Q1 2021 Target Corp Earnings Call
Yeah.
[music].
Ladies and gentlemen, thank you for standing by welcome to the target Corporation 2021 first 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 at that time. If you have a question you will need to press star 1 on your telephone as a reminder, this conference is being recorded Wednesday may 19th.
2021, I would now like to turn the conference over to Mr. John Hulbert, Vice President Investor Relations. Please go ahead Sir.
Good morning, everyone and thank you for joining us on our first quarter 2021 earnings conference call.
On the line with me today are Brian Cornell, Chairman and Chief Executive Officer, Chris.
Christina Hennington Chief growth Officer, John Mulligan, Chief operating Officer, and Michael <unk>, Chief Financial Officer.
In a few moments, Brian Christina John and Michael will provide their perspective on the first quarter and their thoughts on our outlook for the second quarter and beyond.
Following their remarks, we will open the phone lines for a question and answer session.
This morning, we're joined on this conference call by investors and others, who are listening to our comments via webcast. Following the call Michael and I will be available to answer your follow up questions and finally as a reminder, any forward looking statements that we make this morning are subject to risks and uncertainties. The most important of which are described in our most recently filed 10-K on.
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 I'll turn it over to Brian for his thoughts on the first quarter and his perspective on our outlook Brian.
Thanks, John and good morning, everyone.
The first quarter exactly on the first step towards a posting in our world and our team and operating model continues to work alongside our guests and communities.
Moving them well to another channel for growth and healing.
From our unique mix of categories Dara on that.
Options are businesses, delivering what consumers want and need each and every day.
The results we delivered in Q1 are nothing short of outstanding.
Comparable sales grew by nearly 28%.
Making our fourth consecutive quarter in which comp sales grew more than 20%.
Maintaining that pace this quarter was especially notable.
Even then we were comping over double digit growth a year ago.
Over the last 2 years comp sales have grown about 36%.
And total sales the expanded by $6 5 billion.
In the first quarter alone.
This year sales growth reflected more than $1 billion and market share gains.
A clear signal of how relevant guests find our experience even though they have many more shopping options available compared with this time last year.
In a quarter featuring many things to celebrate on.
I am most proud of the performance of our stores.
With vaccinations rolling out across the country.
And consumers increasingly comfortable venturing out.
We've seen an enthusiastic return to in store shopping.
Yes, we're happy to come back to our stores because they love the environment, we've created and invested in over time.
As a result, our store comp sales increased 18% in Q1.
Driven almost entirely by higher traffic and.
In accounting for the vast majority of our growth.
Contrast that to a year ago, when the channel mix of our business with changing rapidly.
With guests leaning heavily into our digital fulfillment options essentially our same day services in the midst of a nationwide lockdown.
A year ago on this call we were highlighting a digital comp of 141%.
Driven by growth in our same day services on more than 275%.
These 2 contrasting scenario clearly demonstrate the flexibility of our operating model.
But they also show how our stores and digital channel complement each other to drive guest engagement.
Even though digital stole the headlines a year ago, our store comps actually increased about 1% in the first quarter last year.
And this year, while store sales accounted for most of our growth.
First quarter digital comp sales also grew 50%.
On top of last year's enormous numbers.
This is the power of Dan.
Gets turned to target because of our stores and our digital options.
Not 1 versus the other.
And for US the distinction between a store sale and a digital sale is largely irrelevant.
Because of our unique storage with hub model more than 3 quarters of our first quarter digital sales were fulfilled by our stores.
That means in total more than 95% of targets first quarter sales were driven by our store assets store inventory and store teams.
This store driven growth is translating to outstanding bottom line performance.
Our first quarter adjusted EPS of $3 69.
Established a new all time high for the company.
Compared to a 2020 when profitability to a temporary dip. This year's performance represents the astounding increase more than 6 fold.
If we look back to first quarter of 2019, this year's adjusted EPS with more than 140% higher.
Demonstrating how far our business has advanced in a short time.
I want to pause here and thank our team members across the world.
They have consistently demonstrated incredible passion commitment and focus to serve our guests and take care of each other.
I am grateful and proud to serve with this outstanding team and.
Share the incredible business results, they're delivering quarter after quarter.
It's also important to highlight how the category mix plays a key role in the flexibility of our model.
For instance.
With guests venturing out we've seen an incredible rebound in apparel sales with Q1 comp growth of more than 60%.
On the other hand.
And as expected, we experienced slower growth in food beverages and essentials.
As we annualize the peak stock up period, a year ago.
Most notably we saw continued strength in our home and hard lines categories, which delivered outsized growth on top of very strong numbers a year ago.
Kristina will provide more detail in a few minutes.
A relentless focus on operational excellence is another key factor on our performance.
This is best summarized by our guest satisfaction scores, which across all of our services remained stable or moved higher despite record growth, let's now compounding on a 2 year basis.
This is a clear testament to the diligence of our team.
And the return on our investments in training hours and wages.
For the last several years.
Over those years sales on our same day services.
Order pickup drive up and ship have accounted for the bulk of our digital growth and they grew to well over half of our digital sales in the first quarter.
Same day penetration has more than doubled since Q1 of 2019.
When sales through these services accounted for less than a third of our digital sales.
While all free same day services continue to grow faster than overall digital drive up has been a standout and consistently received the highest ratings of anything we do.
This service only accounted for about 5% of our first quarter digital sales 2 years ago.
And that ratio expanded to more than 30% this year.
Put another way in the first quarter alone <unk> sales have grown by well over $1 billion in last 2 years.
As John will outline in more detail.
We continue to expand the assortment available for drive up and we've earmarked capital investments to make Brian up even more convenient for our guests and efficient for our team.
That we anticipate continued rapid growth of the service.
While it's gratifying to see what our team has accomplished over the last several years there is much more opportunity in front of us.
We're planning significant investments in our store assets as we remodeled 100 store locations rollout, new Ulta and Apple shopping environments.
And the efficiency of our same day services.
And introduce neighborhoods by opening new small and medium size stores.
We're also investing in our brand portfolio as we focus on presenting the best owned and National brand store guests, which we highlight due to the best in store and digital shopping experience in the market.
We're also making continued investments in safety aikman.
Reinforcing the trust and confidence we have already established with our guests.
And we continue to invest in our team.
On their pay.
Benefits training and advancement to ensure the target continues to be a destination for top talent.
And as you've seen for many of our recent announcements.
We're investing to leverage our size and scale.
Purpose and values to work for all families.
This summer we will share more information about our refreshed enterprise sustainability strategy that further draws on our company legacy of corporate responsibility diversity and inclusion.
And community engagement.
As part of our immediate efforts will focus on designing and elevating sustainable brands.
Innovating to eliminate waste.
An accelerating opportunity and equity and all communities on.
All in service to a safe and prosperous future for all.
It was 4 years ago at the beginning of 2017 that we first announced our plan to double down on investments and growth.
The decisions, we announced that day and the investments we made in the intervening years left us well prepared to handle all the challenges and opportunities presented by the pandemic.
And then on first quarter of 2017.
Our business generated sales of just over $16 billion.
And adjusted EPS of $1 21.
4 years later first quarter sales have grown nearly 50%.
And adjusted earnings per share a triple.
From today's vantage point.
The opportunities ahead of us both this year and overtime, our adjusted price as they work on that day 4 years ago.
Despite what has already been accomplished.
We've only scratched the surface of what this brand and his team can accomplish overtime.
I am excited to stand with them as we ranked the next chapter in this great company's history.
Now I'll turn it over to Christina who will share more perspective on our first quarter results and for priority going forward Cristina.
Thanks, Brian.
As we enter 2021, we knew it would be a year like no. Other that's because we're coming off of 2020, which was by far the most unusual year any of us have ever experienced.
Such we knew there'd be a wide range of potential outcomes for our sales both by category and in total and so far with 1 quarter behind us results have been extremely positive across every dimension.
In the face of this strength, we've seen an incredible response from our teams across the board from our stores to our merchants to the supply chain have all worked together in service of our GAAP. While there are many ways to measure the impact of those efforts guest loyalty and market share are the 2 most important measures of success in this volatile time.
Consequently, it's incredibly gratifying to see that across every 1 of our guest segments in the first quarter, we measured an increase in average trips per guest and a larger average basket.
This led to more than $1 billion of additional market share in the quarter on top of $1 billion gain a year ago.
In terms of category performance, we saw the strongest growth in our apparel business, which delivered comp growth in the low 60% range.
As Brian mentioned, we saw a temporary dip in apparel sales last year, when first quarter costs were down around 20%.
Following this year's strong increase first quarter apparel sales have grown approximately 29% over the last 2 years.
Home also delivered incredible growth with an increase in the mid 30% range on top of a high single digit increase a year ago.
Within home growth was strong across the board with the most robust performance in our decorative home and seasonal businesses.
Heartlands also delivered huge volume with comp growth above 30% on top of a 20% increase a year ago results were led by sporting goods and toys, which both saw comps above 40%.
Judy Comped in the high teens on top of a high single digit growth a year ago.
Then beauty skincare Sun care and Bath categories delivered comp growth in the mid 30% range with cosmetics growing in the low twenties.
Finally, our essentials and food categories, both delivered comps in the low to mid single digits.
To see healthy growth on top of last year is remarkable as youll recall that a year ago gas, we're aggressively stocking up their pantries Frenchism freezers and we sold virtually every unit of paper goods that we owned.
Beyond category strength I want to pause and also highlight that sales on target owned brands grew approximately 36% in the first quarter the strongest increase we've ever recorded.
Because of our unique capabilities in product design development and sourcing our own brand product offering unbeatable combination of design quality and value. These brands aren't something that our guests pick up while they're at target. They are big reason why they shop at target, which is why we continue to invest in them.
We frequently talk about performance by category and our brands because it's important that our entire portfolio is healthy and well positioned to meet our guests' needs but.
But it's also important to realize that they create value for our guests beyond simply the sum of the parts rather it's the combination of all our offerings, including categories brands and services across our distinct multi channel experience that allows target to serve our guests needs today and overtime.
Last year as guest focus more on enjoying time at home that had implications not just for home category, but also for hotlines food and beverage and essentials.
And their focus on health and wellbeing affected trends in activewear beauty healthcare food and beverage and more.
The same is true for our sales channels as guests last year focused on social distancing they leaned into digital including our same day services and this year as Theyre looking to get back out in public they are flocking to our stores based on the trust. We have established over time, which was further reinforced by last year's investments.
So as we plan the remainder of the year, both in total and by category, we continue to listen closely to our guests to understand how they are thinking and feeling and.
And when we talk to our guests a day they tell us they want to maintain some of the new habits and routines. They formed during the pandemic, including an enhanced focus on the joy of home and health and wellbeing of their family.
At the same time, there is a rapidly emerging emphasis on style and mobility as guests feel increasingly safe and public spaces.
That trend is playing out in an explosive demand for dresses and cosmetics as well as luggage and categories based on being active like sporting goods and performance active wear.
This reinforces the concept of and target can fulfill our guests' needs as they focus on home and health and when they look to venture out we can welcome them back into our stores and continue to serve them with our same day services, they've recently tried and now love.
So after a record setting first quarter, we're keeping our foot on the GAAP based on our guests' desire to bring rejuvenated life and energy to their homes celebrate seasonal moments with loved ones and step out in public I could not be more excited about the ways, we're ready to inspire and energize our guests.
Just last week, we launched our latest limited time collection Hilton Carter for target off to a great start. This collection features live plants flow greenery and unique plant accessories for experienced and novice gardeners alike.
Not to be outdone by their parents younger kids want to make their space with their own and our popular kids brand pillar <unk> will continue to help them do just that for its 5 year anniversary pillow forward to celebrating with hundreds of new items that can grow with them and be used in any area of the house.
As our guests begin stepping out there focused on looking and feeling your best with this rekindle passion for fashion, our guests will be overjoyed with the latest installment of our designer dress collection featuring.
<unk> designs by Christopher John Rogers, Alexis and Rick. So this assortment offers more than 70 original and affordable dresses and bold bright patterns and statements silhouettes and of course with our continual focus on inclusivity and celebrating every body. This collection features affordable prices in a range of sizes from extra extra small.
On to Forex.
We've long focused on making target a destination for holidays and life events, and we just wrapped up a huge mother's day season.
<unk> solutions for mom across the store from apparel gifting beauty flowers candy and more and now we're gearing up for father's day in June we've got a great assortment of gifts for dad from all in motion a tire for golfing hitting the gym or just hanging out to align of shave skin care and hair care products from goodfellow.
Of course June celebrations arent exclusive to that.
With so many in person celebrations canceled last year, we're ecstatic about our fabulous new assortment for price as we celebrate in love with our LGBTQ IHS team members and neighbors.
Later in the summer we know families are excited to celebrate the fourth of July with a long awaited neighborhood Cookout, a road trip out of town or an intimate backyard barbecue with a few fireworks with great deals on the perfect on a national brand Assortments. It doesn't matter. If the celebration is bigger small targeted everything you'll need to fill a cooler.
Packet Beach bag and fill up with friends family and funds.
And before we know what it's time to head back to school and we're planning for 1 of our biggest back to school and college seasons ever.
Of course, we will have great deals on all the traditional school supplies.
We'll also have the new normal on the school supply lists like hand, sanitizer and disinfectant wipes.
With local school lifts on target Dot com and our industry, leading fulfillment options back to school shopping has never been safer or easier.
And with a great new apparel offerings from Cat and Jack Art class more than magic Wild fable original use and all in motion all found only at target. We will have our school down guests looking and feeling fresh for that first day of school.
Before I close I want to pause and highlight some of the work on most passionate about.
That's our work on targets for each committee, which we formed last year to achieve lasting systemic change for our black guests team members and communities.
This work aligns with our vision for sustainability at target and it's a strong example of how we're becoming an equitable company, creating change that strengthen our business.
Hopefully you've seen our recent announcement that target has committed to spending more than $2 billion with black on businesses by the end of 2025.
In addition, we've announced the new scholarship program to support students are more than it does in historically black colleges and universities.
And this summer both in store and online we are adding more items per black beyond measure assortment.
I'm. So proud of these efforts and everything we do to help all families discover the joy of everyday life.
I also want to give a quick shout out to our store teams are recently had a chance to visit stores on the New York City market and after more than a year in which most of my meetings have been virtual it wasn't incredibly energizing experience I visited new small format locations across the city from Manhattan to Queens to Brooklyn.
Every location with a unique reflection of the local neighborhood from design to assortment and the team members serving their neighbors based.
Based on the energy and passion I could feel from these teams. It's clear why we're seeing such strong sales in our stores across the country.
As the first chief growth officer on target I couldnt be more enthusiastic about the opportunities still ahead of US as you saw throughout 2020 and now in 2021, we have a long runway to continue investing in and growing our core business at.
At the same time, we will continue to develop innovation pipelines and exploring new initiatives, maintaining a balance between fundamentals on execution.
And the exploration of new opportunities as.
As we plan for future growth will continue to listen to our guests and apply those insights to prioritize their work with US gas first approach. We're confident we can continue to build relevance and market share both today and over time.
With that I'll turn the call over to John.
Thanks, Christina at our financial community meeting earlier this year, we detailed how last year's $15 billion on sales growth was more than we grew over the prior 11 years and as you've seen today trends are not slowing down as we added another $4 $5 billion of sales in the first quarter.
Given this continued rapid growth and the opportunities still ahead of US. The operations team is focused on building capacity and enhancing processes to create and enable targets continued growth.
Work starts on our supply chain, where we've outlined our plans to add 4 new regional distribution centers by the end of 2022 with the first 2 building slated to open later this year.
These new buildings located in Chicago, and New Jersey are set to go live in the next several months, creating additional capacity for the network in total while enhancing service levels and high volume markets that continue to grow.
More specifically once these buildings are operating at scale, they'll meaningfully shorten lead times to nearby stores improving in stock levels, while reducing the need for safety stock in those locations.
Beyond the capacity, we're adding with these new buildings. We're also investing in updated fixtures to create additional capacity across our current network.
Changes are highly capital efficient involving a small amount of capital to open up a substantial amount of incremental capacity within the network.
Quickly on to the addition of about 1 and a half new distribution centers.
And as we told you at our meeting in March we are pleased with the initial results from our new Sortation Center in Minneapolis as a result, we have plans to build up to 5 more of these facilities in 2021 with additional openings planned for 2022 and beyond.
We're opening these centers, which are smaller than an average store in markets with a high concentration of local packaged delivery there.
They are designed to receive and sort packages from a large group of surrounding stores multiple times, a day, which allows for more optimized granular sortation.
This precision reduces costs for our delivery partners meaningfully reducing what we pay for delivery. In addition, these facilities eliminate the need for sortation the stores they serve while freeing up packing capacity at those same locations.
Sort centers have long been on our fulfillment roadmap, which we've built through internal development along with small acquisitions in.
In these facilities, we optimize the selection of delivery partners by applying technology from Grand Junction, which we acquired in 2017.
And we optimize sortation to minimize cost to increase speed by applying technology, we acquired from day live in 2020.
In addition, beginning in the first quarter, our Minneapolis short center began testing package delivery using shipped another 2017 acquisition to add capacity reduce costs and enable more flexibility, which will benefit our rapidly growing ship from store capability over time.
Within our store network, we have begun ramping up our remodel program. Following the pause we implemented last year.
We have just over 34 remodels slated for completion in the second quarter and more than 100 planned for the back half of the year.
Based on past experience, we expect these remodeled stores will generate an incremental 2% to 4% sales growth in the year following completion with another 2% incremental growth in the second year.
Beyond the direct impact on sales these transformations create an ideal platform for all of the merchandise innovations and service enhancements that we'll launch over time.
In addition to full store Remodels, we're planning other store investments this year, including more than 100 ultra shop in shops slated to launch in the back half of the year as well as our enhanced Apple layout in electronics in select stores across the country.
Among our store services, we've long known that our same day fulfillment options will be popular with our guests, but their growth over the last few years has been far above our expectations.
This is most evident in our drive up service, where first quarter sales volume was nearly 21 times higher than it was 2 years ago amounting to nearly $1 3 billion of incremental sales volume over that period.
In the face of this incredible growth there are emerging opportunities in high volume locations to invest in capacity and efficiency in support of our same day services.
Specifically in more than 100 locations. This year, we're investing in small projects to optimize the front ends of these buildings freeing up additional capacity for continued same day growth, while making the lay up more efficient and safer for the team.
We also continue to enhance the assortment available for all 3 same day services, adding more perishable food to our pickup and drive up services and more general merchandise like apparel to the assortment available through shipped.
And we just announced that in the second quarter, we'll have adult beverages available through pickup and drive up and more than 200 stores and available for same day delivery in more than 600 stores across the country.
Beyond activity on existing stores, we're expanding our new store opening plans to more than 30 additional locations across the country. This year as we continue to find compelling opportunities in urban and dense suburban markets and on or near college campuses.
In recent years. These custom formats have typically been less than 50000 square feet.
However, given local real estate conditions in dense suburban markets. We're also finding compelling opportunities to open somewhat bigger stores between 50, and 100000 square feet, which weren't available in the past.
As a group these new stores are generating higher than average sales productivity above average gross margin rates and strong financial returns and we see a very long runway to open more of them over time.
And finally after store comp growth of 18% in the first quarter driven almost entirely by traffic. We're confident that we're already benefiting from a differentiated service model on our stores.
But that's a lead we cant take for granted so we're continually looking for ways to get even better. So this year. Our store teams are rolling out an enhanced service model focused on consistency of every interaction to ensure that our guests will always feel welcomed and appreciated and if they need help there'll be team members, who can find solutions to enhance their experience.
This new engagement models strongly connected to our company purpose culture and values and we're supporting it with enhanced training and tools across the chain.
It's designed not to be a 1 and done effort, but a sustainable model that is integrated with our operational goals not something separate that's added on to everyday tasks.
So as I turn it over to Michael I want to once again, thank the entire team for the incredible things you've already done and your passion to continually raise the bar.
This year on celebrating my 25th year at target. So you might be tempted to think I've seen at all but.
But when I step back and realize what this team has accomplished in the last year under the most challenging of circumstances. It's clear that there is no limit to this team's potential and there is no doubt that we have the best team on retail.
Now I will turn the call over to Michael.
Thanks, John.
When I think about the underlying themes of our recent performance. The most dominant 1 by far has been the unprecedented growth and share gains we've seen over the last 5 quarters on the P&L the leverage resulting from growth has more than offset all of the unique headwinds we faced over this challenging period, resulting in really strong performance.
Targets total sales grew 23, 3% in the first quarter, reflecting comp growth of 22, 9% given last year's double digit growth first quarter sales have expanded more than 37% over the last 2 years driven almost entirely by higher comps.
Unlike last year, when consumers were consolidating trips and shopping less often this year's comp growth was driven primarily by a traffic increase of more than 17% combined with a 5% increase in average ticket.
As Brian mentioned store comps were the growth engine. This year, while digital was the primary driver in Q1 2020 as such over the last 2 years, both our stores and digital channels have expanded their first quarter sales by more than $3 billion.
This balance highlights the relevance and complementary nature of both channels and serving our guests needs.
Our first quarter gross margin rate of 30% was 490 basis points ahead of last year, when we faced a number of temporary headwinds, including markdowns on other costs to right size, our apparel inventory.
Compared with 2019 this year's first quarter gross margin rate was about 40 basis points higher which is notable given the digital sales penetration more than doubled in that time from 7 1% in 2019 to more than 18% this year.
In terms of the year over year gross margin drivers mix had a positive impact of about 150 basis points, reflecting the dramatic increase in apparel sales and continued strength in our home category.
The remaining favorability was driven by core merchandising as we continued to benefit from low promotional and clearance mark down rates and we annualized last year's cost to rightsize, our apparel inventory.
The rate impact of supply chain and digital fulfillment costs was approximately neutral compared to last year as the cost of outsized digital growth were offset by the benefit of a stronger mix of same day fulfillment and our ongoing work to control unit costs across our entire suite of digital fulfillment options.
Our first quarter SG&A expense rate was 18, 6% this year down more than 2 percentage points from 27% a year ago and 28% in 2019 in terms of drivers leverage benefits have more than offset all of the extra costs. We've absorbed over the last 2 years, including meaningfully higher pay and benefits for our team and other.
It's to protect the health and safety of our team and guests.
While DNA expenses have grown in each of the last 2 years. This year's first quarter D&A expense rate was about 40 basis points lower than a year ago, and about 80 basis points lower than 2019.
Altogether, our first quarter operating margin rate increased on astounding 7 4 percentage points compared with a year ago to an unprecedented 9 8%. This year from a temporary low 2 4% a year ago.
However, even compared to a very healthy 6 4% operating margin rate in the first quarter of 2019. This year's rate was more than 3 percentage points higher in terms of dollars first quarter operating income has more than doubled over the last 2 years.
On the bottom line, our business delivered first quarter GAAP EPS of $4 17.
Up more than 600 per cent from a year ago and well over double our 2019 GAAP EPS.
On the adjusted EPS line, which excluded the gain from the sale of our Derm store business. We earned $3.69 this year more than 500% higher than a year ago and well over double our 2019 adjusted EPS.
As you know our capital deployment priorities remain the same as they've been for decades, we first look to fully invest in our business and projects that meet our strategic and financial criteria.
Second we return cash through our quarterly dividend, which we've maintained every quarter as a public company and grown every year since 1971.
And finally, we return excess cash over time through share repurchases within the limits of our middle a debt ratings.
In the first quarter, we invested just over half a billion dollars on capital expenditures to support our business. We continue to expect our full year capex will be approximately $4 billion.
But the bulk of those expenditures will be more back loaded in the year given the timing of this year's projects.
We paid dividends of $340 million on the first quarter up slightly from a year ago as growth in the per share dividend was partially offset by a decline in share count.
And finally, we resumed share repurchases in the first quarter. Following a temporary pause in 2020 and deployed about $1 2 billion towards higher $6 1 million shares at an average share price of just under $191.
And in February we completed the sale of our Derm store business, which contributed just over $350 million to our first quarter cash flow.
Altogether, we ended the quarter with about $7 $8 billion of cash and cash equivalents on our balance sheet. This was down about $700 million from the beginning of the quarter, but still well above where we expect to operate over time.
With this cash will be funding approximately $3 $5 billion of additional capex in 2021, and we'll be recommending a robust increase in our quarterly dividend to the board later this year.
Beyond these uses we should have ample capacity for continued share repurchases and we'll continue to govern the magnitude and pace of repurchases in support of our goal to maintain our middle a credit ratings and given where we are today it will likely be a multiyear journey before our debt metrics move fully back to where they've been over time.
Now I'd like to turn briefly to our return on invested capital, which reflects both our operating results and the investments we've made to generate them.
In the first quarter, our trailing 12 month after tax ROIC moved up to 37%, which is well over double the 13, 4% we reported a year ago.
While we've indicated that this measure will likely be volatile near term and could revert to a very healthy number near 20% over time. The fact that our business has generated such a high after tax return over the last 12 months is a testament both to the strength of our model and outstanding execution by our team.
Now, let me turn to our sales outlook, we learned a lot on the first quarter and notably got our first look at how our business is successfully comping the comp with impressive growth on top of last year's strong surgeon sales.
Also and importantly, we've continued to gain market share on top of last year's dramatic share gains based on these results. We're now planning for our business to deliver a mid to high single digit comp increase in the second quarter.
This expectation is in line with the 2 year growth rates, we saw on the first quarter and while we only have a couple of weeks in the quarter behind us. The results. We've seen so far this month are consistent with this outlook.
The range for second quarter operating income remains wide, but should remain strong far ahead of our 2019 rate of 7 2%, but perhaps not fully as high as last year's unprecedented rate of 10%.
In terms of the specific puts and takes on the quarter, we'll be comping over last year's reversal of the return reserve estimate, which added about $110 million to last year's operating income.
In addition, this year, we're making purposeful investments in store labor hours to ensure we deliver outstanding service and stronger in stocks than a year ago when sales grew far beyond our expectations.
Of course, we will continue to benefit from meaningful sales leverage given that we're planning for healthy growth on top of last year's record setting increase.
Putting that altogether, we expect to see continued strong performance on this line.
In the back half of the year the range of possibilities for comp growth is also quite wide and we will gain more insights as the year progresses as of today based on our recent results on confidence going forward, we expect to see positive single digit comps on the back half of the year on top of last year's unprecedented performance.
Regarding our full year operating margin rate following an exceptionally strong first quarter, we have increasing confidence in the consumer and industry backdrop in the back half of the year as.
As such the range of outcomes for our 2021 operating margin rate has moved significantly higher so despite the anticipated headwinds from higher markdown rates. Following last year's historically low rates, we believe that our business is positioned to deliver our full year operating margin rate, that's well over last year's rate of 7%.
More specifically, we believe this year's operating margin rate could reach 8% or perhaps a little higher.
We will continue to refine our view throughout the year.
As the team looks ahead to the rest of the year, they're focused on staying agile and what continues to be a volatile environment, rather than placing all of their bets on a single forecast number theyre focused on contingency planning, creating flexibility that will allow us to react to unexpected changes and importantly take advantage of opportunity when we see it.
We're also excited about the investments still ahead of us and the growth will create.
Hundreds more remodels dozens of new stores, new Ulta, and Apple shopping environments and supply chain investments to support both replenishment and fulfillment given.
Given the performance, we're seeing today, which is the product of the investments we've made over the last few years, we're eagerly leading into future opportunities to enable more profitable high return growth overtime.
Before I turn it back over to Brian I want to add my voice and thanks to the team the value of our team members are creating for our business communities shareholders and each other goes far beyond what we can measure on our P&L.
Thanks for making target an even stronger company on behalf of all of our stakeholders Brian.
Before we move to your questions I want to pause and acknowledge again the role our team played and the outstanding results. We delivered this quarter.
I'm thankful for their continued focus on our guests focused on operational excellence and passion for our brand.
I also want to acknowledge the challenges facing our India headquartered team along with our team members who have family there given the recent surge in COVID-19 cases.
We have been carefully monitoring conditions on the ground and providing extra support to our team during this difficult time.
To ensure they can take care of themselves and their families.
We've also funded $500000 donation to UNICEF to increase access to oxygen treatment and hospitals across the country and bring testing resources is the hardest hit communities.
We're hopeful that conditions, there will continue to improve.
So now as we get ready to move to your questions I want to underscore the confidence you've heard throughout our remarks today.
Coming off an unbelievable year in 2020, we had a lot of confidence as we entered 2021.
But our first quarter results came in far ahead of our baseline expectations.
With the macro and consumer backdrop, that's been surprisingly positive we've seen remarkable momentum in our performance even as we started a comp over the period of peak increases a year ago.
The flexibility of our category mix and fulfillment options combined with an agile energetic and engaged team.
Continue to resonate with our guests driving double digit traffic growth and an increase in average ticket in the first quarter.
But as you've often heard me say, we shouldnt EPS performance with potential.
Even after more than a year unprecedented growth.
Saying focus and leaning into the opportunities ahead of us.
Making investments to build on an already strong foundation.
With these investments I'm confident that our business model and outstanding team will continue to raise the bar on on our already best in class retail experience, resulting EBIT stronger loyalty and guest engagement over time.
With that we'll turn to Q&A, Christina John Michael and I will be happy to take your questions.
Thank you we will now begin the question and answer session to ask a question. Please press star followed by 1.
To withdraw your request press star 2.
1 moment for the first question.
Our first question is from Bob <unk> with Guggenheim You May go ahead.
Hi.
Good morning congratulations.
Bob Thank you.
Great job, Brian Good question.
Just when you look at that.
The mix, especially on the apparel side can you talk about.
Any new brands that you're excited about.
Got it great job with the pilot brand piece and I think as you move through the year any expectations that you have just on that mix and some of the margin implications around that category would be great. Thank you.
Yes.
Bob Good morning, why don't let Kristina spend some time talking about what we're seeing with categories. Some of the highlights between our owned brands and National brands, Obviously, Kristina highlighted the fact that despite our overall robust performance in the quarter on brands grew by 36% of record performance. We're on so we're clearly.
On a great performance in both our owned brands and National brands, but Kristina wanted to build on so what we're seeing in the different categories.
Absolutely and good morning, Bob Thanks for the question.
As Brian was just sharing we really are excited about the strength across the board apparel was certainly a stand out in this quarter with growing over 60% and that came from a range of brands and every segment of the business.
Reality is the 3 trends that I talked about in my prepared remarks.
Are benefiting our multi category approach across the board Joy at home on the opportunity to celebrate everything that brings the GAAP.
To their home eating being with their families and the investments that they've made over time in their home health and wellbeing the opportunity that our guests are taking to invest and proactive health care.
Fitness at home in active wear and that is the newer and more emerging trend is really dial in mobility as guests are going out they are looking for.
Fresh look so our newest collection.
Adjusted by Christopher John Rogers, <unk> been ratio couldn't be more perfectly timed to really help guests look there Bob.
They're wearing an uncertainty also cross selling anytime.
Thank you.
Thank you.
And the next question is from Paul Trussell with Deutsche Bank You May go ahead.
Good morning, and outstanding results congratulations to the team.
I guess on my question is on first same day services, which obviously continues to really showcase robust growth I'm. Just wondering if you can talk a little bit more about how the business has evolved what are the additional learnings and what are the actions that have been taken to really.
Improve efficiency.
And profitability of that particular business and service.
Well, Paul Thanks, again for joining us. This morning, why don't we let John Mulligan and talk about some of the progress we've made from our same day fulfillment standpoint.
Good morning, Paul it's good to talk to you.
As you know, while we've talked about stores as hubs now for going on for years, and we have always said.
We like it for a couple of reasons 1 great guest service into better Economics same day services are.
That on steroids, they have much better economics than shipping something to someone's home.
Because as we've talked about the shipping expense is the biggest part of delivering something to someone's home. So if we take that out of the equation and we ended up with economics that are much closer to that of store transaction. The thing we love about all of the same day services pick up drive up and shipped all of them continue to grow faster than our overall digital growth and we continue to.
Find ways to improve them as you said part of that is investing in technology for our teams improving there theyre short path improving how they pick we've done a great deal of process worked to break things apart to make it simpler for our teams to execute we've done things to help them find items in the store. So that we don't end up with what we call <unk>.
Items not found.
And then we continue to invest in helping them physically and that's a big focus for us this year and will be over the next couple of years in the case that drive up which as we've talked about a couple of times, Brian talked about and I talked about has been our fastest growing same day service since basically since we started it. It also has our highest NPS score so guests love it.
We will let you just decide when you want to come we don't force you into a time slot and then our team brings it out to you in 2 minutes or less so our guests absolutely love that and you'll see us invest in making that easier for our team building capacity on the front end of the store over the past year, we've rolled out adding temperature controlled products to drive up and so youll see us add refrigerated.
Duration and freezers to the front end of the store all behind the wall. So that our guests don't see that but making it much easier for our teams to execute and then much safer, we'll make it much easier for them to walk out to cars on <unk>.
<unk> them from the environment, a little bit so all of that experience continues to improve as well. So every year. Our team comes up with multiple ways to continue to improve the service first and foremost for the guest and then on the backend improve things for our teams. So they can execute it easier as we continue to grow so we see a lot more opportunity for us and as I said that'll be a big part of our cash.
<unk> investment over the next several years.
John the only thing I might add is.
As we saw Rguest turn to same day services during the pandemic using pick up and drive up and ship. We expect those services to be very sticky overtime, and certainly think we have matured the awareness and the use of the.
Same day services by 2 3 if not 4 years and certainly as we go into the backing up on a year on during the holiday season, I think we're going to continue to see our against turn to shift and drive up and pick up as just an easy and convenient way to shop at target.
Thank you for the color just a quick follow up from Michael Obviously, you really showcasing a lot of confidence.
On the trajectory of the business given the outlook provided for the balance of the year, maybe just a little bit more detail on how we should think about gross margins and SG&A.
For what's clearly going to be a really healthy operating margin rate.
In <unk> on the second half.
Sure Paul Thanks for the question.
I touched on this a bit in my remarks, but if I had to summarize our profit story. It goes back to the scale benefits, we see when we have growth in our plan for the back part of the year is to see growth on top of some of the strongest quarters in target history last year. So we would expect that leave to lead to lead to improving profit rates on a year over year.
Basis, there's still a wide range of where those numbers may ultimately land and we'll continue to refine our point of view as the year progresses, but.
Scale is a wonderful thing and we've seen impressive growth over last year, and we expect more to come on the balance of this year.
Yeah.
And does that conclude your question Sir.
Yes, Thank you and best of luck Paul Thank you.
Thank you. The next question is from Karen short with Barclays. You May go ahead.
Hi, Thanks, very much and I'll add my congratulations to a great quarter.
I wanted to just ask a little bit about share gains and obviously, we know the category is and you're gaining share across all categories, but I wanted to see if you could give a little bit more color on its share gains by demographic and which demographics you think you're gaining share from and then I had a follow up to that last question that was asked.
Alright, Thanks again for joining us today and I. Appreciate the question on market share as you look at our business and I think you know our target guests on our target shopper.
All demographics than we've had over now well over 30 million guest and shop US every week most of America shop, the target and I think as we look at it we're picking up share across all of these various cohorts. So it's not 1 consumer at all of the guests who are shopping target and as they return to our stores.
Shopping multiple categories and I think thats the magic behind our performance is a great combination of our in store experience, the ease and convenience of digital but that multi category portfolio and that unique combination of our own brands and curated national brand.
We appeal to a broad group of consumers in different cohorts and we're picking up share across all of these different areas.
Okay. Thank you and then just on inventory growth. Obviously your inventory growth was very strong this quarter, which is impressive given the freight issues, but an important issues, but maybe some color on that growth in general and how you think about the balance of actually wanting more and Mark Downs in 2021 versus 2020.
And you know how we should think about that in the context of gross margin.
Michael Why don't you start and then we can provide some additional color of casino talks about our inventory positions.
Sure.
First off Garen I feel really good about our inventory position heading into the second quarter and you can see we're up on a year over year basis, and we should be given the growth in sales that we've seen and continue to expect.
When it comes to markdowns through the balance of the year and I've talked about this a little bit previously we were sold through and a lot of seasons last year, that's not optimal for US we don't want to look at empty shelves at the end of our seasonal set and so now with our anticipation for growth in the remainder of this year, we'll be buying appropriately to that and hopefully that means we've got fuller shelves at the end.
Have a season and with that will come some clearance Mark downs that'll be a little bit of a drag on mark down rates on a year over year basis, If I had the guess, but I would welcome a little bit of that rate drag because it means that were fallen in stock for the guests throughout the season.
Great. Thanks very much.
Thank you. The next question is from Chris <unk> with J P. Morgan you May go ahead.
Okay.
Thanks, Good morning, everybody.
A couple of questions on guidance, Mike. My first question is in the second quarter, Michael why couldn't you reach 10% or at least be close to that he did a 90 day and 1 Q sales volumes look to be similar as it is it less rich mix performance or perhaps youre, putting in some caution around potential promote.
<unk> and clearance.
Sure Chris Thanks for the question well, we would expect like I said in my remarks, the second quarter to be far ahead of.
The 2 year ago performance likely not as high as last year, but theres still a broad range around that outcome and so we'll see as the quarter plays out exactly where we land worth, noting and I touched on this as well there's some factors unique to the quarter, we got a $110 million headwind from the way our returns reserve calendarize between Q1 and Q2 and the.
Second thing is we are investing and we'll continue to invest in the team and in store payroll to make sure. We're staffed in in stocks to support the sales we expect it to come in and our teams have done just an incredible job this year, providing such great guest experience and we want to make sure we're investing to continue to support that and to support growth.
Understood and then as you think about the gross margin can you talk about the puts and takes of this year versus 2019, obviously you have a higher ecommerce mix, but you would think that sort of the mix of the.
The business.
By category could be richer and you also have a pretty lean inventories.
Against a strong demand backdrop.
Yeah, So maybe I'll speak to actuals and unpack the first quarter, just a little bit versus 2 years ago.
If you look at kind of versus our 2019 performance, we saw mark down efficiency, and we've talked about that lower levels of promotional and clearance markdown rates in 2019 on a 2 year basis mix is actually about 40 basis points of a drag in the first quarter and also on a 2 year basis, you can see digital and supply chain.
Pressure of a shade over a point given the growth in the digital business and the impact that that has to rates and so those are familiar drivers we've talked about over time, where those drivers land for the balance of the year will dictate where margins ultimately balls.
Great. Thanks, very much have a great spring.
Thanks, Chris.
Thank you. The next question is from Scott <unk> with our 5 capital you May go ahead.
Hey, guys. Thanks for taking my questions I wanted to go into labor, Brian I heard your comments today on CNBC about that it's kind of not really having a struggle getting getting labor.
I also heard you guys talk about enhanced service model. So I was wondering if you could talk about whether you guys believe you have a labor advantage and kind of what youre doing with your labor force to enhance the store experience.
Well Scott Thanks for joining us on a nice start and then I'll, let John build on my comments, but as I said earlier today, we've been investing in our team for many years now.
And we took our industry leading position with our starting minimum wage we've continued to invest over the last year in the health and wellness and safety of our team and I think thats allowed us to build even deeper engagement with our teams in stores and our teams and supply chain. So I do think it gives us a competitive advantage and I think low.
Focus we placed on our team the care of our team, making sure we're investing in their training their development. There are growth I think that's really provided us with a unique experience and I think it's 1 of our competitive advantages in the marketplace.
John Yes.
Yes, Hi, Scott.
Just building on what Brian said basically I think.
Our thought has always been the best way to staff, our stores and our supply chain frankly is to limit turnover and so let's invest in our team and give them a great experience and you've seen us do that for several years now we've invested in wages. We've invested in benefits just as importantly, we've invested in training to help upskill them and then over the course of the past year and a half or so we've invested in safety.
Very overtly and so as Brian said engagement is very high turnover is down significantly relative to 2019. So we feel really good about where our stores that and as turnover decreases you get so many benefits right. We get team members that know their job to get team members that know their guests that are in their stores because they are in their weekly they can engage with them in this kind of <unk>.
To the service model, where the idea is to engage with our guests make them feel welcomed and importantly.
Solve their problem if they have an issue solve it in the moment for them and so youll see us continue to do that we're very encouraged by what we see our NPS scores across all of our services, including the in store experience are up over last year and up over 2019. So we're just getting started on this journey, but the early results are very encouraging.
And I would just finish where Brian did we you've heard us say for a long time, we have the best team in retail and we absolutely believe that's the truth.
That's great on how to share with you.
But John and I had a review just yesterday with our store team leaders to look at turnover and retention rates and we just continue to see stronger and stronger numbers and mark to the point that John abate, though the operating model changes we've made over the last few years, putting experts in place in areas like beauty and technology.
Those team members are really passionate about the work that they do and they continue to learn and grow every day and I think that focus on providing training and development opportunities the expertise that we're providing in those key categories.
Moving to continue to provide benefits to us over time.
Alright, guys. Thanks very much thank you.
Thank you. The next question is from Kate Mcshane with Goldman Sachs. You May go ahead.
Hi, good morning, Thanks for taking our question.
I wondered if I could go back to the digital fulfillment questions that were asked earlier I think you said costs for neutral and I wondered is it possible for them, how you're fulfilling to turn into a tailwind as you continue to drive more growth towards the same day services and away from 2 day free ship.
And then separately.
You mentioned, the sortation centers and the number you are opening this year I Wonder if you could talk to just the cost optimization, John knows sortation centers over the long term.
Sure. Thanks for the question Kate I can start and then maybe John can provide more color on the Sortation center work that we're doing.
Yes, we didnt see pressure on the supply chain and digital line this quarter.
That's due in part to the just incredible strength in our store business with stores up 18% on a year on year over year basis.
I get excited by the efficiency improvements I see us continue to make in our digital experience John talks to some of those just a minute ago, but we can do a lot with the volume that we've built over the last 2 years and some of those same day services and all of that volume translates to more efficiency opportunity as we can continue to squeeze down the per unit.
Cost to fulfill.
But I don't shy away from growth or from a drag on that line from our growing digital business and the reason why is when gasoline into digital when we get more omni channel guests more guests using drive up more guests using same day, even if that sale itself comes at a slightly lower rate. It does incredible things for the rest of our P&L.
Because we see those guests spend more on total about 30% more for our new drive up our shipped guests in.
That's way more important than the little bit of rate drag we've seen overtime from digital growth.
How we continue to think about it.
Yeah and on the short centers Kate.
We remain pretty excited about this opportunity, but I would caution you that it's early days for us still.
We always talk about crawl walk run I'd say, we're still firmly and crawl here in Minneapolis, and so we see a lot of opportunity in front of us, but the play here is a couple of things.
And first of all day about capacity in the store. So we can sweep packages out of the stores more routinely than once a day that frees up space and that frees up space for us to pack additional products in the store.
And that's an important thing for US then as we move downstream the more granular sort is where we start to see potentially.
Cost reductions as we can sort to provide to our carrier partners further downstream in their operations and like we've done announced about a month ago.
Using the <unk> technology, creating local routes for local packages, we can get very efficient on delivery using shipped and chip drivers and so put all that together in our guest gets a great experience, we create more capacity and we have the opportunity to continue to improve on what we believe are already advantaged economics because of our stores as hubs.
Model, so more to come on all of that it's early days, but we remain pretty optimistic on all 3 of those fronts.
Thank you.
Operator, we've got time for 1 last question today.
Thank you. Our last question is from Joe Feldman with Telsey Advisory Group you May go ahead.
Great. Thanks, guys for taking the question.
So I wanted to ask you.
You touched on it a little bit I think Christina in the prepared remarks about back to school and being excited in.
Assuming we do have a more normal back to school and with this child tax credit coming.
Are you guys planning.
On the back to school period in the second half any differently. This year in terms of marketing or inventory levels, maybe that you could share a little bit with us.
Yeah, Joe I'd be happy to talk about that so we're very excited about what these life moments on Florida in the back half the opportunity for a little more quote unquote normal fee.
<unk> creates opportunities for us to be relevant non-GAAP in many different ways.
And so when you think about back to school, the huge moment, where the convenience of our assortment across multi category portfolio is already a preferred destination, but then you think about how that leads into opportunities in Halloween.
Good day, and the holiday opportunities for our families to be together and celebrate sometimes for the first time in almost 2 years and so this is where the power of our assortment and the gifting opportunity the value equation that we offer.
<unk> with our brand really shine in that view.
We are very excited about what the fall outlook.
So Joe Thanks for that final question, it's a great place relative to wrap up on hopefully for all of you recognize the competence we have on our business as we go forward the execution that we're seeing across all of our different functions and the way. We are focused on serving the guests. So I appreciate everyone joining us today and operator that can.
<unk>, our first quarter earnings call. So thanks again for joining us.
Okay.
Yeah.
Okay.
Yeah.
[music].
[music].
Ladies and gentlemen, thank you for standing by welcome to the target Corporation 2021 first 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 <unk>.
Close the prepared remarks, we will open the queue for the Q&A session at that time. If you have a question you will need to press star 1 on your telephone as a reminder, this conference is being recorded Wednesday may 19th 2021.
I would now like to turn the conference over to Mr. John Hulbert, Vice President Investor Relations. Please go ahead Sir.
Good morning, everyone and thank you for joining us on our first quarter 2021 earnings conference call.
On the line with me today are Brian Cornell, Chairman and Chief Executive Officer, Chris.
Christina Hennington Chief growth Officer, John Mulligan, Chief operating Officer, and Michael <unk>, Chief Financial Officer.
In a few moments, Brian Christina John and Michael will provide their perspective on the first quarter and their thoughts on our outlook for the second quarter and beyond.
Following 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 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 mornings press release, which is posted on our Investor Relations website.
With that I'll turn it over to Brian for his thoughts on the first quarter and his perspective on our outlook Brian.
Thanks, John and good morning, everyone.
The first quarter it felt like a first step towards a posting on our world.
Our team that operating model continues to work alongside our guests and communities.
Moving them well to another chapter of growth and healing.
From our unique mix of categories Dora on that.
Our business is delivering what consumers want and need each and every day.
The results we delivered in Q1 are nothing short of outstanding.
Comparable sales grew by nearly 23%.
Making our fourth consecutive quarter in which comp sales grew more than 20%.
Maintaining that pace this quarter was especially notable.
Given that we were comping over double digit growth a year ago.
Over the last 2 years comp sales have grown about 36%.
And total sales the expanded by $6 5 billion.
In the first quarter alone.
This year sales growth reflected more than $1 billion and market share gains.
A clear signal of how relevant guests find our experience even though they have many more shopping options available compared with this time last year.
In a quarter featuring many things to celebrate on most proud of the performance of our stores.
With vaccinations rolling out across the country.
And consumers increasingly comfortable venturing out.
We've seen an enthusiastic return to in store shopping.
Yes, we're happy to come back to our store because they love the environment, we created and invested in over time.
As a result, our store comp sales increased 18% in Q1.
Driven almost entirely on higher traffic.
And accounting for the vast majority of our growth.
Contrast that to a year ago, when the channel mix of our business with changing rapidly.
With guests leaning heavily into our digital fulfillment options essentially our same day services in the midst of a nationwide lockdown.
A year ago on this call we were highlighting a digital comp of 141%.
Driven by growth in our same day services are more than 275%.
These 2 contrasting scenarios clearly demonstrate the flexibility of our operating model.
But they also show how our stores and digital channels complement each other to drive guest engagement.
Even though digital stole the headlines a year ago on.
Store comps actually increased about 1% in the first quarter last year.
And this year, while store sales accounted for most of our growth.
First quarter digital comp sales also grew 50%.
On top of last year's enormous numbers.
This is the power of being.
GAAP turn to target because of our stores and our digital options.
Not 1 versus the other.
And for US the distinction between a store sale and a digital sale is largely irrelevant.
Because of our unique storage as hub model more than 3 quarters of our first quarter digital sales were fulfilled by our stores.
That means in total more than 95% of targets first quarter sales were driven by our store assets store inventory and store teams.
This store driven growth is translating to outstanding bottom line performance.
Our first quarter adjusted EPS of $3 69.
Our standard a new all time high for the company.
Compared to a 2020 when profitability to a temporary dip. This year's performance represents the astounding increase more than 6 fold.
If we look back to first quarter 2019, this year's adjusted EPS with more than a 140% higher.
Demonstrating how far our business has advanced in a short time.
I'm on a pause here and thank our team members across the world.
They have consistently demonstrated incredible passion commitment and focus to serve our guests and take care of each other.
I am grateful and proud to serve with this outstanding team.
And to share the incredible business results, they're delivering quarter after quarter.
It's also important to highlight how the category mix plays a key role in the flexibility of our model.
For instance.
With guests century out we've seen an incredible rebound in apparel sales with Q1 comp growth of more than 60%.
On the other hand, and as expected we experienced slower growth in food beverages and essential.
As we annualize the peak stock up period, a year ago.
Most notably we saw continued strength in our home and hard lines categories, which delivered outsized growth on top of very strong numbers a year ago.
Kristina will provide more detail in a few minutes.
A relentless focus on operational excellence is another key factor on our performance.
This is best summarized by our guest satisfaction scores switch across all of our services remains stable or moved higher despite record growth, let's now compounding on a 2 year basis.
This is a clear testament to the diligence of our team.
And the return on our investments in training hours and wages.
For the last several years.
Over those years sales on our same day services.
Order pickup drive up and ship have accounted for the bulk of our digital growth and they grew to well over half of our digital sales in the first quarter.
Day day penetration has more than doubled since Q1 of 2019.
When sales through these services accounted for less than a third of our digital sales.
While all free same day services continue to grow faster than overall digital drive us there has been a standout and consistently received the highest ratings of anything we do.
This service only accounted for about 5% of our first quarter digital sales 2 years ago.
That ratio expanded to more than 30% this year.
Put another way in the first quarter alone <unk> sales have grown by well over $1 billion in last 2 years.
As John will outline in more detail, we continue to expand the assortment available per driver and we've earmarked capital investments to make Brian up even more convenient for our guests and efficient for our team.
Even that we anticipate continued rapid growth of the service.
While it's gratifying to see what our team has accomplished over the last several years there is much more opportunity in front of us.
We're planning significant investments in our store assets as we remodeled 100 store locations rollout, new Ulta and Apple shopping environments.
That's in the efficiency of our same day services.
And introduce neighborhoods by opening new small and medium sized stores.
We're also investing in our brand portfolio as we focus on presenting the best owned and National brand store guests, which we highlight the best in store and digital shopping experience in the market.
We're also making continued investments in safety equipment.
Reinforcing the trust and confidence we have already established with our guests.
And we continue to invest in our team.
On their pay.
Benefits training and advancement to ensure the target continues to be a destination for top talent.
And as you've seen for many of our recent announcements.
We're investing to leverage our size and scale.
Purpose and values to work for all families.
This summer we will share more information about our refreshed enterprise sustainability strategy that further draws on our company legacy of corporate responsibility diversity and inclusion.
And community engagement.
As part of our immediate efforts will focus on designing and elevating sustainable brands.
Innovating to eliminate waste.
An accelerating opportunity in equity in all communities on.
All in service to a safe and prosperous future for all.
It was 4 years ago at the beginning of 2017 that we first announced our plan to double down on investment and growth.
The decisions, we announced that day and the investments we made in the intervening years left us well prepared to handle all the challenges and opportunities presented by the pandemic.
And then on first quarter of 2017.
Our business generated sales of just over $16 billion.
And adjusted EPS of $1 21.
4 years later first quarter sales have grown nearly 50%.
On adjusted earnings per share a triple.
From today's vantage point the opportunities ahead of US both this year and over time, our adjusted Brian as they work on that day 4 years ago.
Despite what has already been accomplished.
We've only scratched the surface of what this brand and his team can accomplish overtime.
I'm excited to stand with them as we rank the next chapter in this great company's history.
Now I'll turn it over to Christina who will share more perspective on our first quarter results and for priority going forward Cristina.
Thanks, Brian.
As we enter 2021, we knew it would be a year like no. Other that's because we're coming off of 2020, which was by far the most unusual year any of us have ever experienced.
Such we knew there'd be a wide range of potential outcomes for our sales both by category and in total and so far with 1 quarter behind us results have been extremely positive across every dimension.
On the face of the strength, we've seen an incredible response from our teams across the board from our stores to our merchants to the supply chain have all worked together in service of our guests. While there are many ways to measure the impact of those efforts guest loyalty and market share are the 2 most important measures of success in this volatile time.
Consequently, it's incredibly gratifying to see that across every 1 of our guest segments in the first quarter, we measured an increase in average trips per guest and a larger average basket.
This led to more than $1 billion of additional market share in the quarter on top of a $1 billion gain a year ago.
In terms of category performance, we saw the strongest growth in our apparel business, which delivered comp growth in the low 60% range.
As Brian mentioned, we saw a temporary dip in apparel sales last year, when first quarter costs were down around 20%.
Following this year's strong increase first quarter apparel sales have grown approximately 29% over the last 2 years.
Home also delivered incredible growth with an increase in the mid 30% range on top of a high single digit increase a year ago.
Within home growth was strong across the board with the most robust performance in our decorative home and seasonal businesses.
Heartlands also delivered huge volume with comp growth above 30% on top of a 20% increase a year ago results were led by sporting goods on toys, which both saw comps above 40%.
Judy Comped in the high teens on top of a high single digit growth a year ago with empty you would either skincare Sun care and Bath categories delivered comp growth in the mid 30% range with cosmetics growing in the low twenties.
Finally, our essentials and food categories, both delivered comps in the low to mid single digits.
To see healthy growth on top of last year is remarkable as you call that a year ago guests were aggressively stocking up their pantries Frenchism freezers and we sold virtually every unit of paper goods that we owned.
Beyond category strength I want to pause and also highlight that the sales on target owned brands grew approximately 36% in the first quarter the strongest increase we've ever recorded because.
Because of our unique capabilities in product design development and sourcing our own brand products offering unbeatable combination of design quality and value. These brands aren't something that our guests pick up while they're at target. They are a big reason why they shop at target, which is why we continue to invest in them.
We frequently talk about performance by category and our brands because it's important that our entire portfolio is healthy and well positioned to meet our guest needs but.
But it's also important to realize that they create value for our gift beyond simply the sum of the parts rather it's the combination of all our offerings, including categories brands and services across our distinct multi channel experience that allows target to serve our guests needs today and over time.
Last year as guest focus more on enjoying time at home that had implications not just for home category, but also for hotlines food and beverage and essentials.
And their focus on health and wellbeing affected trends in activewear beauty healthcare food and beverage and more.
The same is true for our sales channels as guests last year focused on social distancing they leaned into digital including our same day services and this year as Theyre looking to get back out in public they're flocking to our stores based on the trust. We have established over time, which was further reinforced by last year's investments.
So as we plan the remainder of the year, both in total and by category, we continue to listen closely to our guests to understand how they are thinking and feeling and.
And when we talk to our guests a day they tell us they want to maintain some of the new habits and routines. They formed during the pandemic, including an enhanced focus on the joy of home and health and wellbeing of their family.
At the same time, there's a rapidly emerging emphasis on style and mobility as guests feel increasingly safe and public spaces.
That trend is playing out in an explosive demand for dresses and cosmetics as well as luggage and categories based on being active like sporting goods and performance active wear.
This reinforces the consequent and target can fulfill our guests' needs as they focus on home and health and when they look to venture out we can welcome them back into our stores and continue to serve them with our same day services, they've recently tried and now love.
So after a record setting first quarter, we're keeping our foot on the GAAP based on our guests' desire to bring rejuvenated life and energy to their homes celebrate seasonal moments with loved ones and step out in public I could not be more excited about the ways, we're ready to inspire and energize our guests.
Just last week, we launched our latest limited time collection Hilton Carter for target off to a great start. This collection features live plants flow greenery and unique plant accessories for experienced and novice gardeners alike.
Got to be out John by their parents younger kids want to make this space with their own and our popular kids brand pillar 4 it will continue to help them do just that for its 5 year anniversary piliform celebrating with hundreds of new items that can grow with them and be used in any area of the house.
As our guests begin stepping out there focused on looking and feeling your best with this rekindled passion for fashion, our guests will be overjoyed with the latest installment of our designer dress collection.
Featuring designs by Christopher John Rogers Alexis on Rick. So this assortment offers more than 70 original and affordable dresses and bold bright patterns and statements silhouettes and of course with our continual focus on inclusivity and celebrating every body. This collection features affordable prices in a range of sizes from extra extra space.
Paul to Forex.
We've long focused on making target a destination for holidays and life events and we just wrapped up a huge mother's day season, we had solutions for mom across the store from apparel gifting beauty flowers candy and more and now we're gearing up for father's day in June we've got a great assortment of gifts for dad from all in motion a tire for cash.
All things hitting the gym or just hanging out to align of shades skincare and hair care products from goodfellow of.
Of course doing celebrations arent exclusive to that.
With so many in person celebrations canceled last year, we're ecstatic about our fabulous new assortment for pride as we celebrate in love with our LGBTQ I guess team members and neighbors.
Later in the summer we know families are excited to celebrate the fourth of July with a long awaited neighborhood Cookout, a road trip out of town or an intimate backyard barbecue with a few fireworks with great deals on the perfect on the National brand Assortments. It doesn't matter. If the celebration is bigger small targeted everything you'll need to fill a cooler.
Packet beachbag and fill up with friends family and fun.
And before we know what it's time to head back to school and we're planning for 1 of our biggest back to school and college seasons ever.
Of course, we will have great deals on all the traditional school supplies.
We also have a new normal on the school supply lists like hand, sanitizer and disinfectant wipes.
With local school lifts on target Dot com and our industry, leading fulfillment options back to school shopping has never been safer or easier.
And with a great new apparel offerings from Cat and Jack Art class more than Magic Wild fable original youth and all in motion all found only a target will have our school down guess looking and feeling fresh for that first day of school.
Before I close I want to pause and highlight some of the work on most passionate about.
That's our work on targets for each committee, which we formed last year to achieve lasting systemic change for our black guests team members on communities.
This work aligns with our vision for sustainability at target and it's a strong example of how we're becoming an equitable company, creating change that strengthen our business.
Hopefully you've seen our recent announcement that target has committed to spending more than $2 billion with black on businesses by the end of 2025.
In addition, we've announced a new scholarship program to support students.
And then it doesn't historically black colleges and universities.
And this summer both in store and online we are adding more items per black beyond measure assortment.
I'm. So proud of these efforts and everything we do to help all families discover the joy of everyday life.
I also want to give a quick shout out to our store teams are recently had a chance to visit stores in the New York City market and after more than a year in which most of my meetings have been virtual it was an incredibly energizing experience I visited new small format locations across the city from Manhattan to Queens Brooklyn.
Every location with a unique reflection of the local neighborhood from design to assortment and the team members serving their neighbors based.
Based on the energy and passion I could feel from these teams. It's clear why we're seeing such strong sales in our stores across the country.
As the first chief growth officer at target I couldn't be more enthusiastic about the opportunities still ahead of us as you saw throughout 2020 and now in 2021, we have a long runway to continue investing in and growing our core business at.
At the same time, we'll continue to develop innovation pipelines and exploring new initiatives, maintaining a balance between fundamentals on execution.
And the exploration of new opportunities as.
As we plan for future growth will continue to listen to our guests and apply those insights to prioritize their work with US guest's first approach. We're confident we can continue to build relevance and market share both today and over time.
With that I'll turn the call over to John.
Thanks, Christina at our financial community meeting earlier this year, we detailed how last year's $15 billion on sales growth was more than we grew over the prior 11 years and as you've seen today trends are not slowing down as we added another 4 and a half a billion dollars of sales in the first quarter.
Given this continued rapid growth and the opportunities still ahead of US. The operations team is focused on building capacity and enhancing processes to create and enable targets continued growth.
Work starts on our supply chain, where we've outlined our plans to add 4 new regional distribution centers by the end of 2022 with the first 2 building slated to open later this year.
These new buildings located in Chicago, and New Jersey are set to go live in the next several months, creating additional capacity for the network in total while enhancing service levels and high volume markets that continue to grow.
More specifically once these buildings are operating at scale, they'll meaningfully shorten lead times to nearby stores improving in stock levels, while reducing the need for safety stock in those locations.
Beyond the capacity, we're adding with these new buildings. We're also investing in updated fixtures to create additional capacity across our current network.
Changes are highly capital efficient involving a small amount of capital to open up a substantial amount of incremental capacity within the network equivalent to the addition of about 1 and a half new distribution centers.
And as we told you at our meeting in March we are pleased with the initial results from our new Sortation Center in Minneapolis as a result, we have plans to build up to 5 more of these facilities in 2021 with additional openings planned for 2022 and beyond we are opening these centers, which are smaller than an average store in markets with a high concentration of local package delivery.
They are designed to receive and sort packages from a large group of surrounding stores multiple times, a day, which allows for more optimized granular sortation.
This precision reduces costs for our delivery partners meaningfully, reducing what we pay for delivery and additionally facilities eliminate the need for sortation for stores they serve while freeing up packing capacity at those same locations.
Sort centers have long been on or fulfillment roadmap, which we've built through internal development along with small acquisitions in.
In these facilities, we optimize the selection of delivery partners by applying technology from Grand Junction, which we acquired in 2017.
And we optimize sortation to minimize cost to increase speed by applying technology, we acquired from day live in 2020.
In addition, beginning in the first quarter, our Minneapolis short center began testing package delivery using shipped another 2017 acquisition to add capacity reduce costs and enable more flexibility, which will benefit our rapidly growing ship from store capability over time.
Within our store network, we have begun ramping up our remodel program. Following the pause we implemented last year.
We have just over 30 full remodels slated for completion in the second quarter and more than 100 planned for the back half of the year.
Based on past experience, we expect these remodeled stores will generate an incremental 2% to 4% sales growth in the year following completion with another 2% incremental growth in the second year.
On the direct impact on sales these transformations create an ideal platform for all of the merchandise innovations and service enhancements that we'll launch over time.
In addition to full store Remodels, we're planning other store investments this year.
Moving more than 100 ultra shop in shops slated to launch in the back half of the year as well as our enhanced Apple layout in electronics in select stores across the country.
Among our store services, we've long known that our same day fulfillment options would be popular with our guests, but their growth over the last few years has been far above our expectations. This.
This is most evident in our drive up service, where first quarter sales volume was nearly 21 times higher than it was 2 years ago, I don't think to nearly $1 $3 billion of incremental sales volume over that period.
In the face of this incredible growth there are emerging opportunities in high volume locations to invest in capacity and efficiency in support of our same day services.
Specifically in more than 100 locations. This year, we're investing in small projects to optimize the front ends of these buildings freeing up additional capacity for continued same day growth, while making the lay up more efficient and safer for the team.
We also continue to enhance the assortment available for all 3 same day services, adding more perishable food to our pickup and drive up services and more general merchandise like apparel to the assortment available through shipped.
And we just announced that in the second quarter, we'll have adult beverages available through pickup and drive up and more than 200 stores and available for same day delivery in more than 600 stores across the country.
Beyond activity on existing stores, we're expanding our new store opening plans to more than 30 additional locations across the country. This year as we continue to find compelling opportunities in urban and dense suburban markets and on or near college campuses.
In recent years. These custom formats have typically been less than 50000 square feet.
However, given local real estate conditions in dense suburban markets. We're also finding compelling opportunities to open somewhat bigger stores between 50, and 100000 square feet, which weren't available in the past.
As a group these new stores are generating higher than average sales productivity above average gross margin rates and strong financial returns and we see a very long runway to open more of them over time.
And finally after store comp growth of 18% in the first quarter driven almost entirely by traffic. We're confident that we're already benefiting from a differentiated service model in our stores.
But that's a lead we cant take for granted so we're continually looking for ways to get even better. So this year. Our store teams are rolling out an enhanced service model focused on consistency of every interaction to ensure that our guests will always feel welcomed and appreciated and if they need help there'll be team members, who can find solutions to enhance their experience.
This new engagement model is strongly connected to our company purpose culture and values and we're supporting it with enhanced training and tools across the chain.
It is designed not to be a 1 and done effort, but a sustainable model that's integrated with our operational goals not something separate that's added on to everyday tasks.
So as I turn it over to Michael I want to once again, thank the entire team for the incredible things you've already done on your passion to continually raise the bar.
This year I'm celebrating my 25th year at target. So you might be tempted to think I've seen at all but.
But when I step back and realize what this team has accomplished in the last year under the most challenging of circumstances, it's clear that there's no limit to this team's potential and there is no doubt that we have the best team in retail.
Now I'll turn the call over to Michael.
Thanks, John.
When I think about the underlying themes of our recent performance. The most dominant 1 by far has been the unprecedented growth and share gains we've seen over the last 5 quarters.
On the P&L the leverage resulting from growth has more than offset all of the unique headwinds we faced over this challenging period, resulting in really strong performance target.
Targets total sales grew 23, 3% in the first quarter, reflecting comp growth of 22, 9% given last year's double digit growth first quarter sales have expanded more than 37% over the last 2 years driven almost entirely by higher comps.
Unlike last year, when consumers were consolidating trips and shopping less often this year's comp growth was driven primarily by a traffic increase of more than 17% combined with a 5% increase in average ticket.
As Brian mentioned store comps were the growth engine. This year, while digital was the primary driver in Q1 2020 as such over the last 2 years, both our stores and digital channels have expanded their first quarter sales by more than $3 billion.
This balance highlights the relevance and complementary nature of both channels and serving our guests needs.
Our first quarter gross margin rate of 30% was 490 basis points ahead of last year, when we faced a number of temporary headwinds, including Mark Downs and other costs to right size, our apparel inventory.
Compared with 2019 this year's first quarter gross margin rate was about 40 basis points higher which is notable given the digital sales penetration more than doubled in that time from 7 1% in 2019 to more than 18% this year.
In terms of the year over year gross margin drivers mix had a positive impact of about 150 basis points, reflecting the dramatic increase in apparel sales and continued strength in our home category.
The remaining favorability was driven by core merchandising as we continued to benefit from low promotional and clearance mark down rates and we annualized last year's costs to right size, our apparel inventory.
The rate impact of supply chain and digital fulfillment costs was approximately neutral compared to last year as the cost of outsized digital growth were offset by the benefit of a stronger mix of same day fulfillment and our ongoing work to control unit costs across our entire suite of digital fulfillment options.
Our first quarter SG&A expense rate was 18, 6% this year down more than 2 percentage points from 27% a year ago and 28% in 2019 in terms of drivers leverage benefits have more than offset all of the extra costs. We've absorbed over the last 2 years, including meaningfully higher pay and benefits for our team and other.
It's to protect the health and safety of our team and guests.
While DNA expenses have grown in each of the last 2 years. This year's first quarter D&A expense rate was about 40 basis points lower than a year ago, and about 80 basis points lower than 2019.
Altogether, our first quarter operating margin rate increased on astounding 7 4 percentage points compared with a year ago to an unprecedented 9 8%. This year from a temporary low $2 4 per cent rate a year ago.
However, even compared to a very healthy 6 4% operating margin rate in the first quarter of 2019. This year's rate was more than 3 percentage points higher in terms of dollars first quarter operating income has more than doubled over the last 2 years.
On the bottom line, our business delivered first quarter GAAP EPS of $4 17.
Up more than 600 per cent from a year ago and well over double our 2019 GAAP EPS on.
On the adjusted EPS line, which excluded the gain from the sale of our Derm store business. We earned $3.69 this year more than 500% higher than a year ago and well over double our 2019 adjusted EPS.
As you know our capital deployment priorities remain the same as they've been for decades, we first look to fully invest in our business and projects that meet our strategic and financial criteria.
Second we return cash through our quarterly dividend, which we've maintained every quarter as a public company and grown every year since 1971.
And finally, we return excess cash over time through share repurchases within the limits of our middle a debt ratings.
In the first quarter, we invested just over half a billion dollars on capital expenditures to support our business. We continue to expect our full year capex will be approximately $4 billion, but the bulk of those expenditures will be more back loaded in the year given the timing of this year's projects.
We paid dividends of $340 million on the first quarter up slightly from a year ago as growth in the per share dividend was partially offset by a decline in share count.
And finally, we resumed share repurchases in the first quarter. Following a temporary pause in 2020 and deployed about $1 $2 billion towards higher $6 1 million shares at an average share price of just under $191.
And in February we completed the sale of our Derm store business, which contributed just over $350 million to our first quarter cash flow.
Altogether, we ended the quarter with about 7 $8 billion of cash and cash equivalents on our balance sheet. This was down about $700 million from the beginning of the quarter, but still well above where we expect to operate over time with this cash will be funding approximately $3 $5 billion of additional capex in 2021, and we'll be recommending.
A robust increase in our quarterly dividend to the board later this year.
Beyond these uses we should have ample capacity for continued share repurchases and we'll continue to govern the magnitude and pace of repurchases in support of our goal to maintain our middle a credit ratings and given where we are today it will likely be a multiyear journey before our debt metrics move fully back to where they've been over time.
Now I'd like to turn briefly to our return on invested capital, which reflects both our operating results and the investments we've made to generate them.
In the first quarter, our trailing 12 month after tax ROIC moved up to 37%, which is well over double the 13, 4% we reported a year ago.
While we've indicated that this measure will likely be volatile near term and could revert to a very healthy number near 20% over time. The fact that our business has generated such a high after tax return over the last 12 months is a testament both to the strength of our model and outstanding execution by our team.
Now, let me turn to our sales outlook, we learned a lot in the first quarter and notably got our first look at how our business is successfully comping the comp with impressive growth on top of last year's strong surgeon sales also and importantly, we've continued to gain market share on top of last year's dramatic share gains.
Based on these results, we're now planning for our business to deliver a mid to high single digit comp increase in the second quarter.
This expectation is in line with the 2 year growth rates. So we saw on the first quarter and while we only have a couple of weeks in the quarter behind us. The results. We've seen so far this month are consistent with this outlook.
The range for second quarter operating income remains wide, but should remain strong far ahead of our 2019 rate of 7 2%, but perhaps not fully as high as last year's unprecedented rate of 10%.
In terms of the specific puts and takes on the quarter, we'll be comping over last year's reversal of the return reserve estimate, which added about $110 million to last year's operating income.
In addition, this year, we're making purposeful investments in store labor hours to ensure we deliver outstanding service and stronger in stocks than a year ago when sales grew far beyond our expectations.
Of course, we will continue to benefit from meaningful sales leverage given that we're planning for healthy growth on top of last year's record setting increase putting that altogether. We expect to see continued strong performance on this line.
In the back half of the year the range of possibilities for comp growth is also quite wide and we will gain more insights as the year progresses as of today based on our recent results on confidence going forward, we expect to see positive single digit comps on the back half of the year on top of last year's unprecedented performance.
Regarding our full year operating margin rate following an exceptionally strong first quarter, we have increasing confidence on the consumer and industry backdrop in the back half of the year.
As such the range of outcomes for our 2021 operating margin rate has moved significantly higher.
So despite the anticipated headwinds from higher markdown rates following last year's historically low rates, we believe that our business is positioned to deliver our full year operating margin rate, that's well over last year's rate of 7% more.
More specifically, we believe this year's operating margin rate could reach 8% or perhaps a little higher.
We'll continue to refine our view throughout the year.
As the team looks ahead to the rest of the year Theyre focused on staying agile and what continues to be a volatile environment, rather than placing all of their bets on a single forecast number they're focused on contingency planning, creating flexibility that will allow us to react to unexpected changes and importantly take advantage of opportunity when we see it.
We're also excited about the investments still ahead of us and the growth will create.
Hundreds more remodels dozens of new stores, new Ulta, and Apple shopping environments and supply chain investments to support both replenishment and fulfillment given.
Given the performance, we're seeing today, which is the product of the investments we've made over the last few years, we're eagerly leading into future opportunities to enable more profitable high return growth overtime.
Before I turn it back over to Brian I want to add my voice and thanks to the team the value of our team members are creating for our business communities shareholders and each other goes far beyond what we can measure on our P&L.
Thanks for making target an even stronger company on behalf of all of our stakeholders Brian.
Before we move your questions I want to pause and acknowledge again the role our team played and the outstanding results. We delivered this quarter.
I'm thankful for their continued focus on our guests and focus on operational excellence and passion for our brand.
I also want to acknowledge the challenges facing our India headquartered team along with our team members flow family there given the recent surge in COVID-19 cases.
We have been carefully monitoring conditions on the ground and providing extra support to our team during this difficult time.
To ensure they can take care of themselves and their families. We.
We've also funded $500000 donation to UNICEF to increase access to auction treatment and hospitals across the country.
Bringing testing resources is the hardest hit communities.
We're hopeful that conditions, there will continue to improve.
So now as we get ready to move to your questions I want to underscore the confidence you've heard throughout our remarks today.
Coming off an unbelievable year in 2020.
We had a lot of confidence as we entered 2021.
But our first quarter results came in far ahead of our baseline expectations.
With the macro and consumer backdrop, that's been surprisingly positive we've seen remarkable momentum in our performance even as we started a comp over the period of peak increases a year ago.
The flexibility of our category mix and fulfillment options combined with an agile energetic and engaged team.
Continue to resonate with our guests driving double digit traffic growth and an increase in average ticket in the first quarter.
But as you've often heard me say, we shouldn't confuse performance with potential.
Even after more than a year unprecedented growth.
Being focused and leaning into the opportunities ahead of us.
Making investments to build on an already strong foundation.
With these investments I'm confident that our business model and outstanding team will continue to raise the bar on our already best in class retail experience, resulting in even stronger loyalty and guest engagement over time.
With that well.
We'll turn to Q&A, Christina John 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 1 to withdraw your request press Star 2.
1 moment for the first question.
Our first question is from Bob <unk> with Guggenheim You May go ahead.
Hi.
Good morning congratulations.
Thank you.
Great job, Brian the question that I have just 1.
When you look at that.
The mix, especially on the apparel side can you talk about.
Any new brands.
Youre excited about.
<unk> done a great job with the pilot brand piece and I think as you move through the year any expectations that you have just on that mix and some of the margin implications around that category would be great. Thank you.
Well, Bob Good morning, why don't let Kristina I spent some time talking about what we're seeing with categories. Some of the highlights between our owned brands and National brands, Obviously, Kristina I highlighted the fact that despite our overall robust performance in the quarter on brands grew by 36% of record performance for us.
We're clearly seeing great performance in both our owned brands and National brands, but Kristina wanted to build on so what we're seeing in the different categories.
Absolutely and good morning, Bob Thanks for the question.
As Brian was just sharing we really are excited about the strength across the board apparel was certainly a stand out in this quarter were throwing over 60% and that came from a range of brands and every segment of the business.
Reality is the 3 trends that I talked about in my prepared remarks.
Are benefiting on our multi category approach across the board Joy at home on the opportunity to celebrate everything that brings the GAAP.
To their home eating being with their families and the investments that they've made over time in their home health and wellbeing the opportunity that our guests are taking to invest and proactive health care.
Fitness at home in Activewear.
The newer and more emerging trend is really styling mobility as guests are going out they are looking hard on.
Fresh look so our newest collection.
Adjusted by Christopher John Rogers, <unk> been ratio Couldnt have been more perfectly time to really help guests look there Bob.
They are wearing and are certainly also across Anthony anytime.
Thank you.
Thank you.
And the next question is from Paul Trussell with Deutsche Bank You May go ahead.
Good morning, and outstanding results congratulations to the team.
I guess on my question is on first same day services, which obviously continues to really showcase robust growth.
Wondering if you can talk a little bit more about how the business has evolved what are the additional learnings and what are the actions that have been taken to really improve efficiency.
And profitability of that particular business and service.
Well, Paul Thanks, again for joining us. This morning, why don't we let John Mulligan and talk about some of the progress we've made from our same day fulfillment standpoint.
Good morning, Paul good to talk to you.
As you know well, we've talked about stores as hubs now for going on for years, and we have always said.
We like it for a couple of reasons 1 great guest service and to better Economics same day services are.
That on steroids, they have much better economics than shipping something to someone's home.
Because as we've talked about the shipping expense is the biggest part of delivering something to someone's home. So if we take that out of the equation and we ended up with economics that are much closer to that of store transaction. The thing we love about all of the same day services pick up drive up and shipped all of them continue to grow faster than our overall digital growth and we continue.
To find ways to improve them as you said part of that is investing in technology for our teams improving there theyre short path improving how they pick we've done a great deal of process worked to break things apart to make it simpler for our teams to execute we've done things to help them find items in the store. So that we don't end up with what we call <unk>.
Items not found.
And then we continue to invest in helping them physically and that's a big focus for us this year and will be over the next couple of years in the case of drive up which as we've talked about a couple of times, Brian talked about and I talked about has been our fastest growing same day service since basically since we started it. It also has our highest NPS scores so guests love it.
We view that you've just decide when you want to come we don't force you into a time slot and then our team brings it out to you in 2 minutes or less so our guests absolutely loved that youll see us invest in making that easier for our team building capacity on the front end of the store over the past year, we've rolled out at a temperature controlled products to drive up and so youll see us add refrigerated.
Duration of freezers to the front end of the store all behind the wall. So that our guests don't see that but making it much easier for our teams to execute and then much safer, we'll make it much easier for them to walk out to cars.
<unk> them from the environment, a little bit so all of that experience continues to improve as well. So every year. Our team comes up with multiple ways to continue to improve the service first and foremost for the guests and then on the backend improve things for our teams. So they can execute it easier as we continue to grow so we see a lot more opportunity for us and as I said that'll be a big part of our <unk>.
Capital investment over the next several years.
John the only thing I might add as low as we saw Rguest churn the same day services during the pandemic using pick up and drive up and ship. We expect those services to be very sticky over time, and certainly think we have matured the awareness and the use of those same day services by 2 3 of <unk>.
For years, and certainly as we go on to the backing up on a year on during the holiday season, I think we're going to continue to see our against turn to shift and drive up and pick up as just an easy and convenient way to shop at target.
Thank you for the color just a quick follow up from Michael obviously, you're really showcasing a lot of confidence.
And the trajectory of the business given the outlook provided for the balance of the year, maybe just a little bit more detail on how we should think about gross margins and SG&A.
But what's clearly going to be a really healthy operating margin rate.
<unk> in the second half cash.
Sure Paul Thanks for the question.
I touched on this a bit in my remarks, but if I had to summarize our profit story. It goes back to the scale benefits, we see when we have growth in our plan for the back part of the year is to see growth on top of some of the strongest quarters in target history last year. So we would expect that leave to lead to lead to.
<unk> profit rates on a year over year basis, and Theres still a wide range of where those numbers might ultimately land and we'll continue to refine our point of view as the year progresses, but.
Scale is a wonderful thing and we have seen impressive growth over last year, and we expect more to come on the balance of this year.
Yeah.
And does that conclude your question Sir.
Yes, Thank you and best of luck Paul Thank you.
Thank you. The next question is from Karen short with Barclays. You May go ahead.
Hi, Thanks, very much and I'll add my congratulations to a great quarter.
I wanted to just ask a little bit about share gains and obviously, we know the categories and you're gaining share across all categories, but I wanted to see if you could give a little bit more color on share gains by demographic and which demographics you think youre gaining the most share from and then I had a follow up to that last question that was asked.
Alright, Thanks again for joining us today and I. Appreciate the question on market share as you look at our business and I think you know our target guests on our target shopper, we're appealing to all demographics.
We've had over now well over 30 million guests, who shop US every week most of America shops, the target and I think as we look at it we're picking up share across all of these various cohorts. So it's not 1 consumer at all.
All of the guests who are shopping target and as they return to our stores shopping multiple categories.
And I think Thats the magic behind our performance is a great combination of our in store experience, the ease and convenience of digital but that multi category portfolio and that unique combination of our own brands and curated national brand.
We appeal to a broad group of consumers in different cohorts and we're picking up share across all of these different areas.
Okay. Thank you and then just on inventory growth. Obviously your inventory growth was very strong this quarter, which is impressive given the freight issues, but an important issues, but maybe some color on that growth in general and how you think about the balance of actually wanting more and Mark Downs in 2021 versus 2020.
And you know how we should think about that in the context of gross margin.
Michael Why don't you start and then provide some additional color on casino talks about our inventory positions.
Sure.
First off Garen I feel really good about our inventory position heading into the second quarter and you can see we're up on a year over year basis, and we should be given the growth in sales that we've seen and continue to expect.
When it comes to markdowns through the balance of the year and I've talked about this a little bit previously we were sold through and a lot of seasons last year and thats not optimal for US we don't want to look at empty shelves at the end of our seasonal set and so with our anticipation for growth in the remainder of this year, we'll be buying appropriately to that and hopefully that means we've got fuller shelves at the end.
Have a season and with that will come some clearance Mark downs that'll be a little bit of a drag on mark down rates on a year over year basis, If I had the guess, but I would welcome a little bit of that rate drag because it means that were fallen in stock for the guests throughout the season.
Great. Thanks very much.
Thank you. The next question is from Chris <unk> with Jpmorgan you May go ahead.
Okay.
Thanks, Good morning, everybody.
A couple of questions on guidance. My first question is in the second quarter, Michael why couldn't you reached 10% or at least be close to that you did a 90 day in 1 Q sales volumes look to be similar is it is it less rich mix performance or perhaps youre, putting in some caution around potential promote.
<unk> and clearance.
Sure Chris Thanks for the question well, we would expect like I said in my remarks, the second quarter to be far ahead of.
The 2 year ago performance likely not as high as last year, but there is still a broad range around that outcome and so we'll see as the quarter plays out exactly where we land worth noting and I touched on this as well there are some factors unique to the quarter, we've got a $110 million headwind from the way on returns reserve calendar rises between Q1 and Q2 and.
The second thing is we are investing and we'll continue to invest in the team and in store payroll to make sure we're staffed and in stock to support for sales, we expect it to come and our teams have done just an incredible job this year, providing such great guest experience and we want to make sure we're investing to continue to support that and to support growth.
Understood and then as you think about the gross margin can you talk about the puts and takes of this year versus 2019, obviously you have a higher e-commerce mix, but you would think that sort of the mix of the.
The business.
By category could be richer and you also have pretty lean inventories.
Against a strong demand backdrop.
Yeah, So maybe I'll speak to actuals and unpack the first quarter, just a little bit versus 2 years ago.
If you look at kind of versus our 2019 performance, we saw markdown efficiency.
We've talked about that lower levels of promotional and clearance mark down rates from 2019 on a 2 year basis mix is actually about 40 basis points of a drag in the first quarter and also on a 2 year basis, you can see digital and supply chain pressure of a shade over a point given the growth in the digital business and the impact that that has to rates and so.
Those are familiar drivers we've talked about over time, where those drivers land for the balance of the year will dictate where margins ultimately false.
Great. Thanks, very much have a great spring.
Thanks, Chris.
Thank you. The next question is from Scott <unk> with our 5 capital you May go ahead.
Hey, guys. Thanks for taking my questions I wanted to go into labor, Brian I heard your comments today on CNBC about that it's kind of not really having a struggle getting getting labor day.
And I also heard you guys talk about enhanced service model. So I was wondering if you could talk about whether you guys believe you have a labor advantage and kind of what youre doing with your labor force to enhance the store experience. Thanks.
Well Scott Thanks for joining us why don't I start and then I'll, let John build on my comments, but as I said earlier today, we've been investing in our team for many years now.
And we took our industry leading position with our starting minimum wage we've continued to invest over the last year in the health and wellness and safety of our team and I think thats the amount of stability, even deeper engagement with our teams in stores and our teams and supply chain. So I do think it gives us a competitive advantage and I think so.
The focus we placed on our team the care of our team, making sure we're investing in their training their development. There are growth I think that's really provided us with a unique experience and I think it's 1 of our competitive advantages in the marketplace.
John Yes.
Yes, Hi, Scott.
Just building on what Brian said basically I think.
As Bob has always been the best way to staff, our stores and our supply chain frankly is to limit turnover and so let's invest in our team give them a great experience and you've seen us do that for several years now we've invested in wages. We've invested in benefits just as importantly, we've invested in training to help upskill them and then over the course of the past year and a half or so we've invested in safety.
Very overtly and so as Brian said engagement is very high turnover is down significantly relative to 2019. So we feel really good about where our stores that and as turnover decreases you get so many benefits right. We get team members that know their jobs, we get team members that know their guests that are in their stores because they are in their weekly they can engage with them in this kind of get.
To the service model where the.
The idea is to engage with our guests make them feel welcomed and importantly.
Their problem if they have an issue solve it in the moment for them and so youll see us continue to do that we're very encouraged by what we see our NPS scores across all of our services, including the in store experience are up over last year and up over 2019. So we're just getting started on this journey, but the early results are very encouraging and I.
Just finished where Brian did you have heard us say for a long time, we have the best team in retail and we absolutely believe that's the truth.
That's great share.
John and I had a review just yesterday with our store team leaders to look at turnover on retention rates and we just continue to see stronger and stronger numbers in mark to the point that John abate.
On the operating model changes, we've made over the last few years, putting experts in place in areas like beauty and technology.
Those team members are really passionate about the work that they do and they continue to learn and grow every day and I think that focus on providing training and development opportunities the expertise that we're providing in those key categories.
That's going to continue to provide benefits to us over time.
Alright, guys. Thanks very much thank you.
Thank you. The next question is from Kate Mcshane with Goldman Sachs. You May go ahead.
Hi, good morning, Thanks for taking our question.
I wondered if I could go back to the digital fulfillment questions that were asked earlier I think you said costs for neutral and I wondered is it possible for.
How you're fulfilling to turn into a tailwind as you continue to drive more growth towards the same day services and away from 2 day free ship.
And then separately.
You mentioned, the sortation centers and the number you are opening this year I Wonder if you could talk to just the cost optimization, John those sortation centers over the long term.
Sure. Thanks for the question Kate I can start and then maybe John can provide more color on the Sortation center work that we're doing.
Yeah, we didn't see pressure on the supply chain and digital line this quarter.
That's due in part to the just incredible strength in our store business with stores up 18% on a year on year over year basis.
I get excited by the efficiency improvements I see us continue to make on our digital experience John talks to some of those just a minute ago, but we can do a lot with the volume that we've built over the last 2 years and some of those same day services and all of that volume translates to more efficiency opportunity as we can continue to squeeze down the per unit to <unk>.
Cost to fulfill.
But I don't shy away from growth or from a drag on that line from our growing digital business and the reason why is when gasoline into digital when we get more omni channel guests more guests using drive up more guest using same day, even if that sale itself comes at a slightly lower rate. It does incredible things for the rest of our P&L.
We see those guests spend more on total about 30% more for our new drive up our shipped guest.
It's way more important than the little bit of rate drag we've seen overtime from digital growth.
How we continue to think about it.
Yes, and on the sort centers Kate.
We remain pretty excited about this opportunity, but I would caution you that it's early days for us still.
We always talk about crawl walk run I'd say, we're still firmly and crawl here in Minneapolis, and so we see a lot of opportunity in front of us, but the play here is a couple of things.
And first of all day about capacity in the store. So if we can sweep packages out of the stores more routinely than once a day that frees up space on that frees up space for us to pack additional products in the store.
That's an important thing for US then as we move downstream the more granular sort is where we start to see potentially.
Cost reductions as we can sort to provide to our carrier partners further downstream in their operations and like we've done announced about a month ago used.
Using the <unk> technology, creating local routes for local packages, we can get very efficient on delivery using shipped and shipped drivers and so put all that together in our guest gets a great experience, we create more capacity and we have the opportunity to continue to improve what we believe are already advantaged economics because of our stores as hub Mod.
So more to come on all of that it's early days, but we remain pretty optimistic on all 3 of those fronts.
Thank you.
Operator, we've got time for 1 last question today.
Thank you. Our last question is from Joe Feldman with Telsey Advisory Group you May go ahead.
Great. Thanks, guys for taking the question.
So I wanted to ask you.
You touched on it a little bit I think Christina in the prepared remarks about back to school on being excited in.
Assuming we do have a more normal back to school and with this child tax credit coming on.
Are you guys planning.
The back to school period in the second half any differently. This year in terms of marketing or inventory levels, maybe that you could share a little bit with us.
Yeah, Joe I'd be happy to talk about that so we're very excited about what these life moments afford us in the back half the opportunity for a little more quote unquote normal fee.
It really creates opportunities for us to be relative with our guests in many different ways.
So you think about back to school the huge moment, whereas the convenience of our assortment across our multi category portfolio is already a preferred destination. But then you think about how that leads into opportunities in Halloween and Thanksgiving and the holiday opportunities for our families to be together and celebrate on time.
For the first time in almost 2 years and so this is where the power of our assortment and the gifting opportunity the value equation that we offer and the residents with our brand really shine on so that we have.
We're very excited about what the fall outlook.
So Joe Thanks for that final question, it's a great place for us to wrap up and hopefully for all of you recognize the competence we have on our business as we go forward the execution that we're seeing across all of our different functions and the way. We are focused on serving the guests. So I appreciate everyone joining us today and operator that concludes.
<unk>, our first quarter earnings call. So thanks again for joining us.