
Throughout this crisis, we have deepened our relationship with American consumers and introduce millions of them to our digital fulfillment services.
As a result.
We've seen unprecedented growth in market share.
A trend that we expect to continue.
With a strong business and deep financial strength, we feel well prepared to weather any near term economic headwinds and continue to serve and delight our guests.
Our team is ready and eager to seize the opportunity in front of us.
Now I'll turn the call over to John will provide an update on operations and our plans going forward John.
Thanks, Brian if the overall theme of our first quarter was unexpected change in rapid adjustment in the second quarter. It was an increasing sense of normalcy.
We'll quickly say things today are far from the old normal in fact hardly anything feels the same today as it did six 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 dual routines all centered around safety and we've returned to many to routines, we pause during the first quarter.
Now that our new cleaning routines are fully established they are operating successfully interim state condition.
We continually here from our guests that safety is even more important than ever and they appreciate the cleanliness and safety or visible priorities for our team across every aspect of what we do.
In late April we grant accepting in store returns again following a five week pause soon after in May we began a phased reopening of the Starbucks locations in our stores.
As the quarter per guest many other activities resumed including a steady reintroduction of the weekly added select markets and our assumption of a more normal cadence for handily clearance promotions and merchandise transitions.
In our Super target locations, we initiated a contact was 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 three new store locations in March we took a pause in our new store projects as uncertainty from the pandemic emerged since then we've been ramping up our new store construction activity and we're now on track to open up to 27 more stores this year.
Nine of these new locations are slated to open this month with another 16 to 18 expected in October.
We continue to be pleased with the performance of our new small format stores and our pipeline is expected to support 35 to 40 of these new locations annually in future years.
Perhaps most vivid example of our progress is the fact that we resumed our plans to add fresh refrigerated and frozen items to our pickup and drive up services.
Going into the year, we had planned to rollout this capability to half or more of our stores. This year. However in March given the severe swings we were seeing in store traffic and the onslaught of new routines. We are asking our store teams to perform we passed on this rollout to provide our team more time to focus on safely serving our guests.
By the time of our first quarter call in May we had already resumed the rollout and since then we have made more progress than we had originally planned for the full year. In fact, we are already offering an extended food assortment for drive up and pick up in more than 1500 of our stores far exceeding our original goal.
Hi, This holiday season, we expect to have this capability in nearly 1600 stores. In addition, we've added adult beverages to our pickup and drive Absorbents and more than 300 stores in selected markets and will continue the rollout of both perishable items and adult beverages two additional locations next year.
Our teams and systems are successfully handling the additional complexity that comes with these expanded assortments and our guests are happy as well.
They are telling us they appreciate the ability to receive these items without shopping our sales floor, providing them a contact with option when that is their preference.
Following the introduction of an expanded assortment engine markets, we see a steady increasing usage week after week as more gas learn about it.
I guess tell us they're eager for us to make even more items available there will be exploring further assortment enhancements over the remainder of the year and beyond.
Yeah, and assortment, we continue to implement process enhancements to our digital fulfillment services driving both efficiency and speed for our guests.
New this quarter, we introduced improvements to the target app, allowing guests to toggle their fulfillment choice between pickup in drive up orders up until the point the guests arise at the store.
This option provides additional flexibility for the guest to update their fulfillment option as their plans change.
Given the explosion in demand we've seen this year, we've been adding additional drive up spots and locations across the country. This additional capacity was contemplated in our original plan, but with recent growth. We are adding these extra spots earlier than originally anticipated.
The process is straightforward as we add 2% 12 additional spots depending on store specific needs repaying the parking styles and using additional temporary signing to highlight the change.
For our ship from store capability, we continue to roll out process improvements for processing orders and packing boxes, increasing efficiency and reducing waste.
We've also enhance prioritization algorithms to ensure that the orders with the most time sensitive items, including Colgate sensitive categories are prioritized earliest for packing and shipping.
While digital orders inherently involve more handling and more cost compared with conventional store transactions, we've been realizing meaningful improvements in average fulfillment cost per unit, reducing the impact of digital growth on our operating margin rate.
These efficiencies are driven by multiple factors first as we continue to roll out new tools and processes, we've been seeing increased efficiency across each of our digital fulfillment options.
Second we are benefiting from favorable mix within digital fulfillment as our same day options continue to grow faster than overall digital growth average unit costs go down because these options are much less costly compared with shipping to home.
Third we are seeing meaningful leverage on digital fulfillment given the unusually high growth rates, we've seen this year.
Some of this leverages more subtle than conventional fixed cost leverage for example, as the stores drive up order volume increases more and more of the time our team is able to pick multiple orders together gain efficiency in the pick process. In addition, we realized a similar benefit in the parking lot where our teams are increasingly delivering multiple orders at a time, reducing the cost per order of that delivery.
For up to the parking lot.
And finally, as we've seen meaningful trip consolidation. This year, we realized a benefit as fixed or costs are spread across more items.
Aggregating all of these benefits our second quarter average unit costs for digital fulfillment was approximately 30% lower than a year ago. This provided a significant offset to the cost pressure, we would otherwise be seeing from our unusually high rate of digital sales growth.
But while we will always focus on driving efficiency and reducing costs, we embrace digital transactions because they drive guest engagement, which ultimately benefits every part of our business.
Our most recent data indicates that a multichannel guest spend four times as much as a store only guests and 10 times as much as a digital new guests.
Our research also continues to validate that after a guest tries drive up for the first time, we see nearly 30% increase in their overall spending including an increase in their conventional store shopping.
It's particularly notable that this increase historic shopping is occurring despite the unusual environment in which consumers are minimizing time spent in public places.
However, the data certainly provide some additional context for the unprecedented growth of more than 10% and conventional store sales we reported this quarter.
As we gain new digital gas and unprecedented numbers. We're also seeing higher engagement from these guest than we've seen in the past specifically among our new digital guests in the first quarter, we've seen nearly double the rate of repeat purchases within seven days compared with a year ago and the rate of repeat purchases in the intervening 90 days has been fully double what we measured a year ago given.
That we've added 10 million new digital guests in the first half of the year, we feel good about our prospects for building on their elevated level of engagement overtime.
Now I want to spend a minute talking about our current inventory levels and in stock performance.
While we made a lot of progress in the second quarter, we are still facing challenges across multiple parts of our assortment driven by a couple of distinct factors.
First and many of our frequency categories, our vendors continue to face capacity constraints as they work to accommodate unexpectedly high demand across the U.S.
While these vendors continue to ramp up production and we've been successful in negotiating higher allocations for many of them demand in our stores continues to outpace supply as a result on shelf availability and many of these categories continues to look sparse even as our allocation quantities are increasing.
We will continue to work with our vendor partners to make more progress in the back half of the year.
Second regarding import categories, we successfully increased receipts throughout the second quarter, but as Brian outlined earlier, we also have seen a meaningful acceleration the pace of sales in these categories.
Based on our current plans, we expect that our import inventory will reach last years levels by the end of the third quarter and should expand well beyond last years levels in the fourth quarter.
And finally I want to address the nagging questions. We continue to here regarding our capacity and ability to further scale our store base fulfillment model.
I've addressed this question multiple times in prior earnings calls and I would think that our recent results were dispel these worries but.
But we clearly havent commenced everyone. Yet so we'll continue to provide facts to support our modeling here's some fun facts from the first half of this year.
Of our six plus billion dollars and comparable sales growth. So far this year conventional store sales have grown nearly $2 billion, while digital sales of expanded more than $4 billion. Our year to date digital sales of nearly $7 billion have already eclipsed our full year digital sales in 2019, even though the peak holiday shopping season is still ahead of us.
Of this year's digital growth sales on order shipped from stores have grown more than $1.6 billion sales from our pickup and drive up services have also grow more than $1.6 billion. So far this year with drive up accounting for well over $1 billion that growth.
And of course much of this year's growth has been unplanned being in our systems in store teams have had to adjust quickly and real time.
So again, we hope these facts hope you put your capacity concerns cities, but if not we'll continue to address them in the future.
With that before I end my remarks, I want to pause and thank our team for the resilience dedication and flexibility during a tumultuous year.
It has been incredibly gratifying to watch our team has adapted to unprecedented change serving consumers in record numbers, while staying laser focused on what matters. Most the safety of our guests and our fellow team members.
While we all can't wait for the day when we can look at this pandemic in the rearview mirror. The reality is that it's not likely to end soon in the meantime, we're committed to supporting each other and building on the foundation, we've created over the last several years, allowing us to emerge from these tough times as an even stronger company with a deeper relationship with American consumers.
Now I'll turn the call over to Michael who will provide more detail on our second quarter financial results and our priorities going forward Michael.
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 three months ago remain true today.
Yes, Sir 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 and pay and benefits for our team and a new measures to enhance safety and cleanliness in our stores.
We're seeing unprecedented market share gains across our multi category assortments 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 half a point of benefit from new and non mature 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 shipped which together grew 273% over last year as John mentioned these services have much lower unit cost compared with the orders we shipped to our guests, helping us to control cost even as our digital sales continued.
To explode.
Our second quarter gross margin rate of 30.9% with about 30 basis points higher than last year. Among the tailwinds to gross margin. We saw about 180 basis points of rates benefit from core merchandising strategies, which played out most prominently in lower markdown rates compared with last year.
In addition, we saw about 50 basis points of benefit from the change in the sales return reserve estimate that we held at the beginning of the quarter.
Among the headwinds digital fulfillment and supply chain costs accounted for our rate headwind of about 130 basis points, while category mix drove about 70 basis points of pressure.
On the SGN a line second quarter results included $400 million of investments in key member pay and benefits and measures to protect the health and safety of our guests and team.
However, these investments were more than offset by the leverage benefit of exceptionally strong sales growth.
And as John mentioned earlier, the benefits of this leverage extended well beyond strictly fixed costs, leading to an astounding reduction in our SGN a expense rate of about 180 basis points in the quarter.
On the depreciation and amortization line. We also saw healthy leverage on a small reduction in dollars driving about 60 basis points of rate favorability compared with last year.
Altogether, our second quarter operating margin rate of 10% was about 280 basis points higher than a year ago.
This performance was well outside anything I have seen in my 15 years at this company and certainly beyond anything we would have anticipated going into the quarter.
However, these results followed a first quarter profit decline that was also well outside of anything I've ever seen or would have anticipated.
As such it's useful to look at the two quarters together and see how things have played out so far this year.
On a very strong comp sales growth of nearly 18% in the first half of 2020, our operating margin rate is about 30 basis points lower than last year, reflecting meaningful pressure on the gross margin line, mostly offset by rate improvements on both the SGN, a and DNA expense lines.
This performance translates to a very healthy operating income dollar growth of 12.6% for the first half of the year, which is a testament to the durability of our model in a very unusual environment.
On the bottom line, our business generated second quarter, adjusted EPS of $3.38 and GAAP EPS of $3.35, both up more than 80% compared to last year.
Year to date, both of these measures of seeing increases in the upper teens stronger than we anticipated as we entered the year.
Turning now to cash flow and capital deployment many of the themes we outlined in our last earnings call remain the same today.
Regarding cash flow, we saw strong second quarter performance on top of a strong first quarter as a result through the first half of the year, we've generated cash from operations of about $5.1 billion, which is $2.3 billion higher than last year.
The largest driver of this favorability as our inventory leverage which was well above 100% at the end of the quarter a portion of this leverages the natural benefit of rapid sales growth, which increases inventory turnover and enhances payables leverage.
However, as I mentioned last quarter. This benefit is exaggerated by our inventory position, which continues to be leaner than we wanted to be.
Specifically at the end of the second quarter, our inventory position was 3% is lower than a year ago compared with a year to date sales increase of more than 18%.
Put another way at the end of the quarter, we'd have preferred to have less cash and more inventory to support the frequency and import categories. John highlighted earlier and we have plans in place to invest in that stronger inventory position in the back half of the year, which will unwind a portion of the favorability you've seen in the front half.
Turning to capital deployment, our priorities remain the same as I have been for decades, we first invest fully in our business and projects that meet our strategic and financial criteria second we support the dividend and build on our nearly 50 year history of annual increases.
And finally, we return any excess cash beyond these first two uses through share repurchases within the limits of our middle a credit ratings.
Regarding capex, we invested $660 million in the second quarter, bringing our year to date totaled just over $1.4 billion slightly higher than last year.
As John mentioned earlier following a brief pause in the first quarter. We are back in the business of building and opening new stores and we're on track to open nearly 30 new locations. This year just short of our original plan.
However, given the dynamics of remodel projects, we're maintaining our revised plan to complete about 130, Remodels this year well below last year and our original plan.
As a result, we are expecting 2020 capex in the 2.5 billion to $3 billion range down from our original plan of about $3.5 billion for the year.
Turning to dividends, we paid a total of $330 million in the second quarter up from $328 million a year ago.
And in June our board of Directors approved a 3% increase in the quarterly dividend keeping us on track to deliver our 49th consecutive year of annual dividend increases.
We didn't invest any cash and share repurchases in the second quarter. Following our first quarter announcement that we were suspending repurchases in the current environment.
Today, if you look to casually at our current cash position and second quarter results you might wonder if we were ready to resume share repurchase activity and the answer to that question is not yet.
While second quarter profitability was unexpectedly strong it was only 90 days ago that we reported a quarterly profit decline of more than 60% highlighting how volatile the environment has been and may continue to be.
Moreover, as we look ahead there are many potential challenges on the horizon, including uncertainty surrounding cobot 19, economic headwinds from historically high unemployment uncertainty surrounding government stimulus and a contentious November election.
So while we have very strong confidence and our long term prospects our ability to continue to expand market share and grow profitably overtime. We believe it's the prudent long term decision to preserve liquidity in the current environment, giving us the flexibility to safely navigate through any near term headwinds.
So finally I will close this section with a quick comment on our after tax ROI C, which grew to 17.2% this quarter up from 15.2% a year ago.
Even though we report this metric on a trailing 12 month basis. It has been unusually volatile this year given the dramatic changes in performance we've seen.
Specifically at the end of the first quarter. This metric was nearly four percentage points lower than today at 13.4% driven by the steep profit decline we faced in the first quarter.
So while this metric may continue to move around during this period of heightened volatility we will remain focused on making the right long term investments in our business, allowing us to deliver higher after tax returns overtime.
Now I want to turn briefly to our outlook and consistent with last quarter I won't be providing any precise guidance.
However, I want to reinforce what I was just saying earlier, which is that we are moving through a period of unusually high uncertainty and volatility.
And while John was correct that we felt a much stronger sense of normalcy in the second quarter volatility continued to be elevated specifically within the second quarter may was by far the strongest month with a 33% comp followed by June at 21% in July at about 20%.
And so far in August due largely to softer sales in our back to school categories month to date comp sales have been running in the low double digits.
Now, let me be clear a double digit increase is still quite strong in the context of history, but a 20 percentage points spread between our may in August to date comps is an incredibly wide swing within a few months highlighting the difficulty of forecasting our business right now.
So given that our Q1 performance was not a good predictor of our second quarter results. Our Q2 results should not be viewed as a predictor of our performance going forward.
And given that we can't eliminate uncertainty and the environment. We continue to place a premium on flexibility in our plans. This will allow us to quickly pivot when we see changes in our business as you've seen us do successfully multiple times this year.
So now I want to conclude my remarks in the same way I did 90 days ago by saying that a single quarter's financial results are not to the basis for our long term confidence.
That confidence springs from the fact that we continue to focus on investing for the long term because targets long term prospects have never been brighter.
We have a durable business model with flexibility in both our merchandising assortment and the fulfillment options we offer.
We're building on already deep relationship with our guests as they trust us like never before to conveniently and safely fulfill their wants and needs and with a strong balance sheet and robust cash flow. We have the capacity to navigate any near term challenges and play offsets just like we have over the last few years.
But most importantly, we have an amazing team across our stores headquarters distribution facilities in offices around the world.
We have all rallied around a common purpose to serve our guests serve our communities fight for racial equity and to support each other.
All of US who work here know how special the Tms.
So I want to thank our entire team for all they are doing in this exceptional time and for making target special truly a company like no other.
Now I'll turn it over to Brian for some final remarks.
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 awhile.
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 five 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 a $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 ROI see expanded to full percentage points to 13.3%.
Nearly four percentage points lower than the 17.2%, we just reported.
Among the priorities we covered in this call five 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 the small format stores in dense urban areas.
Also in the quarter five years ago, we sold our pharmacy business to Cvs and announced the John Mulligan will become the company's first chief operating officer with a goal of modernizing our supply chain and operations.
As an every upper journey, our progress over the last five years has not been a straight line.
Along the way, we reached some plateaus and sometimes even loss them altitude before resuming the climb.
That's why it's sometimes helpful to look back over longer distance to get a truer picture of the progress.
But unlike the incentive of mountain.
Our journey will not end up with the climb back down.
Success will be defined by further growth with a constant eyes, and 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 of define this great company for decades, and our commitment to maintaining them has never been stronger.
With that we'll move to Q and eight.
Jon Michael and I will be happy to take your questions.
Thank you we will now begin the question and answer session to ask a question. Please press star followed by one.
To withdraw your request press star two.
Our first question.
Well just be one moment.
First question as Trevor Karen short with Barclays. You May go ahead.
Hi, Thanks, very much and congratulations great quarter.
I want it I don't want anywhere take away from the success in 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 look like on the topline I think we probably have pretty good handle on SGN a in terms of how that will look obviously, depending on sales that growth.
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 income the context that hundred 80 basis points in rate benefits from lower markdowns, because presumably you had marked down things you know in pre marked down in one key when you're benefiting from that in.
To Q. So we really have to look at the back half without that hundred 80 basis points and then I had one other quick follow up.
Light one start share Karen.
And maybe I'll start by saying I empathize with those of you on this call trying to extract trends from our Q1 in Q2 margin rates you can see underline volatility of the business.
Pick apart those trends in Q1 in Q2.
To focus for our second on where we bid I actually think it's useful to zoom out and look at the year to date.
You unpack margin on year to date basis, we've got just over a point of pressure from the accelerated growth in digital and supply chain investments and up just over a 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 with the in a slower in the benefit of more sales at Red crisis.
Q2, and an example of that Karen is really you think about how the sell through we're getting given our strong sales were taking a lot less product clearance. We ended the season typically and so that's an example of one of those drivers of favorability the contributes to the 180 basis points. The good news in Q2.
Those will be the key levers as we look ahead going forward, but like we said before predicting them exercise an impressive at this point.
Okay. That's helpful. And then you gave us obviously a lot of color on your digital in fulfillment capabilities, but I was wondering if you could just give a little more color on the new 10 million customers say he gained a you know anything you can point to and demographics behavior.
Ticket.
David behavior and relative to your more regular customers Don anything else Oneth, Yeah, I care and I'd say the great thing is that from a behavior perspective, a behave just like the rest of our our gas when we convert someone to a drive up ordered historically, we've seen them become more engaged with target to 30% more sales that's exactly what we.
See with this 10%.
Probably more encouraging from our perspective is that from our repeat purchase perspective, we've seen that increased seven day repeat purchases are higher than we've 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 are much more engaged with us and we know that the deeper naked engage the more they use our services that the more they will be engaged in the more they will use our services. So from our perspective very encouraging results as those guests have come on started dotcom in period. The only thing I would add is.
We continue to see the most valuable and profitable guess at target is to get uses all of our channels and we continue to see sticking his at store guest discovers drive up or discovers the benefits of ship.
And also digital guests that are now coming into our stores because the investments we've made and the trust. We're building. So we'll continue to report more about those new guests in quarters ago, but certainly we're very excited about what that means to our future.
Great. Thanks, very much thank you.
Thank you. The next question is from Edward Kelly with Wells Fargo. You May go ahead.
Hi, Good morning, guys I was just curious on the August cop, obviously impressive results quarter today, given stimulus rolling off back to school I was hoping that you fried a little bit of category color in terms of what you're seeing.
Yes, 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 you know 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 a wind up being this quarter.
It wasn't I start and that I commented earlier today that are honest pumps are off to a very solid start with low to mid teen growth at this point in the month and it's been broad base.
So we're continuing to see that kind of performance. We saw in the second quarter continue into Q3 strengthened food and essentially continued strength in electronics continued strength in home and certainly we've seen some adjustments in categories that are very school related as consumers look were later sir.
The 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 that consistent market share growth that we're seeing across our entire portfolio and each and every week as we look at IRI, an MTD 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 was 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 something close to 56 million students in the K through 12 bracket that are waiting to go back to school 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.
Those students will be welcome back to a classroom in September or October Mehdi may wait actually until January. So we've made the decision to be flexible and will extend the season and extend our assortment because we know at some point in time, those students will need backpacks and uniforms theyre going to need school supplies. So weve NMHC.
We continue to flex and I think it's been the hallmark of our performance throughout the first two quarters for this year, our ability to stay agile stay flexible meet the needs of the new environment and we will continue to take that approach with back to school season, and with the back to college environment as well.
And then maybe just a follow up quickly yeah, that's a comments around holiday and sort of stretching out holiday.
Maybe just a little bit more color on on what you're looking to do there do you think shopping patterns consumer wise and traffic will actually follow that.
There is still a bit more color in terms of how you're thinking about holiday at this point.
And we do think it's going to be a longer holiday shopping season.
We are certainly preparing to start earlier than ever before in the October period, we're going to make some big changes, we announced recently that will be closed on Thanksgiving and we certainly expect is going to be a different rhythm to the shopping season.
Fleet, we're going to put a big premium on ease and convenience delivering great value, but will emphasize safety and will also make sure that I guess knows that those items and that great value is going to be available throughout the season.
And given 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 extended holiday shopping season, we think it plays well to our multi category.
Portfolio in the flexibility of our stores and our convenient same day offerings, so well prepared 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.
Great. Thank you. Thank you.
Thank you. The next question is from Paul Trussell with Deutsche Bank You May go ahead.
Thank you good morning, and congrats on stellar results. Thank you the.
But just on your omni channel business.
First just curious of the cadence with the channel mix.
Just interested in seeing if there was an acceleration of in store.
Moderation of.
Sale.
The quarter progressed.
And economies reopened and then second is obviously this spring day services are quite robust Im just curious what are some of the learnings that you have over the last few months as it relates to order pickup drive up and shipped and how are these businesses therefore evolving.
And improving from these learnings.
So Paul why don't I start 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.
Commented earlier today, when I was speaking with CNBC that despite the tremendous topline growth of 24.3% and digital going 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.
Yes, returning to store throughout the second quarter.
And that was consistent from May into June and July and we continue to see guest 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 at great 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 similar learning from our same day fulfillment I would tell you I think the biggest learning is just how adaptable and flexible our teams have been.
Then and how quickly they responded to a surge in something like driver that grew over 700% during the quarter alone.
Yep.
I think Brian hit right on probably the core learning is the ability of our team to be incredibly agile and and we went in a matter weeks from normal digital sales to volumes that exceeded Q4 last year.
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.
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 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 seven over 700% and still having an NPS score in excess of 80.
It's just outstanding work by our teams I think the last thing that it kind of changed our thoughts on the thing we worried about only worried being not quite the right word that thought about a lot is the stores are busy in Q4, serving guests in store and so how do we continue to balanced that with our fulfillment and what we've seen over the past three months is that.
It'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 20 comp on digital.
Both of those together and so we feel really good about the model. We've built in the team has built over the past several years and I think thats, probably the biggest learning over the past three months, yet all I can only one other detail and I think its attribute 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 pick up and drive up to include fresh and frozen.
Food and beverage products.
We turn it back on.
And the team recognizes that was very important or again it was going to continue to be an important we one of the second half of the year and despite the unprecedented same day growth and the demand we've seen for drive up and pick up the team has put that back on the roadmap and we're now expanding that across the country and to me that just point to the further upside.
Hi 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 or get and as opposed to waiting until 2021, we're going to that back in our roadmap and begin to stand of capabilities for the second half of the year and I think thats going to be just one more aspect to it will be appreciated by.
Yes, when they shop target in the third fourth quarter.
Thank you best of luck. Thank you.
Thank you for the next question is from Matt Mcclintock with Raymond James You May go ahead.
Hi, Yes, some may I also say congrats to the broader or target team outstanding execution. Thank you, Matt honestly all year.
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 some some categories have had some out of stocks of probably because they're just longer lead time category I'm, not really sure, but I I want to.
Given the massive volatility and your sales as Michael talked about how or how are your thoughts changing or evolving towards demand forecasting and how are you thinking about just sourcing in general from those vendors that that may be have long lead times and manufacturing themselves. Thanks.
Well, it's a good question and you know 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 the thing we're working on that with them is.
We would call joint business planning just being sure were 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 you know for our vendors that are continuing to build our capacities who have us on allocation, having conversations with them about what we see in demand what demandware, leaving on the table because we perhaps.
I would 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 rate and we talked about 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.
Then I'd only add if we had christina or Jill or step 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 Weve 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 in.
Into our system and we've made some adjustments in the 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 us to use 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 will become even more efficient going forward.
[music].
Thank you very much for like color very helpful. Thanks.
Thank you then next question is from Oliver Chen with Cowen You May go ahead.
Hi, congratulations.
Regarding the assortment, it's it solved the performing so excellently what do you see as opportunities ahead in the assortment at what are you. Most focused on in terms of areas that will we'll see further innovation and would also just love your take on target circled. The next step in that program as well as your thoughts around the marketplace model.
In the in the on the ecommerce platform.
Well already got quite a few questions in the queue and I'll start now certainly let Michael and John also jump in so I think it's we think about our strategy from an assortment standpoint I'll go back to something we've talked about four years now we're in our best when we're at curator and balancing.
Curated assortment of our own brand 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 into 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 I think that is a huge.
Only the difference for us it served us well it allows us to meet the growing demand in the digital channel because those items that were fulfilling same day are largely filling out of our core stores or so you'll see is focused on being great curators.
As we think about something like target plus.
We're also taking a very different approach we're inviting people. It is an invitation only platform and we want to make sure that even in that environment. We're constantly curated making sure we're delivering the light extension for our assortment and for our guests. So we'll continue to take a very different path focused on three.
Duration in this environment, both with our physical assortment in digital assortment and we think Thats 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 and target circle, and obviously going forward if the another opportunity for us it deepens our relationship with the get to make sure. We're even more relevant in their lives and that we continue to enhance the truck.
That I think we've gained throughout the pandemic, so and we're very excited about the opportunity and I think about the 10 million new digital guess that weve.
Invited in over the last few months no 75 million in growing our historical numbers. It's just one more way for us to continue to meet the needs into life. The guests we shot target each and every week.
The operator. Thank you we now have time for one last question today.
Thank you our last question, it's from Michael Lasser with you B S. You May go ahead.
Good morning, Thanks, a lot for taking my question would you attribute all 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 are going away as well and the question really gets at the heart of once we get past.
Back to school season shouldn't you see your sales accelerate going to have a flow Vicki.
Yes, Mike obviously, we're watching it carefully and a lot of conversation around the impact the stimulus. What this means going forward and we certainly hope theres a second round of stimulus for small businesses in 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 channel, we continue to grow market share and see momentum within our business. So we'll watch it carefully obviously is Michael and John.
Stated several times.
It's a very challenging environment for us to provide guidance. We've got the pandemic in front of us Weve uncertainty about back to school back to college the state of the economy. We do have the election coming up in November so lots of different dynamics that we have to try to sort through and we're putting a premium being really responsive and really.
Lexical, but it's just hard for us to provide an outlook beyond a couple of weeks at the time.
Oh My follow up question is that you provided a lot of helpful Statistics about how the average unit cost to fulfill in online or is that 30% below last year.
Yes, the because the digital.
Growth is so strong that that led to a 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 year consumers have really gravitated to use.
Digital fulfillment options like in store pickup and drive up.
In those stick around in that digital penetration remains where it is should we think that this.
Gross margin pressure of about 100, 130 basis points sticks or do you have offset offsets on the horizon that can reduce pressure.
Well I can take that one Michael I think that for the.
Well, we don't know exactly what those numbers will look like for the back half of the area I'm not gonna attempts 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 transactions because it deepens our.
Relationship with the guest and that pays off in spending in aggregate and I think you can see evidence of the 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 air and that we would have had a point or more of pressuring gross margin from category mix, but that our operating income rate would leave us in 30 basis points of the year. Prior I have taken that outcome in a heartbeat. So I think that just shows how if you assume out from the specifics of just one digital transaction you get a sense of the durability of them.
Okay.
Like others 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 endemic behind US when we're spending time with family and friends were probably again kids are back in school.
One of the things I think we'll stick around for US is a consumer who is 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 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 built with the consumer during the endemic and the growing trust that we've formed with the guests who shops are stores or shopped with us online each and every day. So we're excited about the future I think sitting here with Michael and John We've never felt better about the prospects for the company and we certainly advanced our digital maturity by several years.
But I think weve really matured our overall operating capabilities during the pandemic and I think thats 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 your for joining US today and your continued support so thank you and say well.