Target Corporation Q2 2023 Earnings Conference Call Insights

Key highlights from Target Corporation (TGT) Q2 2023 Earnings Concall

Management Update:

• [00:13:53] TGT is optimistic that consumer confidence will continue to recover as inflation rates moderate.

• [00:15:21] The company is doubling down on investments in areas where it is seeing growth, such as entertainment and home.

• [00:29:15] TGT plans to open about 20 new locations this year, ranging in size from 20,000 to 137,000 square feet.

Q&A Highlights:

• [00:45:25] Rupesh Parikh with Oppenheimer asked for more details about TGT’s QTD performance and initial observations of the back-to-school season. Brian Cornell CEO said that TGT is pleased with the results of the first 10 days of August for back-to-school and back-to-college shopping, which are consistent with the results from July. The company expects the shopping season to extend into September.

• [00:46:43] Rupesh Parikh at Oppenheimer enquired if it’s still possible for TGT to achieve a 6% operating margin rate in FY24 given the weaker top line? Brian Cornell CEO replied that TGT is focused on delivering a strong back half of the year and is pleased with the profit recovery in 2Q. The speaker expects the progression on profit to continue through the balance of this year.

• [00:47:51] Kate McShane from Goldman Sachs asked for more details on the factors that affected TGT’s GM in 2Q, including markdowns and offsetting factors. Michael Fiddelke CFO said that TGT saw a meaningful improvement from last year’s excess markdowns and costs to clear inventory, with the majority of the improvement coming from being cleaner from an inventory perspective. The promotional environment is rational and as expected for the quarter, and TGT is pleased with the team’s agility in building back profit.

• [00:49:36] Kate McShane with Goldman Sachs asked if there’s any changes in consumer behavior within the discretionary categories, especially as traffic got better into July and the category’s outlook? Michael Fiddelke CFO said TGT expects the consumer to continue to be cautious about discretionary spending in the goods sector in the back half of the year. And TGT is confident that its inventory position will allow it to chase into demand as it changes.

• [00:50:59] Oliver Chen of TD Cowen asked about TGT’s traffic forecast for the remainder of the year, and do they expect it to continue to decline in the low to mid-single-digit range? Brian Cornell CEO said that TGT saw a sequential improvement in traffic in July and expects traffic to continue to grow in the back half of the year. The company’s traffic growth is evidence of the deeper guest engagement that the company has built.

• [00:51:10] Oliver Chen at TD Cowen also asked about TGT’s opportunities in apparel and how is the company rebalancing its private label assortment. Christina Hennington replied that TGT is focusing on newness and innovation in its discretionary portfolio, especially in its own brand products. The company is also taking advantage of opportunities to cross-sell products from different categories, such as food and beverage, home, and apparel.

• [00:56:36] Michael Lasser with UBS asked what actions TGT can take to recapture guests who have become disenfranchised or are seeking out value or discretionary goods at other retailers, and how much it might cost to regain those guests. Brian Cornell CEO said that since the start of the pandemic, TGT has added over $30 billion of top-line growth, driven by an increase in trips and transactions. The company will continue to invest in a great in-store experience, retail fundamentals, and its own brand portfolio, which is now a $30 billion brand portfolio.

• [00:58:27] Michael Lasser from UBS enquired about the opex outlook in light of traffic declines, and whether there are any one-time factors that would benefit opex dollar growth that would not be sustainable moving forward. Michael Fiddelke CFO answered that TGT experienced softness in the SG&A line due to the inflationary environment and fixed expenses, but the team’s flexibility and well-managed inventories have led to a cleaner inventory position across the system, making them more efficient. The team is focused on managing costs and expenses well in the current environment.

• [01:00:41] Simeon Gutman at Morgan Stanley enquired about the spread of TGT’s comp performance across its best, middle, and most occasional customers, and whether there is anything that can be gleaned from that in terms of recovery. Christina Hennington said that during Target Circle Week, the company saw a significant increase in customer acquisition, with over 500,000 new guests joining the loyalty program, demonstrating the depth of its engagement with customers and its ability to understand and serve them uniquely.

• [01:02:15] Simeon Gutman at Morgan Stanley also asked if there are any factors that could prevent TGT from recovering its margins in the next year or so. Michael Fiddelke CFO answered that a return to positive comp growth in higher margin discretionary categories would be a welcome benefit to margin. Also, the pressure from shortage is one of the single biggest margin headwinds in the business and that it will be an important variable to watch going forward.