Target Q1'16 Earnings Conference Call: Full Transcript

Operator:

Welcome to the Target Corporation's TGT First Quarter Earnings Release Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will invite you to participate in a question-and-answer session. At that time if you have a question you will need to press star, one on your telephone. 

As a reminder this conference is being recorded Wednesday May 18, 2016. 

I would now like to turn the conference over to Mr. John Hulbert Vice President Investor Relations. Please go ahead sir. 

John Hulbert:Vice President-Investor Relations:

Good morning everyone, and thank you for joining us on our first quarter 2016 earnings conference call. On the line with me today are Brain Cornell, Chairman and Chief Executive Officer, John Mulligan, Chief Operating Officer and Cathy Smith, Chief Financial Officer. 

This morning Brian will discuss our first quarter performance including results across our merchandise categories, then John will provide an update on our efforts to improve in-stocks and build our supply-chain capabilities and finally Cathy will offer more detail on our first quarter financial performance and our outlook for the second quarter. Following the remarks we'll open the phone lines for a question-and-answer session. 

As a reminder, we're joined on this conference call by investors and others who are listening to our comments via webcast. Following the call, Cathy and I will be available 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. Also, in these remarks we refer to adjusted earnings per share which is a non-GAAP financial measure and return on invested capital which is a ratio based on GAAP information with the exception of adjustments made to capitalized operating leases. 

Reconciliations to our GAAP EPS and our GAAP total rent expense are included in this morning's press release, which is posted on our Investor Relations website.

With that I will turn it over to Brian for his comments on the first quarter and our priorities going forward. Brian?

Brian C. Cornell:Chairman of the Board and Chief Executive Officer:

Thanks, John and good morning, everyone.

Before I start with prepared remarks, let me set up the structure for our call this morning, in order to make sure we spend significant time talking about our first quarter results, and Cathy and John and I will cover both our first quarter performance and also talking about the second quarter outlook. But we're going to make sure, we need significant time for Q&A in order to make sure we have time today to address your questions, provide additional insights into our first quarter performance and the factors that are guiding our outlook for Q2. 

Let me start with the first quarter. Our team delivered outstanding first quarter financial results, in a very challenging consumer environment, which became softer and more volatile as the quarter progress. Our first quarter adjusted EPS of a $29 was well beyond the high-end of the guidance for the quarter and more than 16% ahead of the $10 last year. These results demonstrate the value of our strategy in the face of more challenging consumer landscape. 

First quarter comparable sales growth was driven, by an increase in both traffic and average ticket, as traffic grew in both our stores and digital channels. Comparable digital sales grew 23% in the first quarter on top of 38% a year ago. We generated very healthy profit margins on our sales in the quarter. As our team did a great job, managing the business in the phase of a number of headwinds particularly following the Easter holiday. 

As planned our first quarter gross margin rates reflected the benefit for the sales of our pharmacy business, favorable merchandising mix and our cost savings initiatives. These benefits allowed us to offset markdown pressure in a very promotional environment. The team also delivered on the expense line, which benefited from the pharmacy sales and cost initiatives offsetting pressure from investments we made in our business including our team. Kathy will provide more detail in a few minutes. 

Sales in the quarter came in lighter than expected, and daily and regional shopping patterns were more volatile than in the prior periods. So against generally maintains their pattern of larger and Pantry stocking visits. We saw a slowdown in growth of smaller convenience trips. Against that background, our results show that our strategy continuous to resonate with our guests, as comparable sales in our signature categories style, baby, kids and wellness grew more than three times as fast as the Company average. 

Given the concentration of signature categories in home and apparel, comparable sales in both categories outperformed the company, driving market share gains in both areas. Constant home grew nearly 4%, led by spring in domestics to core and [Inaudible]. Highlights concluded our kids home assortments, which saw comp sales in the mid teens, driven by a successful launch our new [05-01:14] brand. 

We were also pleased with the results from our partnership with which attracted guest to explore our assortment in stores and digital, driving sales in both comp and apparel. Overall comps and apparel grew between 2% and 3% led by sales in baby, kids and women's ready-to-wear. Rapid growth in ready-to-wear is especially notable given the tough comparison from last year, specifically, the two stacks of the first quarter comp sales in ready-to-wear is more than 16% higher than two years ago. First quarter comps in food were down slightly as an increase imperishable was offset by a decline in center store grocery. While results were impacted by deflation in some categories they also reflected a meaningful disruption from the reset of our center store grocery area which was executed in stores across the country in April. 

Despite the disruption, this effort better positions us for success over the longer-term as we've implemented changes to assortment, presentation and category adjacencies. 

Specifically, we have updated assortment and segmentation to align with local demographics and showcase wellness and we integrated nutrition bars into the center store for pad creating an industry relating destination for these items. In total we added about a thousand new items with this reset including 55 new better for you brands across 25 categories and we've incorporated our simply balanced brand into an additional 30 categories. This represents an important step in the reinvention of our grocery business. Following the reset we've received very positive guest feedback and the subsequent results have been better than expected. 

Within hardlines we saw a high single-digit increase in the first quarter of comparable sales and toys even as we computed over high single digit growth last year. Offsetting the growth in toys, we saw declines in electrons and entertainment reflecting the secular challenges these categories continue to face. These declines for about 70 basis points of pressure on our first quarter comparable sales growth. 

I want to pause and welcome Mark Tritton who will be joining our team as the EVP and Chief Merchandising Officer overseeing our enterprise buying, sourcing, product design, development and merchandising operations. We have conducted an exhaust research for a new CMO and I am confident Mark is the right leader for our merchandising team. Mark come to us with a wealth of retail and merchandising experience including positions of Nike, Timberland and Nordstrom where Mark doubled their private label business. Mark is a bold decisive and visionary retail leader and we are excited to have him on our target team. 

Once again this quarter, we were able return a compelling amount of cash to our shareholders through dividends and share repurchase. Altogether, we return more than $1.2 billion to our shareholders in the first quarter up from just under $900 million a year ago. In addition, given our strong financial position this quarter we are able to refinance some high cost debt by issuing new debt at very attractive rates. Cathy will provide more details in a few minutes. 

As we look ahead we are approaching our business with appropriate caution as sales trends at target and many of our key competitors weakened and became more volatile in the first quarter. In addition, many of competitors were sitting on meaningful access inventory which we expect will extend a very intense promotional environment in to the month ahead. Despite our near term caution, we'll continue to execute the long term strategy vision that we led out 18 months ago. The vision which has been shaping our results ever since. 

We are very excited about the launch of our new case apparel brand CAT & JACK which will roll out in the second quarter and we'll continue to invest in quality through our owned and exclusive brand assortment with a particular emphasis on signature categories. We will continue to work to enhance our food offerings to become more fancy and local with more natural and clean label offerings and we will continue to partner with our colleagues to CVS to complete the re-branding of our pharmacies within our stores. Following the re-branding effort we'll collaborate with CVS on an awareness campaign to ensure that both our guests and members of our PDM businesses are aware of the change within our stores. As John will describe in a few minutes, we're also investing in store experience and flexible prevalent capabilities, while modernizing our supply chain to become more agile in a way we serve our guests. 

We are very excited to be near completion of our LA 25 remodels. Which began more before the holiday season and we're eager to gain guests feedbacks determine which enhancements will rollout more broadly in the future. 

And finally we are making investments in our team, adding specialized talents like new visual merchandising leaders while ensuring the store presentation in our style categories, highlight the investments we are making to enhance quality and innovation. 

Going forward we'll continue to look for ways to simplify processes in our stores, freeing up time for our team to focus on serving our guest. Before I turn the call over to John, I want to thank the entire Target team for their tireless work on behalf of our business and our guest. As we have said many times, we have the best team in retail, both in our stores and our headquarters and I am continually inspired by their passion to drive Target success by better serving our guests. With this outstanding team a strong brand, great looking stores, a resilient business model, and a strong balance sheet, I am confident we'll successfully navigate the near term retail environment as we implement strategies that will drive Targets long-term success. 

With that I'll turn the call over to John who discuss his teams efforts to modernize our supply chain and improved our operations. John? 

John Hulbert:Senior Director, Investor Communications:

Thanks Brian and good morning everyone. Today I am going to provide an update on our efforts to reduce out of stocks and improve inventory flow throughout our supply chain. Then I'll cover our current work to enable our existing supply chain infrastructure to operate more flexibly and support of our strategy. And finally I'll turn to our efforts to elevate the store experience on behalf of our guests, including enhancements to the order pickup process. 

Many of you have told us, that you've noticed the improvement in our in-stock position in our stores and our internal measures confirmed which you have been seeing specifically in the first quarter, we saw a 27% improvement in out-of-stock measures compared with the first quarter last year. This represents a sequential acceleration from our fourth quarter performance and we are seeing improvements across all of our merchandise categories. 

Some of the in-stock improvement is being driven by additional inventory investments in essential categories, which drove a portion of our year-over-year increase in our inventory at the end of the quarter. However we have opportunities to make other changes that will allow us to streamline our inventory position overtime. Specifically the team is taking a data driven approach to reduce the number of skews in our assortment, making room for additional facings of the best selling, faster turning items on our store shelves.

In addition the team is collaborating with vendors to reduce case pack sizes which will reduced backroom inventory while increasing store label efficiency by reducing the number of times and item is touched before it's displayed on shelves. Beyond these improvements the out-of-stock team has successfully tested other enhancements that will roll out later this year. One test applied new replenishment algorithms for items with the regular demand patterns like seasonal sporting goods and the results of the test were dramatic as out-of-stocks improved by 50% on test items. Another test involves updates to our presentation standards for items that are typically purchased in multiples. 

This ensures that our minimum standard reflect the way guests are shopping today allowing us to better optimize the tradeoff between inventory investments and out-of-stocks. And with our vendor partners the team is worked to meaningfully reduced shipping windows which will enhanced speed and reliability throughout the supply chain. We are very pleased with collaboration we've seen from our vendors on this effort and improving shipping windows will be implemented across all merchandise categories by this fall. Beyond our work on in-stocks we are making changes in our distributions centers to modernize our capabilities. 

These changes will allow our existing infrastructure to operate more flexibly simultaneously reducing shipping times by officially leveraging our entire network inventory on behalf of our guests. 

At our financial community meeting in March I outlined the conversion of three of our traditional regional distribution centers and the delayed allocation centers which can house slower turning items with more variable demand allowing the remaining DCs faster turning excuse more efficiently. In addition, these delayed allocation centers will allow us to pause the right amount of seasonal inventory across the country throughout the season as demand patters emerged keeping us in-stock longer in areas of unexpectedly high demand or reducing excess inventory in areas of unexpectedly low demand. We successfully completed the conversion of all three delayed allocation centers in the first quarter and early results indicate that these additional notes are improving product allocation compared with our past performance. 

Among our other regional DCs this year's we're making changes to three facilities to enable and shipped directly to guests. This requires a meaningful transformation and capabilities to these facilities as direct to shipments require the team to pick and pack individual items or shipments to stores require fast moving shipments of case packs compliance. Despite the challenge we are excited about this work, because like our ship from store capability they've really shipped from our regional DCs directly to guests provides deeper access to network inventory enhancing our digital in-stocks while allowing us to reach our guests more quickly by controlling costs. In addition adding direct ship capability to one of our existing facilities, acquires 85% lower capital investment compared with the construction of new dedicated web fulfillment center. 

As you know a meaningful portion of our capital expenditures in recent years has been devoted to technology and supply chain, and we've said that we expect these investments to continue in the future. At the same time, we know that investments in our store experience are important than ever, and as a result nearly $1 billion of our CapEx this year will be focused on the store experience. In addition to our store remodel program which includes the LA25 stores Brian highlighted earlier we continue to rollout new flexible format stores in dense urban and suburban areas, and we're really pleased with the performance of these new hyper localized stores so far. 

In addition, we continue to invest in presentation and experience across the broad set of our stores. This year we're investing in self checkout lanes, operational enhancements and merchandising innovations across the meaningful portion of our store base. A key area focus in our stores is the elevation of our digital order pickup, and a team is taking steps to make the process more convenient and less transactional for our guests. Our goal in these efforts is to increase satisfaction with the order pickup experience leading to more repeat usage of this capability by our guests. 

Speed is key and our store teams continue to improve the speed which would safe filled to pickup orders. 

In a first quarter, approximately 90% of orders were ready for pickup in less than an hour, up nearly 10 percentage points from last year. This is the one reason that guests satisfaction regarding the pickup experience is up meaningfully from last year, and repeat usages increasing as well. Despite this progress, we have more work to do, and we intend to continually improve our performance in response to get feedback. To maintain a momentum we will rolled out streamlined order pickup communication to our guests this month and in select store we are testing a separate pickup area with additional holding capacity, dedicated team members and enhanced merchandise presentation to encourage additional shopping on their store visit. 

While we are still early in our efforts and I'm very pleased with the progress we have made in the short amount of time by focusing on downstream outcomes and improving handoffs between every part of the supply chain from vendor to distribution center to our stores we are making systematic repeatable improvements which will sustained better operating efforts over time. 

Now I'll turn it over to Cathy who will share her insights on our first quarter financial performance and our outlook going forward. Cathy.

Cathy R. Smith:Executive Vice President and Chief Financial Officer:

Thanks, John and good morning everyone. As Brian mentioned, we generated very strong financial results in the first quarter even in the base of an unexpectedly choppy and weak environment. 

Our first quarter adjusted EPS of a $1.29 was $0.19 higher than last year and $0.04 better than the high end of our guidance. First quarter GAAP EPS from continuing operations was $1.02, $0.27 lower than the adjusted EPS reflecting $0.26 of losses related to our debt tender offer and one penny of expense related to the sale of our pharmacy business. Our first quarter comparable sales increase of 1.2% was driven by growth both growth in traffic and average ticket. As expected total sales declined from last year reflecting a sale of our pharmacy business CVS. 

Within this quarter we experienced solid results through the Easter holiday post Easter sales and traffic trends soften noticeably consistent with what you've heard from many of our competitors. Also notable in the first quarter we saw a meaningful increase in the volatility of our weekly sales performance compared with last year. 

Not surprisingly weather pattern cause some of this volatility as we saw a meaningful co-relation between sales and temperature trends in different regions of the country. We continue to invest in our digital and flexible fulfillment capabilities to drive sales in all channels and we continue to see strong results. 

Comparable digital sales increased 23% in the first quarter on top of the 38% increase a year ago. Credit card penetration was 23.4% in the first quarter, up nearly 200 basis points from last year. This represents the addition of nearly 700,000 new credit and debit accounts in the quarter combined with the impact of the sale of the pharmacy business. Excluding the impact of the pharmacy sale, penetration was up about 80 basis points from a year ago. 

Our team delivered a stronger than expected 11.5% EBITDA margin rate in a first quarter. On the gross margin line, we saw about 50 basis points of improvement from last year. This growth reflects the benefit of the sale of the pharmacy business and continued positive merchandise mix driven by strength in signature categories. These benefits offset markdown pressure in an environment which continues to be very promotional. 

On the SG&A line, we saw the benefit of strong discipline across the organization along with the benefit from the sale of the pharmacy business. This allowed us to offset strategic investments we are making in our business including our team. All together, first quarter SG&A expense was about 50 basis points better than last year. Quarter end inventory was up a little bit more than 4% driving faster than sales. 

As John mentioned, some of this growth reflected intentional inventory investments in to support in-stocks and essential categories. However, given the recent slowdown in our sales and our caution regarding the second quarter we are planning to manage inventory carefully throughout this quarter and beyond. 

Turning to capital deployment; we returned $336 million to shareholders in the form of dividend this quarter and invested nearly $900 million in share repurchase. As Brian mentioned, we also took the opportunity to refinance some high coupon debt during the quarter with the issuance of 10 year and 30 year bond at very attractive rates. As a result we recognized $261 million in debt retirement losses in first quarter GAAP EPS, and given that the settlement of on the last front of the debt tender occurred at the beginning of the second quarter, we expect to recognize another $161 million of debt retirement losses in second quarter GAAP EPS. 

Beyond these accounting losses, we expect this refinancing to reduce our ongoing interest expense by $5 million to $10 million per quarter. I want to pause here and discuss our quarter end cash position. We ended the first quarter with about $4 billion of cash on our balance sheet essentially the same as when we started the quarter. However this was the result of timing and we expect to reduce our cash position by more than 50% by the end of the second quarter. 

In fact already this quarter we deployed nearly $1 billion to retire the final tranche of the debt tender and we expect to buy another $750 million to find a debt maturity in July. 

When you combine these uses with continued investments in the dividend and share repurchase we expect to end the second quarter with a cash balance of between $1 and $2 billion. I want to emphasize that our capital deployment priorities remain the same. We invest first in our business to support projects that need a strategic and financial criteria. Secondly support the dividend and expect to maintain a record of consecutive annual dividend increases since 1971, and finally we invest in share repurchase within the limits of our single-A long-term credit ratings. 

One of our longer term financial goal is to increase our after-tax return on invested capital and we expect to reach the mid teens or higher in the next five years and I am please that we are already making meaningful progress on this metrics. For the twelve months period through the first quarter we recorded and after tax return of 16% including the gain on the pharmacy sales in the fourth last year. Excluding our gains, our after-tax return on invested capital was a very strong 14% in the first quarter up about 150 basis points from a year ago. 

On another note, our effective income tax rate from continuing operations was unusually low in the first quarter at 31.6%. This was the result of the adoption of a new accounting standard for employee share-based payments, which reduce our tax expense by $17 million combined with our impact of lower pre-tax earnings resulting from the loss on debt retirement. 

Now let's turn to our outlook for the second quarter and the implications for the full year. While we are coming off a quarter of outstanding financial performance, Brian mentioned earlier we have elevated short-term volatility and software sales transact Easter which clear that consumers are behaving more cautiously. With that backdrop, we are planning for second quarter comparable sales of flat to down 2% this will represent slower then second quarter performance then we will planning at the beginning of the year. While we believe this outlook is prudent given the trends we see as many others have been seeing. given lower than expected sales, we are planning for a moderate year-over-year decline in our second quarter EBITDA margin rate in the range of 40 basis points at the mid-point of our comp guidance. 

Compared with our plan going in to the year our updated expectations reflects continued gross margin pressure from a very promotional environment combined with the deleveraging of SG&A expense on store sales. Altogether we expect to generate second quarter adjusted EPS in the range of $1 to $1.20. 

Given our performance over the last year and half, we believe we're pursuing the right strategy and our strategy is working. We have many levers we can deploy to drive our performance even if the environment remains challenging. As a result even with a more tempered year of the second quarter we are still focused on achieving full year adjusted EPS within the guidance range we provided at the beginning of the year. 

As we progress to the second quarter, all of us will gain more perspective which will in former outlook for the later half of the year. As I mentioned at our financial community meeting one of my first priorities on joining this team last year with did and an understand in detail the factors that drive target financial performance. As a result of that view, I'm confident in the resilience of our business model which extend our business through all consumer and retail environment. Importantly, our financial strength combined with our business model enable us to continue investing in our long term priorities even when others are having to pullback. 

Its one of the many reasons I will still excited to join this team and this company last September. 

With that we will conclude today's prepared remarks. Now Brain, John, and I are happy to take your questions. 

Question & Answer

Operator:

At this time, if you would like to ask a question please press star followed by the number one on your telephone keypad. Again that is star, one. 

We will pause for just a moment to compile the Q&A roaster. Our first question is from Greg Melich with Evercore ISI.

Greg Melich:Evercore ISI:

Hi a few questions thanks Brain, thanks John and Cathy you all give a nice overview there when you described how the quarter progressed. Could you help us to understand where April was, was that actually negative and also any geographic distinctions that you saw in the quarter then I had a follow up on margin. 

Cathy R. Smith:

Greg I'll start we did see obviously we had a very strong February and March and fell really great around our performance in each year. We saw that we took share in apparel in Easter and so we were really good there. But we did see a slowdown in April a lot of it though is that adjust that we were seeing. 

So that's part of what we are seeing with regard to but we did see slowdown throughout the course of April. 

Brian C. Cornell:

And Greg let me provide some color as far as the geographic volatility and I am going to be really transparent with some of the examples and as we look at business in April and again in the start of May we have seen a significant performance difference between our West Coast markets and particularly our Northeast markets and significant variability where we seeing some very positive growth performance across our entire portfolio and Los Angeles and San Francisco and many of our core West Coast markets offset by significant slowness in the Northeast in Boston, in New York, in Philadelphia, in DC. And given categories we have seen dramatic performance differences and the ready-to-work category, on the West Coast and in parts of the Midwest where we've seen an earlier spring, you know, we are seeing double-digit growth in ready-to-wear offset by very significant declines in the Northeast. 

With a review with our team yesterday we looked at categories like fans, we have markets that are up 20% and markets that are down 90% so we're seeing volatility driven by certainly climates, but I think a number of other factors that we're certainly analyzing. Cathy talked about an earlier Eastern, we have certainly looked at weather patterns, we recognized the year-on-year fuel prices have increased and our guests and the consumer spending more than they did it a year ago at the - and we certainly recognized that within overall categories today's consumer our guest is reinvesting in their homes, they are spending money on home improvement, we have seen that in our home category which was up 4% in the first quarter. So a lot of volatility and it's both geographic and within category mixes.

Greg Melich:

That's helpful. I guess there is also a transition into the marginal, if I got your guidance right, the midpoint of it that take the comps and to get ready EPS, I get margins down in the second quarter. One is that right and two it sounds like the real reason for that might be a little bit of deleverage than basically markdown risks on inventory given the rest your comment that there.

Cathy R. Smith:

Craig I am really sorry but you really cut out line when you said that why you were trying to ask about even margins. So I am sorry, can you please repeat.

Greg Melich:

Yes it looks to us from guidance EBIT margin is down 50 bps in the second quarter at the midpoint I guess how much of that is just deleverage and how much of that is markdown risks from the elevated inventories and categories.

Cathy R. Smith:

Yes, so we did talk about gross margin, we expect gross margin to be 40 basis points at the midpoint and we still expect the promotional environment and we are planning for that.

Brian C. Cornell:

Yes and Gregg I think under the circumstances as we have looked at our competitors reports, we recognized there is significant inventory in the marketplace we expect the second quarter to continue to be very promotional and as factored into our guidance for the second quarter.

Greg Melich:

That's right. Thanks a lot, good luck.

Brian C. Cornell:

Thanks Gregg.

Operator:

Your next question is from Oliver Chen from Cowen and Company. 

Oliver Chen:Cowen and Comapny:

Hi thanks for all the details, we had a question regarding in the smaller convenient slowdown. Could you just help us understand as you look at the data if there is patterns there that give you some insight into how that dynamic maybe playing out and what's the opportunity there and secondly on the promotional pressure that you're seeing what's the axis from which that maybe happening in terms of A categories and B, Amazon versus bricks and mortar competition are there different aspects of competition that you're facing as you look to determine what's of the fiscal after more from the execution on - point of view? Thank you.

Brian C. Cornell:

Sure. let me address the trips, we talked in the prepared comments. We continue to see very strong performance and what will describe as that stock up trip, where as a company we performed very well throughout 2015 and again in the first quarter of '16 where we have seen some trip erosion is with the guest two is coming in for that fill interest. So as we think about actions we're taking in our business right now, we want to continue to make sure we're serving for guests who is looking for that stock-up item that stock-up trip and we're going to be even more focus as we manage through the quarter and the balance of the year to make sure we are winning and driving more filling trips. 

So you'll see us enhance and change both our promotional calendar our in-store presentation of more fill in items to make sure that we are doing both continuing to win with the guests who's shopping target for that stock up occasion but also making sure we're capturing more of that fill-in trip throughout the quarter. So those are actions that we're taking right now, the team is working on making adjustments in our promotional cadence and presentation to make sure that we're doing both. We'll continue to win with the stock of shopper but we are also capturing more share of wallet with that fill-in guests. 

From a promotional stand point we would expect to see most of the intensity in the apparel space where we certainly recognize that many of our competitors were sitting on high levels of inventory we've got to be prepared for continued promotional intensity in that space and I think we are well positioned as both Kathy and John have noted to manage through that throughout the quarter. 

Oliver Chen:

Okay thank you. Just the quick follow up as you been monitoring and you've been really ahead of thinking in terms of the omnichannel experience, Brian are there any little changes that you've been seeing in terms of how customers you convenience what you are seeing now in terms of the online plus offline experience that difference in terms of like the trends you've been recognizing. 

Brian C. Cornell:

I think although the one thing that we continue to see and we have embraced as an organization is whether or against the shopping in store or online it's start digitally so we continue to make sure we are investing in our digital assets, to make sure we are providing the ease and convenience for our guests whether they are in store or shopping online it's why we have made such a commitment as John talked about to enhancing our order online pick up in store capabilities, it's why we have elevated our focus on sure that we provide an easy shopping experience for a guest online. We continue to build that those capabilities. 

So we have recognized that even as we look at the start of 2016 the majority of the retail business in the United States continuous to be done in stores but it starts an online. So we got to had great digital capabilities to make sure when or against the shopping target no matter how they shop, we make it a convenient easy experience. So that has not changed dramatically and one are the numbers that we feel best about in the first quarter is the fact that on top of a very strong 38% growth in the first quarter of 2015 we grew our digital sales by 23%. So we are continuing to connect with that guest who wants to shop Target online and we will continue to invest and build our capabilities in that space. 

Oliver Chen:

Thank you. Best regards.

Brian C. Cornell:

Thank you.

Operator:

Your next question is from Joe Feldman from Telsey Advisory Group.

Joe Feldman:Telsey Advisory Group:

Yes, hi John. Thanks for taking the question. I was desperate if you could talk a little about the infill trips again wanted to go back to currently of if I recall I don't think you have mentioned it on the call this time and I'm just wondering if there is any changes going on there or what you are doing presumably that would be a way to help stimulate the in field trips like localization personalized marketing I know guys do a great job with that with your mobile effort. So just is it something kind of fall apart on that front or maybe some things were affected could you talk about that a little? 

Brian C. Cornell:

Well Joe in some ways you're looking inside of our current playbook and certainly as we think about winning more trips with that filling guests Cartwheel will plays a incredibly important role and we'll continue to make sure that we activate Cartwheel to drive those trips and meet that guests needs. I think one other things that we are certainly recognizing as we look at 2016 shopping pattern is there is the consumer and a guest who continues to look for value and that values expressed in more filling trips buying smaller packs, smaller baskets, so again it's not shipped in our strategy it's a recognition that we have to do both. We have to continue to the guest when they come to target for that big stockification and we have to have the right assortment, the right value, the right presentation for that guests who is coming to us for the fill in trip. 

So Cartwheel plays a very important role in that and as we think about adjustments and modifications we're making to our plan Cartwheel plays a very important role in driving more trips back to our stores and certainly meeting the needs of our guests who is coming to us for that indication. 

Joe Feldman:

Got it, thanks. And then you guys mentioned that the center store disruption and all the efforts you made that you are making to improve the healthy living and that category I guess we are able to qualify how much of an impact that had presumably it was decent disruption in April that could have had a bit of drag.

Brian C. Cornell:

Yes. Joe, it was a significant disruption, you know our stores, you know the layout, import all of our center store dry grocery items. We moved everyone of those items in all of our stores. 

So, significant disruption for the gusts. Short terms it's certainly has an impact on our performance in grocery and food, but as we've made the changes the response we're seeing from the guests is very encouraging. They're recognizing the new assortments, the new brands, more local items, the fact that we've more organic and gluten free items on our shelf and in many of these categories like the significant change we made in bars we're seeing very strong sales results coming out of the reset. So, it was an investments we had to make in both labor and in disruption to make sure we continue to move forward in the reinvention of food. 

So, short term it had a meaningful impact on our food sales, but we certainly expect to see the recovery over the balance of this year, as we provide a more relevant assortment to our target grocery shopper.

Joe Feldman:

Got it, that's helpful. Thank you guys and good luck with this quarter. 

Brian C. Cornell:

Thank you.

Operator:

Your next question is from Kate McShane from Citi Research. 

Chris Wetherbee:Citi Research:

Hi this is Chris in for Kate. With the comp coming in below your expectations is there a reason why you chose to get more promotional of this quarter. Could you walk us through how much of your gross margin was impacted by promotions and was it more than last year?

Cathy R. Smith:

Yes. We were as promotion was necessary we drove as we share a 4% comp in our signature categories which are the areas that tend to be more promotional. So, we feel very good about our promotional cadence continue to work on being more and more effective but still have a long way to go there. 

So I wouldn't say that we saved any on promotions in particular we were as promotional as we thought was appropriate and it showed up in our comp. 

John Hulbert:

And Chris I'd only add that as we look at individual category performance, we thought like we were very competitive in categories like apparel. Where as we look at the NPD data we look at the market share results, we are one of the big market share winners in the first quarter and clearly in apparel we picked up market share the two weeks leading up to Easter, during the Easter week and the week following. 

So our assortment our presentation, our promotions certainly connected with the guest and in important signature categories we continue to advance market share. But we feel particularly good in a tough apparel environment that we posted positive comps, we grew market share and importantly we grew market share before during and after the important Easter holiday which is a critically important holiday for the apparel category. 

Chris Wetherbee:

And just looking ahead you mentioned I guess apparels can be very competitive are there any other categories you see they'll also face pricing competition and also just really quickly for your in stock initiatives how much to be improvement in those initiatives contribute to the comps in Q1.?

John Hulbert:

Well on the in stock question I think it's hard to parse that out a very difficult question to answer, certainly we have some estimates internally but gets into trading behavior as you know and how guest will trade out but overall I think the in stock definitely having it there when the guest once it but more important in that is ensuring that they trust us that don't matter when they come in the store will have what they want and that's about building trust for the brand over the long-term and so there is an immediate impact but this is much more about being sure we are reliable all the time for the guest.

Chris Wetherbee:

Okay, thank you.

Operator:

Your next question is from Peter Benedict from Robert Baird.

Peter Benedict:Robert Baird:

Hi guys, just a clarification just on the second quarter gross margin outlook I think you sit down 40 basis points assume that's on a reported basis right, so excluding the pharmacy impact it would be down maybe closer to a 100 and am I right on that.

Cathy R. Smith:

As I saw that gross margin I had we really I meant 40 basis points on EBITDA. So we should see actually a slight uptick in gross margin, I saw a downtick in SG&A and then the EBITDA with the 40 basis points. So then for asking that's the clarification.

Peter Benedict:

No perfect, okay thank you that's helpful. Just one SG&A is it I mean fair to say that the SG&A dollars to exclude the pharmacy comparisons were down slightly year-over-year in the first quarter and I am curious that's trend that you think can persist over the balance of the year given the tougher sales environment.

Cathy R. Smith:

Yes, the team did a great job in managing expenses in the first quarter and we will continue to do that and yes it was down year-over-year we will continue to manage our expenses. 

Peter Benedict:

Okay last question, I apologize if I miss this any change to the CapEx plan for the year which I think around a $1 billion or $1.8 sorry.

Cathy R. Smith:

$1.8 no change at all.

Peter Benedict:

Okay, terrific. Thanks guys.

Brian C. Cornell:

Peter thank you. 

Operator:

Your next question is from Bob Drbul from Nomura.

Bob Drbul:Nomura:

Hi, good morning. I guess just follow on Peter's last question but when you look at the sales results that you had the last few weeks especially April does that make you rethink your longer term sales used that you laid out back in March.

Brian C. Cornell:

Bob it doesn't and obviously it's been a question that we have asked ourselves in as Cathy and John have both mentioned we feel very good about the progress we are making from a strategic standpoint. We've talk multiple times now certainly we talk to most of you are on the call during our March Investor Day. Our continued focus on building out our digital capabilities, we are making very good progress there we think those are going to be essential to our future. 

We feel very good about the progress we are making on signature categories where we continue to build market share and drive differentiation. We are very excited about the early results of Pillow fort and feel as that when we launch our new CAT & JACK brand for kids that is going to be another potential $1 billion brand in our portfolio. So great progress from a category roll and signature categories standpoint. 

As John mentioned during his remarks our flex formats continue to be very well received as we move into new urban markets. We are excited about our store will open up in October, but we have been excited about every one of these new flex format and they have been well received in both urban and collage markets. We continue to think we've got significant opportunities and localization and the work we have done in Chicago and now Los Angeles just continues to confirm that. So our strategy continues to reform well John and the team continue to enhance our store and supply chain capabilities to continue to meet the needs of our guests. 

So as we sit here today there is no significant change in our strategy, but tactically we've recognized the consumer environment is tougher we have going to make sure we are delivering the right value. We are winning with both of these stock-up and fill in trip, we are making sure that we have the right experience for our guest whether shopping in-store and online and we don't see any structural change in the consumer environment, leading this is short term bump in the road, but we think we're well positioned and everything we see from a GDP and consumer confidence standpoint, gives us the confidence that this is going to be a short term impact and we're going to see very solid results in both the third and fourth quarter and keep us on our long term guidance track.

Bob Drbul:

Great. Thank you very much good luck.

John Hulbert:

Thank you. 

Operator:

Your next question is from Scott Mushkin from Wolfe Research. 

Scott Mushkin:Wolfe Research:

Hey guys thanks for taking my questions. So I just wanted to clarify the resets in the dry grocery when did that take place was that in during quarter or is that after quarter closed and if it was during April or what was the drag you guys have? 

Brian C. Cornell:

Scott it took place right after Easter during the month of April. So on major effort inside of our stores we touch as I mentioned earlier all of those center store grocery we added a number of new items over a thousand, we've brought new brands into those categories, we've expanded our simply balanced line. So all that took place and it was very disruptive and we plan for it in April. 

We now have the work behind us and I am very excited about the feedback we're receiving and the responses we're seeing in many of these categories and certainly expect that we'll see those businesses accelerate now that we have more relevant assortment and we've significantly increase the representation of organic and natural and gluten free and local items in those. 

Scott Mushkin:

So Brain the weakness you continue to see into May so I think you said that recent one really well and that's you have chunk of sales. So the weakness you see continuing into May would be non-consumables areas that are just as you say happy inventories some of these signature categories is that a good way to frame it? 

Brian C. Cornell:

Yes I think it's largely the case. It's got again as I said earlier and I want to make sure we're really transparent about this with examples and we've seen very slow sale performance in the North East and we have a same presentation, we had the same ad, we had the same value, we had the same great in-store experience but on a day and day basis we are getting very different outcomes. So on one hand it gives me confidence to say what we are going is working we have this working in many part of the country but we have isolated geographies where whether it's a late spring whether it's a change in short-term consumer behavior we're not seeing the same results but we are delivering the same great content. 

So I expect the Northeast to recover, I think spring will arrive their and I think when the guest is out shopping they will continue to choose target and we'll continue to provide them a great in-store and online experience. But we are seeing very significant geographic volatility unlike anything I'd seen in many, many years. 

Scott Mushkin:

Interesting and then I just wanted to touch on the fill-in trip situation and I think you touched about promoting a little bit more to try to get those trips. Is that promotion different is that promotion more in the consumable side of things as you look at there it seem intuitively that would be but just want to kind to get your thoughts?

Brian C. Cornell:

Scott you're spot on, it's much more about consumables, household essentials and to be very clear it's probably less about promotional intensity but ensuring that we are promoting and presenting the right items particularly at the back end of the month when the consumer and our guest is more likely to look for single unit items, more items that value. So we want to make sure we are making the tactical adjustments to what we advertise, what we present in store and making sure that we are winning both with the stock-up guest but also with the guest who is looking for value and looking for smaller single unit packs at the right value.

Scott Mushkin:

So that I had just one last and I want to sneak in because in your store and long beach which I thought was wonderful that small target.

Brian C. Cornell:

It's a fabulous store.

Scott Mushkin:

How closer you from cash to actually maybe rolling out more of those then our yield. Thank you.

Brian C. Cornell:

Yes I am smiling and I make turn this over to John. But we have actually visited our Fixed B stores and 1B over the last few weeks the store really captures the best of target in a smaller 30,000 square foot environment and very positive reaction from the guest. So as we think about future reflects formats that is a model that we are excited about a model that certainly seems to be connecting with the guest and you should expect to see more of those as we go forward but let me handed it over to John who has been intimately involved in the rollout of flex formats and specifically the work we are doing in long beach.

John Hulbert:

I would just ad, obviously we are very excited about the performance of the stores I think the financial performance certainly. But I think like Brian mentioned really it's the guest reception of those stores and while they are very conveniently place like the - store they are not convenient stores the intent is to lead forward with what target does well home, apparel our signature category categories and that's what you really see in that store. 

So we will continue increase the number we are doing as we go forward, but continue to test geographies and sizes of stores and how those two work together. Obviously the big stores is quite large and that's a little bit different neighborhood than we've done in the past and so the store, that Brian referenced again very dense urban store two level stores. So we continue to test kind of configuration and neighborhood but feel very-very good about what we found so far and you'll see us continue to grow those number of stores that we opened over the next several years.

Brian C. Cornell:

Just a finish up on that. I think the long beach store that you visited is a great example, that really shows how we're approaching each of these initiatives. We are testing, we are learning, we are refining, the team is getting better and better at layout and assortment, and you've seen that when you walk the Long Beach location and the feedback that we've received from the gusts is even in a smaller box it feels like target, and it feels like the best of target. 

The work that the teams done in the center of that store to merchandise our soft lines is really outstanding. We're getting great feedback around our food presentation in that store. We've got the right home assortment. So, we're tailoring that for the local market. 

But it's example of the fact that we've been disciplined, we're not sprinting, we are making sure that we're really thoughtful, we're learning, we're adjusting and you're seeing each of the new flex formats get better and better and layout assortment and tailoring to meet the local market. So, we are very excited about it, and we'll continue take that learning and build it in the new flex format that will be opening up over the balance of this year and in the next year. 

Scott Mushkin:

Thanks guys. 

Brian C. Cornell:

Thank Scott.

Operator:

Your next question is from John Zolidis with Buckingham Research. 

John Zolidis:Buckingham Research:

Hi, good morning. Thanks for taking my question. I wanted to ask about the second half of the year or you've already address it's a little bit and you provide us a lot of evidence I think that point towards weather as they significant corporate in the volatility in the sales at the end of the first quarter to start of the second quarter. But you also alluded at some points that may be there is something else going on with the consumer. 

So I was wondering if you could just talk about what else might be negatively impacting the consumer or your consumer that you aware of and do you have any data for example if you look by segment of consumer income levels or red card usage that would help you understand the trend to greater extend. Thank you. 

Brian C. Cornell:

John as you might imagine we are spending a lot of time and have spend a lot of time as the team looking at performance through a number different advantage points both internally, but also certainly incorporating external data. Certainly it was a earlier Easter that we've recognized the impact of that, certainly weather in many major markets has been a factor it's not an excuse we've about to figure out how we performed under any circumstances. We know as the guest and our consumer has moved through the course of 2016 prices of the pump, fuel prices have risen and that's certainly an impact and then when we look at a macro basis on overall sending we certainly recognize that consumers are spending more on travel, on leisure activities, they've been investing in their homes as I mentioned before. 

But there is no structural change that gives us pause and has its changing our strategy altering our outlook for the full year. We think we are continuing to improve our digital capabilities I think our store experience is improving each and every week the response we are getting from the guests based on changes we have made in apparel and home and recently in food are very encouraging. 

As John mentioned our flex formats performing quite well. So we feel confident that the content we have in place the plans we have for the second half for the year some of the enhancements we have made from a branding and in store and online stand point are going to continue to deliver solid results. 

So we see this is a momentary speed bump but we see no reason to alter our strategy these are tactical adjustments we have to make and market-by-market we want to make sure we are well positioned to compete going forward.

John Zolidis:

Thanks very much and good luck. 

Cathy R. Smith:

Thank you.

Brian C. Cornell:

We had time for one more question Operator.

Operator:

Okay your last question comes from Chris Horvers from JP Morgan.

Chris Horvers:JPMorgan:

Thank you. So following up on that question and that just that thread of question. So outside of the Northeast and California hasn't been more consistent and then related to that as you think about the second quarter guidance are you basically extrapolating current trends which have been weather impacted or taking a directional view either more conservatively it's likely to pick up as the quarter progresses or in either direction? Thanks.

Cathy R. Smith:

Yes so we obviously have insight into where may is at today and then we have got on of the coming we have got great plans around leading into Memorial Day and have every confidence we are going that we are going to have guest come to this target whether in further online and then we summer and warmer weather will come until we have an expectation that it that the trend we see today doesn't change overnight but it does improved throughout the quarter we really have got some really great plans to deliver for our guest. And then also in the later part of this quarter we have Jack launching and we are very excited about Cotton Jack launching before back fiscal season and we expect that to be a leading target only brand that will be a billion dollar brand in time. 

Brian C. Cornell:

So Chris thanks for your question and I really appreciate everyone who calls in today we trying to make sure we allotted significant time for your questions hopefully we had a chance to answer your question address some of your concerns. So that will conclude our quarter I appreciate your time today and thank you dialing in.

Operator:

This does conclude today's conference call. Thank you for participating at this time you may now disconnect.