Target Corp (TGT) — Q2 2022 Earnings Call Transcript

Good morning, everyone, and thank you for joining us on our second 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 minutes, Brian, Christina, John, and Michael will provide their perspective on our second quarter performance and our outlook and priorities for the remainder of the year. Following their 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 the back half of the year. Brian?

Thanks, John, and good morning, everyone. Back in June, we announced that our team would be undertaking a bold effort to rightsize our inventory position in the categories through which demand patterns have rapidly changed. While this decision had a meaningful short-term impact on our financial results, we strongly believe it was the best path forward. Consider the alternative: we could have held on to excess inventory and attempted to deal with it slowly, over multiple quarters or even years. While that might have reduced the near-term financial impact, it would have held back our business over time. Of course, this decision would have driven incremental costs to store and manage the excess inventory over a longer period. But much more importantly, it would have degraded the guest experience. It would have cluttered our sales force and hampered our ability to present new, fresh, and fashionable items, the ones our guests expect from Target. Just as importantly, the extra inventory would have presented an ongoing burden to our supply chain and store teams, as they face the distraction of working around it day after day. Instead of taking that passive position, our team chose a more decisive path, aggressively reducing the inventory we already owned and cutting back on receipts for the back half of the year. And today, with those decisions behind us, we're in a much better position as we head into the fall season. As you'll hear in more detail, we've meaningfully reduced our ownership and commitments in categories where we've seen softening demand. This has allowed us to strengthen our inventory position and in-stock position in the categories that are driving our growth, most notably in Food & Beverage, Beauty, and Essentials. Regarding the financial impact of those decisions, Michael will provide more details in a few minutes. But the high-level story is, the vast majority of the financial impact of these inventory actions is now behind us. This positions our business to deliver a meaningful improvement in operating margin rates in the fall season. However, beyond financial and operational outcomes, I'm focused on how our inventory actions will benefit our guests and our team. Regarding our guests, we're now positioned to continue driving engagement and growing traffic with a clean, safe, and uncluttered store experience and an assortment that highlights newness and supports growth. For our team, this quarter's inventory actions will enable them to focus on doing what they do best: providing a great guest experience while reducing the strains and distractions from overly crowded store backrooms and distribution facilities. After we announced the rightsizing effort at the beginning of June, I have heard from countless leaders across the company, who wanted to relay their gratitude for the decision to move quickly and face the issue head-on. In the same spirit, I want to pause and acknowledge the incredible effort of the entire Target team during a very challenging time for the economy, for our industry, and our business. Our success in reducing inventory was a result of unprecedented effort, coordination, and collaboration across multiple teams, from our U.S. headquarters to our Target India headquarters, to our stores, distribution centers, transportation team, and sourcing offices around the world. And today, in the face of a very challenging backdrop, I'm proud of how our team and business model continue to serve our guests' evolving needs. Everything we do, from the design of our operating model to the way we train our team, is done with a focus on better serving our guests. It's reflected in how we choose our assortment, where we curate a broad range of items, both in-store and online, from the stylish to the functional, incorporating quality and value throughout. It's also evident in how we design our store and the digital shopping experience that makes them easy, convenient, and inspirational, inviting guests to choose the right option every time they shop. All of these decisions make our business model more durable, allowing us to drive deeper guest engagement and grow traffic in every environment. Consistent with the shopping trends we've seen for more than a year, our second quarter comp increase of 2.6% was driven entirely by traffic, which expanded 2.7% this year, on top of double-digit growth a year ago. With this increase, second quarter traffic has expanded by well over 20% since 2019. In raw numbers, that means in the second quarter alone, we've added more than 90 million guest visits over the last three years. These visits are a vivid demonstration of a deepening level of guest engagement resulting from multiple investments throughout our business. These investments include dozens of new stores and hundreds of remodels every year. They also include investments in our industry-leading same-day services, which have transformed our business in a short time. More specifically, three years ago, in the second quarter of 2019, digital fulfillment accounted for just over 7% of total sales. In contrast, by the second quarter of this year, the same-day portion of our digital sales accounted for more than 10% of our total sales. This drove our total digital penetration up to almost 18%, more than doubling in only three years. Beyond our stores and fulfillment services, guests continue to respond to our investments in our own brand portfolio. This portfolio delivers more than $30 billion in annual sales and includes 12 brands that generate more than $1 billion each. At the same time, we're investing in new spaces and presentations for key national brand partners like Apple, Disney, and Levi's. And of course, we've been rapidly expanding the number of stores that feature an Ulta Beauty at Target given the incremental traffic and sales they deliver. But nothing has been more important than the investments we made in our team. These investments include the move to a starting hourly wage range of $15 to $24 across the country, enhanced health care and wellness benefits for a larger percentage of our team, the rollout of an industry-leading debt-free college educational plan, and our work to enhance the growth and development opportunities available to all of our team members, particularly those who are members of underrepresented communities. As we look ahead to the back half of the year, the team is laser-focused on delivering convenience, value, and joy at a time when our guests are facing multiple challenges. And while we've taken a cautious stance on our inventory commitments, we'll continue to lean into frequency categories where guest demand has been strong and where markdown risks are very low. In addition, given the ongoing pressure our guests are facing from inflation, we're leaning into value. This means we're focused on providing great everyday pricing and strong opening price points across every category, including in our own brands. At the same time, we hear from our guests that they're focused on celebrating the seasonal moments they missed over the last two years. As a result, we'll lean into those seasonal moments, helping our guests find ways to come together and celebrate with family and friends. So we still have a lot of business ahead of us. We've seen an encouraging start to the back-to-school and back-to-college season, and our teams are already deep into their planning for the upcoming Halloween season, a time when we expect our guests will fully embrace trick-or-treating and scheduling parties to celebrate with family, friends, and neighbors. Given continued volatility in the external environment, we built our fall plans with a priority on flexibility and agility, and that's where our business model shines. More specifically, our multi-category portfolio stays relevant and drives traffic across a wide range of wants and needs. In today's environment, that means our Food & Beverage category is front and center, having grown more than 50%, or $1.8 billion since the second quarter of 2019. But regardless of whether a Target Run begins with a need for an item in food and beverage or household essentials, to see what's new in our beauty assortment, the pick of a toy for a birthday party, or a piece of luggage for an upcoming trip, our safe one-stop shopping experience provides an opportunity to sell items in every one of our categories on every guest visit. Beyond our assortment, our unique stores-as-hubs operating model offers unmatched flexibility in how we can fulfill guest demand. Whether a guest wants to make a conventional in-store shopping trip, place a drive-up order, arrange a Shipt delivery, or simply have a box delivered to their front door, stores can fulfill every one of those needs quickly and reliably, allowing our guests to choose what works best for them in that moment. And as Michael will outline in more detail, our strong balance sheet and robust cash generation support continued investments during tough times like these, investments in our long-term growth and market share. At a time when many others will be struggling just to survive, the ability to play offense and focus on the long term makes us well positioned to emerge from the current downturn even stronger than before. So as I get ready to turn the call over to Christina, I want to thank our team for their continued passion for serving our guests and each other. While the environment remains challenging, I'm inspired by the new and unique merchandise, seasonal offerings, and partnerships our team has planned for the back half of the year. And as I've traveled across the country to visit our stores and distribution centers, I've been inspired to hear how our team is energized and eager to serve our guests with energy, empathy, and care, bringing some daily joy at a time when our guests are dealing with multiple headwinds. This unshakable guest focus is one of the many reasons our unique team makes Target a great company, and I am privileged and grateful to serve with them. With that, I'll turn the call over to Christina.

Thanks, Brian, and good morning, everyone. Despite the tough environment we are facing today, I continue to be pleased with both our top line performance and the underlying market share we're seeing across our business: namely, across all five of our core merchandising categories. We saw unit share gains in the second quarter, providing clear evidence that our guests are finding more and more ways to satisfy their wants and needs with every Target Run. As Brian mentioned earlier, the inventory actions we announced in June involved incredible collaboration across teams at headquarters, stores, and throughout our supply chain network. And I'm proud to say that together as one team, we accomplished what we set out to do. By moving through excess units, we were able to realign our broader inventory portfolio to those categories our guests are most focused on, including frequency categories like Food & Beverage, Everyday Essentials, and Beauty, as well as all things new, seasonal, and fashion-forward. To accomplish that goal, teams analyzed and built action plans to aggressively work through excess inventory at every point along the product journey, from vendor to guests. This included rigorously reforecasting expectations for the balance of the year and beyond and determining where to reduce future receipts and orders. In some cases, this meant working with vendor partners to reduce our fall receipts in light of our updated expectations. It also meant quickly building compelling promotional plans to drive unit velocity for product we already owned, all with a focus on providing great value and generating excitement for our guests. And throughout the execution of these action plans, our teams remain steadfast in their guests-first focus, refusing to compromise the shopping experience in our stores or online. As you heard from Brian, the short-term profit implications of these decisions were meaningful, but we're confident they're the right long-term decisions for our business, for our teams, and for our guests. As we formed and revisited our plans for the third quarter and beyond, we spent a lot of time listening to the wants, needs, hopes, and concerns of our guests. What we're seeing in our results and hearing from our guests is that they still have spending power, but they're increasingly feeling the impact of inflation. And while the recent reduction in prices at the gas pump has been encouraging, guest confidence in their personal finances continues to wane. Against that backdrop, we've seen our guests shop our owned brands in bigger ways and more frequently, knowing they are choosing great quality products with incredible value. We've also seen guest behavior evolve as they focus on optimizing their personal budgets through a heightened response to promotions as well as greater trip consolidation. At the same time, guests continue to experience difficult news headlines, COVID surges, and continued political volatility, leading them to seek more ways to celebrate, connect, and find opportunities to bring joy to their families. This is one of the reasons we continue to see such strength in our seasonal categories, which we expect will continue in the back half of the year. Now let me turn to some of the category highlights from the second quarter, in which overall comparable sales grew 2.6%, on top of 8.9% a year ago, reflecting continued strength in Food & Beverage, Beauty, and Household Essentials. Food & Beverage led the way in the quarter with growth in the low double digits, reflecting broad strength across multiple subcategories. Beauty grew in the high single digits, reflecting notable strength in Ulta Beauty at Target, along with the skincare and bath categories. Essentials grew in the mid-single digits, with performance led by pets and healthcare. Overall, across our discretionary categories, sales were softer than a year ago, but remained nearly $3.5 billion or more than 35% higher than the second quarter of 2019. In Hardlines, overall comp sales were down slightly to last year. Within Hardlines, softness in electronics was partially offset by strength in entertainment, which grew in the high single digits, along with high single-digit comp growth in toys, an encouraging sign as we plan for the fourth quarter holiday season. Overall, the Home category saw a low single-digit decline compared to last year despite affinity for our seasonal assortments and encouraging early results in back-to-school and back-to-college. Apparel also saw a low single-digit decline in the second quarter but saw meaningful growth in women's fashion-forward categories, along with performance apparel, on top of strong sales growth in the category over the past two years. As I mentioned earlier, while overall sales growth is one key indicator of the health of our business, market share is an equally important measure that we use to understand how we're performing. And notably, during inflationary times like these, we heavily focus on unit share, specifically to better understand our relevance as compared to our competitive set, given that growth in both traffic and units is a strong proxy for the guests' overall engagement with Target. Time and time again, these metrics have proven to be a better barometer for lasting success as compared to growth solely through average retail prices. That's why I'm so encouraged that across all five of our core merchandising categories, we grew unit share in the second quarter. So now let's turn our sights to all that is to come for the balance of the fiscal year. Having celebrated holidays in a big way in the second quarter, guests already have their sights set on upcoming holidays and seasonal moments in Q3 and beyond. Preparing for the upcoming school year is top of mind for families right now. And to help with the transition, we're providing budget-friendly options for students, parents, and teachers alike. Beyond our assortment of value-priced owned brands and leading national brands, we're offering a one-time 20% off Target Circle deal for college students to get those dorm rooms prepped and ready. And we've also extended our teacher prep event to nearly eight weeks of discounts on supplies and more. And today, while we still have several weeks of the season left to go, we've been encouraged by early results in both our back-to-school and back-to-college programs. Shortly after school begins, we'll turn our attention to celebrating Latino Heritage Month, which begins in the middle of September. We're excited to help celebrate this important cultural moment with our guests through the presentation of a compelling assortment, 99% of which was created by members of the Hispanic/Latino community. Then, before we know it, Halloween celebrations will be underway, with all the tricks and treats the season has to offer. Our guest research indicates that more families plan to participate in Halloween festivities compared with last year, and we're ready with a wide array of gender and size inclusive costumes, new owned brand trick-or-treating candy and accessories, haunted house cookie building sets, and so much more. And for those that want to celebrate the broader fall and harvest season in general, rest assured that there will be no shortage of new offerings from Good & Gather to create perfect meal, snacking, and entertaining solutions, including delicious new flavors of the season like maple, cinnamon, apple, and, of course, all things pumpkin spice. Outside of specific holidays, we are focused on helping our guests experience Everyday Joy, and our ability to cut across brands and categories is part of what makes us uniquely Target. For an example, look no further than our upcoming collaboration this fall with Marvel to bring a unique assortment to our guests across the Avengers and Spider-Man franchises. One standout will be lots of Marvel Studios' Black Panther: Wakanda Forever and Black Panther Legacy exclusives within toys, Apparel, Home, and more. We'll have more details to share in the coming months. And in an exciting collaboration with long-time partner, The LEGO Group, we are bringing their popular LEGO Ideas contest to Target, in which LEGO superfans submit ideas for a themed LEGO building set. After a public submission phase, a handful of finalists will be selected for guests and fans to choose their favorite idea to be produced as an exclusive set at Target and LEGO brand retail stores. But Target Joy goes well beyond key holidays or exclusive launches. It's about how we continue to iterate and improve upon what our guests already know and love from their regular Target Run. This next quarter, you'll see us elevate our fashion assortment with several new collections and updated brands. We'll introduce new well-known national brands in cookware and kitchen. We'll also continue to expand our leading national brand partnerships, including opening more Disney stores and, of course, Ulta Beauty at Target. In fact, we're only a year into this new partnership, and there's plenty of room to grow ahead. With the introduction of new designer fragrance brands, including Coach, Clinique, Kate Spade, and more, as well as additional skin and hair care products, we continue to evolve the assortment to bring more joy to our Beauty guests. We remain on track to open at least 250 of these unique spaces this year. Plus, we've already seen more than 1.5 million guests link their Target Circle and Ultamate Rewards accounts, a number that's sure to continue to grow in the months and years ahead. So now before I pass things over to John, I'd like to take a moment and echo Brian's gratitude for the team. While we have demonstrated time and time again that our durable, flexible model can quickly pivot with changing consumer demands and a host of retail and economic conditions, none of that can happen without an incredible team. Their talent, dedication, passion, and expertise allows us to continue putting the Target guests at the center of every decision we make. As a result, we continue to benefit from deeper guest loyalty and preference for our brand. I have been at Target 19 years, and I continue to be inspired every day by the talent around me. Thank you for your commitment and care to all our stakeholders. With that, I'll pass things over to John.

Thanks, Christina. In past calls, I've described how our operations team is always focused on two things at the same time. Of course, they're always focused on short-term execution and problem-solving to ensure we provide a convenient, consistent, and inspiring experience for our guests. In addition, our team works every day to deliver on our long-term vision and aspirations, ensuring our operations are ready to support our future plans. While this dual focus on both near-term and long-term priorities has always been present, it's been especially notable this year, given that we've been operating in a very unique environment. In terms of the short term, and as Brian and Christina mentioned earlier, our work to quickly rightsize inventory required determination, commitment, and coordination between multiple teams across the company. And given the need to protect the guest experience, there was no higher priority than delivering against this near-term plan. At the same time, our team remains passionately focused on the long-term investments we're making in our future. These investments include our work to modernize and expand our store footprint, increase upstream capacity in our supply chain, automate distribution center processes to reduce store workload, and enhance our last-mile fulfillment capabilities by opening sortation centers and integrating them into our Shipt network. And fortunately, as Brian highlighted, the strength of our business allows us to continue funding these long-term investments even in the face of the challenging external backdrop we're facing today. I want to first turn to our work on inventory. And I'm happy to report that our team has made remarkable progress over the last few months, causing conditions in our supply chain to improve significantly. More specifically, and to provide some helpful context, over time, we want to keep our DC network operating at or below 85% of its maximum capacity, given that operational difficulties and costs rise significantly when we move beyond that level. So it's important to note that back in June, inventory in our DC network peaked at well over 90% of our capacity. Also notable, by the end of the second quarter, less than two months later, our team had quickly reduced DC capacity utilization to below 80%. Put another way, by the end of the second quarter, the physical space occupied by our distribution center inventory was more than 20% lower than the peak we reached in June. So today, while we still have some individual sites where we need to make more progress, the team has accomplished a remarkable improvement in a very short time, which will allow our end-to-end operations to function more efficiently and effectively in the back half of the year. As Christina mentioned, beyond addressing the inventory we already owned, the team also took a hard look at sales trends and determined ideal inventory levels across every category for the remainder of the year. As a result, we've meaningfully reduced our fall season receipt commitments in many discretionary categories. With these reductions, we're projecting our DCs will remain at or below 85% capacity through the remainder of the year, even after the seasonal increase in holiday inventory that is set to occur over the next two months. In other words, for the first time I am aware of, our fall season inventory is projected to peak at a lower level than in spring, providing another vivid illustration of the unique dynamics we've encountered so far this year. While this inventory rightsizing process hasn't been easy and our teams have devoted an amazing amount of effort in a small amount of time, this work has allowed our teams to strengthen ongoing communication mechanisms and build new processes. Going forward, these improvements will enable our merchandising and supply chain teams to maintain enhanced real-time communication, particularly with respect to categories where we face the highest inventory risk, allowing us to respond to changes with more speed and agility. While pressure from excess inventory has presented the biggest challenge to our team this year, dealing with high costs and volatility in the external supply chain has run a close second. And today, while conditions remain far from what we would have considered normal in the years before the pandemic, there are early signs that both costs and volatility may have peaked. More specifically, lead times in global shipping have begun to decline. Spot rates to move shipping containers have fallen somewhat. And in light of the reduction in petroleum prices we've all seen recently, fuel surcharges have been easing somewhat compared with the peak rates we saw earlier in the second quarter. That said, conditions remain highly unfavorable when compared to the years before the pandemic, and we're mindful of the continued risks in the months ahead, including potential slowdowns at the West Coast ports, a reversal of the recent decline in energy costs, and the possibility of additional COVID lockdowns in China. In addition, we continue to encounter far too many delays affecting overseas shipping, which require us to pay spot rates to move containers, rates that are well above our prenegotiated shipping rates. As such, we're maintaining our practice of moving receipt dates earlier than we would have in the past, which allows us to mitigate the business risk from receiving shipments later than expected. You'll recall that at this time a year ago, when the external supply chain began slowing down and shipments were arriving late, we began relying on air freight much more than usual to ensure we receive key seasonal merchandise on time for the holiday season. While that was the right decision at the time given the circumstances we were facing, this year, we expect to meaningfully reduce our reliance on air freight by moving to early receipt dates for seasonal inventory. To accommodate these early receipts without adding further clutter to our supply chain in stores, we secured temporary capacity to store and stage shipping containers near the ports where we receive them. When needed, this allows us to quickly clear the containers from the port area and hold them until the ideal time to begin moving inventory into our supply chain network. While we don't expect to need this additional capacity over the long term, we believe it's clearly the most efficient approach in today's environment, given the volatility we continue to face. I also want to highlight the critical role that our stores have played in our work to improve conditions in our supply chain. During the second quarter, our store teams engaged in a host of activities to support the effort, including the execution of countless promotions and markdown programs to move the excess merchandise quickly and the development of innovative presentation strategies to highlight the deals we were offering our guests. This included repurposing the seasonal presentation space in our stores to highlight deals and create meaningful statements, including key item promotions. It also included the early wind down of our outdoor living assortment, which allowed us to bring in our back-to-school set earlier than usual, ensuring we are back in stock and reliable on key items parents needed to fill their back-to-school shopping list. More specifically, at the end of the second quarter, about three-quarters of our back-to-school and back-to-college receipts were already downstream in our stores, a number that was closer to 50% at the end of Q2 a year ago. So now before I turn the call over to Michael, I want to turn my focus to our longer-term priorities and the multiple ways we're investing in our future growth. As you know, the majority of our CapEx is going into our store network, both to extend our footprint and invest in existing locations. These store investments fall into three major buckets. The first and largest investment is in our store remodel program, where we completely transform the space in an existing location, modernizing the shopping experience while enhancing the productivity of our team. At this point in the year, well over 100 remodels are currently in flight across the country, keeping us on track to complete nearly 200 remodels this year. In addition to these complete transformations, we're also making smaller investments in hundreds of other locations. This includes the hundreds of fulfillment remodels we'll accomplish this year, in which we reconfigure portions of the store to enhance the efficiency, safety, and capacity of our drive-up, in-store pickup, and ship-from-store services. In addition, this year, we're investing in several hundred locations to add an Ulta Beauty at Target, a co-branded Apple shopping space, or a Disney store presentation to the sales floor. And finally, we're on track to add about 24 new store locations in 2022. So far this year, we've opened 12 new locations across the country, in neighborhoods as diverse as SoHo in New York and Jackson Hole in Wyoming. Beyond this work in stores, we're also making significant investments in our supply chain focused on three main priorities. The first is to build additional upstream capacity to our network, given that we continue to grow sales on top of the $27 billion we added in 2020 and 2021. In support of this goal, we opened two upstream DCs near the end of 2021 and plan to open six new upstream facilities over the next several years, including two on track to open in 2023. In addition to the space we're adding to the network, we're continuing to modernize how our existing distribution centers serve our stores by developing and automating processes that reduce the amount of store workload devoted to receiving inventory and restocking store sales floors. And finally, we're rapidly expanding the number of sortation centers operating around the country. We have six of these facilities operating today, including three that have opened in the last few months, and we have plans to add five more by early next year. These small facilities expand ship-from-store capacity in the locations they serve while significantly reducing last-mile delivery costs, particularly as we integrate our Shipt drivers into the process. Given the package delivery density we've achieved across many markets over the last few years, we see continued opportunities to add more sortation centers over the next few years, which add speed and significantly reduce last-mile costs in markets where they operate. As I mentioned last quarter, this year's capital projects are being impacted by the cost increases, material shortages, and supply chain pressures that are affecting other parts of our business. And I'm really proud of how our construction team is managing through these headwinds. More specifically, while cost increases are raising the cost of many of these projects, the team has done an excellent job in keeping the vast majority of projects on track and on time despite the significant headwinds they are facing. So as I conclude my remarks, I have to pause and add my thanks to the entire team for their resilience and perseverance during a period of incredibly rapid change, which caused this quarter to be as challenging as any I've seen in my career. In the face of that challenge, what's been amazing is how our team members have stayed positive, how they've worked to find collaborative solutions across multiple teams, and never strayed from their commitment to our guests and our company purpose. With the progress they have made, our operations are now in much better shape, and the team is energized and ready to play offense in the back half of the year. While we are all mindful of the near-term volatility in the environment, it's times like these that often present the biggest opportunity to gain long-term market share as others face the distraction of trying to stay afloat while we continue to invest and improve our operations. That's one of many reasons that I've never been more optimistic about our prospects in the years ahead. With that, I'll turn the call over to Michael.

Thanks, John. As John mentioned, we often ask our team to be mindful of both short-term and long-term considerations when making decisions. And given the unique circumstances we've been facing, this quarter, we faced a decision with meaningful implications for both. As Brian outlined earlier, if we had decided not to deal with our excess inventory head-on, we could have avoided some short-term pain on the profit line, but that would have hampered our longer-term potential. Instead, because of the path we took, our quarterly profit took a meaningful step-down, but our future path is brighter. Our operations are healthy, our store and DC teams have more flexibility to maneuver, and we're ready to feature both the fresh assortment and uncluttered shopping experience our guests expect and deserve. That passionate commitment to the guest experience is one of the many reasons we've now seen 21 consecutive quarters of comparable sales growth. While normally our income statement gets the most attention, I want to start my remarks today with the balance sheet and specifically, our inventory position. And as I dig into the detail, I want to acknowledge upfront that this kind of analysis is a relatively complex exercise because of the growth and volatility we've experienced over the last couple of years, because of the broad and diverse assortment that we sell and the fact that our business is seasonal from quarter to quarter. More specifically, given that our inventory position throughout the pandemic was far from optimal, focusing on year-over-year growth numbers isn't very helpful right now. As a result, we often base our inventory analysis on growth trends compared with 2019, a pre-pandemic year when our inventory and sales trends were much more in sync. With that as context, I want to zero in on one of the questions I'm sure you have, which is why our inventory on the balance sheet remained roughly constant at around $15 billion between the first and second quarters. The simple answer is that while that single number didn't change much, we accomplished exactly what we intended to do during the quarter, which helped change conditions significantly below the surface. More specifically, because of the inventory actions we executed, unit growth compared with 2019 in our discretionary categories decelerated by more than 15 percentage points between the first and second quarter, a change we estimate would have reduced our inventory position by more than $1 billion if taken in isolation. However, a couple of offsetting changes moved our quarter-end inventory in the other direction. First among them, we leaned into our frequency categories during the quarter, accelerating three-year unit growth versus Q1 at a double-digit rate, resulting in stronger in-stock metrics compared with 90 days ago. Another factor that drove inventory dollars higher is the continued increase in unit costs we've been seeing across all of our categories, which caused the dollar value of our inventory to grow faster than unit growth in the second quarter. So where do we stand today? At the end of the second quarter, inventory on the balance sheet was about $6 billion higher than we reported three years ago. Of that dollar growth, about $3 billion or approximately half of that total growth is the result of higher unit costs across our assortment. Of the remaining $3 billion, our analysis indicates another $1 billion to $2 billion is related to our decision to move receipt timing earlier, given the volatility we continue to expect in the supply chain. And also importantly, beyond reshaping the inventory we already have, our Q2 inventory actions also included the removal of more than $1.5 billion of fall receipts in our discretionary categories, reflecting our continued focus on reducing risk in the current environment. That's why we feel good about our inventory position as we head into the back half of the year. So now I'll turn to a review of our second quarter financial results. Total sales increased 3.3% in the quarter, driven by a 2.6% increase in comparable sales, combined with the impact of new stores. Total revenue increased 3.5%, reflecting sales growth along with the benefit of nearly 15% growth on the other revenue line, driven by continued strength in our Roundel ad business. Just as Christina pointed out, that unit share is a key measure of Target's relevance versus competitors; traffic growth is another important indicator of the relevance of our brand. Our continued traffic growth in the second quarter clearly demonstrates the ability of our balanced multi-category assortment to deliver continued relevance in a rapidly changing environment like we're seeing today. So that even as our guests' preference for individual categories has been changing dramatically so far this year, that hasn't affected their preference for Target. As a result, traffic accounted for 100% of our comparable sales growth in the second quarter, increasing 2.7%, on top of 12.7% a year ago. Average ticket remained essentially flat in the quarter, as low single-digit increase in average retail was offset by a similar reduction in the number of items per transaction. Across our sales channels, store comps grew 1.3%, on top of 8.7% a year ago, while digital comps grew 9%, on top of 9.9% last year. Digital growth continues to be led by our same-day services, which saw double-digit growth overall and mid-teens growth in drive-up. On the gross margin line, we saw a nearly 9 percentage point decline compared with last year. Merchandising accounted for more than 7 points of this pressure, driven primarily by our inventory reduction efforts, along with the impact of higher fuel and transportation costs, product cost increases, and higher shrink, partially offset by the benefit of retail price increases. In addition, digital fulfillment and supply chain drove about 1.5 points of pressure, reflecting increased compensation and headcount in our distribution centers, combined with the cost of managing excess inventory and higher last-mile shipping costs. Consistent with the first quarter, mix accounted for approximately 10 basis points of pressure. The softness in higher-margin categories like Apparel and Home was largely offset by softness in lower-margin discretionary categories, most notably electronics. On the SG&A line, we continue to benefit from fixed cost leverage and efficiency gains across our operations, which helped to offset the impact of cost inflation across multiple expense lines. Within overall compensation, lower incentive compensation more than offset continued investments in pay and benefits for our hourly team members. Altogether, our second quarter operating margin rate was 1.2%, down from an unusually high 9.8% a year ago, driven entirely by the decline in our gross margin rate. This operating margin performance was below the midpoint of our most recent guidance, as the cost of our inventory actions was somewhat higher than expected. While an operating margin rate of just over 1% is well below anything I've seen in my career and something I never expect to see again, I have no doubt that it was the right outcome given the unusual circumstances we've been facing this year. Our focus throughout the second quarter was to ensure that we took care of the excess inventory of our network and adjusted future receipts to reflect the rapid change in sales trends we've seen so far this year. We accomplished this goal to the benefit of our operations, our team, and our guests. Finally, one note on our tax rate. In a period like this year, when our operating profit is unusually low, tax benefits have a larger-than-normal impact on our tax rate, which helps to explain why our year-to-date tax rate has been lower than expected. Looking forward, given that we anticipate a meaningful improvement in our operating performance in the back half of the year, we continue to expect our full year effective tax rate will be in a range around 21%. Now I'm going to turn to capital deployment and begin where I always do by articulating our priorities, which we've supported consistently for decades. Our first priority is always to invest fully in our business, in projects that support our strategic and financial criteria. Once we've met this first priority, we support our dividend and look to extend our 50-year record of annual increases. And finally, once we've supported the first two priorities, we return any remaining excess cash by repurchasing our shares over time, within the limits of our middle A credit ratings. Regarding the first priority, second quarter CapEx was approximately $1.5 billion, bringing our year-to-date total to just over $2.5 billion. As you'll recall, at the beginning of the year, we guided to an expected full year CapEx range of $4 billion to $5 billion. At the time, I indicated my hope that we'd reach the high end of that range, with the outcome depending on how many capital projects could stay on schedule. So I'm happy that, as John mentioned, the team is doing a great job of keeping projects on track despite facing multiple headwinds, all while inflation in the cost of equipment, materials, and labor is driving project spending above initial projections. As such, we now expect our full year CapEx will be $5 billion or more for the year, reflecting both the number of projects that remain on track and the expected impact of cost inflation. Of course, while we prefer not to face the cost pressure on these projects, I'm encouraged that so many value-creating projects remain on track to be completed this year, projects that will benefit our operations and our P&L for years to come. Turning to our second capital deployment priority, we returned $417 million in dividends to our shareholders in the second quarter, up from $336 million a year ago, driven by a 32% increase in the per share dividend, partially offset by a decline in average share count. And finally, in June, we reached the final settlement for the accelerated share repurchase agreement we initiated last March. Under this ASR, we invested $2.6 billion to retire 12.5 million shares of our stock. Looking forward, just as our inventory commitments reflect continued caution for the remainder of the year, we're taking a similar cautious stance in terms of our share repurchase activity. And, of course, any repurchase activity will be consistent with our long-term goal to maintain our middle A credit ratings. So now I want to close my commentary on the quarter by covering our after-tax return on invested capital, which measures both our near-term profitability and the efficiency of our CapEx decisions over time. In the second quarter, our trailing 12-month after-tax ROIC was 18.4% compared with 31.7% a year ago. And it's notable, while the current number is well below where we expect to operate over time, an after-tax number in the high teens would have been considered aspirational for our business only a few years ago. So for us to temporarily move down to this level in an environment as challenging as we're facing is a vivid confirmation of the underlying strength and resilience of our business model, and the reason we continue to be incredibly optimistic about our future prospects. And that confidence starts and ends with our team, so I want to pause and express my gratitude to the best team in retail. Without your efforts, we couldn't have achieved the remarkable growth in traffic and sales that we've seen over the last few years and why even in a tough year, our business remains strong. Now let's turn to our guidance. And based on the hard work of our team in the second quarter, we feel really good about how we're positioned going into the back half of the year. At the same time, given that we've been experiencing volatile economic conditions so far this year and that volatility appears likely to continue in the months ahead, we're maintaining a cautious stance as we plan our business given the potential macro and consumer risks that might emerge. That's why, as you've heard throughout our remarks today, our second quarter inventory actions were specifically designed to reduce our level of risk in discretionary categories. And in terms of our operations, the team has focused on building flexibility into our plans, placing a premium on staying nimble and adjusting quickly in the face of any potential changes in macro trends. Regarding the top line, our expectations have remained consistent so far this year, with guidance for full year total revenue growth in the low to mid-single-digit range. With the front half of the year behind us, both our Q1 and Q2 results have put us squarely in the middle of that range. And today, based on our current performance and plans for the back half of the year, we remain positioned to deliver full year revenue growth in the low to mid-single-digit range. On the operating margin line, our most recent guidance anticipated a fall season operating margin rate in a range centered around 6%. This expectation is nearly double our spring result. And notably, if we hit that rate in the fall, it would exceed the fall season rates we were delivering prior to the pandemic. And today, similar to my commentary on the top line, based on the success of our Q2 inventory actions and our current performance, we remain positioned to deliver an operating margin rate in a range around 6% in the fall season. Between the last two quarters of the year, we expect our third quarter rate will be well below our Q3 performance over the last couple of years, while our fourth quarter rate should be much more in line with our recent Q4 experience. Most notably, in the third quarter, we'll continue to experience some spillover impact from our inventory actions in the range of $200 million. In contrast, in Q4, we'll be annualizing meaningful cost headwinds that surfaced a year ago, which will make the year-over-year comparison more favorable despite the current headwinds we're facing. All that said, while we typically anticipate something closer to a balance of upside and downside potential when we make any forecast, the macro and consumer risks in the back half of this year feel skewed to the downside. That's why even in the face of consistent business trends in recent months, we've undertaken the significant cost and effort to remove risk from our inventory commitments. It's why we're stubbornly focused on real-time monitoring and communication of evolving conditions, and why we've asked our team to build flexibility and agility into their plans. With that mindset, if trends move away from what we're seeing today, we're ready to quickly adjust. So now before I turn the call back over to Brian, I want to emphasize why we're so confident in our long-term potential, even as we navigate a very challenging environment in a year of multiple challenges, including rapidly changing consumer preferences, inflation at 40-year highs, volatile supply chain conditions, and rising fuel and transportation rates that are expected to add well over $1 billion of cost this year. Our business continues to generate historically strong traffic increases, low to mid-single-digit revenue growth, and unit share gains across all of our core merchandising categories. And even in the face of unprecedented profit rate pressure driven by the host of factors I just listed, we remain profitable with an after-tax ROIC in the mid-teens. In fact, if our performance in the fall is consistent with the revenue growth and operating margin rates I outlined earlier, we remain positioned in 2022 to generate higher operating margin dollars than we did in 2019. That's what we mean when we say we have built a durable model. And today, while we expect conditions to remain challenging in the near term, the operating margin rate improvement we're projecting in the back half of the year should serve as an early indicator of the continued rate improvement we should deliver in the years ahead. With the potential for additional rate expansion and continued growth in traffic and revenue in the years ahead, we're facing a compelling financial picture as the economy and consumer eventually recover. That's why I've never been more confident in our long-term prospects than I am today. With that, I'll turn the call back over to Brian.

Thanks, Michael. I often tell my team that leadership and performance are tightly linked over time, but that leadership often appears first. That's why I'm extremely proud of the leadership our team showed in the second quarter. After they took a hard look at our owned inventory position and the amount that was building up across our industry, they opted to make the hard choice: get in front of the problem and address it head-on. They made that decision with the full knowledge it would have a profound impact on our near-term profitability. They also knew there was another path. We could have avoided attacking the problem and avoid some of the pain in the short run. But instead, our team chose to lead. They knew the best path for our guests and for our teams in our stores and distribution centers was to take action and improve the condition of our inventory and operations quickly. That path would allow the entire Target team to move ahead without facing the ongoing burden of excess inventory holding us back. So the team quickly developed the bolder plan, which we announced in early June, just over two months ago. And in the intervening weeks, teams across the company worked tirelessly to take the plan and make it a reality. That's the reason we're positioned to deliver a strong improvement in our profitability this fall despite an environment that's far from ideal. Because of our team's leadership, our business today is much better positioned to perform, and I couldn't be more proud and grateful for the courage they have shown.

So operator, that concludes our second quarter call. We look forward to talking to many of you over the next few weeks and seeing you later this year, so thank you.