Target Corporation (TGT)

TGT 
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Industry: Consumer Services
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Target Corporation (TGT)

Financial Community Meeting Call

October 30, 2013 13:00 ET

Executives

Gregg Steinhafel - Chairman, President and Chief Executive Officer

Tony Fisher - President, Target Canada

Kathee Tesija - Executive Vice President, Merchandising and Supply Chain

Casey Carl - President, Multichannel and Senior Vice President, Enterprise Strategy

Jeff Jones - Executive Vice President and Chief Marketing Officer

John Mulligan - Executive Vice President and Chief Financial Officer

Analysts

Matt Fassler - Goldman Sachs

Dan Binder - Jeffries

Greg Melich - ISI

Priya Ohri - Barclays

Walt Pearson - Brown Capital Management

Peter Benedict - Robert Baird

Chris Horvers - JP Morgan

Jason DeRise - UBS

Jack Balos - Focus Research

Bernie Sosnick - Gilford Securities

Patrick McKeever - MKM Partners

Randy Harris - Trendex

Presentation

Gregg Steinhafel - Chairman, President and Chief Executive Officer

Good afternoon and thank you all for joining us in Toronto for our Financial Community Meeting. I hope you enjoyed visiting our Square One store, which is our largest store in Canada at just over 160,000 square feet. I also want to extend a warm welcome to all of our online listeners this afternoon.

I am joined by other members of Target’s executive team who will be speaking today, Tony Fisher, President of Target Canada; Kathee Tesija, Executive Vice President of Merchandising and Supply Chain; Casey Carl, President of Multichannel and Senior Vice President of the Enterprise Strategy; Jeff Jones; Executive Vice President and Chief Marketing Officer; and John Mulligan, Executive Vice President and Chief Financial Officer. While you are likely familiar with Kathee, John and me, for many of you this will be the first time you’ve heard from Tony, Casey and Jeff. I am very excited for them to share their retail expertise and Target perspective with you today and for you to see why I have such confidence in their leadership.

Following today’s formal remarks, we’ll have time for your questions. As a reminder, any forward-looking statements that we make this afternoon are subject to risks and uncertainties, the most important of which are described in our SEC filings. Finally, in today’s remarks, we refer to adjusted earnings per share, which is a non-GAAP financial measure. Our 2012 annual report posted on our Investor Relations website includes a reconciliation to our GAAP results.

I am happy to be here with you today to talk about the actions we are taking to generate strong performance in this challenging environment, while innovating and evolving as an organization. To ensure we remain competitive in the consumer landscape and retail industry undergoing unprecedented change. This is the latest chapter, excuse me, this is the latest chapter in more than 50 years of history in which this company has driven strong performance while reinventing itself to remain relevant with our guests. In fact, about 10 years ago, after I arrived at Target, we went through a massive transformation. Until that point, Wal-Mart, K-Mart and Target were closely aligned in their strategic positioning. All three had grown beyond their home markets and were increasingly competing in overlapping trade areas.

Wal-Mart decided to focus primarily on supply chain, efficiency and delivering the lowest prices on very broad assortments. At Target, we chose to move beyond the price alone and focus on value by providing a more upscale, differentiated assortment in discretionary categories and a curated assortment of branded hard goods combined with a superior in-store experience and great prices. This new approach leveraged some of our core assets and our cultural DNA, including a department store heritage of fashion and trend merchandising, the ability to curate and edit assortments for our guests, expertise in global sourcing and a fast, fun and friendly team culture. Even though we were building on our strengths, this transformation required a big change in our culture and how we approached our core customers who became guests from that point forward.

Today, Target is facing a transformation of similar or even greater magnitude. Our guests’ daily activities and shopping habits are converging in dramatically new ways. Technology is changing nearly every aspect of consumers’ lives. Work, shopping, entertainment and communication are all happening simultaneously. This fundamental change in the way people live, research and shop presents a compelling opportunity to gain market share. We fully recognize that we live in a multichannel world and we are firmly committed to being a multichannel business. And given the ongoing backdrop of continued economic challenges and cautious consumer spending, gaining market share profitably has become more important than ever.

Today, we will share details that will demonstrate why I am confident that Target will thrive in this multichannel landscape by leveraging our core strengths and assets, building on strategies that are already working, developing new capabilities, changing our culture and how we interact with our guests and finding new ways to grow profitably. Although we are already well into this journey, there is a long road ahead. And consistent with our history, we are intently focused on performing while transforming thoughtfully managing our business and generating strong results today to fuel the changes we are making to ensure our success over time. As we evolve, we will continue to leverage our assets to compete in new ways and our most powerful assets continue to be our team and our stores.

The Target team has a proven track record of driving results while embracing change. This team has an outstanding ability to rally around priorities and treat every new goal as an opportunity to excel and has a deep and unwavering commitment to our guests. Our stores are also a key asset for Target. They are in convenient, profitable locations because we have been disciplined about closing and relocating stores when necessary. Because we have continued to invest in our stores, most recently with our PFresh remodel program, they are in better physical condition than they have ever been. And they offer a highly relevant assortment of wants and needs as we have continually evolved our assortment, layout and experience to meet changing guest preferences.

Behind the scenes we have invested in core assets that are key to our ability to provide value through a differentiated assortment. Our multi-faceted product design and development and sourcing capabilities, which have been developed over decades provide shorter lead times and the agility to respond quickly to changing trends and conditions. They allow Target to rapidly deliver high-quality products at a scale that drives down product costs. As a result, we offer a powerful combination of owned and exclusive brands. Like our stores, we are investing to build these brands and grow their penetration of sales over time. As we continue to leverage these assets, we inspect in-store and digital sales of owned and exclusive brands to continue to grow faster than our total sales.

Just as we plan to leverage key assets, we’ll continue to pursue strategies that are sustaining our performance in a tough environment. Value is the essence of our Expect More. Pay Less. brand promise and today our value message is stronger than it’s ever been. On nationally branded items, we continue to offer everyday pricing on par with the lowest priced competitors. And throughout our assortments, we offer additional ways for guests to save on top of our everyday pricing through the weekly circular in the U.S., known as the flyer here in Canada; cartwheel, our new online coupon portal; our print, online and holiday price match programs, which allow our guests to shop with confidence; and of course, our 5% REDcard and Pharmacy Rewards programs. When you add it all up, it’s clear that Target offers unbeatable prices in the U.S. and now in Canada.

Convenience is also a core facet of our brand. And in today’s environment, we are investing and innovating to provide enhanced convenience across channels. We are building online and mobile capabilities like lists and wayfinding, investing in PFresh remodels to allow our guests to do more in one store and flexing our format to reach urban guests with CityTarget. Fast, fun and friendly service is a key differentiator. Today, we are enhancing the level of service in our stores by training our teams to go beyond answering basic navigation questions to offering solutions. We are enabling this change by making investments in technology to equip the team to solve problems quickly. This is a major cultural change in our stores moving beyond an operational model to a service and sales orientation. We are punctuating this change by adding dedicated service to key areas in our stores, including beauty and baby.

Our designer strategy has long been the most visible part of the Expect More side of our brand promise. Beginning with our first partnership nearly 15 years ago, we have been wowing guests with access to high-end designs at unbelievable Target prices. Since then, we have continued to raise the bar bringing our collaborations to nearly every area of the store and getting the biggest names in fashion involved like Missoni, Jason Wu and Liberty of London. Many others have tried to copy us, but no one delivers these programs like we can. In addition, because we are known for delivering seasons like no one else, we’ll continue to focus on providing guests with solution during key seasons like back-to-school and back-to-college and the upcoming holiday season.

Finally, we are focused on continuing this company’s long history of operational discipline from in-stocks to seamless transitions to clean, bright, well-organized stores every hour of everyday. As John will discuss in more detail, this discipline, combined with a returns-based approach to investing and returning cash through dividends and share repurchase are the keys to delivering on our long-range financial goals. A theme you will hear throughout the day will center on developing new capabilities for a multichannel world. We know the importance of continually evolving to stay relevant and succeed.

As a result, we are engaged in a wide range of efforts to transform our business. We are working with a large group of merchants through MCX to develop a consumer-focused mobile wallet that’s convenient, safe and widely accepted. We are tapping into new categories, like streaming entertainment with – like Target Ticket, which Casey will address later. Recognizing the importance guests place on faster web-to-home delivery, we are ensuring we have the right systems and processes in place that create capacity in our supply chain to enable more flexible fulfillment. We are investing in small, but strategic, acquisitions, like CHEFS Catalog, Cooking.com and DermStore, that augment our digital content and capabilities while giving us access to brands we can grow both online and in stores. And our merchandising and service enhancements will allow our stores to be even better at closing the sale, whether it occurs in the store or through the extended assortment we offer in our digital channels.

To offer these new capabilities our teams need to be flexible and quick to adapt to changing expectations. We are moving to a more rapid test-and-learn approach to innovation, in which we explicitly consider the trade-off between speed and perfection to drive change more rapidly. And we are building organizational agility to adjust quickly when needed. We are also becoming even more disciplined in prioritizing our investments in capital and expense, freeing up resources to invest in our most compelling opportunities. All of this goes hand-in-hand with having access to the right talent, both hiring – both through hiring and through collaboration.

We will accomplish this by: Hiring world-class talent with deep subject matter expertise to augment our capabilities throughout the company, in areas like technology, digital, supply chain, data analytics and loyalty; Leveraging our new Innovation Center in San Francisco which allows us greater access to the technology talent in that area; And accessing the talent of a broad spectrum of leading companies in all spaces to advance our ability to connect with guests.

We are developing relationships with organizations ranging from small startups to the world’s biggest companies to bring leading edge capabilities to Target. Our recent collaboration with Facebook to develop Cartwheel is an excellent example. Ultimately, all of the objectives I have outlined must lead to profitable growth. In this rapidly changing environment, we are finding new ways to grow profitably.

For example, we are exploring new formats, such as CityTarget. Now that we have opened eight of these locations, we are learning from initial results to evaluate the opportunity to make this format even smaller. We are expanding our digital offering to reach guests in new ways. Digital sales, particularly in our higher margin discretionary categories are already growing much faster than our total sales and we expect that trend to continue well into the future. Beyond digital capabilities we are investing in flexible fulfillment, which presents a compelling growth opportunity to drive incremental sales through our existing store and distribution assets. And of course, as they mature, our newly opened Canadian stores will play a key role in our growth over the next five years. While initial sales in Canada have fallen well short of expectations, we remain very confident in the long-term potential of these assets. These are great locations in strong markets with demographics that are ideal for our strategy. And because we have invested to completely renovate them, these locations are outstanding physical assets as well. Given these strengths and the tactics we will deploy to drive shopping frequency, I am confident that we will reach our long range financial goals in our Canadian Segment. Tony and John will share additional details on our strategic, operational and financial plans for the Canadian Segment.

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