Target Corporation Q2 FY2025 earnings call

Board Announcement

• The Board elected Michael Fiddelke as the next CEO, effective at the start of 2026 fiscal year, after a thorough succession planning process.

Michael's Priorities

• Reestablish merchandising authority across all categories, focusing on style and design, with examples like FUN 101 in Hardlines and plans for the home category.
• Elevate the guest experience in stores and online, with improvements in on-shelf availability and intra-day inventory reliability seen in Q2.
• Leverage technology to improve speed, guest experience, and efficiency, including reevaluating headquarters processes, increasing in-person collaboration, and deploying AI tools.

Financials and Capital Deployment

• Net sales down 0.9% Y/Y but improved from Q1, with store sales trends stronger. Gross margin rate down 1 percentage point Y/Y due to merchandising pressures offset by inventory shrink benefits. Ending inventory up 2% Y/Y due to investments in frequency categories. SG&A dollars down 0.1% Y/Y. GAAP and adjusted EPS $2.05 in Q2. Maintaining full year guidance with low single-digit comp sales decline, GAAP EPS $8-$10, adjusted EPS $7-$9.

Back-to-School and Seasonal Plans

• Back-to-school and back-to-college seasons off to encouraging starts, with value offerings and style-forward assortments like Champion for Target collection performing well.

In the second quarter, comparable sales were down 1.9%, a nearly 2 percentage point improvement from Q1. Digital comparable sales grew 4.3%, with same-day delivery powered by Target Circle 360 growing over 25%. Hardlines categories under FUN 101 saw positive comps and traffic growth, with trading cards up nearly 70% year-to-date and on track to deliver over $1 billion in sales. Apparel, particularly women's denim, saw acceleration. Food and beverage grew slightly driven by newness. Beauty had bright spots in core categories like skin, bath, and hair care. The own brand portfolio of over $31 billion plays a key role in providing value and style across assortments.

Full Year Guidance

• Maintains low single-digit decline in comparable sales.
• Anticipates GAAP EPS of $8 to $10 and adjusted EPS of approximately $7 to $9.
• Cautious approach maintained due to volatile and uncertain environment, but confidence in delivering guidance based on Q2 performance.

Tariff Uncertainties

• Continued challenging and uncertain tariff environment, though team has made progress in mitigating impact on P&L.### Operational Inefficiencies
• Legacy technology, manual work, unclear accountabilities, slow decision-making, siloed goals, and lack of quality data identified as areas slowing down operations.### Macroeconomic Challenges
• Consumer spending pressures and inflation impacting pricing and consumer behavior, requiring focus on value and affordability.

Q: What price increases were taken during the second quarter as a result of tariffs and expectation for the second half?

A: Tariff mitigation strategies include diversifying country of production, evolving assortment (e.g., Bullseye's Playground), and negotiating with partners. Price taken as last resort, focusing on everyday good value and leveraging own brands. Bulk of onetime tariff costs behind, with continued focus on value and competitive pricing.

Q: How does the succession plan bring about change and when to expect substantial progress?

A: Michael emphasizes candor, urgency, and pace, focusing on reestablishing merchandising authority, elevating guest experience, and leveraging technology. Changes are ongoing in categories like Hardlines and home, with work in progress to transform performance. Progress expected quarter by quarter, building on Q2 improvements.

Q: Quantify investment needed to close performance gap with peers?

A: Capital will follow high-return projects, including new stores, store remodels, and technology investments. Strong pipeline of projects, with new stores exceeding expectations, remodels modernizing merchandise, and tech investments to accelerate business.

Q: Merchandising strategies to drive frequency and basket size?

A: Focus on delivering newness on trend, stylish, and affordable. FUN 101 in Hardlines driving growth in trading cards and Nintendo Switch 2. Apparel acceleration in women's denim. Home and food categories with newness. Core beauty categories with growth in skin, hair, and bath care. Continued focus on newness at affordable prices to drive frequency and basket size.

Q: Clarification on tariff costs and inventory position?

A: Majority of onetime tariff costs hit in Q2, with inventory position satisfactory after first half adjustments. Inventory up 2% Y/Y due to investments in frequency categories, with units down low single digits. Well positioned for back half with current understanding of tariffs.

Q: Key factors driving results closer to high end of guidance?

A: Q2 performance reinforces confidence, but cautious approach maintained due to consumer and tariff uncertainty. Monitoring closely and will adjust as needed while maintaining full year guidance.

Q: Labor investments for executing priorities?

A: Evaluating roles and store functions, testing in Chicago with pivots to optimize store fulfillment and in-store experience. Applying learnings to more markets to balance digital fulfillment and in-store experience, aiming for consistency in guest experience.

Q: External vs internal factors in turnaround?

A: Both factors at play, with consumer choicefulness and inflationary pressure being external, and internal focus on merchandising authority, guest experience, and technology being internal. Focus on leading on front foot across categories and delivering great guest experience to drive turnaround.

Q: Reevaluation of financial plan and timing for positive comps?

A: Retail is nimble and evaluates opportunities. Encouraged by back-to-school and back-to-college response, with seasons not yet done. Confident in guest response but timing for positive comps dependent on continued execution of merchandising and operational strategies, leveraging easier traffic comps and tariff pricing adjustments.