Q1 2022 Target Corp Earnings Call

May 18, 2022

Ladies and gentlemen, thank you for standing by welcome to the target Corporation 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 our 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 one on your telephone.

As a reminder, this conference is being recorded Wednesday may 18th 2022.

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 2022 earnings conference call on the line with me today are Brian Cornell Chairman and Chief Executive Officer, Christina Hennington, Chief growth Officer, John Mulligan, Chief operating Officer, and Michael Fidel Key Chief Financial Officer.

In a few of months, Brian Christina John and Michael will provide their perspective on our first quarter performance and our outlook and priorities 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.

Knowing 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 quarter and his perspective on our outlook Brian .

Thanks, John and good morning, everyone.

Our first quarter results demonstrate the underlying strength of the relationship we built with our guests at a time when our team is working through multiple cost pressures affecting our business.

As expected our business continued to grow in the first quarter.

On top of huge gains a year ago.

Your line is the resilience of both the consumer and the ability of our teams.

However through a host of factors this growth was challenged by unusually high costs.

<unk> and profitability, well below where we expected to be and where we expect to operate over time.

First quarter comparable sales grew by three 3%.

On top of 23% growth a year ago.

This marks our 20 <unk> consecutive quarter of comparable sales increases.

11 of those quarters, where before the pandemic.

Followed by the rapid acceleration we saw in 2020.

We're also encouraged that traffic continues to fuel our growth increasing nearly 4% in the quarter on top of 17% growth a year ago.

Our first quarter gross margin rate was well below our expectations, reflecting a combination of factors.

Proved to be very different than expected.

By rapidly shifting macro backdrop.

And changing consumer behavior.

More specifically.

We saw much higher than expected freight and transportation costs and a more dramatic change in our sales mix than we anticipate.

This resulted in excess inventory.

Much of it in both categories, which put additional strain on an already stressed supply chain.

Christina John and Michael will share more details shortly.

And while we have a lot of work ahead of us to restore profitability the level, where we expect to operate over time.

I want to thank the team for maintaining their laser focus on the guest experience.

We have spent years growing part of this relationship with our guests, which is fueling the traffic and sales growth we're seeing today.

And sustaining that guest focus we're confident we'll see deeper loyalty.

And Rocco sales growth in the years ahead.

Among our sales channels first quarter comps were balanced wheat storage and digital as each increased a little more than 3%.

Within our digital channel growth continues to be led by our same day services and drive up with vigor, which delivered growth in the mid teens. This year on top of more than 100% growth a year ago.

Since Q1 of 2019 prior to the pandemic.

Quarter sales have grown more than 40% or just over $7 4 billion.

Broken down by channel store.

<unk> sales accounted for about $4 1 billion. So this increase while digital sales drove another three three.

$3 billion.

And then expanded by more than 250% over that time.

From a category perspective, we.

Continue to benefit from our balanced multi category portfolio.

Which allows us to serve our guests as their wants and needs change.

More specifically in the first quarter, we continued to see strong growth and market share gains in food and beverage and essential categories.

We also benefited from double digit comp growth in beauty, reflecting our ongoing work to enhanced presentation assortment and service, including our new and expanding partnership with Ulta beauty.

The result of this partnership have exceeded our initial expectations driving higher productivity and sales in both beauty and adjacent categories in the store, where we've added an ulta beauty experience.

In our other three core merchandise categories apparel home and hard lines, we saw a rapid slowdown in the year over year sales trend at the beginning of March.

And we began to annualize the impact of last year's stimulus payments.

While we anticipated a post stimulus slowdown in these categories.

And we expect the consumer to continue refocusing their spending away from goods and services we.

We didn't anticipate the magnitude of that.

As I mentioned earlier.

This led us to carry too much inventory.

Particularly in multi categories, including kitchen appliances, Tvs and ultra furniture.

And with very little slack capacity after two years of unprecedented growth, we faced elevated cost of store and indicated right sizing our inventory position.

Nevertheless, we're still seeing healthy overall spending by our guests.

Even as our spending continues to evolve, notably we continue to see meaningful spending surges around holidays, including Easter in April and mother's day, a couple of weeks ago.

Also notable in comparing this year's weekly sales of pre pandemic levels at the beginning of 2019.

We're actually seeing stronger growth trends in recent weeks compared with the beginning of the first quarter, even in categories, where we saw a rapid slowdown on a one year basis.

These encouraging longer term growth trends demonstrate the continued resilience of the American consumer.

And the trust they place in target <unk>.

Even if they faced multiple challenges.

Not surprising when we talk to our guests they often expressed their concerns about a host of rapidly changing conditions ranging from geopolitics to the hyatt persistent inflation, they've been experience, particularly in food and energy.

At the same time guests are focused on getting back to many of the habits and behaviors. They suspended during the heart of the pandemic.

Including travel.

Out of home activities and social gatherings and.

And importantly, even ask the mix of what they are buying continues to evolve.

Spending capacity continues to benefit from elevated saving rates.

Appointment and healthy wage growth.

So as we continually adapt our offerings to best serve our guests in a rapidly changing environment.

We're focused more than ever on providing value across our multi category assortment presenting options that are affordable and accessible to a broad and diverse base of guests.

Across a wide range of household incomes.

And even as we faced multiple cost pressures our team is working tirelessly to maintain prices wherever possible.

Of course, while it's always the last lever we felt.

External conditions led us to raise prices across a broad set of items and multiple candidates, but as you've clearly seen in recent quarters overall costs have been rising much faster than retail prices.

And year over year decline in our gross margin rates.

While we're not happy about the near term pressure. This causes on the profit line we.

We strongly believe these decisions will benefit our business over time.

And as we carefully monitor our prices and quality stack up versus the competition. Our guests are telling us. They appreciate the value and experience with <unk>.

More importantly, our guests are showing their appreciation with more footsteps in our stores and work on our site.

<unk> continued traffic and sales growth on top of record growth a year ago.

As we look ahead, we will maintain the focus on value.

Helping them save time and money in a rapidly evolving environment.

For those who are focused on driving fewer miles in response to record high gas prices are broad and unique merchandise assortment combined with our low prices offers a smart way to save time and miles by consolidated shopping trips.

Of course for guests were looking for money saving options when theyre shopping for their families. Our $30 billion portfolio of home brands offer outstanding quality and savings across every one of our merchandising categories.

And because saving time is valuable in any environment, we're continuing to invest in expanding the scope of our reliable and convenient.

It's sandy services, including our driver.

And in store pickup services, which we offer to our guests at no charge.

Just as we design, our merchandize portfolio the flexibly serve our guests our operations have managed to extreme volatility over the last few years.

The growth amounting to tens of billions of dollar combined with unprecedented shift in demand across categories channels and services is.

Has created a host of challenges for our team.

Which they've handled with incredible energy and focus.

And while we entered this year.

That volatility will begin to moderate.

We've experienced the extreme opposite in Q1, and we don't see currently is improving right away.

In the face of this volatility our team continues to focus on the guest experience working to ensure that anything our team is handling behind the scenes doesn't work FC and deal.

So as we look ahead.

It is clear that many of these pressures will persist in future quarters, but that hasnt affected our long term plan and expectations, including our confidence in the ability of our business to grow mid single digits and maintained an operating margin of 8% or higher over time.

In the meantime, even as we navigate the restore profitability from the impact of these short term challenges.

We're continuing to invest in projects designed to deliver continued profitable long term growth.

Our business model and team have proven their ability to successfully navigate through extreme volatility and.

And we're confident our business will emerge even stronger from these challenges we're facing today.

Jeff regarding messages in early 2017 were followed by profitable growth in later years, we're confident the decisions, we're making today combined with our investments in future growth will pay off handsomely over time.

With that I'll turn it over to Christine.

Thanks, Brian and good morning, everyone.

Just a few months ago at our financial community meeting my presentation outlined our strategic vision as a company while I covered many facets of our strategy that day, where I started then it's where I want to start again today with our guest.

We frequently get questions about how our guests are feeling given the current economic environment, how their shopping habits are evolving and what's top of mind for them.

Rguest space encompasses every slice of the American population given that we serve nearly 20 million guests on average each and every week and the breadth of their individual decisions as they navigate a rapidly changing macro environment is justice broad, making the answers to those questions that much more complex.

I guess might be telling us that they're worried about inflation and rising gas prices. They're also looking to splurge, new shoes, some accent pillows for their home.

Another gas remains worried about COVID-19, but theres still planning to resume travel and looking forward to summer outings like literally games and barbecues with France.

Many guests are sharing their uncertainty of the overall state of the economy, but are feeling more positive about their personal finances.

With so much on their minds and a wide array of wanton needs. It has never been more important for target to be flexible and provide ease safety inspiration and solutions for all of our guests in.

In the first quarter, we invested in delivering a great guest experience to build and maintain the trust and love for the target brand and those decisions came with substantial costs I'll share more on this shortly.

Our first quarter results reinforce the power of our multi category portfolio, which allows us to lean into those ever changing wants and needs more and more we are seeing our guests', increasing mobility and love of newness play out in their target purchases.

Basket shift more towards experiences and going out categories.

This includes notable strength in fashion forward apparel prepaid cards toys and travel.

While apparel basics moderated in the quarter trend based apparel accelerated meaningfully as increasingly people are returning to the office are dining out with friends.

We're also seeing robust growth in beauty, driven by particular strength going out categories like sunscreen color cosmetics and fragrance.

<unk> grew more than 50% as the world continues to reopen and we reunite with places and people we have missed visiting.

And our own brand portfolio continues to grow faster than total sales as it have quarter after quarter for years now we continuously benefit from the growing guest affinity for our own brands, which are designed to drive trips to target not simply to provide another option when guests are already in a store or.

Our guests appreciate the value quality and great design, they have come to expect and love from target owned brands.

And as they continue to appreciate our national brand options and partnerships as well.

As Brian outlined our team delivered just over 3% and comparable sales growth in the first quarter inline with expectations, reflecting strong traffic and unit share gains.

First quarter growth was strongest in frequently purchase categories, including food and beverage beauty and essentials food.

Food and beverage, which delivered low double digit growth this quarter was strong across the entire assortment.

Over the last three years first quarter food and beverage sales have increased by nearly $1 8 billion.

Accounting for nearly one quarter of our total sales growth over that time.

Market share gains in this category are being driven by unit share growth, most notably in our own brand offerings as more and more guests turned to good and gather and favorite day for their meal solutions.

Beauty has been one of our fastest growing categories for years now and grew again in the low double digits in Q1 as guests spend more time outside of the home and want to look and feel their best.

Since the first quarter of 2019 beauty sales have expanded by more than 45%.

Majority of which occurred before our rollout of the Ulta beauty target experience evidence that there is still plenty of room for growth in this category.

Essentials grew in high single digits in Q1, having added well over $1 billion in first quarter sales over the last three years.

Notably nearly half a billion dollars of that growth happen. After 2020, when we saw explosive demand for categories like household paper over the counter and cleaning supplies.

Across our other core categories apparel home and hard lines, we saw small declines in comparable sales this quarter.

Apparel, despite unfavorable weather across most of the country.

Comp sales remain nearly flat to last year, having grown more than 60% in the first quarter, a year ago and nearly $1 billion since the first quarter of 2019.

In home, even after a small pullback in Q1 comps sales remained more than 40% higher than the first quarter of 2019.

Waiting to more than $1 2 billion in growth over that time.

Our seasonal categories continued to excel as our guests turned to target for all of their holiday and celebratory solutions, leading to all time records in the recent Valentine's day and Easter seasons.

And notably guests are finding new ways to enjoy and celebrate the spaces. They have invested in over the past few years having.

Having already renovated their homes with purchases in categories like furniture, and small appliances guests are now refreshing their homes with smaller touches driving demand in categories like the core candles and seasonal assortments.

Further evidence not just of the strength in our multi category portfolio, but the breadth of what we offer within categories as well.

Its hard line saw a slight pullback in Q1, but has grown more than $1 $3 billion since the first quarter of 2019.

Within hard lines guests have been refocusing their spending away from electronics like Tvs and into experiences for both kids and adults, which led to strengthen our toys travel and prepaid card categories.

As Brian mentioned first quarter gross margin performance was well below our expectations. This was driven by a number of factors. The most impactful of which was softer than expected sales in several categories, resulting in too much inventory in those areas.

As we developed our plans for the quarter. Our task was to anticipate how spending will change under circumstances, no one had ever seen before given that we were about to compare over two years of historically high federal stimulus payments.

As such we relied on numerous forecast and estimate both internal and external to help determine our view for the quarter.

Despite this careful approach the mix of actual demand materialize differently than we had anticipated.

In addition, our supply grew and demand shifted away from bigger bulkier products like furniture, Tvs and more we needed to make difficult trade off decisions. We could keep this product knowing with sell over time or we can make room for fast growing categories like food and beverage beauty and personal care and household essentials.

To preserve the quality of on shelf presentations and support the guest experience. We chose the latter leading to incremental markdowns that reduced our gross margin.

While these were difficult decisions, we believe they will pay off in the long term given that building long term loyalty remains our top priority.

As we look ahead, we will continue to do all we can to support our guests providing them great value and unbeatable selection of necessities and affordable luxuries.

Shopping experience that Sparks, a smile and provides a temporary escape.

The second quarter offers many opportunities for our team to help all families discover the joy of everyday life and this summer's assortment features some of our most inclusive offerings yet.

First in May we are celebrating Asian, American and Pacific Islander, Heritage month by highlighting Asia founders and creators amplifying their voices with stories of how their unique cultures influenced the creation of their products and businesses.

With June right around the corner, we're excited to honor our LGBTQ plus community as we celebrate pride month. This uplifting and always relevant assortment offered bold product inclusive marketing and everyday affirmation that authentically represents and celebrates community and culture.

And of course, we just finished celebrating mom in may and have plenty of options to honor dads in June along with many other opportunities to celebrate the joys of summer.

And speaking of Joy, we're ecstatic about our recently announced expanded partnership with actress author and social media phenomenon Tabitha Brown, a beacon of positivity inspiration enjoy having collaborated with her on social media for years, we're excited to grow our partnership with habitat and feature for limited time only collections set to launch over the next.

Year.

Starting with an exclusive apparel and accessories line of more than 75 items. This June that are sure to lift both style and spirit.

Before I pass things over to John I want to thank our teams across stores distribution centers and headquarters locations all around the globe for their unwavering leadership and service to our guests and to each other without them, we would not be able to continue growing our business and serving our guests each and every day.

Despite the volatility and rapid shift in consumer demand the macro environment and the global supply chain, our business remains strong and we're confident in both our long term strategy and our team's ability to navigate through this dynamic period.

We continue to focus on serving our guests and all that we do through.

Through our ability to provide relevance enjoying our assortment the delivery of a positive one of a kind inspiring guests experience and by building lasting deepened affinity overtime.

We're lucky to have the best team in retail to make all of this come to life and I look forward to all we will do together in the second quarter and beyond.

With that I'll pass things over to John .

Thanks, Christina over.

Over the last couple of years, our team has been focused on two separate and related issues, namely.

Namely beginning with the acceleration in sales in early 2020, our inventory wasn't growing fast enough to keep up with the expansion of our sales volume and as a result, we werent maintaining in stock levels consistent with our standards.

Following two years of effort to catch up by the time. We entered 2022, we have made considerable progress overall inventory levels were aligned with both the level of sales, we had already achieved and our near term growth expectations.

As a result, we began to see improvements in both in stocks and product availability.

Wherever conditions have remained far from perfect some items and categories remain spotty.

Typically driven by vendors, who are facing multiple constraints in their businesses.

A separate challenge our team has been facing which became more acute in the back half of 2021 is driven by capacity constraints in both the global and domestic freight markets.

These issues continue to make it more difficult and more expensive to move inventory, where we needed to be.

Our team has done a great job managing through these challenges and as you've seen from our recent gross margin results. Our P&L has reflected those higher freight costs.

Coming into this year, we anticipated, we'd see continued tight conditions and elevated costs and freight markets, but the actual conditions and costs have been much more challenging than expected more.

More specifically first quarter freight and transportation costs came in hundreds of millions of dollars higher than our already elevated expectations.

For the full year, we're now expecting about $1 billion of incremental freight costs, even compared to our expectations only three months ago.

Among the reasons for this incremental pressure record high fuel costs are a meaningful driver as well as the global shipping market, where costs have stayed unusually high and when we sometimes need to rely on the spot market to secure adequate capacity.

Compounding these near term pressures on our gross margin rate volatility in both consumer demand and delivery times placed additional stress on our supply chain Q1, one that was already running lean on capacity in light of the growth we've seen over the last two years.

As Brian and Christina mentioned this quarter, we ended up carrying too much inventory in several categories, where the slowdown in sales was more pronounced than expected, including home electronics sporting goods and apparel.

In addition capacity pressures were compounded by the fact that in several of these categories, including kitchen appliances furniture and outdoor living.

Items are bulkier than average and require higher than average amounts of storage capacity.

As our team collaborated with Christina team to work through this excess inventory, we made decisions with an eye on preserving the guest experience rather than jamming store sales floors with excess product, which would have made them more difficult to shop, our team secured temporary storage capacity instead.

And as Kristina mentioned, rather than carrying items beyond their relevant season. Her team made the tougher call and marked items down to clear them and keep our presentation fresh and inspiring.

While these were difficult decisions in a moment, we have no doubt they are the right long term choices.

However, they involved higher costs, resulting directly from the actions we chose to take and indirectly in terms of team member hours required to manage the extra volume.

As Michael will discuss in more detail, while we don't expect these conditions to persist over time that will continue to impact our Q2 results before conditions begin improving later in the year.

More specifically as we move beyond the front half of the year.

Had enough time to adjust inventory levels and receipt volumes to match the pace of sales even in longer lead time categories and.

In addition capacity in our supply chain will continue to build throughout the year as the new buildings. We opened last fall continue to ramp up their productivity, while we work to open additional buildings in the years ahead.

Beyond this ongoing work to expand the upstream supply chain, we continue to add downstream capacity and our sortation centers, which increase speed and reduce the unit cost of last mile delivery.

Following our successful test of the concept in the Minneapolis market. We now have six sortation centers open and operating with plans to open three more by the end of the year.

While the newly opened centers are still ramping up their capacity in total or six sortation centers handled $4 5 million packages in Q1.

A number that is expected to grow significantly throughout the year.

Each of these facilities already has volume flowing to our national carrier partners, including the ability to sort USPS packages individually by post office, creating a high speed low cost delivery option and the metro areas surrounding each center.

In addition, we've begun rolling out our lowest cost delivery option target last mile delivery at our Atlanta, Sortation Center and will soon expand that capability to the other four recently opened facilities for.

This capability, we collaborate with our partners at ships, whose drivers sign up to deliver batches of orders that had been sorted hyper locally down to the neighborhood level.

This provides a fast efficient reliable and low cost delivery option for our business benefiting both our guests and the P&L.

While we're excited about the results of these centers are already delivering this initiative is in the very early stages and we have plans to continue opening centers and ramping up this new capability for years to come.

Beyond investments in the supply chain. We're also excited about the investments, we're making in our stores, allowing them to become more productive more fun and more inspiring to shop.

For the year, we have plans to complete remodel projects and nearly 400 stores and through the first quarter. We had already mobilized on just under half of those projects keeping us on pace for the year.

Just under 200 of this year's projects will be traditional full remodels and which we transform every part of the store from wall to wall in Florida ceiling updating the shopping experience to make it more inspiring for our guest and more efficient for our team to operate.

Beyond those full Remodels, we're planning to complete just over 200 fulfillment remodels in 2022 as well.

These projects are focused on the operations of the store and their ability to support our same day services more specifically these project make changes within the four walls of the store to add capacity for same day orders and incorporate features to enhance our pickup and drive up capabilities.

When warranted. These remodels include the addition of walk in coolers and freezers near the front of the store, adding reliable capacity for our team to fulfill fresh refrigerated and frozen items through our pickup and drive up services and <unk>.

Addition, with many of these projects we had a dedicated door for our team members to use when delivering drive up orders to the parking lot.

We're also adding canopies more prominent signing and more drive up spaces in our parking lots, making the drive up process safer and easier for both our team members and our guests.

Beyond these existing store investments, we continue to open new stores around the country.

In the first quarter, we opened seven locations all smaller formats in markets ranging from Jackson hole in Wyoming to times square in New York.

We continue to be pleased with the performance of our new stores and their ability to flexibly serve guests in new neighborhoods.

And for our stores in markets that were temporarily affected by Covid, including college locations tourist destinations in dense urban areas. We've seen continued rapid recovery in sales volumes as activity ramps up in those markets following periods of lockdown over the last two years.

Similar to the pressures we've been experiencing in our merchandise costs. Our construction team has been dealing with volatility in the price of raw materials, and labor and our new store and remodel projects and.

And like our merchandising partners they've done a great job working around those costs and constraints keeping projects on track, while maintaining their focus on delivering a great guest experience.

So as I get ready to hand, the call over to Michael I want to pause and thank the entire operations team from our stores to supply chain and our properties team to our partners at shipped the.

The growth we've seen in our business and the expansion of our capabilities over the last two years has been both energizing and inspiring but it certainly hasn't been easy for our team.

They've handle growth well beyond what any of US would have expected two years ago, even as they worked around new challenges and unexpected obstacles one.

One of the joys of the last year has been the ability for me to once again get out in the field traveling to our stores and distribution facilities around the country and experiencing firsthand the energy and positive attitude our team brings to work.

They are United in their support of our guests for our brand and for each other.

Every day, they bring our company purpose to life and every day I am inspired by what they accomplish.

Now I'll turn the call over to Michael.

Thanks, John .

I want to start my remarks today, where John just ended and add my thanks to our entire team even with all of the challenges <unk> been facing they refused to get distracted instead, they maintain their focus on our company purpose to help all families discover the joy of everyday life.

Our team shows up to work every day with a passion for serving all families and for serving each other.

As John mentioned, it's been a joy in recent months to be able to travel once again meet with teams across the country and hear what's on their minds.

And the optimism and energy of our team is infectious I can feel it whenever I meet with the team and obviously our guests can feel it when they shop, which explains why our first quarter traffic has increased more than 20% over the last two years.

In the first quarter, our comp increase of three 3% was supported by a traffic increase of three 9%, partially offset by a small decrease in average ticket.

Longer fulfillment channels store sales grew slightly faster than digital in the quarter within digital same day services continued to drive our growth and accounted for well over half of our first quarter digital sales.

Within our same day services drive up accounts for the majority of sales and it continues to grow the fastest in fact of the $3 $3 billion in the first quarter digital sales that we've added since 2019 drive up accounts for nearly half of that growth on.

In the first quarter gross margin line, we saw rate decline of about four three percentage points compared with last year.

Among the causal factors merchandising actions drove about three percentage points of the decline driven by the combined impact of impairments markdowns and other actions taken to rightsize, our inventory position and categories that were too heavy along with the impact of higher freight costs.

Among other drivers higher supply chain costs accounted for a little over one percentage points of this year's rate decline, reflecting the impact of higher head count and compensation and our distribution centers.

Sales mix accounted for the remainder of the decline worth about 10 basis points of pressure.

On the SG&A expense line, we benefited from fixed cost leverage and strong expense control throughout the quarter, which helped to offset the impact of inflation driven cost increases in multiple expense lines.

Within compensation the continued impact of team investments was offset by lower incentive compensation compared with last year.

On the D&A expense line, we saw about 10 basis points of benefit in Q1, reflecting leverage on strong revenue growth.

Altogether, our first quarter operating margin rate of five 3% was about four five percentage points lower than last year.

While we expected this year's rate would be well below last year, our actual performance in the quarter was far lower than we anticipated driven by the unexpectedly high costs, we incurred on the gross margin line.

Turning now to capital deployment, I'll start where I always do by reiterating our priorities, which have remained consistent for decades.

First we fully invest in our business and projects that support our strategic and financial criteria.

We support the dividend and look to build on our 50 year record of annual dividend growth.

And finally, we returned any remaining excess cash within the limits of our middle a credit ratings through share repurchases over time.

Beginning with the top priority first quarter Capex was just under $1 billion, keeping us on track to spend $4 billion to $5 billion for the year.

While our teams continue to face multiple challenges, including supply shortages shipping delays and permitting and inspection delays in some communities theyre doing a great job of working around these obstacles and keeping projects moving in.

In addition, as John mentioned unexpected inflationary pressures are affecting some of our capital projects, which will impact our total spending for the year.

As I mentioned at our recent financial community meeting, we're excited to make progress on our capital projects, which continue to move our business forward and today given the team's efforts to advance. This year's projects I believe we will reach the high end of our $4 billion to $5 billion plan for the year.

Moving to our second priority, we paid dividends of $424 million in the first quarter up about 25% from last year, reflecting a 32% increase in the per share dividend, partially offset by a decline in share count.

We plan to recommend that our board approve a healthy increase in our quarterly dividend in the mid teens to low 20% range. Later this year, keeping 2022 on track to be our 50 <unk> consecutive year of annual dividend increases.

And finally regarding share repurchases, given our strong leverage metrics coming into the year, we entered into an accelerated repurchase plan in the first quarter, which will result in the retirement of up to $2 75 billion of our stock by the time the plan settled in June .

In addition to this ASR, we repurchased another $10 million in shares in the first quarter.

We anticipate having continued ample capacity to return capital through share repurchases. This year given the current supply chain challenges, we're facing and their impact on working capital. We now expect our total repurchases. This year will be lower than the $7 billion. We returned in 2021.

As always we'll adjust our pace up or down based on external conditions business performance and cash flow with a goal of maintaining our middle a credit ratings.

So now I want to turn to our after tax return on invested capital, which measures both our profitability and the efficiency of our capex decisions overtime.

In the first quarter, we reported a trailing 12 month after tax ROIC of 25, 3%.

This is a very strong number indicative of the underlying health of our business. It was much lower than expected near the very low end of where we expect to operate over time.

Now, let's turn to our guidance in terms of the top line based on our first quarter results and the trends we've seen so far in May we continue to expect full year revenue growth in the low to mid single digit range.

In terms of our profitability given the unexpected cost headwinds that we are currently facing we now believe our full year operating margin rate will be well below our prior guidance of 8% or higher.

More specifically given the elevated level of volatility we're currently facing and multiple sources of uncertainty going forward, we see a range of potential outcomes centered around a 6% operating margin rate for the full year.

As John mentioned in the second quarter, we expect the challenges we faced in the first quarter will continue to impact our near term profit performance and our team is focused on doing everything necessary to ensure we enter the fall season with an appropriate level of inventory by category.

As such we expect Q2 operating margin rate and a wide range centered around our first quarter rate of five 3% well below where we would expect to operate under normal conditions.

As we move into the back half of the year. We continue to expect our profit performance will begin to improve.

In particular as John mentioned, we expect to have worked through the excess inventory positions that hampered our Q1 performance.

And which we expect to impact our gross margin in Q2.

That said, we don't expect the external environment will be anything close to normal in the back half of the year.

In particular, we don't expect to see any meaningful reduction in global supply chain pressures until 2023 at the earliest so the elevated costs, we've been facing will continue to affect our profitability for the remainder of the year.

But let me be clear about a couple of things.

First we are not happy with our current profit performance and our team is laser focused on helping to quickly restore our business performance to where it should be operating overtime.

That said nothing that is happening today has changed our long run expectations regarding the ability of our business to grow.

Nor has it changed our view of the long run potential of our business to deliver an operating margin rate of 8% or higher over time.

And today as we navigate these near term challenges we are fortunate to have an incredibly healthy underlying business.

One that can stand up to the significant headwinds, we're facing and come out stronger on the other side.

We have ample financial capacity to continue making long term investments in new stores Remodels supply chain and of course, and our team all with a focus on serving and delighting our guests driving deeper loyalty and building on the top line growth we've seen in recent years and which continues today.

After all even after a significant pullback from last year first quarter earnings per share were more than 40% higher than in the first quarter of 2019 prior to the beginning of the pandemic.

That doesn't mean, we're where we want to be operating today. It shows we have a strong foundation from which we can recover from today's challenging environment and restore our operating margins to 8% or higher over time, consistent with our long term financial algorithm.

And given the loyalty and momentum we've established with our guests and the power of the investments. We continue to make we expect to continue growing the top line, even as we regain the level of profitability, we expect our business will generate over time.

Now I'll turn it back over to Brian for some closing remarks. Thanks.

Thanks, Michael before we move to your questions I wanted to ask a.

A few minutes to reinforce why we are confident in the ability of our team and our durable business model is exactly navigate today's volatile environment and deliver continued market share growth in the years ahead.

As Michael covered.

Even as elevated cost to put meaningful pressure on our near term financial performance.

Our business today remains thoughtful and very healthy.

And it continues to grow.

Since the first quarter of 2019, both on a revenue on the top line and our EPS on the bottom line, but each growing by more than 40%.

Underlying our growth.

We benefited from strong increases in both guest traffic and average ticket over the last three years.

Against a sound more reasons to visit our stores and our site.

And purchase more when they shop.

This is the definition of a durable business model when they can stand up an unexpected pressures and it remains healthy and grill.

When I think about the critical drivers of our long term success. There are two things right at the top it with our team.

And the relationship we've developed with our guests.

And when I think about the quality of our G. I don't believe there's ever been better.

Over the last five years, we've made significant purposeful investments to ensure we're hiring elevating and retaining the best team in retail.

These vessels begin with payer benefits.

Also about new ways to enhance the work experience and provide pathways for advancement.

All in keeping with our target forward goal to create an equitable and inclusive workforce and workplace.

So even as we work tirelessly to restore our business to its long term profitability you should expect us to continue investing in our team because we'll never achieve our long term potential without them.

We are at the same perspective regarding our relationship with our guests.

Over the last five years, we've made a number of deliberate decisions that were designed to deepen the relationship between target and our guests.

These decisions have resulted in ever increasing traffic.

Principally didn't grow on.

Both the topline and the bottom.

So in the quarter just ended when our team was facing potential trade offs between the guest experience and incurring short term costs I am proud to say that they maintain their focus on the guest experience.

That's because our team is laser focus on our long term financial performance.

Which depends on building and maintaining an ever deepening relationship with our guests.

So with that I want to thank you for listening into our call today and now 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 one to withdraw your request press Star two.

Our first question comes from Chris <unk> with Jpmorgan you May go ahead.

Hi, Thanks, Good morning, I have a question and as well as a follow up. So first question is in the first quarter of 2020, you took a large inventory impairment that you were able to get back in the second quarter now understanding its a different environment that we face in this quarter, but the question is how much lingering markdown risk.

Could there be in <unk>.

How large was the impairment and why wouldn't this capture the risk in the first quarter and how are you framing out the potential gross margin decline into Q.

Yes, thanks for the question Chris.

We still got some inventory to work through and so you saw some of that pain in Q1, and our gross margin guidance of Q2 of operating or sorry, our operating margin guidance of a five 3% give or take a wide range around that contemplates. The work. We still think we have to do on the inventory side in the second quarter Importantly, we believe taking those actions in Q1 and Q2.

To set us up well for the balance of the year, we got some big important seasons in front of US back to school back to college there'll be following holiday before we know it and so we're taking the right actions now to preserve a guest experience that.

<unk> to be strong and you saw it in traffic in Q1, and we're excited about what we see is the start of Q2 on the top line as well.

Okay, and then as a follow up can you expand a little bit more on what and what change in your implied operating margin outlook for the back half you mentioned supply chain cost or are these now about $1 billion for the year are these now big enough to offset the airframe press.

<unk> in the back half, particularly <unk>.

And then did you also change your mix assumption and to what extent are you baking in.

More promotions and clearance relative to a few months ago.

Yes, you hit on two of the bigger factors that'll be at play in the back half of the year.

Discussed, we see about $1 billion of freight and transportation pressure outside of what we would just described even at the start of Q1.

But we do expect and we continue to take product in early intentionally to protect against supply chain disruption, we expect to see some offset as we don't anniversary the same level of airfreight that we saw in the back half of the year.

When it comes to mix I mentioned in my remarks about a 10 basis point drag from margin rate mix.

The biggest shift from a category perspective is just the change in some of the categories at the top of the guest shopping lists some of those categories, where we've got some inventory to work through the ones will work through in the first half of the year and we'll be better positioned heading into the second half.

Thank you very much.

Thanks, Chris.

Thank you. The next question comes from Karen short with Barclays. You May go ahead.

Hi, Thanks very much.

Two questions. So the first is.

I'm just curious on your philosophy with respect to the fact that you had an analyst day on March 1st and.

<unk> had some insight into the trends that you were seeing so can you maybe just update us on your philosophy on maybe giving a pre announcements because I mean, I think that did come up with Walmart yesterday as well so.

You're in good camp on things changing very quickly what they eat.

Tumor and with the cost side of the equation. So that's my first question and then I just had a quick follow up.

Karen as we sat in front of you and others in March we did not anticipate the rapid shifts we've seen over the last 60 days, we did not anticipate that transportation and freight costs wood with sort of the way they have as fuel prices have risen.

Arisen to all time highs.

While we were certainly anticipating.

Impact of overlapping stimulus and consumer and guests returning to more normal activities. We did not expect to see the dramatic shift in many categories that we've talked about.

Ship from categories like Tvs, the luggage from small appliances to toys and guests celebrating being out with friends that certainly impacted our business in the first quarter and we expect that to continue in Q2, and we certainly didn't anticipate the impact that would have on our supply chain.

So things change rapidly after we sit on stage in New York, we own that it's what we're adjusting as we build our plans for the balance of the year and we're committed to improving our operating performance over the second third and fourth quarter and getting ourselves back on track for a more normalized environment in 2023.

Okay and then my second question is obviously you have the higher sales productivity that should be sustainable.

So that should also translate into a sustainably higher operating margin structure right longer term, which is what you guided to but that's the biggest question obviously that.

Investors are asking today, given what you just reported and what your guide reflects so maybe if you could just give a little more color and why and the puts and not the puts and takes but the I guess the stair step function to get back to your algorithm.

Hi.

Yes percent operating margin.

You hit the nail on the head in your question.

The sustainability of scale benefits, especially as you have seen in SG&A leverage that should be sticky and we would expect it to be sticky. We've got some work to do on the margin line in Q1, and Q2 outlook reflects that but as we work through some of that inventory liability as we let the levers we have to pull reacts.

The current environment to Bryan's note some of that snuck up on us in the first quarter and we'll work through some of that over time, but we continue to have a lot of confidence that the long term run rate of profitability for the business is in the 8% range give or take and it's our work to do the hard work to get back to that path Karen I'll just finish by one of the things that Hasnt change.

Since we were together in March and gives us great confidence as we go forward is the relationship we have with the guest.

Well, we've certainly seen significant cost pressures since the start of this quarter.

The guest continues to reward us with footsteps in our stores and growing traffic more visits to our site, we feel very good about putting over 3% comps on top of 23% last year.

<unk> traffic grew by almost 4% on top of 17% last year gives us great confidence that while we're facing some operating challenges.

Made that invisible for the guest and we protected the guest experience as they shop, our stores and visit our site that gives us tremendous confidence that that guests will continue to reward us, particularly as we provide great value and affordability during a time of need so that continues to give us confidence not just this year.

But in our out year forecast.

No. It was certainly footsteps don't lie long term, so I agree with that.

I'm, sorry workout congratulations.

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 Wonder if you could help us understand a little bit more that slightly down average ticket.

During the quarter, just given the level of inflation that we did see on the cost side and the prices that you may have pass through are there any pricing actions here that can help offset some of these margin pressures further or can we expect higher prices than what we saw in Q1.

Sure. Thanks for the question.

As we shared in our remarks, the headline story for us as traffic growth, but as you decompose ticket. We did see a low single digit increase in Asps is offset by a reduction in units for basket.

As you've heard us probably say many times before a lot goes into that ASP number it's a little bit product mix, it's a little bit how much inflation in the environment and so a little trickier to decompose there, but that's just a little more color on what we saw in the basket.

We continue to be laser focused on that traffic number that's a great indicator for us. So how what we're doing is resonating with our guest and to continue growing the top line by growing and deepening engagement with target.

That positions us well for the back part of the year and that positions us to have the topline that we want as we rightsize the profit picture overtime.

Okay. Thank you.

With regards to the operating margin guidance.

Greg I know you've.

Kind of anchored to that to the five 8% and it being a wide range around that is there any way you can dimensionalize how much lower do you think the margin can go or what what what the bottom of that range might be in your scenario analysis.

Yes, I mean, obviously, there's a lot of factors at play as we look at Q2 and the balance of the year.

We use the language, we wouldn't expect it to be normal for the balance of this year. So our best view of those factors is in our Q2 guide of five 3% plus or minus a wide range around that and in our guide of 6% for the year.

Thank you.

Thanks, guys. Thank you.

The next question is from Scott <unk> with RFID capital you May go ahead.

Hey, guys. Thanks for thanks for taking my questions.

So I guess the first thing I wanted to talk about a little bit is the inflation that the consumers are seeing.

Particularly in those everyday items like utilities food.

How do you think the consumer is going to react over time, I know people talk about peak inflation, but from our vantage it probably doesn't occur till maybe late summer and how concerned are you that consumer demand holds up.

Well Scott obviously, we're watching this on almost a daily basis, and while we can't project into the future I wish I had that crystal ball in front of me. We can tell you what we saw during the quarter and the start of May where we just continue to see a resilient consumer our traffic numbers are up to start the second quarter Theyre shopping malls.

Book categories.

And they are appreciating both the newness that we're providing the seasonal relevance in our stores and in our assortment and the value, we're providing and we think that's critically important to our success over time.

So I'd love to give you an outlook on what's going to happen with the consumer and how do they respond to ongoing inflationary pressure, but I can't tell you. The traffic we saw in our stores and the visits to our site in the first quarter. The way that is continuing in May one tells us that we built extraordinary trust over the last couple of years and we're continuing to be reward.

Added by our guests and the consumer as we work into the second quarter.

So as a follow up to that Bryan I guess, when you guys look at your business and the volatility that we're seeing in the potential of the consumer could weaken I know youre not seeing it yet.

When do you start getting more aggressive on your cost to take action.

To maybe bring things down.

If you see things how quickly can you move and when do you start to do that.

Well, Scott we work each and every day to make sure we're finding efficiency throughout our operation and certainly coming out of the first quarter, we are doubling down on finding operating efficiencies and greater effectiveness in the organization.

We've got to be really agile and I think it's been one of our strengths over the last few years and certainly pronounced during the pandemic that we have to be able to respond to a changing environment, whether it's the consumer changes the economic changes around us and we will continue to make sure we're focusing on agility maintaining that relationship with against growing.

Market share even in a volatile environment and making sure. We just deepen that relationship with our guests, which we think long term along with investing in our team is the most successful way for us to create value for our shareholders.

Alright, Thank you very much and good luck guys going forward.

Scott.

Thank you. The next question is from Joe Feldman with Telsey Advisory Group you May go ahead.

Hey, guys. Thanks for taking the question.

I think earlier in the scripted remarks, Christina had made a comment that consumers see more positive about their finances and I was just curious if you could share a little more color behind that like what you're you're seeing or hearing in your survey work.

Yeah, I'd be happy to Joe.

We have been the last couple of years, we have been highly engaged in trying to understand the consumer and we've been through a series of chapters of consumer behavior shifts almost every two months for two plus years honestly and what we're seeing is that the consumer has taken control of their environment more so because of the.

Macro environment feels out of control and so despite the fact that they might have worried about inflation. They are in charge and they're making decisions based on their preferences and what they value, which means going back out if that's what they want to do traveling because they've missed it seeing the friends and family again.

About moderating those behavior shifts in accommodating our assortment and our messaging and our.

Relevance based on how those shifts happen and so it's really important to say.

Closer to the consumer and not expect the past behavior as an indicator of the future.

Got it. Thank you and then just a follow up again on the gross margin pressure you guys are seeing.

Should we assume the.

Things gradually improve as the year progresses, because presumably you'll be lapping some of that pressure from last year.

Prior to this quarter I mean, historically you guys have always had a pretty steady gross margin on an annual basis any way around 28% and so is there any reason to think we won't.

Naturally come right back to that as we cycle through these pressures.

Youre certainly pointed in the right direction there Joe we've given the kind of explicit expectations for Q2, but implied in the full year is in improving profitability picture that.

That will come through margin and the balance of the year.

To focus on the annual in the long run there is a theme that I've come back to over and over quarterly margin is going to have more volatility than one might think but in the long run.

We're pleased with what we see as the potential of the profitability of the business and will be on a path in the back half of this year to take steps in that direction for sure.

Okay, great. Thanks, guys. Good luck this quarter.

Thanks, Joe Thanks, Joe.

Thank you. The next question is from Edward Kelly with Wells Fargo. You May go ahead.

Yes, hi, guys good morning.

Brian I wanted to ask you about about pricing.

On the inventory issue much of the pressure.

It seems cost related in areas like supply chain can you talk about the potential to pass these costs through to consumers and the timeframe. This may occur I mean, we are hearing from probably your biggest competitor I guess.

Plans to do this.

Theres any hesitation, maybe talk about why.

Yeah Joe.

<unk> are looking at this very carefully and you should expect us to surgically pass along costs, where appropriate but we're also laser focused on protecting our value position in this environment and making sure we provide greater affordability to the guests in a time of need. So we will take a very balanced perspective on that but I think we've got to start with doing the right thing for our guests.

And making sure we continue to provide the value that they look for from target each and every day, while we manage the cost environment and determine where and when we can pass along cost selectively.

Okay, and then just follow up.

Inventory per store is up a lot over 2019 before pre pandemic.

What is obviously changing your sales are a lot higher but can you talk about where this should be may.

Quantify the amount of excess.

Still sitting in inventory today.

And where the most work needs to be done and then what are you doing going forward to adjust things.

Think that cancellations or is it just really sort of adjusting order rate going forward.

Yeah, Ed it's a good question.

There's a few things going on if you look at the level of inventory on our balance sheet. One is we've got some categories, where we need to work through some inventories. We've already we've already talked about that piece. There is a little bit of product cost inflation sitting in that number too, but I will say given our desire to make sure. We're landing some product earlier and protect against supply chain volatility for the near term.

Here, you should expect kind of that new normal of sales growth to inventory growth to include some working capital investments as we land some of that product sooner to make sure. We've got it for the guest and so those are the three big factors that we're watching.

Obviously, the first of those factors will work to make some progress on here in the second quarter to get us in line with what we expect sales trends to look like for the back part of the year.

Old normal might not be the current run rate in the near term as we work to secure product landed early and avoid some of the disruptions that are caused out of stocks over the last year.

Just to pile on a little bit.

I think all things being equal we would say given how much larger we are we turn everything would turn faster, but I think Michael hit on I don't think 2019 as a reasonable compare given the frankly slowness in the supply chain lead times are longer and that means we carry more inventory at any given time because of those lead times and so we aren't where we want.

Right now for sure like Michael said, we are lumpy and we need to work through that we will but in general the increase in terms that we would naturally see being a larger business with more sales is going to be offset by lead times that have increased virtually across every part of the supply chain.

Operator, we have time for one more question and correct.

Thank you our last question comes from Robbie <unk> with Bank of America. You May go ahead.

Thank you for squeezing me in two quick follow ups. The first is <unk>.

If you if you guys isolate.

Grocery so household essentials and food and beverage how was how was the gross margin in that area of your business versus expectations is that seeing similar kind of pressure.

We feel good about the gross margin performance in grocery and I mean, just food and beverage in general has been such a steady top line grow our share gainer quarter after quarter and so the strength that we've built in that category I think makes all of the economics and food and beverage work in the right.

Direction.

We've talked a lot and I think it's important as we think about consumer looking for value the strength of the owned brands in food and beverage good and gather and favorite day and the guest response, we've seen to those two owned brands has just been incredible and Thats great from a guest preference perspective, it's also good for margin.

And the ability to cover the cost increases coming through on the national brands has been healthy.

Yes, we're obviously looking at that across all categories, and making sure that we're providing great value to our guests in spite of those inflationary cost pressures no different approach in food and beverage, where we're looking to get that balance right there too.

And then just quickly on the traffic, which is was really healthy against I think it was plus 17 last year.

Any sense of new customers versus frequency.

Yes, so it's always a little bit of a mix of both when we're doing our job right, but the thing that we come back to when it comes to driving traffic is just driving deeper and deeper engagement and you've heard us talk in the past with over $100 million target circle guests. That's just one more way that we can continue to drive preference on a personalize.

Wei and build deeper and deeper engagement with target over time.

And you can see that coming through and the traffic results. We see not just this quarter, but over the past couple of years and that gives us a lot of optimism that what we're doing is resonating with the guests and that should bode well for the balance of the year and beyond.

Yes, Robin if I could just add two cents to that the breadth of our growth.

Breadth of our growth across our gas based with very broad all income levels.

Demographic levels, it was broad and thats because of our commitment to continue to.

More and more relevant over time, using the tools that Mike talked about but really our commitment to being consumer centric.

Alright, operator with that we're going to conclude our call today I really appreciate everyone participating and we look forward to talk to you soon thank you.

Okay.

Good afternoon.

Okay.

[music].

Ladies and gentlemen, thank you for standing by welcome to the target Corporation 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 one on your telephone.

As a reminder, this conference is being recorded Wednesday may 18th 2022.

I would now like to turn the conference over to Mr. John Hulbert, Vice President Investor Relations. Please go ahead Sir.

And a few of months, Brian Christina John and Michael will provide their perspective on our first quarter performance and our outlook and priorities 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.

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 quarter and his perspective on our outlook Brian .

Thanks, John and good morning, everyone.

Our first quarter results demonstrate the underlying strength of the relationship we built with our guests.

Time, when our team is working through multiple cost pressures affecting our business.

As expected our business continued to grow in the first quarter.

On top of huge gains a year ago.

Your line is the resilience of both the consumer and the.

Ability of our team to serve them.

However through a host of factors this growth was challenged by unusually high costs.

<unk> and profitability well below where we expect it to be and where we expect to operate over time.

First quarter comparable sales grew by three 3%.

On top of 23% growth a year ago.

This marks our 20 <unk> consecutive quarter of comparable sales increases.

11 of those quarters, where before the pandemic.

Followed by the rapid acceleration in 2020.

We're also encouraged that traffic continues to fuel our growth.

Increasing nearly 4% in the quarter on top of 17% growth a year ago.

Our first quarter gross margin rate was well below our expectations, reflecting a combination of factors.

Proved to be very different than expected.

By rapidly shifting macro backdrop.

And changing consumer behavior.

More specifically.

We saw much higher than expected freight and transportation costs and a more dramatic change in our sales mix than we anticipated.

This resulted in excess inventory.

Much of it in both categories, which put additional strain on an already stressed supply chain.

Christina John and Michael will share more details shortly.

And while we have a lot of work ahead of us to restore profitability the level, where we expect to operate over time.

I want to thank the team for maintaining their laser focus on the guest experience.

We spent years growing part of this relationship with our guests, which is fueling the traffic and sales growth we're seeing today.

And sustaining that guest focus we're confident we'll see deeper loyalty.

And Rocco sales growth in the years ahead.

Among our sales channels first quarter comps were balanced fleet stores and digital as each increased a little more than 3%.

Within our digital channel growth continues to be led by our same day services and drive up pick up which delivered growth in the mid teens. This year on top of more than 100% growth a year ago.

Since Q1 of 2019 prior to the pandemic.

Quarter sales have grown more than 40% or just over seven 4 billion.

Broken down by channel.

<unk> sales accounted for about $4 1 billion. So this increase while digital sales drove another three three.

$3 billion.

And then expanded by more than 250% over that time.

From a category perspective, we.

<unk> continues to benefit from our balanced multi category portfolio.

Which allows us to flat we serve our guests as their wants and needs change.

More specifically in the first quarter, we continued to see strong growth and market share gains in food and beverage and essential categories.

We also benefited from double digit comp growth in beauty, reflecting our ongoing work to enhanced presentation assortment and service, including our new and expanding partnership with Ulta beauty.

The result of this partnership have exceeded our initial expectations driving higher productivity and sale in both beauty and adjacent categories in the store, where we've added an ulta beauty experience.

In our other three core merchandise categories apparel home and hard lines, we saw a rapid slowdown in the year over year sales trends beginning in March.

And we began to annualize the impact of last year's stimulus payments.

While we anticipated a post stimulus slowdown in these categories.

And we expect the consumer to continue refocusing their spending away from goods and services we.

We didn't anticipate the magnitude of that yet.

As I mentioned earlier.

This led us to carry too much inventory.

Particularly in bulking categories, including kitchen appliances, Tvs and outdoor furniture.

And with very little slack capacity after two years of unprecedented growth, we faced elevated cost of store and indicated right sizing our inventory position.

Nevertheless, we are still seeing healthy overall spending by our guests.

Even as our spending continues to evolve, notably we continue to see meaningful spending surges around holidays, including Easter in April and mother's day, a couple of weeks ago.

Also notable in comparing this year's weekly sales with recent levels.

Levels at the beginning of 2019.

We are seeing stronger three year growth trends in recent weeks compared with the beginning of the first quarter.

Even in categories, where we saw a rapid slowdown on a one year basis.

These encouraging longer term growth trends demonstrate the continued resilience of the American.

Tumor.

And the trust they place in target, even if they faced multiple challenges.

At the same time guests are focused on getting back to many of the habits and behaviors. They suspended during the heart of the pandemic include.

Including travel.

Out of home activities and social gatherings.

And importantly, even at the mix of what they are buying continues to evolve.

They are spending capacity continues to benefit from elevated saving rates.

Employment and healthy wage growth.

So as we continually adapt our offerings.

Best serve our guests in a rapidly changing environment today.

Today, we're focused more than ever on providing value across our multi category assortment present, the options that are affordable and accessible to a broad and diverse base of guests.

Across a wide range of household incomes.

And even as we faced multiple cost pressures our team is working tirelessly to maintain prices wherever possible.

Of course, while it's always the last lever we felt.

External conditions led us to raise prices across a broad set of items and multiple candidates, but as you've clearly seen in recent quarters.

Overall costs have been rising much faster than retail prices.

And year over year declines in our gross margin rates.

While we're not happy about the near term pressure. This causes on the profit line we.

We strongly believe these decisions will benefit our business over time.

And as we carefully monitor our prices and quality stack up versus the competition. Our guests are telling us. They appreciate the value and experience with funding.

More importantly, our guests are showing their appreciation with more footsteps in our stores and work on our site.

<unk> continued traffic and sales growth on top of record growth a year ago.

As we look ahead, we will maintain the focus on value.

Helping them save time and money in a rapidly evolving environment.

For those who are focused on driving fewer miles in response to record high gas prices are broad and you didn't merchandise assortment combined with our low prices offers a smart way to save time and miles by consolidated shopping trips.

And because saving time is valuable in any environment, we're continuing to invest in expanding the scope of our reliable.

It's sandy service, including our driver.

In in store pickup services, which we offer to our guests at no charge.

Just as we design, our merchandize portfolio the flexibly serve our guests our operations with managed to extreme volatility over the last few years.

Goodwill amounting to tens of billions of dollar combined with unprecedented shift in demand across categories channels and services is.

Has created a host of challenges for our team.

Which they've handled with incredible energy and focus.

And while we entered this year.

That volatility will begin to moderate.

We've experienced the extreme opposite in Q1, and we don't see currently is improving right away.

In the face of this volatility our team continues to focus on the guest experience working to ensure that any.

Our team is handling behind the scenes doesn't where I can see and feel.

So as we look ahead. It is clear that many of these pressures will persist in future quarters, but then it hasnt affected our long term plan and expectations, including our confidence in the ability of our business to grow mid single digits and maintained an operating margin of 8% or higher over time.

In the meantime, even as we navigate to restore profitability from the impact of these short term challenges.

We're continuing to invest in projects designed to deliver continued profitable long term growth.

Our business model and team have proven their ability to successfully navigate through extreme volatility and.

And we're confident our business will emerge even stronger from these challenges we're facing today.

Jeff regarding vessel in early 2017 were followed by profitable growth in later years, we're confident the decisions, we're making today combined with our investments in future growth will pay off over time.

With that I'll turn it over to Christina.

Thanks, Brian and good morning, everyone.

We frequently get questions about how our guests are feeling given the current economic environment, how their shopping habits are evolving and what's top of mind for them.

Our guest space encompasses every slice of the American population given that we serve nearly 20 million guests on average each and every week and the breadth of their individual decisions as they navigate a rapidly changing macro environment is justice broad, making the answers to those questions that much more complex.

I guess might be telling us that they are worried about inflation and rising gas prices. They're also looking to splurge, new shoes, theres some accent pillows for their home.

Another gas remains worried about COVID-19, but theres still planning to resume travel and looking forward to summer outings like literally games and barbecues with France.

Many guests are sharing their uncertainty of the overall state of the economy, but are feeling more positive about their personal finances.

With so much on their minds and a wide array of Watson needs. It has never been more important for target to be flexible and provide ease safety inspiration and solutions for all of our guests in.

In the first quarter, we invested in delivering a great guest experience to build and maintain the trust and love for the target brand and those decisions came with substantial cost.

Q1 2022 Target Corp Earnings Call

Request a DemoDemo

TGT

Target

Earnings