Q4 2022 Target Corp Earnings Call

[noise] the meeting is about to begin.

[music] [noise].

[noise] well good morning, everyone and welcome to our 2023 financial community meeting I'd like to start by welcoming the investors and others, who are attending this meeting remotely.

Of course, we're happy that so many of you have joined US here in person today.

Before I turn it over to Brian to start the meeting I have a couple of important disclosures first any forward looking statements that we make this morning are subject to risks and uncertainties. The most important of which are described in our SEC filings and second in today's remarks, we refer to non-GAAP financial measures, including adjusted earnings per share reconciliations of all non-GAAP mess.

<unk> to the most directly comparable gap measure are included in our financial press releases financial presentations and a SEC filings, which are posted on our investor relations website with that I'll turn it over to Brian to begin the meeting.

Yeah.

Africa.

Who knows.

Oh.

Yeah.

It's our program.

It's an idea.

The center of every decision made it's something to believe giving.

Giving our guest more of what they love.

Every day in every way.

From opening up new location.

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Putting brands on shelves that says all family.

[noise] investments and has made on our strategy all come together.

I believe.

No matter, where how when.

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We'll be here.

Helping me discover the joy of everyday life.

[noise] well good morning, and thank you for joining us.

Sending this time with you.

We're eager to share our plans, including how will continue to grow.

How will continue to rebuild profitability on that growth and.

And how will strengthen our business and conditions that have changed a lot since we gathered here at the time center last year.

At that time.

We just passed a crucial milestone.

We would just become Ah 106 billion dollar company.

For the full year 2022, which were reporting today, we place the other $3.1 billion in revenue growth.

On top of that growth.

We grew traffic by 2.1%.

We gain you to share across our core merchandising categories.

Which means that consumers.

Constrained by inflation and have to be very selective about where they shop and what they buy continue.

Continue shopping and buying a target.

And despite difficulties throughout the year.

We close the books on 2022.

With our 23rd straight quarter of comp sales growth.

However.

The path between last year's time Center meeting and this one was anything but predictable.

When we last gathered here.

<unk> was still under Emas bandit.

Although consumers had started moving towards Postpay, then it behaviors with families returning to travel in restaurants and shifting some dollars at a retail.

We are just beginning to see how volatile and uncertain 20 twenty-two would become.

Is spiralling inflation force families to put discretionary purchases on hold and focused most of their spending on necessities.

And there was a rapid escalation to the most expensive property environment, we've seen in decades.

All of which was made worse by.

By the spike in fuel prices.

Caused by Russia's war on Ukraine.

Those variables and many others continue to have a profound effect on the retail landscape.

So this morning.

We want to take stock of that situation.

You want to speak clearly about target is planning to stay on our growth path for the years ahead.

We're keeping this morning's agenda very focused.

On our strategy.

Operations.

Growth investments and financial expectations.

We see this as a time to your mind steady leadership with our long term strategy.

And a continued focus on agility and strong focus on retail fundamentals.

Our goal is this morning.

To show you how were navigating near term challenges.

How the durability of our business model lies in its flexibility.

We'll share or prioritizing to stay in step with our guest.

And how will flex across our multi category portfolio, which means in the near term.

Leaning into growth and non discretionary categories.

Well also reinforce how the trust and loyalty, we've built with our guest shows and our traffic and share games.

Given value is absolutely top of mind right now.

Being able to deliver affordable joy differentiates us in the marketplace.

And that's a clear advantage in the near term.

It remains our focus over the long term.

With those factors in mind.

We also want to use this time to set clear and realistic expectations, so shareholders and stakeholders can track what progress looks like in 2023.

Taking a step back.

I might start by recognising that our growth in 22 didn't come easily.

It wasn't nearly as profitable as we expect it to be over time.

2020 and 2021.

Our team put in the effort and the hustle to keep pace with the most turbulent business environment many of us have ever seen.

They brought the expertise and experts to take the company to a new level.

But.

While we gained incredible scale.

I continue to prioritize our guests.

I acknowledge we're still developing some of the tools to Marshall that scale efficiently.

Yet as.

As we think about what growth looks like from here it.

It's helpful to anchor back to what we were saying at year end 2019.

At that time, we were putting up proof points on a strategy that was and still is unique in retail.

When we built for a lively deliver low single digit increases in sales year after year.

It started by investing in our team.

In part because we believe human interaction is the key to growth in a digital age.

As we move into 2023 will continue to support our team.

Our culture.

Knowing there at the heart of our overall success.

The 2019 strategy what stores at the center of everything.

Because when we remodeled or added a store and it proved against experience cops group.

At the same time, turning stores into fulfillment hubs was and still is the most efficient and least costly way to grow omnichannel sales.

Casual here today, we're not standing still on our store remodel and expansion plans or investments and a bigger supply chain.

Ongoing improvements in digital.

It's no surprise that 100 per cent of our store sales are fulfilled by stores.

But in our case more than 95% of all sales, including digital are too.

Since 2018.

Our store basis only grown slightly.

But total sales grew nearly 40% in that timeframe.

Our digital business nearly tripled in size.

And our sales per square foot increased by 37%.

And fulfilling substantially all that growth through essentially the same as the base was nothing short of incredible on the part of our team.

So as we hold onto those gains and looked to put growth on top of them will continue to invest in stores.

And supply chain and digital through our stores as hubs model.

R 2019 strategy prioritize this differentiation and profit performance of its own brand portfolio that is simply unmatched in retail.

At the same time.

We're curating national brands are gifts love.

And in 2019, we had just started our premier partnerships with Levis and Disney.

Since then both those partnerships have expanded.

Partnerships with Apple and Starbucks.

And as you know we're in the middle of building, an incredibly exciting partnership with ultra beauty.

Meanwhile, our team is built on our position of strength in one branch, adding 17 of them since 2019.

That includes tumor billion, plus dollar brands and good and gather and all emotion.

But we're not slowing down with one branch in fact, just the opposite.

As you'll hear from Christina we're planning a steady cadence of newness and on brands and national brands across our multi category portfolio.

You're ahead.

What else within the 2019 strategy.

Well that was a year, we introduced targets circle.

At that time, it was a powerful new asset for.

Guest engagement personalization loyalty and sales that quickly attracted 50 million users.

Since 2019, the user basis doubled and is still growing meaningful.

And circle has become the heart of our increasingly connected loyalty ecosystem.

Since 2019 or media company Rondel has grown significantly.

With great additional growth and profit potential on the horizon.

It sought after by advertisers for its relevance and reach.

And it's growing each year, because our against appreciate the engagement and the value it delivers.

Right now it makes for a more deeply engaged gas and partners.

And because it gives us a better understanding of our guest preferences. It makes us that even better and more profitable retailer.

So we intend to place additional emphasis in investment towards circle and rundown of 2023.

Given the growth potential bill unlock.

So let's pause here.

And I will strive to put all this together.

While I'm deliberately drawing a connection between 2019 and the year ahead.

There's one giant difference.

We're starting 2023 on a revenue base of $190 billion.

Not the $78 billion, we had back then.

There are other big difference is too.

Today, we're reporting a full year cop increase in the low single digits.

Similar to 2019.

And you just share gains across all five our core merchandising categories.

But unlike 2018.

Our three year revenue growth is 30 plus billion dollars not just $8 billion.

And our digital penetration now stands at nearly 19%.

During the pandemic.

They can be a more attached to target and.

And as we deepen the gatewood guess more moved into the ranks of our most engaged.

Measured by spend trips and cross category purchases.

Guess engagement is also reflected in a significant increase in transactions since 2019.

In fact, if those increases started as far back as 2017.

And we're positioned to keep growing engagement levels across our guest space.

Even if we focus on expanding that base overall.

So standing here today my sense is that a new normal is on the horizon.

It'll be much more like 2019, and the last three years.

And as we planned prudently to invest in 2023.

We see a return over time to solid and consistent growth.

With operating income margin rate that should move towards and they begin to move beyond our pre pandemic rate of 6% in the next few years.

Today, we will show you our work for how we arrived at that conclusion.

But ah spoiler alert it starts with a strategy.

You've seen it many times before.

While the fastest on this slide haven't changed where prioritizing to accelerate key growth drivers.

Making changes that will help us respond to the short term environment, while continuing to advance all elements of our strategy.

They all work together to keep our growth trajectory rolling.

Proceeding will cover that in greater detail, including the focus this year.

We're placing on the magic of Tar Jay.

An affordable Joy.

And on digital growth target circle, Rondel, and our enterprise sustainability strategy target lowered.

Then John will cover what we're learning from an ongoing operational evolution.

What we're testing what we're in the process of optimizing.

What benefits, we see from the standpoint of efficiency as we continued to scale.

Michael will describe how we are planning cautiously.

And we believe appropriately given the economic challenges we anticipate this year.

But caution doesn't mean cut off and we continued growth and progress.

That some of the most exciting progress we anticipate will be translating our newfound scale and a simpler more efficient ways to run target.

The difference between an enterprise wide efficiency mindset and a cost cutting program starts with what question to ask yourself.

For us the question isn't what can we cut.

It is how do we make things easier for our team.

More efficiently deliver a guest experience that continues to live up our branch to our brand promise.

So will invite microneedle the leader we have to coordinate these efforts across target to offer his perspective on efficiency.

What it is what it isn't.

We can drive continuous improvement.

And what we get unlocked with this focus.

We're looking forward to the next hour or so.

We recognize that the landscape is unpredictable and there are plenty of near term challenges on the horizon.

We believe 2023 will be a year in which the durability of our model allows us to flex up the categories and the value proposition that are most relevant to our guest today.

We'll double down on execution.

So our guests get all they'd been promised every time they turn to target.

And it will stay focused on gaining share across our portfolio.

Underpinning all but we've been work we're doing around efficiency to provide fuel for longer term growth.

We're optimistic about what this team can deliver.

And realistic about how 2023 will keep challenging us to be agile resilient and responsible.

For our guests Archimedes for each other and for our shareholders.

Before we leave here today, our goal is to take you along so you can see exactly what we're seeing.

Now with that let's get going.

[noise] Thanks, Brian .

Despite the challenges of the past year targets differentiated position in retail has never been stronger with the greatest shortening compelling value and unmatched suite of fulfillment options and a joyful shopping experience target continues to drive preference with American shoppers in the face of a turbulent economic and consumer backdrop.

We have continually adapted to the environment around us delivering he's value and inspiration to our guests at a time when daily doses of joy I needed more than ever.

And the Mets. This volatility we continued to hold on the foundational elements, but it takes me a long term winter in retail.

Fourth quarter comparable sales group, 7% on top of nearly 9% last year and for the full year comparable sales grew 2.2% on top of nearly 13% in 2021.

While our business has been generating growth on type of growth fears now the next to last year sales looked vastly different than what we had expected.

Throughout 2022 changing attitude towards Covid.

Followed by the pressure from persistent inflation caused demand for discretionary categories to slow meaningfully.

With this in mind, we've taken a cautious approach to this year's inventory commitments in many of these categories.

And we're focusing on the agility of our operating model to adjust should sales trends exceed our expectations.

In light of the volatility we've experience I often get the question what is target learn from the past year.

What else share with you today are some of the lessons learned.

In short we learned that our strategy is working.

At the same time, we come to further appreciate the importance of strong day to day execution combined with the agility required to react even quicker to changing consumer trends.

And of course last year reinforce the importance of providing every gas with a great shopping experience.

Most of what I'll share today likely won't sound all that different from the playbook with us for the past few years.

Status intentional.

For example are most like category assortment continues to resonate with our guests even as consumer demand continuously evolve.

The unique balance we've achieved across all five of our core merchandising categories.

<unk> to be a key differentiator in the market with each category serving at times as a truck driver at other times of the basket builders and often times as both.

Throughout 2022, we saw and continued to see incredible growth in our food and beverage and essentials and beauty businesses.

Setting a meaningful pullback in discretionary categories like home apparel in hard lines.

But despite this pullback these discretionary categories still delivered around $55 billion in sales last year.

In both our food and beverage and beauty categories 20, twenty-two delivered the third consecutive year of double digit sales growth stemming from increases in both traffic and average ticket.

And while we're thrill, let's have driven unit share gains across all of our major categories last year, we saw the strongest gains in these rapidly growing frequency categories approved.

Proof point of the relevance and value found in these assortments.

In beauty, we continue to be a market leader delivering the highest growth rates of any category we sell.

We've been seeing outsize girls across the entire portfolio from everyday beauty assortments to new and exciting offerings like those with that it through our partnership without the beauty.

In fact last year sales from ultra beauty at target, where more than four times higher than in 2021, and this growth was almost entirely incremental.

As such we remain excited to continue opening additional outer beauty target locations this year and beyond.

Of course, we don't have an assortment for a given snapshot in time.

Rather we flex the cross our categories as consumer demand shifts.

And even in tough times are discretionary assortment provides a unique opportunity to connect with gas in key moments from major life changes to seasonal celebrations and everyday moments in between.

Now I want to be clear that despite our cautious inventory position in discretionary categories. We're still focused on delivering nunez throughout the portfolio and.

And placing select bats in businesses, where we believe market share opportunities are strongest.

That's because despite continued volatility.

Hi.

That target guests are attracted to all things trendy and new.

We believe our commitment and unit as a key reason why we continue to generate traffic growth and why we drove broad unit share gains last year.

Our focus on balance can be found in each category as well, where we continue to offer both industry, leading national brands and high quality affordable own brands that are unmatched by our competitors.

Our own brands have long been a source of pride and differentiation for target.

For a great style and quality are incredible value.

So it's no surprise that our own brands have continued to outpace total enterprise growth.

Why we have plans to launch new or extend assortments in more than 10, one brands this year.

Recently, a study lifting the 10 fastest growing private label brands and 2022 included three found exclusively at target.

Target was the only retailer to have more than one brand on the list and two of them were the only non food brands to make the cut.

Many retailers, we're not focused on newness in 2022, but the opposite was true at target.

Where we continued to excite our guests with innovative and Chinese products.

For example, we launched future collective a first of its kind of parallel and brands featuring collections in partnership with a rotating roster of diverse influences.

This innovative approach blending the strength of targets own brands with the excitement of our limited time partnerships and collaborations has been a huge success.

Particularly with blackouts furthering our commitment to ensure all guests see themselves reflected in our sort notes.

Most recently, we launched a new line with actor an Influencer Tabitha Brown.

Cabotage energy and passion, absolutely shines in this new line and our guests are loving it.

Tabitha serves as the latest example of the endless possibilities that comes from bringing together the credible talents of diverse designers and the power of targets multi category portfolio.

Take a look and see what I mean.

So listening target invited me to do that online.

On line that night.

They let me design it and everything.

My collection with target with inspired by everything that makes our culture is so vibrant.

This collaboration is a dream come true.

Inspiration behind the collection of bringing that joy in the color and the warmth from my Colombian heritage.

This is something that I've worked for my whole career insurances would actually come to life.

<unk> right.

Blessing.

From the creative direction, Protasis, where where the marketing campaign. This entire team has truly leave them to help make my dream a reality.

Yeah, I know all about jacking, the way I want a single.

And right now.

And I feel California.

In so many ways.

[noise] I really appreciated the target interest in proper representation on their shelves.

Really inspired me and my team to.

Really continued to tell our story and hopefully inspire others to do the same.

[noise] the passion of these designers is so inspiring the emotion and pride is palpable and we love the way to Tar Jay Magic of these partnerships cut across categories include.

Including last quarter's lots of marks and Spencer and habitats recent extension into food.

And while these collaborations offer joy for our guests recent history has reinforced that focusing on the basics of retail is just as important as the latest innovation or new offering.

In fact nailing the fundamentals is the bedrock of a successful retailer from the overall shopping experience to ease and convenience relevance everyday value and more.

Of these fundamentals, we know that a strong and reliable shopping experience is the surest way to build trust and affinity.

So we aim to provide a consistent joyous an easy experience both in stores and online making target shopping destination not just a means to an end.

To do this we have invested heavily in new stores Ah remodeled program and our same day fulfillment services as John will highlight shortly.

We led the way and comprehensive pay and benefits attracting and retaining the best team in retail, allowing us to provide a level of service unmatched by our competitors.

We've invested in one of a kind brand partnership experiences like those with Levis, Apple Disney and also beauty.

And while some of these partnerships are newer we featured Starbucks in our stores for decades proves that when we work with iconic brands, we build lasting relationships.

With a starbucks for nearly all of our stores they have become part of the shopping ritual for many of our guests.

In fact, we served up more than 170 million Starbucks beverages last year alone.

A strong digital shopping experiences every bit as important as the one we create in our stores.

So we've been investing to ensure that the experience a seamless across every channel.

Godless of how our guest shot.

Whether searching for an item or browsing for inspiration we continue to elevate their experience.

Personalized and relevant content, using our incredible data and guessing sites.

This will include more customize homepages improved search functionality and even more personalized offers from target circle.

It will also include more relevant content from our digital advertising business round out.

Our digital a success won't be driven by a single service or offering but through a comprehensive set of experiences designed to be greater than the sum of the parts.

Targets Circle is one of the nation's leading loyalty programs with over 100 million members and growing.

Through continuous learning and application of guests insights targets circle served up three times more personalized offers in 2022.

And target Circle members spent three times more on average this past holiday season.

We also continue to invest in the tools team and capabilities of round out.

To us around Dallas more than a digital advertising platform or another revenue source on the piano.

The goal is for our guests have a tailored relevant experience, while helping our vendors reached the guests who are most likely to be interested in their products.

Said simply round Dell makes us better merchants.

More consistently serving our guests with a product they want.

This is why our approach to digital advertising looks different than others.

We put our guests at the center of the strategy just as we do in every other aspect of our business.

It's no wonder we continued to see such explosive digital growth.

Why round Dallas grew by more than 60% over the past few years.

And why we will continue to leverage the risks rich guest.

Sites.

And regardless of whether our gas or something up online or in store.

We're looking for comprehensive value now more than ever.

That means offering great everyday prices and promotions and offering quality and inspiration.

After all target invented affordable joy decades ago, and it's still a key differentiator in a crowded retail market.

Archie gas see value in countless ways from our competitively priced and high quality owned brand offerings.

To multiple red card benefits, including 5% off on every trip and free shipping for all online orders.

Paul with no annual fee.

We offer compelling value at every turn and we are continuously listening to our guests to understand what value means to them.

And beyond these retail basics, we continue to hear from our guests that they prefer shopping with companies to prioritize people and planet.

That's why we're so focused on our target forward strategy.

This isn't a stand alone strategy, but rather target forward is fully integrated throughout our business fueling our growth potential while bettering the world.

As part of this strategy will continue to elevate black voices and brands and are on track to spend $2 billion on black owned businesses by 2025.

We will also continue to focus on designing products for a circular future like in our own brand universal thread.

Where we are using materials, such as recycled cotton and polyester.

These are just a few of the countless examples of how we push ourselves and industry partners to grow sustainably.

Our purpose to help all families discovered the joy of everyday life.

Requires a balance of quality value and innovation that sets us apart from competitors.

We are relentless in ensuring every decision supports this delicate balance.

It's easy to say, but takes incredible diligence to execute and while you've heard me say it before.

It bears repeating now.

We truly have the best team in retail.

So grateful for the many efforts of our team to serve our guests and each other.

In and day out.

With that I'll turn things over to John .

[noise], Thanks, Christina and good morning, everyone.

So Brian talked about the last few years being unpredictable to put a finer point on that if.

If you had told me in late 2020 during the height of the pandemic that 2022 would be the most challenging operating environment in my career.

I would have assumed you were joking.

Yet shifting consumer preferences supply chain volatility in rising inflation created a set of conditions that call for flexibility responsiveness and resilience.

Our environment remains volatile than we expect 2023 will have its own unique set of challenges.

But if I've learned anything over the past three years, it's never underestimate the power of a purpose purpose driven team and the culture they create.

2022 offered more examples of target teamwork than I can count.

But to stick with me for quite a while.

Five months ago in Hurricane Ian devastated communities across Florida, our team sprang into action.

It didn't wait for me or Brian or anyone else in the leadership team to tell them what to do.

Instead, they gathered input from those on the ground and told us what they needed.

Pop up resource centers that provided laundry food gas restroom showers, and Wifi enabled laptops to 700 team members and their families.

Extra inventory to stock local stores with essentials guests would need to weather the storm.

And financial support $5 million to fund local relief efforts and up to $3 million in matching donations to our team member, giving funds, which provides assistance to team members affected by natural disasters.

It was about the same time that our inventory action plan was in full swing.

You'll remember we announced bold measures last summer to quickly take action to rightsize, our inventory in response to shifting consumer demands.

So the big ask of our team one that required them to move quickly and aggressively to reduce existing inventory and cut back on receipts for the back half of 2022.

And the team responded as they always do with heart muscle.

They work through eight distribution centres worth of inventory in a matter of months.

Putting us in a strong position heading into other critical holiday season.

That's our culture inaction bottom-up ingenuity centered on caring for our team and our guests.

And it's that culture that fuels, our strategy and growth.

For years now we've shared our vision of using our stores as fulfillment hubs to get closer to our guests.

It was an idea that was novel when we first introduced it but it's been widely adopted with others expand their view of what stores can do.

I'm, an engineered to my core so it gives me great satisfaction to D. C. The way target built our stores. This hub strategy from the ground up and how our operating model gets stronger with each passing year.

We don't have a rigid roadmap.

Stead, we use a highly repeatable process to test concepts refined them test them again until we can replicate them with confidence efficiency and scale.

Then and only then do we ask ourselves what's next and how can we make this even better and the whole process begins again.

Let's take drive up.

You can trace the origins of drive up to the launch of our store pickup service a decade ago.

It took a few years to get store pick up where we wanted and.

And when we did we were able to take it one step further with drive up.

We launched drive up as a test in our Minneapolis market in 2017.

The following year the services available in more than 1000 stores around the country and.

And it reached all 50 states in 2019.

With the foundation in place and operating scale, we started to explore new capabilities and.

2020, we made fresh and frozen groceries available in 2021, we added adult beverage and expanded our app to give guests some more customized experience.

Last year, we began testing Starbucks that drive up.

And today, we're announcing the next phase of our drive up services with drive up returns, which started as a pilot last year and will be available across the chain by the end of the summer.

Not only is this a huge one for our guests who can now do even more drive up but it brings more efficiency to our returns process with more resale opportunities and fewer expenses for male and returns.

We're combining the strength of our digital self service returns process with our industry, leading drive up experience to meet our guests where they are.

This is what it means to be a truly omnichannel retailer, giving our guest the flexibility ease and convenience to shop, the way that works best for them and scaling capabilities across every facet of our business.

Online and stored drive up it doesn't matter, how they choose to shop with us.

We are here to make their target run better than ever.

Looking back the evolution of drive up May seem like it was a natural progression easy to predict and implement.

When you're bringing to market new ideas in an environment that is anything but stable you have to be ready to adjust course and explore alternatives.

Our team has gotten really good at moving in step with the needs of our guests.

That flexibility and a commitment to the fundamentals that make or break a retailer things like hiring the right people offering the right products and delivering the right experiences to our guests.

Underpin our stores, a sub strategy and contribute to our larger story of growth.

Same day services like drive up are a great example.

They grew nearly 7% last year as more shoppers appreciate the convenience and speed with which they can check off everything on their list.

And because we own our same day capabilities pick up and drive up are much more economical and flexible than other forms of digital fulfillment.

In fact, our average fulfillment cost per unit has come down 40% over the past four years as our same day services have grown to account for over half of our digital sales.

Again these results don't happen overnight and they aren't achieved in a vacuum.

There was a product of steady investment and listening to our guests.

Take our stores, which sit at the heart of our stores as hub strategy and play a dual role of shopping destination and fulfillment hub.

Our stores are not only beautiful with open floor design plenty of natural light and design elements that reflect the communities they serve their.

They are built to keep inventory moving through our system and support targets trajectory of growth.

Late last year, we introduced a new store prototype in Katy Texas.

From the front entrance to the back room. This 150000 square foot store is a stunner.

Beautiful design elements reflect the local environment and community feature.

Features like natural refrigerants electric vehicle charging stations in rooftop solar.

Power or target for sustainability ambitions and get us closer to our goal of net zero emissions by 2040.

In a back room five times bigger than our average store allows us to ramp up same day fulfillment, while preserving a seamless experience for our guests and our team.

We plan to open about 20 stores this year in a mixer sizes from the shores of the outer banks in North Carolina to the heart of Inglewood, California.

We're also planning to invest in about 175 stores throughout the year ranging from full Remodels to the addition of shopping shop experiences like ultra beauty and retrofitted fulfillment spaces to support our same day services.

Our ongoing investment in our suite of stores is just one way we're building for the future.

What might be less evident to our guest is how we're building facilities behind the scenes to make their experience even better.

We built upstream capacity by opening flow centers in Chicago, and New Jersey with several more slated to open over the next few years.

And a new food distribution center that opened in Maryland. This past October expand support for our growing food and beverage business.

This additional capacity gives us more flexibility to manage inventory and keep our store stocked with the items guests want when they want them.

We're also making investments downstream.

Earlier this month, we announced the expansion of our Sortation Center network to more than 15 facilities by the end of 2026.

These facilities have transformed how we move inventory with speed and present precision to guests doorsteps.

We started with a prototype less than two years ago to see how we might bring more efficiency to how we sort batch and wrote packages.

Today, we have nine sortation centers open across the country, allowing us to deliver packages to guests within two days.

Up to 40% are delivered one day when using our last mile delivery capabilities was shipped.

And because shipped is fully integrated into our last mile operations, we benefit from significantly lower delivery costs.

To give you a closer look at how these flirtations centers become corridor business. We asked leaders from target and ship to give you a brief tour and talk about how our test and learn approach applies the last mile delivery.

Let's take a look.

The journey part of that last mile delivery has been incredible fantastic and invigorating. The growth has been simply amazing January 1st 2022, we have foreign sortation passport to today, we have nine flotation servers and it has been a collaborative effort in every step of the way kids.

And the people that have brought this strategy to life sortation centers are paramount to the supply chain, we support B we decreased costs.

Increased guest satisfaction.

Can't do it alone so what made shift and targets such a great partnership is that the potential to create value.

Begin with ship targets rotation incentives can be even more productive.

Cost effectiveness target last mile delivery is an extension of the stores pub strategy. All we're doing within the flirtation is completely <unk> what target can offer as gaps we've introduced automation, we've introduced conveyors different processes full time and part time availability for our team members. We've continued to iterate on everything to ensure that we can move the strategy board.

Last year, we shipped over 200 million packages as we continue to scale and grow we're creating a system now that will optimize the physical movement of packages throughout our facilities. There scanned at each point of recognition every time, there's a physical move there is also a virtual move that we can track real time for ships were very hard to keep the driver.

And at the centre of everything that we do we've launched using bars capacity vehicles at this location. So this gives us an opportunity to increase the number of packages that can be delivered on a route it provides greater earning opportunity for the drivers also further reduced cost per targets. It is without a doubt we're living in society, where people want their <unk>.

Packages and they want it now last mile is up for grabs next day delivery, though for grabbed the north our vision of three last mile has to be the lowest cost next day delivery in the industry really really exciting to see what's coming next and how we're going to stay ahead targeting ships sail those strong future together, we are briefly positioned to treat a best in class capable.

<unk> that exceeds just expectations, we continue to show up to show out every single day for our stakeholders are guests and also our investors and that is what we value your retarded.

How does you heard from Dory sad and come out room, we've learned a lot over the past few years using every opportunity to improve speed cost and quality.

And in regards our saltation centers are just hitting their stride.

We deliver more than 25 million packages through sortation centers last year, and we expect to double that amount in 2023 with the help of our local and national carriers.

Together the investments, we're making create a more nimble sourcing inventory management and fulfillment capability at target.

And they continue to help us navigate tough times prepare for the unpredictable and fuel steady growth all thanks to our incredible team.

We've made huge strides in recent years to connect with our guests through our stores.

The momentum continues to build and I look forward to sharing progress with you and our guests in the quarters to come <unk>.

Michael I'll turn it over to you.

[noise]. Thanks, John is Brian mentioned, there was exactly a year ago that we were on this stage talking about our 2021 financial results a year in which our business generated.

Double digit growth in comparable sales and even faster growth in EPS.

And is Christina discussed we knew on that day that the environment was likely to change.

But we didn't yet know how dramatic those changes would be.

The rapid pace of this transition led to multiple profit pressures on our business, including markdowns and other costs related to last year's inventory actions significantly higher shipping and domestic transportation costs and higher inventory shrink.

So as we focus on our business plans, both for 2023 and the longer term, it's important to consider how the environment will continue to evolve.

On the one hand, many things about life in consumer behavior already look a lot like they did before the pandemic students are back in school sports arenas are full people are eating out again and consumers are embracing in store shopping.

At the other extreme certain aspects of life appear to have changed forever. Many office jobs are now hybrid with remote work in virtual meetings, playing a much more significant role.

That means many of us are spending a lot more time working at home, which has implications for long term buying patterns in multiple categories, most notably our food business.

Fulfillment mix has also seen a permanent to shift our same day service have seen explosive growth. They now account for more than half of our digital sales in more than 10% of our total sales.

And that trend shows no signs of reversing.

Even if people have remix their trips in favor of in store shopping guest engagement with these digital services has continued to grow on top of the huge expansion that's occurred over the last few years.

Most importantly, our guests overall engagement with target has increased significantly over the last few years and it continues to grow.

Think about it this way.

2021, guesstimate about 2 billion trips to target, which was about 300 million higher than in 2019.

And last year, even as consumer spending moved away from products and the services traffic grew again.

The deeper relationship we've established with our guests and our proven ability to deepen. It further are some of the many reasons, we're so well positioned to deliver profitable growth in the years ahead.

Beyond the factors that have changed permanently there are several others that are clearly is still in transition. These.

These include transportation and the global supply chain, where we've already seen remarkable improvement, but we're we're still facing elevated costs and variability compared to the pre pandemic period.

Another factor is inventory shrink, which has increased broadly across U S retail over the past two years.

And finally, the most significant and important driver of uncertainty today is the fact that the broad macro economy is still in transition leading to an inflationary period more pronounced than we've seen in decades.

As Christina mentioned rapidly rising prices have put pressure on discretionary spending as consumers make room for higher prices on necessities.

In addition, higher interest rates have further pressured budgets by increasing the cost of mortgages and car loans.

So where does that leave us today <unk>.

Despite all of the recent turmoil and the pressures facing our business we remain in a very strong position to drive healthy growth in the coming years.

Our guests are more engaged in ever in that engagement continued to grow even during a tumultuous year.

And even after a year in which we experienced unique in unexpected headwinds to both our profitability and cash flow our business. This out it remains strong and where laser focused on the path forward.

In 2023 will focus first on agility and strong execution.

Most notably we'll take a cautious stance on our inventory commitments and markdown sensitive categories with the flexibility to sell indoor based inventory and expand receipts overtime.

At the same time will continue investing in our long term strategic initiatives that propel our market share and profit growth, including our remodel program or new store pipelines and projects to add replenishment capacity and increased efficiency and our supply chain.

We will also focus on strengthening our balance sheet.

2022, our business with a net user of cash for the first time in many years.

This was driven by a host of unique factors, including unexpectedly low profitability higher than expected capex, driven by inflation and project cost and a rapid slowdown in inventory turns due to excess inventory and longer lead times and global shipping.

This year, we expect each of those factors to become more favorable more specifically, we're expecting an increase in profit dollars and a somewhat slower pace of capex.

And given our cautious inventory positioning and rapidly improving lead times and global shipping we're planning for faster inventory turns into 2023, drawing higher payables leverage in recovery and working capital as we move through the year.

In the near term until those expectations play out in our cash generation increases, we're not planning to repurchase any shares consistent with our goal to maintain our middle a credit ratings.

Over time, as our client cash flow recovers and our debt metrics improve we expect to share repurchases will play a meaningful role within our broader long-term capital deployment priorities, but as always those repurchases will only occur after we've fully invested in our business and supported our team. After we've supported our dividend goals and within the limit.

<unk> of our middle a ratings.

Now I want to share some thoughts on our 2023 outlook and I'll start with our expectations for the first quarter.

Given the current conditions were facing we expect our business to generate first quarter comparable sales and a wide range from a low single digit declined to a low single digit increase.

This reflects our expectation for continued strength in our frequency businesses offset by softness and discretionary categories.

On the operating income line, we're expecting our first quarter right in the 4% to 5% range higher than what we saw in the fourth quarter, but down somewhat from the 5.3% are business generated in last year's first quarter.

While there are a number of factors driving this expectation I'd note that our first quarter SG&A expense rate is expected to be about one percentage point higher than a year ago, reflecting continued investments in our team and guest experience without unexpected leveraged benefit from higher sales.

Altogether on the bottom line, we expect our business to generate first quarter gap and adjusted EPS in a range from one dollar and 50 cents.

Two one dollar and 90 cents.

Now I'll turn to our full year expectations and I'll first note that the range of potential outcomes skipped lighter as the year goes on given the high degree of uncertainty regarding the strength of the economy and the consumer.

Given this uncertainty we firmly believe caution is the appropriate posture, especially when planning sales and inventory and discretionary categories.

On the frequency side of the business are full year plans envision continued share gains and strong sales growth, but we're mindful that inflation in these categories may begin to moderate pressuring dollar comps across the industry.

In light of those considerations along with our outlook for discretionary categories. We're planning for the same wide range on the top line that we're planning for the first quarter from a low single digit decline to a low single digit increase and are comparable sales.

In terms of profitability the range of potential outcomes similarly wide.

As I mentioned earlier were positioned to benefit from a number of significant tailwinds on the gross margin line, most notably as we cycled over last year's inventory actions.

In addition, we're expecting hundreds of millions of dollars of additional opportunity from lapping last year's unusually high freight and transportation costs.

At the same time, we're also preparing from so nodal for some notable headwinds on the gross margin mind. These.

These include inventory shrink, which may continue to rise before we see rates begin to moderate overtime.

We're also expecting some pressure from soft sales and our highest margin discretionary categories.

And finally, we see the potential for increased promotional intensity across the industry. This year given that we're competing in a constrained environment for consumer spending.

On the SG&A line. This year, we expect continued strong discipline in maddie managing costs across the enterprise.

But we're also not backing away from investments in our team and guest experience and will face potential right deleverage given our outlook for comparable sales.

In light of these considerations, we're planning for a wide range of potential outcomes for our full year operating income.

But even at the low end of those expectations, we expect to grow our operating income by more than $1 billion. This year.

Altogether, our expectations translate to a full year gap and adjusted EPS range of $7.75 to $8.75, which represents growth of about $1 75 per share at the low end of the range.

On the Capex line this year, we're expecting to invest between four and $5 billion.

While this range is somewhat lower than last year's kept that capex, it's quite strong relative to our history.

This year's plan reflects the optimal level to invest in the current environment and our expectation that will continue to earn higher returns on our long term growth investments, including a remodel program and new store pipeline and our continued work to build capacities and capabilities and our supply chain.

As we think about the longer term trajectory of our business. We expect that is external conditions normalize in the next several years are operating income margin rate should reach and begin to move beyond our pre pandemic rate of 6%.

This return to pre pandemic levels could happen as early as 2024, depending on the speed of recovery for the economy and consumer demand.

I want to pass and emphasize that this year's guidance does not reflect how we expect our business to perform over the longer term.

Once we see a normalization of consumer demand and a resumption of growth in discretionary categories, you'll see that reflected in a stronger topline performance in a meaningful increase in our operating margin right beyond what we're planning for this year.

I also want to reiterate something we've said many times.

While we often talk about rates because it is helpful for analytical purposes. Our goal is to find the optimal rate that maximizes profit dollar growth over time.

In other words will continue to focus simultaneously on top line growth and at the rate we earn on it without focusing on either metric in isolation.

So now before I owned by Bryan and Mike O'neill to join me onstage I want to pass and fake our team for their continued optimism and resilience through a turbulent year <unk>.

Last year presented a host of unexpected and unprecedented challenges that all seemed to arrive at once.

Throw it all our team maintained a long term focus serving our guests and taken care of each other.

As a result, we saw continued expansion in guest traffic and engagement throughout the year, and historically strong hiring and retention metrics across our team.

Those are some of the most important factors in determining our long term success and why I feel so confident about targets potential in the years ahead.

Now I would like to invite Brian and Mike O'neill to join the on stage. So we can have a brief conversation about the enterprise efficiency work with aspect to lead.

[noise] [noise], while Michael Thank you and Mike.

Thanks for joining us today.

Everyone would like to get a get into the work, but I think it would be really helpful. Just pause for a second and talk about your background and why we selected you to leave this very important initiative.

Thanks, Brian really happy to be here and excited about the opportunity to leave this work for target.

Target now for 15 plus years start in finance working in various roles with our merchandising operation partners to.

To help deliver on our strategic priorities and their financial.

Growth.

Through that experience got to see the business model to the length of the piano.

A couple of years ago I went over then third human resources, and let our pay and benefits of strategic workforce planning teams and that was a great opportunity to see the business the length of our team members.

Had a chance to lead that team during the early days of the pandemic and saw quickly.

The work our team does that take you know the importance of taking care of them to take care of our guests.

From there I've been back now in finance for a Coupla years, I was leaving the financial planning analysis teams, we work with every business function.

To deliver on both our finance and strategic priorities and coming back to finance and seeing the growth we've seen over the last couple of years. It was pretty apparent to me the opportunity to step back and think about how do we run this business model out at the larger scale and so I think with those experiences plus.

Plus the relationships I've built over these 15 years I think position me well actually the fourth fourth.

Mike When you took on this role we spent a lotta time talking about what this works about and what it isn't can you share a bit about the reasons, we've initiated the work and what we're looking to accomplish yeah. I think I'll start maybe with what is it this isn't about sacrificing longterm growth for short term profits.

A typical tactic here is a look to shrink your cost base in the face of declining revenues, while that's not target right. We are growing continue to grow in fact this work has come out from the growth we've seen over the last three years Regrown $30 billion over $30 billion. Since 2019, that's more than a 14 years prior and that chromate creates a.

Indus opportunity to step back and re imagine how do we operate this business at the larger scale, but more importantly, highly positioned target for future growth.

So as we're looking for efficiencies will look for ways to simplify the work to streamline processes.

To reduce redundancy all with the mind of how do we make it easier for our team members deliver a great just experience in doing so our initial scoping settled will deliver $2 billion to $3 billion of cost savings over the next three years.

Mike I want a carrot clarify one thing briefly after Brian and I mentioned this effort and our last earnings call. We got some questions about whether that $2 billion to $3 billion number includes the natural recovery from the headwinds we experienced in 2022 can you help clarify that sure I've got a couple of those questions as well and I would say I reiterate that this is not about the work over over <unk>.

Happened to us over the last 12 months, it's about the growth that we've seen over the last three years and so no. What's not included anything that will come the natural recovery from the headwinds of last year. This work is a delight designed deliver fuel beyond that both to deliver on our both our top line and our bottom line goals.

Michael We actually this project we spent a lot of time thinking about the guard rails now obviously, there's big opportunities we want to capture but there's also things we never want to compromise you Wanna talk about the opportunities versus the guard, who say, we'll never heading this direction. Yeah. I think that's a really important question in there.

The things, we're not willing to sacrifice start with a team member in the guest experience.

We're not going to take away anything.

Given the investments we've made our team over the last couple of years and.

Spending that time in human resources during those early days of the pandemic and an appreciation for all our team did.

To run our business and the serve our guests and so I look at our team members of essence, we make as an investment in the best team in retail.

Similarly on the guest side are shopping experience is a key differentiator for target and we're not looking anything to take away from that in fact, our guiding principle around this work is how do we make it easier for our team members are run our business and in doing so would deliver a great guest experience and so we do that we think will see benefits both the team and our guests.

Mike with since we first announced US work I've had a bunch of investors asked me, where they should expect to see the results of this work show up in the P&L can you share your initial thoughts.

Sure I think if you're gonna sit across the full P&L. So I don't want you going to be isolated to one single component what excites me about this work, though as we think about running the different scale I think theres topline opportunity and so it is going to start with sales now we're going to we're not going to.

Do anything against we're gonna continue to invest in our team, but any efficiency work will have <unk> impact on SG&A line and product costs continue to be our biggest Ah line on on the piano. So we'll see if they're as well, but also say to extend beyond beyond.

The piano as we look to be more efficient in our capex.

So I'm like I know you are still in the early stages of scoping. The work, but there's also things that we've been working on for quite some time now that we can build on when a highlight some of those sherwood.

Sure we've talked to based on Ah. This this morning that work or on digital fulfillment I think is a great example, we've been that work in several years under way when you think about our stores of hub model has significantly decreased our fulfillment cost John mentioned, 40% over three years. We've also been able to increase speed of delivery and improve the guests experience across all.

All those different notes, whether that's shipped to home drive up order pick up or ship delivery and it's extremely capital efficient.

If you look for now we think there's hundreds of million dollars to continue and lock with our investment sortation centers. That's a business. That's a capability that's been our roadmap for a few years now but requires scale and density at the market level to unlock and given the growth over the last three years, we now have that and so we think there's opportunity and doesn't have metro.

Markets, we already have nine facilities out there and plan to have a total of 15 by 2026, and so will open those up but also will make those centers more efficient as well as we think about streamlining processes in them and looking to introduce automation and technology.

Thanks, Mike can you also provide an example of a newer effort they're excited about yeah. I think the Best example is the work that's underway now and apparel. This one is near and Dear to my Heart. My first row, a target was the finance partner for our women's apparel business. I also think it serves at a really Great example of what what is possible with this work.

Apparel, just like the rest of our business has seen explosive growth we've run over $3 billion, an hour to over 17 billion dollar business and apparel business.

It also has its unique complexities right from the fact that we partner with vendors to source raw materials to the fact that we have uniques fixtures in store for presentation. So all the geographical.

And weather and demographic considerations that go into assortment planning and an allocation and so that growth combined with that complexity makes a tremendous opportunity of that step back and say how do we how do we run this business at a larger scale and how do we position for future growth and so we're focused right now and drive of simplicity.

Speed and consistency across the entire a pair of value chain and in doing so we expect to see benefits from assortment planning to supply chain, all the way down to guesses silver.

And the benefits will be across the piano, we'll see in a lower markdowns receipt increase productivity labor productivity and we'll sit in the top line sales.

And so I Love that example, because it gives you a chance to step back and say look we've seen this growth over the last three years how.

How do we look and the end across the value chain the position of differently, how do we simplify for the work.

For our guests and in doing so we believe will see benefits across the piano.

With the most important one being topline sales.

So like I love the way you frame this up now.

This is all about fueling future growth driving simplicity, reducing complexity.

Never compromising the guest experience in the role our teams play are there any other components as you think about this that you want to touch upon.

Well, thanks for letting me come up a shared just a couple of examples I would say I would reiterate as this starts with growth.

It starts about how do we make it simple and easier for our team members deliver a great experience and that work is going to be a multiyear journey.

Carl and problem solving across the value chain, but when we do that we focus on making a better team member experience will see a better impact our team our guests and our P&L.

Well like I Wanna. Thank you for joining us on stage here today, we're really excited about the opportunities that are in front of US you have heard a few examples today and will continue to provide updates along the way. So like thank you for joining us.

Michael heavy back here in a second.

So as we get ready to hear from you and take your questions.

I thought I briefly recap some of the themes you've heard today.

First.

Our commitment to our guests is as strong as ever.

Second our strategy are multi category portfolio.

Our sources of model will provide the flexibility we need to keep growing because we're gonna state closely connected to our guests.

Finally.

There've been some fundamental changes at target over the last three years.

We're more than $30 billion bigger.

We set the Omnichannel standard which stores as hubs.

We will continue to build and innovate in that realm.

We will set the pace and supporting and developing the very best team in retail.

Perhaps the most important takeaway is something that hasn't changed.

And that's our ability to shift our business and our categories in step with our guests.

If they need to prioritise food in the essentials will lead into those categories.

But as you heard from Christina.

<unk> discretionary spending was down.

Discretionary categories generated $55 billion in sales.

Our guest today are responding to newness.

They're celebrating seasons as we just solid Valentine's day.

They're eager to be out in our stores and enjoying that guest experience and we're seeing it in our traffic growth.

And we know they really value affordable joy.

So we remain fully committed to our multi category portfolio.

To essentials and tore discretionary categories.

And as our guest we back into discretionary categories overtime will.

We'll be ready to flex into those trends.

Building substantially on the near term plans we share today.

We know that will happen.

But in the meantime, we're moving forward thoughtfully where.

We're doubling down on retail clinic fundamentals.

We're finding fuel.

Further growth through efficiency.

And while we're emphasizing prudence and our near term performance.

I am incredibly positive about the long term potential.

And our ability to translate both into positive outcomes for all stakeholders.

Including shareholder returns over time.

So I want to close by thanking our team is a tune in from around the globe.

And thank you all of you for staying with us on this journey.

And with that.

I'll ask Christina John and Michael to come back and we will open it up for your questions.

[noise] [noise].

Alright, I see hands already going up [laughter].

Paddle runners around the room.

As I call in you I might ask you to support introduce yourself and.

Ask you a question so why don't we start right here Michael. Thank you, it's Michael answered from UBS, a few questions number one last year at this meeting you talked about an 8% operating margin. So what has changed this year to laugh last year. This year structurally with the business to make it.

Lower operating margin business to what is it gonna take to get to the 6% operating margin by next year in third try and sorry.

Did you look at the experience over the last few quarters and say Hey, we we Miss what we expected to do so let's take a more conservative cautious view on how we're planning this year, leaving potential room for upside. Thank you Michael when I asked you to start and then I'll come back and answer look back half of that question yes.

So we've got a journey in front of us on the profit front in 2023 plays an important role in stepping back to where we expect to get overtime. When we guided to a wide range today, even at the low end, we expect over $1 billion in that income growth year over year.

We want to execute that plan, that's first and foremost under the right set of conditions. We think we can get to a 6% in 2024 and then we'll take it from there, but we've got the next couple of years squarely in focus because we got work to do to recover our performance from from last year.

As we think about what's optimal overtime I'll go back to what I said in remarks, we want the optimal rate that maximizes profit dollar growth over time, and I think there's still a few variables that will click into place between now and when we had that conversation.

Quarters in months to come but we wanted to be focused on dollars and dollar growth philosophically that sort of thing that we have the group with today.

And Michael back to lessons learned from last year, we've used the term uncertainty quite a bit today.

We recognise last year that the consumer trends move very quickly and one of the things I'm. Most proud of is the way this leadership team embrace the challenge.

Took it head on may the adjustments in our inventory and protected against experience and that's why we continue to see traffic growth and unit share gains across our portfolio and why we're so well positioned today for 2000 twenty-three with overall inventory down, 3%, but importantly, discretionary inventory down 30%. So.

Lessons learned for us, but I'm incredibly proud of the way this team dealt with that issue upfront protected our team protected our guest and position is for the long term.

When we were on the side.

Thanks, Paul literally Citigroup a couple of questions on drive up returns curious what percent of your returns are done at store.

Also what is your typical attach right when you get somebody in the store that would return an item you also convert them to sales is there a risk that you might give up that opportunity.

And then second just high level free cash flow once you get through all the working capital changes in of 23, what is free cashflow look like in your view for for this upcoming year. Thanks, Alright. So several questions to answer their phone they might ask you to start that would explain why we're so excited about the changes were making with returns through drive up and then Michael we can talk about the second.

Part of the question.

The the majority of returns come back the store, but a meaningful portion are still shipped back to us So that's not insignificant.

As it is or at least here. The second part of your question around attach raid and this was the question. When we started order pickup and when we started drive up and that's a respectful laid out an important consideration.

What is important is allow the guests to interact with us how they choose and at every step when they see us when we see them jumping to drive up when we see them you shipped when we see them you just pick up their engagement with target increases not just digitally but also in store and that becomes a better guest for targets. The best guess separate target are the ones that interact with.

All of our various ways of interacting with them and so this provides them another opportunity to create is you've got your kid in the back I would need some milk and I got a return this whatever at target I put that in my trunk I show up they bring the milk they take that away and I'm off on my day again, and then on Saturday will come into the stock up trip and that'll be great. So.

Our approach is just to continue to lean into where they want us to go top two feedback things on drive up why can't I get my coffee why can't I get a Starbucks and why can't I return something and so we're still working on the Starbucks, but we're ready for returns and again, if we listened to the guest they'll engage with us. So I think one of the things we've learned over the last three years.

And we watched it carefully as we expanded drive up and pick up and started delivering rates are homeless chips, we sent or is this going to impact the guest engagement in store and it's quite the opposite as guests use all of our capabilities. They actually spent more dollars and just reward us with more trips. So it's been an important learning that will build on I think we'll just deepens.

Engagement as we give them another easy solution for returns just.

That risk of piling on.

We care about economics at the transaction level, we care about the economics of the category level, we care about the economics of the fulfillment path, but the thing that we fought differently about overtime is cutting the economics by guest when we take friction out of the process and make it easier for guests to his fault more and more in love with target that's the most powerful economic relationships.

To be focused on I think we've learned that time and time again drive ups. Perfect example, on the free cash flow question, where in guiding the free cash flow for <unk>, specifically, but we expect material improvements from a free cash flow basis, and I touched on some of the drivers. The first is better profitability. The second as we expect working capital recovery I mean, our turns slowed our supply chain trying at times where longer this year.

And that came with working capital investments to make sure we're getting product here early enough with a volatile supply chain.

And so we were running at sub optimal working capital levels through the bulk of 2022 to move through 2023, I would expect that to improve.

I think I'd say hand brightness first real in fact quite a few will start right in the middle.

Great. Thanks, Simeon government Morgan Stanley .

You mentioned that fulfillment cause I think on digital are down 40% since 2019.

Is there any merit to the fact that you're $110 billion sales organization and that you've suddenly become less efficient such that this path back to 6% requires investments and so that the ultimate question is how much of getting back is the pure recapture of lapping markdowns freight costs shrink versus.

How much you have to invest to get back to that level. Thank you.

Yeah, I'm happy to start.

It's a it's a peaceable we've seen some structural changes in the business, we talked about shrink as being one and that's not one that we expect.

To turn in a different direction quickly, but the the efficiency we've been able to drive given how efficient stores are as a film hub is a huge advantage to us when it comes to digital fulfillment. It's fast for the guest the economics of it work for us and we build engagement like we talked about before <unk>.

Separately, we continue to be focused as Mike shared on the efficiency work and that's important work, we want fuel from efficiency to keep investing in growth of the business and that will also play a role in getting us to the right profit outcome that we should have as a 100 plus billion dollars retailer.

So I <unk> I'd add on as it relates to capacity, particularly because you brought up fulfillment.

We've seen our sales productivity in the store increased by 37% over the last few years, Brian mentioned that we.

We still have so an average stores gone call it from $40 million to $55 million over the last three years.

We still have stores that do over $100 million and do well over $100 million. The top quartile does significantly more than the median store. So we have tons of capacity sitting out there unused in our stores and the ability to turn faster.

Again back that we need to improve how we move inventory and how quickly we move inventory, which were on the journey on but our stores have significant capacity to continue to drive both in store sales and our digital business.

Why don't we go in the back.

Right.

Brian .

Talk a little bit about the tray down impacts you are saying.

Are you a net gainer.

Or donor on the tray down and to the extent you are losing some share their <unk>.

You have used as your customer database allow you to adopt wind back strategies targeted those people may have triggered it out.

[noise] procedure, you Wanna talk about will receive as far as guest shopping behavior, Yeah happy too.

First of all over the last couple of years, we've gained a tremendous amount of new guests into the target ecosystem and so our focus right now has been to deepen our engagement with the guests of course, we always want more guests that that opportunity in front of us is much more into convert them into using the sweet of capabilities because they become much more loyal.

I understand the target value proposition more deeply Wednesday.

Experience, the ease and convenience of drive up or once they recognized one incredible food and beverage offering we have and so that's our primary focus right now we talk about trade down that those are words that are used in many different facets, sometimes it's used internally and tuck them that private label for US we talk about one.

Brands, rather than private label because these are brands, we have invested in for years, we build them design them create the packaging the marketing materials and they are hugely important to our strategy and so in that sense, we never think about it as trade down we think about it as trade in it creates more options for people to use.

Use and engage with our portfolio because it tends to be the same great quality at incredible price points and so the growth of our own brand strategy would reflect significant potential in the future based on the success. We've had in the past so right now our focus is to make sure. Our guest are aware of what we have and create a better less.

Friction less experience make sure that we deepen their loyalty with the consumer.

Right right here.

Maybe I'll just I'll jump in <unk> cause I got the Mike Mike.

The power to Mike, Greg Whatever Christ Grateful So you.

Really few questions John maybe maybe.

Maybe Michael if you could help us on some of the other margin drivers that you'll see particularly shrank you called out is still a headwind what do you do to actually fix that and I'm also thinking credit profitability now.

Some of the delinquency rates and other charges are changing and.

And then may be bigger picture, Brian how important is keeping traffic you've gained so much traffic and customer engagement. How do you think about pulling that lover versus promotion and margin and expect more pay less is it critical to traffic keeps growing no matter, what or could it slip one or 2% just given your mix how do you think about pulling those leverages.

We go through this uncertainty.

Here are two Michael when I start with the focus on traffic and as we sit here today and you've heard me talk about this for years and years now we think one of the most important indicator of a retailer's health is the traffic indicators and it's why we feel so good about the fact that we've had 23 consecutive quarters, where we've seen comscore sale.

Growth and it's all in the back of traffic.

We're getting more footsteps it or stores more visit store site greater engagement. Our guests are spending more with us there are rewarding us with more trips and their shopping more categories and we think that's critically important the Johns point, while we've seen a significant lift over the last few years and our sales per square foot. We know there are <unk>.

Still potential to go further and as we think about.

Looking at trips is critically important and in an inflationary environment that we're working on today. It's why we're so laser focus on unit share improvement because those things were going to be really important as we move to a more normalised environment. These the guest is turning to us more frequently for all of their needs.

Frequency and discretionary their shopping more categories, so making sure. We're looking at units carefully looking at trips to me as a key indicator of the health of our business today and why we're so excited about the potential in front of us.

And maybe for the second part of your question Greg When it comes the margin of profitability in general It starts with O'brien at the strength of the top line is going to matter a lot and we feel encouraged by the traffic terms that we've seen in terms of the other structural buckets you had on a few of them talked about shrink we've seen a normalization and some of the credit metrics, we watch and inconsistent with what you'd see in the.

Industry I wouldn't put that highest on the list to factors for next year, but it's one will stay close to it and monitor we've also talked and and some of what we covered earlier today, we expect a promotional environment next year and you'll see a guest responding the promotion in the fourth quarter and.

We expect that that's something that could continue.

We'll also have some tailwinds on the margin side, though I mean, we're anniversarying level.

Level of markdowns and salvage that was extremely typical for us and we want to make sure. We recover that we've seen some improvement and supply chain and freights and so as we anniversary some of the peaks from last year that should be a good guy on the margin mine and so it's all of those variables that we factored into the guidance, we give to them.

Okay. When we go back there.

Alright, I've Influencer Tigers financial partners. Thank you for taking my question I have two questions could you go into some detail on how rondo contributes to revenue growth what percentage of your vendors are on it and how you demonstrate your value proposition to them and then my second question. This morning on your interview on CNBC spoke about your <unk>.

And toys and your growth and home goods, what other category opportunities to you see that going forward, you could liver and become.

Retailer of choice in those categories.

And proceed and I'll, let you talk a bit about rondel and just how important it's been for our vendor partners and deepening engagement, but the second question is something we talk about all the time and sitting here today, you and I. Both know while we built great momentum and added over $30 billion of growth. We know we still have category opportunities all around us.

So first round out like I mentioned in my prepared remarks is an incredibly important part of our egos. It gives our vendors an opportunity to target the gas that they see.

As most likely to be intrigued by their new products and the quality of of merchandise that they're bringing to market. It allows us to highlight those products and give them you know.

Real time insights about how it's selling because of the closed loop reporting that we can offer and so this has been a huge part of the demand generation for a lot of our businesses.

We are very engaged with a broad spectrum of vendors across the entirety of the portfolio and believe that round Dallas is going to be.

The important part of the future.

Partly because of that guest centricity that we bring to the model, but also because our guests want to know, what's new and relevant both across own brands and national brands and how it fits into their lives. So maybe I can pivot to that second question in really talk about what opportunities we have well we have a broad portfolio and we.

Thank the strength of our multi category portfolio is a differentiator in the market.

We don't build an assortment for a snapshot in time to having a healthy business across every dimension allows us to flex as market conditions change right now were flexing into essentials, and beauty and food and beverage, but a couple of years ago. It was home in hard lines that took the center stage, so having the ability.

To connect with consumers and having relevant and strong market share positions and many businesses is important to us.

The way that we continue to build relevance is by gang Super guest centric working to make sure that we are destination for seasonal businesses seasonal businesses are kind of in our core DNA because it's a great way for guests to do more than one store at one time everything you need for back to school you can get your backpack you can get your.

You know.

Calculator, you can get your pens and paper you can get you a new outfit. So those are really important to us but the other is the importance of newness and you heard me talk a lot about that.

They are in an environment, where consumers are making trade offs.

More of the same is not going to get it done and sell really investing in innovation and something that excites them like our apparel for patent right. Now if you haven't been in our stores are on our site lately to check it out that colors. The styles. The aesthetics are right on and it's absolutely grabbing the attention of our gas.

I'm Gonna go back to the heart of your question.

Do we have opportunities to continue to grow share and it's something that Michael and I talked to many of you about all the time.

Despite the growth we've seen over the last few years, adding well over $30 billion a top line growth city here today.

We represent 3% of the retail market.

So as a leadership team, we see opportunities to grow across our entire multi category portfolio.

Continue to leverage growth in store and from a digital standpoint, so while we've seen tremendous progress and we're proud of the way we've transformed the business, we still feel significant runway to take share across every one of our major categories going forward leveraging that great.

In store guest experience and the digital experience, we offer that great combination of.

Inspiration and he's that makes targets such a great destination for guests across the country. So we see tremendous opportunities for years to come to continue to bolster our share position.

Let's go back to the front row your hands went up for awhile.

You remember from Piper Sandler sounds like beauty has been a real strong category for you can you click down a little bit more on alter maybe.

Maybe the the difference in performance there versus not all the stores and maybe why not move faster and then just as a quick follow up on it two to 3 billion.

Inefficiency games do you have any of that baked into twenty-three. Thank you.

Of course did you want to start talking about beauty and then Michael we can talk about twenty-three yeah first and foremost beauty at target has been a success story for a number of years, we have an incredible assortment that's been relevant for awhile, but adding also beauty has completed our assortment ability to offer prestige products in our store with the service and <unk>.

Experience and expertise that also has brought to the table has been that missing link and so we've completed that picture and so really excited about the performance really excited about our partnership.

And we're we're looking to accelerate we're already at 350 stores and will add more as John talked about as part of our remodel program. So really bullish about the future of their head.

And I actually want to store recently and I think you heard from our local team. The fact that very excited about the results were seeing with auto beauty and it clearly driving even more traffic to target, but at the same time that team talk to you about the fact that our core beauty assortment continues to grow so they are complimenting each other and we're just becoming more and more.

On the $2 billion to $3 billion, a piece of that that shows up in 2023, but.

A large chunk of that is multi year in nature and you think about the apparel example that Mike shared I think that's just a perfect example.

Business that grew so fast over the last few years and our teams did an amazing job to protect a good guest experience as we grew but when we step back and look into and across a businesslike apparel, we just see who much opportunity to simplify make things easier for the guest to make things easier for our team and changing some of those core processors won't happen overnight.

That's why the multiyear nature is important but.

But we expect those benefits to be.

Significant squared.

I meant to say like maybe we're getting to the bottom of the curve and then my second question is around the the first quarter operating margin guide versus what's implied for the fiscal year. It doesn't look like.

The implied is maybe like foreign after five on the fiscal year, it's not much better than the midpoint of the first quarter, but yet they.

Bigger quarters, you're gonna laugh all this headwinds from.

The freight side, which should be coming down the markdowns to salvaging. So why is there and presumably consumables inflation comes down so the relative performance improves why wouldn't you see better operating margin performance over the year relative to one Q and thank you for seeing you on.

<unk> some of the trends, we're seeing a discretionary categories. Yeah at the most consistent theme is where there is innovation, they're still relevant and show.

Consumers are finding them social video of course is a great way for consumers to become connected to new products and new ideas and you'll be surprised at the things will spike quickly.

And sometimes we don't see them coming and other times were well prepared but let me tell you that there are pockets of those in every business and so right now we're planning the discretionary categories and aggregate level more cautiously, but we're certainly leaning into market share opportunities, where we see them. We believe that there is opportunity in the <unk>.

Home business and will be launching more brands in the back half of this year, both on a national and one brand side that has the potential to grow share in that category. We're seeing it definitely in apparel, where you get the right fashion moment in the right fashion trend it doesn't matter that they bought a lot of performance where over the last couple.

Correlation without sad, we're also introducing that level of newness and interest in categories like food and beverage in essentials, our favorite day brand that we've launched over the last couple of years is that which is a sweets brand has been has seen explosive growth over the last year or two and this is a place where we have taken the liberty to innovate.

In basic.

Basic categories, whether it's cookies or ice cream, and so forth and flavor profiles the way that they brought that the items to market have really shown that the gas will engage across the board. If we give them a reason to Chris if we go back to discretionary categories, you heard or saw today Christina highlighted the fact that when 2022 despite some.

The softening trends, we still generated $55 billion of revenue in discretionary categories are things I highlighted this morning. During my CNBC interview as I go back to 2019, we've grown our discretionary portfolio by almost $14 billion. So we're going to move forward from a much bigger bay.

<unk> has much more relevance in those categories into Christine. This point, we know they are going to return to growth over time, it's going to be led by newness and innovation in the near term, but we're not much different position going forward and we were pre pandemic and I think we have much more relevance and credibility in a space than ever before.

We're both 20 years or so at target Christina we've seen ebbs and flows across the categories in our assortment over that time and to us the longterm winters will be the ones that build engagement in the moment now that's why we're so focused on traffic apparel and home will have their time on the phone again and will be well positioned when they do.

On the first quarter versus the balance of the year I think I'd go back to their some of the broader themes I think the biggest variable that's a tough one for any of us to predict right. Now is just what's the path of the consumer during the year we <unk>.

Plan to the first quarter reflective and mindful of the discretionary trends that we saw in the fourth quarter and we'll learn a lot I think together as we move through the year and that will inform what the balance of the airplanes out at but.

Appropriately cautious approach based on the trends, we've seen as the right place to start enrolling packages of the year progresses.

I'm trying to scan through the room to see hands has been up for awhile, but we haven't gotten too.

Let's come back over here.

Short from credit Suisse, and so a couple of questions I wanted to ask.

Know what your tail or headwinds were for 22 in terms of dollars there at kind of $1 billion plus Mark and obviously, we know what your guiding Taylor an operating profit dollars for this year, but I guess the question that I would have it.

Yeah. It seems like maybe even set a low bar and so the real question is if there's upside to the top line is that something that you would choose to flow down to the bottom line or would you be more inclined to lean into continuing to I guess and best at to maintain that kind of five plus per cent an operating margin for 23.

And then the second question I would have is just on the teeter $3 billion. If you could just give a little bit more on the buckets of where those are coming from and then you know it sounds like there's some capture in 2003, but most of it is 24 and beyond.

It's a good question, Karen and I guess I would go back to just kind of philosophically, how we think about the business world maximizing dollars business and so we'd read and react through this year to make the right choices that we think maximize profit dollars, both for 2023 and position as well for beyond.

Love nothing more than in the quarters to call them to say gosh. Some trends played out stronger the consumer was stronger in the back half of the year, then maybe we thought and if that's the case then.

We'd we'd happily have that conversation and be thrilled to outperform but I think the reality is as we said at the start of the year, it's an uncertain environment and we want a plan cautiously and that and that that isn't just kind of on paper cautions, that's making sure that we're positioning the business right. It was important to start the year clean.

From an inventory perspective, we feel like we've accomplished to that bull and we'd like to lean appropriately cautiously in our inventory buys on the discretionary categories with a ton of flexibility to react if things would turn out better, but we think that's prudent for the volatility that we see right now it looks like we've got time for one more question ICA paddle up in the back.

Great pressures on here, Peter Benedict Bird Thanks, guys.

I guess first question would be on gross margin down a little more than 500 basis points since since 2019.

Assuming mixed doesn't.

Get any better the next Coupla years, just curious Michael how you think about the recapture of.

A portion of that.

Where are the opportunities there what would you think again without mix getting dramatically better.

And then my second question would just be.

In the event that sales this year end up tougher than expected.

Your confidence in your ability to deliver still that billion dollars of improvement needed how much flexibility of thinking on that thank you.

Maybe do those in reverse.

A wide range of guidance that we gave today is reflective of the scenarios that we envision right now and so we feel so good about the the line we have drawn in the sand with that guidance now we'll get a lot smarter together as the year plays out when it comes to margin opportunities, we talked about a lot of them already but <unk>.

Maybe one I would add to the list just as a for example is to link some of what Christina talked about with target circle and how valuable it is for us to be able to interact with our guests in the more individualized way and that translates to good news on the top line. When we can make the right offer the right message show up for the right guest at the right time it should also translate.

Two efficiency on our markdowns as we get more efficient with personalized promotions. We've learned over time that a personalized promotion has a higher return than a mass promotion and so circle gives us the opportunity to do even more of that better in the years to come in so there's a lot of macro puts and takes no doubt as we unpack margin in the years to come but there's also some important things that were drive.

Within the business, but you know.

So is that I want to thank all of you for joining US today I know, we will see many of you throughout the year and I hope to see I'll be back here at the time Center next year. So thanks for joining us get home safe.

Thank you for joining us.

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