Target Corporation — 2023 Q4

Good morning, everyone, and welcome to our 2024 Financial Community Meeting. I'd like to start by welcoming the investors and others who are attending this meeting in person with us. And of course, we're happy that many, many more of you are attending the meeting remotely. Brian is going to kick off the meeting in a minute, but first, I have a couple of important disclosures.

Good morning, and thanks for joining us. We're looking forward to providing our perspective on the results we shared this morning, and I can't wait for you to hear from several of our top leaders, including Christina Hennington, Rick Gomez, Jill Sando, Cara Sylvester and Michael Fiddelke. While Michael still has his hands firmly on the wheel as CFO, this is his first FCM in his new role as our Chief Operating Officer. I can tell you, we're looking forward to discussing Target's growth horizon and how it transcends volatility over any particular quarter or year. Our preference is always to think long term.

Thanks, Brian, and good morning, everyone. Continuing on what you've heard so far this morning, I want to emphasize 2 key themes. First, we build the foundation for long-term growth with a strategy that is both unique to Target and durable. And second, we're committed to building on that foundation for years to come. So this morning, I'll walk through the ways we're leaning into our core strengths, capabilities and differentiators we've built and refined over time to meet consumers where they are and drive long-term market share gains, sales growth and profitability.

Okay. Well, thanks for joining me. Why don't we start Jill and Rick by telling us a little bit about yourselves and your careers.

Good morning. I am Jill Sando and I lead the Apparel & Accessories, Home and Hardlines merchandising organization. I've been with Target for over 25 years. The majority of that time has been in merchandising, running different businesses across our discretionary portfolio. Also spent some time in planning and help stand up our product design and development capabilities for our non-apparel businesses.

Hello. Good morning. I'm Rick Gomez, I lead Target's Food, Essentials and Beauty businesses. I've had the opportunity to lead a variety of different disciplines at Target, including marketing, digital strategy. And then before Target, I spent over 20 years working in the CPG industry developing, launching and managing a bunch of different Food & Beverage brands.

We're happy to have you here. Okay. Our owned brand portfolio on its own would be a Fortune 100 company. More than $30 billion in sales and nearly 1/3 of our total revenue and even more of our gross margin. That's because we have amazing capabilities that allow us to produce brands our guests genuinely love. Jill, let's start with one I know you're particularly excited about a new brand in toys called Gigglescape.

Kids related categories are huge for Target and toys plays a key role in keeping Target relevant with families. National brands like LEGO and exclusive brands like Our Generation have made Target one of the biggest toy retailers in America. And the addition of Gigglescape gives consumers on more only-at-Target reason to shop toys. Gigglescape is important for a few reasons. It's consumer-centric. It's our first owned brand design specifically for generation alpha and their unique needs. It's filling white space in our owned brand assortment and it has us poised to drive growth in a high-margin category.

I love them. They're super cute. Okay. Rick, our frequency categories play such a crucial role in driving trips. And with up & up and dealworthy, we're giving our guests new reasons to choose Target. Can you tell us about that?

Yes. Well, as you know, Christina, we invest a lot of time listening to consumers to better understand their needs. And one of the themes that we are consistently hearing is the need for value and affordability. So to address this consumer need, we are relaunching up & up and introducing dealworthy. up & up is one of Target's most popular brands, delivering nearly $3 billion in sales, offering over 2,000 everyday items at affordable prices. And now we are making it even bigger and even better. We have developed product improvements across 40% of the line. We are also introducing hundreds of new items, and we are offering great prices with the average item priced under $7.

Indeed, our frequency businesses are an important part of driving trips to Target, meeting guest critical needs but our discretionaries have the -- categories have the opportunity to do that as well. Jill, can you tell us a little bit about Cat & Jack?

Yes. Kids apparel is another area where we have outsized market share and Cat & Jack is a big part of that. This is the kids brand that we launched in 2016. Today, it's a $3 billion brand, the biggest kids brand in America. To put that into perspective, consider this, we sell well over 300 million units of Cat & Jack a year, which comes out to about 8 Cat & Jack items for every child in America under the age of 12. This is part of a discretionary category, but Cat & Jack is a brand that drives repeat business for Target because of great prices and great quality, which parents love and great design that kids love.

Thank you, Jill. Rick, let's switch gears a little bit and talk about Good & Gather because that's a brand that's helped us reimagine our grocery space and experience and really build our credibility in food.

Yes. Absolutely. I'd love to talk about Food & Beverage. Our Food & Beverage business delivers over $20 billion in sales, and that's up $8 billion in sales since 2019. That's because over the last few years, we've been making big strides in improving the Food & Beverage experience. I'd like to say that we have gone from being a retailer that just sells food to a retailer that truly celebrates food. And in doing that, we have made Target a destination for food. Now, Good & Gather has played a key role in that at nearly $4 billion in sales. Good & Gather delivers a great value proposition, delicious products that the whole family will enjoy, high-quality ingredients with no artificial colors, no artificial flavors, no high-fructose corn syrup. And importantly, great pricing with most items under $5.

Well, it's abundantly clear that our guests rely on our owned brands. Jill, you've been a part of these launches for so many years in your career. What makes us a leader in this space?

We have unrivaled design capabilities, amazing talent across our team, hundreds of patents, it is no exaggeration to say that Target pioneered cheap [indiscernible]. And what we're doing is so hard to replicate because we didn't decide to make a play in owned brands 5 or even 10 years ago. We've been doing this for decades. We've had an in-house sourcing capability for 25 years. Now today, it spans 20 offices across 14 countries. Because we own our end-to-end sourcing business, we control our own destiny. When you think about issues like country of production and raw material costs. We're more cost-effective with far fewer intermediaries in our network, which allows us to grow our bottom line even as we pass savings on to our guest.

And these capabilities, they really do set Target apart, especially considering the scale at which we operate, delivering a steady drumbeat of newness to consumers. In my previous role in the CPG industry, it was a big year if we launched a few dozen new products. But for our food scientists, that's a couple of weeks' worth of work. In Food & Beverage alone this year, we'll add hundreds of new items to Good & Gather and Favorite Day and that's on top of the hundreds of new items that we launched last year. We are delivering innovation at scale that is unmatched by others.

Well, our capabilities certainly are first rate. But that human touch, fueled by the power of insights, can't be stressed enough.

That's right. When we designed All In Motion, our performance brand, the first thing that we did was to engage with 15,000 consumers. We talked to fitness coaches, we attended dozens of workout classes because if you're designing for the consumer, it starts with listening to the consumer. And we're not just consumer-led when we're launching a product, we're consumer-led in how we continue to grow and develop our owned brands because you can't mistake performance for potential.

Consumer insight has also helped to continue to develop and grow Favorite Day. We launched the brand during the pandemic, and we've seen it drive trips, build baskets, delivering double-digit growth year after year. So as Food & Beverage has become a go-to category for Target during the holidays, we've expanded the role of Favorite Day to offer key seasonal items. You saw that in November and December with gingerbread kits, hot cocoa-bombs, a huge range of snack mixes. And just a few weeks ago, Favorite Day was front and center for Valentine's Day. And we'll continue to expand Favorite Day into those big seasonal moments that are so important to our guests and important to keeping Target relevant.

Well, Jill, this leads the enhanced approach we take into brand management, including a team under your leadership.

We launched our brand management capability years ago and created an end-to-end process to successfully launch owned brands. And that has enabled an accelerated rollout of owned brands over the past 5 years. And we've been evolving our capabilities and are now operating more like a CPG company, the research, the market analysis, looking hard at the white space. That's shaped our decision making around existing brands, like prioritizing Threshold as our flagship home brand and then offering a range of styles within it. That's critical because Target is one of the biggest home retailers in the country, and this is making it easier for our consumers to navigate our assortment and our brand management work was critical to the success of our new kitchenware brand Figmint, which debuted last fall.

There's been a lot of work in Food & Beverage to sharpen the focus of our brand portfolio. The launch of a flagship brand, Good & Gather was the first step. We focused Market Pantry on family favorites at our most affordable prices and we've also retired our previous snack and dessert brand, Archer Farms and replaced with Favorite Day, a brand with a much stronger identity around indulgent treats for the whole family.

Well, thank you both. I love that, and that's a perfect note to close on, consumer centricity. That's a theme running through everything we've covered today, new brands like Gigglescape, Figmint and dealworthy. Our relaunched up & up and powerhouses like Gather and Cat & Jack. So thank you, Rick and Jill for that look into our owned brand work, it really is incredible.

Thanks, Christina, and hello, everyone. Today, I'm excited to talk about our guest experience. And you might ask Cara, how do we define guest experience at Target? Well, we think of it as the way we engage across America. From simply saying hello to consumers in a warm-Target way to deepening the relationships we have with existing Target guests, to how we create moments of discovery, connection and joy that invite people to choose Target again and again.

So I love that video because it captures who we are as a brand and what we aim to deliver across our entire guest experience. Our team brings so much empathy to their work. And it's not just the face-to-face interactions at checkout or in the aisles. Empathy is infused into how we design every part of the guest experience.

So bringing together Target Circle, Target Circle Card and Target Circle 360 simplifies and expands how we deliver value to our guests. And as we've been talking about, we've designed the program to give guests flexibility and control in how they shop. There's the Target Circle our guests know and love today that gives every member access to the best deals and rewards at Target. There's absolutely no cost to join. What's new is they can now shop target without having to search for and add offers. Deals are automatically applied at checkout, plus they'll continue to receive partner perks with Ulta Beauty and Apple and even more rewards through personalized bonuses based on their shopping behavior. For those guests who want to save even more, Target Circle Card offers an extra 5% off each trip. This is on top of the automatic savings they receive as Target Circle members, plus free 2-day shipping, extended time for returns and no annual fee.

Thanks, and good morning, everyone. As Cara just mentioned, I've recently taken on a new role. And while I'll be staying on as CFO for a little while longer, I'm honored and excited to be leading our incredible operations team as Chief Operating Officer. As an engineer by training, I've always had a passion and respect for the work of my new team. And I've learned a lot working with them and alongside them during my 20-plus years at Target. As John Hulbert would tell you, over the years, I've often added complexity to our investor travel. So we could squeeze in just one more store visit.

comparable sales, new stores and other revenue. Comps are expected to be the primary source of growth with increases in the low to mid-single-digit range in a normal year, consistent with our average over the last decade. We'll support this comp growth with continued investments in our business in remodels, own brands, national brands, signature partnerships and value-added services across all channels.

Michael, thank you. As we get ready to take your questions, I might get started with some of the questions I can imagine are on your mind this morning. First, are the updates we shared enough to get Target back to growth? The answer is absolutely. We're confident that the road map we've outlined today puts our core strengths, capabilities and points of difference to work in new ways with even greater value, relevance, ease for our current guests and U.S. consumers more broadly. This road map will help us meet consumers where they are to drive traffic, profitable sales growth, and long-term market share gains.

Hands are going up, why don't we start right here?

Simeon Gutman from Morgan Stanley. My first question is on the buying discipline. So Target makes a lot of its profit on discretionary products. Do you think you've developed new muscle over the last year or so? Or you just reacted to the environment and we'll see some of this go back?

Christina, I think that's a great place to start. And you can talk about the work we've done with our global sourcing teams to make sure we are evolving the way we buy goods across the country.

Yes. Thank you for the question. We have evolved significantly over the last 1.5 years plus. What we've been living through over the last couple of years really has been quite unprecedented. And the opportunity has been to infuse more agility and flexibility into our model. So in 2023, we bought with an intention of [ placing bets ] on the things that we were most excited about, innovation, newness, our own brands, where we saw the business trends were. But we also wanted to make sure that we created flexibility in the model. And so overall, we certainly bought less in those down-trending categories to manage the inventory. But by buying less led to swifter operations, ease and just clarity in how to operate within this environment. We were also able to introduce levers through dual sourcing capabilities, a country of production diversification having more domestic backup.

I'd only add that even in 2023, as we took a more conservative approach in discretionary categories, Christina, Rick and Jill's teams certainly leaned into key seasonal moments to make sure that we had the right newness, the right affordability as guests continue to celebrate those key seasonal moments. We'll do more of that in 2024 as we continue to make sure we adjust our flexibility to meet the needs of guests as they continue to change their shopping patterns. Let's go over on the side. Michael.

I have 2 questions. One, seems like if we were to characterize the strategy today, it would be remodel the stores, introduce new products, leverage some of the relationships that you have with your customers through a reintroduced Circle program. You have a lot of experience with those strategies. Is it right for us to think that each one of those could contribute 100 basis points to your comp, and that's how you build to getting low to mid-single-digit comp over the long term?

I'm happy to start, Michael. And we're not going to provide you the waterfall today that breaks all those components apart, but everything you've talked about is baked into our plans. We certainly expect new stores to be a major contributor as we go forward. Michael talked about, over a decade, we expect those 300 new stores to generate about $15 billion of incremental revenue. We'll continue to invest in remodels. And we've got a long track record of seeing those remodels deliver really good returns.

Yes. And maybe just add on that by kind of reinforcing a point Brian made. I love the fact you can't decompose our strategy and to discrete things. It's how they work together, a guest engaging with circle that finds discretionary category discovery within that experience. And so it's never 1 plus 1 equals 2. We're hoping 1 plus 1 plus 1 equals 10. And it's how all of it comes together. You asked a question specifically on the cadence as we move through the year. I touched on it a little bit in my remarks, we anniversaried some of the strongest business last year in Q1, and so we would expect to see a build as we move through 2024.

How about right back here.

Scot Ciccarelli with the Truist. Can you guys provide any more color on your most recent shrink results? And can you help us understand what happens with the sales velocity of products when you put them behind lock and key?

Yes. Michael, I'm happy to start because I know it's a topic on everyone's mind. And when I think about shortage, when I think about shrink, I'll start with the word progress. I think we're seeing really solid progress and greater awareness at the national, state and local level. And certainly, our teams have been working to ensure we provide a great guest experience and provide an experience that's safe for our team and safe for our guests. And Michael, I think our teams have made significant progress, but a lot more to come.

Yes. I mean I can't say enough about the hard work of the teams that have led to that ton of progress that Brian hit on. And the way that rolls into our [indiscernible] is we're expecting shrink to be flat year-over-year. We learned a lot in the first quarter. We inventory a lot of stores in Q1, and so it will be smarter a quarter from now. But that progress has us expecting for a lagging metric flat, and we'll see what we've learned as we go through the year.

All right. Just roll it back here.

Mike Baker from D.A. Davidson. I wanted to talk about your efficiency efforts in the $500 million that you achieved this year. How do we think about that over the next few years? Is that linear? Does it sort of get sort of roll down hill and get better? What is assumed in your 2024 outlook.

Yes. Well, I'm happy to start. The teams work against a tough top line to deliver that efficiency progress this year. It's a great start, and I can view that as a down payment toward that $2 billion to $3 billion that we expect to get over time. The things are a little closer in that were highlights of that this year. I'd call out the continued benefits of something like our sortation centers. We have a sortation center in a market ,we're faster and we're cheaper than other forms of delivery.

Yes. Michael, I'd only add that taking a very measured approach to setting priorities year-by-year. We see opportunities in stores, in supply chain, opportunities to better leverage technology to continue to build on that efficiency road map. So year after year, we'll reset priorities to make sure we're laser-focused on delivering those results, and they'll build over time. All right. Back over here.

Danny Bretthauer with HSBC. Question to Cara on the new Target Circle program. I mean, is $49, obviously, like an introductory price? How long are you willing to sustain at the price level? Because I think it's hard to make the math with same day 1 hour delivery at $49 and how do you plan to compete with the other programs, loyalty programs out there? What would be some of the key differentiators other than this entry $49 price point.

Cara, I'll let you take it away.

Take it away. We're really excited to talk about it. And I think it's really important that we really anchor on the entire Target Circle ecosystem. That was really important to us. And the notion of accessibility and for all is really, really important. That's why we first are reimagining how we're thinking about delivering value. Our guests are really clear. They want value, affordability and they want ease and so we're making it even easier for our 100 million members to actually be able to get the deals and rewards that they want with automatic savings applied at checkout. I'll hit on your question around pricing in just a minute, but I think it's really important to talk about our cardholders as well. Today, the cardholders, that program doesn't work with Target Circle. And so what we're doing is we're actually bringing these 2 things together.

I just want to take this moment and I hope many of our leaders back home are listening and just thank the Circle team, the teams have been working on this program for months and months. Our tech teams have been supporting them and the entire effort that the organization has put behind bringing this forward today. As you can doubt, we are really excited about the future Target Circle and think it's going to be a major growth driver and deepen guest relevance and bring new consumers into the target franchise. All right. Back up front.

It's Greg Melich with Evercore ISI. I had 2 questions. One was, Michael, could you just -- you said Roundel will be up again. I think it was 20% last year. For guidance this year, are you thinking that offsets any pressure on credit and just tell us how credit is going?

So if I start with the questions on the credit side of things, we've seen -- I think we've characterized it throughout the year, kind of an expected return to normal in a lot of those underlying credit metrics. And so you've seen a little bit of softness year-over-year there. Then in 2023, was offset nicely and then some by the incredible growth we've seen in the Roundel business. And as a reminder, I think I said this twice in remarks, Roundel is both a little other revenue and a lot of gross margin. And so it benefits 2 places to get to that $1.5 billion of value in total. But we've seen outsized growth there, and we would expect that to continue this year. We're really confident about our prospects to continue growing our Roundel business to the benefit of the guest that get strong engagement with all of those offers.

Traffic.

Yes, we won't break out ticket versus traffic. But the theme I'll talk about that we've seen this year is a moderation of inflation, I think, but disinflation is the word of the quarter in retail. That's a good thing for the consumer. You've heard it for the consumer. You've heard us talk about that being one of the inputs, some share of wallet recovery on the discretionary side of things. And so we're pleased to see that ticket pressure because we think it's a good thing for the U.S. consumer.

Ed Yruma, Piper Sandler. You spent much of the last decade kind of opening 8 typical stores, small boxes, urban locations, and it sounds like you're pivoting back to kind of traditional large boxes and ostensibly suburban areas. Would love to understand kind of what that small box portfolio looks like? Have you been pleased with the returns, given some of the changes in the urban dynamic? And then as you look to these larger stores, how should we think about the role of food in some of these bigger boxes?

Ed, it's a great question. I'm happy to start. And actually, over the last couple of years, you've seen us move from a focus on small stores, and we can talk about the performance there to more larger-sized stores as we see new opportunities and catchments where we haven't competed in the past. And we've been very pleased with the performance of these new full-size stores as well as the continued performance in urban centers and on college campuses.

Yes, we feel really good about the returns of those small stores. And it's great to have that flexibility in kind of our toolbox of what's the right thing to build for the opportunity in a specific market. And to be clear, going forward, if the right opportunity can be fit with a 25,000 square foot box that brings us closer to a college campus or an urban center. We know how to do that. We like the returns, and we'll lean in there. But as we step back, and look at what that pipeline looks like in total. It's actually the big box stores where we're able to bring the best of Target that are bubbling to the top in terms of where we expect returns to be strongest. And so we'll lean in to that shift over time. And if our properties team was here on the stage with us, they could roll out a map of the U.S. and show a bunch of main and main locations where we'd love to bring Targets to new communities, and we feel good about what that pipeline looks like.

And I'd add 3 more points as we think about small formats. And we're here in Manhattan. 10 years ago, we really didn't have a brand presence in Manhattan. Today, we have over a dozen locations, and we're in many of the different neighborhoods across the city. We've now been connecting with a consumer that we couldn't reach in the past. And we're going to build a long-term relationship there. We're on many college campuses across the country. We know the value of building a connection with college students while they're on campus and the lifelong benefits that's going to provide for our brand as they move into their first apartment or have their first child and start their families. And one of the other things like Christina build on it is the work we've done with smaller formats has allowed us to understand a lot more about segmentation and getting the assortment right geography by geography.

Yes. The only thing I'd add, even the lifelong relationship with college students, you heard Jill be very intentional. We actually seek to make sure that we are really relevant at certain life stages, especially early on in our consumers' lives. Think about the strength that we have in a business like baby, then we migrate them to toys, then we migrate them into video games and/or into juniors. And then having then presence, we do very well at back-to-school and back-to-college time frames. It's very intentional in making sure that our brand stays in touch with families through every life stage. College is the natural next step in that phase and then, of course, back to childbirth. So afterwards. And so that's been very intentional, but then to build back on segmentation opportunities yes, we've learned a lot. I mean, these boxes are small. They're difficult to operate.

Cara, one of the things you and I talked a lot is as we open up new stores, there's certainly a physical store component. We drive a lot of new revenue. But there's also benefits from a digital standpoint as we introduce the brand to new communities, you want to expand on some of the things we've learned.

Absolutely. We see -- we talk a lot about digital influence sales. We know how consumers are shopping today. And so many of us, right, are starting, even if you love shopping and only purchase in stores, you're using our app to check out what's new, to see if something is in stock, et cetera. So we understand the power of digitally influenced store sales. What we also see, though, is the power of store influenced digital sales because we know some guests are browsing in stores and actually are pulling up their app right while they're in the store and having impact digitally.

All right. We've got time for a couple more questions. Let's go up here.

It's Bob Drbul, Guggenheim Securities. I just wondered if we could spend a few minutes on gross margin, maybe Q4 buckets and the performance detail around that, your assumptions in '24 for the full year. And then curious if you could share the financial implications, especially around gross margin on Target 360 your assumptions for the rollout for this year?

Well, Michael, this is a surprise. We've made it all the way to the last few minutes of our conference today, and this is the first time we've had a question about gross margin.

Excited to get the question as always. We'll, I can start by unpacking a little bit what we saw in Q4, and there's some consistent themes to what we saw in the broader part of the year because the theme of gross margin recovery this year. And I think Q4 and the year, we were just shy of 3 percentage points of improvement in gross margin. Better inventory management, we saved a lot of markdowns and costs that were associated with some of the inventory challenges that we had a couple of years ago.

Okay. Go back here.

Ivan Feinseth, Tigress Financial Partners. Congratulations on the great results out this morning. I have 3 questions. First, Cara, in thinking about like store layout and remodel, like, for example, in my local Target, food is on like the left side, but yet cookware is all the way on the other side of the store. And sometimes when I'm purchasing food, I find the need, I may need some cookware to do the dish I'm looking to cook. As an example.

There's a lot there.

So Cara, why don't you start with partnerships? And Christina, why don't you talk about some of the learning that we have around how we build assortments?

Absolutely. And so as I think about the introduction of Target Circle 360, we are absolutely looking at a wide range of what partnerships could look like to add benefits. Importantly, though, we are always going to be listening to our guests. That is how we actually struck up our conversation and partnership with Ulta Beauty as well as what we offer in our base program today with Apple. And so we'll be guests led, not Target led as we think about the types of partnerships that will add value to our guest lives. I do want to hit on specifically your question around Shipt. We do not leverage any data of Shipt on their marketplace internally at Target as we think about our assortment.

More specifically on how we build assortment and premium prices to answer some of your questions. Our goal is to make sure that we are meeting our guests' needs across a wide range of shopping occasions. And so we look at -- you heard us describe this especially when we talk about [ own brands ], right? We look for unmet need spaces and white spaces to innovate against.

I'll just finished up that discussion by saying, I think we've learned time and time again. We make really good decisions when we listen to the guests and listen to the broader consumer trends. Some of the things we rolled out recently. Starbucks for our Drive Up guest. We didn't come up with that. They was the guest saying, "Well, if Target could only provide me with my favorite Starbucks product, I'd enjoy this drive experience even more." If you could take my returns, I would really be pleased. So we respond to what the guests and the consumer tells us, and that's going to guide us for years to come. All right. We've got time for one final question. So I guess we're going right over here.

Chris Horvers, JPMorgan. So I have 2 questions. The first question, as you think about the performance in the fourth quarter, how do you think about share. Do you think it's more give back from the COVID pump? Do you think it's the consumers just so focused on food and value and you're just not getting the trip, so it's not resonating to the power of the target box. And how do you think about recapturing that share going forward?

Michael, why don't you start with the second half, and I'll wrap up with Chris' first question.

Yes. So as we look at the first quarter, I think the key thing there is our cautious approach on the top line, and there's some differences year-over-year in what we anniversary, but that's a source of pressure in the first quarter. As we get back to growth, deeper in the year, we'll see some of that pressure subsides. So that's the headline on that one, Chris.

And Chris, from a market share standpoint, I can assure everyone here, we look at market share in a very granular way every single week across our entire portfolio. And we're going to be very focused on taking market share as we go forward. I'll step back, not just look at the last year, but the last several years. And if I go all the way back to the prepandemic, we've added billions and billions of dollars of revenue growth. I think, Michael, over $30 billion.