Target Corp (TGT) — Q2 2025 Earnings Call Transcript

Good morning, everyone, and thank you for joining us on our second quarter 2025 earnings conference call. On the line with me today are Brian Cornell, Chair and Chief Executive Officer; Michael Fiddelke, Chief Operating Officer; Rick Gomez, Chief Commercial Officer; and Jim Lee, Chief Financial Officer. In a few moments, Brian, Michael, Rick and Jim will provide their insights on our second quarter performance and outlook for the rest of the year and also share their perspective on today's announcement regarding CEO succession. 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, Jim 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, including those described in this morning's earnings press release and 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 earnings press release, which is posted on our Investor Relations website. With that, I'll turn it over to Brian to kick things off. Brian?

Thanks, John. While today's call was scheduled to discuss our second quarter earnings, I want to start with a bigger headline. The announcement that the Board of Directors has unanimously elected Michael Fiddelke to become Target's next CEO and to join the Board at the start of our 2026 fiscal year. The Board chose Michael through a deliberate and thoughtful succession planning process, which took place over the last few years. As part of this process, the Board conducted a rigorous search through which Michael's skills, experience and qualifications were thoroughly evaluated alongside a strong list of both external and internal candidates. Today's announcement is an important milestone in the history of our company. And I'm confident that Michael is the right candidate to lead our business back to growth. Since I arrived at Target, I have consistently relied on Michael's strategic insights and sound judgment when making decisions. He has played a critical role in advancing the key initiatives that have grown and sustained our business. Michael knows how our business can perform and what our team can deliver when we're at our best and he'll bring that confidence along with an aggressive mindset for change into the CEO role. Through a wide range of career experiences, Michael has developed a deeper knowledge of our business and greater insight into our organization than anyone I know. Importantly, through these experiences, Michael has forged deep relationships and built strong trust across the organization and I'm confident the Target team will enthusiastically embrace his leadership. As I look back on my time at Target, I'm proud of what our team has accomplished as we worked to evolve and grow our business in countless ways. By making significant investments in our team and our physical and digital assets, we built the right foundation on which Michael and the rest of our leadership team can deliver strong performance in the years to come. At the same time, I share Michael's passion and urgency to accelerate our performance and build new momentum in our business. Results over the last few years have fallen short of our expectations and our potential. That's why Michael has been engaging the entire leadership team in an effort to refocus our strategy and assess how we're functioning as an organization and provide the launch pad to reestablish Target as a premier leader in retail. Included in this work is the Enterprise Acceleration Office that we launched last quarter and which Michael will continue to lead. The team is building out specific plans to address the attributes of our working model that slow us down in an environment that demands more speed and agility than ever before. In particular, we know that process and technology opportunities at headquarters get in the way of a great guest and team member experience. And that's where we're focused first. Michael will share more of these initial insights in a few minutes, but I want to stress that this is a longer-term effort that's focused on finding new and sustainable ways of working that can serve us for years to come. The way our team has worked together this year to navigate through a volatile and uncertain tariff environment provides a vivid example of how our team can perform when we remove barriers and coordinate our efforts across the business. As one of the largest importers in the country, the prospect of higher tariffs meant we were facing some major financial and operational hurdles as we entered the year. This was further complicated by the multiple changes in tariff policy that have been announced and implemented as the year has progressed. Addressing these challenges has required close coordination between our merchandising, supply chain, stores and finance teams. This broad cross-functional group has developed and rapidly implemented countless revisions to our product and inventory plans involving our assortment, product development, sourcing, receipt timing, supply chain flow, order quantities and pricing. While the tariff environment remains challenging and highly uncertain, the team has made significant progress in mitigating their impact on the P&L, while maintaining our focus on value by limiting the impact on our pricing. While we expect this year's P&L will reflect some short-term pressure from tariffs, we expect to end the year in a healthy position and move beyond this period of uncertainty in 2026. As you'll hear from the team over the next few minutes, we saw clear indications of progress in our business in the second quarter, as traffic and comp trends improved meaningfully from Q1, particularly in our stores. Additionally, we're continuing to see improvements in quality measures surrounding the store experience, including on-shelf availability. We continue to see particular strength in our business when guests find newness and innovation in our assortment, most notably in gaming, toys and trading cards this quarter. I want to pause and thank our team for their efforts to deliver these encouraging results, while simultaneously working to minimize the impact of tariffs on our guests and our business. I've been inspired by the positive energy I've seen throughout our team, and their hunger to build on this momentum in the second half of the year and beyond. To be clear, while we were happy to see improvement in Q2, we are far from satisfied with where our business is performing today. We need to do better, and our entire team is focused on consistent execution, building further momentum and getting back to profitable long-term growth. We're confident that we have the right foundation for this effort. Nearly 2,000 well-located, well-maintained stores located in all 50 states, a $31 billion owned brand portfolio, supported by best-in-class product design, development and sourcing capabilities, an assortment that includes best-loved national brands in every category and world-class brand partnerships, including Apple, Starbucks, Levi's and Champion. One of the biggest loyalty programs in the country in Target Circle, which offers a growing list of services, including personalized discounts, same-day delivery and 5% off when using our credit and debit cards and of course, an outstanding global team united in supporting our guests and each other. Surrounding all these assets, capabilities and our team, we're fortunate to be part of an iconic brand that's developed a unique relationship with American consumers. It's a relationship we should never take for granted. We need to continually invest and evolve how we serve our guests, just as their wants and needs will continue to evolve over time. I am confident that under Michael's leadership, the team can strengthen the Target brand and deliver profitable growth. I'm firmly committed to supporting Michael and the entire Target team as we work together to improve our performance, finish the year strong and enter 2026 with renewed momentum across our business. With that, I'll turn the call over to Michael.

Thanks, Brian, and good morning, everyone. I'm honored and eager to step into the role of leading the company that I love and truly believe in. As Brian outlined earlier, I've been fortunate to serve in a broad range of roles and functions over my 20 years here. I've learned from every one of these experiences with each giving me a deeper appreciation for the specific ways that Target is special and strategically distinct in a crowded retail landscape. It means I've seen how our business can perform when we're at our best and therefore, where we also have clear opportunities today to improve our performance, and we must improve. I know we're not realizing our full potential right now. So I'm stepping into the role with a clear and urgent commitment to build new momentum in the business and get back to profitable growth. In partnership with Brian, the Board, and my colleagues on the leadership team, we're taking a clear-eyed approach to the work in front of us to understand where we need to lean in and where we need to accelerate change. My work over the past few months leading the Enterprise Acceleration Office has also provided a fresh opportunity to broadly assess where we're at and where we need to go across the enterprise. But even as this work is ongoing, I've established 3 key priorities to help us reinforce what will continue to set us apart for years to come. I strongly believe in our differentiated place in retail. At our core, we are a style and design-led company, we're merchants at heart who love product and win through offering a unique assortment. So first, we must reestablish our merchandising authority in a way that is distinctly Target. Second, we're a retailer that believes that an elevated experience is every bit as important as product. We want guests to find a sense of joy from every trip to Target and we must do that more consistently and frequently. Third, we must more fully use technology to improve our speed, guest experience and efficiency throughout the business. Let's unpack these in a bit more detail. Beginning with our assortment, industry-leading style and design has long been one of the most critical attributes that make Target, Target. We need to reclaim that merchandising authority. As you've seen over the last few years, even when overall results have fallen short of our aspirations, we've shown how strongly our guests respond when we offer the right blend of quality, value and style not seen anywhere else in the market. To reestablish our leadership here, we need to go beyond the occasional design partnership or new product launch and ensure we're bringing this authority across each category in our business throughout the year. That will require change, and that change is happening. As an example, we're already well underway in building FUN 101, our name for the transformation within our Hardlines categories in which we're reshaping the assortment in an unmistakably Target way. I know Rick plans to share some specific examples shortly, but we're already seeing positive comps and traffic growth in these categories, all from leaning into style and culture in much the same way we're known for in our apparel assortment. Looking ahead, we need to push much harder in bringing this approach to our home category. To be clear, even a category like food and beverage plays here. We have a fantastic opportunity to further build on the newness and differentiation our loved own brands and national brand partners provide in food. In addition, across the entire assortment, we have an opportunity to further leverage our merchandising authority through our more than $31 billion owned brand portfolio, where we've spent decades building and refining our industry-leading design and sourcing capabilities. The team behind these capabilities truly puts us in a category of one in our ability to read, shape, scale and deliver emerging merchandising and style trends at incredible value. Beyond the assortment we sell is how we sell it, through an elevated and joyful shopping experience, both in stores and online that powers love for the Target brand all day every day. We can never take for granted the love our guests show us when they affectionately refer to their local store as 'my Target.' That's loyalty we need to consistently go out and earn from well stocked shelves and clean stores to a friendly and helpful team and an online experience that brings inspiration and discovery; we want to delight our guests who shop with us every time they shop. While we certainly aren't done, progress is happening. Across the entire assortment and in particular, key items that should never be out of stock our on-shelf availability metrics in Q2 were the best we've seen in years. We're also seeing far greater consistency in our intra-day inventory reliability as well as between weekdays and key weekend shopping windows. We will continue to build on this momentum. Finally, while technology is at the core of all our operations today, it will need to play an even stronger role going forward. As we continue investing in our future growth, we'll be making key technology investments throughout our stores, supply chain, headquarters, and digital operations to power our team and our business. Over my career, I've seen how critically important it is to continually reevaluate strategies and stay in step with evolving consumer expectations and trends. I've seen firsthand the impact bold leaders like Brian have made strong decisive choices to not only meet the needs of today, but to tap into the potential of tomorrow. Despite the solid foundation that's been established, our performance over the last few years has not been acceptable. While we're proud of the many ways that Target is unique in American Retail, we have real work in front of us. To be blunt, we need to move faster, much faster, and we are. As Brian mentioned, over the past few months, we've been urgently adjusting our approach to assortment planning amidst a rapidly evolving external tariff and consumer landscape. This type of speed and agility is exactly how we need to lead across all aspects of our business, serving as a textbook model for our new Enterprise Acceleration Office. While the work of this office is just beginning, we've already identified areas of opportunity, and we're acting on them with a focus on leaning into and embracing the role of technology in greater ways across all our operations. We've identified the biggest challenges that slow us down, legacy technology that doesn't meet today's needs, manual work that can be automated, unclear accountabilities, slow decision-making, siloed goals, and a lack of access to quality data. For example, it's clear that at our headquarters, team structures and processes have significant opportunities to improve. Everything we do should be in service of our guests, and we're evaluating how to best ensure our resources and talent better align with our strategy to drive speed, quality, and consistency in support of the tens of millions of guests that shop with us each week. This evaluation requires that we take a hard look at where, when, and how we work. We started redesigning large cross-functional processes like how our teams build our merchandising and inventory plans to clarify roles and access the right data to make more effective decisions. While we still believe in the flexibility of a hybrid workplace, we've set the expectation that our team should be working in-person more often so they can collaborate more effectively across team lines and solve problems more quickly. We're also improving in embedding more technology and data within our team to get that work done and moving quickly to evaluate every one of our tech initiatives determining which have the highest return and are most mission-critical so we can realign resources accordingly. By leveraging AI and other tools, our team can build and update forecasts more accurately while spending less time creating them. We've deployed more than 10,000 new AI licenses across our team, and there's more to come. These are just a few examples of the work we've done so far and the focus we'll have going forward. Solving these challenges will require changes, both big and small, across technology and data, process and structures and organizational behaviors. I'm committed to ensuring our teams clearly understand our priorities and are relentless in our pursuit back to growth. As I pass things over to Rick, I want to thank our team for continuing to show up for our guests, our stakeholders and each other and for the progress you delivered in Q2 that we'll build on going forward. I share your hunger to win, and I'm committed to helping us do just that. Brian, thank you for your stellar leadership and mentorship over more than a decade. For the Board, thank you for the trust you have placed in me to lead this company. To our shareholders, thank you for your continued interest and support of our business. I'm eager to continue this conversation with you in the years to come. Each quarter, we will continue to provide meaningful updates, and I hope you'll feel the urgency that I see across this team to move this company forward, back to growth, back to our style authority and back to a shopping experience that helps all families discover the joy of everyday life. With that, I'll turn the call over to Rick.

Thanks, Michael, and I want to offer my congratulations to you as well. I'm excited about what this announcement means for Target, and I look forward to continuing to work with you as we collectively write the next chapter for Target. Brian, I also want to thank you for the opportunities you have provided me and the lessons I've learned under your leadership. Thank you for all you have done for me personally and for all of us at Target. Turning to our second quarter results, which demonstrated some tangible signs of progress on our path back to growth. While our current performance is far short of our aspirations, we are pleased with the sequential improvement we saw across each of our 6 core categories from the first to second quarter, led primarily by improvements in store traffic trends. In total, for the second quarter, comparable sales were down 1.9%, a nearly 2 percentage point improvement to Q1. Sales trends were strongest in the digital channel, where comparable sales grew 4.3% with notable strength in same-day delivery powered by Target Circle 360, which grew more than 25%. In terms of category performance, you'll notice a familiar theme to what I've shared in prior quarters. How newness and style-forward product at an incredible value continues to resonate most with our guests. In Q2, performance was led by FUN 101, our updated approach to bringing greater style and cultural relevance to our Hardlines assortment. With this new approach, we saw growth of more than 5% in Q2, our strongest quarterly comp in this category since 2021. One notable area of strength within FUN 101 was in trading cards where we've been leaning in, given the cultural relevance and wide appeal to young fans and adult collectors alike. As a result of doubling down on this assortment, trading card sales are up nearly 70% year-to-date, driving hundreds of millions of dollars of incremental sales, making us a top market share player in this category and putting trading cards on track to deliver more than $1 billion in sales this year. Also within FUN 101, trend-forward tech accessories like brightly colored headphones and phone cases and toys priced under $20 are leading to share growth in these categories, a trend we intend to build on in the coming quarters. Of course, within Electronics, we saw an incredible response to the launch of Nintendo Switch 2, in which we were among the top retailers in terms of overall sales and market share performance. The affinity between the Nintendo and Target brands has long been incredibly strong, and we are excited about the continued strength we expect to see in the back half of the year, both from hardware sales as well as the attachment of software and related apparel, toys and collectibles. Food and beverage categories grew slightly year-over-year driven by newness and floral offerings around key moments like Mother's Day, along with new trending flavors throughout the assortment, including beverages, ice cream, snacks and other backyard barbecue essentials. In Q2, beauty sales were down slightly, though we did see many bright spots throughout the assortment. In our core beauty assortment, which represents more than 95% of our total beauty sales, we saw notable strength in skin, bath and hair care categories, which all grew low single digits. Before turning to our expectations for the balance of the year, I want to share an update on our recent announcement in which we mutually agreed with Ulta Beauty not to renew our partnership when it concludes in August of 2026. Trends and expectations can change rapidly across virtually every sector of retail, but this is particularly true in beauty. We're proud of what we were able to accomplish in our partnership with Ulta Beauty and we'll both continue to focus on providing an inspirational shopping experience for the remainder of our partnership. Over time, in light of shifting consumer trends, we believe we have a compelling opportunity to repurpose this space to meet those changing needs. As we turn the page to Q3 and beyond, we're already well into the back-to-school and college seasons, a particularly important time for our guests and Target's second largest seasonal moment of the year. While a lot of the season is still ahead of us, both back-to-school and back to college are off to encouraging starts. Guests are responding to our value offerings, including essential school supplies, where we've maintained last year's prices. From $5 backpacks to $0.50 boxes of Crayola Crayons, we want to ensure students will have everything they need for a successful start to the school year. We're showing up for the true classroom heroes as well by offering teachers exclusive discounts and support with school registries for everything they will need for the year. This year, we have seen hundreds of thousands of teachers take advantage of our registry program, up significantly from last year. On the back-to-college front, our style forward mix and match dorm sets at unbeatable prices are doing well and showcase yet again the importance of providing style, quality and affordability within our assortments. As students and non-students alike look to refresh their wardrobes, we're so excited about our latest collaboration, Champion for Target. Having launched just over a week ago, early signs suggest this is going to be very popular with our guests, and initial sales trends are better than we originally expected, including more than 500 stylish sports-inspired items across apparel, accessories, footwear and sporting goods for kids through adults. This collection is designed exclusively for Target and blends Champion's iconic heritage with the modern design and premium fabrics consumers expect from Target. As the seasons turn from warm summer days to cool fall nights, we are excited about our plans for all of the remaining seasonal moments that are just around the corner, including our plans for Halloween and the Q4 holiday from pumpkins to throw blankets and decor to Halloween candy and costumes, we are delivering incredible amounts of on-trend newness and value throughout this year's assortment. In fact, nearly 1/3 of this year's Halloween candy assortment is new and around 75% of our home assortment is new as well. While we are planning cautiously for the back half of the year, given continued uncertainty and volatility, that won't stop us from leaning into what consumers want, ways to amplify and celebrate the seasons affordably with family and friends without sacrificing on style or quality. From managing through a rapidly changing tariff landscape to developing assortments that match the wants and needs of the moment, I am constantly inspired and impressed by our team and the passion and care they show for each other and our guests in all that they do. Thank you, Team Target, for your unwavering dedication to bring joy to the lives of the tens of millions of guests we are fortunate to serve. With that, I'll turn the call over to Jim.

Thanks, Rick. I also want to offer my congratulations to both Michael and Brian. One of the many reasons I chose to come to Target was the opportunity to serve on the leadership team with both of you, and I'm excited about the opportunities ahead of us to accelerate our performance in the quarters and years ahead. In the second quarter, net sales were down 0.9% from a year ago. This was nearly 2 percentage points better than our Q1 performance, led by an even stronger improvement in our store sales trends. Both traffic and basket trends improved as well. As Rick covered earlier, we continue to see healthy growth in digital. And within our non-merchandise sales, Roundel, Target Plus and membership all delivered double-digit growth compared with last year. Across the months of the quarter, sales trends were notably stronger in June and July than they were in May. For the 35 subcategories for which we track market share, we've gained or held share in 14 so far this year. While we are far from satisfied with this performance, we were encouraged to see improvements in our share performance in the latter part of the quarter, giving us confidence that trends have stabilized and are positioned to move in the right direction. Our second quarter gross margin rate was 1 percentage point lower than a year ago. This decline was primarily the result of about 210 basis points of pressure within merchandising, reflecting inventory adjustment costs related to the slowdown in our first quarter sales combined with the tariff-related pressures including purchase order cancellation costs. These pressures were partially offset by improvements in inventory shrink worth about 130 basis points of benefit in the quarter. For the full year, we continue to expect about 80 basis points of operating margin rate benefit from lower shrink, which when combined with the 40 basis points of benefit last year will bring this year's shrink rate down to pre-pandemic levels. I also want to pause and comment on our Q2 ending inventory, which was about 2% higher than a year ago. This increase was driven by purposeful investments in our frequency categories to support in-stocks and other reliability measures. In addition, this year's inventory reflects higher product costs than a year ago, driven by tariffs and other pressures. Our Q2 ending inventory units saw a low single-digit decline versus last year. Bottom line, having completed the necessary inventory adjustments we had planned for the first 2 quarters of the year, we feel good about our inventory position as we enter Q3. Moving down to expenses on the P&L, our second quarter SG&A dollars were 0.1% lower than a year ago, driven by strong expense control across the organization. I want to thank the entire Target team for their continued cost discipline and focus on efficiency in an environment where we are facing challenges on the top line. At the bottom of the P&L, the business generated GAAP and adjusted EPS of $2.05 in the second quarter compared with $2.57 a year ago. It's notable that the vast majority of this decline was driven by the combined impact of inventory adjustment costs and tariff-related costs. Looking ahead, we expect more favorable comparisons in the back half of the year as we've already made all the necessary inventory adjustments and expect that the bulk of this year's one-time tariff costs are also behind us. Before I turn to capital deployment, I want to briefly cover our after-tax return on invested capital, which measures the quality of our investment decisions over time. For the trailing 12 months through the second quarter, our business generated an after-tax ROIC of 14.3%. While this is a strong after-tax return on an absolute basis, it's one of the many financial measures we expect will improve over time. Turning to capital deployment, I want to reiterate our priorities, which have been consistent for decades. First, we fully invest in our business and projects that meet our strategic and financial criteria. Second, we support the dividend and look to build on our decades-long record of growing the per share dividend annually. Last, once the first 2 goals have been satisfied, we look to deploy any remaining excess cash to repurchase shares over time within the limits of our middle A credit ratings. Regarding the first priority, we've invested approximately $1.9 billion in capital expenditures so far this year and continue to expect full-year CapEx in the $4 billion range as we open new stores, remodel existing ones and invest in our supply chain and technology, all in support of our goal to deliver a fast, reliable and differentiated shopping experience for our guests. Regarding the second priority, we returned just over $500 million in dividends to our shareholders in the second quarter and the upcoming Q3 per share dividend will reflect a 2% increase that was approved by the Board of Directors in June. Regarding the last priority, given the uncertainties we are facing, notably from tariffs, we did not repurchase any shares in the second quarter. However, given the performance of the business in Q2 and the agility our team has demonstrated in navigating the tariff environment, we should have the capacity to repurchase shares in the back half of the year. However, we'll approach this activity cautiously and remain steadfast in our goal to maintain our middle A credit ratings. Looking ahead, we're maintaining our full-year guidance, which anticipates a low single-digit decline in our comparable sales, GAAP EPS of $8 to $10 and adjusted EPS of approximately $7 to $9. While our Q2 performance reinforced our confidence that we can deliver on that guidance, we're still facing a highly volatile and uncertain environment and believe it's prudent to maintain a cautious approach in the back half of the year. Before I turn the call back over to Brian, I want to make a brief comment on my new role in leading our strategy team. One of the primary functions of a strategy team is to help the company prioritize and deploy resources to maximize the long-term performance of the business. While our work as a leadership team to refocus our strategy is ongoing, I'd like to build upon Michael's comments on areas that are clear themes. First, we will continue to leverage our stores as fulfillment hubs. It's an incredibly fast, efficient and capital-light approach to running an omnichannel business and to ensure our store teams can deliver an outstanding in-store shopping and digital experience, we're investing in technology and process improvements to further streamline the fulfillment process. Second, as Michael covered, we need to make decisions and work more quickly in an increasingly dynamic and unpredictable environment. This involves changing how we work and make decisions and applying a continuous productivity mindset in order to fuel investments, including the rapid deployment of technology solutions to operate more efficiently and win in the marketplace. Third, we will lean further into the aspects of our business where we are already strong and differentiated, including style and design and the shopping experience. Within our merchandise assortment, we have an opportunity to further amplify areas of strength and market share leadership, areas that include baby and kids, swimwear, beauty, health, and toys. You'll see us lean further into our role as an accessible partner for other brands, vendors, and retailers. We benefit from strong partnerships with vendors, including Starbucks, Apple, CBS, Disney, EssilorLuxottica, and Champion. We see an opportunity to lean into those relationships while being open to new ones down the road. Another example is our recent decision to invest in the more than 100 retail partners on our ship-to-marketplace by eliminating markups on same-day deliveries from their stores. Target's desirability as a partner is a unique attribute of our brand and the way we go to market. We'll be looking for more opportunities to leverage that strength in the years ahead. Now I'll turn the call back over to Brian and Michael for some closing remarks.

Thanks, Jim. For the past 11 years, I've concluded each of our earnings calls before moving to your questions. Today, I'll pass the baton to Michael to share his closing thoughts. I want to thank each of you for your engagement over the past 11 years. I look forward to speaking with you one last time during our third quarter earnings call. Michael, over to you.

Thanks, Brian. I'm truly grateful for everything I've learned from you and eager to bring those lessons to my work with you and the rest of the leadership team as we begin writing the next chapter in our company's history. Before taking your questions, I want to reinforce a few key points I've made this morning. First, while we're encouraged by the momentum we've been seeing in the business, we're far from satisfied with our current performance. The entire leadership team is bringing a sense of urgency to our work to return this company to growth. Next, the way we will get there is by being unapologetically and unmistakably Target. That means we need to fully recapture our merchandising authority and signature style, elevate the guest experience consistently, both in stores and online and more fully leverage technology to help us move faster. Standing here today, I am more confident than ever in our future potential. We have invested heavily over the past decade to position ourselves for long-term sustainable growth, and that is exactly where we're headed. I'd also like to take a moment to address our teams in our stores, our supply chain buildings and our headquarters locations around the world. I'm incredibly proud of all you do day in and day out to bring joy to the tens of millions of guests that shop with us every week. You're truly the best team in retail. My aim is to move at pace, with accountability to improving performance and driving growth. Let's rally together for an outstanding finish to the year and show the world what we can accomplish together in the years ahead. With that, Brian, Rick, Jim and I will be happy to take your questions.

We want to congratulate both Brian and Michael on the announcement today. We have a question regarding price. What price increases were implemented during the second quarter due to tariffs, and what are your expectations for the second half?

Rick, do you want to spend some time talking about the pricing environment and our plans for the back half?

Sure. I can talk about both tariffs and pricing and the outlook for the back half. From a tariff perspective, teams are working really hard to mitigate the impact of tariffs and have done a terrific job of mitigating the vast majority. We feel we are well-positioned relative to other retailers given Target's size and scale, the flexibility we have with our multi-category business. The fact that we have a world-class global sourcing and design team puts us in a good position to navigate these tariffs. We are employing several different strategies including diversifying the country of production and, in some cases, evolving our assortment. A good example of that is Bullseye's Playground, which we've committed to price points of $1, $3, and $5. We've made some changes to the assortment to bring in beauty minis to hit those price points. We're continuing to negotiate with our partners to ensure that we're offering everyday good value to the consumer. Our position continues to be that we'll take price as a last resort. However, our commitment is to offer everyday good value and to have competitive pricing. As we think about going forward, I would just say that value is very top of mind for consumers right now. They're looking to stretch their budget and navigate inflation and uncertainty around tariffs. So, value is key and we will continue to offer great value in the form of deals and promotions, but also consumers are thinking about value more broadly. They're considering quality and style and trend too. So, we'll very much lean into our own brands, which deliver outstanding value, great pricing, great quality, great trend, and great taste as a way to help consumers navigate the challenging macro environment.

Kate, the only thing I'd build on there is just reiterating Rick's thank you to the team. The way the team has rallied to navigate what's admittedly been a volatile tariff environment, I think just shows how we can perform when we're at our best, moving with pace. The work they've done to set up a back half of the year where we can sit here today and reiterate the $7 to $9 EPS guidance is a great testament to their efforts.

The market has been looking from the outside and asking for a catalyst or an agent for change. How does the succession plan that has been put into place bring about the change that would improve the trajectory of the business? How soon do you expect it will take to show substantial progress? As part of that, is Target going to make any changes to its culture to realize the priorities that have been set forth?

I'm happy to start. I think it's an important question. Sitting here today, a couple of things are certainly true for me as I look to step into the role. First, there's real power in drawing on 20 years of knowing what makes Target, Target. Having seen us at our very best in different chapters gives me a clear focus on who we are in retail and what our unique path is that will lead to growth. It centers on style and design. You're going to hear me come back to that over and over. But let me spend just a second more on what that means. That means we win through incredible product and setting and amplifying trend across all the businesses. Sure, style and design might jump first to mind like apparel, thrilled with things like our new Champion set and the guest response to that. I'd argue that it's true in a category like food and beverage. Our ability to bring newness with our national brand partners and grow that category on the back of two beloved owned brands in Favorite Day and Good & Gather that are all about differentiation is the path forward for how we win across every single category. Expect me to operate with candor, urgency and pace in making the changes we need to get the growth we expect.

As the succession plan is set into motion, it is a fantastic opportunity to help properly calibrate expectations about the heavy lifting that will be set in motion. Can you put into context and quantify the investment either in margin and/or capital that will be necessary for Target to close the performance gap with its peers and realize its potential?

You've heard us consistently communicate how we think about capital allocation. Capital will follow any high-return projects that we see. We're fortunate to have a strong pipeline of those projects. Strong pipeline of new stores. I've had the chance to visit some of those new store openings this year, and I'm pleased to report that more often than not, those new stores are exceeding our expectations. We'll continue to put capital to work when we can bring a new store to a new market. It's also important that we continue to remodel stores. We've talked about remodels for a while, and we have several hundred stores that don't yet have our latest thinking. This is an important step for those stores where we can expand categories to meet the business's needs and modernize the way we merchandise across every single category. We will also continue to put capital behind technology. You heard me talk about that as the third of my three priorities. We have a real opportunity to use technology more boldly to accelerate the business. I'm excited about the conversations I'm having with Pratt as he steps into leading our technology business this year. The work the teams did in digital to modernize that piece of the business sets a high bar, and we get the chance to apply that thinking to our entire technology portfolio now. We'll make the right investments that drive return, which we've done in the past and will continue to do.

I had a question just on the long-term growth framework that you've laid out. You introduced the $15 billion of sales growth target over the next 5 years, implying roughly low single-digit CAGR. Given the current headwinds, what are the key operational and strategic levers that you'll pull to achieve this target, and how should we think about the trajectory towards this goal with the succession plan announced today?

I appreciate the question that starts with growth because that is the path for us going forward. It's my primary goal as I step into the role. We know this business model only works when we are growing and taking share, using that to drive the bottom line. That's the long-term path that works in retail. Our path to get there is focused on the three priorities I laid out. We need to know who we are and move with speed and urgency against the high bar for what product looks like and the experience looks like. We need to take it a quarter at a time. It is good to see progress in the business in Q2 versus Q1. To be clear, we are not pleased with a quarter that has a negative comp, but to take a step forward across all 6 key categories in Q2 versus Q1 is a step in the right direction. We need to build on that momentum as we look at the back half of the year and into next year.

Just a follow-up on traffic and market share dynamics with traffic obviously impacting comp and discretionary spending being pressured. What are specific merchandising or pricing strategies that you're implementing to drive frequency and basket size, particularly relative to key competition in today's environment where prices are increasingly sensitive among your key customers?

Rick, do you want to take that one?

Sure. Let me unpack our performance and give you a sense of what's driving some acceleration across our major lines of business. Starting with discretionary, our discretionary business saw a 400 basis point improvement from Q1 to Q2, driven by what we're calling FUN 101, which was our Hardlines business as we're strategically moving that into a more trend-forward, culturally relevant business. The FUN 101 business delivered a 5% comp, driven by trading cards and Nintendo Switch 2. Apparel also saw acceleration driven by several different things, highlighting women's ready-to-wear, particularly women's denim, which saw a 28% comp, driven by new styles, silhouettes, and washes. Home saw acceleration driven by newness and innovation in small appliances like Ninja Shark. For frequency, I mentioned food and beverage, where our beverage business saw a 6.5 point comp, driven by probiotic sodas, new energy drinks, new seasonal flavors. Beauty also saw growth in core categories, with skincare, hair care, and bath growing. The common theme is when we deliver newness that’s stylish at an affordable price point, the consumer reacts and we drive sales. That's what our focus will be for the back half of the year.

There's something that's important for the long term in the theme you heard Rick amplify. It’s about product and assortment, getting that style and design leadership and newness across the categories. That is the bright spots in the business that we see powering through Q2. Expect much more of that as we remake categories like Hardlines now FUN 101 in home. It starts with product and great product that leads with style and design is where we see strength as we remake those categories.

Congratulations, Michael, on the CEO spot. With merchandising, how do you guys change the mindset of the team that's in place now? How do you stimulate that change, given the existing teams in place?

Joe, I think Rick would be happy to talk about that.

Style and design are not new to Target. It's core to our DNA. We have built a design team and a sourcing team that lives and breathes trend and design. We will build momentum by leaning into the green shoots and where we see bright spots. I'll use the home category, for example. The home business is not where we want it to be, but we do have some bright spots. Kids' home, as an example, like Pillowfort. When we did Pillowfort in collaboration with Disney and Marvel, we saw growth. On Casaluna, our premium bedding line, we introduced new colors, patterns, and fabrics, driving growth. The team needs to do more of that consistently across the business. The focus is also on facilitating discovery and inspiration within the in-store experience. That's how we will build momentum and push until we can get all six of our major businesses back to growth.

That's very helpful. Just a follow-up on the tariff comments. If I heard in the prepared remarks, I thought you said the bulk of the tariff cost is behind. Can you clarify that?

Yes, Joe, I'd be happy to clarify that. In Q1, I mentioned two primary headwinds facing us in the balance of the year, related to inventory adjustment costs. All of those have been addressed in the first half of this year. We are clean from a second half perspective. We talked about tariff costs. The majority of tariff-related costs we signaled were related to one-time costs primarily driven by order cancellation costs. The vast majority hit us in Q2, so you won't see significant portions of that going forward.

To build on that, Joe, it's the one-time things we're focusing on. The direct cost impact of tariffs will remain as long as tariffs are in effect. We've set a goal to ensure we like our inventory position as we exit Q2, and we achieved that goal. You'll see inventory up just a couple of percent on the balance sheet, driven by investments in our frequency categories. Our inventory investment supports achieving our goal to get more items in stock. We feel well positioned in discretionary categories with the insights we have today. Looking ahead at our view for the back half of the year aligns with our current understanding of tariffs, enabling us to step into that phase well.

I want to start off by revisiting the full-year guidance range, which is still a wide range on a low single-digit sales decline. I'm curious what key factors can drive results closer to the high end of that range.

As I mentioned in my remarks, Q2 performance certainly increased and reinforced our confidence in delivering within the $7 to $9 range. However, given that we have a significant runway left for the year and heightened uncertainty with consumers and tariffs, we believe it is prudent to maintain a cautious approach.

Great. My follow-up question: Michael, regarding the three key priorities you laid out, do you see a need to make additional labor investments to execute these objectives?

It's a good question, Rupesh. One of the things we're examining is how we leverage stores to support different parts of the business. Over the last half-decade, significant positive outcomes have happened in our business. We've built a profitable digital business of $20 billion supported by the incredible roles stores played during that growth. The pandemic allowed us to support that digital business with great speed to guests. That profitable businesses results from store fulfillment economics. We've seen the complexity in stores has increased significantly compared to five years ago, juggling digital and maintaining the in-store experience. I've mentioned this year that bringing consistency to the in-store experience is a priority. Some of how we unlock that is identifying which roles best serve which responsibilities. We ran some tests, and we might say some stores are built to fulfill while others might focus more on order fulfilment, delivering a greater in-store experience. We're pleased with the tests, both for digital fulfillment and in-store experience. We'll apply those learnings across 30 to 40 more markets before year-end, using store assets more effectively as a strategy.

Congratulations, Michael, and Brian, good working with you over the years. My first question, Michael. At one point, the Target turnaround was discussed as becoming more discretionary in categories. This call seems to focus more on internal factors. What portion of change would you attribute to external versus internal?

I won't put a percentage on it but acknowledge both sides. We've seen consumers becoming more selective with their spending, and inflation placed pressure on their household budgets. This shift is evident and contributes to the pullback in some discretionary categories. We've seen the importance of tailoring our products and promotions to address these external demand shifts. We must also work internally to ensure that we are maintaining our strengths across all categories in the current landscape.

And with regard to the financial plan, you were part of this year in setting it. Are you reserving the right to reevaluate? Or are you suggesting you accept the current run rate?

We are always evaluating. A retailer should be nimble. We feel good with the guidance we provided last quarter. Although we remain aware of potential consumer and tariff impacts, our performance in Q2 reinforces our confidence.

Operator, we have time for 1 last question.

Michael, congratulations. I wanted to ask you about comp momentum. Can you provide a bit more color on what you've seen in back-to-school? How are you thinking about the puts and takes? Traffic compares are easier, and you may have some tariff pricing. When do you expect to return to positive comps?

Yes. It’s energizing to be in the stores during the back-to-school season. Thank you to all the store teams and merchandising teams that stocked incredible products for both back-to-school and back-to-college seasons. I'm encouraged by the consumer response so far, though both seasons are still underway. The back-to-college season has been particularly exciting for customers as we've addressed last year's gaps. I'm optimistic about maintaining our momentum as we progress.

Operator, that concludes our second quarter call. I want to wrap up by congratulating Michael once again. Hopefully, for all of you who are with us today, you realize Michael is day 1 ready to move into this role, and I'm excited to see Michael step into the chair as the new CEO of Target. Thank you for joining us today, and we look forward to seeing you soon.