Good morning, everyone. Thanks so much for joining us today, and thanks for your flexibility as we have adjusted our plan for this meeting. Before we get started, I have a couple of important disclosures that we need to cover that will apply to all of our remarks and Q&A today. 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 measures to the most directly comparable GAAP measure are included in our financial press releases and SEC filings, which are posted on our Investor Relations website. With that, I'll turn it over to Brian who can get us started.

First, I want to thank all of you for dialing in this morning. While we would have loved to have seen you in New York today, given the circumstances, we wanted to make things easier for out-of-town travelers who might want to stay closer to home. For the first part of the meeting, John, Michael and I will walk you through the highlights of our recent performance, the continued evolution of our long-term strategy and our outlook on the future. After that, we'll open things up and take your questions for the balance of the meeting. Again, I want to thank you for your flexibility and look forward to an engaging conversation with all of you this morning. And with that, let's get started. [Presentation]

By any measure, 2019 was another strong year at Target. You've seen that in our financial results and in the media coverage. But it's this chart that really tells the story. Trace those bars back to this very meeting 3 years ago. That morning, we said we'd invest more than $7 billion in capital to reengineer our supply chain, to reimagine our stores and to reinvent our own brand portfolio. We said we'd take $1 billion in operating income and invest in our team and our pricing. And we said this while many others were headed in the opposite direction, closing stores, cutting jobs, trying to save their way to success. But we've never been the kind of company that follows the herd, and this was no time to start. But we also weren't placing bets just above conventional wisdom. We had every reason to believe this would work because we've been doing our homework, testing these bets and listening to our guests. And for them, stores weren't dead. They were just boring and uninspiring. Our guests still loved our brand. They just wanted us to do more. And it was this dose of tough love that inspired our team to redefine the Target Run and change the future of our company. We started by unpacking the big questions. What would it take to combine the hallmarks of the physical experience: discovery, inspiration and service with the ease, convenience and personalization made possible through digital? In an age of AI and robotics, where do people fit in? When everyone's talking endless aisles, what's the role of curation? In an on-demand world, could digital ever become more than a drag on the P&L? There are lots of theories, but nobody had the answers, and there certainly wasn't a playbook. So we…

I spent 30 years working with CPG companies all over the world. And I can tell you, I've never seen this kind of care and connection anywhere else. In fact, this approach is what earned Target a top spot on Fast Company's list of the World's Most Innovative Companies. And this philosophy was a driving force behind our new brand, All in Motion, a brand created with everybody in mind. Of course, own brands are only one prong of our assortment strategy. In 2019, we struck premier partnerships with 2 of the most recognizable brands in the world, Levi's and Disney. And we're attracting more and more new brands across the assortment, including most recently Boar's Head in food. We also continue to be the preferred distribution channel for America's most innovative DTC brands, like Harry's, Native and Quip, who see Target's platform as a launchpad for scale and mass market appeal. When companies like P&G, PepsiCo, L'Oréal, Dyson or Mattel want to introduce innovation to the market, Target is the first call on their list. Add it all up, these partnerships, combined with our 20-year legacy of limited time-only collaborations, make Target the retailer of choice for great companies who want to extend their reach and see their brands shine. Perhaps the most game-changing element of our store-centric strategy is our approach to fulfillment. It wasn't that long ago that a Target Run involved a handwritten shopping list and a Sunday afternoon with a shopping cart. And spoiler alert, millions and millions of guests still really, really like to do that when they have time. But sometimes they don't. That's why we've built the most comprehensive suite of same-day services in the marketplace. Now we can put tens of thousands of items in your basket, in your trunk or…

Good morning, everyone. As you heard from Brian, the path we've set for Target is different than what you see across retail. We designed a strategy around the unique capabilities that set Target apart and built an operation to support our durable financial model. It's all about having the right assortment with great service and easy fulfillment options that keep our guests coming back. The difference maker for us, our stores. We put our nearly 1,900 stores at the center of how we offer inspiration and convenience. As you know, we spent the last few years investing to do that, from opening new stores to making our existing ones work harder. In 2019, we continued to scale those capabilities. We opened small formats by the dozen and completed remodels by the hundreds, just like the year before. We expanded same-day fulfillment options to millions more guests, took our new operating model to every store and laid out more automation, robotics and artificial intelligence throughout our supply chain to help our stores run better than ever. By leaning into our stores, we've emerged as an omnichannel leader with competitive fulfillment options and a differentiated store experience. This year, we'll take it to the next level and use our foundational capabilities rooted in our stores to serve guests in new ways. We'll get closer to new guests, continue to elevate the store experience and redefine ease and convenience to serve guests in ways no one else can. Remember when we opened just one small-format store back in 2014 and then opened only a few more the next year? We took it slow to learn and build the right foundation so we could scale those stores successfully. We refined how to find sites to balance population density and local needs. We built a…

Just 6 months in, this new model has shown tangible proof in guest satisfaction. During our busiest time, the Net Promoter Score for our Black Friday experience rose 12 points over last year because our team was staffed and trained to help guests find products and check out quickly. Led by our new Chief Stores Officer, Mark Schindele, a 20-year veteran leader across operations, our teams will always be refining what a truly guest-focused service model looks like. They'll bring even more joy to our guests while streamlining how we keep shelves stocked and backrooms organized. This new operating model is also how we enable our growing suite of fulfillment services. From Drive-Up to Pickup and delivery from Shipt, our stores are serving up a whole range of options to meet guests however they want to shop and as soon as an hour. Last year, as you know, we made our same-day options available to millions more guests. We took Drive-Up even further, now in 1,750 stores across the country. And this year, we'll turn it on at many small-format stores with parking lots to make shopping even easier for local guests. Remarkably, even as Drive-Up grew more than 500%, sales from our more mature order pickup services rose nearly 50%. And 1/3 of the time, those pickup guests made additional purchases when they came inside. We also continue to grow Shipt same-day delivery offering with 2.5x the sales from the year before. And we integrated the delivery option into our Target.com checkout. Now guests can use their REDcard to get 5% off and pay per order if they don't have an annual membership. Outside of Target, Shipt continues to establish itself as a leader in the delivery space. It's steadily growing its membership and broadening its marketplace of regional and national retailers, which now include Petco and CVS. Shipt's momentum shows the growing consumer demand for fulfillment in minutes, not days. At Target sales fulfilled by our same-day options grew more than 90% last year, far outpacing the demand for shipping and drove the majority of our digital growth. And because all of our same-day services have better economics than 2-day shipping, our average fulfillment cost per unit has come down nearly 25% over the past year. And that's played an important role in our margin performance. The engine behind our same-day operation is no doubt our stores and the more than 300,000 people running them to serve our guests every single day. There's no one else who will run an order out to your car in less than 2 minutes and throw in a Good & Gather sample just to say thanks. And our guests are loving our same-day options because they make an extra Target Run that much easier. Take a look. [Presentation]

This convenience is giving our guests new reasons to shop at Target. Last year, nearly 1 in 3 people who placed a same-day order had never before shopped on Target.com. And our existing guests are shopping us more frequently. On average, nearly 1/4 of our Drive-Up sales and all of our same-day delivery sales are incremental, which shows that as we give guests new ways to shop with us, they're actually spending more. Combining our curated assortment and great service with the ease and convenience of getting it in an hour has brought guests to shop us more often. No one else is doing that at scale like we are. And it's building loyalty with our guests that will sustain our growth over the long term. This year, we'll expand our assortments so our services are even more essential and fit with how guests are shopping at Target. Time and time again, they tell us they love Drive-Up, but it sure would be nice to pull up for their order and a gallon of milk, not to mention adult beverages. Whether it's a 6-pack and chips on the way to a party or a bottle of wine to go with a box of diapers and crying kids in the back seat, our guests want that option. Starting this spring, we'll test a curated assortment of fresh grocery and adult beverage items available through order pickup and drive-up. We'll start in a few states and learn how to do it well before we scale fresh pickup to nearly half of our stores and take adult beverage to the majority of the chain, all by fourth quarter, just in time for holidays with the in-laws. All of this is possible because of the supply chain investments we've made to support our stores,…

The solution you just saw is about organizing what goes into every box. We've designed it to sync up with the systems we showed you last year from our Perth Amboy facility, which is about organizing those boxes, sorting them by store and then sequencing them on the truck for easy unloading. When those 2 solutions work together, we'll revolutionize how our store teams receive inventory and get the products our guests want on the shelf as quickly as possible. By summer, we'll use the robotics to send presorted units to hundreds of our stores. And we'll take the box sort and sequence operation to another facility where the 2 systems can work together in service of our stores before we expand it further across our network. This year, all of our supply chain investments: the systems, robotics and processes that make each individual part of our operation better, will start working together, and our stores will really start to feel the impact. Inventory positioning will be even more precise. Replenishment will be even faster. Our backroom inventory levels will keep declining, and out-of-stocks will continue to improve. We've spent the last several years building capabilities that would support a strategy to put our stores at the center of how we serve our guests. We said physical was the answer to digital and knew it wouldn't be easy for others to imagine. We'd have to put up the points to prove our case. This year, we showed quarter-after-quarter how our stores are driving growth, profitable growth for our business. We still have a lot of work in front of us, but the foundation is set. From here, we'll use our capabilities to keep building an experience that sets us apart from the pack, and it'll be our stores, powered by our supply chain and brought to life by our team, that sits at the heart of the fastest and easiest Target Run yet.

Good morning, everyone. We're grateful that you've taken the time to listen to our remarks today, and I'm looking forward to having many more in-depth discussions with you in the months ahead. Today, I'm going to share a little bit of my perspective on our business, how we've worked to create a healthy and sustainable model and how we plan to build on that success over time. But you shouldn't expect any big surprises in my remarks today because our long-term financial algorithm remains the same as we first shared with you a year ago. Specifically, we have built a business and financial model that's positioned to generate low single-digit growth in comparable sales, mid-single-digit growth in operating income, high single-digit growth in earnings per share and continued expansion of Target's after-tax return on invested capital. But before I get to the model, I want to share a little bit about my experience here at Target and how it's informed my perspective on our business. As Brian mentioned earlier, I began my career in finance, and that's always been my passion. However, I've also been able to benefit from several experiences outside of finance, which helped me to gain a deeper understanding of our business and operations. Now that I'm back leading the finance team, I plan to leverage those insights in support of the organization as we help our business partners solve problems and evaluate trade-offs. And we face potential trade-offs all the time: focusing on our quarterly numbers or investing in the future, focusing on profit rates or profit dollars, minimizing the cost of a single transaction or maximizing the lifetime value of a guest relationship, investing in promotions or in everyday prices or managing the cost of labor on the P&L versus making deliberate investments in the…

Thank you, Michael. By now, I hope you have a sound understanding of the strategic choices we're making. I hope you have a keen sense of our disciplined investment agenda, and I hope we've made clear all the ways our durable financial model and industry-leading capabilities position Target to capture more market share, deliver more profitable growth and earn more love and loyalty from the tens of millions of guests who we've asked to expect more from our brand. But before we turn to Q&A, I want to underscore what I think is the most important point: Target is different. We've always been different. That's what our guests love about our brand. We're not like everyone else. We are Target. And it was that simple fact that inspired us 3 years ago when the fate of the industry was far from certain. We asked our guests what more could we do, what mattered most in their lives. And then we took what they told us and we reimagined our company with them, putting them first in every decision we made. That meant leaning into our purpose, pursuing our own path, writing our own playbook, betting on our brands, our team and the millions and millions of guests who shop Target every day. 3 years later, it's clear. That was the best bet we could have ever made because today, our guests are choosing Target more than ever before. They're depending on us to bring a little bit of joy every time they shop. And look, I know you read the headlines and keep close tabs on our competition. Because our strategy is working, others are taking note and applying some of our pages to their own playbooks. But for us, the whole is greater than the sum of the parts.…

Before we break, I wanted to pause and make sure everyone understands what's going to happen. And the good news is that most of you can simply stay on this webcast, and you'll hear the Q&A session beginning in about 10 minutes. However, if you received a conference call invitation and you want to ask a question during Q&A, you will need to leave this webcast and dial into the number for the conference line, which was sent with your invitation. But again, even if you received the invite but don't intend to submit a question, you want to stay on this webcast to listen in. With that, we can begin a 10-minute break. Thanks. [Break]

[Audio Gap] gentlemen, thank you for standing by. Welcome to the Target Corporation 2020 Financial Community Meeting Q&A Session Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, March 3, 2020. We are ready for our first question from Christopher Horvers with JPMorgan.

So I have 2 questions. First, a bit of a retrospective on the fourth quarter. How much do you think there were some industry factors that went on there, like in electronics and toys, versus the 6 fewer days and versus what maybe you left on the table in non-gaming electronics and home? And then related to that, as you get into the fourth quarter next year, I know it's far out, but you do have 2 extra days. You have a new PlayStation and Xbox launching. So are you more optimistic on the potential top line outlook for the fourth quarter next year? And then of course, related to that, there's probably a gross margin headwind there given the mix probably turns upside down relative to what you saw this year.

Thanks for joining us. And I want to thank everyone for being so flexible today. We look forward to seeing you in person throughout the year, and certainly, we look forward to gathering again in person next year. Chris, as I think about Q4, and we've talked about some of the implications, obviously, we felt really good about our performance in many categories, very strong growth in apparel, strength in beauty, in household essentials and also in food and beverage, which was offset by softness in toys where we ran a flat comp but actually grew share in a category that was facing some pressure overall, and we were disappointed with our performance in electronics. That being the case, we're feeling very confident that we're already putting plans in place for the fourth quarter of this year. We'll learn from last year. We'll make sure that we enhance our inventory position on key items. As we've said many times, we exited the fourth quarter of this year and went into January with very little clearance inventory. We're going to make sure that we rebalance inventories as we go into next year. We're excited about some of the newness in electronics, some changes we'll make in our home cadence. But overall, we're already working on our plans for the fourth quarter of 2020 and feel very confident that we'll certainly learn from this year and build some exciting plans for our guests as we think about the holiday season of 2020.

Got it. And then from a long-term perspective, the third-party assortment that you have online, you called out 250,000 SKUs. Is that inclusive of your SKUs online? Or is that incremental? How large do you see this potentially going? And then on the fulfillment front, is this a drop-ship arrangement from the vendor? Or are you stocking these items now? And just really big picture, how do you think about that opportunity over the long term?

Chris, we're going to continue to carefully curate our Target Plus assortment. I'll continue to emphasize the fact that it's an invitation-only. We're carefully working with vendors that we think meet our criteria. We will expand that selectively over time, and that is an arrangement where those vendors ship directly to our guests. So we're very pleased with the early reaction. We'll carefully build curation and assortment over time, but the reaction has been very positive.

Our next question comes from Mike Baker with Nomura.

In terms of the comps throughout the year, should we expect any variation by quarter? It sounds like February is off to a good start. You have a tougher comparison in the first quarter on a 1-year basis, but it's not as tough when you look at it on a 2-year basis. Just anything we should think about in terms of the pace throughout the year?

Yes. As Michael discussed during the prepared comments, we expect a very consistent level of performance throughout the year, low single-digit comps, mid-single-digit operating income expansion, high single-digit EPS. There'll be some fluctuation month-to-month, but you should expect a very consistent performance over the balance of the year. We felt very good about the start of our business in February, and we expect to deliver very consistent results throughout 2020.

Fair enough. And one follow-up if I could, and if you said this and if I missed it, I apologize, but I don't think I did. How do you expect your digital sales to grow in 2020? As you said, it's 6 straight years of 20% or even 25% or higher. What should we think about for 2020?

Yes. I think we should see a very consistent pattern with digital as we continue to invest in our same-day fulfillment options and the guest continues to gravitate in that space. So we've got a very consistent track record over the last 6 years. I think you're going to continue to see that perform quite well as we go into 2020 and beyond.

Our next question comes from Oliver Chen with Cowen and Company.

Brian, Drive-Up has been a really positive and amazing process and momentum there. What are your thoughts on how that will evolve in terms of automation in-store? And what will happen as this continues to ramp up and engage the customer there? I would also love your thoughts on managing promotions and your thoughts on what you can do with promotions as well as in-store automation and what will happen over time as you look to AI and robotics as well.

Sure. Oliver, thanks for joining us. Why don't I let John talk about some of the changes and enhancements we'll make to Drive-Up? And I'll let Michael talk about some of the changes that we have on the promotional front.

Sure. On Drive-Up, I think the big changes you're going to see this year, we talked about, we want to add fresh or temperature-controlled products. That is -- it is the #1 request from our guests, to add a little bit a selective portion of our assortment there so that they can round out their Drive-Up trip. You'll also see us add adult beverage. That is also a request directly from our guests as we continue to get feedback on that. I would say directly on the automation, our -- we may be going in a little bit different direction than some others. I think -- we think the store experience is based on interactions with our team member. And we think the differentiation, much like we see with Shipt, is the opportunity to provide that human connection between our team and the guest. From our perspective, the value of the automation today is upstream. And so we look to take work out of the store, consolidate it upstream and then working with our distribution teams to automate some of that to make it more efficient. And the goal there is to free our teams up in-store to interact with our guests and, again, provide that human connection and that includes as it relates to Drive-Up. And so that's the direction we've gone, as you know, for many years, and we'll continue to work against that.

Yes. Thanks, Oliver. On the promotion front, I think you'll see us continue to make sure we've got that right balance of great promotion and strong everyday price. And there are certain times of the year where we lean in more into promotion appropriately. But I think you'll see us consistent in trying to balance both of those, promotion and everyday price, in the right way. I also might add, that's why I get excited about a program like Circle. That gives us a great foundation to even personalize greater -- to a greater degree of fidelity the right promotion to the right guest. And so the launch of Circle in October gives us another arrow in our quiver when it comes to getting the right promotions in front of guests.

Okay. Our last question is on next-day. It's a question we're receiving. What are your thoughts on how that will continue to be important and how you'll competitively position your fulfillment with [ these ] in mind?

Yes. I mean, Oliver, we've been really clear, as we talk to our guests and as we think about our strategy going forward, we'll continue to focus on same-day. And we really think that's the point of difference for Target. Whether it's order online, pick up in-store, Drive-Up or having a Shipt shopper come to your own within hours, we really think that's the most important area for us to focus on. And you'll continue to see us lean into our same-day fulfillment options in 2020 and beyond.

Congrats, best regards.

Oliver, thank you.

The next question comes from Kate McShane with Goldman Sachs.

John Mulligan, in your comments, you had said that this was the first year, I guess, 2020, where the supply chain investments were all going to come together. And I just wondered, in the gross margin guidance that you gave that was very helpful, how should we expect that supply chain investment to drive potentially better gross margin results longer term?

Yes. I think, first, I'd say there is a sequencing thing here, right? We continue to see IPC scale, our inventory planning and control, the -- where we put the inventory. As we said, we'll scale automation, the -- [ each is ] automation to about 1/4 of the stores this year. And then late this year, we'll bring -- start to bring the Perth Amboy automation together with that to get the totality of what we've been building over several years together. Our focus, like I said, has been to consolidate that work, pull it out of the stores and then use automation to improve how we do it upstream. So I think the biggest impact you'll see, from a gross margin perspective, relates more to continuing to reduce out-of-stocks to get our -- one, improve the guest experience; but two, capture those sales and improve gross margin dollars. So I think that's by far the largest improvement. The other place where we continue to have opportunity is exactly what Brian just said. As we continue to grow same-day fulfillment, that has a positive impact or it lessens the negative impact, if you will, of continuing to grow our digital business.

So Kate, I'd just reinforce a couple of points that John has made. As we think about the benefits of upstream automation, we'll continue to focus on improving our in-stock positions, the quality of our in-store presentation, continue to invest in that high-touch service and continue to support our same-day fulfillment option. So you'll continue to hear us repeat that again and again as we think about 2020 and beyond. But we think we've got opportunities to improve our in-stock position, improve the quality of our presentation each and every day, continue to make sure that we use our team members and that human touch as a point of differentiation and continue to invest in our same-day fulfillment options.

And if I could just ask one follow-up question, you have made mention that you're getting some national brand wins in some of your categories. Is that something that we can expect across the whole store in 2020 over the longer term?

Well, Kate, obviously, as we continue to invest in growth both in-store and online, we're seeing a number of new vendors knocking on our door. Certainly, we've seen that in categories like apparel with Levi's and what we've done in the space with Disney, but we're also seeing new brands knocking on our door in categories like beauty. We were really excited this week to announce the new partnership with Boar's Head in food and beverage. So I would expect that's going to continue to happen over time. And we'll carefully select those new partners that fit our brand standards and are right for our guests.

Our next question is from Michael Lasser with UBS.

The first question is on the coronavirus. Are you seeing any indications today from your vendor partners that you're going to have supply disruptions in the coming months? And are you altering any decisions or doing any contingency planning for an extended consumer disruption? For example, might you be even delaying share repurchases because it could impact your stock price in the coming weeks and months?

Michael, like others, we've been carefully monitoring the situation and the impact on our business, our team and our guests. We've been working closely with our overseas vendor partners, both our own brand partners and our national brand partners, to understand the state of play. We've set up a team over the last month that's literally meeting daily to monitor POs, to understand the state of production in China, to understand the rate of workers returning to work, understanding the state of the ports. So we've been looking at this from all possible dimensions. And certainly, from a merchandising standpoint, we know that we're going to see some periodic delays. We're out in front of that, making changes in our assortment and our promotional and presentation plans. But all that's reflected right now in our view of guidance for certainly the first quarter and the balance of the year. We've also been working very closely with some of our domestic vendors, our DSD partners, as we see some growing demand in categories like household essentials and food and beverage to make sure we are supporting that with the right level of inventory. So it's an ongoing process, and it's very dynamic. But I feel really good about the work our teams have done, the focus that our sourcing groups, our supply chain, our merchants have brought to this discussion. And our focus is going to be to continue to meet the needs of our guests during these challenging times that we're all facing.

That's very helpful. And my follow-up question is on the gross margin. Can you give us a little bit more detail on how the gross margin by line item performed in the fourth quarter and mostly from the merchandising strategies and digital fulfillment piece? Because on -- and then as part of that, on the digital fulfillment piece, that had become less dilutive to the gross margin. Seems like based on the commentary, the headwind from that is going to pick up. Have you just reached an inflection point where you're doing as much as -- a lot of digital fulfillment through your stores, and as you do more, you don't see as much of a marginal benefit from that as you move forward?

So I'll start with some of the Q4 margin piece of that, Michael. The 2 things I would call out in Q4 that really helped us on the margin side, we are really proud of the profit performance we were able to deliver in Q4. And it came in part from some of the categories where we really saw strength. Apparel grew strong and gained share, and that's always beneficial to the gross margin side, both the gross margin naturally in that business, and then we ended the season really clean. And that saves us clearance markdowns on the back end. The second callout is actually the second part of your question. The same-day service growth is healthy for our profit. Compared to shipping a box long distances, those same-day services are way closer to the economics of an in-store sale. And that's helpful on the bottom line, too.

The next question is from Joe Feldman with Telsey Advisory Group.

I wanted to ask, can you share a little more color on -- like you talked about the electronics category, redesigning it. Like, what are you guys envisioning there for that department and if you've maybe tested it anywhere and if there's a significant cost to do that?

Yes. Joe, we're still in the early stages of testing some new redesigns. You should expect that to appear in about 200 locations this year, start to envision TVs at a much lower level as you would actually see them in your home, an emphasis on more interaction with our team members to provide insights into how to bring these products home and install them in your home, certainly elevating some of the focus on the key brands in that space. And we know that brands are really important in that space, so the focus we'll place behind brands like Apple and Samsung. So really trying to make sure it's a more inviting environment where we can have better interaction with our guests, where our teams can provide the professional services that our guests are looking for in that space. So we'll continue to test and learn and iterate as we've always done with changes in-store. But we really want to make sure that we bring the guests a much more inspiring environment within electronics where our team members can provide the expertise that they need each and every day.

And the only thing I'd add, Joe, on the cost side, if you think about doing this in the context of a store remodel where we tear up a fair bit of the store through the course of that remodel, the marginal capital here is relatively modest and certainly far better than doing it on its own and going into the store and just doing this part of the store. So as Brian said, we'll bring it into the remodel program. The early testing certainly shows that there is a payback to doing so. And so we feel good about that. And as Brian said, we'll get into a few more stores and a couple of hundred stores and really have a good idea of what it brings.

If I could follow up with the own brands, private brands, you guys have obviously done a great job, brought in some or developed so many new ones. How should we think about it going forward? Like will you continue to bring newness and replace some of the brands that you've even launched maybe 2, 3 years ago? Or will they be all additive? Or how are you envisioning that for the next couple of years?

Joe, I think you're going to see us spend a lot more time on brand management. And I'll use Cat & Jack as an example. Cat & Jack's been part of our collection for 4 years now. It's now a multibillion-dollar brand. But our teams will need to continue to bring newness, make sure that, that brand is on trend, make sure that we continue to bring a refreshed assortment to our guests each and every quarter and understand when we need to make changes and pivot some of these brands to make sure that we constantly stay on trend. So over the course of time, some of the brands we have introduced, they might go away and be replaced by some new brands. But I think more and more, we're going to be making sure we're managing the life cycle of those brands, bringing newness, bringing great insights, refreshing the collection, making sure the aesthetic is on trend for what our guest is looking for and continue to strengthen and invest in the brands that we have in place today. So Cat & Jack is just one of many of examples of where we know we've got additional opportunities to build even stronger relationship with our guests and make sure those brands are even more relevant in years to come.

Our next question comes from Peter Benedict with Baird.

First one, just on the mix of digital fulfillment, I think for last year, it was -- 24% or so was the same-day stuff. Can you give us a flavor for how -- or a sense for how the remaining 76% breaks down between just the traditional kind of fulfillment center going to someone's home and then how much of that is kind of the stores delivering to the home but not obviously on a same-day basis? That's my first question.

Sure. Like we've said, Peter, the aggregate for Q4 and where we're running right now is about 80% of the fulfillment we do is done by the stores. If you take away the same-day portion, all of the rest of that is shipped from store. The remainder of that is our FCs, which is probably, depending on the day, in the 12% to 15% range, and then direct vendor ship is very, very small. I mean we prefer that because the service there isn't typically at our standards. But I think overall, you'll continue to see us operate in that 80% range. And as the same-day fulfillment grows, the ship from store will come down a little bit or not grow as fast really. It will continue to grow, just not grow as fast. But the stores overall, continuing that. We think that 80% range is right where we want to be.

That's great. And then just on the inventory position, how you're feeling about it heading into the spring here. I mean obviously, it sounds like February off to a good start here, but curious about kind of the early indications around seasonal demand, whether it be in the southern markets or whatnot. How is that setting in and where you are from an inventory perspective? And then as we think just down the road to back-to-school, are you rethinking any of the sourcing for back-to-school product? I'm not sure how much of that would be even coming out of China. But just how are you thinking about kind of your back-to-school plans here in terms of getting the product here?

Yes. Peter, we'll start with the first big season of the year, and that was Valentine's Day in February where we saw a very strong performance and a great reaction from the guests. We expect that to continue as we go into Easter. And obviously, we're very focused on back-to-school, back-to-college, which is a very important season and life moment for Target. And I think we feel very good about our sourcing plans and our position as we get ready for that holiday season. So off to a good start. We see a very good reaction to our assortment and our plans for Valentine's Day. We're now focused on the Easter holiday. And I think our teams have put together really strong plans for back-to-school and back-to-college this year, and we feel good about how we're positioned going into those seasons.

Our next question is from Karen Short with Barclays.

A couple of questions for you. First of all, just on the quarter-to-date sales, I guess, I'm wondering, I think your comments on coronavirus were much more limited to the supply chain as opposed to top line. But any color you could give in terms of whether there had been some positive benefit from kind of stockpiling, I guess, in the quarter-to-date trends?

Yes. I'll start, and I'll let John and Michael jump in. But over the last few days as obviously everyone's been reporting, we've certainly seen a U.S. consumer that's starting to stock up on household essentials, disinfectants, food and beverage items. All those staple items that the CDC has recommended, they add to their pantry. And certainly, we've seen aggressive shopping across the country in our stores. So we're obviously working closely with our domestic vendors, with our DSD partners to make sure that we're elevating inventory in preparation for what we think is going to be a continued demand for stock-up items. So certainly, we're seeing that across our network. We expect that to continue over the next few weeks, and we'll watch it carefully over time.

Okay. And then just on inventory and, I guess, working capital in general, obviously, we -- it was advertised that you would have inventories down in 3Q given the year-over-year comparison. But I guess I'm wondering if you have any thoughts or color on whether you overly managed inventory in terms of losing out on some sales in the season and then thoughts on working capital and inventory specifically into next year as it relates to out-of-stock.

Why don't I start, and then I'll let Michael continue? And I think as we look at the fourth quarter, we clearly recognize that we exited the fourth quarter at a level of inventory that was actually too clean and certainly lost some sales as a by-product of that. There were many key items where we didn't buy deep enough. We ran out before the holiday season. We had very little clearance inventory in January. And while that was a benefit to our gross margin during the period, we certainly lost some sales because of that. And our teams are actively engaged in making sure that we learn from that as we plan for the holiday of 2020.

Yes. I would just add, that's the age-old balancing act of retail. And so 2 years ago, we were much heavier than we wanted to be during and coming out of the season. This year, a little light. Next year, I feel good that we've got the plans to split the middle.

Okay. And just one final question is on dividend growth. How should we think about that then in terms of the growth rate going forward?

Yes, sure. As I shared in my remarks, we've kind of been tracking toward a dividend payout ratio of 40%. As we get to that mark, you could expect us to increase dividends at a more aggressive pace going forward. Something in the mid-single-digit range for this year in total is probably about right. In the long run, holding that ratio would imply dividends per share growing at a similar rate as earnings per share.

Our next question is from Robbie Ohmes with BofA Global Research.

Actually a follow-up on Drive-Up maybe for Prof. John Mulligan. I was wondering if we could get maybe a little more detail on the move into fresh, frozen and alcohol and the early responses that you've seen in the Twin Cities test. And maybe kind of walk us through what the barriers are to rolling that out quickly or sooner rather than later and what the profit impacts are on Drive-Up when you start including things like fresh and frozen.

Sure. Professor is probably a strong word to describe me. I think we've been testing this in the Twin Cities with team members for a few months now, several months. I think like I said, the guest feedback broadly is that they want to add a few more items to their Drive-Up basket, something like milk, eggs, whatever, bread, whatever the kind of staples are that they need or bananas. And so we feel good that that will be -- this will ultimately be adding a few more items to what is already a Drive-Up order. And from that perspective, we think ultimately, we'll get to a good place on the economics. Clearly, we have work to do to scale the business, to work through the operating -- operations for the stores. We want to ensure that we have the chill chain wired and all of that. And I think that's where you'll see us make sure we can do it at scale. We've done the operating tests with our team members, so we understand how it should work. But then we want to get to a place where as that demand grows, as we introduce it, which we've seen with every one of the things we've introduced from a fulfillment capability perspective, the demand grows relatively rapidly, and we want to be sure we're built for it. The final piece that perhaps changes the cadence a little bit is we do need to go back in and ensure we have capacity in the store to handle the temperature-controlled. The one thing we will not trade on is the speed and efficiency with which Drive-Up occurs today. A 2- to 3-minute promise is incredibly important. We think it's a -- we know it's a differentiator in the marketplace. And so ensuring that we have frozen and refrigerated capacity close to the front of the store so that our team members can continue to deliver on that pace requires some buildout. And so you'll see us work through that as well. Put all that together, us wanting to learn, some buildout time, and that's why we get to the scaling that we're talking about for this year.

And then my follow-up question would just be on Target Plus. And as you're -- as Target is bringing in more brands -- national brands, what is the economics on that? Are you pursuing brands that you just think will drive traffic to your website? Or are you getting alternative profit stream benefits from bringing on those brands?

Yes. Kind of to Brian's comments earlier, we're really focused on curating the right sellers to complement what we already sell in-store and online. And we feel like that's an additive benefit to the guest experience and assortment choice in total.

Our next question is from Edward Kelly with Wells Fargo.

I wanted to ask you about CapEx. So the 2021 and beyond CapEx guidance came up. What's driving that? And can you just provide more color around where you're going to be spending capital that's -- that wasn't anticipated prior?

Sure, I can take that. Our overall expectations for the level of continued investment in the business are actually about the same. I think what you're seeing are some puts and takes by year as we've refined our expectation on the specific timing of certain projects. For example, the timing of when we bring a distribution center online can move around a year versus what we thought before, and we're continually revising those out-year plans. We'll be about $0.5 billion light of where we thought we'd be in 2019. 2020 is unchanged at $3.5 billion. 2021 is a little higher based on the retiming of some of those projects but $3 million to $3.5 billion. And the out years are still at $3 billion or just a shade less.

Okay. And then just a quick follow-up on what you're seeing currently on coronavirus and demand. As it relates to digital fulfillment, any increased demand that you're seeing there, thoughts on how that might impact digital growth next year -- or in 2020, sorry? And are you making any adjustments on fulfillment capacity at all related to this?

Yes. Ed, actually, as we sit here today, I think we're reminded just how important stores are to our guests during a time like this. And we've certainly seen a surge in store traffic as guests begin to stock up on those household essentials and those core food and beverage items. So it's been a reminder to all of us that stores are critically important to our guests. It's where the majority of U.S. shopping still takes place. And while our same-day fulfillment options are growing in popularity, our guests still respond to our stores first and foremost. So that's certainly what we've seen recently, and I think you're seeing that across the retail sector. But it is a reminder that our multi-category portfolio is very important during times like this, and our stores play a really important role to meet the needs of today's guests during uncertain times.

Our next question is from Paul Lejuez with Citi.

I'm curious, as we look back at 2019, what were your biggest surprises? Maybe if you can maybe throw out one positive, one negative thing that really surprised you in 2019. And I'm also curious what you view as the lowest-hanging fruit for 2020 as well as how you're thinking about your biggest challenge in 2020.

Yes. I'll start, but I think this is a great question to open up for both John and Michael. If I think about positive surprises for 2019, I think the overall consistent performance that we delivered from a top line standpoint, the exceptional growth we delivered, the market share gains we saw across so many categories, and we illustrated that during our presentation today but seeing the type of share gains that we delivered in apparel, in beauty, the continued strength in toys, the strength we saw in household essentials and food and beverage. Our multi-category portfolio performed so well throughout the year. Obviously, we were very pleased with our ability to translate that into operating income growth and obviously into expanded EPS improvement. So for me, the health of the entire portfolio, the fact that our entire multi-category portfolio performed so well and we're able to take oversized share in so many categories, translate that back to operating income and EPS growth for our shareholders, I think the quality of the results in 2019 is something we feel very good about. If I think about an opportunity, we've talked about it many times. We were disappointed with our performance in the fourth quarter in several spaces. And we think we've got opportunities to go back into 2020 and improve performance in toys, in electronics, in parts of our home business. As we focus on key items next year, we want to make sure we're buying to the depth required to make sure that we meet the demand in the marketplace during the holiday season. So those are important lessons learned. But the combination of our strength in our portfolio, the growth we saw in same-day fulfillment options, think about the fact that order online, pick up in-store has been something we've been offering for 5 to 6 years now, the fact that during the fourth quarter, we saw growth rates of close to 50%, the expansion in the way the guest has reacted to the Drive-Up component, we feel really good about those highlights. And obviously, we're always a company that's self-critical. There's things we know we can do better and we will as we plan for 2020. John, what's on your list?

Well, you had a good list there. I think from my perspective, the 2 things I'd say from an operations perspective, one, Brian hit right on it, the way same-day -- really the guest acceptance there and the guest preference there for same-day, we certainly plan for that to grow meaningfully this year. That exceeded our expectations. And so I think that is something we will continue. As we said, build out next year, improve Drive-Up, add different categories to Drive-Up, I think, is a huge opportunity for us. And then continuing to grow Shipt both inside Target and outside Target, we think, is an opportunity. The other highlight I would say that we haven't talked a lot about today, but the work of the stores teams and delivering the great store experience they did while we changed entirely their operating model and, as I said earlier, 300,000 team members basically all getting new job descriptions across the company; and the way they handled that change, the great job the leaders did to lead through that and, as I said, while continuing to provide a great in-store experience, one is it's a highlight for me for 2019, but it is a huge opportunity for 2020 and beyond because we're just getting started there, right? Everyone's learned their jobs. And now we have the opportunity to really improve that operating model, improve how we work with our guests and serve their needs in the store. And I think that's a great, great opportunity for us in 2020.

Michael?

You guys have covered a lot of ground. I'll try to add to it. In 2019, if you step back and look at that year compared to our long-term algorithm, low single-digit comp growth, mid-single-digit operating income growth, high single-digit EPS growth, it was a year that exceeded that algorithm meaningfully. And our ability to translate top line strength into bottom line profit is a real standout for me. And then the capper is to see ROIC at 16%. Back to the investment question and CapEx question earlier, we've got a balance sheet that we've built intentionally to afford ourselves the capacity to invest in growth. And to see those investments pay off with strong ROIC performance is always good from the chair I sit in. In terms of opportunities, a little bit more inventory at the end of the year would have been nice. We've touched on that already. And then as I think about 2020, I'd go back to the multi-category model both in the -- through the lens of strengths and opportunities. I think we've really shown over time that model affords us the ability to lean in and be aggressive and take share across a number of categories when the opportunity presents itself. And when I think about risks, it's the stuff that we can't see coming as we sit here today that's probably going to be what we're talking about as the year progresses. But the benefit of a multi-category model is it buys us a lot of diversification of that risk. And our ability to flex within that model to overcome whatever is thrown at us is really strong.

Yes. So Paul, I'll come back to kind of 2 other highlights as we think about the year and I think about even the fourth quarter. While we were disappointed with our comp sales in the fourth quarter, only growing by 1.5%, we were able to take market share across many categories. But importantly, because of the work that we've done in-store, the disciplined approach we've taken in our supply chain, our ability to manage category mix and the fact that on a comp growth of 1.5%, we grew operating income by 7.3%, EPS up over 10%, is something that I think our team is very proud of. And I would end by going back to the team. And for several years now, I think our team has demonstrated that we have built a sustainable, durable financial model that -- one that's going to perform continuously over time. And I feel terrific about the talent we have at Target, the diversity of our team, the leadership that we have in place right now. And obviously, at the end of the day, it always comes down to people. And this is a fabulous team that I think is prepared to face any of the challenges in front of us but puts the guest first, is thinking about what's right for our business, right for our shareholders. And I think that's one of the things that we all feel really good about as we go into 2020.

Our last question comes from Greg Melich with Evercore ISI.

Great. So I got the pressure here now.

No pressure at all, Greg.

A lot in here. So 2 things I really wanted to follow up on. One was you mentioned inventory a lot. I guess I want to ask a little bit, it sounds like you really wish you had more. And I'm wondering what things can you do to sort of change the incentive structure for the organization or shift to have that extra $500 million of inventory because it just seems to make sense given your traffic growth and the interest rate environment that we're in.

Yes. Greg, I'll start. And as I think about where we ended up and the choices we made, it's not about changing our incentive structure. Our incentive structure is really well connected to the overall financial objectives of this company. Next year and actually throughout the year, you're going to see us focus on fewer items in a much bolder way to make sure we're delivering a great experience for our guests. But you'll see us curate even tighter as we go into 2020, make sure that we stand behind those key items that we know are on trend, that are going to drive demand, that are going to delight our guests and bring them joy when they're shopping our stores or shopping online. So it's not about changing an incentive structure. It's about saying, all right, here's items we're going to stand for. We're going to make sure we're bold and deep as we make those buys. And we're going to make sure that they're the right items that deliver upon our brand promise and make sure that we're delivering both a great experience and great quality and style and terrific value throughout the year.

And the other thing I'd add, Greg, I don't think this was our merchant teams, our planning teams, IM teams, inventory management teams lacking conviction. I think we finished the year before a little bit heavy. The teams looked at a calendar with 6 less days of sales in front of them and perhaps took a -- well, we did take a conservative approach, and we perhaps went a little bit further. And I think, like Brian said, we recognize where we have some opportunity, and already adjustments are in place. So we feel good about the -- of that resolving itself.

Got it. And then secondly, of course, we see the leveraging was, you said, John, down 25% fulfillment cost [ as you ] shift in-store. I'm curious what the growth of fresh and adult beverages would do to that this year. Should we expect a similar improvement? Will that create some headwinds? Because ultimately, if digital is profitable, it sounds like it is now but not as much as the store. Something along those lines you could help us with would be great.

Yes. I think -- as I think Michael described it well in his remarks, right, digital is always going to be dilutive to rate. But from our perspective, digital is really important because as we talked about, particularly with those same-day sales, we see a lot of incrementality. We see 25% incrementality when someone brings Drive-Up into how they engage with Target. We see 100% of their Shipt sales being incremental. So these are individuals becoming more engaged with Target and that with respect to Drive-Up, as we give them the opportunity to buy a larger assortment, again, what we hear from our guests consistently is, "I want to do what I want to do. But hey, by the way, can I throw 1 or 2 more things into that basket?" And so from that perspective, we feel good about getting to a good economic place with those transactions. And so there's much for us to learn here as -- we aren't even really doing this for guests yet in Minneapolis or we may have just started in the past week or 1.5 weeks. So there's a lot for us to learn there, but we feel really good and we feel really good especially given that consumers clearly are moving very quickly to same-day. And those economics are very beneficial to us. So we feel good about the direction, and more for us to come back and talk to you guys about as we learn more about Drive-Up.

All right. So with that, we're going to wrap up our session today. Again, we appreciate your flexibility. Thanks for joining us today, and we look forward to seeing you throughout the year.