Target Corp (TGT) — Q1 2022 Earnings Call Transcript

Good morning, everyone, and thank you for joining us on our first quarter 2022 earnings conference call. On the line with me today are Brian Cornell, Chairman and Chief Executive Officer; Christina Hennington, Chief Growth Officer; John Mulligan, Chief Operating Officer; and Michael Fiddelke, Chief Financial Officer. In a few moments, Brian, Christina, John and Michael will provide their perspective on our first quarter performance and our outlook and priorities for the second quarter and beyond. 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 most recently filed 10-K. 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 his perspective on our outlook. Brian?

Thanks, John, and good morning, everyone. Our first quarter results demonstrate the underlying strength of the relationship we've built with our guests at a time when our team is navigating multiple cost pressures affecting our business. As expected, our business continued to grow in the first quarter, building on huge gains a year ago, highlighting the resilience of both the consumer and the ability of our team to serve them. However, due to a host of factors, this growth was challenged by unusually high costs, resulting in profitability well below our expectations and our intended operating levels over time. First quarter comparable sales grew by 3.3%, on top of 23% growth a year ago. This marked our 20th consecutive quarter of comparable sales increases. Eleven of those quarters were before the pandemic, followed by the rapid acceleration we saw in 2020. We're also encouraged that traffic continues to fuel our growth, increasing nearly 4% in the quarter, building on 17% growth a year ago. Our first quarter gross margin rate was below our expectations, reflecting a combination of factors, driven by a rapidly shifting macro backdrop and changing consumer behavior. More specifically, we saw much higher-than-expected transportation costs and a dramatic change in our sales mix than we anticipated. This resulted in excess inventory, much of it in bulky categories, which put additional strain on an already stretched supply chain. Christina, John, and Michael will share more details shortly. And while we have a lot of work ahead of us to restore profitability to the intended level, I want to thank the team for maintaining their laser focus on the guest experience. We've spent years growing Target's relationship with our guests, which is fueling the traffic and sales growth we're seeing today. In sustaining that guest focus, we're confident we'll see deeper loyalty and profitable sales growth in the years ahead. In our sales channels, first quarter comps were balanced between store and digital, with each increasing a little more than 3%. Within our digital channel, growth continues to be led by our same-day services, particularly Drive-Up, which delivered mid-teen growth this year on top of more than 100% growth a year ago. Since Q1 of 2019, prior to the pandemic, first quarter sales have grown more than 40%, or just over $7.4 billion. Broken down by channel, store sales accounted for about $4.1 billion of this increase, while digital sales grew another $3.3 billion, having expanded by more than 250% over that time. From a category perspective, we continue to benefit from our balanced multi-category portfolio, which allows us to flexibly serve our guests as their wants and needs change. More specifically, in Q1, we continued to see strong growth and market share gains in food and beverage and essential categories. We also benefited from double-digit comp growth in Beauty, reflecting our ongoing work to enhance presentation, assortment and service, including our new and expanding partnership with Ulta Beauty. The results of this partnership have exceeded our initial expectations, driving higher productivity and sales in both Beauty and adjacent categories in the store, where we've added an Ulta Beauty experience. In our other three core merchandise categories: Apparel, Home, and Hardlines, we saw a rapid slowdown in the year-over-year sales trend beginning in March, when we began to annualize the impact of last year's stimulus payments. While we anticipated a post-stimulus slowdown in these categories and expect the consumer to continue refocusing their spending away from goods and into services, we didn't anticipate the magnitude of that shift. As I mentioned earlier, this led us to carry too much inventory, particularly in bulky categories, including kitchen appliances, TVs, and outdoor furniture. With very little slack capacity after two years of unprecedented growth, we faced elevated costs to store and began rightsizing our inventory position. Nevertheless, we're still seeing healthy overall spending by our guests, even as their spending continues to evolve. Notably, we continue to see meaningful spending surges around holidays, including Easter in April and Mother's Day a couple of weeks ago. Also notable, in comparing this year's weekly sales to pre-pandemic levels at the beginning of 2019, we're actually seeing stronger three-year growth trends in recent weeks compared with the start of Q1, even in categories where we saw a rapid slowdown on a one-year basis. These encouraging longer-term growth trends demonstrate the resilience of the American consumer and the trust they place in Target, even amid multiple challenges. Not surprisingly, when we talk to our guests, they often express their concerns about rapidly changing conditions, ranging from geopolitics to high and persistent inflation, particularly in food and energy. At the same time, guests are focused on getting back to habits and behaviors they suspended during the heart of the pandemic, including travel, out-of-home activities, and social gatherings. Importantly, even as the mix of what they're buying continues to evolve, their spending capacity continues to benefit from elevated saving rates, high employment, and healthy wage growth. So, as we continually adapt our offerings to best serve our guests in this rapidly changing environment, today, we're focused on providing value across our multi-category assortment, presenting options that are affordable and accessible to a broad and diverse base of guests across various household incomes. Even as we face multiple cost pressures, our team is working tirelessly to maintain prices wherever possible. Of course, while it's always the last lever we pull, external conditions have led us to raise prices across a broad set of items in multiple categories. As you’ve clearly seen in recent quarters, overall costs have been rising much faster than retail prices, resulting in year-over-year declines in our gross margin rates. While we're not pleased about the near-term pressure this causes on the profit line, we firmly believe these decisions will benefit our business over time. As we currently monitor how our prices and quality stack up against the competition, our guests are telling us they appreciate the value and experience we're providing. More importantly, our guests are showing appreciation, with more footsteps in our stores and more clicks on our site, resulting in continued traffic and sales growth on top of record growth a year ago. As we look ahead, we'll maintain this focus on value, helping guests save time and money in a rapidly evolving environment. For those focusing on driving pure mileage in response to record high gas prices, our broadened unit merchandise assortment, combined with our low prices, offers a smart way to save time and miles by consolidating shopping trips. For guests looking for money-saving options when shopping for their families, our $30 billion portfolio of home brands offers outstanding quality and savings across every one of our merchandising categories. Because saving time is valuable in any environment, we're continuing to invest in expanding the scope of our reliable and convenient same-day services, including our Drive-Up and in-store pickup services, which we offer our guests at no charge. Just as we've designed our merchandise portfolio to flexibly serve our guests, our operations have managed through extreme volatility over the last few years. Rapid growth amounting to tens of billions of dollars, combined with an unprecedented shift in demand across categories, channels, and services, has created a host of challenges for our team, which they've handled with incredible energy and focus. While we entered this year hopeful that volatility would begin to moderate, we’ve experienced the extreme opposite in Q1, and we don't see current conditions improving right away. In the face of this volatility, our team continues to focus on the guest experience, ensuring that anything our team is handling behind the scenes doesn't impact what our guests see and feel. As we look ahead, it is clear that many of these pressures will persist in future quarters, but that hasn't affected our long-term plans and expectations, including our confidence in the ability of our business to grow mid-single digits and maintain an operating margin of 8% or higher over time. In the meantime, as we navigate efforts to restore profitability from the impact of short-term challenges, we're continuing to invest in project design to deliver continued profitable long-term growth. Our business model and team have proven their ability to successfully navigate through extreme volatility, and we're confident our business will emerge even stronger from these challenges we're facing today. Just as our investments in early 2017 were followed by profitable growth in later years, we're confident the decisions we're making today, combined with our investments in future growth, will pay off handsomely over time. With that, I'll turn it over to Christina.

Thanks, Brian, and good morning, everyone. Just a few months ago, at our Financial Community Meeting, my presentation outlined our strategic vision as a company. While I covered many facets of our strategy that day, the point I started with then is where I want to start again today, with our guests. We frequently get questions about how our guests are feeling given the current economic environment, how their shopping habits are evolving, and what's top of mind for them. Our guest base encompasses every slice of the American population, given that we serve nearly 20 million guests on average each week. And the breadth of their individual decisions as they navigate a rapidly changing macro environment is equally broad, making the answers to those questions all the more complex. A guest might tell us that they're worried about inflation and rising gas prices, but they're also looking to splurge on new shoes or some accent pillows for their home. Another guest remains worried about COVID, but they're still planning to resume travel and looking forward to summer outings like Little League games and barbecues with friends. Many guests share their uncertainty about the overall state of the economy but feel more positive about their personal finances. With so much on their minds and a wide array of wants and needs, it has never been more critical for Target to be flexible and provide ease, safety, inspiration, and solutions for all of our guests. In the first quarter, we invested in delivering a great guest experience to build and maintain trust and love for the Target brand. Those decisions came with substantial costs. I'll share more on this shortly. Our first quarter results reinforce the power of our multi-category portfolio, allowing us to lean into ever-changing wants and needs. More and more, we are seeing our guests' increasing mobility and love of newness play out in their Target purchases as baskets shift more toward experiences and going-out categories. This includes notable strength in fashionable apparel, prepaid cards, toys, and travel. While apparel basics moderated in the quarter, trend-based apparel accelerated meaningfully as more people return to the office or dine out with friends. We're also seeing robust growth in Beauty, driven by particular strength in going-out categories like sunscreen, color cosmetics, and fragrance. Luggage grew more than 50% as the world continues to reopen, and we reunite with places and people we've missed visiting. Our owned brand portfolio continues to grow faster than total sales, as it has for years. We continuously benefit from the growing guest affinity for our owned brands, designed to drive trips to Target, not simply to provide another option when guests are already in a store. Our guests appreciate the value, quality, and great design they expect and love from Target-owned brands, even as they continue to appreciate our national brand options and partnerships as well. As Brian outlined, our team delivered just over 3% in comparable sales growth in the first quarter, in line with expectations, reflecting strong traffic and unit share gains. First quarter growth was strongest in frequently purchased categories, including Food & Beverage, Beauty, and Essentials. Food & Beverage, which delivered low double-digit growth this quarter, was strong across the entire assortment. Over the last three years, first quarter Food & Beverage sales have increased by nearly $1.8 billion, accounting for nearly a quarter of our total sales growth during that time. Market share gains in this category are being driven by unit share growth, most notably in our owned brand offerings, as more guests turn to Good & Gather and Favorite Day for meal solutions. Beauty has been one of our fastest-growing categories for years and grew again in the low double digits in Q1 as guests spend more time outside the home and want to look and feel their best. Since the first quarter of 2019, Beauty sales have expanded by more than 45%, the vast majority of which occurred before our rollout of the Ulta Beauty at Target experience, indicating that there is still significant room for growth in this category. Essentials grew in the high single digits in Q1, having added over $1 billion in first-quarter sales over the last three years. Notably, nearly $0.5 billion of that growth occurred after 2020, with explosive demand for categories like household paper, over-the-counter products, and cleaning supplies. Across our other core categories: Apparel, Home, and Hardlines, we saw small declines in comparable sales this quarter. In Apparel, despite unfavorable weather across most of the country, comp sales remained nearly flat to last year, growing more than 60% in the first quarter a year ago and nearly $1 billion since the first quarter of 2019. In Home, even after a small pullback in Q1 comps, sales remain more than 40% higher than the first quarter of 2019, equating to more than $1.2 billion in growth over that time. Our seasonal categories continue to excel as our guests turn to Target for all their holiday and celebratory solutions, leading to all-time records in the recent Valentine's Day and Easter seasons. Notably, guests are finding new ways to enjoy and celebrate the spaces they've invested in over the past few years. Having renovated their homes with purchases in categories like furniture and small appliances, guests are now refreshing their homes with smaller touches, driving demand in categories like decor, candles, and seasonal assortments; further evidence, not just of the strength in our multi-category portfolio, but the breadth of what we offer within categories as well. Hardlines saw a slight pullback in Q1 but has grown more than $1.3 billion since the first quarter of 2019. Within Hardlines, guests have been refocusing their spending away from electronics like TVs and into experiences for both kids and adults, which has led to strength in our toys, travel, and prepaid card categories. As Brian mentioned, first quarter gross margin performance was well below our expectations. This was driven by several factors, the most impactful of which was softer-than-expected sales in several categories, resulting in too much inventory in those areas. As we developed our plans for the quarter, our task was to anticipate how spending would change under circumstances no one had ever seen before, given that we were about to compare two years of historically high federal stimulus payments. As such, we relied on numerous forecasts and estimates, both internal and external, to help formulate our view for the quarter. Despite this careful approach, the mix of actual demand materialized differently than we had anticipated. Additionally, as supply grew and demand shifted away from bulkier products like furniture, TVs, and more, we needed to make difficult trade-off decisions. We could keep this product, knowing it would sell over time or make room for fast-growing categories like Food & Beverage, Beauty, and personal care and Household Essentials. To preserve the quality of our on-shelf presentations and support the guest experience, we chose the latter, leading to incremental markdowns that ultimately reduced our gross margin. While these were difficult decisions, we believe they'll pay off in the long term, as building long-term loyalty remains our top priority. As we look ahead, we'll continue to do all we can to support our guests, providing them great value, an unbeatable selection of necessities and affordable luxuries, and an inspiring shopping experience. The second quarter offers many opportunities for our team to help all families discover the joy of everyday life. This summer's assortment features our most inclusive offerings yet. First, in May, we are celebrating Asian American and Pacific Islander Heritage Month by highlighting Asian founders and creators, amplifying their voices with stories of how their unique cultures influence the creation of their products and businesses. With June around the corner, we're excited to honor our LGBTQ+ community as we celebrate Pride Month. This uplifting and always relevant assortment offers bold products, inclusive marketing, and everyday affirmation that authentically represents and celebrates community and culture. And of course, we just finished celebrating mom in May and have plenty of options to honor dads in June, along with other opportunities to celebrate the joys of summer. Speaking of joy, we're ecstatic about our recently announced expanded partnership with actress, author, and social media phenomenon, Tabitha Brown, a beacon of positivity, inspiration, and joy. Having collaborated with her on social media for years, we're excited to grow our partnership with Tabitha and feature four limited-time-only collections set to launch over the next year, starting with an exclusive apparel and accessories line of more than 75 items this June that are sure to lift both style and spirit. Before I pass things over to John, I want to thank our teams across stores, distribution centers, and headquarters locations all around the globe for their unwavering leadership and service to our guests and to each other. Without them, we would not be able to continue growing our business and serving our guests each day. Despite the volatility and rapid shifts in consumer demand, the macro environment, and the global supply chain, our business remains strong, and we’re confident in both our long-term strategy and our team's ability to navigate through this dynamic period. We continue to focus on serving our guests in all that we do through our ability to provide relevance and joy in our assortment, the delivery of a positive one-of-a-kind inspiring guest experience, and by building lasting, deepened affinity over time. We're fortunate to have the best team in retail to make all of this come to life, and I look forward to all we will do together in the second quarter and beyond. With that, I'll pass things over to John.

Thanks, Christina. Over the last couple of years, our team has focused on two related issues: namely, beginning with the acceleration in sales in early 2020, our inventory wasn't growing fast enough to keep up with the expansion of our sales volume, which resulted in us not maintaining in-stock levels consistent with our standards. Following two years of effort to catch up, by the time we entered 2022, we had made considerable progress. Overall inventory levels were aligned with both the level of sales we had already achieved and our near-term growth expectations. Consequently, we began to see improvements in our in-stocks and product availability. However, conditions have remained far from perfect. Some items and categories remain spotty, typically driven by vendors facing multiple constraints in their businesses. A separate challenge our team has faced, which became more acute in the back half of 2021, is driven by capacity constraints in both the global and domestic freight markets. These issues continue to make it more difficult and expensive to move inventory where we need it to be. Our team has done an excellent job managing through these challenges. And as seen from our recent gross margin results, our P&L has reflected those higher freight costs. Coming into this year, we anticipated tight conditions and elevated costs in freight markets. But the actual conditions and costs have been much more challenging than expected. Specifically, first quarter freight and transportation costs came in hundreds of millions of dollars higher than our already elevated expectations. For the full year, we're now expecting about $1 billion of incremental freight costs, even compared to our expectations just three months ago. Among the reasons for this incremental pressure, record high fuel costs are a meaningful driver, as well as the global shipping market, where costs have stayed unusually high and where we sometimes need to rely on the spot market to secure adequate capacity. Compounding the near-term pressures on our gross margin rate, volatility in both consumer demand and delivery times placed additional stress on our supply chain in Q1, one already running lean on capacity in light of the growth we've seen over the last two years. As Brian and Christina mentioned, this quarter, we ended up carrying too much inventory in several categories where the slowdown in sales was more pronounced than expected, including home, electronics, sporting goods, and apparel. In addition, capacity pressures were compounded by the fact that in several of these categories, including kitchen appliances, furniture, and outdoor living, items are bulkier than average and require higher-than-average storage capacity. As our team collaborated with Christina's team to work through this excess inventory, we made decisions focused on preserving the guest experience. Rather than jamming store sales floors with excess product, which would have made them more difficult to shop, our team secured temporary storage capacity instead. As Christina mentioned, rather than keeping items beyond their relevant season, her team made the tougher call and marked items down to clear them and keep our presentations fresh and inspiring. While these decisions were tough in the moment, we have no doubt they are the right long-term choices. However, they involved higher costs, resulting directly from the actions we chose to take and indirectly in terms of team member hours required to manage the extra volume. As Michael will discuss in more detail, while we don't expect these conditions to persist over time, they will continue to impact our Q2 results before conditions begin improving later this year. More specifically, as we move beyond the front half of the year, we'll have had enough time to adjust inventory levels and receipt volumes to match the pace of sales, even in longer lead time categories. Additionally, capacity in our supply chain will continue to build throughout the year as the new buildings we opened last fall ramp up their productivity while we work to open additional buildings in coming years. Beyond this ongoing work to expand the upstream supply chain, we continue to add downstream capacity in our sortation centers, which increased speed and reduced the unit cost of last-mile delivery. Following our successful test in the Minneapolis market, we now have six sortation centers open and operating, with plans to open three more by the end of the year. While the newly opened centers are still ramping up their capacity, our six sortation centers handled 4.5 million packages in Q1, a number that's expected to grow significantly throughout the year. Each of these facilities already has volume flowing to our national carrier partners, including the ability to sort USPS packages individually by post office, creating a high-speed, low-cost delivery option in the metro areas surrounding each center. Additionally, we've begun rolling out our lowest cost delivery option, Target last-mile delivery, at our Atlanta sortation center and will soon expand that capability to the other four recently opened facilities. For this capability, we collaborate with our partners at Shipt, whose drivers sign up to deliver batches of orders sorted hyper-locally down to the neighborhood level. This provides a fast, efficient, reliable, and low-cost delivery option for our business, benefiting both our guests and the P&L. While we're excited about the results these centers are already delivering, this initiative is in the very early stages, and we plan to continue opening centers and ramping up this new capability for years to come. Beyond investments in the supply chain, we're also excited about the investments in our stores, making them more productive, fun, and inspiring to shop. For the year, we plan to complete remodel projects in nearly 400 stores. Through the first quarter, we had already mobilized just under half of those projects, keeping us on pace for the year. Just under 200 of this year's projects will be traditional full remodels, transforming every part of the store, from wall to wall and floor to ceiling, updating the shopping experience to inspire guests and increase operational efficiency. Beyond those full remodels, we're planning to complete just over 200 fulfillment remodels in 2022 as well. These projects focus on store operations and their ability to support same-day services. More specifically, these projects make amendments within the store to add fulfillment capacity for same-day orders and enhance our pickup and Drive-Up capabilities. When warranted, these remodels include adding walk-in coolers and freezers near the front of the store, which ensures reliable capacity for our team to fulfill fresh, refrigerated, and frozen items through our pickup and Drive-Up services. Additionally, for many of these projects, we had a dedicated door for our team members to use when delivering Drive-Up orders to the parking lot. We're also adding canopies, more prominent signage, and more Drive-Up spaces in our parking lots, ensuring the Drive-Up process is safer and easier for both our team members and our guests. Beyond these existing store investments, we continue to open new stores across the country. In the first quarter, we opened seven locations, all smaller formats, in markets ranging from Jackson Hole in Wyoming to Times Square in New York. We're pleased with the performance of our new stores and our ability to flexibly serve guests in new neighborhoods. And for our stores and markets that were temporarily affected by COVID, including college locations, tourist destinations, and dense urban areas, we've seen continued rapid recovery in sales volumes as activity ramps up in those markets following periods of lockdown over the last two years. Similar to the pressures we've experienced in our merchandise costs, our construction team has been dealing with volatility in the price of raw materials and labor in our new store and remodel projects. Like our merchandising partners, they've done a great job working around those costs and constraints, keeping projects on track while maintaining their focus on delivering a great guest experience. So, as I get ready to hand the call over to Michael, I want to pause and thank the entire operations team, from our stores to supply chain, our properties team, and our partners at Shipt. The growth we've seen in our business and the expansion of our capabilities has been energizing and inspiring but hasn't been easy for our team. They've handled growth well beyond what any of us would have expected two years ago, even as they worked around new challenges and unexpected obstacles. One of the joys of the last year has been the ability for me to get out in the field again, traveling to our stores and distribution facilities across the country and witnessing firsthand the energy and positive attitude our team brings to work. They're united in their support of our guests, for our brand, and for each other. Every day, they bring our company purpose to life, and I am continually inspired by their achievements.

Thanks, John. I want to start my remarks today where John just ended and add my thanks to our entire team. Despite all the challenges they face, they refuse to be distracted. Instead, they maintain their focus on our company purpose: to help all families discover the joy of everyday life. Our team arrives at work daily with a passion for serving all families and serving each other. As John mentioned, it’s been a joy in recent months to be able to travel again, meet with teams across the country, and hear their thoughts. The optimism and energy of our team is infectious. I feel it whenever I meet with the team, and our guests can feel it when they shop, which explains why our Q1 traffic has increased more than 20% over the last two years. In the first quarter, our comp increase of 3.3% was supported by a traffic increase of 3.9%, partially offset by a small decrease in average ticket. Among our fulfillment channels, store sales grew slightly faster than digital in the quarter. Within digital, same-day services continue to drive our growth and accounted for well over half of our first quarter digital sales. Within our same-day services, Drive-Up accounts for the majority of sales and continues to grow the fastest. In fact, of the $3.3 billion in first quarter digital sales we've added since 2019, Drive-Up accounts for nearly half of that growth. On the first quarter gross margin line, we saw a rate decline of about 4.3 percentage points compared with last year. Among the causal factors, merchandising actions drove about 3 percentage points of the decline, stemming from the combined impact of impairments, markdowns, and other actions taken to rightsize our inventory position in categories that were too heavy, along with the impact of higher freight costs. Among other drivers, higher supply chain costs accounted for a little over one percentage point of this year's rate decline, reflecting the impact of higher headcount and compensation in our distribution centers. Sales mix accounted for the remainder of the decline, which accounted for about 10 basis points of pressure. On the SG&A expense line, we benefited from fixed cost leverage and strong expense control throughout the quarter, which helped offset the impact of inflation-driven cost increases in multiple expense lines. Within compensation, the continued impact of team investments was balanced by lower incentive compensation compared with last year. On the D&A expense line, we observed about a 10 basis point benefit in Q1, reflecting leverage on strong revenue growth. Ultimately, our first quarter operating margin rate of 5.3% was about 4.5 percentage points lower than last year. While we anticipated this year's rate would be well below last year, our actual performance in the quarter was far lower than we anticipated, driven by unexpectedly high costs incurred on the gross margin line. Now turning to capital deployment, I'll start where I always do by reiterating our priorities, which have remained consistent for decades. First, we fully invest in our business and projects that support our strategic and financial criteria. Second, we support the dividend and aim to build on our 50-year history of annual dividend growth. Finally, we return any remaining excess cash within the limits of our middle A credit ratings through share repurchases over time. Starting with the top priority, first quarter CapEx was just under $1 billion, keeping us on track to spend $4 billion to $5 billion for the year. While our teams continue to face multiple challenges, including supply shortages, shipping delays, and permitting and inspection delays in some communities, they are doing a great job working around these obstacles and advancing projects. In addition, as John mentioned, unexpected inflationary pressures are affecting some of our capital projects, impacting our total spending for the year. As I noted at our recent Financial Community Meeting, we're excited to make progress on our capital projects, which continue to advance our business. Today, given the team's efforts to advance this year's projects, I believe we'll reach the high end of our $4 billion to $5 billion plan for the year. Moving to our second priority, we paid dividends of $424 million in the first quarter, up about 25% from last year, reflecting a 32% increase in the per-share dividend, partially offset by a decline in share count. We plan to recommend that our Board approve a healthy increase in the quarterly dividend, in the mid-teens to low 20% range later this year, keeping 2022 on track to be our 51st consecutive year of annual dividend increases. Regarding share repurchases, given our strong leverage metrics coming into the year, we entered into an accelerated repurchase plan in the first quarter, expected to result in the retirement of up to $2.75 billion of our stock by the time the plan settles in June. In addition to this ASR, we also repurchased another $10 million in shares in the first quarter. While we expect ample capacity to return capital through share repurchases this year, given the supply chain challenges we're experiencing and their impact on working capital, we expect our total repurchases this year to be lower than the $7 billion we returned in 2021. As always, we'll adjust our pace, up or down, based on external conditions, business performance, and cash flow, with a goal of maintaining our middle A credit ratings. Now, let's discuss our after-tax return on invested capital, which measures both our profitability and the efficiency of our CapEx decisions over time. In the first quarter, we reported a trailing 12-month after-tax ROIC of 25.3%. While this is a strong number, indicative of the underlying health of our business, it was much lower than expected, near the very low end of where we expect to operate over time. Now let's turn to our guidance. In terms of top-line performance, based on our first quarter results and the trends we've seen in May, we continue to expect full-year revenue growth in the low to mid-single-digit range. Regarding our profitability, given the unexpected cost headwinds we currently face, we believe our full-year operating margin rate will be well below our previous guidance of 8% or higher. More specifically, considering the elevated volatility we're facing and multiple sources of uncertainty going forward, we see a potential outcome centered around a 6% operating margin rate for the full year. As John mentioned, we expect the challenges we faced in Q1 to continue impacting our near-term profit performance in Q2. Our team is focused on doing everything necessary to ensure we enter the fall season with an appropriate level of inventory by category. Therefore, we expect a Q2 operating margin rate in a wide range, centered around our first quarter rate of 5.3%, well below where we'd expect to operate under normal conditions. As we move into the back half of the year, we expect our profit performance will begin to improve. Specifically, as John mentioned, we anticipate having worked through excess inventory positions that hindered our Q1 performance and which we expect to continue affecting our gross margin in Q2. That said, we don't anticipate the external environment will return to normal in the back half of the year. In particular, we expect that significant global supply chain pressures will persist until 2023 at the earliest, meaning the elevated costs we're facing will continue to affect our profitability for the remainder of the year. However, let me clarify a couple of points. First, we are not satisfied with our current profit performance, and our team is laser-focused on quickly restoring our business performance to where it should be operating over time. That said, nothing occurring today has altered our long-run expectations regarding the ability of our business to grow, nor has it changed our view of its potential to deliver an operating margin rate of 8% or higher over time. As we navigate these near-term challenges, we are fortunate to have an incredibly healthy underlying business, one that can withstand the significant headwinds we're facing and emerge stronger. We have ample financial capacity to continue making long-term investments in new stores, remodels, supply chain, and our team, all with a focus on serving and delighting our guests, driving deeper loyalty, and building upon the top-line growth we've experienced in recent years, which continues today. After all, even after a significant pullback from last year, first quarter earnings per share were more than 40% higher than in the first quarter of 2019, prior to the pandemic's onset. While this does not mean we're where we want to be today, it shows we possess a strong foundation from which we can recover from today's challenging environment and restore our operating margins to 8% or higher over time, consistent with our long-term financial algorithm. Given the loyalty and momentum we've established with our guests and the strength of our ongoing investments, we expect to continue growing the top line, even as we regain the level of profitability we anticipate the business will generate over time. Now, I'll turn it back over to Brian for some closing remarks.

Thanks, Michael. Before we move to your questions, I want to take a few minutes to reinforce our confidence in the ability of our team and our durable business model to successfully navigate today's volatile environment and deliver continued profitable market share growth in the years ahead. As Michael covered, even as elevated costs put meaningful pressure on our near-term financial performance, our business today remains profitable and healthy, and it continues to grow. Since the first quarter of 2019, both revenue and EPS have each grown by more than 40%. Underlying that growth are strong increases in both guest traffic and average ticket over the last three years, meaning guests are finding more reasons to visit our stores and our site and to purchase more when they shop. This defines a durable business model that can withstand unexpected pressures and remain healthy and growing. When I consider the critical drivers of our long-term success, two things rise to the top of the list: our team and the relationship we've developed with our guests. I believe the quality of our team has never been better. Over the last five years, we've made significant, purposeful investments to ensure we're hiring, retaining, and advancing the best team in retail. These investments begin with pay and benefits, but we've also discovered new ways to enhance the work experience and create pathways for advancement, all in alignment with our Target forward goals to establish an equitable and inclusive workforce and workplace. Even as we work diligently to restore our business to its long-term profitability, you should expect us to continue investing in our team, as we will never achieve our potential without them. We have the same perspective regarding our guest relationships. Over the last five years, we've made numerous deliberate decisions designed to deepen our connection with guests. These decisions have resulted in ever-increasing traffic, translating to growth both at the top and bottom lines. In the recently concluded quarter, when our team was faced with potential trade-offs between a guest experience and incurring short-term costs, I'm proud to say they maintained their focus on the guest experience. This is because our team is laser-focused on our long-term financial performance, which depends on building and maintaining an ever-deepening relationship with our guests. So, with that, I want to thank you for listening to our call today. Now, Christina, John, Michael, and I will be happy to take your questions.

I have a question and a follow-up. So for my first question, in the first quarter of 2020, you took a large inventory impairment that you recovered in the second quarter. Now, understanding this is a different environment, how much lingering markdown risk could there be in Q2? How large was that impairment? Why wouldn't this capture the risk in the first quarter, and how are you framing out the potential gross margin decline in Q2?

Yes. Thanks for the question, Chris. We still have some inventory to work through. You saw some of that pain in Q1. Our gross margin guidance for Q2, at around 5.3%, contemplates the work we still think we have to do on the inventory side in the second quarter. Importantly, we believe taking those actions in Q1 and Q2 will set us up well for the balance of the year. We're facing big important seasons ahead: back to school, back to college. Before we know it, it will be fall and holiday, and we're taking the right actions now to preserve a strong guest experience. You saw it in traffic in Q1, and we're optimistic about what we're seeing at the start of Q2 on the top line, too.

Okay. As a follow-up, can you expand on what changed in your implied operating margin outlook for the back half? You mentioned supply chain costs—are these now projected at about $1 billion for the year? Are these now significant enough to offset the air freight pressures in Q3? Did you also change your mix assumption? How much more are you anticipating in terms of promotions and clearance than a few months ago?

Yes. You've touched on two of the larger factors that will be at play in the back half of the year. We projected about $1 billion of freight and transportation pressure, which has recently grown beyond what we described at the start of Q1. We do expect, and we continue to take product in early intentionally to protect against supply chain disruption. We anticipate some offset since we won’t anniversary the same level of air freight that we had in the back half of the year. With regards to the mix, I mentioned earlier approximately a 10 basis point drag from the margin rate mix. The most significant shift category-wise has been in some of the categories at the top of the guest shopping list, and some of those categories where we have work to do on inventory were ones we’ll focus on in the first half of the year. We'll be better positioned ahead of the second half.

I have two questions. The first is, I'm curious about your philosophy with respect to your Analyst Day on March 1 and your insight into the trends you saw then. Can you update us on your philosophy regarding pre-announcements, given the rapid shifts both in consumer behavior and costs that you've experienced?

Karen, when we stood in front of you and others in March, we did not anticipate the rapid shifts we've seen over the past 60 days. We did not expect transportation and freight costs to soar the way they have, as fuel prices hit all-time highs. While we certainly anticipated the impact of overlapping stimulus and consumer behaviors returning to normal, we did not expect the dramatic shifts in many categories that we've discussed—the shift from categories like TVs to luggage, from small appliances to toys and guests celebrating again. That impacted our business in Q1, and we expect it to continue in Q2. We own that and are readjusting our plans for the balance of the year, aiming to enhance our operating performance in Q2, Q3, and Q4 to return to more normalized conditions in 2023.

Okay. My second question relates to your higher sales productivity. This should be sustainable and possibly translate into a higher operating margin structure, which is what investors are directly asking about, based on your recent performance and guidance. Could you add some clarity to the elements contributing to a return to your algorithm of 8% operating margin?

You hit the nail on the head in your question. The sustainability of scale benefits, especially in SG&A leverage, should be consistent, and we would expect it to remain so. We have some work to do on the margin line, and Q1 and Q2 outlook reflects that. But as we manage through these inventory liabilities, we anticipate the levers we have will respond to the current environment. As Brian noted, some issues from the first quarter took us by surprise, and we'll work through these over time. However, we're confident that our long-term profitability run rate remains in the 8% range, give or take. It's our responsibility to do the hard work necessary to get back on that path.

Karen, one thing that hasn’t changed since we were together in March, which gives us confidence moving forward, is the relationship we have with our guests. We've seen significant cost pressures since the beginning of this quarter; however, the guest continues to reward us with footsteps in our stores and increasing online traffic. We feel optimistic, given that we’ve achieved over 3% comps on top of 23% last year. Moreover, the fact that traffic rose by almost 4% on top of 17% a year ago gives us great confidence that while we’re facing operating challenges, we've made that invisible to guests and preserved the guest experience. That bolsters our assurance that the guest will continue to reward us, especially as we provide value and affordability during this time of need. This gives us confidence not just for this year, but for our expected performance in years to come.

I was curious if you could help us understand the slight decrease in average ticket during the quarter given the inflation level we experienced. Were there pricing actions that can help offset some of these margin pressures further? Or can we expect higher prices than what we saw in Q1?

Sure. Thanks for the question, Kate. The headline story for us is traffic growth, but if you dive deeper into ticket metrics, we saw a low single-digit increase in ASPs, offset by a reduction in units per basket. As you’ve heard us state many times, numerous factors contribute to that ASP number—product mix and inflation in the environment are two critical elements. It’s a little more complex to decompose, but that gives you more insight into what we observed with our baskets. We're very focused on that traffic number. It’s a key indicator of how we're resonating with guests, and we feel good about continuing to grow the top line through deepening engagement with Target. This positioning sets us up well for the later part of the year and while also ensuring we can grow the top line as we correct the profit picture over time. Yes, there are many factors at play as we analyze Q2 and the rest of the year. We maintain our guidance of around 5.3% for Q2, and the expectation for our full-year guidance sits at about 6%.

I wanted to discuss inflation that consumers are experiencing, particularly in essential items like utilities and food. How do you think consumers will react over time? There's conversation about peak inflation possibly reaching late summer. How concerned are you about consumer demand's sustainability?

We're monitoring this closely, Scott. While projecting the future is challenging, what we observed during the quarter alongside the early start of May shows signs of a resilient consumer. Our traffic numbers are increasing to begin Q2 as consumers shop across multiple categories. They appreciate both new offerings and the seasonal relevance in our stores, as well as the value we’re providing. That remains vital to our success long-term. While I wish I could provide a definitive outlook on how the consumer will respond amid ongoing inflationary pressures, I can say the traffic and visits to our site during Q1, as starting May 1 continues, indicates that our guests have cultivated extraordinary trust with us over the past couple of years and continue returning as we enter Q2.

As a follow-up, when you examine your business's volatility and the potential for consumer weakening, I know you haven't seen it yet. How soon do you become more aggressive in your cost management to bring expenses down if you start noticing shifts? How quickly can you pivot, and when would you initiate those actions?

Each day, we are focused on finding efficiencies throughout our operations. Certainly, emerging from Q1, we are doubling down on seeking operating efficiencies and greater effectiveness within the organization. Agility is crucial, and it has proven to be one of our strengths over the last few years, especially during the pandemic. We'll remain vigilant on agility while maintaining our relationship with our guests, growing market share even amidst current volatility, and deepening our connection with our guests. We believe this long-term strategy will ultimately create shareholder value.

Earlier in the scripted remarks, Christina made a statement that consumers seemed more positive about their finances. Could you provide a bit more detail on that, possibly from your survey work?

Yes, I'd be happy to, Joe. We have actively engaged over the past two years in striving to understand consumer behavior. We've experienced shifts in consumer behavior every two months or so for more than two years. Currently, we observe that consumers have taken control of their choices more than ever, as the macro environment feels somewhat uncontrollable. Although they may express concerns over inflation, they are still in charge, making decisions based on their values. Those decisions may involve traveling again, engaging in experiences, or socializing—activities they've missed. It's significant to moderate those behavioral shifts and adapt our assortment and messaging to remain relevant as shifts occur. Remaining close to the consumer is imperative.

In light of the gross margin pressure you're experiencing, should we assume things will gradually improve throughout the year? Historically, your gross margin has been steady annually around 28%. Is there any reason to think we won't naturally trend back to that as we work through this gross margin pressure?

Yes. You're certainly pointing in the right direction there, Joe. Our explicit expectations for Q2 are known, but implied in our full-year expectations is an improving profitability picture progressing throughout the year. It's essential to focus on annual performance; quarterly margins may see fluctuations. However, we're pleased with the potential profitability of the business in the long term, and we’ll take steps in that direction during the latter half of this year.

I wanted to touch on pricing. Beyond inventory challenges, much of the pressure seems cost-related within supply chain. Can you discuss the potential to pass these costs onto consumers and the timeframe for that? We’ve heard plans from some of your competitors regarding this.

Yes, we are carefully analyzing this aspect. You should expect us to sensibly pass on costs where appropriate. However, we're deeply focused on sustaining our value position during this period of need to ensure we offer great affordability to guests. We’ll take a balanced approach in that regard, ensuring we prioritize doing right by our guests while we manage cost conditions and determine when and how to selectively pass on costs.

Lastly, inventory per store has significantly risen compared to 2019 pre-pandemic levels. Can you describe where this should be? How much excess inventory remains today, and where do you think the most work is needed? Are you adjusting things like cancellations, or is it primarily about changing your ordering process moving forward?

Yes, Ed, your question is good. We're dealing with a few factors regarding our balance sheet's level of inventory. We have categories where we need to manage inventories, as we previously discussed. There's a degree of product cost inflation included as well. Given our aim to secure products earlier to protect against supply chain unpredictability, for the short term, expect our typical sales growth to outpace inventory growth as we land products early to ensure we have adequate supply for guests.

Yes, to build on that, everything being equal, we would expect faster turns as we've grown, but we shouldn’t be comparing the current dynamic to 2019. The supply chain has lengthened lead times. That means we carry more inventory than we generally would at any given time because those lead times are longer. We're not where we want to be right now, as we have work to do. However, as Michael mentioned, our efforts will contribute to improving our standing in the second quarter and beyond.

Operator, we have time for one last question today.

Two quick follow-ups. First, can you isolate groceries, such as Household Essentials and Food & Beverage, on gross margin in that segment versus your expectations? Is that area witnessing similar pressure?

We are pleased with the gross margin performance in groceries. Food & Beverage has consistently been a stable top-line growth category and market share gainer quarter over quarter. The strength we’ve built in that category positively influences the economics of Food & Beverage. We previously discussed, and it’s important to note, the strength of our owned brands in Food & Beverage—Good & Gather and Favorite Day—has garnered a fantastic guest response, benefiting margins as well.

Regarding the ability to pass through cost increases seen in national brands, has that been effective?

Yes, we’re closely monitoring that in all categories. Our goal remains to provide great value to our guests despite inflationary cost pressures. This approach holds true in Food & Beverage as well, where we focus on achieving the right balance.

Regarding traffic, which was very healthy against an impressive last year, can you provide insight into new customers versus frequency?

When we're executing correctly, it's a mix of both new and returning customers. The key to driving traffic is deepening engagement. With over 100 million Target Circle guests, we can personalize our engagement and build lasting relationships with our guests over time. This is reflected not just in this quarter, but across years, which gives us optimism for the balance of the year and beyond.

To add to that, the breadth of our growth across our guest base was very robust, spanning all income and demographic levels. This broad reach is built on our commitment to remain relevant over time using the tools Michael discussed, primarily our consumer-centric approach.

With that, operator, we’ll conclude our call today. We appreciate everyone's participation, and we look forward to speaking with you soon. Thank you.