Q2 2022 Target Corp Earnings Call

Ladies and gentlemen, thank you for standing by welcome to target Corporation second quarter earnings release Conference call.

During the presentation, all participants will be in a listen only mode.

Afterwards, we will invite you to participate in a question and answer session.

At the close our prepared remarks, we will open the queue for the Q&A session at that time. If you have a question you will need depressed star one on your telephone.

As a reminder, this conference is being recorded Wednesday August 17 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 second 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 <unk>, Chief Financial Officer.

In a few minutes Bryan Christina John and Michael will provide their perspective on our second quarter performance and our outlook and priorities for the remainder of the year.

Following their remarks, we'll open the phone lines for a question and answer session.

This morning, we're joined on this conference call by investors and others, who 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 quarter and his perspective on the back half of the year Brian .

Thanks, John and good morning, everyone back in June we announced that our team will be undertaking a bold effort to rightsize our inventory position.

And the categories for which demand patterns have rapidly changed.

While this decision had a meaningful short term impact on our financial results. We strongly believe it was the best path forward.

Consider the alternative.

We could have held on to excess inventory and attempted to deal with it slowly over multiple quarters or even years.

Well that might have reduced the near term financial impact.

Would have held back our business overtime.

Of course, this decision would have driven incremental costs to store and manage the excess inventory over a longer period.

But much more importantly, it would have degraded the guest experience.

It would've cluttered, our salesforce and hampered our ability to present, new fresh and perishable items the ones our guests expect from target.

Just as importantly, the extra inventory would have presented an ongoing burden to our supply chain and store teams.

As they face the distraction of working around it day after day.

Sort of taking that passive position.

Our team chose a more decisive paths.

Aggressively reducing the inventory, we already own and cutting back on receipts for the back half of the year.

And today with those decisions behind us we're in a much better position as we head into the fall season.

As you'll hear in more detail, we've meaningfully reduced our ownership in commitments in categories, where we have seen softening demand.

This has allowed us to strengthen our inventory position in stock position in the categories that are driving our growth most notably in food and beverage beauty and essentials.

Regarding the financial impact of those decisions Michael will provide more details in a few minutes.

But the high level story is the vast majority of the financial impact of these inventory actions is now behind us.

This positions our business to deliver a meaningful improvement in operating margin rates in the fall season.

However, beyond financial and operational outcomes.

I'm focused on how our inventory actions will benefit our guests and our team.

Regarding our guests, we're now positioned to continue driving engagement and growing traffic with a clean safe and uncluttered store experience and an assortment that highlights newness that supports growth.

For our team this quarter's inventory actions will enable them to focus on doing what they do best provide a great guest experience.

While reducing the stress and distraction from overly crowded store backrooms and distribution facilities.

After we announced the right sizing effort at the beginning of June I've heard from countless leaders across the company.

We wanted to relay their gratitude for the decision to move quickly and face the issue head on.

In the same spirit I want to pause and acknowledge the incredible effort of the entire target team during a very challenging time for the economy for our industry and our business.

Our success at reducing inventory was a result of unprecedented effort coordination and collaboration across multiple teams from our U S headquarters to our target India headquarters to our stores distribution centers transportation team and sourcing offices around the world.

And today in the face of a very challenging backdrop.

Proud of how our team and business model continue to serve our guests' evolving needs.

We do.

Sign of our operating model and the way we train our team is done with a focus on better serving our guests.

It's reflected in how we choose our assortment.

Where are we curate a broad range of items, both in store and online from the stylish and functional.

Cooperating quality and value throughout.

It's also evident well designer store.

And the digital shopping experience that makes them easy convenient and inspirational inviting guests to choose the right option every time they shop.

All of these decisions make our business model more durable, allowing us to drive deeper guest engagement and grow traffic in every environment.

Consistent with the shopping trends, we've seen for more than a year, our second quarter comp increase of two 6% was driven entirely by traffic, which expanded two 7%. This year on top of double digit growth a year ago.

With this increase second quarter traffic has expanded by well over 20% in 2019.

In raw numbers that means in the second quarter alone we've added more than 90 million guest visits over the last three years.

These visits are a vivid demonstration of a deepening level of guest engagement, resulting from multiple investments throughout our business.

These investments include dozens of new stores and hundreds of Remodels every year. They also include investments in our industry, leading same day services.

Which have transformed our business in a short time.

More specifically three years ago in the second quarter of 2019 digital fulfillment accounted for just over 7% of total sales in contrast by the second quarter of this year.

Same day portion of our digital sales accounted for more than 10% of our total sales.

This drove our total digital penetration up to almost 18% more than doubling in only three years.

Beyond our stores and fulfillment services guests continue to respond to our investments in our own brand portfolio.

This portfolio delivers more than $30 billion in annual sales and includes 12 brands that generate more than $1 billion each at.

At the same time, we're investing in new spaces and presentation for key National brand partners like Apple Disney and Levis.

And of course, we've been rapidly expanding the number of stores that feature an ulta beauty of targets given the incremental traffic and sales they deliver.

But nothing has been more important and the investments we've made in our team.

These investments include.

The move to a starting hourly wage range of 15 to $24 across the country.

Enhanced health care and wellness benefits for a larger percentage of our team.

The rollout of an industry, leading debt free college educational plant.

And our work to enhance the growth and development opportunities to build all of our team members and the team members of color in particular.

As we look ahead to the back half of the year. The team is laser focused on delivering convenience value enjoy at a time when our guests are facing multiple challenges.

And while we've taken a cautious stance on our inventory commitments will continue to lean into frequency categories, where guest demand has been strong.

And where the markdown risks are very low.

In addition, given the ongoing pressure on our guest are facing from inflation.

Leaning into value.

This means we're focused on providing great everyday pricing and strong opening price points across every category, including in our own brands.

At the same time.

We hear from our guests that they're focused on celebrating the seasonal moments they missed over the last two years.

As a result, we will lean into those seasonal moments, helping our guests find ways to come together and celebrate with family and friends.

So we still have a lot of business ahead of us we've seen an encouraging start to the back to school and back to college season, and our teams are already deep into their planning for the upcoming Halloween season.

<unk> when we expect our guests will fully embrace trick or treating and scheduling parties to celebrate with family friends and neighbors.

Given continued volatility in the external environment, we built our fault plans the priority on flexibility and agility.

And that's where our business model shines more specifically, our multi category portfolio stays relevant.

And drives trips across a wide range of wants and needs.

In today's environment that means our food and beverage category is front and center, having grown more than 50% or $1 $8 billion since the second quarter of 2019.

But regardless of whether a target run begins with a need for a item in food and beverage or household essentials.

To see what's new in our beauty assortment.

To pick up a toy for birthday party for piece of luggage for an upcoming trip.

Our safe one stop shopping experience provides an opportunity to sell items in every one of our categories on every guest visits.

Beyond our assortment our unique stores as the operating model offers unmatched flexibility and how we can fulfill guest demand.

Whether it gets wants to make as conventional in store shopping trip place a drive up order a range of ship delivery or simply a box delivered to their front door stores gives a pill every one of those needs quickly and reliably, allowing our guest to choose what works best for them in that moment.

And as Mike will outline in more detail, our strong balance sheet and robust cash generation support continued investments during tough times like these.

<unk> and our long term growth and market share.

At a time when many others will be struggling just to survive.

The ability to play offense and focused on the long term it makes us well positioned to emerge from the current downturn even stronger than before.

So as I get ready to turn the call over to Christina <unk>.

Want to thank our team for their continued passion for serving our guests and each other.

While the environment remains challenging I'm inspired by the new and unique merchandise seasonal offerings and partnerships. Our team at this plan for the back half of the year.

And as I've traveled across the country to visit our stores and distribution centers I've been inspired to hear how our team is energized and eager to serve our guests with energy empathy and care.

And daily Joy at a time when our guests are daily with multiple headwinds.

This unshakable guest focus it's one of the many reasons are unique team makes target a great company.

And I am privileged and grateful to serve with them.

With that I'll turn the call over to Christina.

Thanks, Brian and good morning, everyone.

Despite the tough environment, we are facing today I continue to be pleased with both our top line performance and the underlying market share we're seeing across our business.

Namely across all five of our core merchandising categories.

Unit share gains in the second quarter, providing clear evidence that our guests are finding more and more ways to satisfy their wants and needs with every target Brian .

As Brian mentioned earlier, the inventory actions, we announced in June involve incredible collaboration across teams at headquarters stores and throughout our supply chain network and I'm proud to say that together as one team we accomplished what we set out to do.

By moving to access units, we were able to realign our broader inventory portfolio to those categories. Our guests are most focused on including frequency categories like food and beverage everyday essentials and beauty as well as all things new seasonal and fashion forward.

To accomplish that goal teams analyze them build action plans to aggressively work through excess inventory at every point along the product journey from vendor to gas.

This included rigorously re forecasting expectations for the balance of the year and beyond and determining where to reduce future receipts and orders.

In some cases and that working with vendor partners to reduce our fall receipts in light of our updated expectations. It also meant quickly building compelling promotional plans to drive unit velocity for product we already owned.

All with a focus on providing great value and generating excitement for our guests.

And throughout the execution of these action plans our teams remain steadfast in their guests first focus refusing to compromise the shopping experience in our stores or online.

As you heard from Brian in the short term profit implications of these decisions were meaningful.

But we're confident they are the right long term decisions for our business for our teams and for our guests.

As we formed and revisited our plans for the third quarter and beyond we spent a lot of time listening to the wants and needs hopes and concerns of our gas.

What we're seeing in our results and hearing from our guests is that they still have spending power.

But they are increasingly feeling the impact of inflation.

While the recent reduction in prices at the gas pump has been encouraging guests confidence in their personal finances continues to wane.

Against that backdrop, we've seen our guests shop, our own brands in bigger ways and more frequently knowing they're choosing great quality products with incredible value.

We've also seen guest behavior evolve as they focus on optimizing their personal budgets through a heightened response to promotion as well as greater trip consolidation.

At the same time guests continue to experience difficult news headlines COVID-19 searches and continued political volatility.

Leading them to seek more ways to celebrate connect and find opportunities to bring joy to their families.

This is one of the reasons, we continue to see such strength in our seasonal categories, which we expect will continue in the back half of the year.

Now, let me turn to some of the category highlights from the second quarter and with overall comparable sales grew two 6% on top of eight 9% a year ago.

Selecting continued strength in food and beverage beauty and household essentials.

Food and beverage led the way in the quarter with growth in the low double digits, reflecting broad strength across multiple subcategories.

Beauty grew in the high single digits, reflecting notable strength and Ulta beauty of target along with the skincare Bath categories.

Essentials grew in the mid single digits with performance led by pets and health care.

Overall across our discretionary categories sales were softer than a year ago, but remained nearly $3 $5 billion or more than 35% higher than the second quarter of 2019.

In hard lines overall comp sales were down slightly to last year.

Within hardline softness in electronics was partially offset by strength in entertainment, which grew in the high single digits.

Along with high single digit comp growth in toys, and encouraging sign as we plan for the fourth quarter holiday season.

Overall, the home category, you saw a low single digit decline compared to last year.

<unk> affinity for our seasonal Assortments and encouraging early results in back to school and back to college.

Apparel also saw a low single digit decline in the second quarter, but saw meaningful growth in women's fashion forward categories, along with performance apparel on top of strong sales growth in the category over the past two years.

As I mentioned earlier, while overall sales growth, it's one key indicator of the health of our business.

Market share is an equally important measure that we use to understand how we're performing.

And notably during inflationary times like these we heavily focus on unit share specifically to better understand our relevance as compared to our competitive set given that growth in both traffic and units is a strong proxy for the gas overall engagement with target.

Time and time again these metrics have proven to be a better barometer for lasting success as compared to growth solely through average retail prices.

That's why I'm, so encouraged that across all five of our core merchandising categories. We grew unit share in the second quarter.

So now, let's turn our sights to all that is to come for the balance of the fiscal year.

Having celebrated holidays in a big way in the second quarter guests already have their sights set on upcoming holidays and seasonal moments in Q3 and beyond.

Preparing for the upcoming school year is top of mind for families right now and to help with the transition we're providing budget friendly options for students parents and teachers alike.

Andre assortment of value priced owned brands, a leading national brands, we're offering a one time, 20% off target circle deal for college students to get those dorm rooms, prepped and ready and we've also extended our teacher prep event to nearly eight weeks of discounts on supplies and more.

And today, while we still have several weeks of the season left to go we've been encouraged by early results in both our back to school and back to college programs.

Shortly after school begins we will turn our attention to celebrating Latino heritage month, which begins in the middle of September .

We're excited to help celebrate this important cultural moment with our guests through the presentation of our compelling assortment, 99% of which was created by members of the Hispanic Latino community.

Then before we know it Halloween celebrations will be underway with all the tricks and treats the season has to offer.

Our guest research indicates that more families plan to participate in Halloween festivities compared with last year, and we're ready with a wide array of gender and size inclusive costumes, new owned brand trick or treating candy and accessories.

Haunted House Cookie building sets and so much more.

And for those that want to celebrate the broader fall and harvest season in general rest assured that there'll be no shortage of new offerings from good and gather to create perfect meal snacking and entertaining solutions, including delicious new flavors of the season like Maple cinnamon Apple and of course, all things Pumpkin Spice.

Outside of specific holidays, we are focused on helping our guests experience everyday joy and our ability to cut across brands and categories as part of what makes us uniquely target.

For an example look no further than our upcoming collaboration this fall with Marvel to bring a unique assortment to our guests across the Avengers and Spider man franchises.

One standout will be lots of Marvel Studios' Black Panther will conduct forever and Black Panther legacy exclusives within toys apparel home and Moore will have more details to share in the coming months.

And in an exciting collaboration with longtime partner the Lego group, we are bringing their popular Lego ideas contests to target in which Lego superfan submit ideas for Athene Lego building set.

After a public submission phase a handful of finalists will be selected for guests and fans to choose their favorite idea to be produced as an exclusive set at target and Lego brand retail stores.

But target Joy it goes well beyond key holidays are exclusive losses, it's about how we continue to iterate and improve upon what our guests already know and love from their regular target run.

This next quarter, you'll see us elevate our fashion assortment with several new collections and updated brands.

We will introduce new well known national brands, and cookware and kitchen.

We'll also continue to expand our leading national brand partnerships.

<unk> opening more Disney stores and of course also beauty at target.

In fact, we're only a year into this new partnership and there's plenty of room to grow ahead with.

With the introduction of new designer fragrance brands, including coach Quinney, Kate Spade and more.

As well as additional skin and hair care products, we continue to evolve the assortment to bring more joy to our beauty guests.

We remain on track to open at least 250 of these unique spaces. This year.

Plus we've already seen more than $1 5 million guests link their target circle and ultimate rewards accounts a number that's sure to continue to grow in the months and years ahead.

So now before I pass things over to John I'd like to take a moment and echo Brian's gratitude for the team.

Well, we have demonstrated time and time again that our durable flexible model can quickly pivot with changing consumer demands and a host of retail and economic conditions, none of that can happen without an incredible team.

Their talent dedication passion and expertise allows us to continue putting the target guests at the center of every decision we make.

As a result, we continue to benefit from deeper guest loyalty and preference for our brand.

I have been a target 19 years and I continue to be inspired every day by the talent around me. Thank you for your commitment and care to all our stakeholders.

With that I'll pass things over to John .

Thanks, Christina and past calls I've described how our operations team is always focused on two things at the same time of.

Of course, there are always focused on short term execution and problem solving to ensure we provide a convenient consistent and inspiring experience for our guests.

In addition, our team works every day to deliver on our long term vision and aspirations, ensuring our operations are ready to support our future plans.

While this dual focus on both near term and long term priorities has always been present.

And especially notable this year given that we've been operating in a very unique environment.

In terms of the short term and as Brian and Christina mentioned earlier, our work to quickly right size inventory required determination commitment and coordination between multiple teams across the company.

And given the need to protect the guest experience there was no higher priority than delivering against this near term plan.

At the same time, our team remains passionately focused on the long term investments, we're making in our future.

These investments include our work to modernize and expand our store footprint increase.

Increased upstream capacity in our supply chain.

Automate distribution center processes to reduce store workload.

And enhance our last mile fulfillment capabilities by opening sortation centers and integrating them into our ship network.

And Fortunately as Brian highlighted the strength of our business allows us to continue funding. These long term investments even in the face of the challenging external backdrop, we're facing today.

I want to first turned to our work on inventory and I'm happy to report that our team has made remarkable progress over the last few months, causing conditions in our supply chain to improve significantly.

More specifically and to provide some helpful context over time, we want to keep our DC network operating at or below 85% of its maximum capacity.

Given that operational difficulties and costs rise significantly when we move beyond that level.

It's important to note that back in June inventory in our DC network peaked at well over 90% of our capacity.

Also notable by the end of the second quarter less than two months later, our team has quickly reduce DC capacity utilization to below 80%.

Put another way by the end of the second quarter, the physical space occupied by our distribution center inventory was more than 20% lower than the peak we reached in June .

So today, we still have some individual sites, where we need to make more progress.

The team has accomplished a remarkable improvement in a very short time.

Which will allow our end to end operations to function more efficiently and effectively in the back half of the year.

As Kristina mentioned beyond addressing the inventory we already owned the team also took a hard look at sales trends and determined ideal inventory levels across every category for the remainder of the year.

As a result, we've meaningfully reduced our fall season receipt commitments in many discretionary categories.

With these reductions we're projecting our dcs will remain at or below 85% capacity through the remainder of the year.

Even after the seasonal increase in holiday inventory that is set to occur over the next two months.

In other words for the first time I'm aware of our fall season inventory is projected to peak at a lower level than in spring.

Abiding another vivid illustration of unique dynamics, we've encountered so far this year.

While this inventory right sizing process hasn't been easy and our teams are devoted an amazing amount of effort and a small amount of time.

This work has allowed our teams to strengthen ongoing communication mechanisms and build new processes.

Going forward. These improvements will enable our merchandising and supply chain teams to maintain enhanced real time communication, particularly with respect to categories, where we faced the highest inventory risk.

I'm asked to respond to changes with more speed and agility.

While pressure from excess inventory has presented the biggest challenge to our team this year dealing with high costs and volatility in the external supply chain has run a close second.

And today, while conditions remained far from what we would have considered normal in the years before the pandemic. There are early signs that both costs and volatility may have peaked.

More specifically lead times and global shipping have begun to decline spot.

Spot rates to move shipping containers have fallen somewhat and in light of the reduction in petroleum prices. We've all seen recently fuel surcharges have been easing somewhat compared with the peak rates, we saw earlier in the second quarter.

That said conditions remain highly unfavorable when compared to the years before the pandemic and we're mindful of the continued risks in the months ahead.

<unk> potential slowdowns at West Coast ports, a reversal of the recent decline in energy costs and the possibility of additional Covid lockdowns in China.

In addition, we continue to encounter far too many delays affecting overseas shipping which requires to pay spot rates to move containers rates that are well above our pre negotiated shipping rates.

As such we're maintaining our practice of moving receipt dates earlier than we would have in the past, which allows us to mitigate the business risk from receiving shipments later than expected.

You'll recall that at this time, a year ago, when the external supply chain began slowing down and shipments were arriving late we began relying on airfreight much more than usual to ensure we receive key seasonal merchandize on time for the holiday season.

Well that was the right decision at the time given the circumstances, we were facing this year, we expect to meaningfully reduce our reliance on airfreight by moving to earlier receipt dates for seasonal inventory.

To accommodate these early receipts without adding further color to our supply chain and stores, we secured temporary capacity to store and stage shipping containers near the ports, where we receive them.

When needed this allows us to quickly clear the containers from the port area and hold them until the ideal time to begin moving inventory into our supply chain network.

While we don't expect to need this additional capacity over the long term. We believe it is clearly the most efficient approach in today's environment, given the volatility we continue to face.

I also want to highlight the critical role that our stores have played in our work to improve conditions in our supply chain.

During the second quarter, our store teams engaged in a host of activities to support the effort, including the execution of countless promotions and markdown programs to move the excess merchandise quickly.

And the development of innovative presentation strategies to highlight the deals we were offering our guests.

This included Repurposing, the seasonal presentation space in our stores to highlight deals and create meaningful statements, including key item promotions. It also included the early wind down of our outdoor living assortment, which allowed us to bring in our back to school set earlier than usual, ensuring we are back in stock and reliable on key items parents needed to fill there.

To school shopping lists.

More specifically at the end of the second quarter about three quarters of our back to school and back to college receipts were already downstream in our stores a number that was closer to 50% at the end of Q2 a year ago.

So now before I turn the call over to Michael I want to turn my focus to our longer term priorities and the multiple ways, we're investing in our future growth.

As you know the majority of our Capex is going into our store network, both to extend our footprint and invest in existing locations.

These store investments fall into three major buckets, the first and largest investment is in our store remodel program, where we completely transformed the space in existing location.

Modernizing the shopping experience, while enhancing the productivity of our team.

At this point in the year well over 100 Remodels are currently in flight across the country.

Pick us on track to complete nearly 200 Remodels this year.

In addition to these complete transformations, we're also making smaller investments in hundreds of other locations.

This includes the one hundreds of fulfillment Remodels, we'll accomplish this year and which we reconfigure portions of the store to enhance the efficiency safety and capacity of our drive up in store pickup and ship from store services.

In addition, this year, we're investing in several hundred locations to add an ulta beauty at target a cobranded Apple shopping space or a Disney store presentation to the sales floor.

And finally, we're on track at about 24, new store locations in 2022.

So far this year, we've opened 12, new locations across the country and neighborhoods as diverse as Soho in New York and Jackson hole in Wyoming.

Beyond this work in stores, we're also making significant investments in our supply chain focused on three main priorities.

The first is to build additional upstream capacity to our network given that we continue to grow sales on top of the $27 billion. We added in 2020 in 2021.

In support of this goal we opened two upstream Dcs near the end of 2021.

And plan to open six new upstream facilities over the next several years, including two on track to open in 2023.

In addition to the space, we are adding to the network. We are continuing to modernize how our existing distribution centers serve our stores by developing and automating processes that reduce the amount of store workload devoted to receiving inventory and restocking store sales floors.

Finally, we are rapidly expanding the number of sortation centers operating around the country. We have six of these facilities operating today, including three that opened in the last few months and we have plans to add five more by early next year.

These small facilities expand ship from store capacity in the locations they serve while significantly reducing last mile delivery costs, particularly as we integrate our ship drivers into the process.

Given the package delivery density we've achieved across many markets over the last few years, we see continued opportunities to add more sortation centers over the next few years, which adds speed and significantly reduce last mile costs in markets, where they operate.

As I mentioned last quarter. This year's capital projects are being impacted by the cost increases material shortages and supply chain pressures that are affecting other parts of our business and.

And I'm really proud of how our construction team is managing through these headwinds more.

More specifically while cost increases are raising the cost many of these projects. The team has done an excellent job in keeping the vast majority of projects on track and on time, despite the significant headwinds they're facing.

So as I conclude my remarks, I have to pause and add my thanks to the entire team for their resilience and perseverance during a period of incredibly rapid change, which causes this quarter to be as challenging as any I've seen in my career.

In the face of that challenge, what's been amazing is how our team members have stayed positive.

They've worked to find collaborative solutions across multiple teams and never straight from their commitment to our guests and our company purpose.

With the progress they've made our operations are now in much better shape and the team is energized and ready to play offense in the back half of the year.

While we are all mindful of the near term volatility in the environment. It's times like these that often present, the biggest opportunity to gain long term market share as others face the distraction of trying to stay afloat, while we continue to invest and improve our operations.

That's one of many reasons that I've never been more optimistic about our prospects in the years ahead.

With that I'll turn the call over to Michael.

Thanks, John as John mentioned, we often ask our team to be mindful of both short term and long term considerations, when making decisions and given the unique circumstances, we have been facing this quarter, we faced a decision with meaningful implications for both of.

As Brian outlined earlier, if we had decided not to deal with our excess inventory head on we could have avoided some short term pain on the profit line, but that would have hampered our longer term potential instead.

Instead because of the path, we took our quarterly profit took a meaningful step down, but our future path is brighter.

Our operations are healthy our store and DC teams have more flexibility to maneuver and we're ready to feature both the fresh assortment and uncluttered shopping experience our guests expect and deserve.

That passionate commitment to the guest experience is one of the many reasons, we've now seen 21 consecutive quarters of comparable sales growth.

While normally our income statement gets the most attention I want to start my remarks today with the balance sheet and specifically our inventory position.

And as I dig into the detail I want to acknowledge upfront that this kind of analysis is a relatively complex exercise because of the growth and volatility we've experienced over the last couple of years because of the broad and diverse assortment that we sell and the fact that our business is seasonal from quarter to quarter.

More specifically given that our inventory position throughout the pandemic was far from optimal focusing on year over year growth numbers isn't very helpful. Right now.

As a result, we often base our inventory analysis on growth trends compared with 2019, our pre pandemic year, when our inventory and sales trends were much more in sync.

With that as context I want to zero in on one of the questions I'm sure you have which is why our inventory on the balance sheet remained roughly constant at around $15 billion between the first and second quarters.

The simple answer is that while that single number didn't change much we accomplished exactly what we intended to do during the quarter, which helped to changed conditions significantly below the surface.

More specifically because of the inventory actions, we executed unit growth compared with 2019 in our discretionary categories decelerated by more than 15 percentage points between the first and second quarter of.

A change we estimate would have reduced our inventory position by more than $1 billion if taken in isolation.

However, a couple of offsetting changes moved our quarter end inventory in the other direction.

First among them, we leaned into our frequency categories during the quarter accelerating three year unit growth versus Q1 at a double digit rate, resulting in stronger in stock metrics compared with 90 days ago.

Another factor that drove inventory dollars higher is the continued increase in unit costs, we've been seeing across all of our categories, which caused the dollar value of our inventory to grow faster than unit growth in the second quarter.

So where do we stand today.

At the end of the second quarter inventory on the balance sheet was about $6 billion higher than we reported three years ago.

Of that dollar growth about $3 billion or approximately half of that total growth is the result of higher unit costs across our assortment.

Of the remaining $3 billion, our analysis indicates another $1 billion to $2 billion is related to our decision to move receipt timing earlier, given the volatility we continue to expect in the supply chain.

And also importantly beyond reshaping the inventory we already have our Q2 inventory actions also included the removal of more than $1 $5 billion of fall receipts in our discretionary categories, reflecting our continued focus on reducing risk in the current environment.

That's why we feel good about our inventory position as we head into the back half of the year.

So now I'll turn to a review of our second quarter financial results.

Total sales increased three 3% in the quarter driven by a two 6% increase in comparable sales combined with the impact of new stores.

Total revenue increased three 5%, reflecting sales growth along with the benefit of nearly 15% growth on the other revenue line driven by continued strength in our round Dell ad business.

Just as Kristina pointed out that unit share as a key measure of target's relevance versus competitors traffic growth is another important indicator of the relevance of our brand our continued traffic growth in the second quarter clearly demonstrates the ability of our balanced multi category assortment to deliver continued relevance in a rapidly changing environment.

Like we're seeing today.

So that even as our guest preference for individual categories has been changing dramatically. So far this year that hasnt affected their preference for target.

As a result traffic accounted for 100% of our comparable sales growth in the second quarter, increasing two 7% on top of 12, 7% a year ago.

Average ticket remains essentially flat in the quarter as low single digit increase in average retail was offset by a similar reduction in the number of items per transaction.

Across our sales channels store comps grew one 3% on top of eight 7% a year ago, while digital comps grew 9% on top of nine 9% last year Digi.

Digital growth continues to be led by our same day services, which saw double digit growth overall and mid teens growth and drive up.

On the gross margin line, we saw a nearly nine percentage point decline compared with last year merchandising.

Merchandising accounted for more than seven points of this pressure driven primarily by our inventory reduction efforts along with the impact of higher fuel and transportation costs product cost increases and higher shrink partially offset by the benefit of retail price increases.

In addition, digital fulfillment and supply chain drove about one five points of pressure, reflecting increased compensation and head count in our distribution centers combined with the cost of managing excess inventory and higher last mile shipping costs.

Consistent with our first quarter mix accounted for approximately 10 basis points of pressure and softness in higher margin categories like apparel and home was largely offset by softness in lower margin discretionary categories, most notably electronics.

On the SG&A line, we continue to benefit from fixed cost leverage and efficiency gains across our operations, which helped to offset the impact of cost inflation across multiple expense lines within overall compensation lower incentive compensation more than offset continued investments in pay and benefits for our hourly team members.

Altogether, our second quarter operating margin rate was one 2% down from an unusually high nine 8% a year ago driven entirely by the decline in our gross margin rate.

This operating margin performance was below the midpoint of our most recent guidance is the cost of our inventory actions was somewhat higher than expected.

While an operating margin rate of just over 1% is well below anything I've seen in my career and something I never expect to see again I have no doubt that it was the right outcome given the unusual circumstances, we have been facing this year.

Our focus throughout the second quarter was to ensure that we took care of the excess inventory of our network and adjust future receipts to reflect the rapid change in sales trends, we've seen so far this year.

We accomplished this goal to the benefit of our operations our team and our guests.

Finally, one note on our tax rate in a period like this year when our operating profit is unusually low tax benefits have a larger than normal impact on our tax rate, which helps to explain why our year to date tax rate has been lower than expected looking forward given that we anticipate a meaningful improvement in our operating performance in the back half of the year we.

<unk> to expect our full year effective tax rate will be in a range around 21%.

Now I'm going to turn to capital deployment and begin where I always do by articulating our priorities, which we've supported consistently for decades. Our first priority is always to invest fully in our business and projects that support our strategic and financial criteria.

Once we have met this first priority, we support our dividend and look to extend our 50 year record of annual increases.

And finally once we have supported the first two priorities, we return any remaining excess cash by repurchasing our shares over time within the limits of our middle a credit ratings.

Regarding the first priority second quarter Capex was approximately $1 5 billion.

Bringing our year to date total to just over $2 $5 billion.

As you'll recall at the beginning of the year, we guided to and expected full year Capex range of $4 billion to $5 billion.

And at the time I indicated my hope that we would reach the high end of that range with the outcome, depending on how many capital projects could stay on schedule.

So I'm happy that as John mentioned the team is doing a great job of keeping projects on track despite facing multiple headwinds all while inflation in the cost of equipment materials and labor is driving project spending above initial predictions.

As such we now expect our full year capex will be $5 billion or more for the year, reflecting both the number of projects that remain on track and the expected impact of cost inflation.

Of course, while we prefer not to face the cost pressure on these projects I'm encouraged that so many value creating projects remain on track to be completed this year projects that will benefit our operations and our P&L for years to come.

Turning to our second capital deployment priority, we returned $417 million in dividends to our shareholders in the second quarter up from $336 million a year ago, driven by a 32% increase in the per share dividend, partially offset by a decline in average share count.

And finally in June we reached the final settlement for the accelerated share repurchase agreement. We initiated last March under this ASR, we invested $2 6 billion towards higher 12 5 million shares of our stock.

Looking forward just as our inventory commitments reflects continued caution for the remainder of the year, we're taking a similar cautious stance in terms of our share repurchase activity.

And of course any repurchase activity will be consistent with our long term goal to maintain our middle a credit ratings.

So now I want to close my commentary on the quarter by covering our after tax return on invested capital, which measures both our near term profitability and the efficiency of our capex decisions overtime.

In the second quarter, our trailing 12 month after tax ROIC was 18, 4% compared with 31, 7% a year ago.

And it's notable while the current number is well below where we expected to operate over time, an after tax number in the high teens would have been considered aspirational for our business only a few years ago.

So for us to temporarily move down to this level and in an environment is challenging as we're facing is a vivid confirmation of the underlying strength and resilience of our business model and the reason we continue to be incredibly optimistic about our future prospects.

And that confidence starts and ends with our team so I want to pause and express my gratitude to the best team in retail.

Without your efforts, we couldn't have achieved the remarkable growth in traffic and sales that we've seen over the last few years and why even in a tough year our business remains strong.

Now, let's turn to our guidance and based on the hard work of our team in the second quarter, we feel really good about how we're positioned going into the back half of the year at.

At the same time, given that we've been experiencing volatile economic conditions. So far this year.

And that volatility appears likely to continue in the months ahead, we're maintaining a cautious stance as we plan our business given the potential macro and consumer risks that might emerge.

That's why as you've heard throughout our remarks today, our second quarter inventory actions were specifically designed to reduce our level of risk in discretionary categories.

And in terms of our operations. The team has focused on building flexibility into our plants, placing a premium on staying nimble and adjusting quickly in the face of any potential change in macro trends.

Regarding the top line our expectations have remained consistent so far this year with guidance for full year total revenue growth in the low to mid single digit range.

With the front half of the year behind US both our Q1 and Q2 results have put us squarely in the middle of that range and today based on our current performance and plans for the back half of the year, we remain positioned to deliver full year revenue growth in the low to mid single digit range.

On the operating margin line, our most recent guidance anticipated a fall season operating margin rate in a range centered around 6%.

This expectation is nearly double our spring results and notably if we hit that rate in the fall it would exceed the fall season rates, we were delivering prior to the pandemic.

And today similar to my commentary on the top line based on the success of our Q2 inventory actions and our current performance we remain positioned to deliver an operating margin rate in a range around 6% in the fall season.

Between the last two quarters of the year, we expect our third quarter rate will be well below our Q3 performance over the last couple of years, while our fourth quarter rate should be much more in line with our recent Q4 experience.

Most notably in the third quarter, we will continue to experience some spillover impact from our inventory actions in the range of $200 million.

In contrast in Q4 will be annualized a meaningful cost headwinds that surfaced, a year ago, which will make the year over year comparison more favorable despite the current headwinds we're facing.

All that said, while we typically anticipate something closer to a balance of upside and downside potential when we make any forecast the macro and consumer risks in the back half of this year feel skewed to the downside.

That's why even in the face of consistent business trends in recent months, we've undertaken a significant cost and effort to remove risk from our inventory commitments. It's why we're stubbornly focused on real time monitoring and communication of evolving conditions and why we've asked our team to build flexibility and agility into their plans with that mine.

If trends move away from what we're seeing today, we're ready to quickly adjust.

So now before I turn the call back over to Brian I want to emphasize why we're so confident in our long term potential even as we navigate a very challenging environment and a year of multiple challenges, including rapidly changing consumer preferences inflation at 40 year highs volatile supply chain conditions, and rising fuel and transportation rates.

That are expected to add well over $1 billion of costs. This year, our business continues to generate historically strong traffic increases.

Low to mid single digit revenue growth and unit share gains across all of our core merchandising categories.

And even in the face of unprecedented profit rate pressure driven by the host of factors I. Just listed we remain profitable with an after tax ROIC in the mid teens.

In fact, if our performance in the fall is consistent with the revenue growth and operating margin rates I outlined earlier, we remained positioned in 2022 to generate higher operating margin dollars than we did in 2019.

That's what we mean when we say we have built a durable model.

And today, while we expect conditions to remain challenging in the near term the operating margin rate improvement, we're projecting in the back half of the year should serve as an early indicator of the continued rate improvement we should deliver in the years ahead.

With the potential for additional rate expansion and continued growth in traffic and revenue in the years ahead, we're facing a compelling financial picture is the economy and consumer eventually recover.

That's why I've never been more confident in our long term prospects than I am today.

With that I'll turn the call back over to Brian .

Thanks, Michael.

Often tell my team that leadership and performance are tightly linked overtime, but that leadership.

Often appear source.

That's why I am extremely proud of the leadership our team showed in the second quarter.

After they took a hard look at our own inventory position and the amount that was building up across our industry. The opposite make the hard choice get in front of the problem and address it head on.

They made that decision with the full knowledge would have a profound impact on our near term profitability.

They also knew there was another path.

We could have avoided tackling the problem and avoid some of the pain in the short run, but instead our team chose to lead.

They knew the best path for our guests and for our teams in our stores and distribution centers was to take action and improve the condition of our inventory and operations quickly.

That path would allow the entire target team to move ahead without facing the ongoing burden of excess inventory holding us back.

So the team quickly developed the bolder plan, which we announced in early June .

Over two months ago.

And in the intervening weeks teams across the company worked tirelessly to.

You take the plan and make it a reality.

That's the reason we're positioned to deliver a strong improvement in our profitability. This fall despite an environment that is far from ideal.

Because of our team's leadership our business today is much better positioned to perform.

And I couldnt be more proud and grateful for the courage they have shown.

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.

One moment for the first question.

We're now ready with our first question from Christopher <unk> with JP Morgan you May go ahead.

And Mr. Harbors your line is open.

You might be muted.

Thanks, Good morning, and thank you for all the detail you talked about an encouraging start to back to school can you talk about what you've seen in July and August a lot of retailers like you talked about.

Improving trends.

So what does that mean for how are you thinking about the back half comps and does that reflect the current trend in the business as you said it in the guidance because I guess the question. We have is is the risk how did you incorporate the risk that the bounce in trend that youre seeing now is just that episodic event type spending that you've been highlighting at all.

Year.

Chris Thanks for joining us this morning, I will let Kristina and talk about some of the back to school and back to college friends and Michael to build on guidance, but before we start based on the length of our prepared comments, we are going to ask for some additional time for Q&A. So operator, we're going to extend the time for this call to make sure we cover as many questions as possible we are seeing.

I want to start by talking about some of the back to school and back to college trends we're seeing.

Yes.

Third earlier in my prepared remarks.

We're optimistic about what back to school back to college.

During seasonal.

Target really shine the reason being that our multi category portfolio makes us even more relevant.

Good bye.

Uh huh.

The lunch.

That goes in it and of course, all the supply.

Okay.

Moments have always been a good proxy for the strength of the total portfolio.

Let's see.

Good.

There's a lot of business left to be done we.

We believe that that is a good indicator of the strength.

Potential for the fall.

The thing to look at it.

We have performed to date and our traffic and unit share growth that we've seen across the portfolio.

<unk> gives.

It gives us confidence in our guests choice target as a retailer.

Chris I'll, let Michael talk about guidance, but one of the things that really stands out for me as I look at our position today is that continued strength in traffic and the growth we're seeing in units across our entire portfolio. I'd also recognized based on the actions we've taken with our inventory position. If you walk our stores today. It is clear that we are prepared for.

Back to school and back to college, and we're really standing tall in those categories like we want to talk about the guidance and I'll build off the comment you just made Brian .

When we look at the quarter, Chris a lot of the trends we see in Q2 are informing our view of the back half of the year and I think Q2 is a pretty good proxy for some of those top line assumptions that part of the year.

Consistency of traffic for the year across the months of the quarter I think that's the thing that we look at really closely that gives us a lot of evidence that even is.

Shopping habits have changed and category trends have changed we've seen a consistent driver of more and more shoppers shop in our stores and shopping US online is that consistency of traffic is the thing that gives me a lot of optimism as I look to the back half of the year, even if we can't sit here today and predict every twist and turn of course.

Of course I'll add.

One final point as we talk to our guests when we talk to consumers, while theres certainly a cautionary environment in front of US. The one thing that seems to be very consistent as a guest and consumer who says they want to celebrate the holiday seasons. So we certainly expect that theyre going to be celebrating Halloween this year and actively trick or treating and hosting parties.

With friends and family.

No theyre looking forward to Thanksgiving and Theyre going to look forward to celebrating the Christmas holidays and that comes out each and every week as we survey consumers and talk to our guests. So that gives us great optimism for our ability to perform during these key holiday seasons.

Got it and then thank you very much and so my follow up is just <unk>.

Michael you talked about the phasing of the operating margin so.

The interpretation is that the fourth quarter, it's going to look a lot.

More consistent with what you did last year, maybe a little bit below so.

The third quarter comes in.

Well below that 6% around 6%.

Yes, you are.

As I said in my remarks expect we sit here today expecting a fourth quarter. It looks more like the fourth quarters. We've seen the last couple of years and so I think thats a six to eight last year and a six five the year before that that's the right range around which we've since our expectations for the fourth quarter and obviously to get to a six in total that implies a lower number in the third quarter.

And the driver there is like I talked about in our remarks, some of the cost of our inventory actions do spill over into the third quarter and it will continue to manage the elevated fuel and freight costs and how those net against pricing action and things that over the balance of the year, but we feel good about that range around 6% and we will continue to watch the macro environment.

Mostly.

Yes.

Got it thank you very much for joining us.

Thank you. The next question is from Edward <unk> with Piper Sandler You May go ahead.

Hey, guys. Good morning, Thanks for taking the questions two from me I guess first.

On the variance relative to your previous expectations in terms of the inventory actions were there specific areas, where you had to cut deeper or cost more to get out of inventory positions and then as a broader question. One of your peers talked about some changes they are seeing in their customer base. I guess are there any noteworthy changes that you're seeing either customers trading down.

Or trading into target. Thank you.

And I'll start and then I'll turn it over to John to talk about some of the inventory actions, but I really want to start by recognizing our team.

As we sit here today over the last few weeks since our announcement in June this has been a collaborative effort and the team has accomplished so much to put us in the right place as we get ready for the back half of the year. So.

Based on the work that the teams have done across our supply chain system, and merchandising and finance and supply chain and stores. The team has accomplished more than we expected.

Short period of time and put us in a better position from an inventory standpoint than we might've expected back in June .

Yes, Ed.

Just add on I think largely we're on track with what we thought at the when we came out.

With the announcement earlier in Q2, a little bit of it cost us a little bit more in promos or clearance to move some inventory.

I think the work the team did in a very short amount of time to size, what we needed to take care of is largely in line with where we are today and we feel really good about where we're at as Michael said, a little it spilled over into Q3, and that's really just timing more than anything else, we just didn't get to it.

But the work Thats been done we're really proud of them and I would say from my position. We did exactly what we set out to do we got rid of the inventory we need to the operations are in a much better place, there's a little bit more to do here in Q3 that will clean up.

I think the one thing I'd add on that I don't want to get lost is the amount of receipts that were cut from discretionary categories. In Q3, and Q4 and that is just huge for us again because of the uncertainty in those particular categories of sales and up a little bit higher well have a little bit higher sell through and that'll be a great day, but that really derisk those categories going forward. So.

So we feel great about the work that's been done over the past few months.

And maybe I can add a little bit to the question about the customer.

As I shared in my prepared remarks, our guests are still demonstrating that they have spending power.

Choices that theyre, making to balance their budget is what we're watching and so obviously.

We're moderating our investment in some of those discretionary businesses and we're leaning very much into food and beverage essentials beauty, but also select portions of the portfolio discretionary that have stayed resilient, whether it's toys luggage seasonal moments fashion forward apparel and so it's really about reading the gas lift.

Turning to them and continuing to support a level of agility in our business model.

And in terms of other choices that theyre, making I think traffic and unit share of the best barometer for that.

Sure.

Investment in target, we're still growing traffic and growing unit share in every major category, which to me says that our relevance is high with the gas right now and they are managing their budgets.

And they're finding options that target.

Thank you.

Thank you. Our next question is from Steph Wissink with Jefferies. You May go ahead.

Thank you good morning, everyone I wanted to ask a follow up question on pricing for the back half give us some sense of how youre thinking about promotional Eddie. Thank you had mentioned in your prepared remarks, the consumer is responding to some of the promotions youre putting out can you just give us a sense of what you factored into the guidance in terms of heightened levels of promote.

Thank you.

Yes.

Thanks for the question stuff I mean, we always know as we get to the back half of the year.

The promotional environment. The holiday is always are and so we've factored that in accordingly, and we see a consumer in the current in the current inflationary environment, that's focused on value and like we've said many times in these calls.

About pricing first through the lens of our guests do you want to make sure it's fine.

Great value shelf online and the way that were priced and we feel good about where we've struck that value equation and I think the traffic we're seeing speaks to the fact that yes.

And Steph I'd only add that Christine and her team have done a wonderful job as we plan for the back half of the year of ensuring that we have great value for our guests, but also that we have exciting newness and I think that combination is a winning formula for us as we think about the back half of the year.

Okay. Thank you very much thank you.

Thank you. Our next question is from Michael Lasser with UBS you May go ahead.

Good morning, Thanks, a lot for taking my question My first question.

The promotional activity.

Due to the same store sales growth in the first and second quarter.

You see more downside than upside risk to the guidance for the back half of the year.

It's moderate the guidance a little lower for the back half.

Sure Michael Thanks for the question a while.

Counterfactual, whatever elasticity of where Q2 in Atlanta, Theres, a little bit of more art than science.

We think that the net dollar impact of our markdowns as probably negligible all in in the second quarter.

And of course, we took some markdowns to move through some product, but we think that probably net net.

<unk> move our topline Tom a lot as we think about the back half of the year were informed in the back half based on the trends that we're seeing now in the business and you know as we've talked about some of those trends that we saw a change at the end of Q1, we've seen persist into Q2, and we factored that into our thinking for the back half of the year well.

We will continue to be mindful of whats clearly uncertain environment for the economy and the consumer and appoint Kristina made earlier in Q&A, we'll stay close to those trends and will adjust accordingly, and thats why taking the inventory actions, we did to give us some room to operate and to give us some flexibility in the system will be important in an uncertain environment.

Okay.

Good question.

Do you see a lot of moving pieces with what's happening at target right now.

It's been a lot of this transitional phase.

For a better 2023 really somewhat independent of the macro environment and with that being said could you size the impact to your margin.

All of the inventory actually.

You're taking this quarter next quarter that are temporary and will be isolated to this year.

Next year.

Better sense of what the ongoing profitability of the business.

I'll start by saying I think your summary, really captures the actions we've been taking today I wanted to make sure that we continue to build on the traffic we're seeing in our stores and the visits to our site.

Strength, we're seeing in unit market share gains, but importantly, the investments we made to ensure we have a great guest experience in the back half of the year and going into 2023. So the bold decisive actions were really to make sure. We continue to build on our current momentum the great relationship we have with our guests. The momentum we are building from a market share standpoint.

And providing our guests with a great target experience every time, they shop that will continue and set us up well for 2023 as far as sizing. It will certainly come back to all of you as we think about guidance for next year, but we certainly expect to see a more normalized environment from an operating profit standpoint, as we move into 2023 and continue to build on.

On the momentum and the investments we've been making our business for years.

Thank you.

Thank you. The next question is from Simeon Gutman with Morgan Stanley You May go ahead.

Mr. Gutman. Your line is open you might be muted.

Yes, sorry about that hi, good morning, everyone.

Following up on Michael's question is there any way you can quantify some of the structurally higher costs in labor in the D. C. Just as a way to back out that that might be the one driver that stays in gross margin, but then in theory, you should recapture most of whats happened this year.

Yes, I mean, there's probably a piece in each bucket them in as we've grown the business, obviously, we invest more labor and moving the product to support that growth and that's a piece of some of that growth there.

And then it also cost us more when we're full.

<unk> was full in the second quarter and so there's a piece of that that will result in improved productivity over time as we get some of that inventory out of the fish system to Brian's point will come back and unpack next year. When the time is right to do that but I expect to see both of those drivers presence as we do so.

And maybe just a quick follow up you mentioned Q4 profitability should look more target ask does that mean like what's your assumption for mix in that fourth quarter relative to where we are today.

Breaking out a specific assumption for mix, but I think if you look over the last couple of quarters and you see mix isn't a big driver of our margin results and so I wouldn't think about it in marketing as we projected.

Okay. Thanks, Good luck. Thank you.

Thank you. Our next question is from Kelly Bania with BMO capital you May go ahead.

Thanks for taking our questions.

Curious if you could just help us dissect the gross margin a little bit between the promotional activity the inventory impairment versus the cost of storing and moving this excess inventory because I think it would just be a little helpful for investors to interpret that comp and traffic number and and just how you are.

Thinking about.

That traffic and comp as the promotions moderate into Q3 and it sounds like Q4, you're planning for.

Great Little promotional activity. So I was just wondering if you could kind of parse some of that out to help us think about that maybe.

Maybe start at the end of your question, we expect Q4 to be promotional it always is in our plans plan for promotions that will provide greater value to our guests in those seasonal moments that matter.

It's been true every Q4 in my 18 years here and I expect it not to be any different this time around with respect to unpacking. The margin will go back to some of what I said in my comments and.

We were.

Year over year nine percentage points down seven of that is mostly driven by inventory actions and you see incremental markdowns as a piece of that.

You also see the cost of some of those cancellations that John talked about earlier, and then Youll see about a point and a half of pressure from supply chain and digital and a piece of that is related to us being heavier in the system and that drives some cost a piece of that is the elevated freight and transportation rates that we've talked about previously that.

Well continue to kind of.

Maybe move up and move down based on the day are definitely elevated versus historical measure and you can see over that as you can see that.

As a piece of that year over year pressure too.

Operator, we have time for two final questions.

Thank you. Our next question is from Robby <unk> with Bank of America. You May go ahead.

Oh, Thanks for squeezing me in here My question was on <unk>.

Inflation in food and consumables in.

Can you give us any number on how how much inflation you guys saw in the second quarter, but also.

The two half guide you guys have given us what what's the inflation tailwind you guys are expecting in food and consumables and also related to that you guys talked about the focus on everyday pricing.

Is there any incremental margin pressure from.

The frequency items or the focus on everyday pricing being sharp.

Yes, I mean, we've seen persistent cost inflation in food and I think across the industry <unk> seen prices move with that that's been no different here at target.

We're really mindful of making sure that we feel good about our price gaps definitely do today in food and if you zoom out from the food specific piece of that.

I'll come back to traffic if you look at what drove our growth in the second quarter. There were some puts and takes within basket between ASB in units, but the story was traffic and so.

Again that gives us evidence that we're getting that value equation right for our guests.

And as the inflation component within the same store sales in food and consumables is that similar to sort of the.

The numbers, we're seeing in the CPI for food at home.

Thanks, guys.

Generally in the right ballpark, obviously theres some mix implications there if youre comparing retailer to retailer.

But we've seen persistently high inflation in food and I think that's a.

That's a trend that's been with us for a while we don't expect it to change anytime soon.

And sorry, just to clarify the pricing are you wouldn't would you say you guys are investing in price in food and consumables, so maybe taking a lower margin than the.

Grocery part of your business than maybe historically you would add.

Maybe I'll add a little context here.

<unk> consistently evaluating our complete value proposition to the consumer and so part of that is price and in the consumables category, we've had a little bit more flexibility to move with the market because it domestically replenished and bought every single day and so we have absolutely.

And some retail, but the way we counterbalance total value proposition is by looking at of course, what else produces value compelling promotion and incredible own brand portfolio that allows the guests to opt into whatever price point is right for them.

And our maniacal focus on balancing our good better best and opening price point option and that the combination of those things are yielding more unit share growth.

At target, which means that yes. It does.

We engaged in the offerings that we're providing and of course that traffic that Michael pointed to and Ravi. It's Christina noted the strength of our own brand portfolio. In this environment is a really important element of how we deliver value to our guests each and every day and in food and beverage are good and gather brand now is a $2 billion brand that continues to see very <unk>.

Loan growth. So that's just one way, we deliver value to our guests each and every day at target.

So operator, we got time for one last question today.

Thank you. Our final question is from Oliver Chen with Cowen You May go ahead.

Hi, Thank you very much on the topic of back to school, what would you speak to as factors that are most different this year versus last year as you get ready for that and secondly on the inventory actions.

They relate to third quarter.

What's left to do there and.

Might you have to take deeper promotions than you thought previously the consumers requiring a lot of discounts to respond to promotions more than other retailers thought in many cases would love any thoughts there. Thank you Oliver I'll start I'll, let Michael finish up but I think the one big difference today as we sit here today and think about back to school and back to <unk>.

College is certainty.

We know across the country children are going back to school there'll be in classrooms, they're going to be back on campus. So I think that element of certainty is very different from what we face for the last couple of years and again, we expect to see a very solid back to school and back to college season, because we know children are going to be in classrooms in the vacuum campus and targets.

Place. They go during this important back to school and back to college season.

And then Oliver kind of.

In some of the Q4 actions, we still have to take just to provide kind of an example, they're yes, they're seasonal products natural time until we start stores within Q3 will continue to work through some of that inventory then and so that's an example of some of the work still to be done, but all kind of in where we started we feel really good about it.

Position as we exit the second quarter.

We accomplished what we set out to do from an inventory perspective.

So operator that concludes our second quarter call. We look forward to talking to many of you over the next few weeks and seeing you later this year. So thank you.

Yeah.

[music].

[music].

Ladies and gentlemen, thank you for standing by welcome to target Corporation second quarter earnings release Conference call.

During the presentation, all participants will be in a listen only mode.

Afterwards, we will invite you to participate in a question and answer session.

At the close of prepared remarks, we will open the queue for the Q&A session at that time. If you have a question you will need depressed star one on your telephone as a reminder, this conference is being recorded Wednesday August 17 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 second quarter 2022 earnings Conference call.

On the line with me today are Brian Cornell, Chairman and Chief Executive Officer.

The Stena Huntington Chief growth Officer, John Mulligan, Chief operating Officer, and Michael <unk>, Chief Financial Officer.

In a few minutes Bryan Christina John and Michael will provide their perspective on our second quarter performance and our outlook and priorities for the remainder of the year.

Following their remarks, we'll open the phone lines for a question and answer session.

This morning, we're joined on this conference call by investors and others, who are listening to our comments via webcast. Following the call Michael and I will be available to answer your follow up questions.

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 the back half of the year Brian .

Thanks, John and good morning, everyone back in June we announced that our team will be undertaking a bold effort to rightsize our inventory position.

And the categories for which demand patterns have rapidly changed.

While this decision had a meaningful short term impact on our financial results. We strongly believe it was the best path forward.

Consider the alternative.

We could have held on to excess inventory and attempted to deal with it slowly over multiple quarters or even years.

Well that might have reduced the near term financial impact it.

Would have held back our business overtime.

Of course, this decision would have driven incremental costs to store and manage the excess inventory over a longer period.

But much more importantly, it would've degraded the guest experience.

It would've cluttered, our salesforce and hampered our ability to present, new fresh international items the ones our guests expect from target.

Just as importantly, the extra inventory would have presented an ongoing burden to our supply chain and store teams.

As they face the distraction of working around it day after day.

Sort of taking that passive position.

Our team chose a more decisive path.

Aggressively reducing the inventory, we already owned and cutting back on receipts for the back half of the year.

And today with those decisions behind us we're in a much better position as we head into the fall season.

Here in more detail, we meaningfully reduced our ownership in commitments in categories, where we've seen softening demand.

This has allowed us to strengthen our inventory position is in stock position in the categories that are driving our growth most notably in food and beverage beauty and essentials.

Regarding the financial impact of those decisions Michael will provide more details in a few minutes.

But the high level story is the vast majority of the financial impact of these inventory actions is now behind us.

This positions our business to deliver a meaningful improvement in operating margin rates in the fall season.

However, beyond financial and operational outcomes.

I'm focused on how our inventory actions will benefit our guests and our team.

Regarding our guests, we're now positioned to continue driving engagement and growing traffic with a clean safe and uncluttered store experience and an assortment that highlights newness and supports growth.

For our team this quarter's inventory actions will enable them to focus on doing what they do best provide a great guest experience.

While reducing the stress and distraction from overly crowded store backrooms and distribution facilities.

After we announced the right sizing effort at the beginning of June I've heard from countless leaders across the company.

We wanted to relay their gratitude for the decision to move quickly and face the issue head on.

In the same spirit I want to pause and acknowledge the incredible effort of the entire target team during a very challenging time for the economy for our industry and our business.

Our success at reducing inventory was a result of unprecedented effort coordination and collaboration across multiple teams from our U S headquarters to our target India headquarters to our stores distribution centers transportation team and sourcing offices around the world.

And today in the face of a very challenging backdrop.

Proud of how our team and business model continue to serve our guests' evolving needs.

We do.

So the design of our operating model and the way we train our team is done with a focus on better serving our guests.

It's reflected in how we choose our assortment.

Where are we curate a broad range of items, both in store and online from the stylish stood the functional.

Incorporating quality and value throughout.

It's also evident well designer store and.

And the digital shopping experience that makes them easy convenient and inspirational inviting guests to choose the right option every time they shop.

All of these decisions, making our business model more durable, allowing us to drive deeper guest engagement and grow traffic in every environment.

Consistent with a shopping trends, we've seen for more than a year, our second quarter comp increase of two 6% was driven entirely by traffic, which expanded two 7%. This year on top of double digit growth a year ago.

With this increase second quarter traffic has expanded by well over 20% in 2019.

In raw numbers that means in the second quarter alone we've added more than 90 million guest visits over the last three years.

These visits are a vivid demonstration of a deepening level of guest engagement, resulting from multiple investments throughout our business.

These investments include dozens of new stores and hundreds of Remodels every year. They also include investments in our industry, leading same day services.

Which has transformed our business in a short time.

More specifically three years ago in the second quarter of 2019 digital fulfillment accounted for just over 7% of total sales in contrast by the second quarter of this year.

Same day portion of our digital sales accounted for more than 10% of our total sales.

This drove our total digital penetration up to almost 18% more than doubling in only three years.

Beyond our stores and fulfillment services guests continued to respond to our investments in our own brand portfolio.

This portfolio delivers more than $30 billion in annual sales and includes 12 brands that generate more than $1 billion each at.

At the same time, we're investing in these spaces and presentation for key National brand partners like Apple Disney and Levis.

And of course, we've been rapidly expanding the number of stores that feature an ulta beauty of target given the incremental traffic and sales they deliver.

But nothing has been more important than the investments we made in our team.

These investments include.

The move to a starting hourly wage range of 15 to $24 across the country.

Enhanced health care and wellness benefits for a larger percentage of our team.

The rollout of an industry, leading debt free college educational plant.

And our work to enhance the growth and development opportunities available to all of our team members and the team members of color in particular.

As we look ahead to the back half of the year. The team is laser focused on delivering convenience value enjoy at a time when our guests are facing multiple challenges.

And while we've taken a cautious stance on our inventory commitments, we will continue to lean into frequency categories, where guests demand has been strong.

And where the markdown risks are very low.

In addition, given the ongoing pressure our guests are facing from inflation.

Leaning into value.

This means we're focused on providing great everyday pricing and strong opening price points across every category, including in our own brands.

At the same time, we hear from our guests that they're focused on celebrating the seasonal moments they missed over the last two years.

As a result, we'll lean into those seasonal moments, helping our guests find ways to come together and celebrate with family and friends.

So we still have a lot of business ahead of us we've seen an encouraging start to the back to school and back to college season, and our teams are already deep into their planning for the upcoming Halloween season.

<unk> when we expect our guests will fully embrace trick or treating and scheduling parties to celebrate with family friends and neighbors.

Given continued volatility in the external environment, we built our fall plans the priority on flexibility and agility.

And that's where our business model shines.

More specifically, our multi category portfolio stays relevant Andrew.

It drives trips across a wide range of wants and needs.

In today's environment that needs, our food and beverage category is front and center, having grown more than 50% or $1 $8 billion since the second quarter of 2019.

But regardless of whether a target run begins with a need for a item in food and beverage or household essentials.

To see what's new in our beauty assortment.

To pick up a toy for birthday party or piece of luggage for an upcoming trip.

Our safe one stop shopping experience provides an opportunity to sell items in every one of our categories on every guest does it.

Beyond our assortment our unique stores as hubs operating model offers unmatched flexibility and how we can fulfill guest demand.

Whether it gets wants to make the conventional in store shopping trip placed a drive up order a range of ship delivery or simply have a box delivered to their front door stores can fulfill every one of those needs quickly and reliably, allowing our guest to choose what works best for them in that moment.

And as Mike will outline in more detail, our strong balance sheet and robust cash generation support continued investments during tough times like these investments and our long term growth and market share.

At a time when many others will be struggling just to survive.

The ability to play offense and focused on the long term it makes us well positioned to emerge from the current downturn even stronger than before.

So as I get ready to turn the call over to Christina <unk>.

Want to thank our team for their continued passion for serving our guests and each other.

While the environment remains challenging I'm inspired by the new and unique merchandise seasonal offerings and partnerships. Our team at this plan for the back half of the year.

And as I've traveled across the country to visit our stores and distribution centers I've been inspired to hear how our team is energized and eager to serve our guests with energy empathy and care.

Ladies and daily Joy at a time when our guests are dealing with multiple headwinds.

This unshakable guest focus it's one of the many reasons are unique team makes target a great company.

And I am privileged and grateful to serve with them.

With that I'll turn the call over to Christina.

Thanks, Brian and good morning, everyone.

Despite the tough environment, we are facing today I continue to be pleased with both our top line performance and the underlying market share we're seeing across our business.

Namely across all five of our core merchandising categories, we saw.

Got unit share gains in the second quarter, providing clear evidence that our guests are finding more and more ways to satisfy their wants and needs with every target run.

As Brian mentioned earlier, the inventory actions, we announced in June involved incredible collaboration across teams at headquarters stores and throughout our supply chain network and.

And I'm proud to say that together as one team we accomplished what we set out to do.

By moving to access units, we were able to realign our broader inventory portfolio to those categories. Our guests are most focused on including frequency categories like food and beverage everyday essentials and beauty as well as all things new seasonal and fashion forward.

To accomplish that goal teams analyze them build action plans to aggressively work through excess inventory at every point along the product journey from vendor to gas. This included rigorously re forecasting expectations for the balance of the year and beyond and determining where to reduce future receipts and orders.

Some cases working with vendor partners to reduce our fall receipts in light of our updated expectations. It also meant quickly building compelling promotional plans to drive unit velocity for product, we already owned all with a focus on providing great value and generating excitement for our guests.

And throughout the execution of these action plans our teams remain steadfast in their guests first focus.

Using to compromise the shopping experience in our stores or online.

As you've heard from Brian the short term profit implications of these decisions were meaningful but were confident they are the right long term decisions for our business for our teams and for our guests.

As we formed and revisit our plans for the third quarter and beyond we spent a lot of time listening to the wants and needs hopes and concerns of our guests.

What we're seeing in our results and hearing from our guests is that they still have spending power.

But they are increasingly feeling the impact of inflation.

And while the recent reduction in prices at the gas pump have been encouraging guests confidence in their personal finances continues to wane.

<unk> that backdrop, we've seen our guests shop, our own brands in bigger ways and more frequently knowing they're choosing great quality product with incredible value.

Also seen guest behavior evolve as they focus on optimizing their personal budgets through a heightened response to promotion as well as greater trip consolidation.

At the same time guests continue to experience difficult news headlines COVID-19 searches and continued political volatility.

Leading them to seek more ways to celebrate connect and find opportunities to bring joy to their families.

This is one of the reasons, we continue to see such strength in our seasonal categories, which we expect will continue in the back half of the year.

Now, let me turn to some of the category highlights from the second quarter, and which overall comparable sales grew two 6% on top of eight 9% a year ago, reflecting continued strength in food and beverage beauty and household essentials.

Food and beverage led the way in the quarter with growth in the low double digits, reflecting broad strength across multiple subcategories.

Beauty grew in the high single digits, reflecting notable strength and Ulta beauty at target along with the skincare Bath categories.

Essentials grew in the mid single digits with performance led by pets and health care.

Overall across our discretionary categories sales were softer than a year ago, but remained nearly $3 $5 billion or more than 35% higher than the second quarter of 2019.

In hard lines overall comp sales were down slightly to last year within.

Within hard line softness in electronics was partially offset by strength in entertainment, which grew in the high single digits.

Long with high single digit comp growth in toys, and encouraging sign as we plan for the fourth quarter holiday season.

Overall, the home category saw a low single digit decline compared to last year.

Spite affinity for our seasonal assortments and encouraging early results in back to school and back to college.

Apparel also saw a low single digit decline in the second quarter, but saw meaningful growth in women's fashion forward categories, along with performance apparel on top of strong sales growth in the category over the past two years.

As I mentioned earlier, while overall sales growth is one key indicator of the health of our business.

Market share is an equally important measure that we use to understand how we're performing.

And notably during inflationary times like these we heavily focused on unit share specifically to better understand our relevance as compared to our competitive set given that growth in both traffic and units is a strong proxy for the gas overall engagement with target.

Time and time again these metrics have proven to be a better barometer for lasting success as compared to growth solely through average retail prices.

That's why I'm, so encouraged that across all five of our core merchandising categories weak.

Unit share in the second quarter.

So now, let's turn our sights to all that is to come for the balance of the fiscal year having.

Having celebrated holidays in a big way in the second quarter guests already have our sights set on upcoming holidays and seasonal moments in Q3 and beyond.

Preparing for the upcoming school year is top of mind for families right now.

And to help with the transition, we're providing budget friendly options for students parents and teachers alike.

Beyond our assortment of value priced owned brands, a leading national brands, we're offering a one time, 20% off target circle deal for college students to get those dorm rooms, prepped and ready and we've also extended our teacher prep event to nearly eight weeks of discounts on supplies and more.

And today, while we still have several weeks of the season left to go we've been encouraged by early results in both our back to school and back to college programs.

Shortly after school begins we will turn our attention to celebrating Latino heritage month, which begins in the middle of September .

We're excited to help celebrate this important cultural moment with our guests through the presentation of our compelling assortment, 99% of which was created by members of the Hispanic Latino community.

Then before we know it Halloween celebrations will be underway with all the tricks and treats the season has to offer.

Our guest research indicates that more families plan to participate in Halloween festivities compared with last year, and we're ready with a wide array of gender and size inclusive costumes, new owned brand trick or treating candy and accessories.

Haunted House Cookie building sets and so much more.

And for those that want to celebrate the broader fall and harvest season in general rest assured that there'll be no shortage of new offerings from good and gather to create perfect meal snacking and entertaining solutions, including delicious new flavors of the season like Maple cinnamon Apple and of course, all things Pumpkin Spice.

Outside of specific holidays, we are focused on helping our guests experience everyday joy and our ability to cut across brands and categories as part of what makes us uniquely target.

For an example look no further than our upcoming collaboration this fall with Marvel to bring a unique assortment to our guests across the Avengers and Spider man franchises.

One standout will be lots of Marvel Studios' Black Panther, what kinda forever and Black Panther legacy exclusive within toys apparel home and Moore will have more details to share in the coming months.

And in an exciting collaboration with longtime partner the Lego group, we are bringing their popular Lego ideas contest to target.

Which Lego superfan submit ideas for Athene Lego building set.

After a public submission phase a handful of finalists will be selected for guests and fans to choose their favorite idea to be produced as an exclusive set at target and Lego brand retail stores.

But target Joy it goes well beyond key holidays are exclusive losses, it's about how we continue to iterate and improve upon what our guests already know and love from their regular target run.

This next quarter Youll see us elevate our fashion assortment with several new collections and updated brands.

We will introduce new well known national brands, and cookware and kitchen.

We will also continue to expand our leading national brand partnerships, including opening more Disney stores and of course also beauty at target.

In fact, we're only a year into this new partnership and Theres plenty of room to go ahead.

With the introduction of new designer fragrance brands, including coach Kate Spade and more.

As well as additional skin and hair care products, we continue to evolve the assortment to bring more joy to our beauty guests.

We remain on track to open at least 250 of these unique spaces. This year.

Plus we've already seen more than $1 5 million guests link their target circle and ultimate rewards accounts a number that's sure to continue to grow in the months and years ahead.

So now before I pass things over to John I'd like to take a moment and echo Brian's gratitude for the team.

Well, we have demonstrated time and time again that our durable flexible model can quickly pivot with changing consumer demands and a host of retail and economic conditions, none of that can happen without an incredible team.

Their talent dedication passion and expertise allows us to continue putting the target guests at the center of every decision we make.

As a result, we continue to benefit from deeper guest loyalty and preference for our brand.

I have been a target 19 years and I continue to be inspired every day by the talent around me. Thank you for your commitment and care to all our stakeholders.

With that I'll pass things over to John .

Thanks, Christina and past calls I've described how our operations team is always focused on two things at the same time.

Of course, there are always focused on short term execution and problem solving to ensure we provide a convenient consistent and inspiring experience for our guests and.

In addition, our team works every day to deliver on our long term vision and aspirations, ensuring our operations are ready to support our future plans.

While this dual focus on both near term and long term priorities has always been present, it's been especially notable this year given that we've been operating in a very unique environment.

In terms of the short term and as Brian and Christina mentioned earlier, our work to quickly rightsize inventory required determination commitment and coordination between multiple teams across the company.

And given the need to protect the guest experience there was no higher priority than delivering against this near term plan.

At the same time, our team remains passionately focused on the long term investments, we're making in our future.

These investments include our work to modernize and expand our store footprint increased upstream capacity in our supply chain.

Automated distribution center processes to reduce store workload and enhance our last mile fulfillment capabilities by opening sortation centers and integrating them into our network.

And Fortunately as Brian highlighted the strength of our business allows us to continue funding. These long term investments even in the face of the challenging external backdrop, we're facing today.

I want to first turn to our work on inventory and I'm happy to report that our team has made remarkable progress over the last few months, causing conditions in our supply chain to improve significantly.

More specifically and to provide some helpful context over time, we want to keep our DC network operating at or below 85% of its maximum capacity.

Given that operational difficulties and costs rise significantly when we move beyond that level.

So it's important to note that back in June inventory in our DC network peaked at well over 90% of our capacity.

Also notable by the end of the second quarter less than two months later, our team has quickly reduce DC capacity utilization to below 80%.

Put another way by the end of the second quarter, the physical space occupied by our distribution center inventory was more than 20% lower than the peak we reached in June .

Today, we still have some individual sites, where we need to make more progress.

The team has accomplished a remarkable improvement in a very short time.

Which will allow our end to end operations to function more efficiently and effectively in the back half of the year.

As Kristina mentioned beyond addressing the inventory we already owned the team also took a hard look at sales trends and determined ideal inventory levels across every category for the remainder of the year.

As a result, we've meaningfully reduced our fall season receipt commitments in many discretionary categories.

With these reductions we're projecting our dcs will remain at or below 85% capacity through the remainder of the year, even after the seasonal increase in holiday inventory that is set to occur over the next two months.

In other words for the first time I'm aware of our fall season inventory is projected to peak at a lower level than in spring.

Providing another vivid illustration of the unique dynamics, we've encountered so far this year.

While this inventory right sizing process hasn't been easy and our teams are devoted an amazing amount of effort and a small amount of time.

This work has allowed our teams to strengthen ongoing communication mechanisms and build new processes.

Going forward. These improvements will enable our merchandising and supply chain teams to maintain enhanced real time communication, particularly with respect to categories, where we faced the highest inventory risk.

I was asked to respond to changes with more speed and agility.

Well pressure from excess inventory has presented the biggest challenge to our team this year dealing with high costs and volatility in the external supply chain has run a close second.

And today, while conditions remained far from what we would have considered normal in the years before the pandemic. There are early signs that both costs and volatility may have peaked.

More specifically lead times and global shipping have begun to decline spot.

Spot rates to move shipping containers have fallen somewhat and in light of the reduction in petroleum prices. We've all seen recently fuel surcharges have been easing somewhat compared with the peak rates, we saw earlier in the second quarter.

That said conditions remain highly unfavorable when compared to the years before the pandemic and we're mindful of the continued risks in the months ahead.

Leading potential slowdowns at West Coast ports, a reversal of the recent decline in energy costs and the possibility of additional Covid lockdowns in China.

In addition, we continued to encounter far too many delays affecting overseas shipping which requires to pay spot rates to move containers rates that are well above our pre negotiated shipping rates.

As such we're maintaining our practice of movie receipt dates earlier than we would've in the past, which allows us to mitigate the business risk from receiving shipments later than expected.

You'll recall that at this time, a year ago, when the external supply chain began slowing down and shipments were arriving late we began relying on airfreight much more than usual to ensure we receive key seasonal merchandize on time for the holiday season.

Well that was the right decision at the time given the circumstances. We are facing this year, we expect to meaningfully reduce our reliance on airfreight by moving to earlier receipt dates for seasonal inventory.

To accommodate these early receipts without adding further clutter to our supply chain and stores, we secured temporary capacity to store and stage shipping containers near the ports, where we receive them.

When needed this allows us to quickly clear the containers from the port area and hold them until the ideal time to begin moving inventory into our supply chain network.

Well, we don't expect to need this additional capacity over the long term. We believe it is clearly the most efficient approach in today's environment, given the volatility we continue to face.

I also want to highlight the critical role that our stores. It played in our work to improve conditions in our supply chain.

During the second quarter, our store teams engaged in a host of activities to support the effort, including the execution of countless promotions and markdown programs to move the excess merchandise quickly.

And the development of innovative presentation strategies to highlight the deals we were offering our guests.

This included Repurposing, the seasonal presentation space in our stores to highlight deals and create meaningful statements, including key item promotions.

It also included the early wind down of our outdoor living assortment, which allowed us to bring in our back to school set earlier than usual.

Ensuring we are back in stock and reliable on key items parents needed to fill their back to school shopping lists.

More specifically at the end of the second quarter about three quarters of our back to school and back to college receipts were already downstream in our stores a number that was closer to 50% at the end of Q2 a year ago.

So now before I turn the call over to Michael I want to turn my focus to our longer term priorities and the multiple ways, we're investing in our future growth.

As you know the majority of our Capex is going into our store network, both to extend our footprint and invest in existing locations.

These store investments fall into three major buckets, the first and largest investment is in our store remodel program, where we completely transformed the space in an existing location.

Modernizing the shopping experience, while enhancing the productivity of our team.

At this point in the year well over 100 Remodels are currently in flight across the country keeping us on track to complete nearly 200 Remodels this year.

In addition to these complete transformations, we're also making smaller investments in hundreds of other locations.

This includes the one hundreds of fulfillment Remodels, we will accomplish this year and which we reconfigure portions of the store to enhance the efficiency safety and capacity of our drive up in store pickup and ship from store services.

In addition, this year, we are investing in several hundred locations to add an ulta beauty at target a cobranded Apple shopping space or a Disney store presentation to the sales floor.

Finally, we're on track at about 24, new store locations in 2022.

So far this year, we've opened 12, new locations across the country and neighborhoods as diverse as Soho in New York and Jackson hole in Wyoming.

Beyond this work in stores, we're also making significant investments in our supply chain focused on three main priorities.

The first is to build additional upstream capacity to our network given that we continue to grow sales on top of the $27 billion. We added in 2000 22021.

In support of this goal we opened two upstream Dcs near the end of 2021 and.

And plan to open six new upstream facilities over the next several years, including two on track to open in 2023.

In addition to the space, we're adding to the network, we are continuing to modernize how our existing distribution centers serve our stores by developing and automating processes that reduce the amount of store workload devoted to receiving inventory and restocking store sales floors.

Finally, we are rapidly expanding the number of sortation centers operating around the country. We have six of these facilities operating today, including three that opened in the last few months and we have plans to add five more by early next year.

These small facilities expand ship from store capacity in the locations they serve while significantly reducing last mile delivery costs, particularly as we integrate our ship drivers into the process.

Given the package delivery density we've achieved across many markets over the last few years, we see continued opportunities to add more sortation centers over the next few years, which add speed and significantly reduce last mile costs in markets, where they operate.

As I mentioned last quarter. This year's capital projects are being impacted by the cost increases material shortages and supply chain pressures that are affecting other parts of our business.

And I'm really proud of how our construction team is managing through these headwinds more.

More specifically while cost increases are raising the cost of many of these projects. The team has done an excellent job in keeping the vast majority of projects on track and on time, despite the significant headwinds they're facing.

So as I conclude my remarks, I have to pause and add my thanks to the entire team for their resilience and perseverance during a period of incredibly rapid change, which causes this quarter to be as challenging as any I've seen in my career.

In the face of that challenge, what's been amazing is how our team members have stayed positive.

They've worked to find collaborative solutions across multiple teams and never straight from their commitment to our guests and our company purpose.

With the progress they've made our operations are now in much better shape and the team is energized and ready to play offense in the back half of the year.

While we are all mindful of the near term volatility in the environment. It's times like these that often present, the biggest opportunity to gain long term market share as others face the distraction of trying to stay afloat, while we continue to invest and improve our operations.

That's one of many reasons that I've never been more optimistic about our prospects in the years ahead.

With that I'll turn the call over to Michael.

Thanks, John as John mentioned, we often ask our team to be mindful of both short term and long term considerations, when making decisions and given the unique circumstances, we have been facing this quarter, we faced a decision with meaningful implications for both <unk>.

As Brian outlined earlier, if we had decided not to deal with our excess inventory head on we could have avoided some short term pain on the profit line, but that would've hampered our longer term potential.

Instead because of the path, we took our quarterly profit took a meaningful step down but our future path is brighter our operations are healthy our store and DC teams have more flexibility to maneuver and we're ready to feature both the fresh assortment and uncluttered shopping experience our guests expect and deserve.

That passionate commitment to the guest experience is one of the many reasons, we've now seen 21 consecutive quarters of comparable sales growth.

While normally our income statement gets the most attention I want to start my remarks today with the balance sheet and specifically our inventory position.

And as I dig into the detail I want to acknowledge upfront that this kind of analysis is a relatively complex exercise because of the growth and volatility we've experienced over the last couple of years because of the broad and diverse assortment that we sell and the fact that our business is seasonal from quarter to quarter.

More specifically given that our inventory position throughout the pandemic was far from optimal focusing on year over year growth numbers isn't very helpful. Right now.

As a result, we often base our inventory analysis on growth trends compared with 2019, our pre pandemic year, when our inventory and sales trends were much more in sync.

With that as context I want to zero in on one of the questions I'm sure you have which is why our inventory on the balance sheet remained roughly constant at around $15 billion between the first and second quarters.

The simple answer is that while that single number didn't change much we accomplished exactly what we intended to do during the quarter, which helped to change conditions significantly below the surface.

More specifically because of the inventory actions, we executed unit growth compared with 2019 in our discretionary categories decelerated by more than 15 percentage points between the first and second quarter of change we.

We estimate would have reduced our inventory position by more than $1 billion if taken in isolation.

However, a couple of offsetting changes moved our quarter end inventory in the other direction.

First among them, we leaned into our frequency categories during the quarter accelerating three year unit growth versus Q1 at a double digit rate, resulting in stronger in stock metrics compared with 90 days ago.

Another factor that drove inventory dollars higher is the continued increase in unit costs, we've been seeing across all of our categories, which caused the dollar value of our inventory to grow faster than unit growth in the second quarter.

So where do we stand today.

At the end of the second quarter inventory on the balance sheet was about $6 billion higher than we reported three years ago.

Of that dollar growth about $3 billion or approximately half of that total growth is the result of higher unit costs across our assortment.

Of the remaining $3 billion.

Our analysis indicates another $1 billion to $2 billion is related to our decision to move receipt timing earlier, given the volatility we continue to expect in the supply chain.

And also importantly beyond reshaping the inventory we already have our Q2 inventory actions also included the removal of more than $1 5 billion of fall receipts in our discretionary categories, reflecting our continued focus on reducing risk in the current environment.

That's why we feel good about our inventory position as we head into the back half of the year.

So now I will turn to a review of our second quarter financial results total sales increased three 3% in the quarter driven by a two 6% increase in comparable sales combined with the impact of new stores.

Total revenue increased three 5%, reflecting sales growth along with the benefit of nearly 15% growth on the other revenue line driven by continued strength in our round Dell ad business.

Just as Kristina pointed out that unit share as a key measure of target's relevance versus competitors traffic growth is another important indicator of the relevance of our brand.

Our continued traffic growth in the second quarter, clearly demonstrates the ability of our balanced multi category assortment to deliver continued relevance in a rapidly changing environment like we're seeing today. So.

So that even as our guest preference for individual categories has been changing dramatically. So far this year that hasn't affected their preference for target as.

As a result traffic accounted for 100% of our comparable sales growth in the second quarter, increasing two 7% on top of 12, 7% a year ago.

Average ticket remained essentially flat in the quarter as low single digit increase in average retails was offset by a similar reduction in the number of items per transaction.

Across our sales channels store comps grew one 3% on top of eight 7% a year ago, while digital comps grew 9% on top of nine 9% last year.

Digital growth continues to be led by our same day services, which saw double digit growth overall and mid teens growth and drive up.

On the gross margin line, we saw a nearly nine percentage point decline compared with last year merchandising accounted for more than seven points of this pressure driven primarily by our inventory reduction efforts along with the impact of higher fuel and transportation costs product cost increases and higher shrink partially offset by the benefit of retail price increases.

Yeah.

In addition, digital fulfillment and supply chain drove about one five points of pressure, reflecting increased compensation and head count in our distribution centers.

Bind with the cost of managing excess inventory and higher last mile shipping costs.

Consistent with the first quarter mix accounted for approximately 10 basis points of pressure a softness in higher margin categories like apparel and home was largely offset by softness in lower margin discretionary categories, most notably electronics.

On the SG&A line, we continue to benefit from fixed cost leverage and efficiency gains across our operations, which helped to offset the impact of cost inflation across multiple expense lines with an overall compensation lower incentive compensation more than offset continued investments in pay and benefits for our hourly team members.

Altogether, our second quarter operating margin rate was one 2% down from an unusually high nine 8% a year ago driven entirely by the decline in our gross margin rate.

This operating margin performance was below the midpoint of our most recent guidance is the cost of our inventory actions was somewhat higher than expected.

While an operating margin rate of just over 1% is well below anything I've seen in my career and something I never expect to see again I have no doubt that it was the right outcome given the unusual circumstances, we have been facing this year.

Our focus throughout the second quarter was to ensure that we took care of the excess inventory of our network and adjust future receipts to reflect the rapid change in sales trends. We've seen so far this year. We accomplished this goal to the benefit of our operations our team and our guests.

Finally, one note on our tax rate in a period like this year when our operating profit is unusually low tax benefits have a larger than normal impact on our tax rate, which helps to explain why our year to date tax rate has been lower than expected looking forward given that we anticipate a meaningful improvement in our operating performance in the back half of the year we.

Continue to expect our full year effective tax rate will be in a range around 21%.

Now I'm going to turn to capital deployment and begin where I always do by articulating our priorities, which we've supported consistently for decades.

Our first priority is always to invest fully in our business and projects that support our strategic and financial criteria. Once we've met this first priority we support our dividend and look to extend our 50 year record of annual increases in.

And finally once we have supported the first two priorities, we return any remaining excess cash by repurchasing our shares over time within the limits of our middle a credit ratings.

Regarding the first priority second quarter Capex was approximately $1 5 billion.

Bringing our year to date total to just over $2 5 billion.

As Youll recall at the beginning of the year, we guided to and expected full year Capex range of $4 billion to $5 billion.

And at the time I indicated my hope that we would reach the high end of that range with the outcome, depending on how many capital projects could stay on schedule.

So I'm happy that as John mentioned the team is doing a great job of keeping projects on track despite facing multiple headwinds all while inflation in the cost of equipment materials and labor is driving project spending above initial predictions.

As such we now expect our full year capex will be $5 billion or more for the year, reflecting both the number of projects that remain on track and the expected impact of cost inflation.

Of course, while we prefer not to face the cost pressure on these projects I'm encouraged that so many value creating projects remain on track to be completed this year projects that will benefit our operations and our P&L for years to come.

Turning to our second capital deployment priority, we returned $417 million in dividends to our shareholders in the second quarter up from $336 million a year ago, driven by a 32% increase in the per share dividend, partially offset by a decline in average share count.

And finally in June we reached the final settlement for the accelerated share repurchase agreement. We initiated last March under this ASR, we invested $2 6 billion towards higher 12 5 million shares of our stock.

Looking forward just as our inventory commitments reflects continued caution for the remainder of the year, we're taking a similar cautious stance in terms of our share repurchase activity.

And of course any repurchase activity will be consistent with our long term goal to maintain our middle a credit ratings.

So now I want to close my commentary on the quarter by covering our after tax return on invested capital, which measures both our near term profitability and the efficiency of our capex decisions over time.

In the second quarter, our trailing 12 month after tax ROIC was 18, 4% compared with 31, 7% a year ago.

And it's notable while the current number is well below where we expected to operate over time, an after tax number in the high teens would have been considered aspirational for our business only a few years ago.

So for us to temporarily move down to this level and in an environment is challenging as we're facing is a vivid confirmation of the underlying strength and resilience of our business model and the reason we continue to be incredibly optimistic about our future prospects.

And that confidence starts and ends with our team so I want to pause and express my gratitude to the best team in retail.

Without your efforts, we couldn't have achieved remarkable growth in traffic and sales that we've seen over the last few years and why even in a tough year our business remains strong.

Now, let's turn to our guidance and.

And based on the hard work of our team in the second quarter, we feel really good about how we're positioned going into the back half of the year at.

At the same time, given that we've been experiencing volatile economic conditions. So far this year.

That volatility appears likely to continue in the months ahead, we are maintaining a cautious stance as we plan our business given the potential macro and consumer risks that might emerge.

That's why as you've heard throughout our remarks today, our second quarter inventory actions were specifically designed to reduce our level of risk in discretionary categories.

And in terms of our operations. The team has focused on building flexibility into our plants, placing a premium on staying nimble and adjusting quickly in the face of any potential change in macro trends.

Regarding the top line our expectations have remained consistent so far this year with guidance for full year total revenue growth in the low to mid single digit range.

With the front half of the year behind US both our Q1 and Q2 results have put us squarely in the middle of that range and today based on our current performance and plans for the back half of the year, we remain positioned to deliver full year revenue growth in the low to mid single digit range.

On the operating margin line, our most recent guidance anticipated a fall season operating margin rate in a range centered around 6%.

This expectation is nearly double our spring results and notably if we hit that rate in the fall it would exceed the fall season rates, we were delivering prior to the pandemic.

And today similar to my commentary on the top line based on the success of our Q2 inventory actions and our current performance we remain positioned to deliver an operating margin rate in a range around 6% in the fall season.

Between the last two quarters of the year, we expect our third quarter rate will be well below our Q3 performance over the last couple of years, while our fourth quarter rate should be much more in line with our recent Q4 experience.

Notably in the third quarter will continue to experience some spillover impact from our inventory actions in the range of $200 million.

In contrast in Q4 will be annualized a meaningful cost headwinds that surfaced, a year ago, which will make the year over year comparison more favorable despite the current headwinds we're facing.

All that said, while we typically anticipate something closer to a balance of upside and downside potential when we make any forecast the macro and consumer risks in the back half of this year feel skewed to the downside.

That's why even in the face of consistent business trends in recent months, we've undertaken a significant cost and effort to remove risk from our inventory commitments. It's why we're stubbornly focused on real time monitoring and communication of evolving conditions and why we've asked our team to build flexibility and agility into their plans with that mine.

If trends move away from what we're seeing today, we're ready to quickly adjust.

So now before I turn the call back over to Brian I want to emphasize why we're so confident in our long term potential even as we navigate a very challenging environment.

On a year of multiple challenges, including rapidly changing consumer preferences inflation at 40 year highs volatile supply chain conditions, and rising fuel and transportation rates that are expected to add well over $1 billion of costs. This year.

Our business continues to generate historically strong traffic increases low to mid single digit revenue growth and unit share gains across all of our core merchandising categories.

And even in the face of unprecedented profit rate pressure driven by the host of factors I. Just listed we remained profitable with an after tax ROIC in the mid teens.

In fact, if our performance in the fall is consistent with the revenue growth and operating margin rates I outlined earlier, we remained positioned in 2022 to generate higher operating margin dollars than we did in 2019.

That's what we mean when we say we have built a durable model.

And today, while we expect conditions to remain challenging in the near term the operating margin rate improvement, we're projecting in the back half of the year should serve as an early indicator of the continued rate improvement we should deliver in the years ahead.

With the potential for additional rate expansion and continued growth in traffic and revenue in the years ahead, we're facing a compelling financial picture is the economy and consumer eventually recover.

That's why I've never been more confident in our long term prospects than I am today.

With that I'll turn the call back over to Brian .

Thanks, Michael.

I often tell my team that leadership and performance are tightly linked overtime, but that leadership often appear source that.

It's why I'm extremely proud of the leadership our team showed in the second quarter.

After they took a hard look at our own inventory position and the amount that was building up across our industry. The opposite make a hard choice getting front of the problem and address it head on.

They made that decision with the full knowledge would have a profound impact on our near term profitability.

They also knew there was another path.

Could have avoided tacking the problem and avoid some of the pain in the short run, but instead our team chose to lead.

They knew the best path for our guests and for our teams in our stores and distribution centers was to take action and improve the condition of our inventory and operations quickly.

That path would allow the entire target team to move ahead without facing the ongoing burden of excess inventory holding us back.

So the team quickly developed the bolder plan, which we announced in early June just over two months ago.

And in the intervening weeks teams across the company worked tirelessly.

The plan and make it a reality.

That's the reason we're positioned to deliver a strong improvement in our profitability. This fall despite an environment that is far from ideal.

Because of our team's leadership our business today is much better positioned to perform.

And I couldnt be more proud and grateful for the courage they have shown.

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.

To withdraw your request press star two.

One moment for the first question.

We're now ready with our first question from Christopher <unk> with Jpmorgan you May go ahead.

And Mr. Herbert Your line is open.

You might be muted.

Thanks, Good morning, and thank you for all the detail you talked about an encouraging start to back to school can you talk about what you've seen in July and August a lot of retailers like you've talked about.

Improving trends.

So what does that mean for how are you thinking about the back half comps.

Does that reflect the current trend in the business as you said in the guidance because I guess the question. We have is the risk how did you incorporate the risk that the bounce in trend that Youre seeing now is just that episodic event type spending that you've been highlighting all year.

Chris Thanks for joining us this morning, I'll, let Kristina and talk about some of the back to school and back to college friends and Michael to build on guidance, but before we start based on the length of our prepared comments, we are going to ask for some additional time for Q&A. So operator, we're going to extend the time for this call to make sure we cover as many questions as possible we are seeing.

You want to start by talking about some of the back to school and back to college trends we're seeing.

As I shared earlier in my prepared remarks.

Where we're at.

Optimistic about what back to school back to college.

During seasonal times target really shine.

The reason being that our multi category portfolio it makes us even more relevant.

The lunch.

And everything that goes in it and of course, all the supply.

It's always painful moments has always been a good proxy for the strength.

<unk> portfolio.

Yeah.

Let's see good early trends, albeit there's a lot of business left to be done.

We believe that that is a good indicator of the strength.

Potential for the fall.

The thing to look at it of course is how we have performed to date and our traffic and unit share growth that we've seen across the portfolio.

Lately gives.

Gives us confidence in the guests choice target as a retailer.

Chris I'll, let Michael talk about guidance, but one of the things that really stands out for me if I look at our position today is that continued strength in traffic and the growth we're seeing in units across our entire portfolio.

I'd also recognized based on the actions we've taken with our inventory position. If you walk our stores today. It is clear that we are prepared for back to school and back to college, and we're really standing tall in those categories. Like we wanted to talk about the guidance and I'll build off the comment you just made Brian .

When we look at the quarter, Chris a lot of the trends we see in Q2 are informing our view of the back half of the year and I think Q2 is a pretty good proxy for some of those top line assumptions that part of the year.

Consistency of traffic for the year across the months of the quarter I think that's the thing that we look at really closely that gives us a lot of evidence that even is.

Shopping habits have changed and category trends have changed we've seen a consistent draw to more and more shoppers shop in our stores and shopping US online is that consistency of traffic is the thing that gives me a lot of optimism as I look to the back half of the year, even if we can't sit here today and predict every twist and turn Chris.

Chris.

One final point as we talk to our guests when we talked to consumers, while theres certainly a cautionary environment in front of us, but one thing that seems to be very consistent as a guest and consumer who says they want to celebrate the holiday seasons. So we certainly expect that theyre going to be celebrating Halloween this year and actively trick or treating and hosting parties.

With friends and family.

Theyre looking forward to Thanksgiving and Theyre going to look forward to celebrating the Christmas holidays and that comes out each and every week as we survey consumers and talk to our guests. So that gives us great optimism for our ability to perform during these key holiday seasons.

Got it and then thank you very much and so my follow up is just <unk>.

Michael you talked about the phasing of the operating margin so.

The interpretation is that the fourth quarter is going to look a lot.

More consistent with what you did last year, maybe a little bit below so.

The third quarter comes in.

Well below that 6% around 6%.

Yes.

As I said in my remarks expect we sit here today expecting a fourth quarter. It looks more like the fourth quarters. We've seen the last couple of years and so I think thats a six eight last year and a six five of the year before that that's the right range around which we've since our expectations for the fourth quarter and obviously to get to a six in total that implies a lower number in the third quarter.

And the driver there is like I talked about in our remarks, some of the cost of our inventory actions do spill over into the third quarter and you will continue to manage the elevated fuel and freight costs and kind of how those net against pricing action and things like that over the balance of the year, but we feel good about that range around 6% and we will continue to watch the macro environment.

Closely.

Yes.

Got it thank you very much for joining us.

Thank you. The next question is from Edward <unk> with Piper Sandler You May go ahead.

Hey, guys. Good morning, Thanks for taking the questions two from me I guess first on.

On the variance relative to your previous expectations in terms of the inventory actions were there specific areas, where you had to cut deeper or cost more to get out of inventory positions and then as a broader question. One of your peers talked about some changes they are seeing in their customer base. I guess are there any noteworthy changes that you're seeing either customers trading down.

Or trading into target. Thank you.

And I'll start and then I'll turn it over to John to talk about some of the inventory actions, but I really want to start by recognizing our team I think as we sit here today over the last few weeks since our announcement in June this has been a collaborative effort and the team has accomplished so much to put us in the right place as we get ready for the back half of the year. So.

Based on the work that the teams have done across our supply chain system, and merchandising and finance and supply chain and stores. The team has accomplished more than we expected in a short period of time and put us in a better position from an inventory standpoint than we might've expected back in June .

Yes, Ed I'll.

I'll just add on I think largely we're on track with what we thought at the when we came out with.

With the announcement earlier in Q2, a little bit of it cost us a little bit more in promos or clearance to move some inventory.

I think the work the team did in a very short amount of time to size, what we needed to take care of is largely in line with where we are today and we feel really good about where we're at as Michael said, a little it spilled over into Q3, and that's really just timing more than anything else, we just didn't get to it.

But the work that's been done we're really proud of them and I would say from my position. We did exactly what we set out to do we got rid of the inventory we need to the operations are in a much better place, there's a little bit more to do here in Q3 that will clean up.

I think the one thing I would add on that I don't want to get lost is the amount of receipts that were cut from discretionary categories. In Q3, and Q4 and that is just huge for us again because of the uncertainty in those particular categories of sales and up a little bit higher well have a little bit higher sell through and that'll be a great day.

But that really derisk those categories going forward. So so we feel great about the work that's been done over the past few months.

And maybe I can add a little bit to the question about the customer.

As I shared in my prepared remarks, our guest is still demonstrating that they have spending power.

Choices that theyre, making to balance their budget is what we're watching and so obviously.

We're moderating our investment in some of those discretionary businesses and we're leaning very much into food and beverage essentials beauty, but also select portions of the portfolio discretionary that have stayed resilient, whether it's toys luggage seasonal moment fashion forward apparel and so it's really about reading the gas lift.

Turning to them and continuing to support a level of agility in the business model.

And in terms of other choices that theyre, making I think traffic and unit share of the best barometer for.

Sure.

Investment in target, we're still growing traffic and growing unit share in every major category, which to me says that our relevance is high with the gas right now and they are managing their budgets.

And they're finding options that target.

Thank you.

Thank you. Our next question is from Steph Wissink with Jefferies. You May go ahead.

Thank you. Good morning, everyone. Just wanted to ask a follow up question on pricing for the back half just give us some sense of how youre thinking about promotional <unk> think you've mentioned in your prepared remarks, the consumers were responding to some of the promotions youre putting out can you just give us a sense of what you factored into the guidance in terms of heightened levels of promote.

Thank you.

Yes.

Thanks for the question stuff I mean, we always know that we'll get to the back half of the year.

As a promotional environment in the holiday is always are and so we've factored that in accordingly, and we see a consumer in the current in the current inflationary environment, that's focused on value and like we've said many times in these calls.

Think about pricing first through the lens of our we want to make sure.

You can find great value on the shelf online and the way that were priced and we feel good about where we've struck that value equation and I think the traffic we're seeing speaks to the fact that yes.

And stuff I would only add that Christina and her team have done a wonderful job as we plan for the back half of the year of ensuring that we have great value for our guests, but also that we have exciting newness and I think that combination is a winning formula for us as we think about the back half of the year.

Okay. Thank you very much thank you.

Thank you. Our next question is from Michael Lasser with UBS you May go ahead.

Good morning, Thanks, a lot for taking my question My first question.

The promotional activity.

Due to the same store sales growth in the first and second quarter.

And if you see more downside than upside risk to the guidance for the back half of the year.

It's moderate the guidance a little lower for the back half.

Sure Michael Thanks for the question.

While the counterfactual every elasticity of where Q2 would have land that is a little bit of more art than science.

We think that the net dollar impact of our markdowns as probably negligible in the second quarter.

And of course, we took some markdowns to move through some product, but we think that probably net net that didnt move our topline Tom a lot because we think about the back half of the year were informed in the back half based on the trends that we're seeing now in the business.

<unk> talked about some of those trends that we saw change at the end of Q1, we've seen persist into Q2, and we factored that into our thinking for the back half of the year we.

We will continue to be mindful of whats clearly uncertain environment for the economy and the consumer and appoint Kristina made earlier in Q&A, we will stay close to those trends and will adjust accordingly, and thats why taking inventory actions, we did to give us some room to operate and to give us some flexibility in the system will be important in an uncertain environment.

Okay.

There's obviously a lot of moving pieces with what's happening at target right now.

Is it a lot.

The transitional phase.

For a better 2023 really somewhat independent of the macro environment.

So with that being said could you size the impact to your margin.

All of the inventory.

Youre kicking this quarter next quarter that are temporary and will be isolated to this year and won't repeat next year.

Better sense of what the ongoing profitability of the businesses.

Michael I'll start by saying I think your summary, really captures the actions we've been taking today.

Make sure that we continue to build on the traffic, we're seeing in our stores and the visits to our site. The strength, we're seeing in unit market share gains, but importantly, the investments we made to ensure we have a great guest experience in the back half of the year and going into 2023. So the bold decisive actions were really to make sure we continue to build on.

Our current momentum the great relationship we have with our guests the momentum we're building from a market share standpoint, and providing our guests with a great target experience every time, they shop that'll continue and set us up well for 2023.

As far as sizing it will certainly come back to all of you as we think about guidance for next year, but we certainly expect to see a more normalized environment from an operating profit standpoint, as we move into 2023 and continue to build on the momentum and the investments we've been making our business for years.

Thank you.

Thank you. The next question is from Simeon Gutman with Morgan Stanley You May go ahead.

Mr. Gutman. Your line is you might be muted.

Sorry about that hi, good morning, everyone.

Following up on Michael's question is there any way you can quantify some of the structurally higher costs in labor in the D. C. Just as a way to back out that might be the one driver that stays in gross margin, but then in theory, you should recapture most of whats happened this year.

Yes, I mean, there's probably a piece in each bucket Simeon as we've grown the business, obviously, we invest more labor and moving the product to support that growth and that's a piece of some of that growth there.

And then it also cost us more when we're full.

<unk> was full in the second quarter and so there's a piece of that that will result in improved productivity over time as we get some of that inventory out of the fish system to Brian's point will come back and unpack next year. When the time is right to do that but I expect to see both of those drivers presence as we do so.

And maybe just a quick follow up you mentioned Q4 profitability should look more target ask does that mean like what's your assumption for mix in that fourth quarter relative to where we are today.

Breaking out a specific assumption for mix, but I think if you look over the last couple of quarters, we've seen mix isn't a big driver of our margin results and so I wouldn't think about it market definitely as we projected.

Okay. Thanks, Good luck. Thank you.

Thank you. Our next question is from Kelly Bania with BMO capital you May go ahead.

Thanks for taking our questions.

Curious if you could just help us dissect the gross margin a little bit between the promotional activity the inventory impairment versus the cost of storing and moving this excess inventory because they think it would just be a little helpful for investors to interpret that comp and traffic number and and just how you are.

Thinking about.

That traffic and comp as the promotions moderate into Q3 and it sounds like Q4, you are planning for.

Very little promotional activity. So I was just wondering if you could kind of parse some of that out to help us think about that maybe.

Maybe start at the end of your question, we expect Q4 to be promotional it always is in our plans plan for promotions that will provide greater value to our guests in those seasonal moments that matter.

It's been true every Q4 in my 18 years here and I expect it not to be any different this time around with respect to unpacking. The margin will go back to some of what I said in my comments and.

We were.

Year over year nine percentage points down seven of that is mostly driven by inventory actions and you see incremental markdowns as a piece of that.

You also see the cost of some of those received cancellations that John talked about earlier, and then Youll see about a point and a half of pressure from supply chain and digital and a piece of that is related to us being heavier in the system and that drives some cost a piece of that is the elevated freight and transportation rates that we've talked about previously that.

Well continue to.

Maybe move up and move down based on the day are definitely elevated versus historical measure and you can see over that as you can see that.

As a piece of that year over year pressure too.

Operator, we have time for two final questions.

Thank you. Our next question is from Robby <unk> with Bank of America. You May go ahead.

Thanks for squeezing me in here My question was on <unk>.

Inflation in food and consumables.

Can you give us any number on how how much inflation you guys saw in the second quarter, but also.

The two half guide you guys have given us what what's the inflation tailwind you guys are expecting in food and consumables and also related to that you guys talked about the focus on everyday pricing.

Is there any incremental margin pressure from.

The frequency items or the focus on everyday pricing being sharp.

Yes, I mean, we've seen persistent cost inflation in food and I think across the industry <unk> seen prices move with that that's been no different here at target.

We're really mindful of making sure that we feel good about our price gaps definitely do today in food and if you zoom out from the food specific piece of that.

I'll come back to traffic if you look at what drove our growth in the second quarter. There were some puts and takes within basket between ASB in units, but the story was traffic and so.

Again that gives us evidence that we're getting that value equation right for our guests.

And as the inflation component within same store sales in food and consumables is that similar to sort of the the.

The numbers, we're seeing in the CPI for food at home.

Thanks, guys.

Generally in the right ballpark, obviously theres some mix implications there if youre comparing retailer to retailer.

But we've seen persistently high inflation in food and I think that's a trend that's been with us for a while we don't expect it to change anytime soon.

And sorry, just to clarify the pricing are you wouldn't would you say you guys are investing in price in food and consumables, so maybe taking a lower margin than the <unk>.

Most REIT part of your business than maybe historically you would add.

Maybe I'll add a little context here.

We're consistent.

Consistently evaluating our complete value proposition to the consumer and so part of that is price and in the consumables category, we've had a little bit more flexibility to move with the market because it domestically replenished and bought every single day. So we have absolutely moved up in some retail but the way we can.

<unk> balanced total value proposition is by looking at of course, what else produces value.

Selling promotion and incredible own brand portfolio that allows the guests to opt into whatever price point is right for them.

And a maniacal focus on balancing our good better best and opening price point option.

The combination of those things are yielding.

More unit share growth.

At target, which means that get actively engaged in the offering that we're providing and of course that traffic that Michel appointed and Ravi. It's Christina noted the strength of our own brand portfolio. In this environment is a really important element of how we deliver value to our guests each and every day and in food and beverage are good and gather brand now is a 2 billion.

<unk> brand that continues to see very strong growth. So that's just one way we deliver value to our guests each and every day at target.

So operator, we got time for one last question today.

Thank you. Our final question is from Oliver Chen with Cowen You May go ahead.

Hi, Thank you very much on the topic of back to school, what would you speak to as factors that are most different this year versus last year as you get ready for that and secondly on the inventory actions as they relate to third quarter Whats left to do there and.

Might you have to take deeper promotions than you thought previously the consumers requiring.

A lot of discounts to respond to promotions more than other retailers thought in many cases would love any thoughts there. Thank you Oliver I'll start I'll, let Michael finish up but I think the one big difference today as we sit here today and think about back to school and back to college is certainty I think we know across the country children are going back to school there'll be in classrooms.

They're going to be back on campus. So I think that element of certainty is very different than what we've faced for the last couple of years and again, we expect to see a very solid back to school and back to college season, because we know children aren't going to be in classrooms in the backend campus and targets a place. They go during this important back to school and back to college season.

And then Oliver kind of.

In some of the Q4 actions, we still have to date just to provide kind of an example, they're yes, they're seasonal products natural tie in total of our stores and then Q3 will continue to work through some of that inventory then and so that's an example of some of the work still to be done, but all kind of in where we started we feel really good about it.

My position as we exit the second quarter.

We accomplished what we set out to do from an inventory perspective.

So operator that concludes our second quarter call. We look forward to talking to many of you over the next few weeks and seeing you later this year. So thank you.