目標百貨 (TGT) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation's second quarter Earnings Release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Wednesday, August 18, 2010.

I would now like to turn the conference over to Mr. Gregg Steinhafel, Chairman, President, and Chief Executive Officer. Please go ahead, sir.

Good morning. And welcome to Target's 2010 second quarter earnings conference call. On the line with me today are Doug Scovanner, Executive Vice President and Chief Financial Officer, and Kathy Tesija, Executive Vice President Merchandising.

This morning, I'll provide a high level overview of our second quarter performance and Kathy will discuss category results, share recent guest insights and outline upcoming merchandising initiatives, and finally, Doug will provide more detail on our second quarter financial results and our outlook for the upcoming quarters. Following Doug's remarks we'll open the phone lines for a question-and-answer session. As a reminder, we're joined on this conference call by investor and others who are listening to our comments today via webcast. Following this conference call, John Halbert and Doug will be available throughout the day to answer any follow-up questions you may have. Also, as a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, the most important of which are described in our SEC filings.

We are very pleased with our second quarter financial results, particularly because our team was able to deliver strong profit performance in the face of slightly softer than expected top line sales. Our earnings per share of $0.92 for the quarter was better than we expected, and it established another record high for a non-holiday quarter in the Company's history. Our comparable store sales increased 1.7%, somewhat below our expectation going into the quarter. Healthy traffic trends continued in the second quarter, driving more than 100% of our comparable store sales increase. While some of that strength was driven by our current remodel program, traffic was quite healthy across the chain, the result of compelling merchandising, innovative marketing, strong store execution, and a superior value proposition, the essence of our "Expect More, Pay Less" brand promise. Kathy will provide detail on category performance in a few minutes.

Our teams maintained their disciplined focus on expense control during the quarter. Productivity in our stores continues to increase, even while our guest survey scores confirm that we're consistently delivering superior guest service and great looking stores, and because of strong leadership, thoughtful underwriting, and superb execution, our Credit Card segment turned in a remarkable second quarter performance with segment profit up more than 100% over last year. Looking ahead, teams across the Company are preparing for the launch of our exciting new rewards program this October in which guests will begin receiving 5% off every day when they use one of our credit cards or the Target Debit Card. Doug will provide much more detail in a few minutes.

As we consider the economy and the pattern of our sales, it's clear that the second quarter marked a change in recent trend. Following stronger results in the last two quarters, GDP growth softened considerably in the second quarter and our sales trends leveled off as well. While no one has a clear view of the future, recent results in both our business and the economy reinforce our perspective that the current recovery will be slow and inconsistent. While guests are still cautious, we're encouraged that we continue to see strong traffic, very healthy sales in discretionary apparel and strong market share gains in virtually all of our frequency categories.

Reflecting our you view on the pace of recovery, we continue to take a conservative position with our inventory and seasonal and markdown sensitive categories, preferring that our teams prepare to chase in the event of an upturn, rather than taking excessive risks that would lead to dramatic markdowns in a slower than expected sales environment. As always, we remain committed to being in stock in all of our need-based categories where markdown risks are negligible. We opened three new stores in the second quarter, including our first store in Manhattan. We're very excited about the warm welcome we received from the community in and around Spanish Harlem, and we've heard from many of you that you've already had a chance to see the store in person. We plan to open another 10 stores in the third quarter, and after closings and relocations we expect to add ten locations this year. We plan to steadily build from this very light program in the next few years, adding 20 or more new locations in 2011 and more than 30 in 2012.

While we have the appetite, the team, and access to capital that would enable our new store base to grow more quickly, we're steadfast in applying a returns-based approach to the approval of new stores and these growth expectations reflect our estimate of the number of projects that will meet our investment criteria in the current environment. In the meantime, we're pleased to invest productively in a refresh of our existing store base, incorporating the P-Fresh food layout along with improvements in Home, Beauty, Electronics, Video Games, and Shoes. We completed another 116 remodels in the second quarter alone. So far this year, we remodeled more than 200 stores, and have well over 300 P-Fresh stores operating across the country today.

We continue to make meaningful progress in our ability to execute the remodel process with less disruption for our guests. This quarter we tested an alternative approach with the remodel of our store in Tustin, California. Rather than keeping the store open for a 13 week remodel, we closed it and performed an extreme makeover, reopening a brand-new store after only five days. While we expect to have only limited opportunities to perform extreme remodels like this one in the future, we learned a lot from the process that we can apply to all of our remodels in the future. The performance of our remodeled stores continues to meet or exceed the expectations we laid out for you in January, in terms of traffic, total sales performance, and the amount of cross-shopping outside of food and the crossover categories and very importantly we continue to hear directly from our guests that they love the look of their new store, and they appreciate the time they save when they can complete their grocery shopping at Target.

At its core, our culture is centered on continuous innovation while staying true to our guest and our brand. P-Fresh and the upcoming 5% rewards program are notable examples of this focus. Both of these initiatives resulted from thoughtful evaluation, relying on data, rigorous financial analysis, and consideration of strategic and competitive factors. Obviously, any strategic investment decision creates risks, but moving too slowly creates risks as well. Just as we all have to consider both risks and opportunity in an investment portfolio, we've stress-tested our expectations for both of these strategies and determined that the potential strategic and financial benefits far outweigh the risks. Now that we've made these decisions, we are laser-focused on ensuring superb execution to maximize their long-term benefits. I'm proud to lead an organization of highly engaged and motivated team members who are devoted to Target's success and to creating long-term value for our shareholders. Now, Kathy will provide detail on our guest insights' research and additional information on our merchandising and marketing initiatives.

Kathy?

Thanks, Gregg.

At Target, fulfilling our "Expect More, Pay Less" brand promise means we provide our guests the convenience of one stop shopping and the right choices in a well-edited, unique portfolio of merchandise categories. It means that we achieve the right balance of fashion, newness, and value, while delivering a superior guest experience in our stores. Our ability to fulfill our brand promise has allowed Target to gain market share over time, in both healthy and challenging economic environments. Today, that promise means more than ever, as guests continue to manage their households in an uncertain environment.

Without a doubt, consumers have gained confidence and are willing to spend more than a year ago, but they remain cautious about the future and very thoughtful about how they spend their money. Our strategy and brand promise uniquely positions Target for success in this environment, because we offer guests the right assortment of items across a broad spectrum of categories at fabulous prices. In some cases today, we are seeing guests saving up and splurging on higher ticket items that are meaningful to them. A Kindle, for example, provides a great value because it's thin, lightweight and holds lots of books, making it easier to take while traveling. On the other hand, guests are becoming more comfortable purchasing owned brands like "Up & Up" where they know they'll get the quality of a national brand and pay about 30% less.

During the second quarter, our guests were out shopping at Target as evidenced by our strong traffic trends. Sales in food and health care continued to grow rapidly, while driving store traffic, and guests continue to put a few discretionary items in their baskets when they visited. This led to high single digit increases in women's apparel and shoes during the quarter, similar to first quarter trends. Second quarter sales trends in Electronics, Video Games, Music and Movies, softened noticeably at Target and elsewhere. While some interpret this trend as a sign that consumers are pulling back on discretionary purchases, we believe it's also related to product life cycle stages in these categories. In Televisions, the industry had to cycle over the digital conversion in the second quarter last year, creating a daunting comparison this year. In addition, Video Game hardware platforms are as mature as they've ever been, and a weaker new release schedule led to softer sales. Looking ahead, we believe both of these trends will begin to moderate in the fall as we move beyond the digital conversion and as newness in the Video Game category creates interest and spurs sales.

As Gregg mentioned earlier, the opening of our Harlem store in New York City was a huge success. We tailored the store's merchandise assortment to include a generous selection of multi-cultural and urban lifestyle offerings, appropriate items to meet the needs of the community; and earlier this month, we launched the Harlem designer collection in key stores, predominantly on the East Coast, and on Target.com. This diverse partnership features designs from renowned designers, Isabella Rubin Toledo, Steven Burroughs, and chef extraordinaire, Marcus Samuelsson These limited time only collections span multiple categories and reflect the spirit of Harlem. We're also very pleased with the performance of the merchandise re-inventions incorporated into this year's remodeled stores. This year's remodels build on last year's success in driving traffic and sales in food and across the store by updating visual elements and transforming categories such as Home, Beauty, Electronics, and Video Games. As expected, these updates outside of Food are leading to greater cross-shopping by our guests.

Beginning in July, our remodels added the transformation of the shoe department. This new destination provides an improved shopping experience for our guests with enhanced sight lines, better product visibility, and greater guest comfort with additional seating and mirrors. This new shoe experience will be in approximately 260 stores by the end of October. As I mentioned, many guests are increasingly attracted to our own brands, which provide great value as a great price. To ensure we continue to meet our guests' high standards, we're creating fewer, bigger owned brands throughout the store. "Up & Up" and our food owned brands, Market Pantry and Archer Farms, continue to resonate with our guests and sales penetration continues to grow. Our work in Merona played a key role driving strong results in Ladies Apparel this spring. And we're seeing positive results in our effort to clarify the assortment and aesthetic of Target Home and Room Essentials, positioning us for a successful back-to-college season.

Designer partnerships are an important part of our commitment to offering guests access to unique and coveted styles at affordable prices. This fall, we'll share on trend fashions and accessories with our guests through a number of exciting designer partnerships. Our limited time only Temple St. Clair for Target jewelry collection will be available later this month through the holidays. The vibrant assortment features 14-carat gold-plated brass and cubic zirconium, which fuses rich color into St. Clair's designs. The Temple St. Clair collection includes necklaces, cuffs, earrings, rings, and prices range from $30 to $50.

A new John Derian for Target collection for home and office will be available for a limited time beginning September 5th. New line for Target will feature more than 100 home decor products and office accessories at prices under $25. Also in September, we will launch Tucker for Target. This collection includes women's apparel and eclectic mix of bohemian chic prints featuring tops, bottoms, dresses, outerwear, and knitwear and prices ranging from $20 to $80. In Handbags, Target is partnering with the English luxury brand, Mulberry, to launch a limited edition collection for Target. The Target collection features signature Mulberry silhouettes in bold prints and interesting textures, including denim, pink leopard, black velvet, and patent. The collection ranges in price from $15 to $50 and will be available beginning in October.

And tonight, Target is taking over the Standard Hotel in New York City to create a brilliant, larger-than-life fashion show debuting Target fall 2010 collections. Part fashion show, part light show, the Target Fashion Spectacular will bring the southern facade of the Standard alive. In 155 rooms, 66 dancers, dressed in the latest styles will perform dazzling choreography synchronized with fast-paced lighting patterns set to an original music score. A simultaneous presentation will take place at street level. Guests outside of New York will be able to experience this one-of-a-kind event via a live streaming broadcast at Target's Facebook page.

This back-to-school season, Target offers affordable one-stop shopping for students and parents, from school supplies and dorm decor, to fashionable clothing and the latest gadgets. New this year is Disney's Designed, a line of apparel and accessories for 'tween girls. The new collection is based on the fashions worn by Disney channel characters, such as Sonny Monroe, from "Sonny with a Chance" and Alex Russo from "Wizards of Waverly Place." And for young men, we're introducing style and comfort with the Shawn White collection of graphic tees, played shirts and denim and new this fall Shaun White skate inspired shoes. And while the season still has a long way to go, initial results for both back-to-school and back-to-college have been encouraging, as guests have found the right items and great values when they shop at Target during this important season.

Later in the third quarter, for Halloween, we're offering guests of all ages the chance to experience Haunted Couture, through an exclusive designer partnership with Simon Doonan, creative director of Barneys, New York. Simon has created a line of costumes exclusively for Target that reflect his larger than life personality and keen fashion sense. Costume Couture by Simon Doonan for Target will be available for limited time beginning September 12 at selected Target stores and Target.com.

We're pleased with our results through the first half of 2010. While we would prefer a stronger economy and higher levels of consumer spending, we are well-positioned to operate profitably in this environment. Inventories are well controlled and we continue to gain market share in categories throughout the store. Now, Doug will provide more detail on our financial performance and expectations for the remainder of the year.

Doug?

Thanks, Kathy.

In my remarks today, I plan to review our second quarter and year-to-date results by segment and on an overall basis and I'll also provide some color on our outlook for the third and fourth quarters. As Gregg mentioned, on balance we're very pleased with our second quarter performance, as each of our business segments generated strong profitability and cash flow. Our second quarter earnings per share of $0.92 was 17% ahead of last year's performance, and 12% higher than our previous second quarter record of $0.82, achieved in 2008. In our retail segment, as previously disclosed, our sales grew at a somewhat slower pace than we had expected going into the quarter, yet our profit formula produced very strong EBITDA and EBIT performance, measured in dollars and on a rate basis as well. Overall, our sales increased 3.8%, driven by sales from new stores, combined with the 1.7% increase in comparable store sales.

Comparable store transactions or traffic increased 2.4%, slightly faster than the healthy pace we enjoyed in the first quarter. Average transaction size decreased slightly, as a decline in our average selling price per unit was only partially offset by an increase in units per transaction. As always, these metrics are driven by a multitude of market and competitive trends. They're also influenced by our P-Fresh store remodels, which cause our guests to choose to visit our stores more often and on these new visits purchase a merchandise mix with a lower average selling price per unit. With the number of P-Fresh stores increasing every quarter, these locations are gaining importance in their contribution to our overall comparable sales and traffic. For the quarter just ended, these stores contributed about 0.7 of a percentage point to our consolidated results on these metrics, and for the fall, we continue to expect this important strategy to contribute over a full percentage point of incremental comparable sales to our total.

Our second quarter gross margin rate was 32.0%, in line with last year's modern era record high rate. The impact of sales mix was essentially neutral for the second quarter in a row as strong Apparel sales, strong Food sales, and soft Electronic sales led to this neutral outcome. Rate increases within categories were similarly neutral in the quarter. Year-to-date, gross margin rate has improved about 20 basis points from last year. Our second quarter retail segment SG&A expense rate was also essentially in line with last year's rate, reflecting continued strong expense control in a relatively weak sales environment. Year-to-date, our expense rate was also in line with last year's rate. Overall, we remain highly satisfied with this result in light of the 2.2% growth in same store sales for the period.

In our Credit Card segment, most trends from the first quarter continued through the second quarter. Our base of credit card receivables continued to decline, reflecting macro credit card industry trends, driven in large part by the recent legislation and related regulations. In the quarter, solid revenue yield performance, combined with a benefit of a rapidly moderating risk environment, led to record high overall portfolio profitability, measured as a spread to LIBOR. This was the case both in dollars and as on a rate basis. Additionally, segment profit, our principal measure calculated after we pay third parties, mainly Chase Card Services for the capital they've invested in these financial assets, more than doubled over last year. This produced an annualized pre-tax return on the $3 billion of capital Target has invested in this business segment of just over 20% in the quarter.

As we prepare for the national roll-out of our 5% rewards program in mid-October, we continue to enjoy fascinating results in our Kansas City test market. Our incremental sales are about evenly split between sales to guests who use our credit cards, and those who use the Target Debit Card, a form of private label debit card attached to guest checking accounts. Incremental sales continue to be heavily concentrated among households who were already spending a lot more with us than our more occasional guests spend. Some of this increase is the result of an increase in shopping frequency among households who were active credit card holders even before the test. The rest comes from the approximate 50% lift in sales per households we have enjoyed over time and across all geography from the moment existing guests elect to acquire and use one of our cards. Our aggregate experience in Kansas City continues to validate our belief that this retail segment loyalty strategy will add about a full percentage point to fourth quarter sales and between one and two full points to sales next year.

Turning to other measures of performance, we continue to generate far more cash than we believe is prudent to reinvest in our business at this time. During the quarter, we announced a 47% increase in our dividends to an annualized payout of $1 per share. Coincidentally, we are trading "ex" our first $0.25 quarterly dividend today. During the quarter we also invested just over $900 million to purchase about $17.5 million of our shares at an average price of $51.72. Over the past five years, we have reduced our shares outstanding by more than 3% per year on a compounded basis. Also in the quarter, we issued $1 billion of new fixed rate 10 year unsecured notes with a 3.875% coupon, reflecting one of the lowest coupons in the modern era achieved by any corporation issuing debt of this kind.

Now let's turn to our outlook for the balance of 2010. In our retail segment, our same store sales have increased 2.2% so far this year. In the fall, we will enjoy greater benefits from our two powerful traffic driving strategies, P-Fresh and 5% rewards. Yet, we'll be cycling against stronger prior year performance. Sadly, it's now clear that the economy is not going to improve as quickly as most of us once expected. On balance, we expect comparable store sales to increase 1% to 3% in the third quarter, and likely a little faster in the fourth quarter, in both cases, driven by healthy same store traffic growth. Generally, we expect to preserve or perhaps slightly enhance our already strong EBITDA and EBIT margin rates in this segment in the fall season, with greater opportunity in the fourth quarter than the third quarter on these measures. As we've discussed before, our P-Fresh and 5% rewards strategies are designed to contribute incremental sales at lower gross margin rates and lower SG&A expense rates than our base business, while generally preserving our EBITDA and EBIT margin rate structure over time. This effect on our overall results will become more pronounced as we move forward, especially in the fourth quarter and into 2011, with gross margin rates and expense rates each likely to be somewhat lower relative to our previous experience.

In our Credit Card segment, we expect receivables to continue to decline in the fall season. As we discussed 90 days ago, late fee income will be curtailed beginning this quarter to comply with card act regulations. Now that final regulations are known, we expect third quarter late fee income about one-third lower than our year-to-date experience and expect some sequential recovery from that number in the fourth quarter. These results in both the third and fourth quarters would be somewhat less onerous than our previous expectations. On a more important note, we expect to continue to enjoy a healthier risk profile in the fall, than we experienced last fall. We expect net write-offs to stabilize at about $200 million, plus or minus, in each of the next two quarters. On balance, though, while there is some potential for an additional risk-related reduction in our allowance in the third quarter, we do not expect this factor to continue to contribute to our profitability to nearly the same extent it has on a year-to-date basis. Overall, current first call median estimates for us envision $0.68 in the third quarter, and $1.38 in the fourth quarter. As of today, we believe these are responsible single point estimates within a range of possible outcomes.

Now Gregg has a few brief closing remarks.

We're very pleased with our second quarter performance and the resilience of our strategy. While the economic environment remains uncertain, even more so today than a quarter ago, we're focused on initiatives that will drive our business, regardless of the economy, while also preparing our teams to react quickly to changes in the environment.

That concludes our prepared remarks. Now, Doug, Kathy, and I will be happy to respond to your questions.

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of John Zolidis with Buckingham Research.

Good morning.

Good morning.

Question on the data that you expect to get from the Rewards Card program. You made some interesting comments about what's happening in Kansas City in terms of which households are using the card and their increased spending. As you roll this out to the whole country, do you anticipate that you're going to get incremental data on who your customer is, why they come in, in such a way that you're going to be able to market to that customer more effectively and how do you plan to use that data that you might get?

Thank you.

We already have an extensive database regarding the majority of households who shop at Target, covering the significant majority of our sales. Yes, every time someone begins using one of our cards who didn't use one before, we get even more data, but the difference between the future and today on this score is not that great. We're already in a fine place.

Okay. Thanks.

And just one question on the retail SG&A in the quarter. It grew a little bit faster in 2Q than 1Q. Was that related to the P-Fresh remodels and how should we be thinking about the cost associated with those remodels in the balance of the year?

We're talking about a very fine point here. I think the main issue from my standpoint looking at Q2 versus Q1 is that same store sales growth was softer and, therefore, presented a bigger challenge to hold the growth in expenses lower than the growth in sales. But, at the end of the day, we're only talking about a rounded 0.1 of one percentage point of sales. This is not anything beyond what in my book is noise in the data.

The expenses, of course, of the P-Fresh roll-out, with the exception of accelerated depreciation, are all contained in retail SG&A expense. That's a fairly heavy expense load right now and will continue to be so into the third quarter as well, but of course, if you look back over a long history, we had a lot of new store pre-opening expenses in prior years that has essentially been replaced by this current form of expense.

Thanks and good luck for the back half of the year.

Thanks.

Your next question comes from the line of Robbie Ohmes with BofA Merrill Lynch.

Thank you. Good morning.

Actually two quick questions. The first was, Gregg, I was hoping that you could just comment on beyond the economy, the competitive environment and Wal-Mart, in particular, and any impact you saw or didn't see from some of the rollback strategies or promotions going on at some of your other competitors and what that feels like.

And then the second question is on the launch of the Red Card 5%-off program, what type of marketing are you guys expecting to do? Could you do national TV campaign behind that? Will the marketing approach be the same as what you did in Kansas City or could it be substantially more than that? Thanks.

On your first question, regarding the competitive environment, it was reasonably aggressive and rational, like it typically has been. I think most of the noise or I know most of the noise in the second quarter was really around what was going on at Wal-Mart. Clearly, there was some very aggressive discounting early in the quarter with some very extreme rollbacks that moderated considerably by the end of the quarter.

There was some very substantial personnel changes in there or announced in the middle of the quarter and along with that, some other decisions regarding what they're going to do with Action Alley and somewhat price modifications. But overall, what we've seen is fairly healthy competitive environment. Back-to-school has been fairly typical from what we've seen in other years, so nothing really out of the ordinary from what we've seen in the past.

Regarding the marketing launch of 5% rewards, we had an isolated market in Kansas City, but we weren't really capable of unleashing all of Target's marketing might behind that. We had circular. We had a lot of in-store marketing and I think we did a really good job of communicating this to the guests in that market, but clearly we've learned a lot from that test market; and we will apply even more broader strategic and tactical marketing vehicles to support the broad launch of marketing rewards. You can expect to see some fairly dramatic and impactful ways to communicate this, both via all medium and in-store over the fourth quarter this year.

And the guidance you've given on the comp lift you expect from the program, is that assuming that what you see broadly for all your stores mirrors what you see in Kansas City or are you baking into that that it will be a little stronger than what you've seen in Kansas City?

We're certainly not baking into our outlook anything stronger than what we experienced in Kansas City. We've drawn from our experience in Kansas City and given you our best estimate of what that will translate to in the rest of the country. Our estimates for the rest of the country are not rosy relative to what's happening in Kansas City.

Terrific. Thanks a lot, guys.

Your next question comes from the line of Deborah Weinswig with Citi.

Good morning. A few questions.

Doug, can you remind us what comp you need to lever and the impact of the productivity improvements on SG&A leverage?

Generally speaking, over the last couple of years, we focused on engineering a business model in our retail segment that is pretty neutral on an annualized basis, SG&A as a percent of sales with a comp of 1% or 2%. That relationship will become unglued in a favorable kind of way starting Q4 and beyond where we're generating incremental sales, with sharply lower gross margin rate and sharply lower expense rate than our base business. I expect to start seeing some favorability on that line, but of course it is simply the mirror image of the unfavorability we're virtually certain to experience in gross margin rate, Q4 and beyond, due to these two sales driving strategies.

Okay. That's what I thought.

And then in terms of the June remodel cycle, if memory serves me correct, it was the first one where you had all the six features of the merchandise re-inventions. I don't know, Gregg, if you could just talk about any change in trends that you saw there from a cross-shopping perspective?

It was really the July remodel cycle which was --

Sorry.

Yes. Well, you're close. You're only a month off.

-- which was the first month where we had all aspects, the coordinated store environment, Footwear, Home, Destination, Beauty, and Electronics, Video Games, and Food, so we're really excited that going forward all of those elements are going to be in the remodels going forward; and as we have moved through the various cycles this year we continue to do a better job in terms of selling other merchandise in addition to the food and the crossover categories. We're pretty confident that over time as we introduce all of these refreshed elements into the stores we're going to see the discretionary side of our store, the sales in the discretionary categories, start to improve like we did in the June and July cycle.

And then last question. Doug, I know it's early, but if we look at P-Fresh plus the 5% rewards, I know we're still in 2010, but If my math is correct, could we get to a 5% comp in a more normal environment, so 2% to 3% from the 5% rewards and 1% to 2% from P-Fresh, plus 1% from the base business?

Well, your math is sound. The whole question is what would the base business have accomplished, absent these two sales-driving strategies. But certainly it's possible that we would get into that territory next year. It hangs in the balance of the strength of the economic recovery.

I would say that as we think about the components that you just laid out, I'm quite confident that P-Fresh will deliver as advertised. I'm quite confident that 5% rewards will deliver as advertised on the sales line in both cases. I'm less confident, knowing what base business number we should start from before adding those increments and whether or not that adds up to five hangs in the balance of what base number do we start with.

Great. Thanks so much and best of luck.

Thanks.

Your next question comes from the line of Charles Grom with JPMorgan.

Good morning.

Doug, just wanted to make sure I heard you correctly on your second half guidance that you expect gross profit margin and SG&A rates to be down roughly ,so the EBIT rate would essentially be neutral to last year. Is that correct?

Let's take this one piece at a time.

What I said in my earlier remarks was that our outlook for the fall season envisions either about the same or slightly higher rates, with a bigger opportunity in Q4 than in Q3. Spring season, we're already operating at record high EBITDA margin rates and essentially in line with the highest EBIT margin rates in our retail segment's history. From my standpoint, this simply underscores the notion that the key to strength and prosperity moving forward is to rejuvenate top line growth, while generally preserving our current EBITDA and EBIT margin rate structure; and we have two powerful traffic and sales driving strategies in the form of P-Fresh and 5% rewards that are designed to do just that.

EBITDA and EBIT margin rates, though, are, of course, the product of what happens at gross margins, what happens with expenses, starting especially in the fourth quarter, less so in the third quarter because 5% rewards after all doesn't hit the marketplace until mid-October. Starting in the fourth quarter, I think those gross margin rate and expense rate trends are going to be influenced more heavily by the combination of P-Fresh and 5% rewards.

Okay. Thanks very much.

And then just what is your outlook for D&A for the year? How much do you expect it to come in?

Depreciation and amortization expense in the third and fourth quarter will likely be about the same as last year's levels in dollars, and so we will see some favorable leverage on a positive sales trend, that is, which is of course our assumption on that line item, crossing from EBITDA to EBIT. Recall that we had a huge increment of accelerated depreciation last fall from the first wave of these P-Fresh remodels.

Right. Exactly.

Okay, and then in terms of the P-Fresh, when you look at, say, the Philadelphia market as a test case, you started those 31 in October of last year. How's the comp trended, the list comp trended, since that time as you've gone on almost a year now? Has that comping increased a little bit? And embedded in that, could you talk to the traffic trends as well?

I really don't want to get into disclosures on an ongoing basis of individual markets for P-Fresh. I'd step back from your question and try and answer it in a broader sense.

The lift we continue to experience from all of our P-Fresh stores as a group, inclusive of the importance of Philadelphia's contribution to the total, remains right in line with what we hoped and expected and right in line with what's required to achieve the financial returns that we outlined, which means that from a strategic standpoint, it appears to be a home run.

Okay. Great.

One last one on credit. What's your expectations for year end receivables and year end allowance for doubtful accounts?

Well, the receivables -- our recent receivables experience has been, of course, a double-digit percentage decline. There is a seasonal increase in receivables in Q4 that needs to be respected in making the judgment, but the year-over-year percentage declines that you've seen in Q1 and Q2 should remain generally intact in Q3 and Q4.

The allowance question is a more fascinating question from my standpoint because we really need to think about allowance reductions or the potential for allowance reductions in two very distinct categories. Even if we maintain the same allowance as a percentage of receivables, the allowance is destined, is pre-ordained to decline in line with receivables decline. In the quarter just ended, if our allowance had ended the quarter at the same percentage of receivables it began the quarter, we would have recorded a $35 million reduction in the allowance. Of course, the reduction in the allowance was larger in the current quarter because of the second factor.

As is always the case, we assess the risk in our quarter-end receivables in deciding where the allowance should land. In this case, we decided that the risks were lower at the end of the second quarter than they were at the end of the first and therefore there was a second element to the allowance decline.

Looking forward, clearly the allowance will decline as a result of continued declines in receivables. Secondly, in my remarks, I mentioned that I thought that we would be in a better place, certainly in Q3, from a risk standpoint, so maybe there's the potential for further reduction in the allowance due to declines in risks, but, obviously, at some point, those risks will normalize, will stabilize, and that factor in isolation contributing to reserve reductions will be in our past. When that might happen is a matter of a little bit of speculation. Right now, our momentum remains very, very strong in terms of dissipating risks in our Credit Card business.

Do you anticipate the spread in dollars between write-offs and bad debt to be commensurate in the third and fourth quarter to what you just did in this quarter?

That would be a very, very happy case. That is possible, but it certainly should not be the center line of anybody's expectations. That would require risks continuing to recede in the back half of the year at the same pace they receded in the front half of the year and again, for the reasons I outlined a few minutes ago, that should not be a base case expectation.

Okay. Thanks a lot.

Your next question comes from the line of Adrianne Shapira with Goldman Sachs.

Thank you.

My question related to your comp outlook. It sounds as if Q3 you're looking for 1% to 3%, and some improvement in the fourth quarter. Can you just share with us, given the fact that comparisons obviously get tougher as we move into the fourth quarter, is that a reflection of what you're seeing currently?

It sounds as if it's consistent with the August outlook you had shared with us when you reported July, and help us think about this, especially given August looks as if it's a relatively easy comparison? Thanks.

Well, we went into -- I'm going to back up 90 days to answer your question more fully. We went into the second quarter with an expectation of driving 2% to 4% in same store sales and we did not achieve that expectation. Same store sales ended up a little south of positive 2% during the quarter. The momentum we're carrying into the third quarter, therefore, is in the range of 1% to 2%. I think that the extra contribution in the third quarter from our P-Fresh remodels gives us comfort that a responsible outlook isn't 1% to 2% but rather 1% to 3% for the third quarter.

In sequence, in the fourth quarter, in addition to the continued strong contribution from P-Fresh, we believe that 5% rewards will add essentially a full point to our same store sales performance. We haven't quantified with precision what that translates to in the fourth quarter, but certainly each of us could add 1 percentage point to 1% to 3% and come up with a responsible range, but that's not something that we typically do farther out than one quarter. But 1% to 3% seems responsible in the third quarter, for the reasons I outlined. 5% rewards on top of everything else with we have going on, all else being equal will add nearly a full percentage point, plus or minus a full percentage point to our fourth quarter results.

As Doug said, as you know, we're cycling tougher comps from a year ago and so much of what's going to happen is going to be predicated on the base comp sales. That is the big question mark and if we see a pick-up on that, we're going to be on the happy side of that case. And if things continue to bounce around, we're going to be in that range.

But it's really going to be about consumer sentiment and what happens as we go into the third and fourth quarter from an economy standpoint. And if that strengthens, then I think we'll be fairly pleased. If we see it retrenching and go the other way, then I don't think you're going to see rewards or the P-Fresh -- the strength in those two new initiatives offset the decline in the base business.

Okay.

And then Gregg, just following on that, is the category opportunity in terms of the base -- is the Electronics category, the hard lines, is that really the opportunity to see an improvement? It sounds as if across Discretionary, Apparel and Shoes doing quite well -- it's really the hard lines, Home, that we've seen a little bit of that softness. Is that where the focus is?

Well, that's where the softness has been. That's where our focus is. As Kathy mentioned in her remarks, we expect some of those negative trends to moderate for a number of reasons.

We continue to expect our Apparel business to be good. We expect our Health and Beauty and our Non-food businesses and our Food businesses to be rock solid all the way through the second half of the year. Home has been mixed. There have been portions of home that have been very solid. Others have been softer. On average it's been pretty decent.

The big negative has been around Music, Movies and the Electronics categories. There's a lot more new releases and some things that we're doing internally that we believe will strengthen the trend there, but, certainly, not bring it back up to the Company rate.

Okay. Great.

And then Doug, just on the SG&A front, last quarter you had talked to a re-timing of expense marketing. Could you shed some light in terms of the amount and the timing shift on that?

Well, as always, we try to be careful in disclosing trends, but I don't want to leave the mis-impression that this is a big issue. In Q1, advertising and marketing grew faster than sales. In Q2, advertising and marketing grew a little slower than sales. But for the spring, year-to-date that is, advertising and marketing grew a little faster than sales.

In all cases, these are fairly trivial changes. I heard some speculative commentary this morning about something bizarre like a 20% greater than a 20% decline. I don't know what the source of that kind of mis-information would be.

Okay.

When we head into the back half, any timing shifts to look for?

Nothing that's remarkable. We will always have shifts quarter-to-quarter. Our broadcast schedules have year-end Q3, for example, than it was in Q3 last year.

So in isolation, if I'm not careful here I could give you a big list of things that go in the wrong direction and cause you to run for the exit because there's also a big list of offsetting factors as well, but these are all fairly small changes.

Again, I'm trying to be faithful to answering your question as to which direction these matters go, but none of these in order of magnitude are particularly important.

Okay, and then just last question on online. Obviously, big change next year as you bring it in-house. Could you give us some sense preliminarily in terms of any sort of incremental costs, headcount, what that demands of you, going forward?

Well, as you know, is a monumental internal effort requiring huge teams involved in the technology side of that, on the business services side. We've done a lot of restructuring.

It's a very substantial internal effort that is going to require us to deliver this mid- to end of next year. We're on track. Everything is proceeding as we expected, and we fully expect to be able to launch this with great fanfare middle of next year.

Couple comments.

The biggest issue of course is that we're internalizing the expense base of what had previously been a payments made to an unrelated third party, in this case Amazon. Thinking about the dynamics, though, a couple things are at play here.

Relative to status quo, in other words, relative to sticking with Amazon, we are already incurring some double expenses as we prepare for the launch and that will continue into 2011 as well. So for a period of time, 2010, 2011, we've actually increased our SG&A as a result of this switch. That obviously will create a year-over-year benefit when we get to 2012.

Separately, we are replacing what had been, what is today, a generally variable arrangement with Amazon into what will be more of a fixed cost arrangement internally, and therefore, be subject to much more favorable or unfavorable leveraging, based on changes in sales.

Thank you.

Your next question comes from the line of Jeff Klinefelter with Piper Jaffray.

Yes. Thank you.

One question on your new store development. Gregg, you mentioned at the beginning of your remarks that it's roughly 20 stores next year, 30 stores the following year, could go higher, but they're not penciling out as many of them to meet your model. Could you just talk a little bit more about what is the issue at this point? Is it more the cost of real estate or the cost of the economics of the building and the real estate or finding markets where competitive dynamics support an adequate enough sales volume? Just share a little bit more.

And then where would those new stores, the 20 and 30 be focused generally on a geographic basis?

I'll tackle at least the front half of that question.

If you look back over time, when we were adding 80, 90, 100 stores or more, about two-thirds of our development, our new store development, represented Target stores as a component of much, much larger retail developments with multiple big box, medium box anchors and lots and lots of in line space. That market marketplace in this country is nearly at absolute zero today. There are very few new projects of that kind in flight or coming out of the ground. So the biggest issue that impacts our new store outlook is that there aren't nearly as many opportunities being developed in this country that we could participate in. So we're left to focus on the stand-alone store opportunities and there we are keenly focused on looking at all 50 United States simultaneously.

We don't have a geographic focus in mind of trying to add more stores here and there. We will build any store that is responsible to build, measured in financial and community terms, and we have the capital to do that. We have the team to be able to do that. We have the will to be able to do that. There just simply aren't that many single store opportunities in the current environment in this country that meet all of those criteria.

I don't have much to add other than all of those factors that you mentioned are factors in the decision making process. What are the sales expectation, the profit expectation, demographics, the growth, construction costs, and current real estate prices?

We look at all of those factors to determine whether or not that is going to yield the right kind of MPV and economic value creation. And in some cases it does and in the cases that it doesn't we have to go back to the drawing board and push those projects back until we get a better deal. Sometimes we're able to do that and sometimes we're not.

As I said in my remark, we're going to maintain the financial discipline that we've always demonstrated to make sure we deliver projects that are generating shareholder values and not just doing projects for project's sake; and right now the number of projects is just very, very thin as Doug mentioned.

Okay.

Just as a follow-up, Gregg, does this lack or -- and Doug, lack of real estate or new development focus more of your attention or get you thinking about these international opportunities, perhaps sooner in that time frame that you identified here a couple quarters ago?

And then just one follow-up for Kathy. You indicated back-to-school, back to college trends are encouraging. Does that just suggest those categories are tracking at this point ahead of the chain average? And then in Home, what potential in the second half do you see for the Home category to accelerate its recent comp trend?

I think it really does not accelerate our desire to go international. We're focused domestically on a number of opportunities to grow market share and improve our top line.

Our highest priority is to focus on the base business. We've got a huge strategic initiative in P-Fresh. We are only into 300 plus stores out of a potential of approximately 1,400 stores -- 1,300 or 1,400 stores, so we have a lot yet to accomplish with P-Fresh.

We are starting to examine the opportunities around smaller format, small footprint stores in more urban environments and we've got some tests under way and we real really believe that this will be a potential growth vehicle for us going forward. That's not going to come on stream for a couple of years. We're doing a tremendous amount of research and preparing ourselves for 2012 and 2015 -- or 2013. And then as we described, the 5% rewards is also a huge growth initiative for us.

We have a lot of really important initiatives that we are laser like focused in terms of executing and operating the best we possibly can. This is going to drive our top line growth. We're not really interested in fragmenting our effort and be thinking about international until we can really be further down the line and those four initiatives and really feel more comfortable that we're further through the development of all of those initiatives.

The only two cents worth I would add is that, in the current environment, after we have re-invested in our base business all of the capital we think is warranted, it means the best way I know to increase our sales and our earnings on a per share basis is to invest in our shares rather aggressively, while our shares are priced in the low $50s. Relative to our outlook, that seems like a wonderful place to invest capital, to improve our sales per share and our earnings per share well into the future.

Separately, I'll pass the baton to Kathy in a moment to give you a little more color, but I think the right overall interpretation of Kathy's earlier remarks is that so far in August, our sales performance is right in line with what we said it would be for August and what I discussed earlier in this call regarding the third quarter.

Kathy?

I would add to that, back-to-school and back-to-college are both performing in line with our plan. We had a lot of changes we made in the flat area in back-to-school. You know how important that is from a guest perspective in terms of price perception and having the right items and we've been very competitive and sales have been great. We also aged up our assortment a bit, getting more at that teen guest and so we've seen some good growth there as well.

Same with back-to-college. We had some in stock issues last year. That was our biggest focus this year. And we're in great shape this week, heading into the peak week. In addition to that, you've seen Room Essentials grow as part of our back-to-college assortment. That brand has performed exceptionally well since our relaunch and so it's continuing to do well with back-to-school and back-to-college.

In terms of Home, as we look through the back half, there are a lot of things that we're excited about, starting with back-to-school and back-to-college, which a lot of Home categories pop in that time frame. Room Essentials, I mentioned, that relaunch has been very successful and we would expect that to continue throughout the fall.

The Home brand has also performed well and gaining strength and I think in particular what you'll see this fall in that brand is really some fantastic textures and throws and velvet coverlets and pillows in really incredibly rich colors, purples and teals and greens. Very appealing to the guest, very salable and some really beautiful new additions to that brand, so I would expect us to continue to improve in Home. Hopefully, with the things we have with Halloween, expanding our assortment with adult costumes as well as kids and really playing up that party aspect, that we should continue our slow climb out of where we were with Home into some better number ranges.

Thank you.

We have time for one more question.

Your next question comes from the line of Mark Miller with William Blair.

Hi. Good morning.

I wanted to follow up on your earlier comment about more conservative planning on seasonal inventory and markdown categories. Just trying to gauge whether this is a meaningful change or what type of magnitude there would be in terms of your inventory commitments, maybe on a same store basis, for example?

Well, we expect our inventories to grow commensurate with same store sales and this is not really a new approach to super markdown sensitive categories. I'm referring to things like Halloween and Christmas where the day after it goes 50% off. We're going to leave a little bit of business on the table. We would prefer to leave them in those categories, than more basic categories.

We don't plan these categories for 100% sell-through. We plan these to have reasonable sell-throughs, somewhere in the range of 70% to 80%. If there is stronger business and there's upside potential, then the sell-through will be able to sell deeper into that assortment and then our sell-through goes up, so it really would have to be something really dramatic for us to really miss business. We believe we can sell up from 70% to 80% to even 90% before we would really start to have some kind of out-of-stocks.

This is that risk reward kind of thing. Do you really want to go out there and capture that last sale or do you want to be a little more disciplined and have a little bit more of a scarcity strategy? It's an approach that we have taken for some time. We're just validating that we think that in this kind of current environment, it's as important or more important that we stay focused on -- make sure that we're managing those categories more conservatively than we would categories that have less markdown risks associated with them.

Thanks, Gregg.

Just a question for Doug on depreciation. It declined sequentially although not by a huge amount. Was there anything within those numbers? I would have thought with the P-Fresh remodels that that would still be going up.

That's just not the case. We've had a fairly light capital expenditure budget for quite some time and what you see is just simply the math that results from all of that. I mentioned earlier in the call that we expect generally flat depreciation and amortization to prior year numbers, Q3 and Q4.

That concludes Target's second quarter earnings conference call. Thank you all for your participation, and have a terrific day.

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