Target Corp (TGT) — Q3 2025 Earnings Call Transcript

Good morning, everyone, and thank you for joining us on our third 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 minutes, Brian, Michael, Rick, and Jim will provide their insights on our third quarter performance and outlook for the rest 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, 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 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, and good morning, everyone. This is my final earnings call as Target's CEO, and I plan to keep my comments brief this morning. But I wanted to take a moment to thank all of you for your ongoing engagement and support over the last 11 years. It's been the highlight of my career to lead this great company, and our business has undergone many important changes since I arrived in 2014. We entered into an innovative partnership with CVS to run our pharmacy business. We changed our operating model in food and beverage, paving the way for explosive growth in that part of the business. We invested in our product design, development, and sourcing capabilities and launched several new billion-dollar owned brands. We pioneered the Stores & Subs model for digital fulfillment, remodeled well over 1,000 of our existing stores, and added nearly 200 net new locations in the U.S. All told, this year's top line is expected to be well over $30 billion higher than the year I arrived. In that 2014 fiscal year, GAAP and adjusted EPS both came in around $4 a share. And the upper end of this year's expected range for adjusted EPS is double that number. I am proud that our team could deliver this top and bottom line growth while building a solid foundation of operating capabilities, including one of the nation's largest loyalty programs, Target Circle, and a rapidly growing retail media business in Roundel. That said, our business has not been performing up to its potential over the last few years. I am singularly focused on supporting Michael and the entire leadership team as they make changes to the way we work, enhancing our merchandising authority, our retail experience, and investing in technology to accelerate our business. In the call today, you'll hear how the team is working quickly to get the company back to profitable growth. While we're not there, yes, I'm confident we're on the right path, and Michael is the right person to lead the next chapter of Target's growth. So with that, I want to thank all of you for your participation today and for your thoughtful engagement over the years. Finally, I want to thank the entire Target team. It has been a privilege to work with you in support of this great brand. Now I'll turn the call and today's Q&A over to Michael.

Thanks, Brian, and good morning, everyone. We have high but achievable aspirations for Target's future, and we're acting with urgency to make the changes and investments to position Target for sustainable and profitable growth over time. While our third quarter performance came in as expected, we're far from satisfied with our current results, and we won't be satisfied until we're operating at our full potential. To get there, we've set three distinct but highly interrelated priorities for our team. First, we must solidify our design-led merchandising authority, leading with incredible product in a way that is distinctly Target. Second, as a retailer that believes that the shopping experience is every bit as important as the products we sell, we need to offer a more consistently elevated experience across our stores and digital platforms. And third, we need to more fully use technology to improve our speed, guest experience, and efficiency throughout the business. Together, these priorities are in service of one goal: getting back to sustainable growth as quickly as possible. They guide every decision we make, and I want to spend a few minutes to help clarify what these priorities are, why each matters, and share some of our progress to date. Before I expand on these priorities, I want to pause and acknowledge our recent restructuring headquarters, in which we eliminated approximately 1,800 roles or about 8% of our headquarters footprint, a difficult but necessary step forward. While Jim will walk through some financial aspects of this decision, I want to make it clear that this move wasn't about cutting costs. Instead, by removing layers that have added complexity to the way we work, we're aiming to work with greater agility, making it clear who is responsible for decisions and empowering our team to operate with greater authority and speed in support of our strategy. So let's discuss how we're making progress in solidifying our merchandising authority and elevating our shopping experience. And you'll also see the critical role that enhanced technology is playing in support of both, helping us progress quickly and efficiently in industry-leading ways. We are a design-led company, and that starts with our authority in merchandising. Our ability to build a unique assortment of the right, stylish, on-trend products at incredible value is central to who we are and is key to our differentiation and future growth. At Target, we believe that offering an assortment that's distinctly ours is essential to maintaining our merchandising authority with our guests. Not every category plays the same role towards these efforts, but together, they create an assortment and experience that feels unmistakably Target. A great example is the transformation of our hardlines business into FUN 101, an evolution in bringing greater cultural relevance, style authority, and trend-right energy to the assortment, reinforcing what makes shopping at Target so special. And while we have much more change in FUN 101 to come, it builds our confidence to see the categories that have seen the greatest change driving some of the strongest sales performance already. Rick will have more details to share later on this. And within each category, merchandising authority means staying incredibly close to our guests by knowing what they want next, reacting to, predicting, and even setting new trends, and technology will play a critical role in helping us get there. We're enhancing our capabilities by equipping our teams with new tools that provide them with AI-enabled consumer insights at their fingertips. Our merchants now have real-time access to advanced data from what is currently trending on social media, to which products and styles are resonating with consumers at Target and across the industry today, to what future trends our guests are most likely to care about, helping our team forecast needs, anticipate trends, and buy both smarter and faster. New tools also include our recently developed Target Trend Brain, our new internal creative platform, which uses generative AI technology to help our teams identify and react to emerging trends faster and predict future trends. By leveraging AI to capture color, material, style, and product details and applying consumer research and our brand principles, we can deliver unique and on-trend products to our guests faster than ever before. To further enhance our speed to market, we've also created synthetic audiences, AI-driven models that simulate real consumer populations to preview how different groups could respond to campaigns and products before they ever launch. This allows our marketing and design teams to test, learn, and refine products, promotions, and messaging with incredible speed and efficiency. And while you'll see us continue to accelerate our use of technology, it's our talented team that brings this work to life, and we are investing intentionally in our team and how we approach our work. We're redefining roles throughout the cross-functional team that supports our assortment planning and buying decisions, what we call our merchant roundtable, to better equip our teams to make bolder decisions even faster. I'm also excited to share we welcome new leaders to the team in areas like our home business to bring new ways of thinking and accelerate change in the signature category. These steps forward are examples of how we're solidifying our design-led merchandising authority by using people, processes, and technology to drive greater levels of newness and differentiation across our entire assortment more quickly, reacting to emerging trends, and amplifying these trends faster than ever before. Let's turn now to our team's efforts to elevate the guest shopping experience, both in stores and digital. A great guest experience means a lot of things, but it starts with a warm, friendly, and helpful team. In stores, we're making changes to give our team members more time to focus on what matters most: spending time helping our guests. Through enhanced digital tools, we're reducing time devoted to backroom tasks through more efficient truck unloading and stocking. Every hour we save is being reinvested to allow more guest interaction with a focus on friendliness and service that defines Target. An elevated shopping experience also means consistently finding the products you want and need every time you shop. This holiday season, we're using our expertise and deep consumer knowledge in a new AI-powered gift finder available on our website and our app, allowing guests to ask questions on the app to help them find the perfect gift this holiday season by simply asking something as generic as what is a good present for my mother-in-law, to something more specific like I have a five-year-old son that loves dinosaurs. What gifts are available for under $20? Our app will provide recommendations or ask clarifying questions to quickly and easily help guests find the right presents for every person on their holiday shopping list. For guest shopping in our stores and online, we're also investing resources to ensure we have the right product in the right place at the right time all year long. This includes modernizing the technology that forecasts, orders, and positions our inventory, using machine learning to optimize flow from supplier to shelf. It's helping us move inventory more efficiently, improve reliability for everyday frequently purchased items, and further improve in-stocks. We've coupled these tech enhancements with process improvements, some great root cause problem solving by the team, and clear measurements that show where we have the most room to improve. All in, we've seen meaningful progress on this front. In fact, this past quarter, the on-shelf availability of our 5,000 top items, the ones for which being in stock is most important to our guests and which represent 30% of our total unit sales, saw a more than 150 basis point improvement compared to this time last year. But even with this meaningful progress, I want to emphasize that we have much more room to improve, and we're not slowing down. An elevated store experience also means meeting our guests when, where, and how they want to shop. To do this, we're reconfiguring the role each of our stores plays within a market to optimize fulfillment speed and capabilities and in the process also better supporting the in-store shopping experience. Our pilot in the Chicago market has demonstrated the effectiveness of new operating models that govern each location's mix of in-store and digital fulfillment, helping to improve the guest experience and operational performance at each store at the same time. For those stores with high foot traffic volume, reducing their mix of brown box fulfillment allows those teams to spend more time interacting with in-store guests. For lower volume stores in the same market with big back rooms that are perfectly suited to ship product, we're pushing more digital fulfillment volume their way. And, of course, providing more labor hours to support this work, creating economies of scale in a more optimized workload for each node within a market. With the changes we've made, we're getting guests the products they want faster than ever while reducing average fulfillment costs. As a reminder, we already reached around 80% of the U.S. population with same-day delivery powered by Target Circle 360, where sales grew more than 35% again this past quarter, and around 99% of the U.S. population is already eligible for two-day shipping. And now, with our evolving market fulfillment strategy that includes expanding these learnings to an additional 35 markets, more than half of the U.S. is eligible for next-day shipping, and we expect to meaningfully expand that reach in the coming year. Elevating the experience also means staying ahead of new ways our guests want to shop. We're leading in the next wave of digital engagement by partnering with the world's biggest AI platforms through an initiative we call conversational curation. Building on the app for the ChatGPT experience previewed in early October, we're curating the shopping experience directly from the guest's own conversation. Guests tell us what they want or even what they're trying to solve for, and OpenAI will offer personalized recommendations. Through this partnership, we expect to be one of the first retailers on OpenAI platforms to offer the purchase of multiple items in a single transaction, offer fresh food products on the platform, and the ability to choose drive-up and pick-up fulfillment options in addition to the conventional shipping options offered by others. Finally, I'd like to touch on important investments that will drive both merchandising authority and an elevated experience. Our investments in new stores, store remodels, and chain-wide category changes aim at providing greater inspiration and joy for our guests every time they shop. Our new larger-format stores are outpacing our initial sales expectations and continue to be a strong source of growth. Given current real estate opportunities, we expect to continue opening these bigger boxes in more and more markets across the U.S. Additionally, we're formulating plans for next year that will bring greater changes to key floor pads throughout the store, which will accelerate both our merchandising authority and our experience. To support this change, we'll be increasing our CapEx plans for next fiscal year, spending about $5 billion, about $1 billion more than this year to bring the latest and greatest Target to new and existing markets. Rick and Jim will have more to share on this in a moment. So now before I get ready to pass things over to Rick, I want to thank the Target team. You power our progress, and it is together as a team that we will write Target's next chapter. While we're not yet where we want to be, we're making changes to lay the foundation for a stronger, faster, and more innovative Target, one that's grounded in our purpose, fueled by our team, and focused on growth. I'm proud of the progress we've made and confident in the opportunities ahead. And to those of you listening this morning, if you leave having heard nothing else, I would leave you with the following thoughts: We are not satisfied with our current results and are relentless in our pursuit of returning to growth. Our three priorities around merchandising, experience, and technology have us on the right path. And we know what needs to be done and are actively making progress towards being the best version of ourselves for our guests, our team, and our stakeholders. With that, I'll turn the call over to Rick to share more about our third quarter performance and all we have planned for this holiday season.

Thanks, Michael, and good morning, everyone. Our third quarter results underscore that we still have work to do, but they also show us that the actions we're taking are the right ones for our guests and for our business. We're focused on improving performance, particularly in discretionary categories, listening closely to our guests, and moving with greater agility to bring them the newness and affordability they expect from Target. In Q3, results were in line with expectations and similar to second quarter performance, with the exception of Q2 benefiting from the Nintendo Switch 2 launch. Q3 comp sales were down 2.7%, reflecting continued softness in discretionary categories like home and apparel, partially offset by growth in food and beverage and FUN 101. Digital comparable sales grew 2.4%, fueled by more than 35% growth in same-day delivery, powered by Target Circle 360, and continued growth in Drive-Up. We saw the strongest sales around seasonal moments like back to school, back to college, and Halloween, highlighting once again the importance of these holidays to our business. Across categories, one theme is clear: our guests continue to respond to newness and style-forward assortments. FUN 101 delivered another quarter of growth led by a nearly 10% comp in toys and double-digit growth in music, video games, and our expanded selection of sporting equipment. All categories where we've invested in unique and on-trend assortments that are clearly resonating. Food & Beverage also delivered another quarter of comp growth with notable strength in beverages, which were up nearly 7% in Q3 as guests leaned into our trend-forward health and wellness assortment, from prebiotic sodas to better-for-you energy drinks. We also saw strength in candy categories, particularly as the Halloween holiday approached. While apparel comps were down 5%, we delivered meaningful growth in denim and sleepwear categories, driven by style-forward newness that helped to offset softness across the portfolio. This tells us that while there is still plenty of work to do, where we have made our biggest bets in terms of on-trend, design-led newness, consumers are reacting positively, giving us confidence in our approach and the path ahead. Turning to the consumer, many of the themes remain largely consistent with what we shared in prior quarters. Guests are choiceful, stretching budgets, and prioritizing value. They're spending where it matters most, especially in food, essentials, and beauty, while looking for trend-right deals in discretionary categories. They want quality and price to coexist, something we do particularly well through our balance of must-have national brands, our exclusive owned brand portfolio, and our curation of emerging brands. As part of our work to solidify our merchandising authority, we will continue to elevate our assortment to lead with trend while always considering affordability and value. As we approach the holidays, we know consumers remain cautious. Sentiment is at a 3-year low amid concerns about jobs, affordability, and tariffs. Yet they remain emotionally motivated and want to celebrate with loved ones without overspending. Our job is to help them do just that. Given our focus on affordability, we recently lowered prices on thousands of everyday food and essential items to help families further manage their budgets. And for the next major holiday around the corner, our Thanksgiving meal deal this year is one of our most affordable yet, feeding a family of four for less than $20 with Good & Gather Turkey at just $0.79 per pound, as well as potatoes, stuffing, and other seasonal sides for less than $5. And while we are, of course, standing tall for the traditional Thanksgiving fare, guests are also embracing new food trends like Good & Gather seasonal empanadas, gourmet host gifts from Marks & Spencer, Stonewall Kitchen, Sugarfina, Hearth and Hand with Magnolia Table, and new-to-Target brands like Little Spoon, Everyday Dose, and Protein Pop. As a percentage of our total Food & Beverage sales, we are selling twice the volume of new products compared to the industry, a sign that our trend bets are paying off. We're also accelerating newness in women's apparel, leaning into luxe fabrics and trending athleisure at affordable prices. Inspired by our sourcing trip to the Swiss Alps, our latest Cashmerelike sweater starts at just $30 and delivers the on-trend casual yet chic après-ski look. For athleisure fans, JoyLab is launching new patterns and fabrications in mid-December, earlier than ever this year, perfect for gifting or those New Year fitness goals. In holiday decor, we're offering upscale and festive design at unbeatable prices, from contemporary collections to nostalgic Christmas classics; we have styles for every home. Ornaments start at $1, $3, and $5 price points, with holiday throws at $10 and wreaths and greenery at $12, bringing incredible design and quality within reach. And once the tree is trimmed, it's time to think about what goes under it. As I've shared before, trading cards have been a huge trend that we have been leaning into. This holiday season, we will be offering new product drops nearly every week, including Pokémon, Magic: The Gathering, NFL, MLB, and WNBA cards. This includes highly anticipated exclusives, already hitting shelves and continuing to be released throughout December as well. This year, we've also expanded our assortment of affordable and on-trend toys, including thousands under $20, with many starting at just $5. As the #1 market share player for LEGO, we are partnering with this iconic brand to offer exclusives to Target sets starting at just $10. And for Barbie fans of all ages, we're offering two exclusive Barbie collaborations with Joanna Gaines, a collectible doll and her perfectly designed townhouse to live in. All in, we are introducing 20,000 new items into this year's holiday assortment, twice as many as last year, with over half exclusive to Target. Before turning it over to Jim, I want to share how Michael's new enterprise priorities are taking shape across our commercial organization. In partnership with the Enterprise Acceleration Office, we've been modernizing how our cross-functional teams support all buying decisions at Target, which we refer to as our merchant roundtable. To clarify roles, streamline accountability, and empower teams to make bold data-driven decisions allowing us to move faster and infuse newness into assortments more frequently. But not all newness is created equal. It isn't just about offering new products for the sake of newness. It's about leaning into the emerging trends in culturally relevant moments. When we do, this is when we see the strongest reaction from our guests. For the perfect example, look no further than our Stranger Things 5 assortment. We have the largest assortment of exclusive products in retail in the U.S., along with throwback marketing campaigns that transport guests back to the 1980s nostalgia. Plus, we're dropping new items into the assortment every week to align with the new episode releases. This is yet another example of the incredible work we are doing to reimagine our hardlines assortment into FUN 101, a year-round celebration of culture, trend, and style, served up in a uniquely Target way. And next year, we're planning to take these learnings and make bold investments to transform the in-store shopping experience and assortment. In fact, we already have plans to introduce more changes to our stores than we have in any year in the past decade, and we will have far more details to share at our Financial Community Meeting this spring. With that, I'll turn the call over to Jim to walk through our third quarter financial results and updated expectations for the balance of the year.

Thanks, Rick. Our financial results in Q3 were in line with our expectations as our team continues to focus on what we can control and manage the business with discipline, despite continued softness on the top line, volatility in weekly and monthly trends, and uncertainty in the external environment. Third quarter net sales were 1.5% lower than a year ago, slightly better than our year-to-date performance, but about 60 basis points softer than in Q2. Category sales trends were relatively consistent between Q2 and Q3, with the exception of hardlines, where we saw continued growth but at a slower pace, following an outsized boost from the launch of the Nintendo Switch 2 in the second quarter. Across our selling channels, comp sales in our stores were down about 4%, while comparable digital sales grew 2.4% on top of nearly 11% a year ago. Within our first-party digital sales, we saw mid-single-digit growth in our same-day services, led by more than 35% growth in same-day delivery. Beyond our first-party digital platform, we saw a significant step up to nearly 50% growth in GMV of our Target Plus marketplace and mid-teens growth in Roundel ad sales, demonstrating the breadth and growing relevance of our digital ecosystem. Top line results during the quarter were quite volatile, with net sales close to flat in August and October and down about 4% in September. This pattern reinforces many of the consumer themes we've been highlighting for some time, as guests shopped around back-to-school and back-to-college in August and around Halloween in October, but pulled back in September in between those key seasons. In addition, September apparel sales were hampered by unusually warm weather across the country, while October benefited from the response to our most recent Target Circle week as consumers continue to focus on value. On the gross margin line, our Q3 rate of 28.2% was about 10 basis points lower than last year. Among the drivers, we saw about 1 percentage point of pressure in merchandising, reflecting the impact of higher markdowns. This pressure was offset by about 70 basis points of favorability from lower inventory shrink versus last year. In addition, we saw about 20 basis points of favorability from supply chain and digital fulfillment as the benefit of higher productivity and the lapping of last year's supply chain challenges was partially offset by the deleveraging impact of lower sales. Regarding our outlook for inventory shrink, consistent with our prior commentary, we expect that shrink improvements will account for approximately 80 to 90 basis points of gross margin rate favorability for the full year. This would bring it fully back down to pre-pandemic levels, marking a dramatic turnaround over the last two years. One other note, our Q3 ending inventory was about 2% lower than a year ago. This is in line with recent trends in our Q4 sales outlook and reflects growth in our frequency businesses that were more than offset by lower levels in our discretionary businesses. Moving back to our third quarter P&L, our SG&A expense rate of 21.9% was about 60 basis points higher than a year ago. However, this rate reflected about 60 basis points of impact from one-time business transformation costs. Excluding these costs, our third quarter SG&A expense rate was approximately flat to last year. On the bottom line, our business delivered third quarter GAAP EPS of $1.51 compared with $1.85 a year ago. Adjusted EPS, which excluded business transformation costs, was $1.78 in the third quarter, about 4% lower than a year ago. While this is far short of where we aspire to be over time, it is solid profit performance in a quarter where our top line was down more than 1% and reflects stronger relative performance versus the first half of the year. I'll turn now to capital deployment and reiterate our priorities, which we've consistently followed for decades. First, we look to fully invest in our business in projects that meet our strategic and financial criteria. Second, we look to support the dividend and build on our record of more than 50 years of consecutive annual increases. And finally, we look to deploy any excess cash beyond those first two uses to repurchase shares over time within the limits of our middle A credit ratings. Regarding our first priority, we've invested about $2.8 billion in capital expenditures so far this year and continue to expect full-year CapEx of around $4 billion. Regarding the second priority, we paid $518 million in dividends in Q3, which was $2 million higher than last year, as a 1.8% increase in the per-share dividend was mostly offset by a lower average share count. Regarding the last priority, we deployed just over $150 million to repurchase our shares in the third quarter, following a pause in Q2. While we ended the quarter with a healthy cash position and expect to have continued capacity within the limits of our middle A ratings, we'll continue to exercise caution in our repurchase program in the face of continued uncertainty in the external environment. Now I want to turn to our outlook for the fourth quarter and the full year. While our Q3 results were consistent with our expectations, we've continued to see a high degree of volatility in our business. In addition, we're mindful of the challenges facing consumers, as exemplified by recent declines in consumer confidence. As such, while our top line expectations for Q4 are in line with our prior guidance and recent performance, we've narrowed our full-year EPS ranges and moved our adjusted EPS range to the bottom half of the prior range. With that as context, on the top line for the fourth quarter, we're continuing to expect a low single-digit decline in our comparable sales, in line with our year-to-date performance. On the adjusted EPS line, our updated range is from $7 to $8 for the full year. The expected range for GAAP EPS is about $0.70 higher than for adjusted EPS, reflecting the benefit of the first quarter litigation settlement, partially offset by business transformation costs. Against the backdrop of a very difficult environment, I am proud of the team's hard work this year to navigate a very high level of complexity, including their work to mitigate the impact of tariffs and navigate challenging consumer conditions. Over the past several months, we've also been hard at work to drive prioritization and outline key investments to return Target back to sustainable growth. Looking ahead to next year, we expect to ramp up our capital spending meaningfully in support of our store experience and remodel program, a step-up in technology and digital fulfillment capabilities, and investment in new stores. Our current plan envisions 2026 CapEx dollars increasing by approximately 25% or $1 billion versus 2025. In addition, we are planning to leverage a continuous pipeline of productivity initiatives and approximately $180 million of expected annualized savings from our recent business transformation efforts to invest in key areas in support of our three strategic priorities. We will share more details on our plans for 2026 and beyond at our financial community meeting in March. While we know there's much more work to do, I'm confident that we are rapidly moving in the right direction and positioning our business to get back to sustainable, profitable growth in the years ahead. With that, I'll turn the call back over to Michael.

Thanks, Jim. Before Rick, Jim, and I take your questions, I want to emphasize some of what you've heard from us today and to underscore where we're headed as a team. There is no question that this is a period of transformation for Target. The environment around us continues to evolve, whether it's shifting consumer demand, changing competitor dynamics, or broader macroeconomic pressures. But let me be clear, we are not waiting for conditions to improve. We are driving the change ourselves right now. We are taking bold, decisive steps to reshape how we work and reignite growth with urgency, focus, and confidence in who we are and who we can be. We know what makes Target special: an unmatched merchandising authority and the ability to create joy through an elevated and inspiring guest experience, all enabled by the power of technology to amplify both speed and connection across every part of our business. These are more than ideas on a page. They are the pillars of our strategy, shaping every decision we make, and they are coming to life right now across the company. We're hard at work to simplify how we work to make faster, smarter decisions. We're laser-focused on strengthening our foundation in our supply chain, our stores, our digital experience, and our technology capabilities. We're relentlessly striving towards greater authority in merchandising by combining data-driven insights with design leadership and the creative spark that makes Target unique. And together, these actions are paving the way for what comes next: a return to sustainable, profitable growth. While many out there have questions about where we'll go next, we are confident we're on the right path. That's because we're building from a strong foundation, a brand that guests love, a culture that's resilient, and a team that's united behind a shared mission to help all families discover the joy of everyday life. As we look ahead, we're not just talking about getting back to growth. We're talking about building a stronger, more innovative Target that's ready to lead in the next era of retail, one that moves faster, connects deeper, and stands taller in the hearts and minds of our guests. To our investors, partners, and the financial community, thank you for your continued engagement. If you're frustrated with our recent performance, we are too, and our entire team is working incredibly hard to return to growth and live up to our full potential. Finally, in the spirit of thinking and working differently, I'm excited to share that this year's financial community meeting will take place right here in Minneapolis on March 3. It will be a peek behind the curtain to help bring to life what we've talked about today in a more tangible way, providing a firsthand look at how we're evolving our assortment and technology, all in service of returning to growth. We look forward to seeing you all in Minneapolis this spring, and we'll be sending out more information very soon. And now we'll move to Q&A. Rick, Jim, and I will be happy to take your questions.

And Brian, best of luck. My question, Michael, for you, I think in 2016 or '17, there was a reset of margin during a prior investment phase that helped reposition Target for the next several years. At this stage, I guess can we rule that out? How have you thought about taking maybe a deeper investment in, I guess, margin in order to reinvest? Or should we now assume that this is the plan, it goes forward, and there doesn't need to be one?

Yes. Thanks for the question, Simeon. We've got a pretty big Q4 holiday season that we'll get through before we unpack the specifics for next year. But what I can tell you is we're committed to making the right investments to get the outcomes we want when it comes to leading with merchandising authority and elevating the experience. We also have a lot from which to draw on there. The team is doing a wonderful job of finding efficiency within the business and changing some of how we work to reinvest. An example of that is some of what we found in elevating the store experience. We've taken a lot from our fulfillment market tests in Chicago. And as a reminder, that's about changing how we organize stores against the work to be done. We found that making some stores brown box shipping specialists because they've got that capacity, they've got the big back room, and they might be a little lower volume in general, lets them ship that brown box product so that we can free up our busiest in-stores for our busiest in-store guest experiences to focus on serving those in-store guests. Changes like that, we've seen good results in, and we're rolling out some of the learnings from that test to 35 more markets here before the year is out. That's the type of change we believe can fuel the step-up in experience that we want. The other thing I might add is you heard us describe our capital investments for next year. That's putting capital to work in direct support of the priorities that we've laid out. And like we always have, we chase returns. So the places where we're excited to step up investment are places where we expect really strong returns. That starts with investments in our stores, and those come in a couple of forms. You've heard us talk about the strength of our new store pipeline. That pipeline continues to be as strong as ever. It's been just a delight to watch the new store openings this year, especially those bigger boxes that continue to outperform our expectations. There’s nothing more fun than walking a newly opened store in a market that maybe didn't have a Target or didn't have a Target close to that neighborhood and to see the response in the community when we open a store. That response is reflected in the faces and voices of those guests, as well as in the incremental sales it provides and the high returns we see in those new stores. The second area where you'll see us continue to lean in is in store remodels and refreshing the existing fleet of stores. While we've been talking about that for several years, we've been hard at work, as Brian even touched on in his opening remarks, remodeling the chain. That work isn't yet finished, and we want to ensure that we're investing in some of the stores that when we bring our latest and greatest store experience, we see a reliable strong response from guests. We continue to see strong sales lifts that justify the investment in those remodels. For the stores that haven't yet seen a remodel, we think it's imperative that we bring our latest thinking there. That's a direct investment in the store experience itself back to the strategy. The merchandising authority, because when we do a remodel, we reallocate the space to support our latest thinking by strategy, and that helps the merchandising drive some of that sales lift. And then importantly, technology will continue to be an area of focus for investment. We know the power of technology helps the humans and the humans that we focus on most there are our guests and our team. Wherever we can lean in and use technology, we see that it generates returns when we make things more delightful for our guests. The way technology can enhance personalization on the app or help us get product to their doorstep faster allows our store teams to better serve guests. There are a lot of examples within that CapEx investment, but at its core, does it directly support the areas of focus within the strategy, and do we like the returns? The answer to those two questions is yes, you're going to see us invest.

The quick follow-up, and you partially addressed it. I wanted to ask about the gaps and capabilities. You mentioned the different focuses: merchandising experience. What are the most urgent gaps and capabilities? And then what are you most excited about, meaning things that can get addressed in the near term?

I'm most excited about the areas where we're already seeing momentum. For instance, the work we're doing in FUN 101 exemplifies our focused strategy in categories we previously referred to as hard lines. We're evaluating which categories we excel in and how we can enhance them with style, culture, and design leadership. We've made significant changes in these areas, and the response has been positive. It's encouraging to see categories like toys achieving nearly a 10% increase in Q3. The efforts where we've concentrated our focus are showing progress. The same holds true for the customer experience; our initiatives to create a consistently elevated experience are on a promising trajectory. It starts with basic elements like being well-stocked, which is vital for a great guest experience, and we're witnessing meaningful progress due to the team's hard work. Although we're not fully satisfied yet and still have goals to reach, I appreciate the direction we're headed. We'll keep working and focusing on making the necessary improvements. Rick, if you’d like to add anything regarding the product side and the changes where we’re receiving strong guest feedback, please go ahead.

Yes, I can discuss some of the capabilities that are a priority for us to evolve. I want to emphasize the importance of the merchant roundtable evolution in ensuring we have the right products to drive growth. We have a cross-functional team in place, and recent decisions to reduce our headquarters footprint were primarily aimed at simplifying the organization for quicker decision-making. The next step involves outlining how we will work differently, clarifying roles and responsibilities, and refining our decision-making process. This is the work the team is currently focused on. I'm particularly excited about integrating automation and technology, allowing the team to spend less time on analysis and more time generating creative ideas that meet consumer needs and drive growth, similar to our initiatives in FUN 101.

To build on Rich's last point, the role that technology will play is going to be incredibly important across the enterprise. I want to highlight the pace at which our team is advancing. I see a strong acceleration in our technological progress, evident in some of the AI examples we shared today as well as in the core foundational work necessary to ensure our teams have the tools to create the right assortment, segment that assortment, and effectively use technology to automate the product flow through our supply chain. This remains a key area of focus for us, and the urgency with which we're progressing gives me a lot of confidence.

Great. And I wanted to ask on the level of investment that you're stepping up in the business in terms of the $5 billion for next year in CapEx. How do you think about the key levels or the key areas in which you will be investing? And then how do you think about whether or not that's the right level or if more may be needed to improve results to a greater magnitude across the business?

Yes. Great question, Corey. I think about it in two ways, and this is a conversation that Jim and I have regularly with input across the team, obviously. It's two things. One is it starts with a focused strategy; investments need to follow the path that we think drives the most growth for Target, and that starts with clarity on that strategy. The second is we chase returns. And so the places where we're excited to step up investment are places where we expect really strong returns. That starts with investments in our stores, and those come in a couple of forms. You've heard us talk about the strength of our new store pipeline. That pipeline continues to be as strong as ever. It's been just a delight to watch the new store openings this year, especially those bigger boxes that continue to outperform our expectations. There’s nothing more fun than walking a newly opened store in a market that maybe didn't have a Target or didn't have a Target close to that neighborhood and to see the response in the community when we open a store. That response is evident in the faces and voices of those guests and the high returns we see in those new stores from the incremental sales it provides. The second area where you'll see us continue to lean in is in store remodels and refreshing our existing fleet of stores. While we've been discussing that for several years, we've been hard at work, as Brian even touched on in his opening remarks, remodeling the chain. That work isn't yet finished, and we want to ensure that we're investing in some of the stores that, when we bring our latest and greatest store experience, we see a reliably strong response from guests. We continue to see strong sales lifts that justify the investment in those remodels. Where stores haven't yet seen a remodel, we think it's imperative that we bring our latest thinking. That is a direct investment in the store experience itself as part of the strategy's merchandising authority because when we do a remodel, we reallocate the space to support our latest thinking by strategy, which also helps the merchandising drive some of that sales lift. And then importantly, technology will continue to be an area of focus for investment. We know the power of technology helps the humans we focus on most there: our guests and our team. Whenever we can lean in and use technology, we see that it generates returns when we make things more delightful for our guests. The way technology enhances personalization on the app or assists us in getting products to their doorstep faster ultimately allows our store teams to better serve guests. There are many examples of that within our CapEx investment, but at its core, does it directly support areas of focus within our strategy and do we like the returns? The answer to those two questions is yes; you're going to see us invest.

Great. And then I just have a quick follow-up for Michael. On your comments about change, I just wanted to double-click on that, that word specifically, and the quotient and the multitude of change that you're thinking about making as we head into 2026 and the benefits that you're seeing from lowering prices on key frequency categories. How you're thinking about the opportunity to cut further costs potentially because we did talk about investing in agility in terms of SG&A? So curious about how you think about the ability for the business to change today and how you're building for the future in that regard?

Corey, if I zoom out, change is going to be incredibly important. You've heard us say quite plainly we're not satisfied with our performance over the last few years. While the third quarter came in as expected, you're not going to get a ton of satisfaction from us until that's accompanied by the growth that comes with a positive comp. We've got to do the work; there's no shortcut. That means driving change to get different outcomes. We're starting all that change with really clear priorities. We know how Target is best positioned to win. When we lead with great product, when we're design-led and differentiated, and we pair that with an excellent experience, that's what's driven Target's strength even in the best of times. We think the modern version of that can get the growth outcomes we want. That does mean doing the work. It does mean making changes like we are in FUN 101 to get different outcomes on the merchandising side. That means making the right investments and driving the changes so that the experience can be great in every store, every day, in stores and online. We're committed to doing the work and a huge credit to the team is showing us the reasons to be excited about what's to come even within those third quarter results. We can see where we've focused and made changes, and we're seeing some of the outcomes we want. Next year will be focused on expanding those wins across the business at greater scale.

I wanted to drill in a little bit more on some of the changes. When you're talking about the in-store changes for next year, are there any examples you can give us? I know you mentioned there are key pads within the store maybe. I'm assuming like the FUN 101, but broadening it out, maybe you could share a few examples.

I’d be happy to share a few examples. Let’s start with FUN 101, which we consider a success story, and we're seeing growth, but it's just the beginning. We still need to implement more changes to FUN 101 to truly establish it as a family destination that embodies style, trends, and design. You'll witness those changes come to life in 2026. Another area where we're making adjustments is home. Home has faced challenges for us, so we’re modifying the product to enhance its style. We're also transforming the store experience to encourage more discovery and inspiration while reinforcing the revamped Threshold brand. These are some of the changes we’re making. Additionally, our contract with Ulta Beauty ends in August 2026. The teams are working diligently and exploring great ideas to expand our assortment and enhance the experience. We’ll provide more details at the Financial Community Meeting. We are also making changes in the Baby category, which we view as strategically significant. Historically, we’ve performed well in this area. It's a category that draws customers to Target and fosters loyalty as their children grow. We see an opportunity to make that space more inviting and inspirational, as well as increase gifting offerings. These are just some highlights of what we’re considering. We’ll be in a better position at the financial community meeting to share more specific plans. I’m genuinely excited about these changes. As mentioned in our prepared remarks, this is the most substantial change we've made to the store floor layout in ten years. It's a lot of work, but we’re looking forward to it.

That was helpful. And just a quick follow-up. With regard to your Target Circle card, can you talk about some opportunities there? It feels like penetration of the Target Circle Card has been declining a little bit. I'm curious if you have any reasons why that may be and what you can do to recapture some of those customers, maybe where they've gone otherwise.

Sure. I'd be happy to talk about Target Circle. What we love about Target Circle is its huge size. It's one of the largest loyalty programs in the country, and now with Target Circle 360, we have a membership component to it. What's really exciting is it's helping to fuel our same-day delivery. Target Circle fueled a 35% comp growth in same-day delivery this past quarter, which is really encouraging. The conversations that we're having now focus on how we continue to innovate and evolve the platform. We're looking at things like early access events with Target Circle 360. We did that this past October with Target Circle Week, and it was well received. So we'll be doing more of that this holiday season. The last point I would make is we're excited to have the first-party data that we get through Target Circle and be able to leverage that for personalization, particularly through this holiday season. That will be one of the tools in the toolbox that we'll be using.

Joe, if I can just build on the question specifically on the card. If you're referring to what you see in the results from profit sharing, we did see lower spend, a little bit lower penetration, and overall lower balances in the card program. But what's important is what Rich has highlighted, that when you think about our whole loyalty program holistically across Circle 360 and the card program, we're very pleased with the results we're seeing so far. Where we do have an opportunity, Joe, is to use our big base of Target Circle as a better on-ramp for folks for whom a Circle Card makes a lot of sense. That's a place where we haven't yet achieved our potential. So making sure that because we can know a guest through Circle so well, we should be positioned to identify which guests at the right point in time would most benefit from a Circle Card. We've got work to do on that front, and you'll see that be an area of focus going forward for us.

I believe you mentioned that October was flat, but you're projecting low single-digit declines for the fourth quarter. Does that suggest a slight slowdown after Halloween? Additionally, there's quite a broad range for EPS in the fourth quarter. Can you elaborate on your expectations for margins within that range and how you determine the low end versus the high end?

Yes, I'm happy to start, Mike, and Jim, feel free to add on. While the quarter met our overall expectations, we did experience monthly volatility in Q3. This impacts our outlook, but we are confident that our business is well-positioned as we enter the fourth quarter. Our guidance for both revenue and earnings is conservative, considering the volatility observed in Q3. We begin the quarter in a strong position. Although we haven't discussed it in detail yet, I want to mention that our inventory is well-organized as we head into the fourth quarter. Our balance sheet shows a 2% decline, with increases in our frequency categories, which aligns with the investments we've made. We have improved inventory reliability and availability while appropriately reducing inventory in discretionary categories. We feel we are positioned correctly from an inventory standpoint as we start the quarter. Jim, please feel free to add any thoughts regarding our profit expectations for the fourth quarter or how we've incorporated Q3 trends into that outlook.

Yes, Mike. If I build on that, I mean if you take a step back and look at Q3, obviously, we faced a pretty dynamic environment. Our gross margins were broadly flat, we're pleased with the performance, and that's in line with expectations. A big thank you to the team for their ability to navigate and move quickly with agility to meet consumer needs and understand where things are heading. We expect that dynamic to continue in Q4. We do expect a continued volatile environment, which is why there’s a little bit of a wider range in place because we want to ensure we have the ability to react quickly to changes in this new environment that will represent the range we look at.

Only build I might add, and Rick, feel free to chime in here: We don't have a perfect crystal ball for exactly how it's going to play out by day or by week in Q4. But the thing we feel good about is how we'll show up for the guests. You’ve heard us touch a bit on some of the questions on making sure that we meet the guests where they are at. For us, that's always a couple of things because there are a couple of ingredients of how guests view value. It's the combination of great prices, and you've heard us invest in 3,000 price cuts across Food & Beverage and Essentials. We're really excited about a Thanksgiving meal for four under $20 as we step into Thanksgiving right around the corner. For Target, it's also pairing that great price with incredible product. I’m just as excited about the 20,000 new items we’ll have this coming fourth quarter, which is twice as many as last year, as I am about the great pricing guests will find on those items. It's that combination that matters so much to us, and we feel great about what guests are going to find as they travel the site and the store this holiday season.

We wanted to drill down a little bit more on your commentary regarding inventory and in-stocks. Is there any way you can kind of talk to how you feel about the inventory position going into the holiday, how it looks versus last year? And just how you see the cadence of in-stocks improving over time.

Yes, Kate, regarding inventory in general, we briefly touched on that in Mike's question earlier, but I want to highlight the importance of being in stock. This is a crucial topic for our guests, and you’ll hear us address it repeatedly in our future earnings calls because it truly matters. When customers trust us with their shopping experience, we must not let them down by running out of stock, and we acknowledge that we haven't performed well enough in recent years in this area. We are intensely focused on making improvements, and I commend our team for the progress made so far. However, there's still a lot of work ahead. Our customers have higher expectations than ever regarding availability. You will see us continuously strive to improve over time. We are prioritizing the most frequently purchased items, as being out of stock for these items has a greater impact on our guests, and we recognize that we have let them down in the past. I mentioned earlier our determination to enhance the availability of our top items—specifically, the 5,000 most frequently purchased items, which account for about 30% of our unit sales and form a significant portion of what guests buy daily at Target. Our team is committed to making progress with these items through various methods. This includes leveraging technology to improve our forecasting and stock levels. We also aim to have a clearer understanding of our performance. We’ve adjusted some of our metrics for in-stock items to better reflect where we are excelling and where we need improvement. This has been helpful, revealing that while we may perform adequately on average, we still fall short in some areas, especially during weekends. Our teams are diligently working to enhance our performance there. You may have heard me mention a 150 basis point improvement in Q3. If you aren’t closely following this work, it might be hard to fully grasp the significance of that progress. I prefer this year-over-year improvement in Q3 compared to last year over the gains we saw in Q2, which were better than Q1. This upward trajectory excites me, as it indicates we are on the right track to achieve better outcomes. If we maintain this momentum, I am very confident that we will be increasingly in stock throughout 2026 compared to 2025.

You just outlined a lot of the progress that you're making on key operational metrics such as in-stocks and speed to market, yet we really haven't seen it translate to an overall improvement in the performance of the business. So the obvious question is, why not? And what, as outsiders, is a reasonable time frame for holding the team accountable for showing that progress?

Yes. Thanks for the question, Michael. Here's what I'd say: We're not satisfied with the top line performance of the business. Even as it's come in as we expected in Q3, we're doing the work with urgency. As a team, our focus is to get back to growth. We know that won't happen overnight, but we know the path forward. We're focused on making progress and see momentum. We are investing in a huge credit to the team that is doing the work, and those efforts will lead to growth over time. We'll unpack more of our expectations for next year when we get to the financial community meeting in March, but I feel really good that we've got a team focused on doing the work right now that will lead to growth over time, and rest assured, we are tackling that work with urgency.

Okay. My follow-up question is if I could just add one more on.

Go ahead.

Very much, Michael. I appreciate it. You've already outlined the $1 billion of incremental for next year, perhaps there might be some incremental operating investments that could take down the profitability a bit next year. How amongst those guardrails are you thinking about the commitment to the dividend and the importance of that to your certain shareholders moving forward?

Jim, feel free to pile on to this as well. You've heard us describe our strong support over time of the dividend; Michael, you shouldn't expect anything to change there. We've been consistent in our capital priorities for as far back as I can remember in my 23 years here. It starts with making the right investments in the business. The $5 billion we'll put to work next year excites us, and we believe will generate the returns and growth that warrant that level of investment. The dividend is always the second priority, and I think our track record speaks for itself in terms of our support of the dividend and share repurchases with what's left piece that we'll always adjust as needed, but the dividend sits second on that priority list for good reason. Thanks, Michael. That brings us to the end of today's call. Thanks, everyone, for your questions and engagement.