Target Corporation — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation First Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, May 22, 2024.
Good morning, everyone, and thank you for joining us on our first quarter 2024 earnings conference call.
Thanks, John, and good morning, everyone.
Thanks, Brian, and good morning, everyone. As Brian mentioned, while we are pleased that our first quarter results came in largely as expected, we won't be satisfied until we start growing again, which is our expectation beginning with the second quarter.
Thanks, Christina. As Brian highlighted earlier, we take a long-term approach when making investments in our business with a focus on delighting consumers and our guests both today and in the years ahead. This approach has led to outstanding financial performance over the long term, and we're confident it will continue to serve us well in the months and years ahead. And today, as I step into my new role as COO, I'm bringing this long-term perspective with me as I work with my new team to invest in a reliable and differentiated guest experience.
Before we turn to your questions, I want to recap what we've covered today, including our view of our business, the environment and both our near-term and long-term prospects.
[Operator Instructions] Our first question comes from Simeon Gutman with Morgan Stanley.
So my first question is, I guess, bigger picture on 2024. We talked about, I think, leaning into top line growth. Can you talk about the balance of margin and top line growth that you initially sought for '24? Are you finding that you're beginning to lean more in terms of driving the business, the cost of that to drive the sales a little more? Or are there just puts and takes and levers that you had all along that we just didn't see?
Simeon, I think sitting here today, we've got a very balanced approach to performance in 2024. We are certainly not satisfied with our results in Q1, although they did meet the expectations we set back in March. We won't be satisfied until we see positive comps, and we've got to make sure we're delivering profitable growth along the way.
And then a follow-up, more tactically, the SG&A related to Target Circle, does that go away? Or you just use the SG&A differently? And then the lower prices, how does that get contemplated? Did you also have flexibility in the guidance when you set it out for the year?
Yes, I'm happy to take that one, Simeon. I'll maybe start by saying our expectations on the top line and the bottom line for the year are unchanged. And we feel really good about the progress made on the profit line in total in Q1 to expand operating profit rate in spite of a tough sales environment. It's an outcome that we feel puts the year off to a good start.
Simeon, one other point on Target Circle, and I know I talked about this, we talked about this more broadly in March. While we're excited about the launch or the relaunch that took place in April, this is going to be an ongoing effort each and every week for multiple years as we look to build the base program and build greater guest engagement, expand the use of the Circle Card and dramatically build membership for Target Circle 360, our approach to same-day delivery.
Our next question is from Michael Lasser with UBS.
How much of the price investment that Target announced this week is going to be funded by Target versus being funded by the vendor community? And is it right to think that now that shrink has turned the corner, Target is taking this favorable factor and reinvesting at least a portion of it in driving traffic-related items?
Michael, this is Christina. One of the things that we know for a fact and has been a priority for a very long time is the focus on both Expect More and Pay Less. In fact, that is our brand promise. So value, affordability and how we deliver that is always and has always been important. And as Brian shared in his prepared remarks, it is even more important during this time of 3 years of cumulative inflation in these categories. So our commitment to investing in price on behalf of our guests is to pass savings back along to them to accelerate traffic and unit growth over time.
And Michael, maybe to touch on your question on shrink, if you step back and look at our total, we're managing all the levers of the P&L every quarter, every year. On shrink, we're pleased with the progress that we saw in the first quarter. As you heard us say to kick off the year, our hopes for the year were that shrink would flatten this year, and that would be an important first step on a journey to improving shrink over time.
Michael, we'll get out in front of some of the questions that might be on investors' minds regarding the price investments we announced earlier this week, and this is part of our ongoing focus on retail fundamentals. And you've heard us talk about this for a number quarters now. Michael talked about the great progress we're making on reliability and in-stocks. We want to make sure we continue to provide a great guest experience, leverage our proximity. And you see the way our guests continue to leverage services like Drive Up.
Okay. My quick follow-up is that the outside perception is that Target sales are healthy when it has promotions like Target Circle Week, but outside of those type of events, trends have been a lot softer. So, a, is that the case? And then, b, does that mean that Target has been losing consideration on everyday essentials, and so this price investment is obviously aimed at improving those periods where there are not events or holidays? And how quickly do you expect to see a response from that?
Michael, I'll answer your last portion of that question. We expect to see those trends turn around in the second quarter, and that will be a quarter where we return to growth. And we'll see that fueled by the investments we're making in great assortments, in value and in a great guest experience. So we won't be satisfied until we see positive comps in the second quarter and over the balance of the year.
Our next question comes from Rupesh Parikh with Oppenheimer.
So my first question is just on the trends during the quarter. If you can just comment on the cadence, the trends you saw, and then any comment during quarter-to-date? And then do you believe weather had any meaningful impact during the quarter?
Thanks for the question, Rupesh. I wouldn't call out anything notable in terms of trends as we moved through the quarter. We saw a quarter that from the top line to the bottom line played out largely like we expected it would. And that's a good foundation for us to build on as we move into the second quarter where we expect to return to growth. And you've heard us talk about some of the things that give us confidence in that trajectory.
And Rupesh, on the weather front, while we certainly see some volatile weather over the first quarter, that affects everyone in retail. And I feel really good about the way our store teams have responded, how our supply chain responds to some of the disruption we've seen. And I think we're well positioned to continue to maneuver through some of the volatile weather we're seeing across the country.
Great. And then my follow-up question, just on the merchandising innovation front. So it sounds like your consumers are responding to newness in the box. Just curious how you're feeling about the level of newness innovation for balance of the year.
Yes, great question. Definitely, consumers are responding to newness. When they see innovation and they see that as an incredible value, that's what's motivating them to buy. And so our acceleration of percent of newness has just built quarter after quarter. And you saw that really materialize in the apparel improvements in the last quarter. That was based on the backs of ready-to-wear, our perhaps most fashion-forward part of our entire assortment, our performance business, our young contemporary business, those are big owned brands that we control, design and build; All in Motion, Wild Fable, A New Day, et cetera, punctuated by a great partnership with Diane von Furstenberg.
Our next question is from Corey Tarlowe with Jefferies.
I was wondering if you could talk a little bit more about what you're seeing in your private-label business. With the 2 new launches that you've made recently and the existing very impressive portfolio that you have, it would be great to hear a little bit more color about the momentum that you've seen in that business as you put more investments behind this segment.
Thanks, Corey, for your question. We refer to it as owned brands, and it's a slight nuance, but only because we invest behind our private-label solutions, owned brands like any other brand. We put a lot of attention and care into the quality, the durability and the value, of course. I think you're probably referring to dealworthy because we've had a number of different brands and up&up relaunch, but we have a couple more to talk about. So I'm going to assume those were the ones you were questioning.
Great. And then just as a follow-up, one of the things that's also clear with Target is that strong inventory management helps to unlock better margins. So could you talk a little bit more about your current inventory positioning and how you expect that to unfold throughout the rest of the year, especially as it relates to margins?
Yes. Thanks for the question, Corey. And you're spot on, when inventories are in line, we run more efficiently across our entire system. And that's certainly been the case in the last few quarters and is the case now. We feel really good about our inventory position as we step into Q2 here with inventories down 7% at the enterprise level. But most importantly, that efficiency on inventory is coming with a stronger in-stock position. We're always solving for both. And that one-two punch of lower inventories, the higher in-stocks is the outcome that we want and it's the outcome we're getting.
Our next question is from Mike Baker with D.A. Davidson.
I just wanted to follow up on a previous question and ask you about these price investments and how much of that was contemplated 90 days ago when you gave your full year outlook? And how does -- or how much of it is a reaction to what you're seeing currently? And as part of that, can you outline within your guidance what you expect for gross margins and SG&A within the context of the comp and EPS guidance?
Mike, I'm happy to start. And those actions were part of our full year guidance and our plans. Mike, do you want to talk a little bit more about the implications of that?
Yes. I think the headline is, is we've got 1 quarter in the books that played out largely like we thought, if not a little ahead of our midpoint of guidance on the profit side, and our outlook for the balance of the year is unchanged. So always managing puts and takes across the business, but we knew investment in value was going to be part of the recipe for success this year. And you see this week's announcement as an amplification of some of that plan.
Our final question comes from Kate McShane with Goldman Sachs.
We wanted to ask a little bit about the other revenue streams. If you can provide any more detail about the margin contribution from Roundel or Target Plus or maybe your distribution of Cat & Jack at Hudson's Bay? And did you see any increase in conversion in Shipt subscriptions as a result of the launch of Target 360?
Kate, a great way for us to wrap up our call today. Michael, do you want to cover some of those topics?
Sure. Those are all good ones to touch on. I'll do my best and maybe pair off with Christina on a few of those. We continue to be thrilled with the strength we see in our Roundel ad business. It grew another 20% plus this quarter, and I think that speaks to the value that we're providing guests and some of our partners with that offering. That's been a sustained source of growth, and we would expect that to continue to be a source of growth going forward.
Yes, not a lot to offer besides the fact that you can see the expansion in margin over time, and that comes from creating value with our partners through Roundel. And it isn't just about shifting dollars, it's about accessing new dollars because they see the growth that comes with it and our ability to convert that into sales.
Okay. It gives me an opportunity to recognize a couple of our teams for their work during the quarter. And I'll start with the Roundel team, they just continue to deliver very consistent and meaningful results for us; and all the cross-functional efforts around the relaunch of Target Circle. So I really want to thank those teams and the entire Target team for their contribution during the quarter and their ongoing commitment to getting us back to growth in Q2.
Goodbye.