Q3 2022 Target Corp Earnings Call

November 16, 2022

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

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 November 16th 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 third quarter 2022 earnings conference call.

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

In a few moments, Brian Christina John and Michael will provide their perspective on our third quarter performance and our outlook and priorities for the fourth quarter and beyond following their remarks, we'll open the phone lines for a question and answer session. This.

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, including those described in this morning's earnings press release and 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 third quarter and his perspective on the upcoming holiday season, Brian .

Thanks, John as I begin the call today.

I want to highlight the proactive leadership position, we will continue to take as the operating environment changes.

Just as we took decisive action in the second quarter to right size, our inventory, we're moving proactively in a period of rapidly softening demand and elevated uncertainty.

Accessibly navigate near term challenges alongside our team and in step with our guests.

As we look specifically at third quarter results. They demonstrate how our business continuing to serve our guests even in the face of an increasingly challenging backdrop.

Because of the deepening level of trust, we've established with our guests over the last several years, our topline continues to benefit from growth in guest traffic and share gains across all of our core categories.

This is particularly notable as consumers are showing increasing signs of stress and pulling back from discretionary purchases.

And it reinforces the value of having a balanced multi category portfolio, which allows us to satisfy our guests ever Chaney wants and needs.

In today's environment that means we continue to benefit from strong growth and market share gains in the categories of our guests are leaning into most right now, including food and beverage beauty and household essentials.

Q3 comparable sales grew two 7% on top of 12, 7% a year ago and 27% in the third quarter of 2020.

As Youll recall early in the second quarter, we announced we will be taking decisive inventory actions based on the rapid change in consumer buying patterns that had merged into the end of the first quarter.

These actions were designed to ensure we could continue to provide what our guests know and love about target.

More specifically the effort was designed to free up space in our stores and hours for our team to continue offering fresh inventory and a reliable uncluttered shopping experience for our guests setting up our business to deliver strong growth in Q3.

Among the drivers of our comparable sales third quarter traffic expanded one 4% on top of 12, 9% growth a year ago.

In addition to traffic growth, we saw a one 3% increase in average ticket as guests continue to rely on target for convenient reliable one stop shop.

Across our merchandise categories and similar to the second quarter, we saw very strong growth in our frequency businesses led by double digit growth in both beauty and food and beverage.

That strength offset persistent softness in our discretionary categories, which worsened at the end of the quarter Kristina will provide more detail in a few minutes.

While overall Q3 comp growth was nearly identical to our second quarter performance.

We experienced dramatically different trends within the quarter.

More specifically through the first two months of the quarter, we had seen comp growth of well over 3% and then saw a deceleration to just under 1% in October .

Even within the month of October results in the back half of the month were much softer than in the first half and the mix of our sales tilted much more heavily towards promotions.

This rapid change in trend is consistent with what we're seeing in syndicated data on broader industry trends and the feedback we're hearing from our guests.

More specifically consumers are feeling increasing levels of stress driven by persistently high inflation rapidly rising interest rates and an elevated sense of uncertainty about their economic prospects.

With high rates of inflation continuing to erode their personally power many consumers this year ever lineup borrowing or dipping into their savings to manage the weekly budgets, but for many consumers those options are starting to run out.

As a result, our guests are exhibiting increasing price sensitivity, becoming more focused on and responds to promotions and more hesitant to purchase at full price.

On the private line, we saw unexpected improvement in the third quarter as we move beyond the bulk of those costs from our second quarter inventory actions.

However, Q.

Q3 profitability came in well below our expectations driven by several factors.

First and foremost we faced an unexpected gross margin rate headwind from a higher than expected mix of promotional sales as guests moved away from full price purchases.

In addition, like the rest of the industry, we're facing a growing financial headwind from shortage, which is running hundreds of millions of dollars higher than a year ago.

Along with other retailers, we've seen a significant increase in theft and organized retail crime across our business.

As a result, we're making significant investments in training and technology that can deter theft and keep our guests and store team members safe.

Looking ahead and taking recent trends into account our team is making adjustments in real time with agility and flexibility in light of the revised expectations for both the top and bottom lines in the fourth quarter.

It's in tough environments like these that were most fortunate that for durable business model and a strong balance sheet, allowing us to maintain our focus on long term investments and market share opportunities at a time when many others will be forced to pull back.

And to create additional capacity for us to continue investing in long term growth and market share. While also delivering strong bottom line performance. We are undertaking an enterprise wide effort to identify opportunities to simplify and enhance the efficiencies of our business.

Want to make it clear this effort is not about slashing resources instead, it's about optimizing our operations to match the scale of our business.

This effort is particularly important today because of the rapid and unanticipated level of scale. Our businesses added since 2019 as total revenues have grown from less than $80 billion in 2019 to projection of well over $100 billion. This year.

While our team has done an excellent job of staying agile and quickly accommodating all of that growth. We now have an opportunity to look from top to bottom across all of our operations to ensure they are fully optimized for the size of our business.

We're still in the process of fully scoping out this effort, but we believe that presents an opportunity to save a total of $2 billion to $3 billion over the next three years in support of our investments in long term growth along with our profit goals.

In the near term our team is energized and laser focused on bringing the best of target to our guests throughout the holiday season, knowing it's critically important for target to be there for them during the busiest time of the year.

Our team is committed to offering value across our entire assortment through great everyday prices unbeatable value on our own brands and.

And accessible opening price points in every category.

In addition, we will highlight our compelling and simple promotions free services like drive up and in store pickup and new accessible payment options and of course, we'll provide additional savings opportunities through a red card and target circle programs, neither of which is a membership fee.

So as I get ready to turn the call over to Kristina I want to thank the entire target team Peter energy or spirit, you care for each other and your passion for our guests Interbrand.

You are the reason that target is such a positive impact on the communities, where we live and work and the reason, we're known as a welcoming and inclusive brand. Thank you and happy holidays to all of you with that I will turn the call over to Christina.

Thanks, Brian and good morning, everyone.

The current retail environment requires tremendous levels of flexibility resilience stamina and focus our balance our team continues to carry out at every guest interaction.

Consumers are strained as they work to support their families day to day needs, while looking for the occasional affordable luxury prepping for the changing seasons and planning for the holidays.

It's a difficult balance to strike and getting increasingly difficult each week as more and more of their household budget goes towards the needs of the family, which limits the amount available for discretionary purchases.

It follows that of the many considerations that our guests are currently juggling, we consistently hear that value remains at the top of the list.

We see our guest holding out for and expecting promotions more than.

Never spending less on regularly priced items.

When they shop, our frequency categories. Some guests are trading into smaller pack sizes.

Turning price point options, our own brands to reduce their spending on a single trip.

Others are opting for larger pack sizes are stocking up when items are on promotion, knowing they will receive greater per unit value.

And these trends only became more pronounced towards the end of the third quarter when spending patterns changed dramatically.

With inflationary food prices absorbing more of their spending those costs are crowding out other categories, including spending on discretionary items and in some cases, even household essentials.

However, we also know both from our recent performance and from guest surveys that despite the pressures they're facing our guests want to celebrate the holidays in person with loved ones and they're looking for target to provide them safety ease enjoy as they prepare for every celebration.

These themes played out in the third quarter as guests responded increasingly to promotions, even if they celebrated key seasonal moments like back to school College in Halloween.

Among our frequency categories beauty continues to drive strong performance delivering sales growth in the mid teens skincare hair care and cosmetics, all performed very well and our Ulta beauty at target offerings nearly tripled their total sales volume when compared to this period a year ago.

Food and beverage continued to outperform the market with low double digit growth and strength across the portfolio gaining both dollar and unit share every week throughout the quarter.

Comparable sales in a sense of categories grew in the low single digits, reflecting particular strength in pets and health.

While already soft sales trends in our discretionary categories softened even more in the last few weeks of the quarter.

<unk> that's persisted into the first few weeks of November .

But importantly, despite this challenging environment, we still saw unit share gains in all five of our core merchandising categories in the quarter.

And that when guests are looking for convenience and value on both wants or needs. They are increasingly turning to target.

Apparel comps were down only slightly in Q3, driven by growth in kids men's seasonal our new fashion forward Assortments.

Set by softness in swim women's accessories and basics.

In home sales declined in the mid single digits, despite strong performance in seasonal areas.

Hard lines sales were also down mid single digits, reflecting continued softness in home electronics and sporting goods.

Additionally, we saw a meaningful deceleration in twice this quarter, most notably in October .

This is a trend we will continue to monitor closely as we move throughout the holiday season.

Across the portfolio of owned brands continue to outperform their national brand counterparts.

<unk> at double the rate of the total enterprise in the third quarter.

Because of our unique industry, leading in house design and sourcing capabilities targets exclusive owned brands provide tremendous quality and incredibly competitive prices a great combination anytime, but never more so than in an inflationary environment.

So as we turn our focus to Q4, we will do what we always do work tirelessly to deliver value and solutions to our guests while also delivering affordable joy at a time when they need it most.

As we've outlined this morning, we're taking a prudent approach to our inventory planning and sales expectations for the fourth quarter in light of the concerning industry trends, we've seen over the past several weeks.

But even with this cautious stance, we're focused on providing our guests with affordability and ease at every interaction with the target brand.

One of the signature ways, we plan to stand out. This holiday season is through our focus on the combination of newness and value, which cut across all our core categories.

Given that the gift, giving season is underway and our guests are turning to target more and more for their food and beverage needs. It's an ideal time for our recently announced partnership with British retailer marks and Spencer Who's collaborated with us to offer our limited time assortment of gourmet premium food and chocolates, that's sure to be perfect gifting solution.

This holiday season.

Despite recent trends in toys, we know they will play a critical role for our guests over the holiday season, and we have all the top toys and exclusive this year at incredible prices.

Backed by popular demand are exclusive assortment from Fas Schwartz features more than 120 twice.

And for all the Marvel fans out there the first of its kind collaboration between target and Disney will feature exclusive black Panther merchandise and experiences.

Including the only add target black Panther or condo forever or on the water Lego set.

And the power of these partnerships doesn't stop there we've added nearly 50 Disney shop in shop experience. This year, bringing the total to well over 200 of these shops across the country.

In partnership with Apple, we've more than tripled the number of shop in shops since last year and our target circle members have access to free trials of some incredible Apple services, including our free four month trial of Apple fitness class.

And with Ulta beauty at target, we will have opened another 250 locations. This year and now have more than 350 locations open across the chain.

Through all of our new tried and true and exclusive holiday offerings will remain laser focused on supporting our value proposition with key deals starting earlier than ever.

Weeklong Black Friday deals in our guests' favorite deal of the day offers are available now and feature our best plan prices for the season with prices up to 50% off across toys and games electronics kitchen appliances and more.

Besides industry, leading promotions, we are offering compelling easy to shop everyday price points on key items like $3 Christmas ornaments, five dollar holiday wonder shop and candle Assortments.

And $10 gifting assortments across categories like beauty apparel and home.

And to reinforce our commitment to value will be offering free and easy payment and fulfillment options, including our recently launched reloadable Red cards, which provides all the benefits of our red card debit and credit programs, including free shipping and 5% off every purchase all.

All without the need for a credit check or an existing bank account.

Combine this with our easy convenient and free same day service options like drive up and order pickup all with no membership fees.

And our free to joined loyalty program target Circle, we have an unmatched combination of value added and affordable shopping experiences to help our guests celebrate and amplify the joy of the holidays.

Throughout the season, we will remain nimble and respond to changes in consumer promotional and macro trends.

In service of optimizing current and long term performance.

And despite the challenges facing our business and our guests we have a not so secret weapon to help us provide joy and value for our guests.

A world class team.

Like Brian I want to pause and add my sincere gratitude for the target team.

No matter what is thrown your way you execute with Grace compassion and consistency a combination that leads our guests to return to our stores and website time and time again.

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

Thanks Kristina.

Across the operations team, we focus every day on delivering strong execution, even as we continue to keep our eyes on and invest in projects that will support targets long term profitable growth.

As you know throughout the year, our supply chain and transportation teams have been continuously navigating through an unpredictable environment and these volatile conditions continued in the third quarter.

The good news is that the lead times and global shipping have started to move in the right direction.

More specifically compared with the second quarter lead times improved by about 15% in Q3.

More than three weeks shorter than a year ago.

While we were really pleased to see this improvement the acceleration was faster than we expected, causing many overseas orders to arrive earlier than needed as a result, the team has been reducing lead times on our future orders just as they extend to them during the pandemic.

In addition to prevent early arrivals from entering our distribution and store network before they are needed. The team has implemented multiple strategies and tactics, including new processes to efficiently segment shipping containers as they arrive at domestic ports, allowing early arriving containers to age before sending them downstream into our regional distribution centers.

So today, even as we continue to look heavy on the balance sheet. Our inventory is in a much healthier position than earlier in the year.

Because of the heaviness Youre seeing today is due to the early arrival of fresh inventory, we are planning to sell.

For example by early November of this year nearly 90% of our key Q4 programs had already moved into our distribution centers and stores and contrast last year just over half our key programs were in the network as of the same timeframe.

Similar to our experience with lead times, we saw improvement across multiple dimensions of our transportation costs in the quarter.

Even as those costs remain about pre pandemic levels.

Container rates and global shipping have come down by about one third in recent months and we'll realize that benefit in 2023, as we renegotiate our staggered contracts with shipping partners.

And importantly, we expect to see further reductions in those rates going forward as they remain about three times higher than we were paying in 2019.

Similarly, domestic transportation rates have come down since the beginning of the year, but remain higher than a year ago and double the rates, we were facing in 2019 and.

And of course fuel costs, which are a major driver of our domestic transportation expense are still running more than double the amount we were paying in 2019.

Despite having moderated in recent months.

Now I'll turn to the work of our properties team, where we're still wrapping up some projects, but close to completing our supply chain and store projects for the year.

On the distribution side, we're continuing our work to build replenishment capacity across the country given the amount of growth we've delivered over the last few years.

The other Big addition to our distribution infrastructure as the build out of our Sortation Center strategy a.

A year ago, we were operating a single sort center here in the Minneapolis market and this year, we've opened five more with several more on track to open in 2023.

These centers, which are typically a little bigger than a single store increase our speed and meaningfully reduce our last mile delivery costs in the markets where they operate.

They also create backroom fulfillment capacity in the stores they serve as they eliminate the need for each individual store to sort the boxes they've packed for delivery.

On the store side, we are on track to complete about 200 full remodel projects this year and which we update every part of the store to reflect our latest thinking and offer a modern and inspirational shopping experience for our guests.

Beyond full Remodels. We're also on track to complete about 200 fulfillment retrofits this year in which we optimize their capacity inefficiency in supporting our same day services.

And finally, the team is on track to complete our new store program for 2022, and which we plan to add 23, new locations to the chain.

The size of these new stores ranges widely from 19000 to 145000 square feet as we continue to open the rightsize store for the neighborhood we're serving.

And as we've mentioned in recent calls based on evolving conditions in the commercial real estate market, we've been finding more and more opportunities to open larger locations that can offer the full range of our assortment along with a full suite of fulfillment options to serve our guests.

In light of that opportunity just over a week ago. We opened the first example of a new larger store prototype in the Houston, Texas market.

At nearly 150000 square feet. This new format incorporates our latest thinking and store design featuring a more open layout localized elements to inspire and serve our guests five times more space to support our digital fulfillment services and sustainable features in support of our target forward goals.

While we'll continue to open new stores of all sizes in the next few years, we plan to lean into this new layout when appropriate and incorporate its features into other projects, including Remodels.

Hung the many innovations we've incorporated into this new location in Houston, We've added two new drive up services.

The first is the ability for our guests to order a beverage from Starbucks on their way to pick up their drive of border.

We started testing this new service in the second quarter with a limited menu and a small number of stores.

Allowing us to collect feedback and fine tune operations before expanding it more broadly.

Based on the success of that pilot earlier. This month, we rolled it out to more than 200 additional stores across the country just in time for the holidays.

The other emerging capability is the ability for our guests to return a purchased through our drive up service. We began testing the service only a month ago with our team members and a small number of stores consistent with our test and iterate approach.

Based on the operational success of that initial test in early November we expanded the service to our guests and that same small set of stores.

We will look to apply any learnings from that guest facing test before rolling out the service more broadly next year.

So now before I turn the call over to Michael I want to pause and thank our teams across the country, who have worked tirelessly to ensure we are staffed and ready to serve our guests during the upcoming holiday season.

Our busiest time of the year.

Consistent with prior years before determining our seasonal hiring goals, we focused first on providing opportunities to our existing team to support their desired hours and backup training interests.

And today based on all that hard work and preparation I'm happy to report that we're entering the holiday season, and a very healthy staffing position, reflecting our success in hiring throughout the year the significant wage investments we've made throughout the country and.

An increase in the number of team members, who are looking to pick up extra hours and an 18% increase in applicants for seasonal positions compared with a year ago.

As Brian mentioned its in times like these that we feel most fortunate to have a durable business model, which can sustain us through an ever more challenging economic and consumer backdrop and allow us to emerge with additional profitable growth and market share opportunities overtime.

That's why we are ensuring our teams are staying focused on our guests and taking the right actions to continue deepening our relationship with them if.

If we maintain that guest focus I'm confident we will find ourselves in an even stronger competitive position over time.

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

Thanks, John .

I want to start with John just ended and reiterate how closely we're listening to our guests ensuring we understand how they're feeling and how that is affecting their shopping behavior and moving quickly to serve the rapidly changing needs.

Obviously, if recent softening consumer trends continue through the fourth quarter that will put some pressure on our near term financial performance.

But with a durable model in an agile team, we can navigate those challenges and emerge even stronger in the long term, while continuing to deepen our relationship with guests and build long term preference for target.

Once again this quarter I am going to begin my remarks by covering our inventory position given that it continues to be an important area of focus.

And like last quarter I'm going to base my discussion on comparisons to 2019, given the highly volatile conditions that have affected inventories since the onset of the pandemic.

As you saw in our balance sheet. This morning, we owned $17 $1 billion of inventory at the end of the third quarter, which was $5 $7 billion higher than the end of Q3 2019.

In percentage terms. This year's number represents an approximate 50% increase from three years ago, a deceleration from three year growth of 68% as of the end of the second quarter.

The dollar increase in our inventory since 2019 about two thirds or $3 9 billion.

Is aligned with our sales growth over that same three year period, the remaining one third or about $1 $8 billion is new.

Inventory that's arrived early relative to when it would have been received and pre pandemic years.

This early inventory is being driven by two related factors.

The first is our explicit decision to add cushion to our lead times. This year in order to mitigate the risk we were facing a year ago when the bulk of our global shipments were arriving late.

The second factor is the unexpectedly rapid acceleration in the global supply chain that we saw in Q3, which caused us to receive shipments even earlier than scheduled.

It's also important to note that the composition of our inventory continues to evolve as we've leaned into frequency categories, where we're seeing robust growth and taken an increasingly cautious position and discretionary categories.

More specifically the percent of our inventory units and discretionary categories was eight percentage points lower than at the end of Q2 and lower than in 2019 as well.

With that context, I'll turn to our third quarter financial performance beginning with the top line.

Total sales grew three 3% in the third quarter. The same as in Q2, driven by a two 7% increase in comparable sales combined with the benefit of new stores.

Total revenue grew three 4% in Q3, reflecting a nine 5% increase in other revenue, which was driven by the growth in our round Dell ad business.

Traffic continues to be an important driver of our growth having expanded one 4% in Q3 on top of nearly 13% growth a year ago.

In addition, this quarter, we benefited from a one 3% increase in average ticket.

Among our sales channels stores continue to drive our growth as we saw a three 2% increase in store comparable sales in Q3 on top of nearly 10% growth a year ago.

Comparable sales in our digital channel grew 0.3% in the quarter on top of nearly 30% last year.

Same day services led our digital growth, most notably through our drive up service, which delivered high single digit growth on top of more than 80% growth last year.

As Brian mentioned, while our overall Q3 comp increase was consistent with Q2, we saw a dramatic change in the pace and composition of our business towards the end of the third quarter.

More specifically within the quarter comparable sales grew two 8% in August rose two 4% in September and decelerated to 0.9% in October .

Also notable even within the October period, there was a dramatic change in the pace of our sales.

As Youll recall the month again with an initial round of holiday promotions from target and some of our competitors and in that week, we saw a high single digit increase in comp sales compared with last year.

However for the remainder of the month, we saw a low single digit decline in comp sales over those last three weeks.

Nearly all of the slowdown was driven by our discretionary categories apparel home and hard lines as our guests became increasingly cautious in their spending in those categories at both target and throughout the industry more broadly.

So far in the month of November trends have been largely consistent with what we were seeing at the end of October in terms of our comp trends the mix of sales between frequency and discretionary businesses and the focus on promotions by our guests.

While our Q3 gross margin rate of 24, 7% was more than three percentage points higher than in Q2. It came in far short of our expectations driven by three factors.

The primary driver was a higher than expected markdown impact from promotions as our guests became increasingly price sensitive and concentrated their discretionary spending on items on promotion.

Most notably in the latter weeks of the quarter.

While we anticipated a highly promotional environment. This fall given the excess inventory we have been seeing across retail. This enhanced focus on promotions reflects an increasing level of stress on consumers as they navigate through multiple headwinds, including persistent inflation and rapidly rising interest rates.

A second factor that's impacting our gross margin as inventory shortage or shrink, which is a growing problem facing all retailers at target year to date incremental shortage has already reduced our gross margin by more than $400 million versus last year, and we expect it will reduce our gross margin by more than $600 million for the full year.

As Brian mentioned this is an industry wide problem that is often driven by criminal networks and we are collaborating with multiple stakeholders to find industry wide solutions.

For example, because stolen goods are often sold online target strongly supports the passage of legislation to increase accountability and prevent criminals from selling stolen goods through online marketplaces.

A third factor that affected our Q3 gross margin was the incremental cost of managing early inventory.

In the near term these pressures should begin to recede as we move through the fourth quarter and into next year as receipt flow naturally moderate following the holiday season, and we begin to benefit from the reduction in order lead times John mentioned earlier.

And finally regarding gross margin category mix moved from being a slight headwind in Q2 to a small tailwind in Q3 contributing about 20 basis points of gross margin benefit in the quarter.

This change in mix impact might seem counterintuitive given some of the category trends I highlighted earlier however.

However, underneath the surface of discretionary comps when compared to our second quarter results comp sales in apparel are high margin discretionary category got stronger in Q3, while comps in hard lines, a lower margin discretionary category saw a deceleration in the third quarter.

Moving down to the SG&A expense line, we saw a small amount of deleverage in Q3, even as we continue to benefit from disciplined cost management across the organization and.

In spite of that discipline, we're facing inflationary cost pressures across multiple expense lines in the P&L.

Within compensation expenses reflect ongoing investments in hourly team member pay and benefits, partially offset by a year over year rate benefit from lower incentive compensation expense.

Altogether on the operating income line on both a dollar and rate basis, we saw year over year decline of about 50% in the third quarter.

I want to emphasize that we're not happy with this performance and expect to deliver much stronger dollar and rate performance overtime.

Now I want to turn to capital deployment and as always I'll start by reiterating our priorities, which have been consistent for decades.

We first look to fully invest in our business and projects that meet our strategic and financial criteria.

Then we look to support our dividend and build on our 50 year record of annual dividend increases.

And finally, we devote any excess cash beyond these first two uses to repurchase our shares over time within the limits of our middle a credit ratings.

Beginning with our first priority capital expenditures have come in at about $4 3 billion through the first three quarters of the year and we're now expecting our full year Capex will come in around $5 5 billion.

In light of continued inflationary pressures affecting the cost of this year's projects.

We paid just under $500 million in dividends in the third quarter up from $440 million, a year ago, reflecting a 20% increase in the per share dividend, partially offset by a decline in our average share count.

And finally, we didn't repurchase any shares in the third quarter, given current financial performance and the working capital investments, we've made to support in stocks and early receipts.

In the near term, we will continue to take a very cautious approach to share repurchase in light of the volatility in the environment and our commitment to maintaining our middle a credit ratings.

So now I want to close my Q3 review with a discussion of our after tax return on invested capital.

For the trailing 12 months of the third quarter of this year. Our after tax ROIC was 14, 6% compared with 31, 3% a year ago.

This is a disappointing decline a mid teens after tax return on capital is still very healthy in absolute terms and a testament to the durability of our business.

Accordingly, we expect to see a significant recovery from this number over time as we move beyond the unusual headwinds that have been affecting our business. This year.

Now, let me turn briefly to our expectations for the fourth quarter and the current environment, we're facing an even higher degree of uncertainty than a quarter ago, given the volatility we've been seeing recently and in light of the dramatic changes in shopping patterns, we've seen both target and across the industry. We believe it's prudent to <unk>.

Plan for a wide range of comparable sales outcomes in the fourth quarter that centered around a low single digit comp decline consistent with recent trends.

Underlying the sales expectation, we're planning for softer discretionary category comps than we've seen in the last two quarters, partially offset by the benefit of continued strong growth in our frequency businesses.

If these sales trends persist, we'd see far less of a benefit from leverage on fixed expenses than we've seen so far this year.

In addition, we would expect greater markdown pressure from Q4 promotions given the increase in price sensitivity. Our guests have shown recently and our commitments to end of the year with a clean inventory position, especially in those categories where trends have softened.

And as I mentioned, we're planning for additional pressure from inventory shrink given the worsening trends that have emerged so far this year.

Altogether these expectations lead to a wide range for our expected Q4 operating margin rate centered around 3%.

The single most sensitive input to this profit projection is the level of demand for our discretionary businesses.

If that demand improves from recent trends, we would expect fewer markdowns and would likely outperform our updated profit expectations.

If demand softens further profit could see additional pressure.

As we look beyond the holiday season, we're planning for a continued challenging environment as we move into next year and as John and Brian have already pointed out we are fortunate to have a durable model that is well positioned to continue serving our guests even in the toughest of times.

In addition, we have a significant opportunity to harness efficiencies in support of our long term growth and profit goals.

At the end of 2019, our operations had been built to support a business that delivered $77 billion in sales that year and our long term algorithm at the time was anticipating low single digit topline growth in the years ahead.

If things have played out that way, we might be looking at a total sales number in the low to mid $80 billion range. This year.

Instead, even in the midst of a very challenging environment, we're positioned to deliver total sales of well over $100 billion. This year.

So today, we have a compelling opportunity to look across our operations with an eye to simplify and optimizing those operations for our more than $100 billion business.

And today as we look at the operations, we have and where we think that can be we believe there is a $2 billion to $3 billion savings opportunity over the next three years.

To be clear this isn't about slashing resources and in particular, we're focused on continuing to invest in our team which is our most valuable asset.

As Brian said, we are in the initial stages of scoping this opportunity and we expect to share detail on our progress at our 2023 financial community meeting in the meantime, I want to join Brian and wishing all of you a happy holiday season.

And I want to pause and thank the entire target team for making target a great place to work in a store that is ready to bring joy to millions of our guests throughout this season and beyond.

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

Before we turn to your questions.

I want to relay a few thoughts that I share with our target team earlier today.

While the circumstances, we're facing are difficult and certainly not what anyone would wish for.

Need to embrace the moment.

Focus on what we can control and lean into our strengths.

Because even as we faced multiple challenges all at the same time, we have an even longer list of strengths on our side.

And there are quite a few headwinds.

But we've shown time and time again that our strengths can overcome any challenge we face.

We have nearly 2000, well located well maintained store locations.

We have a rapidly growing set of own brands that are already generating more than $30 billion in annual sales and we have a unique and growing list of national brand partners, including Starbucks Cvs Health, Levis, Apple Disney and Ulta beauty.

Our unmatched product design development and sourcing capabilities allow us to offer an unbeatable combination.

Price quality design and fashion throughout our own brand portfolio.

We have a durable operating model and our balanced portfolio of merchandise categories, which allow us to pivot quickly in a rapidly changing environment.

Our operations are profitable generate robust cash flow and are backed by a strong balance sheet that enables continued investment during lean times and of course.

We have a unique amazing passionate team that has only grown stronger over the last few years.

So this morning, I've asked our team to focus on what they do best moving with agility in responding to the environment and real time <unk>.

Delivering outstanding execution throughout the holiday season and beyond.

And doing it all as one team aligned and supportive of our guests and each other.

While we would all prefer to be operating in a more robust environment today, we have the opportunity and all the resources, we need to continue playing offense, while many others cannot.

By harnessing the strength of our assets and our amazing team I'm confident we will continue to grow guest engagement and deliver compelling growth on both the top and bottom line over time.

With that we can move to Q&A.

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 our first question.

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

Thanks, and good morning can you talk about how you're so two questions. So my first question is can you talk about how youre looking at your business from a planning perspective, and how far the down-low single digit quarter to date trend is relative to your internal plan said another way we knew that holiday was pulled forward.

Last year, given given early sort of panic buying as you think about the past month is the three year trend also deteriorating and do you think that perhaps the election exacerbated the trend it seems like Youre planning on a one year basis on a three year basis, given comparison fees into the balance of the quarter.

Sure. Chris This is Michael I can take that one.

We did see deceleration in the three year CAGR in the back part of October So we're factoring that in our extrapolate the trend going forward.

Heard me say I think other times on this call Q4 is always its own animal so extrapolating trends into Q4 is tricky business in a normal year, but we think it's important to focus on the consumer changes.

Thought in October and plan the business.

This prudently and cautiously against those trends.

Gives us the best position to be able to meet consumer where were at and continue to drive that unit share performance.

Third quarter, Chris did you have a second question.

Yes, the second question.

Is really your views about structural margins and how it is changing you did a 6% operation operating margin in 19, and you've just added $30 billion in sales you did seven in 'twenty and.

And any in 'twenty, one I guess, what's changing and how do you think about the puts and takes there there's more inflation. It seems like on the SG&A side and yes in the near term there is more inventory moving cost and and promotion, but I guess, how do you think about the long term, especially in light of the $2 billion to $3 billion.

<unk> target.

Yeah, Chris I'll take that one too.

Definitely not operating at a profit level, we expect to overtime and the one time impacts we've seen this year from the volatility and the change in trend has led us to more markdowns and salvage action on inventory than we've seen historically by a wide margin and so we would expect to get.

Lots of that margin and that improved markdown performance back and so thats the factor I'd start with first and the second thing I'd call out is what you heard US described in terms of the efficiency opportunities. We have in the business to your exact point, we've generated incredible scale quickly that opens up a whole lot of opportunities for us to rethink process.

<unk> technology and.

Create efficiencies throughout the business by taking that scale that came on us quickly stepping back and optimizing the business against that scale. So we're excited about the efficiencies that should come with it.

Hi.

Got it thanks very much.

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

Good morning, Thanks, a lot for taking my question, obviously target performance. This year has been volatile.

Mike you just mentioned that.

Do you believe you can get.

The margin that you lost this year to transition your inventory back.

But now you're also saying that you need to cut to the $3 billion in cost.

Port your profitability over the next year.

In a way undermine the idea that you can get margin back.

In La <unk>.

Can die in aggregate how much you think is recapture bowl is at two 3 billion.

You add another $3 billion of Matt.

You're playing with a pool of.

Savings Thats really.

For the $6 billion over the next couple of years.

So a is that is that right.

All of our questions.

Michael Thanks for joining us today, and obviously, where there's been a lot more time at our Investor Conference talking about the <unk>.

Deficiency initiative, but it might be helpful for us to share a couple of examples of the work that we think is in front of us and I'll ask John to start first and talk about learning we've seen from a fulfillment standpoint and have Christina talked about some opportunities that we're already looking at it from a merchandising standpoint, yes.

Yes, Michael I think this is.

I think Michael <unk>.

<unk> characterized it well. This is work we always do we've always done this and when we look back at fulfillment. This is something we've done year after year and I remember back in 2017 taken lots of questions about what you guys have enough capacity in your stores to do all of this fulfillment in taking that question in 2018 in 2019 and here we are with a.

The digital business is 20% of our of our business now and $95, 96% of our fulfillment is done in stores and so when you look at what we've done there. It is essentially what Michael is talking about continually going back looking at the process. We are modifying the process reinventing the process investing some capital in some cases to support things.

Drive up our extra packs stations.

And consistently over that time, increasing our unit productivity as it relates to fulfillment and double digits every year. Since then and Thats created capacity for us to continue to drive our digital business and improved our economic performance in the digital business, along the way and so when we step back and look at all the scale. We've gained just like that.

Scale, we gained in the digital business that allowed us to continually improve fulfillment. We've gained all of this scale now in our existing business the broader business and that allows us to take a step back look at what we've what we've been doing the last couple of years to meet our guests demand as we grew quickly and say there is a lot of places for us to go back reinvent process add additional.

<unk> and improve the way we deliver for our guests.

And I would add on a similar note we think that there is opportunity to do that same step that.

How we create make move and sell our apparel business do you think about the exceptional growth that we've had in our business across the board, but certainly in a big category like apparel and the volatility we've seen in import transportation lead times.

Ups and downs in the market for us to take a step back and say is their process flow technology planning decisions sourcing decisions and opportunities to flow inventory with more efficiency is at the heart of <unk>.

Besides we actually have started it.

A while ago, and we'll really be able to.

To accelerate the investment in that process work and.

Re imagine the <unk>.

Opportunity around our apparel.

Michael I want to make sure we're really clear we see significant opportunities over the next three years to find cost savings in the neighborhood of $2 billion to $3 billion as we improve processes and simplify our operations at the same time, we'll continue to be focused on growth and taking market share and meeting our guest and continue to enhance our <unk>.

Business position, so it's not an either or it's an and we will continue to be focused on being a growth company continuing to build market share driving traffic to our stores and visits to our site and become a much more efficient organization that leverages. The scale, we've gained over the last three years.

That's super helpful and let me just clarify that net one follow up question is the $2 billion to $3 billion.

Paul what you'll get.

Recouping the inventory write down the <unk>.

Cancellation fees that you paid.

Cancel orders this year or is that the <unk> to be $2 billion to $3 billion inclusive.

That recapture opportunity and my second question is you need to make price investments in the business to improve the perception amongst customers during this difficult economic time.

That is taking more.

Going to page.

Discussion now that your big competitor talked about a good start to it.

Fourth quarter. So there is discussion around whether target might be losing share to it.

A competitor thats perceived to be more value oriented. Thank you. So much. So Michael there are couple of questions. There one we see that savings as being incremental or.

Operating plan.

Two we do expect the holiday season going to be very promotional we are seeing that as we move into the month of November but as we've mentioned many times one of the things that really stands out in our quarters, our ability to continue to pull.

<unk> and game unit market share across all five of our merchandising categories. So we're continuing to build share we're going to continue to see traffic driving our business and we think it's going to be a promotional holiday season, and we're prepared to compete in this environment.

Thank you so much and good luck.

Thank you.

Thank you. Our next question is from Ed <unk> with Piper Sandler you May go ahead.

Hey, good morning, guys. Thanks for taking the question I guess first you called out shrink a number of times and I know, it's been a persistent issue, but it seems like it's intensifying.

Or something you think you can remediate kind of.

Tactically or process or is it kind of endemic of other structural issues, namely maybe the locations. Some of your newer stores in jurisdictions, where maybe shrink is just more endemic and then as a as a bigger picture question.

Looked at 'twenty, three with the consumer being volatile how quickly can you bend the merchandise offering to focus more on those entry price point are those value seeking items that the consumers demanding today. Thank you.

From a solutions perspective, we see two things one this is a nationwide problem that we need to address nationwide with other retailers.

This is primarily driven by organized crime and so there is a role for us to work as a retail group with with law enforcement with the government to help find solutions more specific target. There are things that we can do from a remediation standpoint, we have put those in place.

And a number of stores and we see the impact of that.

Obviously, not something we like to do is far less convenient for guests as they shop, our stores, but we think we can manage that from a service perspective, and you can see us continue to do that as we see stores that are more impacted will continue to provide additional remediation factors. The biggest focus for us is keeping our team and our guests safe and so we start there and so.

That drives a lot of our behavior and Thats. The goal and then the third thing is to is to prevent theft, but.

But we are really starting to place where it is about keeping our team and our guests safe as they are in our stores and on.

Second question, Ed on value and price perception, and our offerings I would tell you that we've had a concerted effort to make sure that we demonstrate the balanced value across our assortment for a long period of time that last quarter I called it a maniacal focus on opening price point, because we need to make sure that we appeal to you.

The range of consumers that shop target and as I said in my prepared remarks, some of that's going to be opening price point value options that we can engineer into especially in our strong own brand offering but some of it is actually larger sizes, where people are seeking value too.

The per unit.

Equation that taught us a bigger pack sizes. So we are absolutely focused on it it comes through an everyday price comes through in our own brand assortment. It comes.

In our promotions and it comes through our accessibility with our great Red card.

The loyalty programs and the solutions in aggregate and that's part of the target equation. It all also relevant.

Shortly.

Fresh seasonal and on trend it doesn't matter what your price that assortment is relevant and that's why we need to always say target.

Thank you.

Thank you. The next question is from Scott, Michigan with RFID Capital You May go ahead.

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

When you guys got into some good detail about the cost savings you have planned I was wondering is there any thought that 2023, we may have an extension.

The challenge is in thinking about Capex thinking about labor hours and how you might how you might attack that if 2023.

The fed is successful here and engineers.

Recession.

Scott as you might imagine right now we are laser focused on the holiday season, and making sure we and 2022 in a position where we're continuing to hold and grow share and meet the needs of our guests for the very early stages of looking at 2023 will be back after the first of the year with more details about our overall.

<unk>, including Capex spending.

Outlook for the overall consumer environment, So give us a few weeks, we'll be back to you. After the first of the year, but obviously, we're going to spend a lot of time right now focused on executing our plan getting through the holiday season, and then assessing the consumer and the overall retail landscape as we look to 2023.

Sure then another extension of a question, but wanted to get a second view on this.

Imitation is the best form of flattery, and one of the competitors, especially in apparel and home has been kaki you guys are pretty readily.

Partnering with other brands I mean, how much do you think that could impact your sales or maybe is impacting your sales in those categories.

Or do you think.

It's really not a factor.

Scott, It's why we spend so much time looking at unit market share performance and as we continue to perform well across our entire portfolio. We feel like we've got the right mix.

National brand partners.

The strength of our own brands, we have a fabulous in store experience and the ease and simplicity of our digital channels. So we think we're well positioned to continue to hold and grow share across our entire portfolio not just in the holiday season, but for years to come.

Alright, guys. Thank you very very much I appreciate it.

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

Hey, Thanks for taking my question may be for Christina and maybe Brian chime in here.

I know its early but with the kind of shift in trends Youre seeing is there any more you can tell us maybe about the income demographic.

<unk> of your guests just there have been any changes in patterns amongst that so for example, Walmart obviously called out yesterday that they're seeing more of these $100000 plus people trading into Walmart is there any anything you can tell us about your lower income guests versus your middle or higher income that helps us understand what's going on.

Yes, our first proof point about how we're performing is obviously the strength of our traffic as well as our market share gains and those are broad and across all of our categories. As we look at the where the growth is coming from it's coming from deepening engagement with our current guests. So.

They are coming more often and they are.

Our spending across more categories and there are couple of inflection points in behavior with the target guests that are really meaningful one is when they become an omni channel guests.

The second is how much they use our fulfillment capabilities and the third is the amount that they buy food and beverage all of those three are growing at a faster rate than total target that gives us confidence that going forward, we will continue to.

Deepening engagement with our guests that are most meaningful for our long term business.

And then just maybe a quick follow up anything on the digital side any new initiatives you guys would be thinking about maybe doing more with marketplace or things to get your digital growth a little higher again.

Well I think Theres a couple of things there one the digital team is doing a great job in there to Brian's point right now they are very focused on delivering a great Q4 for our guests I think a couple of things. We are excited about is first bringing in these are the top two request from our guests always being led by our guests as it relates to what we're going to provide from a digital perspective number.

One is <unk>.

Adding Starbucks to drive up and we've seen that in the test stores very very popular. This has been a request for a long time from guests I'm getting milk I'm getting diapers why can't I get my my lot pay to go as well I think the second one under the heading of continuing to create is and this is also a request from our guests is being able to do do returns to drive up.

That one's a little bit further behind Starbucks, we're testing that in a small number of stores. It just went guest facing recently and so we will continue to test that through the fourth quarter here and look to hopefully expand that next year, but I think the example, there. The examples there are more important in what we're doing that as the guests leading us to what they want us to provide from a digital perspective, whether it.

That would be on the site or in how we fulfill their services.

Great. Thank you.

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

Hey, good morning, everyone I wanted to ask on the sales backdrop for a minute.

You took a lot of markdowns and some inventory was released to the market.

Walmart has the same and they have been discounting why couldnt. This environment just be off price, having a lot of inventory in the market is just stuff that could be part of this weakness and it's going to take some time for that to clear as opposed to the consumer really weakening fundamentals. So I just wanted to throw that out there.

Yes.

I mean I'll go back to some of the syndicated data that we've been looking at and clearly across all of retail we saw a change in shopping behavior in the back half of October .

Leading into November .

The most recent information we've seen from NPD would indicate during the first week of November general merchandise categories contracted by 14%. So a very significant change in shopping behavior. So I think as Christine has pointed out a number of times and we've had a consumer who has been dealing with various governor.

Inflation for quarter after quarter now.

Certainly starting to look at higher prices and food and beverage.

In many cases prices that are up double digits, they're shopping very carefully on a budget and I think theyre looking at discretionary categories, and saying if I'm going to buy I'm looking for a great deal and a great value.

What we've seen overall is a change in consumer behavior over the last few weeks, we're going to watch it carefully throughout the holiday season, but I think it is a byproduct of a consumer who has been facing higher costs throughout the year is working with their budget shopping very carefully looking for value and recognize they've got to start with core staples.

Before the $10 and discretionary categories.

Yes that makes sense my follow up is the $2 billion to $3 billion.

It sounds like it's it's process oriented, but some of the things you mentioned in terms of flowing inventory.

It seems like that will require capex and again don't want to put words in your mouth, but to be able to drive. These efficiencies is it pure process or does capex need to step up to make investments in order to realize the savings.

Yes, it's a fair question Simeon and sometimes it involves capex and we're happy to invest that capex. When the return is there and so if we can put.

Capital into the business that can drive efficiency for the team and you've seen that <unk> seen us do that with technology in stores and supply chain.

So that's the path we've been on and we certainly aren't shy about making that investment when the alternatives there.

All require capital, there's a lot of process reengineering and optimization that we can do.

And that Shouldnt have the capital price tag associated with it and again back to the examples John Kristina provided so much of that is about the scale of these gains.

There is a path of simplifying and taking costs out of the business. When you don't have growth. We've got a fortunate position to be looking at the business on the heels of just exceptional growth and that creates a lot of opportunity for us to rebuild process against the business that substantially bigger than it was a few years ago.

Operator, Thank you below last question today.

Thank you our last question comes from Kate Mcshane with Goldman Sachs. You May go ahead.

Hi, Thanks for taking our question.

I wanted to ask a couple of follow up questions on the inventory position.

If there was any inventory leftover from the issues that you experienced in the spring and now that it sounds like maybe Q4 is going to be a little bit weaker, but I think the inventories you probably bought with for more of a low single digit comps scenario is the goal to be clean with regards to holiday inventory coming out of Q4 and into.

<unk> 2023.

I will answer that with where you ended your question and that is we are committed to being clean at the end of the holiday season.

And Youre also right in the first half of your question, we accomplished what we wanted to.

The first half of the year, we feel good about that work and you heard me quote some versus 2019 benchmarks. If you were to just look versus.

Versus last year, you'll see that.

Q2, our inventory was up 36% year on year in Q3, it's about 14% and so we made good progress on the plans we had in place obviously, we're looking at the change in the trend closely.

If that trend, we see persist that a couple of more markdowns to make sure we accomplish exactly that goal.

Great.

Operator that concludes our third quarter call, we wish everyone, a safe and happy holiday season, and look forward to seeing you in person in 2023. So thank you.

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Ladies and gentlemen, thank you for standing by welcome to target Corporation third 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.

Good morning, everyone and thank you for joining us on our third quarter 2022 earnings conference call.

<unk> moments, Brian Christina John and Michael will provide their perspective on our third quarter performance and our outlook and priorities for the fourth quarter and beyond following their remarks, we'll open the phone lines for a question and answer session.

This morning, we're joined on this conference call by investors and others, who are listening to our comments via webcast.

During 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, including those described in this morning's earnings press release and 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 third quarter and his perspective on the upcoming holiday season, Brian .

Thanks, John as I begin the call today.

I want to highlight the proactive leadership position, we will continue to take as the operating environment changes.

Just as we took decisive action in the second quarter to right size our inventory.

Moving proactively in a period of rapidly softening demand and elevated uncertainty to some.

Exactly navigate near term challenges alongside our team and in step with our guests.

As we look specifically at third quarter results. They demonstrate how our business continuing to serve our guests even in the face of an increasingly challenging backdrop.

Because of the deepening level of trust, we have established with our guests over the last several years, our topline continues to benefit from growth in guest traffic and check.

Your gains across all of our core categories.

This is particularly notable as consumers are showing increasing signs of stress and pulling back from discretionary purchases.

It reinforces the value of having our balanced multi category portfolio, which allows us to satisfy our guests ever Chaney wants and needs.

In today's environment that means we continue to benefit from strong growth and market share gains in the categories. Our guests are leaning into most right now, including food and beverage beauty and household essentials.

Q3 comparable sales grew two 7% on top of 12, 7% a year ago and 27% in the third quarter of 2020.

These actions were designed to ensure we could continue to provide what our guests know and love about target.

More specifically the effort was designed to free up space in our stores and hours for our team.

Video offering fresh inventory.

A reliable uncluttered shopping experience for our guests setting up our business to deliver strong growth in Q3.

Among the drivers of our comparable sales third quarter traffic expanded one 4% on top of 12, 9% growth a year ago.

In addition to traffic growth, we saw a one 3% increase in average ticket as guests continue to rely on target for convenient reliable one stop shop.

Across our merchandise categories and similar to the second quarter, we saw very strong growth in our frequency businesses led by double digit growth in both beauty and food and beverage.

That strength offset persistent softness in our discretionary categories, which worsened at the end of the quarter Kristina will provide more detail in a few minutes.

While overall Q3 comp growth was nearly identical to our second quarter performance, we experienced dramatically different trends within the quarter.

More specifically through the first two months of the quarter, we had seen comp growth of well over 3% and then saw a deceleration to just under 1% in October .

Even within the month of October results in the back half of the month were much softer than in the first half and the mix of our sales tilted much more heavily towards promotions.

This rapid change in trend is consistent with what we're seeing in syndicated data on broader industry trends and the feedback we're hearing from our guests.

With high rates of inflation continuing to erode their personally power. Many consumers. This year have a lineup borrowing or dipping into their savings to manage the weekly budgets, but for many consumers those options are starting to run out.

As a result, our guests are exhibiting increasing price sensitivity, becoming more focused on and responds to promotions and more hesitant to purchase at full price.

On the private line, we saw unexpected improvement in the third quarter as we move beyond the bulk of those costs from our second quarter inventory actions.

However, Q.

Q3 profitability came in well below our expectations driven by several factors.

First and foremost we faced an unexpected gross margin rate headwind from a higher than expected mix of promotional sales as guests moved away from full price purchases.

In addition, like the rest of the industry, we're facing a growing financial headwind from shortage, which is running hundreds of millions of dollars higher than a year ago.

Along with other retailers, we've seen a significant increase in its depth and organized retail crime across our business.

As a result, we're making significant investments in training and technology that can absorb that and keep our guests and store team members safe.

It's in tough environments like these that were most fortunate to have a durable business model and a strong balance sheet, allowing us to maintain our focus on long term investments and market share opportunities at a time when many others will be forced to pull back.

Want to make it clear this effort is not about slashing resources.

Instead, it's about optimizing our operations to match the scale of our business.

We're still in the process of fully scoped out this effort, but we believe that presents an opportunity to save a total of $2 billion to $3 billion over the next three years in support of our investments in long term growth along with our profit goals.

Our team is committed to operating value across our entire assortment through great everyday prices unbeatable value on our own brands.

And accessible opening price points in every category.

In addition, we'll highlight our compelling and simple promotions free services like drive up and in store pickup and new accessible payment options and of course, we will provide additional savings opportunities through a red card and target circle programs, neither of which is a membership fee.

So as I get ready to turn the call over to Kristina I want to thank the entire target team for your energy or spirit, you care for each other and your passion for our guests and our brand.

Thanks, Brian and good morning, everyone.

The current retail environment requires tremendous levels of flexibility resilience stamina and focus our balance our team continues to carry out at every guest interaction.

Consumers are strained as they work to support their families day to day needs, while looking for the occasional affordable luxury prepping for the changing seasons and planning for the holidays.

It follows that of the many considerations that our guests are currently juggling, we consistently hear that value remains at the top of the list.

We see our guest holding out for and expecting promotions more than ever.

Any less on regularly priced items.

I shop, our frequency categories. Some guests are trading into smaller pack sizes opening price point options, our owned brands to reduce their spending on a single chip.

Others are opting for larger pack sizes are stocking up when items are on promotion, knowing they will receive greater per unit value.

And these trends only became more pronounced towards the end of the third quarter when spending patterns changed dramatically.

With inflationary food prices absorbing more of their spending those costs are crowding out other categories, including spending on discretionary items and in some cases, even household essentials.

These themes played out in the third quarter as guests responded increasingly to promotions, even as they celebrated key seasonal moments like back to school College in Halloween.

Food and beverage continues to outperform the market with low double digit growth and strength across the portfolio gaining both dollar and unit share every week throughout the quarter.

Comparable sales in our central categories grew in the low single digits, reflecting particular strength in pets and health.

While already soft sales trends in our discretionary categories softened even more in the last few weeks of the quarter.

A trend that has persisted into the first few weeks of November .

But importantly, despite this challenging environment, we still saw unit share gains in all five of our core merchandising categories in the quarter.

Assign that when guests are looking for convenience and value on both wants or needs. They are increasingly turning to target.

Apparel comps were down only slightly in Q3, driven by growth in kids men's seasonal our new fashion forward Assortments.

Offset by softness in swim women's accessories and basics.

In home sales declined in the mid single digits, despite strong performance in seasonal areas.

Hard lines sales were also down mid single digits, reflecting continued softness in home electronics and sporting goods.

Additionally, we saw a meaningful deceleration in toys this quarter, most notably in October .

This is a trend we will continue to monitor closely as we move throughout the holiday season.

Across our portfolio of owned brands continue to outperform their national brand counterparts growing at double the rate of the total enterprise in the third quarter.

So as we turn our focus to Q4, we'll do what we always do worked tirelessly to deliver value and solutions to our guests while also delivering affordable joy at a time when they need it most.

But even with this cautious stance, we're focused on providing our guests with affordability and ease at every interaction with the target brand.

One of the signature ways, we plan to stand out. This holiday season is through our focus on the combination of newness and value, which cut across all our core categories.

Given that the gift, giving season is underway and our guests are turning to target more and more for their food and beverage needs. It's an ideal time for our recently announced partnership with British retailer marks and Spencer who has collaborated with us to offer a limited time assortment of gourmet premium food and chocolates, that's sure to be perfect gifting solution.

This holiday season.

Despite recent trends in toys, we know they will play a critical role for our guests over the holiday season, and we have all the top toys and exclusive this year at incredible prices.

Back by popular demand are exclusive assortment from Fas Schwartz features more than 120 twice and.

And for all of the Marvel fans out there the first of its kind collaboration between target and Disney will feature exclusive black Panther merchandise and experiences, including the only add target black Panther or condo forever or on the water Lego set.

And the power of these partnerships doesn't stop there we've added nearly 50 Disney shop in shop experience. This year, bringing the total to well over 200 of these shops across the country.

In partnership with Apple, we've more than tripled the number of shop in shops since last year and our target circle members have access to free trials of some incredible Apple services.

Including a three four month trial of Apple fitness class.

And with Ulta beauty at target, we will have opened another 250 locations. This year and now have more than 350 locations open across the chain.

Through all of our new tried and true and exclusive holiday offerings. We will remain laser focused on supporting our value proposition with key deals starting earlier than ever.

Weak long Black Friday deals and our guest favorite deal of the day offers are available now and feature our best plan prices for the season with prices up to 50% off across toys and games electronics kitchen appliances and more.

Besides industry, leading promotions, we are offering compelling easy to shop everyday price points on key items like $3 Christmas ornaments.

Five dollar holiday Wonder shop, and candle Assortments.

$10 gifting assortments across categories like beauty apparel and home.

All without the need for a credit check or an existing bank account.

Combine this with our easy convenient and free same day service options like drive up and order pickup all with no membership fees.

Our free to joined loyalty program target circle, we have an unmatched combination of value added and affordable shopping experiences to help our guests celebrate and amplify the joy of the holidays.

Throughout the season, we will remain nimble and respond to changes in consumer promotional and macro trends always in service of optimizing current and long term performance.

And despite the challenges facing our business and our guests we have a not so secret weapon to help us provide julian value for our guests.

A world class team.

Like Brian I want to pause and add my sincere gratitude for the target team no.

No matter what is thrown your way you execute with Grace compassion and consistency a combination that leads our guests to return to our stores and website time and time again.

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

Thanks, Christina <unk>.

Across the operations team, we focus every day on delivering strong execution, even as we continue to keep our eyes on and invest in projects that will support targets long term profitable growth.

The good news is that the lead times and global shipping have started to move in the right direction.

More specifically compared with the second quarter lead times improved by about 15% in Q3.

More than three weeks shorter than a year ago.

So today, even as we continue to look heavy on the balance sheet. Our inventory is in a much healthier position than earlier in the year.

Because of the heaviness Youre seeing today is due to the early arrival of fresh inventory, we are planning to sell.

Similar to our experience with lead times, we saw improvement across multiple dimensions of our transportation cost in the quarter.

Even as those costs remain about pre pandemic levels.

Container rates and global shipping have come down by about one third in recent months and we'll realize that benefit in 2023, as we renegotiate our staggered contracts with shipping partners.

And importantly, we expect to see further reductions in those rates going forward as they remain about three times higher than we were paying in 2019.

Similarly, domestic transportation rates have come down since the beginning of the year, but remain higher than a year ago and double the rates, we were facing in 2019 and.

And of course fuel costs, which are a major driver of our domestic transportation expense are still running more than double the amount we were paying in 2019.

Despite having moderated in recent months.

Now I'll turn to the work of our properties team, where we're still wrapping up some projects, but close to completing our supply chain and store projects for the year.

On the distribution side, we're continuing our work to build replenishment capacity across the country given the amount of growth we've delivered over the last few years.

The other Big addition to our distribution infrastructure as the build out of our Sortation Center strategy a.

A year ago, we were operating a single sort center here in the Minneapolis market and this year, we've opened five more with several more on track to open in 2023.

These centers, which are typically a little bigger than a single store increase our speed and meaningfully reduce our last mile delivery costs and the markets where they operate.

They also create backroom fulfillment capacity in the stores they serve as they eliminate the need for each individual store to sort the boxes the packs for delivery.

Beyond full Remodels. We're also on track to complete about 200 fulfillment retrofits this year in which we optimize their capacity inefficiency in supporting our same day services.

And finally, the team is on track to complete our new store program for 2022, and which we plan to add 23, new locations to the chain <unk>.

The size of these new stores ranges widely from 19000 to 145000 square feet as we continue to open the rightsize store for the neighborhood we're serving.

That opportunity just over a week ago. We opened the first example of a new larger store prototype in the Houston, Texas market.

Nearly 150000 square feet. This new format incorporates our latest thinking and store design featuring a more open layout localized elements to inspire and serve our guests.

Five times more space to support our digital fulfillment services and sustainable features in support of our target forward goals.

But we'll continue to open new stores of all sizes in the next few years, we plan to lean into this new layout when appropriate and incorporate its features into other projects, including Remodels.

Among the many innovations we've incorporated into this new location in Houston, We've added two new drive up services.

The first is the ability for our guests to order a beverage from Starbucks on their way to pick up their drive up order.

We started testing this new service in the second quarter with a limited menu and a small number of stores.

Allowing us to collect feedback and fine tune operations before expanding it more broadly.

Based on the success of that pilot earlier. This month, we rolled it out to more than 200 additional stores across the country just in time for the holidays.

Based on the operational success of that initial test in early November we expanded the service to our guests and that same small set of stores and we will look to apply any learnings from that guest facing test before rolling out the service more broadly next year.

Our busiest time of the year.

An increase in the number of team members, who are looking to pick up extra hours and an 18% increase in applicants for seasonal positions compared with a year ago.

That's why we are ensuring our teams are staying focused on our guests and taking the right actions to continue deepening our relationship with them.

If we maintain that guest focus I'm confident we will find ourselves in an even stronger competitive position over time.

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

Thanks, John .

Obviously, if recent softening consumer trends continue through the fourth quarter that will put some pressure on our near term financial performance.

Once again this quarter I'm going to begin my remarks by covering our inventory position given that it continues to be an important area of focus.

And like last quarter, I am going to base my discussion on comparisons to 2019, given the highly volatile conditions that have affected inventory since the onset of the pandemic.

As you saw in our balance sheet. This morning, we owned $17 $1 billion of inventory at the end of the third quarter, which was $5 $7 billion higher than the end of Q3 2019.

In percentage terms. This year's number represents an approximate 50% increase from three years ago.

Deceleration from three year growth of 68% as of the end of the second quarter.

The dollar increase in our inventory since 2019 about two thirds or $3 $9 billion is aligned with our sales growth over that same three year period. The remaining one third or about $1 8 billion as.

As new inventory Thats arrived early relative to when it would have been received and pre pandemic years.

This early inventory is being driven by two related factors.

The first is our explicit decision to add cushion to our lead times. This year in order to mitigate the risk we were facing a year ago when the bulk of our global shipments were arriving late.

The second factor is the unexpectedly rapid acceleration in the global supply chain that we saw in Q3, which caused us to receive shipments even earlier than scheduled.

More specifically the percent of our inventory units and discretionary categories was eight percentage points lower than at the end of Q2.

And lower than in 2019 as well.