Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation third quarter earnings release conference call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, November 18, 2020. I would now like to turn the conference over to Mr. John Hulbert, Vice President, Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining us on our third quarter 2020 earnings conference call. On the line with me today are Brian Cornell, Chairman and Chief Executive Officer; John Mulligan, Chief Operating Officer; and Michael Fiddelke, Chief Financial Officer. In a few moments, Brian, John and Michael will provide their perspective on the third quarter and our priorities as we move into the holiday season. Following the remarks, we'll open the phone lines for a question-and-answer session. This morning, we're joined on this conference call by investors and others who are listening to our comments via webcast. Following the call, Michael and I will be available to answer your follow-up questions. And finally, as a reminder, 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. Also in these remarks, we refer to non-GAAP financial measures, including adjusted earnings per share. Reconciliations of all non-GAAP numbers to the most directly comparable GAAP number are included in this morning's press release, which is posted on our Investor Relations website. With that, I'll turn it over to Brian for his thoughts on the quarter and our focus going forward. Brian?

Thanks, John, and good morning, everyone. Before I move to our third quarter results, I want to acknowledge our team. In an incredibly challenging environment, they have stayed focused on our guests, looked out for each other and built on the purpose and a clear set of priorities we've had in place for several years, making Target an even more relevant and responsive company for the millions of families we serve every week. The pandemic has presented new challenges for all of us, and our team has successfully navigated every one of them. They've stayed laser-focused on safety, agility and reliability as they seamlessly adapted to abrupt changes in guest needs and shopping patterns. They've handled supply constraints in essential categories while chasing inventory in long lead time categories that are experiencing explosive growth. They've been a calming presence and a friendly face to our guests, who are craving normalcy at a time when hardly anything feels that way. And our team members have passionately played an active, positive role in our communities during an incredibly turbulent year. With a deepening level of trust our guests are placing in our team and our brand, we've continued to see very strong business results. Third quarter sales grew nearly $4 billion over last year, bringing our year-to-date growth to more than $10 billion. This unprecedented growth, both in the quarter and the year, has been driven by meaningful share gains across every one of our core categories as guests increasingly rely on Target to reliably and safely serve their wants and needs. Based on the cost leverage driven by steeply higher sales, our business continued to deliver impressive bottom line performance despite the outside investments we have been making in our team, safety and digital fulfillment. Our third quarter adjusted EPS of…

Thanks, Brian. When you pull back and consider what's happened in our business this year, it's clear that a couple of defining themes have emerged. The first is flexibility. You've seen that play out in our merchandising assortment, enabling us to satisfy our guests' rapidly changing wants and needs throughout the year. You've also seen it play out in our operations as our stores-as-hubs model allowed our team to pivot seamlessly when guests move their shopping between stores and our digital channels. This flexibility will continue to serve us well in the fourth quarter and beyond, given that we continue to face an elevated level of uncertainty across multiple aspects of our business. Our third quarter results continue to demonstrate the power of our same-day services to deliver speed and convenience for our guests while driving an impressive amount of the company's growth. In the third quarter, our same-day services grew well over 200% compared with last year, adding more than $1 billion of incremental sales. Nearly $700 million of this growth was from our Drive Up service alone, which increased more than 500% compared with last year. Amazingly, this growth was not at the expense of in-store pickup, which increased more than 50%. And while Shipt remains the smallest of our same-day services, it continues to grow rapidly as Target sales on Shipt increased nearly 280% in the quarter, accounting for more than $200 million of incremental sales. I want to pause and give a shout out to our team at Shipt and congratulate them on an incredible year of growth and expansion, which has included a doubling of their shopper base. Altogether, our third quarter digital sales grew more than $2 billion compared with last year. For perspective, $2 billion is more than our company's total digital sales…

Thanks, John. Similar to each of our every day lives since the onset of the coronavirus, hardly anything in our P&L has felt the same as before. But a few factors are most important in understanding our business results so far this year. First off, for the headwinds of which there have been several, including merchandising mix, digital fulfillment costs and an avalanche of first quarter apparel markdown. In addition, we've invested nearly $1 billion in additional pay and benefits for our team, along with safety measures to protect both our team and our guests. Yet in the face of those pressures, our business has delivered outstanding profit. And while there are various places on the P&L where you can see the favorability, they all tie back to the $10 billion of incremental sales that John mentioned earlier. On the expense line, this growth has resulted in an extraordinary amount of leverage, which has more than offset the pressure from additional costs. In addition, this year's unusually strong growth has resulted in exceptionally low markdown rates as I'll discuss in more detail in a few minutes. When you pull back from the detail, it's clear that our business has been able to deliver both incredible top line growth and strong bottom line results. This is a hallmark of the durable model we've been building over the last few years. Our third quarter comparable sales increase of 20.7% reflects the continued pattern of trip consolidation by our guests as our average transaction size grew by more than 15% on top of very healthy traffic growth of 4.5%. Total sales grew 21.3%, about 60 basis points faster due to sales in new and nonmature stores. On the gross margin line, we recorded a rate increase of about 80 basis points in the…

Thank you. I want to reinforce Michael's commentary on our connection to families, which is so fundamental to our strategy. It's right at the center of our corporate purpose: to help all families discover the joy of everyday life. As we enter the holiday season at the end of a truly remarkable year, we're humbled and gratified at the number of families who have turned to Target to help them stay connected this year. We've helped them to find everything they need for a birthday party, including the decor, the food, the presents and a card. We created registries for couples getting married and for parents excited to celebrate the birth of a new child. We've helped our guests to stay connected from a distance with a new mobile phone or tablet. And we've helped them enjoy the additional time they're spending at home, whether that was new decor, office equipment, toys, video games or even activewear now that it's become work appropriate in a world in which all meetings are virtual. Even though the holidays will be different this year, we know our guests still want to discover the joy and connect with those closest to them. So our team is focused on helping to make that happen while providing helpful and friendly service in a safe environment during the busiest time of the year. So with that, we'll move to Q&A. John, Michael and I will be happy to take your questions.

[Operator Instructions] And our first question comes from Chris Horvers from JPMorgan.

So I have a near-term question and a long-term question, starting with the near term. I guess curious what your thoughts are on how this holiday plays out. What's the mood of the consumers that you've seen as you head into holiday? You've had some events already that could probably test where you're seeing strength and where you're not seeing strength. So how are you thinking about -- what's the outlook here for the holiday and the timing and so forth?

Well, Chris, it's Brian. Why don't I start out, give everyone a sense for how we're viewing the holiday season. And we've spent a lot of time talking to guests throughout the year. And as it pertains to the holiday, they're clearly telling us that they want to celebrate this holiday season, but they know it's going to be very different: smaller gatherings, those trips that we used to take will be postponed. But we certainly expect that the guests that we serve is going to look for ways to find that little bit of joy during the holiday season. They've reacted very positively to our new promotional plan to start early and actually make those deals available throughout the holiday season. We've heard very positive responses to closing on Thanksgiving and really minimizing those big traffic-driving occasions that we've seen in the past. So we expect this to be a season that's going to be very different, unlike any other we've ever seen. But we expect that guests will decorate their home, and there'll be gifts under the tree and they'll find special ways to celebrate the holiday season. And they'll turn to Target and our multi-category portfolio and our suite of fulfillment services as a way to make that happen.

Understood. And then on the long term, so you've seen the likes of Levi's, Disney shop-in-shops, Ulta last week. Today, WWD has an article that Journelle is coming to Target. It's clear the level of fashion is on the rise at Target. There are plenty of well-known brands that sell into likes of Penneys and Kohl's and Macy's that now seem like a natural fit from Under Armour, Chaps, CK. Is this an active strategy that you are pursuing on the apparel side? What's been the dialogue there? And is there any pushback that you've heard from these types of brands?

First, to be really clear, our focus will always be on curation and making sure we balance the right mix of our own brand and select national brand partners. And that will be an approach we'll take for years to come. So we're very excited about some of our new partnerships and working now with Levi's. And next year, in 2021, welcoming Ulta Beauty to our stores and to Target.com. But we'll always be curators and finding the right mix for our guests between our own brands and iconic national brands.

Our next question comes from Stephanie Wissink from Jefferies.

I have a follow-up question to Chris' question just on brand expansion, but I'm curious if we can look through the lens of your guest profile. Any insights into new to file guests, where they might be coming from and how those baskets may look relative to your historic average guest?

Stephanie, we've talked about the number of new guests that have turned to Target during the pandemic. As John and Michael and I referred to in our opening comments, we're seeing a guest shop multiple categories, take advantage of our vast multi-category portfolio. Some days, they're shopping our stores. Some days, they're taking advantage of our same-day fulfillment services. And we expect that to continue. So the guests that are shopping our stores right now are taking advantage of the multiple categories that we sell. They are shopping in apparel and home. They're coming into Hardlines and Food & Beverage. They're taking advantage of our Beauty offerings as well as Household Essentials. And again, some days, we see them taking advantage of the investments we've made to create a safe shopping experience in-store. And other days, they're taking advantage of the ease and convenience of our same-day fulfillment services.

And our next question comes from Edward Kelly from Wells Fargo.

Your gross margin performance this quarter was excellent obviously. But can you provide a bit more color just on the markdown situation? So of the 200 basis points that you mentioned, was that all markdowns? How much of that was just less promos versus clearance? And then how do we think about Q4 as it relates to these line items? It's obviously pretty hard for us to predict at this point. I'm sure for you as well. But any color there, I think, would be helpful.

Sure. I can take that one. When you think about the drivers in Q3, the north of 200 basis points of good news from a bucket of levers within merchandising. The single biggest of those, for certain, was markdown efficiency. And we've seen continued efficiency on the promo markdown line throughout the year. And then clearance, and so much of that is a function of our sales -- our higher-than-expected sales in some of the seasonal categories. As you guys well know, a big part of our recipe for assortment in stores is bringing seasonal relevance and newness. In Q3, we changed over a lot of the store heading into the fall. And we had sold through a greater degree of that assortment this year than we typically see, and that provided some real tailwind on the margin line in Q3. When it comes to Q4, as one said, Q4 is always its own animal. So we build Q4 bottom-up with a clean sheet of paper and that's the way we've done it this year with admittedly a few more uncertainties in that equation than we might have typically. But we feel really good about, importantly, how our inventory is positioned heading into the holiday season. And we expect and feel good about our prospects for the quarter looking forward and the strength of the multi-category assortment and the strength of our fulfillment options and the ease and convenience that we'll be able to bring the guests should bode well for the fourth quarter as well.

Yes. It's Brian. I'd only add and really recognize the great work our merchants teams have done throughout the pandemic and certainly in the third quarter, making sure that we quickly adjust assortment to make sure it's relevant for the guests in today's environment. And I think you'll expect to see that in the fourth quarter as well. But our merchants have worked very closely with our key vendor partners to make sure we're making the adjustments and we've got the relevant items in our stores and online that guests are looking for today. And that's certainly been a big part of our success throughout 2020.

[Operator Instructions] Our next question comes from Edward Yruma from KeyBanc Capital Markets.

You guys have been very successful in operating and opening stores in some of these more densely populated urban areas. Wonder if you could give us some sense to how they performed, maybe as some folks have left these cities. And I guess the flip side it, if real estate becomes more accessible, is this a strategy you could continue to lean into longer term?

John, you want to talk about small formats in 2020 and some of the outlook that we have for 2021?

Sure. Yes, we remain really bullish on the small-format stores and the opportunity in front of us there. We have many different types of trade areas that we have opened small formats in over the years, and by and large, they are all performing well. There's a couple that I would say are probably not quite where we'd like to be given the year. One is college campuses. Those stores that are heavily dependent on just students have lagged the company a little bit. And the other one is really on employment centers, not really around dense urban neighborhoods. Dense urban neighborhoods have continued to perform very, very well. Employment centers where people have been working from home, those have also lagged a little bit the rest of the chain. But as we look forward, we continue to see great opportunities across all the different trade areas. We believe college campuses, we're very bullish on those for the future. And so you'll continue to see us look to open small formats in many of the same areas that we've opened them in historically. And you'll see us begin to accelerate a little bit next year, potentially 30 to 35, perhaps over time get to 40 stores a year as we continue to think about opening those smaller stores to address trade areas where guests are seeking the Target experience, but today can't get that store experience. So like I said, we remain very bullish on that whole concept.

And our next question comes from Karen Short from Barclays.

I'm just wondering, with respect -- a short-term question and then longer term. You gave a lot of color in terms of the things that you're doing near term and also for January to the extent that January slows down. But I guess I'm wondering how you're thinking about December from the perspective of there's been so much pull-forward of shopping. Do you think there's some risk from a December perspective that December kind of fizzles a little bit? And how are you planning for that? And then I just had one other bigger picture.

Karen, why don't I start? I think as we've looked at the holiday season, we expected the guests to start shopping earlier but continue to shop throughout the holiday season right up to Christmas eve. So we think it's going to be a prolonged shopping season. I think we're going to see very different shopping patterns. We don't expect to see those big spikes during Black Friday and on weekends. I think it's going to be spread across the holiday season. And we think December is going to be a very important gifting season for our guests. So we're watching it carefully. And again, we'll put a premium on flexibility and agility as we work through the months of November and December. But all indications, as we've talked to the consumer and talked to the guests is they're going to look to celebrate this holiday season. They're going to be focused on gifting and celebrating with their family and close friends. And we expect them to be in our stores and shopping online right till the very end of the holiday season.

Okay. And then my second question is just for -- as we look to 2021, obviously, there are some tough comparisons on the top line and maybe some tougher comparisons on the promotional from a lack of promotions this year. How are you thinking about the environment in 2021 as some retailers have to lap some of the tough comparisons? Or is it a function of the fact that there are many retailers that really can't be promotional because they don't have the balance sheet and capability to do that?

Karen, right now, we're very focused on the first half of 2021. And this is going to be a familiar theme: really taking some of the lessons learned from 2020, putting a premium on flexibility and agility because as Michael and I have both said, we, unfortunately, don't have that crystal ball as we look to the future. We're all looking for greater certainty. But we know we're going to go into the first half of 2021 facing the continued pandemic, waiting for vaccines, looking for greater clarity around the condition of the economy and unemployment. And I think we're going to just have to make sure that we remain flexible and provide the assortment and the services and the safety that the guest is looking for from Target. We certainly expect certain trends will continue. We think guests will continue to consolidate the number of locations where they shop. We think our multi-category portfolio will continue to be very important as we serve the needs of families. We think ease and convenience, combined with safety, will continue to be important. And we'll continue to deliver great value. So Michael talked about our continued focus on market share and the market share opportunities that are in front of us, and I think we'll be very focused on continuing to build off of the market share gains that we achieved in 2020 and further share opportunities in 2021.

And our next question comes from Paul Lejuez from Citi.

A couple of quick ones. Just I'm curious if you can quantify the percent of your sales increase that's being driven by new customers versus existing customers? Curious about the store comp, if you can talk traffic versus ticket. And then, Brian, you mentioned, I think the top quartile of your stores are doing $500 a foot. Curious if you looked at that top quartile, let's say, as of 2019 versus the bottom quartile, how are each of those performing this year in 2020?

Yes. Why don't I start and then I'll ask for both John and Michael to provide a perspective. But I'll start with the recognition that on an average week, we see well over 30 million guests shopping our stores. And as you've seen in our third quarter results, we've seen traffic continue to grow at a rate of 4.5%, basket expand over 15%, and certainly, there are a mix of new guests to Target. But the Target guests and the families that shop us each and every week are visiting us more frequently. They're certainly shopping more categories. And that's creating greater trips either to our stores or to our fulfillment channels, and they're shopping a wider array of categories to take advantage of our multi-category portfolio. So we're seeing both growth with our existing guests and new guests to Target and to Target.com. Mike, can you give perspective on top-tier versus lower-tier store performance?

Yes. I'll take that really quickly. As you'd imagine, given just the magnitude of the number of stores, those tiers tend to move in unison. So we talked about the top tier being up, the bottom tier move the same amount. And any individual store will have its own story. But in quartile, they tend to move pretty consistently.

So I think the only thing I'd add is we look at our performance, our comps by geography each and every week. And we're seeing very consistent results literally across the country. From both coasts and the heartland of America and in the Southern market, really consistent comp and growth performance. So certainly, it's not 1 or 2 markets that are driving it. It's not our top-tier stores versus some of our lower-volume stores. We're seeing a consistent lift across the entire fleet of stores and obviously very strong growth in our digital channels.

And our next question comes from Paul Trussell from Deutsche Bank.

Very strong quarter. The question I'm not going to ask is to John on whether there's enough capacity for the holiday season. I think the point is very well made there. But I do want to ask about -- I do want to ask about the evolution of the same-day services. And just curious on what you're learning given the robust growth, how you're improving efficiency, your ability to add additional items of merchandise in categories to be included in those services?

Yes. Well, first, thank you, God bless you for not asking about capacity. I would tell you, our store teams and the Shipt team continue to execute our same-day services at a very, very high level. And I think you hit on one of the things we've been very focused on this year, which is really assortment expansion. For Drive Up and for Pick Up, that has meant adding frozen, refrigerated and fresh foods. We are on a trajectory when we started the year to add it to about 300 stores. We obviously paused in the early spring. And then as things started to open up, really proud of the way our store teams responded and decided we could execute that across our properties team, supply chain and stores to get that in close to 1,600 of our stores today. And so that's available and that's been a huge win for our guests. We see the unit increases -- the number of units in the basket increase as guests start shopping that. It was the #1 guest satisfier. If I can come and get diapers and a couple of other things, why can't I get a gallon of milk and some eggs. And so now we're able to fulfill that. Right along with that, in OPU and Drive Up -- with Order Pick Up and Drive Up, we've added adult beverage, another key category for us where, again, it just tops off the basket. So a real guest satisfier and we'll continue to work to add other categories at Shipt. The opportunity there was to get some more of our discretionary categories available for our guests as they use our same-day service. And so as Brian mentioned earlier in the call, we added children's and adult apparel to that right here before the holiday. We think that will do very well. So the teams continue to execute, continue to build efficiencies into what we're doing. But importantly -- I think the most important thing is they continue to ask the guests what it is they want and what we can fulfill for them and you'll see us continue to work toward that. And that will guide really how we continue to improve those services.

Our final question comes from Robby Ohmes from Bank of America.

First, Brian and team, I just want to say congrats on the execution of your strategy. It's been plain remarkable. My question, I'm sorry, I'm going to ask two. Brian, you mentioned Shipt. I was wondering if you could give us a little more on Shipt and profitability and maybe growth outside of Target, maybe a little more color on what Shipt is becoming. And then the second, maybe a shorter question, just a Target Plus, your marketplace. Anything changing with your strategy there that you can share with us, given your momentum online?

John, you want to start with Shipt and then we'll wrap up with Target Plus.

Yes. We continue to be really, really pleased with the performance of Shipt and the execution of the team. As we said, Shipt at Target has grown 280% this quarter, $200 million of incremental sales. So -- and it's a key part of what we're going to do here in the fourth quarter, we think you'll see us throughout the fourth quarter really lean into our same-day service as Order Pick Up, Drive Up and Shipt as a way -- as our way to fulfill our guest needs, and Shipt will be a big part of that. I think beyond that, Shipt continues to experience very strong growth. They continue to add retailers. There are over 100 national and regional retailers. They added Bed Bath & Beyond this quarter in addition to a few others. They've doubled the number of shoppers since the spring and are planning to add another 100,000 shoppers here for the fourth quarter. So we continue to see really strong growth, and we're very pleased with Shipt's performance overall.

And Robby, on Target Plus, our approach continues to be the same. We're very selectively curating some vendor partners. I think we're up to about 175 right now. We probably have now close to 400,000 SKUs available through Target Plus. But we'll continue to make sure we curate very carefully and complement our store and online assortment. So with that, I do want to thank everyone for joining us today. I wish everyone a safe and happy holiday season. We look forward to the day when we can all be back together in person. But thanks for joining us. Thanks for your support, and have a safe and happy holiday season.