Target Stock

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation Second Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, August 19, 2026.

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

Good morning, everyone, and thank you for joining us on our second quarter 2026 earnings conference call. On the line with me today are Michael Fiddelke, Chief Executive Officer; Cara Sylvester, Chief Merchandising Officer; Lisa Roath, Chief Operating Officer; and Jim Lee, Chief Financial Officer.

In a few moments, Michael, Cara, Lisa and Jim will provide their insights on our second quarter performance and outlook for the rest of the year. Following their remarks, we'll open the phone lines for a question-and-answer session. This morning, we're joined on this conference call by investors and others who will be listening to our comments via webcast.

Following the call, Jim and I will be available to answer your follow-up questions. Also, as a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, including those described in this morning's earnings press release and in our most recently filed 10-K. Also in today's earnings materials, we refer to non-GAAP financial measures, including adjusted earnings per share, adjusted operating income and adjusted SG&A expenses.

Reconciliations of all non-GAAP numbers to the most directly comparable GAAP number are included in this morning's press release, which is posted on our Investor Relations website. And finally, as many of you know, I'm getting ready to retire after more than 26 years at Target, and today marks my final earnings call. Along with that news, I'm really excited to let you know that Justin Madson has accepted the role of Vice President, Investor Relations for the company. Going forward, Justin will be kicking off these quarterly calls, beginning with our Q3 call in November.

With that, I'll turn it over to Michael to kick things off. Michael?

Thanks, John, and thank you to everyone joining the call today. Before we dive into our prepared remarks, I want to congratulate John on his upcoming retirement and thank him for his countless contributions to Target. Today marks his 76th earnings call, leading our Investor Relations team. As many of you know, John has played an instrumental role in communicating the strength of our brand and sharing our story with the investment community.

Personally, I'm grateful for his counsel, partnership and friendship, and I wish him all the best in this next stage of life. Earlier this year, we shared how our refreshed strategy, all in service of returning to sustainable growth is centered on serving busy families with a differentiated combination of style, design, quality and value in a way that is uniquely Target. To deliver on this strategy, we've outlined 4 key priorities: leading with merchandising authority, elevating the guest experience, accelerating technology and strengthening our team and communities.

Across each of these 4 priorities, we're seeing encouraging momentum. Our results show that our strategic choices, combined with the hard work of our team are delivering change that is resonating with guests. To be clear, we're just getting started, and there's a lot of important work ahead. But importantly, these early results give us increasing confidence that the investments we continue to make, all in service of our strategy will support continued growth on both our top and bottom line while making Target not just a place to shop, but a destination for busy families.

As we continue to elevate what we sell and how we sell it, they're choosing us more often, reflected in another strong quarter of traffic growth, up 3.6% to last year, which is a slight acceleration on a 2-year basis compared to Q1. In a moment, Cara, Lisa and Jim will unpack our second quarter results and key investments we've made to elevate the business.

But before they do, I'd like to highlight a few examples of the progress we're making in our work in flight. In light of our focus on merchandising authority and elevating the guest experience, Q2 saw the completion of the largest volume of in-store transitions of any quarter over the past decade. Those changes included layout changes encompassing nearly half of our center store grocery assortment, a complete reimagination of our Fun 101 floor pad, replacing nearly 3/4 of our decorative accessories assortment in home and continuing to deliver limited time partnerships that reinforce Target as the destination for what's new, on trend and culturally relevant.

And in a testament to the dedication of our team, even with this volume of change, we're seeing continued progress on inventory reliability and guest satisfaction metrics, which are now reaching levels we haven't seen in many years. And while we know there is still a lot of work to be done for every store to reach its full potential, we're very encouraged by this progress we're seeing and the momentum we're building. Just as importantly, we're delivering an incredible amount of trend-right newness while also providing outstanding value across the entire portfolio.

As we've said consistently for years now, all of our business decisions are grounded in a focus on the consumer and providing outstanding value on every trip to Target. Over the past year alone, we've lowered prices on more than 10,000 items, reinforcing our commitment to ensuring families can find a unique combination of style, quality and affordability every time they shop with us. Cara and Lisa will expand on these efforts in a few minutes.

To support this year's ambitious agenda, we're accelerating our tech capabilities to make every part of the business stronger from how we serve guests to how we equip our teams. We're continuing to modernize our tech foundation while investing in new industry-leading capabilities that allow us to personalize experiences across stores and digital channels, strengthen one of the nation's premier retail media businesses, help our merchants identify and respond to emerging trends faster than ever before and connect with both new and existing guests in increasingly relevant ways.

Earlier this year, we became one of only a small number of retailers to partner initially with OpenAI, Google Gemini and other leading platforms to shape the future of agentic commerce. And while still small in total today, as more consumers begin to explore the benefits of agentic shopping, Target's digital traffic sourced from external AI platforms is growing more than 3.5x the industry as compared to a year ago. I'm also excited to share that to help us build on that momentum, we recently announced our new Chief AI Officer, Chandu Nair, who will accelerate how we harness the power of AI to create better guest experiences and unlock new capabilities across our business.

As we continue investing in products, the guest experience and tech, at Target, it's our team that brings a great guest experience to life, and we're committed to continue investing in our team. We've expanded training to help them sharpen skills while deploying technology that simplifies work, reduces friction and gives them more time to focus on what matters most, serving our guests. And core to our roots as a company, we've been investing in communities all across the country.

Already this year, we've opened 24 new full-size stores, serving new neighborhoods and creating thousands of jobs in communities we hadn't previously served. Every new store allows us to become a trusted new neighbor for tens of thousands of additional busy families, delivering a joyful shopping experience, affordable everyday essentials and inspiring fines and bringing the best of our brand closer to more and more families. Together with our new supply chain facilities, we're investing billions of dollars across the U.S., strengthening local communities while positioning us to serve even more guests for years to come.

I want to close by thanking our team members across the company. Every achievement this quarter from executing major merchandising transitions to advancing our technology capabilities, opening new stores and so much more reflects their commitment, resilience and care. Thank you for everything you've done so far this year and for the passion you bring every day. Because of you, we're building a stronger Target with tremendous opportunity still ahead.

With that, I'll turn the call over to Cara.

Thanks, Michael. On our last earnings call, I outlined how our enterprise strategy is centered on serving busy families by becoming more relevant in the areas that matter most to them. This led us to identify 7 priority areas where we're placing disproportionate investments, areas that we believe have an outsized importance with busy families. As a reminder, they include building a leading beauty destination, expanding our role in health and wellness, being food forward, celebrating baby and kid life, leading in women's style, inspiring the love of home and building culture-driven categories, including toys and entertainment.

Today, these areas represent about 50% of our sales, and we believe they will contribute even more to our growth going forward. We're still early in this journey, but what we're seeing gives us confidence. Importantly, our growth disproportionately came from the areas where we're making some of our biggest changes, reinforcing that we're investing behind the right opportunities and beginning to see those choices translate into performance.

You'll recall that in the first quarter, we invested meaningfully in baby, health and wellness and beauty, and we've been pleased with the response from our guests. Importantly, the response has been durable. We're not simply driving a quarter of strong performance. We're building momentum. And that's an important part of strengthening Target's merchandising authority, having a clear point of view on what our guests want, making sharper assortment choices and delivering newness, differentiation and incredible value through an experience that feels distinctly Target. In Q2, we brought that approach to life through significant transitions across food and beverage, Fun 101, decorative accessories and home and other priority categories, creating more reasons for guests to choose Target.

Let's start with food. Earlier this year, I talked about our ambition to make food a destination, not simply a category guest shop while they're in our stores, but a reason they choose to come to Target. We recently completed our largest food transition in more than a decade. changing the presentation of nearly half of our center store grocery assortment, adding new and unique offerings and reimagining end caps and in-aisle presentation to make discovery easier. But this wasn't just about resetting aisles. We also expanded fresh produce, created new focals for seasonal offerings, added space for fast-growing categories like snacks, global foods and functional coffee and continued introducing emerging brands and trending products.

The response has been really encouraging. Snacks, beverages and candy were already among our largest categories by sales, and these transitions are building on that strength. For example, post transition, snack sales are running more than 15% ahead of last year with outstanding momentum in protein bars, meat sticks and better-for-you snacking options. Just as importantly, we're pairing that innovation with incredible value. That's merchandising authority in action, understanding where the guest is going and moving with speed to get there, bringing together trend, quality, differentiation and affordability in a way that's uniquely target.

Also in the second quarter, our teams completed a massive reinvention within the Fun 101 category. It's a great example of the intentional choices we're making to differentiate our assortment and experience. That meant evolving legacy presentations within TVs and bikes and dedicating more of that space to categories like wearable tech, LEGO, trading cards and collectibles. These are the kinds of choices we need to make more consistently, staying close to the guest, moving at the speed of culture and being disciplined about where we invest our space.

One great example is our refreshed only at Target Heyday electronics assortment, where we're bringing even more compelling style, design and value to the category. Sales of our style forward $10 headphones are running more than 35% ahead of last year. And in toys, we added a Plush wall, expanded our LEGO assortment and made the experience far more exciting and immersive. While these enhancements have only been live for a few weeks, our focus on culture right toys at incredible value has been fueling this business for several quarters now and did so again in Q2. LEGO sales are up more than 30% to last year. Plush sales are up more than 20% and guests are gravitating towards on-trend newness at compelling $5, $10, $15 and $20 price points.

Finally, I'd like to spend a minute on one of the things that makes Target truly unique, our ability to create cultural moments. These moments do far more for us than creating short-term buzz. These moments attract new guests, deepen our relevance and reinforce Target's role in culture. In the second quarter, exclusive collaborations continue to demonstrate the power of that strategy. Our Pokemon collaboration inspired joy for fans of all ages and became one of the biggest fan moments in our history. Beyond the incredible social engagement we saw across platforms, this exclusive collaboration also introduced thousands of new guests to Target and reinforced our leadership in fandom and collectibles.

As we enter the back-to-school season, we built on that momentum with our exclusive partnership with Love Shack Fancy. This offering ended up being the largest limited time collaboration in Target's history, and I think it's a great example of what only Target can do. We identified a brand with enormous cultural relevance and partnered with their incredible team to create something truly special. Our merchants and designers work to translate their aesthetic across multiple categories, including through partnerships with key national brands.

We use the scale of Target to turn it into an immersive experience, and we made most of the assortment available for under $25, style, culture, multi-category merchandising, incredible value. That combination is distinctly Target and very difficult to replicate. Our focus on merchandising authority is also driving meaningful progress in another critical area, improving inventory reliability. Being reliably in stock isn't just an objective for Lisa and the operations team. It's a team sport and a merchandising imperative. We have to make sure our guests can find the product they want when and where they want it. That requires our merchandising and operations teams to work differently together.

And you'll hear more from Lisa shortly on how our teams are working together to do just that. Looking ahead, our team is focused on extending our Q2 momentum into the back half of the year. And later this quarter, we'll introduce Target Beauty Studio in more than 600 stores, creating a more elevated beauty destination and furthering our solid foundation as an industry leader in this space. Having just reset 75% of our decorative accessories assortment in home, we'll continue our work to strengthen our home offerings with significant assortment changes ahead in kids home and bedding.

And of course, we're still in the back-to-school and back-to-college season. This year, our combination of style, trend and value is resonating with guests. In fact, 95% of our school supplies assortment is priced at or below last year's prices. We've also enhanced the shopping experience with AI-powered teacher and college wish list and more personalized content on our app's home screen. Guests are responding with total wish list creations up more than 50% to last year. items added to these lists more than doubling and conversion across our key back-to-school pages up nearly 20%. With some important weeks still ahead, we're focused on delivering a strong finish in back-to-school and back-to-college.

And throughout the third quarter, we'll continue giving our guests reasons to choose Target through differentiated owned brands, exclusive partnerships and compelling value. We've already lowered prices on more than 10,000 items over the last 12 months and are planning for additional price reductions yet this year. As we've said before, this transformation won't happen all at once. In some categories, we're pleased with our progress, and we're seeing meaningful momentum. In others, including home and apparel, our performance is not where it needs to be, and the work will continue into 2027 and beyond.

But compared with where we were at, at the beginning of this year, we have greater clarity. We're moving faster, and we're seeing more evidence that the choices we're making are resonating with our guests. We know where we want to focus and what it will take to win. We know where we need to get better, and our teams are executing against those priorities with urgency. There's a lot of work still ahead of us, but I'm confident in the direction we're heading and in a team that is hungry to win. Team, I want to thank you for the tremendous amount of change you've taken on this year. I'm incredibly grateful for the energy, the creativity and commitment you bring to our guests, our brand and our business every day. Thank you.

With that, I'll turn the call over to Lisa.

Thanks, Cara. In my role as Chief Operating Officer, I'm focusing my team on creating an easy, inspiring and friendly experience for our guests by strengthening execution across our enterprise. That focus for our team will always be key, but one theme within this ambition has become increasingly clear, the importance of consistency. As we've accelerated the pace of change across the business this year, consistency matters more than ever.

It means being clear and disciplined about our priorities, translating our plans into execution and delivering against our expectations every day. It also means consistency in how we lead, engaging our teams, listening to their feedback and providing clarity about what matters most. With so much changing around us, that clarity and consistency from us are more important than ever. Ultimately, that consistency needs to show up in the experience we create for our guests. We want every store to deliver on our promise.

Every interaction with the guest feel welcoming and helpful and every product we sell to bring delight. A consistently great experience every time. That's what we're striving toward. And while we aren't there yet, we are encouraged by the progress we've made so far this year. And if you look back at the second quarter, the amount of change our teams delivered was truly remarkable. As you heard from Cara, we completed the largest amount of space transformations in more than a decade.

Our teams reinvented food spaces, transformed Fun 101, prepared more than 600 stores for the launch of Target Beauty Studio, opened 17 new stores, advanced more than 100 remodels across the country and prepared for and kicked off one of our biggest seasonal moments, back-to-school and back to college. And while we're excited about the results these changes are driving, none of this work was simple. From evolving legacy bike and TV walls to create more relevant shopping experiences to executing our largest center store grocery reset in years to changing how products flowed through our network for back-to-school, thousands of decisions and countless overnight shifts brought these changes to life.

And because so much of this work was completed only recently, guests are just beginning to experience the impact. That gives us growing confidence in what these changes and the investments still ahead can deliver for our guests and our business. And with each activation, we learn how to improve future transitions, helping us move closer to our aspiration to be the most delightful shopping experience in retail. Improvements in our planning tools are enabling stronger store execution, while closer coordination across merchandising, supply chain and store operations help ensure our teams can stay focused on serving guests, even while delivering an extraordinary amount of change. That same end-to-end thinking guided our preparation for back-to-college and back-to-school.

By prepositioning inventory and dedicating trailer capacity to key seasonal assortments, we improved product availability in our highest volume stores and helped create a more reliable and inspiring guest experience during these important seasons. At the same time, our teams are hard at work preparing for the launch of Target Beauty Studio, from routing fixtures to training dedicated beauty advisers, all to help our team deliver an elevated guest experience in beauty. The new spaces are under construction as we speak, and we're excited to unveil these new offerings at more than 600 stores beginning next month. And while our transformation work has added disruption to the store experience for our guests and that work is far from over, we are encouraged by the progress we're seeing. That progress also shows in our inventory reliability metrics, which continue to improve.

On our most important items, those that are most frequently purchased, we've attained the strongest item availability in recent years, while overall reliability metrics have reached multiyear highs. That means more guests are ending their shopping trips with all the products they came to Target to buy, one of the most important ways we're looking to build trust. But to be clear, even with this progress, we still aren't where we want to be.

We'll continue to dedicate an outsized focus on the continued improvement of our inventory reliability metrics, driving towards greater consistency across all stores and all categories. To do that, we're investing in tools like Proxima, a digital twin of our middle mile inventory positioning system, which allows our team to test and iterate on inventory flow plans before going live. Proxima helps us more efficiently evaluate inventory processes between our buildings and stores, giving our teams a way to quickly understand potential downstream impacts, learn faster and make inventory decisions with greater confidence.

We also saw meaningful gains in delivery speed. This past quarter, we fulfilled nearly 30% more same-day and next-day units than last year, and we will continue investing to get even faster. When we combine the impact of our in-store transitions, assortment changes, tech enhancements and improvements in inventory reliability, it all adds up to an elevated experience that is being noticed by our guests.

Overall satisfaction scores continue to improve across multiple measures of the guest experience, extending the momentum we shared with you last quarter and reinforcing that our continued investments in our teams, training and our team's tireless execution are making a difference. Beyond work that's helping our business today, we're also investing in the future of our operating network from our stores to our supply chain, with these investments dedicated to making Target more reliable, more productive and better positioned for long-term growth.

This quarter, we opened 17 new stores. 24 new full-size stores so far this year. And now we have more than 100 full store remodels underway on our way to around 130 this year. These investments allow us to better serve guests and strengthen our business for the long term. And because our stores serve as fulfillment hubs for more than 95% of our sales, their impact extends well beyond the in-store experience, bringing inventory closer to guests and enabling faster, more reliable and more cost-effective fulfillment. That same end-to-end mindset is shaping how we're continuing to strengthen our global supply chain.

Since joining us earlier this year, Jeff England, our Chief Supply Chain Officer, has been focused on building on the strong foundation already in place and ensuring our teams work together to get the right product to the right place at the right time. We're encouraged by the opportunities we see to further simplify how we work and drive greater efficiency and productivity over time.

I'll close where I began. The progress we're seeing is encouraging, but consistency isn't something you achieve in 1 or 2 successful quarters. It's something you earn every day and over time. We have a lot of work ahead to simplify execution, strengthen connectivity and improve reliability, all in service of delivering sustainable, profitable growth. And there is no easy button to make this happen. All of this work is just that, hard work.

And none of this would be possible without the incredible commitment of our team members across our stores, supply chain facilities, service centers and headquarters locations. This has already been an extraordinary year of change, and our teams have met every challenge with resilience, flexibility and an unwavering commitment to our guests and to each other. To every team member listening today, thank you. Your dedication is what brings our strategy to life, and it's what gives me confidence in our ability to meet our full potential as a company.

With that, I'll turn the call over to Jim.

Thanks, Lisa. As you heard from Michael, Cara and Lisa, our second quarter results provide another encouraging proof point that our strategy is gaining traction. We saw broad-based growth across multiple dimensions of our business. And importantly, the strength in the top line translated into strong underlying profit performance as well. For the quarter, net sales of $26.5 billion were 5.3% higher than last year. Comparable sales increased 3.8%, driven by a 3.6% increase in traffic, with average ticket about flat. Doore comparable sales grew 2.7%, while digital comparable sales increased 8.7%, led by growth of more than 25% in same-day delivery.

As Cara shared, we saw particular top line strength in Fun 101, food and beverage and beauty categories, growing our confidence that when we invest in differentiating what we sell and how we sell it, our guests respond favorably. On a 2-year basis, Q2 net sales compounded annual growth rate was 2.1%, 30 basis points higher than in Q1. We also continue to see strong growth beyond our first-party business. Specifically, gross billings from Roundel grew nearly 20%. Target Plus marketplace GMV grew more than 40% and Target Circle 360 membership revenue increased by over 40% as compared to last year. These areas continue to drive outsized top and bottom line growth for us, driving greater relevance, loyalty and choice for our guests.

Moving down the P&L. Our second quarter gross margin rate of 33.7% was 4.7 percentage points higher than last year, including 3.7 percentage points of benefit from IEEPA tariff refunds. Excluding that impact, our gross margin rate was about 1 percentage point higher than last year as we lapped last year's elevated markdown and purchase order cancellation costs and benefited from continued growth in our higher-margin revenue streams.

In addition, we saw strong merchandising performance that was partially offset by continued intentional investments in value. Our Q2 P&L included a $994 million pretax benefit from tariff refunds, which was recorded as a reduction of cost of sales. As we discussed throughout last year, our teams have been working incredibly hard to manage the tariff environment with a continual focus on protecting value for our guests. Our 4.6% full year adjusted operating margin rate in 2025, which represented a significant step back versus historical rates reflected our investment in value in the face of meaningfully higher tariff costs we faced. And that commitment to providing value for our guests has not changed. We continue to look first to find other means to reduce the impact of tariffs, including changes to the country of origin, collaborating with vendors to find offsets and adjusting our assortment. Those tactics have helped us to reduce tariff pressure while continuing to deliver the combination of style, design and value consumers expect from Target.

And as you heard from both Cara and Michael earlier, we have reduced prices in over 10,000 items in the last year have held or lowered prices on 95% of our school supply assortment this back-to-school season and plan to continue lowering prices to drive incremental value for our guests on every trip to target.

Moving back to the P&L. SG&A expense grew 7% versus last year, in line with our Q1 trends and with the guidance I provided during our financial community meeting in March. This reflected higher compensation costs, including our investments in additional hours and training for our field teams, along with higher incentive compensation and planned spending related to capital projects.

Our Q2 SG&A rate of 21.6% was about 30 basis points higher than last year. Overall, our second quarter operating margin rate was 9.6% compared with 5.2% last year. Tariff refunds accounted for 3.7 percentage points of benefit to this year's rate. Excluding that impact, our operating margin rate was approximately 70 basis points higher than last year. Altogether, we delivered second quarter GAAP and adjusted EPS of $4.11 compared with $2.05 last year. Tariff refunds contributed $1.65 to EPS. Excluding these refunds, both GAAP and adjusted earnings per share were approximately 20% higher than a year ago.

Now I want to turn to capital deployment and begin where we always do with our priorities, which have been consistent for decades. We first look to invest fully in our business in projects that meet our strategic and financial criteria. Next, we look to support the dividend and build on our more than 50-year record of annual increases. And finally, we look to deploy any excess cash beyond those first 2 uses to retire shares over time within the limits of our middle A credit ratings.

Regarding our first priority, we have deployed approximately $2.4 billion in capital expenditures so far this year, up nearly 30% from a year ago, reflecting intentional incremental investments in new stores, full store remodels, in our supply chain and technology capabilities. We continue to expect approximately $5 billion of CapEx for the full year as we invest behind the strategic growth priorities we outlined in March. Regarding our second priority, we paid $518 million in dividends in the second quarter and just over $1 billion through the first half of the year as we balance our long-standing commitment to the dividend with our goal of moving towards a 40% payout ratio over time.

And finally, regarding our third priority, we continue to expect to have capacity within our long-standing capital deployment goals to resume share repurchases in the back half of the year. As always, the magnitude and pace of future repurchases will be governed by our operating outlook, cash generation, capital expenditure plans and our commitment to maintaining our middle A credit ratings. Inventory was $13.2 billion, up approximately 3% from last year, supporting our plans to continue growing the business and our focus on continuing to further improve in-stock levels, particularly in our faster turning frequency categories.

Finally, our trailing 12-month after-tax ROIC was 15.4% compared with 14.3% a year ago, reflecting the strong operating profit growth we've seen this year. Before I turn to our outlook, I want to recognize our incredible team. We've asked a lot of them this year as we've moved quickly to bring our clarified strategy to life, and I'm incredibly grateful for their energy, focus and commitment. We've accomplished a tremendous amount in a relatively short period, and that work is increasingly visible in our financial performance and improving guest satisfaction metrics. That progress is a direct result of our team's execution and commitment to serving the millions of families who shop Target every day. I want to thank them for everything they've done and for the continued urgency they're bringing to the work ahead.

So now let's turn to guidance. Given our performance through the first half of the year, we are raising our guidance for full year net sales growth to a range around 5%, 1 percentage point higher than our prior outlook. On the operating margin line, we now expect our full year rate, excluding tariff refunds will be in a range around 0.5 percentage point higher than last year's adjusted rate of 4.6%. On the bottom line, we are raising our EPS range from $7.50 to $8.50 up to a range of $9.90 to $10.90. This updated range includes $1.65 benefit from tariff refunds recognized in the second quarter but does not include the impact of any potential additional refunds through the balance of the year.

As such, excluding the impact of tariff refunds, the midpoint of our guidance range represents a $0.75 increase versus the prior range. So to close, we're encouraged by another quarter of healthy top line growth and improving underlying profitability. At the same time, we have a lot more work ahead of us to realize the long-run potential of our business. We'll continue investing to drive sustainable growth, maintaining discipline across our P&L and balance sheet and staying focused on delivering the style, quality and value our guests expect from target.

With that, I'll turn it back over to Michael.

Thanks, Jim. Before we move to Q&A, I want to bring together all that you've heard from our team today. We entered the year with a refreshed strategy to put us on a new trajectory, one of sustainable growth. That means serving the busy families that shop us with that only a target blend of style, design, quality and of course, incredible value. We aspire to be the place families can count on for what they need while also helping them discover what's new, what's next and what will bring a little more joy to their everyday lives. .

The team has been executing with urgency and discipline against that strategy. And as you've heard today, we can see that coming to life across our business in exciting ways. To be crystal clear, we have much more work to do, and we're early in our journey. and we're encouraged to see proof points that are compounding with each investment building on the last to create a hole that is greater than the sum of its parts. Our job now is to execute consistently and keep earning every trip from every guest we have the privilege to serve.

So now before I close, I want to pause and thank our team. We've already asked a lot of them this year. And as we turn our focus to the balance of the year, we continue to ask a lot. So to the team, a heartfelt thank you. I'm incredibly grateful for all you've done and all that you continue to do to shape this new chapter of growth for Target.

With that, we'll turn to your questions.

[Operator Instructions] Our first question comes from Rupesh Parikh with Oppenheimer.

Also congrats on a nice quarter. So just going back to the traffic momentum. I know 1 and 2-year basis, we saw a really good momentum. Just curious how you guys feel about the sustainability of that momentum. And then just given you're seeing really healthy top again stores, are you surprised that home and Parel, maybe you didn't see better performance, just given the natural traffic gains.

Thanks for the question, Rupesh. I think traffic is actually a great place to start because when we see the strong traffic response like we did in Q2, and we've seen so far this year, it's just a reinforcement to us. The guests are responding to the change that we're making and that we're earning more and more trust that's translating to more and more trips to target. When I think about healthy indicators of sustainable long-term growth, traffic is at the top of that list. And to see the pre and post response from guests of where we've activated within the store is one of the things, I think, is most encouraging for us as we look at all the change to come.

Cara, do you want to maybe walk through some of the things we saw in the second quarter that we're pleased to see the guest response to.

Absolutely. And I think what's really encouraging is start with some of the changes that we actually highlighted in Q1. So baby wellness, beauty, we saw sustained growth from those businesses and sustained traffic growth. Then you layer on the changes that we made in Q2 with really big changes in the food and beverage business, seeing an acceleration in that business as well from both a growth, a guest engagement and a traffic standpoint. And then we also have talked a lot about Fund 101 and the impact that that's having on our business.

So I think, Rupesh, what we're looking at is sustained growth for each of the categories. If I turn to home and apparel, just to be clear, we are not satisfied with the performance in either of those businesses, and there's more work ahead in 2027 and beyond. But you'll see us continue to drive focus and clarity on what needs to evolve there. And what's encouraging is the places that we have evolved and made changes. In both businesses, we are seeing the guests respond as well as the traffic follow there.

So apparel in Q2, we focused on our kids assortment. We relaid our kids floor pad, and we're actually seeing our kids basics running double digits, our tween art class brand up 50%. And so we're seeing the guests respond. In home, we've talked about decorative accessories, the change there as well as enhancing the in-store experience, and we're seeing the performance follow. So those proof points give us confidence that we're on the right path. We're going to continue to execute with discipline and work through our plans in those businesses for the balance of this year and into next year.

Yes. to Cara's point, I mean, we're eager to build on some of the momentum we've seen where we've made change in the categories that still need some work. And it was good to see growth across all of our key merchandising categories, but flattish growth in apparel and home isn't what we strive for over time. And the earnings power potential of those 2 high-margin categories returning to a place of more sustained growth as I think something we look forward to.

Great. And a quick follow-up question, just on back-to-school, some positive commentary in the prepared comments, but is there anything else you can share in terms of expectations or addition to what you're seeing currently?

We will probably fill up the rest of the time talking about -- going back to college. I think it might be a favorite season of some of those on the call here. I'd headline by saying we're encouraged with what we see in back-to-school and back to college so far. And we have the benefit of being out in stores a lot this time of year and to hear our guests play back what they're excited about gives us confidence that what we're offering for back-to-school and back to college is really resonating.

Cara, do you maybe want to provide a little more color on what we have in back-to-school and back to college right now. in many ways is a perfect example of that meeting with style and design and punctuating with incredible value.

I think, yes, in the middle of really critical weeks here, but we are encouraged, and we're seeing the busy families are responding when we bring them that combination of newness, great product at compelling prices. back-to-school, we are seeing broad-based strength in everything from school supplies to kids apparel to our beauty assortment and beyond. It was exciting to kick off the season with that Love Shack Sams collaboration, which was -- it turned out to be our largest design collaboration in our history, which we were thrilled about. It's an example of how we're evolving our collaborations to really bring newness across categories. but also school supplies, Pastel notebooks, $5 Cat & Jack Basics, that combination of style design and value is really resonating.

And then in back-to-college also seeing strength, a highlight for us. We hit on the day assortment. But that's a great example. We took a category, and we brought the target magic of style, design and value, $5 gadgets, $10 headphones and on-trend colors and stylish patterns, and we're seeing a really strong response to that as well as Storm Essentials. So encouraged. We've got a few big weeks ahead of us, and so -- but we're encouraged by what we're seeing so far.

Back to school as a topic, it's a place we're executing the fundamentals so well matters so much. We know we don't win in a season where every school peaks at a different time if we don't have inventory at the right place at the right time. And if we aren't providing a great guest experience, I couldn't be prouder of how I see our teams show up in stores right now in all the stores I've been in.

Lisa, do you maybe want to provide a bit more color on how we thought about showing up in the right way for the guests from an experience standpoint.

Yes. I think it's really important to call out that the fundamentals that Michael mentioned played a role in delivering that consistently elevated experience and it came to both back-to-school and back to college. If I look at back-to-school specifically, one area of improvement that we're really proud of is our in-stock position. We know that's the time of the year where if you're a guest coming in, you want to be able to find every item on your child's list. And this year, we were able to deliver meaningful improvements in inventory availability on all of the top items across that list. .

And so we'll continue to bring that same level of disciplined execution to how we're thinking about those important moments and the everyday moments for the balance of the year.

Our next question comes from Christopher Horvers with JPMorgan.

So my first question is just following up on the apparel and the home decor side. Can you maybe talk about what you've seen in terms of what just happened with the reset there? And as you diagnose the turn in those business because those categories are so important to the target merchandising experience. Is it simply a function of the longer lead time and that's making the changes just happen more slowly where maybe in some of these other categories, you're able to affect them faster because it's more third-party brands.

Yes. You're spot on in many ways, Chris. Those are longer lead time businesses, and so change doesn't come as quickly there as it might in a category like food and beverage. As we embarked on the year. We said home would be a multiyear journey. Cara talked a little bit about some of what we're seeing in apparel. But let's spend a second on home. I get really excited about the plans that Mar and team have to get that business to a better place over time. and it will take some time. And where we're making the beginnings of change, we're seeing the green shoots of a good guest response.

Absolutely. I think in Q2, decorative accessories, as we mentioned, which is sort of the center of home, really focal point that elevates the home experience is where we improved our assortment but also evolved the experience. and those stores are outperforming. In Q3, just in front of us, we've got major change coming in betting, in kids home and in our bath assortment. As we head into 2027, we've got big changes coming in our kitchen and dining. And so themes, I would say, sharper curation, really compelling value. But again, leading with that style design and value across the board, as well as elevating the experience.

And so your point is those are longer time -- longer lead time businesses. And so it does take us time to work category by category, but we're encouraged by the places that we've made change, and we've got our plans laid out in the quarters to come.

The only thing I might add, Chris, is not specific to apparel and home, but across the chain that we get excited about driving not just this year, but next year and the year to follow and the year to follow that. is there's healthy tension between the urgency of how much change to drive and our ability to execute that change well across 2,000 stores and a 400,000 person team. And I view that as a real high-grade opportunity. It means that we've got years of ideas of what we want to get done. And it's on us to sequence and prioritize those with clarity.

Just yesterday, we were talking about a lot of the plans in place for '27 and even '28 in some of the places where lead times matter most. And we get a ton of energy by thinking about what's possible. But it's on us to pace that change in a way we can execute well. If I had to pick something that I think is a truly remarkable outcome the team delivered so far this year is elevating the guest experience alongside driving so much change in stores. that's a tricky one to punch. And the progress the team has made in our inventory reliability, the progress we're seeing and the guest satisfaction scores played back to us at a time when we're changing a lot within the store, it's just truly a testament to the work the team has done so far this year.

Understood. And then my follow-up for Jim is, are there more refunds potentially coming later this year? And then as we think about sort of the underlying earnings base into 2027 -- previously, you've talked about $9 to $10, how do you think about lapping these tariff refunds? Like what's the proper jumping off point for 2027?

Yes. What I would say is the tariff refund we recorded in Q2 accounts for the significant majority of IEEPA tariff refunds we applied for to date, and we do expect some more to come. The way I would look at the underlying performance is we are trying to focus on adjusted EPS, excluding the tariff refunds. We think that's a better measurement, just especially given the timing of how the refunds are coming through our P&L. And then as you saw in Q2, our underlying -- our adjusted EPS, excluding tariff refunds were up 20% versus prior year. And year-to-date, that's up 24%. So that's the number we probably want everyone to anchor on to grow office going forward.

Our next question comes from Kate McShane with Goldman Sachs.

We wanted to ask about your philosophy on price investments. I know in the prepared comments, you spoke to the 10,000 items with lower prices so far this year, and you're looking to do more, but at the same time, you've also stated you're pleased with your price gaps, especially in food and beverage. So I just wondered if you could reconcile that and also just tell us a little bit more about how you think about it into the end of the year.

Yes. Thanks for the question, Kate. We feel really good about our price position, and that's what our team does every day to make sure that consumers are finding incredible value on our shelves. And you should hear us always talk about value as and expect more and pay less as the brand promise for a reason. We want to lead with style and design and differentiation. A lot of the changes that we've made across the store are doing exactly that in more and more categories. But we want that smile you see when you see a great sweater on the apparel floor bed to get bigger when you flip over the price tag and see the price of it.

And so it needs to be both for us every single day. And I think the evidence of that is true and the actions you've seen us take so far even just this year. We have lowered prices on over 10,000 items over the course of the last year. We're proud of that price investment. We think it matters to consumers right now. And we want that to be coupled with more and more differentiation across the floor pad.

Cara, feel free to add if there's anything else you'd want to pushout there.

I think you said it. It's always looking at both sides of the equation. And I think we have a long history of being competitive on price. We've demonstrated that this year. We'll continue to do that across the board. And we're looking to bring new affordable options throughout our assortment. And so a business like toys, we talked about that in Q1, we did more in Q2. We changed the experience. We added a $5 Barbie statement and guests are responding to those affordable prices at $5, $10, $15 and $20. So to Michael's point, this is a huge part of what defines target value in our unique rain in retail. It's what our teams are focused on each and every day. .

And as a quick follow-up, I wondered if you could speak to the cadence of comp throughout the quarter.

Yes, I'm happy to start, Jim, feel free to add, but we saw strength across the quarter. And I think broad-based strength is the headline I would leave with on a bunch of fronts. We saw that across guest demographics. We saw that across categories, and we saw strength throughout the quarter. as you heard us talk about, we're really encouraged by how back to school, back to college is going so far as well.

Yes. And Kate, if I can add, yes, we did see consistent strong top line growth across the months and across income brackets as well.

Our next question comes from David Bellinger with Mizuho.

Two questions for us. Strong comps again this quarter. Can you give us some more insight into the performance across the store cohorts or quartiles. Is there a good subsegment in the store base that's still underperforming the company average and can be lifted with remodels or some other factors?

Yes. I'd go back to broad-based being the theme that we saw in the quarter. With the strength of our top line driven by traffic, I mean, we really saw that happen across the chain. And your question is a fair one, and that we know we haven't brought the very best of our thinking to every single store. That's why those investments in remodels are so important. That's why the change we're doing that touches the whole chain when we make the changes to half of our center store grocery presentation like we did in matter so much to bringing the latest and greatest thinking across the chain, but the investments and the step-up investments that's come with some capital and expense costs this year, is investment, we're really excited about. We know we see a reliable strong guest response to when we remodel a store and the lifts we see in those stores are so important. Another place where you'll see us continue to invest in stores. is in new stores. At least I think it might be worth walking through a little bit of kind of the response we're seeing and the 24 new stores that we've opened so far.

Yes. I mean you're entering back to one of our most important priorities, which is delivering that consistently elevated experience. Some of that happens through new stores and remodels and then some of that also happens through investments that we make in our team. I think on the new store and remodel side, we announced -- we opened 17 new stores in the quarter, which is a huge quarter for us, 24 so far this year. We've advanced more than 100 remodels we get excited about those investments because our guests and our communities get excited about those investments.

They bring the best of Target closer to more guests, which is one of the best ways that we can get our story out there in the world. I think when it comes to consistently elevating the experience that our guests have in our existing stores, one of the best ways that we do that is through investing in our team. We've talked about our targeted investments in payroll this year. We've talked about training, all of that helps elevate the experience that our team is ready to get out there and bring to our guests. And so we'll continue to make sure that we're investing both in the fleet from a property standpoint, but then also in the experience that we're delivering through our team.

Great. I also wanted to follow up on the Fund 101 category, up double digits again this quarter. Can you provide some more context of the components of that, particularly around the trading card category. Is that an area of the store that's accelerating further and getting better product allocation from some of the larger trading card producers? And just what's the next step for building out this category.

Yes. We're excited about the guest response, the changes we've made in Fund 101. And as all of you know, that's a category where we're a little farther down the path of bringing the change to life because we got started at the end of last year. We've continued to make change. and there'll be more change to come. Cara, do you want to zoom out and kind of talk about the journey we're on in Fund 101.

Yes. I think it's a perfect example of making really sharper choices around where we invest our space. As we thought about last year, we got really clear on the categories where Target had a right to lead. And we also, this year, we're clear about where was our space not working harder for us. And so we acted on that, and we completed the largest space move in our company's history this past quarter. And that allowed us to bring in and create truly unique destinations and sells you think about a category like toys, where we simplified the shopping experience, it allows us to actually lean into brands like LEGO and that pushback wall and some of the other items I talked about.

In pop culture, we have introduced an entirely new fandom experience and destination that leans into things like trading cards and collectibles, but also exclusive collaborations into one cohesive experience. We talked about our Pokemon collab in Q1. Well, in Q2, we actually had our second drop. We brought that to life together. And so we are thrilled to celebrate fandom with our guests with busy families. trading cards is certainly a part of that, but really, it's all those top culture and fandom categories that we're thrilled about. Guests are responding and we've got more to come.

Our next question comes from Corey Tarlowe with Jefferies.

I guess the sales recovery has been very impressive. And I think that what strikes us is that it feels like many of the underlying financial building blocks are all improving simultaneously. So that's inventory productivity, traffic, higher-margin revenue streams. I guess the bigger strategic question that I have is as you look out over the next 3 to 5 years, where do you see the greatest opportunity to further enhance the earnings power of the business that investors may not be fully appreciating today.

Yes. Thanks for the question, Corey. I'll go back to some of what you heard us talk about in our prepared remarks. As we started the year, we laid out year 1 of a plan and we're only 2 quarters into that work. There's a lot in front of us to continue taking the momentum we have in some areas like a consistently elevated guest experience, like inventory liability, like transforming categories for a sharper point of view on where we're uniquely differentiated and have a right to win. but there's way more of that in front of us than is behind us at this point.

And -- so we sit in, I think, the appropriately healthy place of pouring gas on what's working and making sure we're taking the learnings from the things that guests are responding to so positively, while being clear eyed about the work still in front of us. You heard us talk about the opportunities ahead in apparel and home. I think those are some good category examples where we've got work to do. But our goal isn't 1 or 2 quarters of good results. Our goal is sustained profitable top line growth over time, and we're confident we've got the clarity of strategy to give us a long runway of work in support of that goal.

Understood. And then just as a follow-up, I think looking at the progress that you've made over the last year, as you mentioned, clearly, a lot of it has been merchandising led. What I'm really wondering is, are there any aspects of the merchandising strategy that surprised you the most? And are there any areas where you continue to see substantial runway for improvement that you think you haven't really touched enough yet to this time?

Cara, maybe let you expand on kind of some of where you're most excited and where you see the most opportunity. But Corey, I might recharacterize even how you framed your question. Yes, we talk a lot about the product we sell. We know that seeing the lens through the categories that we talk about is important. But there is no bigger team sport than retail. And so much of what we're focused on as we activate as a team is making sure we're doing it as one team for guests to respond well to some of the changes we're making. It requires a true understanding of the guest that comes from insights and analytics capabilities across so many teams.

It comes from, yes, strong merchandising leadership to make sure we're picking our curated point of view where we uniquely serve those guests well. But then it's an entire 400,000 person team that brings that to life from supply chain team that flows the product that if it's not there at the right time, all the best merchandising plans don't mean anything to the store team that brings that to life in such a uniquely target human way at the store level. to the digital teams that more and more often create the front door where people go before they come to the store. And so I could go on and on about all the teams it takes to bring it to life.

And so -- you hear us talk the category a lot in a setting like this, but just to pause for a second. Yes, it's merchandising, but it's everything. And one of the things I get excited about your first question touched on this, is we're making progress across all of that. And I think we see that as a recipe to add up to something greater than the sum of its parts over time. Cara, if you zoom back into the merchandising specific part of that question, what would you like to add?

Yes. And I would just maybe anchor where I started my remarks today talking about the 7 priority areas that we've laid out. Those aren't just merchandising priorities. Those are target priorities. And so we think about -- they are at different stages of their transformation and their journey for us to really truly achieve a bold ambition. And I think beauty is a great example. This is a category where we've had really strong performance over years. We've got a new ambition. And so while we're embarking upon the next month is our BD Studio that isn't just bringing new assortment in, that's actually bringing an entirely new immersive experience. .

Lisa talked about how we're going to have dedicated beauty advisers. We're incredibly excited about this next chapter for us. And so I think that's one example where, yes, we brought in new beauty products in Q1, we'll bring them in, in Q2. We'll continue to bring those in. And our ambitions are much greater for each of these 7 areas. And so you're going to continue to hear us talk about them. and how we're going to evolve in the years to come.

Operator, I think we have time for one more question.

Our last question comes from Simeon Gutman with Morgan Stanley.

Actually, putting together, Michael, what you said and Cara said, if you take the merchandising reset as a whole, take the entire store as an entity, and relative to Investor Day targets of how much of the store and product and planograms you can touch. Can you give us a sense, are you -- have you touched 30%, 40%? Have you touched 50%, 60%? Where are you in that journey? And if you agree that product and fashion cycles will be a little shorter and quicker, how are you prepared to continue evolving?

We think about where we're at 2 quarters into the year, we laid out a plan with clarity on the change we wanted to drive this year. And I think you heard Lisa say there's no easy button but to do the work. And so the team has been hard at the work, and we're pleased with all the change we've driven so far. We're extremely pleased with some of the guest response we see to that change. We know we aren't going to bat 1,000. We're not going to get it all right or should that be our goal. We're not driving enough change if our expectations that everything works with perfection. We really like the betting beverage we've seen so far this year, and those changes being met with a strong positive response from guests.

In terms of the percentage way through change, I actually might reframe that, too, because as we think about our ambition in some of the places where you heard Cara describe where we want Target to truly be loved and famous for over time with our guests. We're going to be at that work for years. And so yes, we might be a certain percentage of the way through this year. And that's one way to measure progress. But our time horizon is way longer than just this year's plans. And so you can expect us to continue to innovate and lead into change in support of the priorities that we've talked about, not just Q3, Q4 of this year, but in '27 and '28 and beyond.

And then a quick follow-up on the all-important the home and apparel. Is that a -- the amount of newness that's coming and we haven't gone to introduction? Or are there some batting average, meaning some product just hasn't hit and there needs to be more change? Like how would you describe the evolution in those 2 categories?

Cara, I'll let you decide if there's more to add there. But the thing I'll come back to, Simeon, is that where we are making change within those categories, we're encouraged by what we see. We just have a lot more work to do. Now the beauty of a category like apparel is pretty soon the seasons change and a whole new assortment flows in for the fall. We're excited for what we expect guests will find as we get into the back half of the year here. And we've said all along, we expect home to be a multiyear journey. And the team is hard at work on that journey, and we get excited for what that will deliver over time.

That's just what I would add to. There's different cycles in both home and apparel. We talked about kids really important cycle for what we're at the moment that we're in right now for back-to-school and back to college. As we head into the fall, we're excited about what we're doing to simplify the experience and bring in really exciting products into the women's space, and you'll continue to see us lean in with Q4 with a different apparel cycle into Q1. And so there is many cycles in the apparel. And so as we work through those cycles, you're going to continue to see us bring that combination of style, design and values to life.

Thanks, everyone, for joining today. I really appreciate your questions and support.

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation First Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, May 20, 2026.

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

Good morning, everyone, and thank you for joining us on our first quarter 2026 earnings conference call. On the line with me today are Michael Fiddelke, Chief Executive Officer; Cara Sylvester, Chief Merchandising Officer; Lisa Roath, Chief Operating Officer; and Jim Lee, Chief Financial Officer. In a few moments, Michael, Cara, Lisa and Jim will provide their insights on our first quarter performance and outlook for the rest of the year. Following their remarks, we'll open the phone lines for a question-and-answer session.

This morning, we're joined on this conference call by investors and others who will be listening to our comments via webcast. Following the call, Jim and I will be available to answer your follow-up questions. And finally, as a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, including those described in this morning's earnings press release and in our most recently filed 10-K.

Also in these remarks, we refer to non-GAAP financial measures, including adjusted earnings per share, adjusted operating income and adjusted SG&A expenses. Reconciliations of all non-GAAP numbers to the most directly comparable GAAP number are included in this morning's press release, which is posted on our Investor Relations website.

With that, I'll turn it over to Michael to kick things off. Michael?

Thanks, John, and good morning, everyone. Just a few months ago, we shared our refreshed strategy and vision for Target at our financial community meeting here in Minneapolis.

We outlined the priorities driving every decision we make, all in service of returning to sustainable growth because as I've said many times before, that's the only winning path in retail. For Target, that means leading with merchandising authority, elevating the guest experience, accelerating technology and strengthening our team and communities.

Delivering on our aspiration to be the most delightful shopping experience in retail means executing this strategy clearly and consistently. And to bring this strategy to life, I'm excited to be joined by and to introduce some incredible leaders to new roles at this critical juncture for Target.

I want to take a moment to welcome both Cara Sylvester, our Chief Merchandising Officer; and Lisa Roath, our Chief Operating Officer, to their first quarterly earnings call with nearly 4 decades of retail leadership between them and based on my experience and working closely with both Cara and Lisa for many of those years, I'm confident in the expertise and leadership they'll bring at a pivotal moment for Target.

Cara has led teams across digital, marketing, media and loyalty and spent the bulk of her career in merchandising. As our sole Chief Merchandising Officer, she's bringing focus and a bias for action to strengthen the way we operate while aligning the team at the critical intersection of merchandising and experience. Lisa has led many functions across the organization from marketing to merchandising and most recently, our food business that spans merchandising and end-to-end operations. With this breadth of experience, she is driving clarity while connecting across business functions in support of our strategy.

And in a few minutes, Lisa will be sharing more about new leadership in her organization as well where we've welcomed Jeff England to Team Target, serving as our Chief Global Supply Chain and Logistics Officer. I'm excited for you to hear from both Cara and Lisa today.

Today, we're reporting first quarter results that are stronger than expected, early proof points that give us confidence we're on the right path. But to be clear, a single good quarter has never been our goal. Our goal is consistent long-term growth. So while we're very encouraged by our Q1 results, what you'll hear from me and the team today is our focus on continuing the work to reach our full potential as a company. That said, we know that long-term results are built 1 quarter at a time. So let's spend a minute unpacking our first quarter results and how they inform our thinking for the balance of the year.

First quarter net sales grew by 6.7%, reflecting a 5.6% increase in comparable sales. We're encouraged that this top line growth was broad-based with growth across both stores and digital channels led by traffic, net sales increases in all 6 of our core merchandise categories, broad-based strength across guest demographics and cohorts, and momentum around both key seasonal events and everyday moments. Despite this early progress, we know our work is just beginning as we were lapping softer results in Q1 of 2025.

And while we're pleased that this year's Q1 net sales were also 3.7% higher than in Q1 of 2024, that's well below the level of 2-year growth we aspire to deliver over time. In categories like Fun101, beauty and food and beverage, we're seeing mid-single-digit compound growth on a 2-year basis, while sales in home and apparel were still below 2024. This is further evidence that while we're building momentum, we're also not yet where we aspire to be over time. We're focused on executing our plans and are encouraged by early guest response.

As we look ahead, we also acknowledge that the broader operating environment remains uncertain. You'll hear more detail from Cara, Lisa and Jim shortly on how we're managing through these considerations while continuing to make progress against our goals. But the punchline is, we're planning for the balance of the year, clear eyed on what is needed to execute our plans to continue to make progress against our strategy.

Before I hand the call over to Cara, I want to stress a few points. First, we're writing a new chapter for Target, defined by disciplined choices and a clear articulation of our unique role in retail. And on this front, we see encouraging early signs that our plans are resonating with our guests.

Second, we will not confuse this progress with potential. Our focus is on delivering consistent growth, not just in 2026, but for decades to come. That means continuing to invest in our business, our team and the communities in which we operate, so we can deliver growth in 2027 and beyond.

Third, while we have momentum, we're also being cautious about the near-term operating environment, with consumers weighing multiple headwinds and tailwinds and recent dips in consumer sentiment, we continue to place a premium on flexibility not wanting to swing too hard too quickly despite the early signs of momentum we're seeing.

As we've shared before, we like our business model when we're needing to chase inventory in the face of stronger-than-planned sales much more than when we find ourselves needing to cancel purchase orders or markdown excess inventory. And finally, this team is hungry. With a renewed focus on what is possible and the team of more than 400,000 strong that solidly aligned behind our priorities, we're confident in our ability to deliver on our strategy and business plans, both this year and over time.

With that, I'll pass things over to Cara, who will share a bit more color on our Q1 performance and all that is ahead.

Thanks, Michael. I'm excited to be joining the call today not just to share insights on our Q1 performance, but to outline how we're evolving our merchandising plans in support of improved relevance, differentiation and growth. But before I jump in, I want to thank the Target team. The progress that we're seeing, while still early, is a direct result of the focus, resilience and care our teams are exhibiting every day. There's a lot more work ahead of us, and I'm grateful for how the team is leaning in. Thank you, team.

While I'm only a few months into my role as Chief Merchandising Officer, I'm focused on driving greater clarity across my teams on how we need to work differently. First, merchandising has to lead, not follow what others are doing with a clear point of view on where we win, where we invest and where we simplify. Second, strategy only matters if there's strong execution behind it. It's not enough to have the right assortment. We have to bring it to life consistently across stores and digital with product reliability our guests can trust.

And third, we must work faster and be bolder. To do so, we've introduced clearer merchandising standards, strengthen accountability within our teams and are simplifying how work gets done. This framework is designed to help us deliver on the strategy we shared at our financial community meeting centered on serving busy families, guests who are managing a lot and are highly choiceful about where they spend their valuable time and money.

We already have disproportionate wallet share from this consumer segment, but there's an opportunity to deepen that relationship further. So while maintaining a strong core assortment across our categories, we're intentionally leaning in more aggressively behind a set of prioritized assortments and guest needs, areas where we can lead the market by being bold, distinctive and affordable. These focus areas represent about half of our sales today and are expected to drive roughly 3/4 of our growth going forward. They include building a leading beauty destination, expanding our role in health and wellness, being food forward, celebrating baby and kids, leading and women's style, inspiring the love of home and building culture-driven categories, including toys and entertainment.

I'd like to spend a minute or 2 on some early proof points evidencing this strategy is resonating with our guests. Starting with Baby and Kids, where we have an enormous opportunity to build long-term loyalty with busy families. We know the value we can deliver by helping busy new parents find the products they want and need to keep their baby happy, healthy and safe. So we're investing to do just that with a thoughtfully curated assortment of trusted owned and national brand products, an elevated in-store experience and in select stores, new premium services we're testing, including a baby Concierge.

We're encouraged by what we're seeing including a more than 5 percentage point acceleration in baby comp trends in the back half of the quarter following the launch of these new offerings showing that when we reduce friction and build trust early in a family's journey, we foster an ongoing relationship that spans across categories. Busy families are also increasingly focused on health and wellness, an area shopped by more than 70% of our guests already.

To deliver newness and drive greater distinction in the market, we recently added around 1,500 new items and have plans to refresh around 40% of our assortment this year. These changes drove double-digit sales growth in the first quarter, doubling comp growth rates in wellness-related categories compared with Q4 of last year.

In food, guests tell us they're looking for inspiration, new products, trending flavors and better-for-you options. Delivering on these priorities is the goal of our Food Forward strategy, evolving food from a category they shop while they're at target into a reason they choose to come to target. We introduced 3,000 new food items in Q1 alone, with sales from those items growing more than 50% over the prior assortment. We'll continue leaning further into high-growth areas like protein, functional beverages, and better-for-you snacking, where guests are actively seeking newness.

And finally, we're celebrating the trends that shape culture to create buzzworthy assortments and experiences exclusive to Target. So far this year, we've offered 3 such partnerships that far exceeded our aspirations. I'll start with our Q1 drops from Parke and Roller Rabbit. With social engagement significantly exceeding prior collaborations and some of the strongest launch week sales we've ever seen from our limited time offerings.

These partnerships show that when we combine great product with cultural relevance, we create moments that drive traffic, engagement and excitement for our brand. And for fans of all ages, our only at target cross-category Pokemon collaboration helped to position Target at the center of one of the most powerful global franchises. The launch earlier this month set sales and social media engagement records for us, and we're excited about another drop taking place later this quarter.

These examples show how we're focusing on style, design and culture to lead with merchandising authority. But just as important is our commitment to value because consumers shouldn't have to trade what they want for what they can afford. For example, in toys, we've seen tremendous growth from new offerings priced at $20 or less, including many priced at $5 and $10. The combination of on-trend toy assortments at prices busy families can afford helped to support double-digit comp growth for toys again this quarter.

Across all these examples, the takeaway is clear. Guests respond when we're bold in our assortment, distinctive in our point of view and clear on value. While these are encouraging early signs of progress, the bulk of the work is still in front of us. As we look ahead to Q2, there's a lot of change ahead and Lisa and I are partnering to drive the right decisions to build further momentum.

In food, we'll be executing our largest transition in over a decade, resetting nearly half of our center store grocery assortment, accelerating our pace of newness by nearly 50% and better aligning to wellness trends, including the elimination of all certified synthetic colors from our cereal assortment.

In home, we're beginning a multiyear reinvention. We'll make significant edits to decorative accessories this quarter, changing out nearly 3/4 of this assortment. Later this year, we'll introduce that same level of change to kids home and bedding categories as we continue to clarify our offerings and value proposition in these ever-important style categories. We have plans to continue this journey with additional home categories like kitchen and storage in 2027.

And in beauty, we're preparing for this fall's launch of our Target beauty studio in more than 600 stores, building on the momentum we've been seeing in the beauty category. This includes working to minimize the disruption that these changes will cause cultivating an assortment of trending beauty products, and building out robust plans to support an efficient transition.

So as I get ready to pass things over to Lisa, I want to leave you with a summary of where we're at and where we're going. We have a clear strategy. We're investing behind that strategy, and we're seeing strong early proof points across our priority categories. But this is a multiyear journey. With a ton of change still ahead of us, we're executing our plans with urgency, scaling with working, learning quickly and continuously raising the bar on how we show up for our guests. We're moving faster and with greater intention with the discipline required to build sustainable long-term growth.

With that, I'll pass things over to Lisa.

Thanks, Cara, and good morning, everyone. I'm honored to join you today in my new role as Chief Operating Officer. I step into this role after more than 20 years at Target with experience across merchandising, stores and operations, supply chain and marketing. That breadth has given me a deep understanding of how strategy becomes real for our guests. From the products we choose to how they flow through our network to how our teams bring our product and an elevated experience to life every day.

That perspective matters because strategy only creates value when it shows up consistently for our guests. As COO, my focus is on strengthening execution across the enterprise, giving our teams the clarity, tools and support they need to deliver our North Star, a consistent easy, inspiring and friendly experience at every interaction, and we're seeing encouraging momentum.

In Q1, many of our store experience metrics reached 3-year highs with improved Net Promoter Scores and overall satisfaction regarding wait times, product availability, store cleanliness and interactions with our team. At the same time, we're clear-eyed about where we need to improve. Product findability and in-stock availability remain the biggest friction points for our guests, particularly in high-frequency categories like food and at critical times like evenings and weekends. So our focus is simple: strength in the fundamentals while continuing to create moments of inspiration.

To do this, we're engaged in a few key areas across our stores and supply chain facilities. Let's start with inventory availability. We cannot deliver a great experience if the right product isn't on the shelf, whenever, wherever and however our guests choose to shop with us. Despite stronger-than-expected sales, we made significant progress on improving in-stocks this quarter. Notably, top item availability improved meaningfully year-over-year, and removing with urgency to chase into the additional inventory we need, given our elevated top line expectations for the balance of the year.

Beyond overall in-stock levels, we're focused on improving the connectivity between our upstream and downstream processes across the operating system. That means starting with optimized merchandising decisions that impact how product is received within our network and how that product flows through the system. This, in addition to the investments we're making to improve data and network visibility will help us to drive greater consistency and flow throughout our network.

Another key focus is on our store workload and labor. We've been making intentional investments in payroll and training to rebalance workloads, so our teams can spend more time with guests. We're putting the hours where the workload is, and we're measuring the impact these investments are having on the guest experience. At the same time, we're working to simplify fulfillment to manage growing digital demand without compromising the in-store experience.

We've now provided more than 300,000 team members and leaders with our guest experience training, which reinforces our strategy by connecting daily behaviors to clear expectations and building accountability across the field. Early feedback has been strong with teams saying they appreciate the clarity on priorities.

Just as importantly, we're seeing early improvements in guest experience and satisfaction metrics in stores where we've increased support. There's more work ahead, but these early signals are encouraging. And beyond training, we want to make sure our teams have the physical and technological tools they need to complete their work as well. This is why we're enhancing tools like myDevice. The handheld devices that support our store teams through a variety of tasks and processes. And we're enhancing performance dashboards to simplify workflows and improve visibility. So teams can stay focused on our guests.

And finally, we're focused on driving greater consistency across our more than 2,000 stores. We're approaching this with our store remodels, prioritizing projects where our guests will feel the greatest impact and where operational benefit and financial returns are the strongest. Alongside these foundational improvements, we're making changes to elevate how our assortment comes to life in stores.

As an example, in beauty, we're testing new staffing and operating models to free up more time to focus on guests, especially during peak periods. And as Cara mentioned, we're excited about the upcoming launch of our beauty studio concept which will create a more immersive discovery-driven experience.

Beyond our investments in talent and the presentation within our stores, I want to spend a few minutes talking about the investments we're making in the physical buildings themselves. In Q1, we opened 7 new stores, including our 2,000th location and we remain on track to open more than 30 this year. We're energized not only by the financial strength these openings bring but by the meaningful impact they have in the communities we serve, expanding access to our incredible value and assortment, creating jobs and bringing us closer to more guests, giving us additional opportunities to invest our time resources and support as the new neighbor in town.

Beyond new stores, we're also scaling our remodel program with over 100 projects already underway including an enhanced focus on food and frequency driving categories where we're seeing the strongest returns. Given our stores as hub fulfillment model, which allows us to fulfill more than 95% of our sales from our stores, any investment we make in stores is also an investment in our supply chain. That said, we're also investing in supply chain specific facilities and technology.

Our supply chain is one of the most complex capable networks in retail. Our go-forward strategy is focused on reliability, speed and cost efficiency including continued improvement in product availability, ship to home speed and improved leverage on supply chain expenses. We're building from a strong foundation.

In Q1, we saw higher inventory productivity with turns up more than 10% year-over-year. We also maintained consistent top item availability and improved key reliability metrics even amid higher-than-expected demand. At the same time, there are clear opportunities to improve, and that starts with our upstream facilities. And we're investing there. adding network capacity with 2 recently opened facilities, a new receive center in Houston and a new food distribution center in Colorado. The Houston facility alone is expected to process around 25 million cartons annually, significantly expanding upstream network capacity.

To further drive the step function change we expect from our supply chain. I'm excited to announce that we recently hired Jeff England as our Chief Global Supply Chain and Logistics Officer. With decades of supply chain and logistics experience, Jeff is a transformational leader with a proven track record of improving inventory availability, reducing transportation costs and strengthening operational excellence.

So now before I pass the baton to Jim, I'll end where I began. I'm excited to step into this role I'm encouraged by the strength of our business foundation and even more energized by the opportunity ahead. We have the assets, the scale and the team to reach our full potential. And well on the topic of team, I want to express my gratitude to each and every one of you. And in particular, our frontline team members in stores, distribution centers and service centers that bring our brand to life for our guests each and every day.

Our mission is clear: drive greater consistency, improve reliability and leverage technology to enable our teams to continue to deliver the most delightful guest experience in retail. Because when we get that right, when every guest can count on target to be easy inspiring and friendly, that's how we unlock the full potential of our business.

With that, I'll pass the call over to Jim.

Thanks, Lisa. When we last spoke with you at our Financial Community Meeting in early March, we shared that we were seeing a strong start to the quarter. Through the remainder of the quarter, top line trends remained strong and exceeded our expectations. And with this upside on the top line, we saw better-than-expected performance on the bottom line as well.

For the quarter, net sales of $25.4 billion were 6.7% higher than last year and 3.7% higher than 2 years ago. Comp growth of 5.6% was driven primarily by a 4.4% increase in traffic, which more than offset a 2.4% decline a year ago. Top line trends were strong across multiple dimensions of our business. including both our stores and digital channels across our core merchandising categories and across the quarter. And importantly, we gained or held share in the significant majority of our divisions in the quarter and across income brackets as well.

In our storage channel, net sales were up nearly 6% from the first quarter a year ago, accounting for more than $1 billion of additional sales or about 2/3 of our net sales growth overall. Within the digital channel, first-party sales grew nearly 9%, led by growth in same-day delivery of more than 27%. On Target Plus, our third-party digital sales platform, we saw nearly 60% growth in first quarter GMV.

On the gross margin line, our first quarter rate of 29% was about 80 basis points higher than a year ago. This improvement was the result of productivity initiatives and leverage in our supply chain, growth in high-margin revenue streams like Roundel and Target Plus and lower markdown rates, partially offset by higher product costs.

On the SG&A expense line, our Q1 rate of 21.9% was more than 2 percentage points higher than last year's rate of 19.3%. The However, as you'll recall, last year's SG&A expenses included the benefit of legal settlements totaling nearly $600 million. Last year's adjusted SG&A rate, which excluded the benefit of those settlements, was 21.7%, about 20 basis points lower than this year. This year's adjusted SG&A expense growth of around 7% reflected the impact of investments in additional hours and training for our field teams along with higher incentives, planned spending related to capital projects, higher marketing spend and growth in general liability expense.

Our Q1 operating margin rate of 4.5% was lower than last year's rate of 6.2%. And but about 80 basis points higher than last year's adjusted rate of 3.7%. Altogether, our business delivered first quarter GAAP and adjusted EPS of $1.71, 24% lower than prior year GAAP EPS and 32% higher than prior year adjusted EPS.

Now I want to turn to capital deployment and begin where we always do with a reminder of our priorities, which have been consistent for decades. We first look to invest fully in our business in projects that meet our strategic and financial criteria. Next, we look to support the dividend and build on a more than 50-year record of raising the annual dividend. And finally, we look to deploy any excess cash beyond those first 2 uses to retire shares over time within the limits of our middle A credit ratings.

Regarding the first priority, we deployed about $1 billion for capital expenditures in the first quarter and continue to expect about $5 billion of CapEx for the full year as we invest behind the growth priorities we outlined at our financial meeting in March. Regarding the second priority, we paid $516 million in dividends in the first quarter, up slightly from a year ago, driven by a 1.8% increase in the per share dividend, partially offset by a lower share count.

We plan to request that our Board approved another small increase in the quarterly dividend later this year, allowing us to build on our record of annual increases while moving us closer to our long-term goal of a 40% payout ratio over time. And finally, regarding the third priority, we did not engage in any share repurchase activity during the first quarter. Looking ahead and assuming our business continues to perform well, we should have some capacity to repurchase shares later in the year with the magnitude and pace governed by our outlook and our goal to maintain our current middle A credit ratings.

Now I want to turn to our expectations for the remainder of the year. As Michael said earlier, while we're very encouraged by our Q1 performance, we have a ton of work ahead of us, and we're maintaining a cautious outlook overall. Notably, in the quarter just ended, we faced the easiest prior year comparison of the year, and we'll be facing the hardest comparison in Q2, a nearly 2 percentage point difference as we begin lapping last year's launch of the Nintendo Switch 2. Furthermore, we believe this year's higher tax refunds were a source of upside to consumer spending in Q1 and that benefit will be feeding over the rest of the year.

While consumers have proven to be resilient so far, sentiment has been declining recently, and we're keeping a close eye on their spending behavior. With that as context, I'll turn first to our annual guidance on the top line, where we've updated our expectations. For the full year, we are now planning for a net sales increase in a range centered around 4%. This outlook is 2 percentage points stronger than our prior range and reflects some moderation from our first quarter pace based on the reasons I outlined above.

Turning to the bottom line. We previously provided an EPS range of $750 million to $850 million. Given the profit upside we saw in the first quarter, we are now expecting to end the year near the high end of that range. That said, we still have most of the year ahead of us and continue to believe we're best served by maintaining a cautious outlook.

Looking ahead, we will continue to focus on providing full year guidance. But as I mentioned earlier, we'll be facing more challenging prior year comparisons in Q2. In addition, we continue to expect more challenging cost headwinds in the first half of the year that are expected to moderate in the second half.

So to close, I'll simply reinforce that we're making investments to win and drive long-term sustainable growth. And while it is early in our journey, we're pleased with our Q1 performance and encouraged that our strategic focus and priorities are showing clear progress.

With that, I'll turn it back over to Michael to close this out.

Thanks, Jim. Before we open the call for questions, I want to emphasize some of the key themes I hope you've heard from us today. First, we're encouraged by the progress we saw in Q1. The quarter demonstrated that when we operate with clarity, focus and discipline, our strategy resonates with guests.

We saw strength across our categories, growth in both stores and digital, improving guest experience metrics and early proof points that our merchandising and operational priorities are beginning to gain traction but we also want to be very clear. We are still early in this journey. One quarter does not define success. The majority of the work remains in front of us and we have significant opportunities ahead to further strengthen our relationship with busy families and service of becoming the most delightful shopping experience in retail.

What gives me confidence is that we have a clear strategy, a strong foundation and a global team that is aligned around where we're going and how we'll get there. We're making deliberate investments to deepen our merchandising authority elevate the shopping experience, advance technology and strengthen both the communities in which we operate and how we function as a team. We believe the opportunity is substantial. We have a differentiated brand, a unique combination of design, style, convenience and value and a business model that positions us to continue gaining relevance with guests over time.

And finally, I want to close by thanking the entire Target team across our stores, supply chain facilities, service centers and headquarters, both in the U.S. and around the world, our team continues to show tremendous resilience, energy and commitment to serving our guests every day. The progress we're seeing is a direct reflection of their work, and I'm grateful for everything they do to bring the target experience to life.

With that, operator, we'll open the line for questions.

[Operator Instructions] Our first question comes from Corey Tarlowe with Jefferies.

Congrats on the results today. Michael, I wanted to ask about the key changes that you've made that you feel that really have some sustainability or sticking power throughout this year. As you think about a lot of the organizational changes that you've made, you've also trimmed SG&A to a degree. I believe you highlighted cutting 8% of the workforce previously. So there's definitely a commitment to accelerating change while keeping costs controlled. And I just wanted to hear a little bit more about your perspective there as we continue to build for more profitable growth going forward.

Yes. Thanks for the question, Corey. And I guess what I'd start is where you ended. It's all about growth. The strategy we've laid out with a clear focus on us winning in our unique lane. And we know that when we lead with style and design, while delivering incredible value in the products we sell, that's why the focus on elevating our merchandising authority and how we sell it, elevating our guest experience.

We're all aligned as a team around those priorities, and they're informing every decision that we make. And we know the P&L hangs together well when we get growth. You saw that in the first quarter where a strong first quarter top line outcome translated to better-than-expected bottom line outcome. And so all the decisions we're making are in support of that growth. and we're encouraged by how we see consumers responding to the changes that we make.

I might pass the baton to Cara here to unpack a little bit more of what we saw working well in the first quarter. But the thing that I get encouraged by is where we're making change in merchandising assortment and where we're making change to elevate the guest experience, we see a consumer that's responded. And a huge thanks to the entire Target team that's been working so hard for months now to put that change in place. And we're only a quarter into the year. We've got a lot of change coming in Q2 and beyond.

And I would just layer on that really the merchandising team is laser-focused on serving busy families. And if we think about some of the changes that we put into place in Q1 really highlights from a newness standpoint as we think about really leaning into wellness-related categories.

I would highlight the 3,000 new items that we added in Food and Beverage, the 1,500 new items that we added in our wellness categories. as really areas that we're leaning in to listen to what our guests are searching for, what they're excited by and bringing sort of that mix of style, design and value to them.

The other real standout is our focus on Baby in Q1. And I think that's a great example where we've started early on our journey, but a pretty significant overhaul to the category, listening to deep insights of what busy families we're looking for and bringing in the right assortment, 2,000 new items starting at $1, but also introducing premium offerings where they were looking to spend a little bit more on some of those big ticket purchases.

It was also an area of the store that we had not updated in quite some time. And so we were able to actually bring the level of inspiration and the level of discovery to the baby area by introducing Baby Beacons. And then in 200 stores, we are testing a baby concierge service as we think about really our role in elevating that guest experience. And so I think about those proof points in Q1 as really good early signals that are laser-focused on serving busy families with that combination of value, style and design is working. It's gaining traction. But again, we have much more work to do.

And then just a quick follow-up for Jim. You mentioned in your prepared remarks that cost headwinds in the first half will moderate in the second half. Could you provide a little bit of color about what you meant there? And then specifically also discuss what to expect from a freight perspective this year.

Corey, yes, as I mentioned in the financial community meeting, we assume some level of cost headwinds in the first half of the year relative to the second half. One of those examples was as we're opening new stores and remodeling, you will see much more accelerated depreciation and certain costs just hitting the first half of the year, and that's primarily timing related. There's also a reference to shrink being slightly elevated through the P&L in the first half of the year versus the second half. It's just more timing related to how we book accruals for the year.

Just a quick note on shortage, we expect -- we continue to expect us to be in line with last year. but it's just purely a timing thing versus from the first half to the second half of the year. And from a freight standpoint, we're monitoring that closely. Our guidance reflects what we're seeing as scenarios on freight as well.

Our next question comes from Spencer Hanus with Wolfe Research.

I just was curious what you're seeing in terms of comp momentum and due to date? And then how are you thinking about reinvesting some of the upside from the comps going forward to keep up the momentum that you've seen in the first quarter so far?

Yes. I'll maybe start with your second question. As you think about reinvestment we step back and think about it a little bit differently. We started the year with a clear view of where we needed to invest behind the strategy. We spent a lot of time in our financial community meeting outlining what that strategy is. That's only made real when we make decisions against that strategy and invest with conviction against what we know will work. And so that's what we've laid out in plans this year.

I might ask Lisa to chime in about some of the investments that we're making in stores and in payroll, the hundreds of millions of dollars invested there directly to help improve the consistency of our experience. We're excited about the $5 billion of capital we'll put to work in the business this year, a really strong new store pipeline as a piece of that spend, the remodels that help bring our latest and greatest thinking to more and more target stores in community is a big part of that spend.

And so you'll see us continue to invest behind the places we know will accelerate growth over time. But that's not a read and react by quarter thing for us. That's us being convicted on what we know will work because we've tested it and we've seen results and we lean into what's working. And the path forward is all about sustained long-term growth. We also know that 1 quarter doesn't make a trend yet. But that future is paved a quarter in time, and we're encouraged by what we're seeing in Q1.

Lisa, do you want to maybe share a little bit more about some of the investments that we're making?

Yes. We're excited about the investments that we have underway. And as we talked about, all of those are in line with the strategy that we've put forward. We shared the news that we recently opened our 2,000th store, we have 100 remodels underway this year. We'll have 30 new stores this year on our way to 300 by 2035.

I think what's important to remember about those stores is that they're larger. So you're looking at 125,000 to 150,000 square feet and there's the best expression of our strategy. And so you see us leaning into food and fulfillment in new ways. We're also investing across the chain in transitions as we move throughout the year. And so that's another lever that we have to make sure that we're bringing newness at scale across the portfolio, which we're carefully managing as we move throughout the year.

And then Michael talked about our investments in stores. We started off the year talking about investing hundreds of millions of dollars in payroll for our stores. Our store team members are at the heart of Target and making sure that we put that payroll where the workload is, is critical to us being able to elevate that guest experience. So that means lining that up on nights and weekends, making sure that we're staffing to provide a great experience, and we're seeing that pay off.

We were excited to share 3-year highs in key fundamental guest metrics like cleanliness, interaction with our team members, checkout experience. And so we'll carry that forward as we continue to invest in the parts of our portfolio and our strategy that really lead to that elevated guest experience.

Then on your other question about kind of what we're seeing so far to date in Q2, I think Jim hit in his prepared remarks, well, the things on our mind as we look at the second quarter. There's some unique things from last year like the Nintendo Switch launch that we know or are added some momentum in Q2 of last year. It was the strongest quarter of last year. And so we'll anniversary that in Q2, that's on our mind.

But we're excited about how we've seen the consumer responds to what we're doing in the first quarter. We've got a lot more change coming in the second quarter and beyond. And so the response we've seen so far, gets us pretty excited about what we'll see as we make more change over the balance of the year.

Great. And then just to follow up, in terms of the shelf resets that you've done to date, how have the sales been trending relative to your expectations? And how has that informed how you're going to be resetting categories as we look through the summer and then into back-to-school later this year?

I'll maybe have Cara add some of what we're excited about to come. But the punchline, I would say so far is where we're making change, we're seeing the guest response. And we've got a lot of change plans this year. You heard me say at the Financial Community Meeting, we'll make more change to what we sell and how we sell it in 2026 than we've seen in a decade.

And we're not going to get it all right. We'll have lessons learned as we go through the year. We know managing that amount of change, it's an incredible amount of work for the team. they've shown up to do that so far has just been really encouraging to see in the first quarter. But by and large, where we're investing in product newness, we're investing in elevating the guest experience. We're seeing the consumer response. So that just gets me really excited about the change to come.

Cara, do you want to share some of what you're excited about in Q2 and the balance of the year?

Yes. And I might just layer on as we think about the areas that we've touched so far, we've continued to see momentum in our Fund101 business, which we've talked about, which really started last year as we think about a business like toys. The resets that we've done so far this year, adding in newness to food and beverage, adding space and new items to our wellness and health categories. adding newness to Beauty as well as the changes that I talked about baby, we're really pleased with what we're seeing.

As we think about the quarter ahead, we are focusing on continuing to execute well and driving some of the bigger changes. So right now, as we speak, we are resetting our dry grocery area. It's our largest reset that we've had in this area in over a decade. We're pleased with what we're seeing, but we're really right in the middle of it. And then we are in the beginning of our transformation in home. And so later this quarter, we're going to add in really our threshold shop-in-shops in about 200 stores and start to really the beginning of that transformation when we think about our decorative accessories category.

And then I would just have to also highlight really excited for the launch of the Target Beauty Studio. So the team is a multi-month process to get ready for that reset, but we are heads down and really excited about what's to come.

Our next question comes from Kate McShane with Goldman Sachs.

We wanted to ask a few questions around inventory. Thanks for the commentary so far. But we were wondering if you could speak specifically about in-stocks and product availability on the shelf how this is being addressed, what improvements have been made and how it's being measured.

Yes. Thanks for the question, Kate. I'll maybe ask Lisa to chime in about the journey that we're on there. But the punchline, and you're probably going to hear this punchline repeated over and over from us if we're successful, is we continue to make real progress in improving inventory reliability. And we know the bar is high there. And so you're not going to hear a hint of real satisfaction from us until we continue that progress in the quarters and years to come. But we're encouraged by the progress that we've made.

Maybe just speaking to what you see on the balance sheet briefly. We're anniversarying some higher in-transit levels in inventory last year. If you step away from that, I think our inventory position we'd estimate is up just slightly, and it's meaningfully up in some of the higher turning frequently purchased item categories where we're making real investments in product availability.

But Lisa, you want to share a little bit more about the work that continues to make sure that we're reliably in stock for guests.

Yes. So as you mentioned, impacts are absolutely critical to our guest experience, and we have not been where we need to be but we are making solid progress. We talked about how our in-stocks improved year-over-year. One thing we're excited about is that the fastest improvement that we saw were in our most important items, the top items that our guests are shopping most frequently with target. So I think categories like food, essentials and beauty.

And then we continue to invest to improve that further. And that investment spans how we're approaching intelligence, our team, our facilities and data. And so we're working to use AI to improve our demand forecasting, which helps reduce some of the volatility that can lead to some of those in-stock issues. We talked about the team investment. We're really excited to have Jeff be joining the team with his breadth of experience across the industry.

And then facilities. We shared a couple of new facility openings. One is our Colorado food distribution center. And so when you think about that investment in fresh food, again, that leads to better in-stocks, better freshness in some of those most important, most frequently shopped categories. We also recently announced the opening of a new receive center in Houston. And what we like about that is that it gives us the flexibility to hold more long lead time import, seasonal inventory upstream and then distribute that closer to the time when the guest needs it, which just is just one more lever that gives us the opportunity to have products where our guest needs it when they are looking for it.

And so we've been able to couple that with the strong inventory position that Michael mentioned, we feel really good about being healthy and investing where we need to be investing for in-stock.

Our next question comes from Simeon Gutman with Morgan Stanley.

I think if I heard right, Cara mentioned 40% of merchandise will be revamped or is it reset or changed. Can you talk about what percentage of the overall merchandising overhaul is underway in Q1? What percentage will be by the end of the year? And then if there's any into 2027.

Yes. I'll start there, Simeon. And it looks different by category. I think some of what you heard Cara describe was specific to some upcoming change in food where we've got a lot of new assortments coming in the second quarter. But every category is on a little bit of a different time frame.

And for us to bring the right newness over time, you can expect us to continue to invest in the future and bringing what's new and relevant, leading with style and design, what's relevant and culture that's been so important about driving the continued success we've seen in a category like Fund101, we're a little farther down the path some of that reinvention. But there's other categories where we're just getting started.

I mean home is going to be multiyear work for us to get that category back to where we expect it to be over time. But we're not waiting to start that work. The deck accessories transition -- the decorative accessories transition that we'll have in Q2 changes out 75% of the assortment in that subcategory of home. That will be a good step forward for us. but there'll be parts of the home business that we tackle later in '26 and '27 and beyond. Just came out of some planning meetings in the last couple of weeks about what some of that multiyear plan looks like.

And so I think you can expect us to keep the foot on the gas to make sure we're always bringing the freshest and latest assortment and not every category moves at the same time line. But I'll just underscore, we're encouraged by the response we're seeing. We know when we cement Target is a place for newness, we cement Target as a place for style and design relevance for guests, that leads to them picking target more often as I decompose the strength we saw in the first quarter, one of the things that's most encouraging to me is a little traffic play, to see comp growth driven by traffic means more guests picking target more often, and that's an incredibly healthy sign for us right now.

And Michael, just to -- I want to ask a separate follow-up but to your response, it seems to me that you're just getting started, so that what we saw in the first quarter may not have even reflected the newness yet? Or is that unfair? And then my follow-up question was more for Jim, respecting that it's all about sustainable top line growth, and that is the goal.

I do want to focus on margins for a second. The incrementals were pretty good in the first quarter, maybe SG& a little high, and it looks like a similar level of flow-through implied for the back half, even though the top line may slow a little. So can you talk about the complexion the ability also to see higher flow through over time. And I think some of this goes into self-funding these investments that you've laid out for the year.

Yes. Sure, Simeon. On your first question, the obvious answer is both. Teams have been hard at work for months, building the plans that we executed in the first quarter. and we have a lot more in front of us. I would say, in many ways, we're just getting started with the change that we contemplate against the focused strategy that we laid out at the Financial Community Meeting.

But that's changed that we're approaching with urgency. That's changed that we've been working towards for many months to be in a place where we could put change the guests responded too well in Q1 in place. And we've got a lot of work in front of us given the ambitious plans that we've laid out for the year. So both things are certainly true in answer to your first question.

I'll pass to Jim to decompose margins, but I'll be shocked if the headline isn't top line growth translates to margin opportunity over time. But Jim, you want to unpack some of what we're seeing in the details there.

Sure. And Simeon, to your point, yes, SG&A was higher, it's up 7% in Q1. And that's indicative of the investments that we had outlined during the financial community meeting. So there's no surprises. We're making the right investments to drive sustainable long-term growth.

And I'll emphasize, it's early in the year. We're 1 quarter down. There's still a lot of work ahead of us. So we've guided and flowed through the upside you saw in Q1 EPS to sort of the high end of the range that we provided earlier and we'll continue to update as we go along. But it's early in the quarter. I mean, our recognition is we have more work to do through the balance of the year.

And to Michael's point, driving sustainable growth is so critical for us, getting productivity on a continuous basis and then having top line growth that drives leverage will fuel our margin expansion over time.

Our next question comes from Rupesh Parikh with Oppenheimer.

So just going back to the partnership, a lot of success during Q1. Just curious how you feel about the lineup of partnerships as the year progresses? And then any sense of whether these partnerships have led to a new customer acquisition.

Yes. I'm happy to start and Cara, feel free to share some of the important role that partnerships have played and will continue to play for us. One of the I think perhaps for us, most enjoyable parts of the first quarter as you think about what we've done so far this year with some of those limited time-only partnerships.

I mean, I think I've had the pleasure of waking up to lines outside of Target stores before we open 3 times so far this year. And they were around the unique drops that we had with Roller Rabbits and Parke and Pokemon most recently. That's just an A1 example in targets that are best, we're bringing style and design and a value that you can only find a target around brands our guests love.

And so -- now that was a fun highlight in the first quarter that I think shows the strength of the pipeline of partnerships that we have. I'd probably get in trouble with the team if we got too far over our skis and sharing what's coming for the balance of the year, but you can expect partnerships to continue to play an important role.

Cara, anything you'd add?

Yes. I would just layer on, as we talked about at Financial cementing, we've had a ton of success over decades with our partnerships, and we're working on increasing the cadence and not all of them have to be large and some can be small and drops. And so as you think about what we did in Q1, really leaning into a couple of really fun socially driven brands like Parke and like Roller Rabbit, we're really exciting.

When you think about Pokemon and what we did there. No other retailer is thinking about multi-category and pop tarts to starter jackets to Caboodle's, really thinking about the power of fandom. We actually had one other line drop, which was our K-Pop-BTS launch as well. So we actually had 4 launches in Q1 where we drew lines out of our stores. So what we're working on is consistency. It goes always on traffic-driving buzzworthy moment. And I think Q1 is a great indication of what you can expect from us moving forward.

Great. And then my follow-up question is just on Beauty. A lot of momentum in the quarter. It looks like the spring resets are going well. As you launched that beauty studio, what are you seeing so far from vendor interest? Like how is that progressing versus expectations?

Yes. We're super excited about the change that will unfold as we get to the back half of the year. And so a lot of work leading up to that transition moment later this summer. I think more to come on some of the details as we get closer there. But as you know, Rupesh, the Beauty business has been a source of strength for us for a long, long time. I mean we've got 10 years running of growth in beauty.

Our ambition is to just truly be an incredible beauty destination for our guests and our working beauty studio play an important role there. That's another place where you'll see us do the right work on assortments to have loved brands. And you'll see us invest in experience. We know in a category like beauty, making sure that our service levels are equal to the rare air that some of our brands are is incredibly important. And so that's part of the plan as we as we have that launch later this year.

Our next question comes from Michael Lasser with UBS.

I think we're all trying to figure out how much of the first quarter performance was due to the actions that Target has taken versus exogenous variables like tax refunds. So if we look at your first quarter performance at a 5.6% comp versus what your guidance implies for the rest of the year it suggests around a 1% comp, admittedly, you just flowed through the first quarter outperformance, but still, should we take the difference between those 2, 5.6 versus 1, is what you think with maybe some unique factors to the first quarter?

And alternatively, maybe another way to get at this is you have great data. How much are you seeing longer loss guests come back and that would be a sign that maybe some of the boycotts are diminishing and guests are giving you another shot.

So Michael, it's a fair question. I'd probably stop shy of the precision implied in the math that you were doing there. because I think a few things are true. As we look at the consumer, we see a consumer that continues to be resilient. And they had some headwinds and tailwinds they were managing in the first quarter. And so we'll continue to watch those closely.

We saw strength coming from traffic. We saw strength that was broad-based across categories and guest demographics. So those are all positive signs for us as we look ahead for sure. But importantly, we saw real change on the heels of where we may change to what we were offering and how we were selling it. And so some of the examples you've heard already from Cara are when we're making change, we see the consumer response.

And so there's things that will be out of our control with respect to the path to the consumer in the quarters and years to come. What is in our control is clarity of strategy and how we execute against it. And on that front, we're encouraged by what we saw in the first quarter.

Okay. Going back to -- just as a quick follow-up, coming back to your guidance. You raised your top line expectation and again, probably just flowing through the first quarter outperformance, you simply pointed to the high end of your EPS range. So are there some incremental costs that you had to factor in from areas like freight and other energy-related prices that are acting as an incremental headwind and to what degree are the changes in the tariff situation is going to provide a bit of an offset.

Yes. Thanks for the question, Michael. Jim, feel free to add any more color. But our best view of some of the elevated costs that we've certainly seen is included in that guidance. And the thing I'd probably just reiterate is we're a quarter into the year. And so we know we're at our best when we position the business slightly cautiously.

And we've I've been on these calls with many of you long enough that we've seen the impacts and we haven't taken that posture in the business as well. And so we think that's a prudent way to be planning the business. You heard us say we'd rather be chasing inventory a little bit than canceling inventory. And so that's on our mind as well as we think about making sure that we're a quarter in to a quarter we really -- to a start of the year that we're really pleased with, and we still got 3 quarters of the year in front of us.

And I can add just more, Michael, on the top line. The way I would think about the top line guidance is approximately half of that increase of the full year guidance was driven by what we saw in Q1 and call it the balance for the rest of the year.

As Michael mentioned, I won't get too precise about the numbers, but we did have the easiest comp in overlap from Q1 of last year. So we're facing a little more difficult comps balance of the year. But I wouldn't read too much into that. I mean we're one quarter in. So we'll update that accordingly as we go.

Operator, I think we have time for one more question.

Our last question comes from Chris Horvers with JPMorgan.

So I wanted to touch on the guidance as well. Do you -- what gives you the confidence to raise to the upper end of the range at this point in the year? I know Jim, last year, talked about a baseline of $8 to $10 in earnings that you could eventually grow off of. So as you sit here today, is the message simply like we have visibility on the cost side. We have that line of sight in our inventories clean. So we're just getting back into the range and then there would be maybe some variability around sales. So -- or is it that you're making, I guess, a greater bet in terms of the gross margin outlook, whether that's keeping inventory clean and having full price sell-through?

Yes. I don't think -- the way you characterized it, I think, is probably fair. We entered the year with a pretty clear eye view of where we wanted to make investments. And the thing we have with 1 quarter under our belt is to see how the early path of those investments is starting to play out. And the response we're seeing to where we've made change gives us encouragement as we look at the balance of the year. And we've got a lot of work in front of us.

We laid out a really ambitious plan for this year. It will be the first of a series of years of ambitious plans would be my guess. And we're 1 quarter into that. And so maybe we'll wrap with just a huge thanks to the team that's doing the work. We know in retail, there's no shortcut it's real hard work against the clear strategy that's going to get the long-term growth that we want over time. And I couldn't be prouder of the team's work in the first quarter to take a big step down that path in the early parts of 2026. I'm really excited to do the work over the balance of the year to keep that momentum going.

So with that, I think we'll wrap this quarter's earnings call. A big thanks to everyone for joining, and we'll circle back in 90 days.

Good morning, everyone, and welcome to our 2026 Financial Community Meeting. I'd like to thank everyone who's here with us in Minneapolis today, and welcome everyone who's here with us online. Michael will kick off in a couple of minutes, but first, I have a couple of important disclosures. First, 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. And second, in today's remarks, we refer to non-GAAP financial measures, including adjusted earnings per share, adjusted operating income and adjusted SG&A expenses. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measure are included in our financial press releases, financial presentations and SEC filings, which are posted on our Investor Relations website. With that, I'll turn it over to Michael.

Welcome, everyone. We're thrilled to be hosting our financial community meeting from our hometown of Minneapolis this year, and we're going to dive right in because we've got a lot to cover. It's a new chapter at Target. And today, Cara, Jim and I will share our plans for what's next, starting with a clear definition of Target's place in retail, followed by the 4 priorities that will guide our path forward and the choices that underlie each. And finally, how those choices translate to growth. Our plans build on what's always been true about Target when we're at our best. But let me be clear, that doesn't mean dwelling on the past. Instead, we're moving forward with urgency and a firm focus on Target's unique place in American retail. That means delivering the style, design, experience and value consumers crave and delivering the consistent performance we all expect.

And we've already started. We've updated our organizational structure and leadership team in service of simplicity and speed. We've added new directors to our Board who bring deep expertise in style and design and who have experience with the type of transformational change we're driving. And as we shared in this morning's press release, sales trends have improved in recent months, showing early signs we're on the right path. All of this stems from important work we've done to clearly define the lane we occupy in retail, which I'll come back to in just a minute, and the choices that position us to grow and win. These choices translate to very intentional investments, investments in categories and capabilities where we know we have an edge and that matter most to our guests and our business. So if you take away one thing from today, it's this. Target's new chapter is all about fueling growth, and we'll do so by playing our own game and making big changes to delight our guests.

Now these types of changes don't happen overnight. We have work to do, and there are no shortcuts, but we're excited to do the work. And it's already underway. Many changes guests will see and feel right away. In fact, if I were to step back and draw a heat map of the entire store, highlighting where we're making changes this year, you'd see more change to what we sell and how we sell it than you've seen in a decade. I won't steal Cara's thunder, but know that we're playing to our strengths from categories where we're consistently leading like beauty to others like home where we know we can win and which we're reimagining to achieve greater relevance and differentiation. That means pairing products with experience in a way that only Target can. And all of it is rooted in our learnings of what's worked, what hasn't and what will drive this new chapter of growth. So let's talk about what will be different moving forward.

It starts with clarity about the retailer we are and the experience we create for our guests. It's about doing the work to build connection with new guests, deepen relationship with existing guests and earn back trust with guests we've disappointed. That work starts with listening actively and attentively across all of our stakeholders and using their input to shape our path forward. We've been gathering feedback from consumers, from those who love us to those who don't in order to gain a deeper understanding of the role Target plays in their lives. We've been meeting with founders of small businesses who have grown their brands with Target and want other entrepreneurs to follow in their footsteps. We've also been meeting with national brands and design partners to reinforce our commitment to style, design and value. We've been talking to our team about what they need in order to serve our guests well.

And as a result, we're moving quickly to simplify work, speed up decisions and empower our merchants and store teams. And we've been talking to all of you here today to understand what's top of mind for investors as we get Target back to growth. That collective input has crystallized what we do well, where we have work to do and most importantly, the lane we're uniquely suited to own and win in retail. That lane begins with our purpose of helping all families discover the joy of everyday life and we'll bring that purpose to life by being the most delightful experience in retail. Now those aren't just words. Delight is a critical filter for decisions and informs our actions going forward. It encompasses what we consider foundational to a great shopping experience, convenience, speed, price, yet consumers consistently say they want and expect more, especially from Target.

So delight is our standard. That means getting the basics right, sharp pricing, strong in-stocks, wicked fast same-day delivery. Yet our bar is higher. We want to spark an emotional connection. So shopping isn't a chore, it's a joy. And that spans everything we do from the products we sell to the experiences we create, from the design of our shopping carts to the way we greet our guests from making our marketing campaigns to our community partnerships, all of it ladders up to a brand that's designed to inspire, invite and delight. So clearing this bar requires making choices about how we will show up as a retailer because for Target, differentiation is how we win, and Target is built to be different. We're doubling down on our design ethos across our products and experience. We're leaning into curation with an acute focus on blending style with value. And we're creating an experience that feels elevated, seamless and importantly, human.

And we're getting crisper on the guests who power our growth. These guests are united by mindset. They value style and design, seek ease and simplicity, and they don't want to settle for anything that feels ordinary or joyless. They move fast. They're digitally fluent, and they gravitate toward brands that mix practicality with fun and personal expression. We refer to this group as busy families, and it's one where we see outsized strength in sales and loyalty. So we're leaning in here, knowing that when we serve busy families well, we create durable long-term value that has a positive ripple effect for all Target guests.

That's the foundation, a clear purpose and ambition rooted in joy and delight, clear choices that differentiate us and play to our strengths and a deeper understanding of what busy families need and expect from us, which brings me to the 4 priorities that underpin our growth strategy. 4 priorities we're advancing in parallel because of how they work together to drive growth: leading with merchandising authority, elevating the guest experience, accelerating technology and strengthening team and communities. I'll spend most of my time today on the first 2 because that's where guests will feel change the most. Then I'll touch on how technology, team and community power it all. So let's start with merchandising authority. Earlier this year, I spent some time with the team who manages our corporate archives. This collection is pretty unreal, spanning artifacts from our early department store roots to products from every design partnership we've ever had.

Now I share this not as a point of nostalgia, but as a reminder of who Target is at our best when we're setting the bar on style, when we democratize great design, when we're pacesetters of what's cool and what's buying. That's what merchandising authority means, and it's what we aspire to deliver across categories and brands. At its core, merchandising authority is about curation and playing to our strengths. Target is not an everything store. That's not what guests want from us. They want a strong trend-forward assortment that they can trust to deliver quality and value. And that's exactly what we do at Target when we're at our best. So we're making choices. In assortment, we're doubling down where we are strongest and where guests tell us our right to win and grow is highest.

An early template for this approach is Fun101. This is a multiyear transformation from Hardlines, which many retailers sell to a more immersive trend-forward approach to sports, play, gadgets and pop culture. This is an area where Target has a right to win and our guest base loves to shop. Whether it's bringing style and sport together with a fan central destination or an affordable plush wall, so families can get fun toys at a great price, you're going to see us infuse our assortment with newness, value and a fresh experience to match. And it's not just Fun101. We're taking this approach to categories like baby, home, food and beverage and beauty, repositioning our assortment and our floor plans to bring newness to all 2,000 stores this year. In other words, we're giving guests more reasons to shop us more often. And as we always do, we're using their feedback to iterate, refine and keep getting stronger over time. This will be a journey, and it starts with a lot of change in 2026, but it doesn't stop there. In fact, the team is already actively planning for 2027 and beyond.

Now to priority 2, elevating the guest experience. Delighting our guests always starts with product. But a huge part of what drives guest love for our brand is the experience we create around those products. And for many guests, their experience starts with discovery on social and in search. This is where our scale allows us to lean in and invest at the top of the purchasing funnel so that we reach consumers in all the ways they're shopping today, whether it's connecting with consumers on social by partnering with creators who share our commitment to style, design and value or our investments in AI to make search more conversational, almost like having a personal shopper or the way our media business, Roundel, seamlessly integrates into the shopping experience, so guests find products that feel just right for them.

That's discovery at its best, and it's a critical entry point for building trust, which in turn builds loyalty. And loyalty is an important growth engine for us. The reach of our loyalty program, Target Circle, gives us critical information about how consumers shop, enabling us to deliver an experience that feels more relevant and tailored. And when guests feel like their experience is personal, they shop with us more. Members of our loyalty program, Target Circle, spend 3x more on average. And those enrolled in Target Circle 360 with unlimited same-day delivery spend 7x more. These guests account for more trips, too. As with many of the updates I've shared today, work is already underway on what's next, and Cara will share more shortly. Digital discovery and loyalty are essential to an elevated guest experience.

And especially for Target, I want to emphasize that our stores are every bit is essential. In many ways, they are truly the heartbeat of our experience. Guests tell us they love the feeling of walking into a Target that's clean, welcoming and easy to shop. In fact, one of the greatest compliments we've ever received is when guests refer to their local store as my Target. That possessive speaks volumes about the role our stores play in building lasting relationships with guests. I challenge you to think of any other retailer or company for that matter that sparks the same sense of ownership and care. Now you heard me talk earlier about delight is our standard. We need our experience to delight guests every time. And to be crystal clear, there's real work for us to do here. That's why we're strengthening reliability and service end-to-end as well as making meaningful investments in payroll and training that our teams need to consistently deliver for our guests.

And while we're not yet at the bar I have for us, we're seeing progress. Our relentless cross-company efforts on reliability have produced ongoing year-over-year gains in on-shelf availability, and you'll see us continue to focus on improvements here. We're leveraging technology to support our company's digital growth and enhance the in-store experience. That balance has been skewed in recent years by explosive digital growth. But today, we're using technology to keep momentum building in our digital business and simplify work for our store teams so they can spend more time serving our guests. And we're making a more than $2 billion incremental investment across the business this year, including an additional $1 billion in CapEx to support new stores and remodels and another $1 billion to elevate the guest experience. Jim will provide more detail in a few minutes, but all of this is designed to elevate how guests experience Target every time they shop with us.

The next 2 priorities, accelerating technology and strengthening team and communities are just as critical, and they work hand-in-hand powering the first 2. In fact, we've touched quite a bit on technology already today. It's woven into everything that we do. And that's because at Target, we don't chase technology for technology's sake. We believe in technology with a purpose. In our case, making shopping more joyful, and it should directly benefit our team and our guests. So whether it's making it easier for guests to find the perfect product when they browse our aisles or putting technology into the hands of our team so they can better serve our guests, our tech investments are all in service of our ambition to be the most delightful experience in retail. The same can be said for why we prioritize strengthening team and communities. This has always been core to who we are, and it will continue to be at the center of this new chapter for Target.

For all the team members tuning in today, thank you. Everything I've outlined today, the resilience, the progress, the boldness is because of you, team Target. And our ambition to be the most delightful experience in retail begins and ends with you. I'm so proud to lead this team and excited about what we are building together. And what we are building extends far beyond the walls of our stores, our supply chain facilities and our offices. Target believes in the power of community and turns that belief into tangible action, like for 1 million hours our team volunteered last year, which is the 10th time in our history we've hit that milestone. That includes our Bullseye Builds with Community Program, which pairs our commitment to volunteerism with our design expertise to meet the needs of local neighborhoods. We recently announced a planned investment of $1 million to bring this program to 13 community spaces this year.

Action also includes the 5% in profits we give back to communities in products, cash and through the Target Foundation. This is something we've done for 80 years and today translates to millions of dollars each week. These investments make our communities stronger and more vibrant. We'll also continue to invest in our team so that every team member can grow a meaningful career with us. This includes pay, benefits and signature programs like Dream to Be, which provides tuition-free education assistance for our team. More than 12,000 team members have earned degrees and professional certificates through Dream to Be to date, a testament to the growth and opportunity that we value so much at Target because when our team thrives, so do our guests. And when our communities thrive, so does Target. So let's step back and turn to the bottom line and what all this means to Target's future.

A thriving growing Target is the only goal and will be the focus of this team every single day. A growing Target is a great place for our team and our partners and is the only path to creating value for our shareholders. The questions I know are top of mind for many of you. One, what's Target's winning path? And two, what will it cost? The answer to number one is when we play our own game, we're confident the plans we've laid out today position Target for sustainable growth. Our path to growth and share gains is unique to Target and is fully within our power to drive. And that confidence is justified because the early wins we're seeing directly align to where we've committed to do more. And the answer to the second question, it does require investment.

We have work to do, and Jim will get into the details shortly, but a clear strategy leads to sharper focus. And when you couple that sharp focus with the work the team is doing to find efficiency, we're able to make real investment against the work. You'll see us make the changes in investments in the areas that matter most to guests and ultimately win trips, build baskets and drive growth. And that's the bottom line. Target's new chapter of growth begins this year because we're clear on Target's place in retail, we have 4 priorities that will guide our path forward, and we're making strategic choices and investments across the business to drive performance. I'll now turn it over to Cara and then to Jim to talk more about those choices and how they translate into long-term profitable growth.

Hello, everyone. Thanks, Michael. So I've spent my career at Target at the intersection of merchandising, experience and growth. First as a merchant for about a decade across our frequency and discretionary businesses. Then over the past 5 years, leading our digital marketing and loyalty ecosystem as our Chief Guest Experience and now as Chief Merchant. And that connection matters because merchandising, it isn't separate from the guest experience. It's where the experience begins. It's the choices that we make. It's how we show up in our stores and online, and it's how we earn repeat visits. And I will be direct. Our performance over the last few years has not met expectations, and that is on us. We lost the clarity and the discipline that make Target a place loved by busy families. So the enterprise priorities that Michael shared, they represent clear choices about what we're doing to make Target the most delightful experience in retail.

And my focus is to operationalize these priorities in clear and measurable ways. That means sharper assortment decisions, leading with style and design authority and exceptional value, simplifying where we need to simplify and curating with greater clarity. It means delivering true differentiation, elevating innovation and emerging brands, strengthening own brands and accelerating newness that keeps Target distinct. And in close partnership with Lisa, Adrienne and our stores teams, helping support an elevated experience and execution across our stores so that what we sell and how we present it consistently reflect the Target brand, all reinforced by a digital and loyalty ecosystem that connects discovery to repeat engagement. In short, clearer choices, stronger authority and better execution. So let's start with merchandising authority.

As those of you joining us in Minneapolis saw this morning, this is where our style, our design and our value proposition become tangible and where we're making deliberate choices to differentiate. We are rebuilding legacy strengths. We're accelerating momentum in areas where we're seeing progress. And we're disproportionately investing where consumers tell us we have a distinct right to win. And in everything that we do, we're going after opportunities to drive a stronger, clearly Target point of view. Over the next few minutes, I'd like to discuss the changes that we're making in merchandising to deliver on that commitment.

Specifically, I'll share how we're reclaiming our style authority in home, how we're getting faster with style and culture in our apparel and accessories and Fun101 businesses, the important work this year to accelerate our path as a beauty destination, creating what's next in food with a style-led identity that's distinctly Target, leveraging the power of our multi-category assortment to lean into wellness and evolving our baby business into a category that's fun and inspiring and that builds lifelong relationships with new parents. So let's start with home. This category is foundational to the Target brand. Having led this business before, I understand both its potential and the discipline required to win here. Home is where our design ethos first became tangible, but it's also a space where we've lost our way. You see that in our recent results. And we have a lot of work in front of us.

Transforming this category will be a multiyear journey. But we know that reclaiming our authority in home starts with clarity and conviction in pursuit of a simple ambition to offer the most stylish design-forward home products at accessible prices. So we are going category by category to reinvent key areas that have not been touched in years. As an example, by June, we'll have overhauled 75% of our decorative accessories assortment. Think trays, throws, candle holders, greenery and full florals. And by the fall, we'll have touched more than 3/4 of our top-of-bed assortment and more than 80% of kids home. At the same time, we're also accelerating assortment on our third-party marketplace, Target Plus. This allows us to move with speed and deliver the style and assortment breadth consumers are looking for in categories like furniture, mattresses and rugs while limiting our inventory liability.

We're also streamlining our own brand portfolio and doubling down on our largest and most powerful home-owned brand Threshold. This summer, we will relaunch Threshold, and we'll introduce dedicated shop-in-shop destinations starting in 200 stores. These elevated spaces are designed to feel like specialty environments, reinforcing quality and strengthening brand equity. We are not adding complexity. We're getting back to what differentiates Target, sharper curation, clearer storytelling and a compelling presentation in stores. So own brands play a big role in how we deliver style and design. And so does the design collaboration strategy we invented more than 25 years ago. But culture moves faster today, and so are we. So in addition to a few big collaborations a year, we're introducing a new style series in apparel, which gives us a steady drumbeat of culturally relevant, socially driven brand drops.

You'll see a consistent cadence of tightly curated launches designed to create urgency to shop, drive traffic and keep Target at the center of culture. Our guests expect to find what's new and what's next on every trip to Target. This allows us to meet that expectation with greater speed and flexibility. And that commitment to speed that extends beyond collaborations. You're also starting to see it in our everyday assortment. Some of you heard this a little earlier, and I'll share it again because it is so important, our fast apparel and accessories model. Cutting the amount of time it takes to get a product from design to our stores and our app from over a year to, in some cases, a matter of weeks, that gives our teams more flexibility to read the market and respond to emerging trends. You're seeing this right now in women's swim, where Target holds the #1 market share position.

We maintain that position by leveraging our speed-to-market process, giving us the insight that we need to deliver the right product at the right time and at an incredible value. You'll start to see us use this model in other areas of our businesses this year. Style made us famous. Now we're pairing it with speed to drive greater relevance. So Target is at our best when we're part of culture, not chasing it, but anticipating it. A year ago, we shared with you our decision to reorganize our Hardlines business into Fun101, celebrating the power of a category that millions count on to create joyful moments for themselves and their loved ones. And based on the early momentum we've built, our Fun101 team is making additional space and assortment investments in fandom categories, the things that our guests tell us they absolutely love, including sports, pop culture, trading cards and more.

Through our new PoP gateway destinations, we're creating dedicated in-store platforms to celebrate big cultural moments from seasonal fandom to viral trends. We're moving beyond end caps and temporary displays in the aisles to create a reliable permanent space designed to drive traffic by making Target a discovery destination for cultural moments throughout the year. Since setting these gateways in September, we've more than doubled traffic in fandom categories. We're also going after a significant opportunity in sports, which are a huge part of culture with a completely reimagined Fan central. We're expanding shop-in-shops, elevating presentation and strengthening our license assortment, all in service of creating a premium immersive experience for fans. This is another clear structural decision designed to position Target as the destination for culture and fandom.

So beauty has delivered more than a decade of growth for us. And when I led this business from 2017 to 2019, we really started to see the role of beauty shift to something deeply personal for our guests. Today, it is one of our most powerful traffic and margin-driving categories. And we know the 4 things it takes to delight our guests so that we can win in beauty, the right product, including stronger prestige and emerging brands, an elevated in-store experience that inspires discovery, knowledgeable service that builds confidence and loyalty that keeps guests engaged and coming back. In 2026, we are leaning into all 4. We are expanding our prestige assortment, including new and emerging brands. We're piloting an enhanced service model in select stores right now with team members delivering an intuitive and genuine experience, helping guests discover newness, sharing the latest trends and answering questions about products.

We're integrating beauty more directly into our loyalty strategy with category-specific rewards that increase frequency and deepen relationships. And this fall, I'm thrilled to share that we will introduce Target Beauty Studio in 600 stores, a new immersive destination, which will establish Target as a true beauty authority by pairing specialty level presentation and service with the accessibilities our guests expect from us. Target Beauty Studio represents a structural investment in the category, not just a new space, but a coordinated approach to product experience, service and loyalty. Now food and beverage is one of our most important categories and a powerful trip driver for busy families. We've built this business for how families shop today. It's curated. It's digital first and fast. We invested early in same-day services, and our digital grocery capabilities are deeply integrated in order pickup, Drive Up and same-day delivery.

Today, Target is the fifth biggest digital grocer in America. And we'll continue to innovate in the digital experience and grow Target Circle 360 to drive further separation in digital grocery. At the same time, we're focused on what's next, strengthening Target's unique identity when it comes to food. We are not trying to be an everything grocer or just another grocer down the street. Instead, we're building a truly distinctive grocery destination where emerging brands, wellness and owned brands intersect. Put another way, we're bringing even more of our style and design authority to food for families looking for fun trend-forward options, whether it's for lunch box snacks or a Tuesday night dinner. That's why we're delivering newness at twice the industry's rate.

Last year, newness drove $2 billion in food sales, and we're on track to double the number of unique items in our assortment over the next 3 years because 40% of our guests tell us they're looking for something new when they shop food at Target. And when we deliver trend-right newness, consumers respond, as we saw last year in nonalcoholic beverages with significant newness propelling the category to a 6.5% comp. And we're not stopping there. In May, we will become one of the first national retailers with no certified synthetic colors in any of the cereal that we sell, a decisive step that reflects where families are heading and where Target intends to lead. And we will continue to grow Good & Gather, which is on pace to become our first $4 billion owned brand, leaning into innovation and driving awareness for this powerful brand. We're also investing meaningfully in the in-store food experience because shopping for food at Target should feel distinctly Target, delightful, joyful, unlike what you'll find anywhere else.

One example is how we're expanding sampling, particularly on weekends to create more opportunities for guests to discover something new, to try emerging brands and engage with our assortment in a way that feels energetic and experiential. Food at Target is a large and growing business. We've grown food by $9 billion since 2019, but scale alone is not the strategy. The next chapter is about sharpening our distinctive identity through curated discovery, own brands, wellness leadership and an in-store experience that makes food feel intentional, not transactional. Over nearly a decade, we've invested in supply chain, store expansion, remodels and digital integration to build scale and capacity. Now we're accelerating our differentiation because food drives trips, trips build loyalty and loyalty drives durable growth across our entire assortment.

And when we think about driving more trips and deepening relationships, health and wellness is another space that's critically important. Already, 70% of our guests are shopping wellness categories at Target. So this year, we're expanding our assortment with thousands of new items and more exclusives than ever before. And what separates Target is that wellness is a multi-category effort, integrated across food, supplements, beauty and active because wellness is personal. Our leadership in emerging brands, our style and design-led curation and our commitment to value makes healthier choices feel achievable. Last year, our wellness businesses combined to deliver a 4.6% comp. And during January resolution season, wellness categories accounted for $2 billion in sales. And as we invest in these businesses, Target is uniquely positioned to serve busy families and to build trust and credibility in a more holistic way in this growing space.

Finally, before I move into experience, I want to talk for a moment about the baby category. This is such an important life stage and one of the clearest ways that we build long-term relationships with busy families. When a family welcomes a new child, where they choose to shop matters. And they pick Target, not just for the products that we sell, but for our experience. An environment that's clean, bright, friendly and safe, a perfect place for baby's first trip out of the house. This is a category that's gone untouched for years, and there is so much potential in front of us. So in 2026, we're elevating our baby experience with deliberate investment. That includes new dedicated in-store destinations anchored by gift beacons and curated discovery zones that simplify decision-making and create a shopping journey that inspires confidence. We're expanding Cloud Island, one of our most trusted owned brands.

We're creating a premium boutique style baby experience, featuring partnerships with brands like UPPAbaby, Bugaboo, Doona and Stokke, strengthening our authority across a range of price points. And we're testing a new baby concierge service with specialists helping guests as they navigate this life stage. All in, this is about earning trust early and strengthening relationships that extend well beyond the baby aisle and beyond the baby life stage. So our merchandising authority is a huge part of what differentiates Target. Across the examples that I shared, I hope you saw that style and design, they don't live in a single category. They're critical to everything that we do. And that's driving shifts we're making in categories like food and beverage, wellness and baby to lead with a distinctive point of view. The way we're leveling up our beauty experience to make Target an even stronger destination in this growing space and the way we're leaning into style and culture in home, apparel and Fun101 to make Target -- shopping at Target irresistible.

Now as we turn to our second priority, elevating the guest experience, I want to discuss the moves that we're making in the near term to help bring our assortment changes to life. And I'll start with our stores. Because for millions of people, even in a digitally led world, stores are the single most tangible expression of our brand. And for decades, they have set Target apart. But we've heard clearly from our guests and from many of you that our in-store experience has been inconsistent. Too often, we're cluttered, out of stock or even transactional. So we're making improvements, first, upstream at headquarters and in our supply chain facilities to remove complexity for our stores. And we are resetting our stores' operating model this spring, organizing around 3 clear principles. First, we're easy to shop, zoned, organized, in-stock, clean and fast. Second, we're inspiring with disciplined visual presentation and strong category storytelling.

And third, we're friendly, grounded in a consistent greet, help, thank framework. This isn't just a philosophy. We're backing up our commitment to stores with investment, as you heard from Michael, because we've seen where we've tested payroll investments, results improve, better guest experience metrics, sales lifts, particularly in apparel and home, gross margin expansion and growth in store originated sales. So we're scaling what works because when stores operate at a high level, that lifts everything up. And not only are we elevating our foundational experience, we're also continuing to innovate. In December, we unveiled a new concept store in New York SoHo neighborhood, showcasing the absolute best of Target style and design. Guests love it. And what we're seeing validates the power of merchandising authority, the sharper curation that is inspiring more cross-category shopping.

This gives us further confidence in our path forward, leading with the right style and design-led assortment and inspirational experience and the differentiation that Target is known for to fuel discovery and drive growth. So a year ago, I stood on this stage and promised we would modernize Target's digital and loyalty ecosystem, making it more personalized and more intuitive. Since then, our team has transformed the app experience, strengthened our personalization capabilities and continued scaling Roundel, Target Plus and Target Circle 360. Together, these capabilities form our digital growth flywheel, and they are driving consistent growth and deeper engagement across our ecosystem. Today, our AI-driven personalization engine powered by Target Circle generates billions of dollars in incremental sales, delivering targeted offers and rewards that increase engagement and lifetime value.

Target Circle 360 continues to perform strongly by leveraging our fulfillment capabilities and reinforcing the convenience that busy families rely on. Overall, same-day delivery was up more than 30% last year, and our Target Circle 360 membership doubled. We are pleased with our momentum here, and members continue to shop more frequently, spend meaningfully more and engage across more categories than nonmembers. This is a strength that's fueling our food and beverage business. And this year, we're building on that strength. Loyalty is a constantly evolving space. We continue to move with our guests. For example, we've seen real traction with personalized games and rewards, allowing guests to earn dollars for their next visit and to encourage frequency to drive deeper engagement. So we're expanding our focus on personalized rewards this spring.

We're also offering more member events like Target Circle Deal Days and introducing experiential benefits, including category-specific rewards in beauty and simple moments like Starbucks offers to enhance in-store visits and drive incremental trips. And what we are doing in 2026 will guide even more change in our future as we learn from our guests and work to make our loyalty experience simpler and even more differentiated. The foundation is strong. What we're doing today is all about refining and scaling the flywheel to unlock even greater impact because when product, stores, digital and loyalty operate as one system, we create durable relationships with busy families.

So 2026 is a year of focused change for Target, not change for the sake of change, but disciplined choices about where we will compete and how we will win. We know who we are. We're a style-led design-led forward retailer that delivers value for busy families. And when we operate with clarity with sharp assortment decisions, higher standards in our stores, a distinctive food proposition, clear authority in style-led categories and an integrated digital and loyalty experience, that's our distinct lane. So we're making clear choices and deliberate investments to win there and positioning Target for durable long-term growth. Jim?

Thanks, Cara. Now before I dive into the details, I want to get to the punchline right upfront. Behind the scenes, we've been working hard to clarify our strategy, and that work is guiding the choices and investments we're making in our business, including planned incremental investments of more than $2 billion back into our business this year. And while it's still early and there's much more change ahead of us, we're already seeing clear signs that our work is paying off. As a result, I'm very confident in our ability to get back to profitable growth this year and deliver strong returns to our shareholders in 2026 and beyond. With that context, I want to spend a few minutes recapping where we've been and how that's been a platform for growth this year. And while last year's financial results were far from what we expect to deliver over time, I'm proud of how the team performed in the face of multiple challenges.

After we saw an unexpected top line slowdown in last year's first quarter, we provided updated guidance in our Q1 conference call, and our team delivered against that guidance for the remainder of the year while continuing to invest in our capabilities and preparing our business to deliver improved performance. Last year's gross margin rate was down about 30 basis points from the prior year, which is strong performance given the fact that we face significant pressure from incremental tariff costs. Throughout the year, our team did an outstanding job of managing the business through our rapidly changing tariff environment, working tirelessly to mitigate the net impact. This allowed us to offer outstanding value on our differentiated assortment while also protecting our P&L. And importantly, we're entering 2026 with healthy underlying margin rates and appropriate inventory levels across our assortment.

As I mentioned in our Q1 call back in May, last year's financial results included nonrecurring tariff-related costs and inventory actions we took in the face of slower-than-expected sales. These actions put significant pressure on our adjusted earnings per share, which we don't expect to repeat this year. Notably, without these costs, our gross margin rate would have expanded last year. An important tailwind to last year's gross margin rate was lower inventory shrink, which delivered about 90 basis points of benefit and brought our shrink rate all the way back down to pre-pandemic levels. This improvement is a testament to the great work of our team, along with the industry and community efforts to combat retail theft across the country. Our team also demonstrated strong discipline in managing SG&A expenses last year as they found multiple opportunities to enhance productivity and efficiency.

As such, even as we continue to invest in wages and benefits, our GAAP and adjusted SG&A dollars were lower in 2025 than the prior year. And more importantly, the productivity and efficiency we gained last year will benefit our financial performance in 2026 and beyond. In last year's fourth quarter, we continued to benefit from strong cost control and efficiency gains. In addition, our gross margin rate benefited from year-over-year favorability in supply chain and digital fulfillment costs, driven by strong productivity efforts. Bottom line, in Q4, the team was able to grow adjusted operating income dollars and adjusted EPS over the prior year even on a decline in sales. GAAP operating dollars and EPS were down a small amount as we recognized about $90 million of nonrecurring business transformation costs, primarily driven by lease termination on excess office space.

In addition to encouraging profit performance, we also saw some encouraging early signs of top line progress in Q4. More specifically, following a soft start in November, sales trends accelerated meaningfully in December and January. And as we mentioned in this morning's press release, top line performance accelerated further in February, resulting in very healthy top line growth in the first month of this new fiscal year. Before I move on to our guidance, I want to provide some context based on the work we've been doing to refine our strategy and how that work has shaped the investments we're planning this year. In support of the strategic decisions that Michael and Cara outlined earlier and our goal to move our business back to sustainable growth, we're planning to reinvest $1 billion into our P&L this year.

This includes hundreds of millions of dollars to support additional store labor and training, along with expenses related to a planned increase in new store openings, growth in remodel projects and our most ambitious plan for in-store merchandising transitions in more than a decade. In addition, we're stepping up our spending on brand marketing and technology, including AI. I want to be clear, these investments are not onetime costs, but reflect an ongoing step-up in spending levels as we're investing to win and restore reliable profitable growth to our business. While $1 billion is a major investment for our business, we're funding it by leveraging a number of beneficial factors, most notably from the annualization of about $0.5 billion in onetime tariff and inventory adjustment costs in 2025. In addition, we realized about $200 million in savings from last year's headcount reduction at headquarters and the field team changes we announced in February.

Beyond those discrete savings, our team has adopted a continuous productivity mindset and identified a host of productivity opportunities that will deliver additional savings to the P&L. So with that context, I want to turn to our guidance for the year, starting with the top line. For the full year, we're planning to grow net sales in a range around 2% versus last year, including a small increase in our comparable sales. On top of comp sales, we'll benefit from the opening of new stores, robust growth and revenue from Roundel and from third-party sellers on Target Plus. In total, those sources are expected to add more than 1 percentage point of growth this year. I'll add that we're planning for top line growth in every quarter of the year. On the operating income line, we're planning for a 2026 rate that's approximately 20 basis points higher than the 4.6% adjusted rate we earned in 2025 as the savings opportunities I outlined earlier are expected to fully fund our P&L investments.

Altogether, based on our expectations for the top line and operating margin, we're expecting to generate GAAP and adjusted EPS in a range from $7.50 to $8.50 in 2026. The center of this range represents healthy growth of 5% to 6% when compared with last year's adjusted EPS. I want to pause and take note of the significant effort of the team, which has allowed us to enter this year laser-focused on delivering on our strategy and fully funding our growth-driving initiatives while also delivering modest margin expansion for the year. One other note, while we're not planning to provide ongoing quarterly guidance, I want to share some color on expected timing throughout the year as we're planning for stronger profit growth in the back half of the year based on 3 primary timing considerations. First, regarding shrink, we'll be lapping favorable inventory counts and the resulting accrual adjustments that occurred in the first half of 2025, which will then moderate in the back half of the year.

For the full year, we expect this year's shrink rate will be in line with last year. Second, this year's step-up in CapEx will drive higher start-up costs for new stores in the first half of the year. We're also expecting to see some pressure on the D&A line resulting from accelerated depreciation on a larger number of remodels, most notably in the first quarter. And finally, the expected timing of some SG&A expenses will be more front-loaded compared with last year. Based on these factors, we expect that our first quarter GAAP and adjusted EPS will be flat to up slightly from last year's adjusted EPS of $1.30, followed by accelerating performance later in the year. This expectation is entirely driven by the timing considerations I mentioned above and isn't reflective of underlying performance differences by quarter. Turning to capital deployment. Our priorities remain the same as they've been for decades. We first look to invest fully in our business in projects that meet our strategic and financial criteria.

Second, we look to support the dividend and build on our record of annual dividend increases, which we maintained every year since 1971. And finally, we look to deploy any excess cash beyond those first 2 uses to share repurchases within the limits of our middle A credit ratings. Regarding our first priority, we continue to expect that full year capital expenditures will be approximately $5 billion in 2026, up more than $1 billion from last year. While spending in support of our supply chain and technology will increase, the bulk of our CapEx will continue to be focused on our stores, which fulfill more than 97% of our sales. This year, we're excited about our plans to open more than 30 new stores and nearly all of them will be full sized. We're also ramping up our remodel program and expect to complete more than 130 full store remodels in 2026. We're expecting a strong return on those new store and remodel investments, just as we've seen in recent years.

I also want to note within this CapEx -- this year's CapEx plan, more than $1 billion will be spent in support of our food and beverage business. That's more than double the amount we've invested in this business in recent years. Because we offer a unique and differentiated assortment of national brands, owned brands and emerging brands, the food and beverage category has served as a reliable growth engine over time. Take last year, even in the face of a challenging top line backdrop for the company overall, our food and beverage sales continue to grow, led by mid- to high single-digit growth in both nonalcoholic beverages and candy.

Looking back over a longer period, food and beverage sales have grown more than $9 billion since 2019, translating to an average annual growth rate of more than 8% per year, far outpacing the rest of our assortment and the industry. Given that success and the critical role food plays in guest trips, it has earned more space in our existing stores, in our new stores and in our supply chain. Turning next to the dividend. We plan to recommend that our Board of Directors approve a small increase in our quarterly dividend later this year, resulting in another annual increase in 2026. And finally, once we fully supported our first 2 capital priorities, we plan to repurchase shares to the extent that's supported by our business results and forecasts and can be accomplished within the limits of our middle A credit ratings.

Now I want to spend a minute on our expectation for Target's longer-term financial performance. While we're planning for low single-digit top line growth in 2026, we expect that will further accelerate to the low to mid-single-digit range over time. With this level of top line expansion, we also expect to increase operating margin rates from the relatively low levels we've seen over the last few years. This rate opportunity starts with growth, which drives leverage on many expenses in contrast to recent years where we faced rate deleverage on lower sales. Beyond leverage, we're continuing to expect rapid growth in margin-rich revenue sources, including Roundel and Target Plus. And with robust capital investments in both our infrastructure and technology, we expect to further boost productivity and create additional fuel for our business.

We expect that the aggregate tailwind from these profit rate opportunities will exceed any P&L investments we will choose to make, allowing operating margin rates to increase. As we said consistently over the years, our goal is to move to the appropriate operating margin rate that will sustainably maximize profit dollar growth. And we plan to continue on that journey in 2026. We often get the question of whether we believe operating margin rates can get back to pre-pandemic levels. The answer to that question is a definitive yes. We believe the optimal rate is well above where we performed last year. And until we reach that optimal rate, we have the opportunity to grow operating margin dollars more quickly than sales over the next few years. So now I want to hit on something that Cara talked about earlier, which is the importance of differentiation in our business. It's a point worth reiterating, but I also want to approach it from the standpoint of the assets we can deploy in pursuit of that strategy.

As one of the largest retailers in the U.S., we benefit from scale, similar to our larger peers. But importantly, because of our differentiated strategy, our assets may look different than our competitors, but we have exactly what we need to compete and succeed. At the top of that list is our stores, which are well located, well maintained and generate a lot of cash. Excluding a very small number of exceptions, nearly all of our stores generate strong positive cash flow with the vast majority delivering double-digit EBITDA margins. Put another way, we have a very healthy base of store assets that benefit from the strength of our brand and differentiated offering while powering our digital fulfillment model. We have a strong pipeline of new stores planned for 2026 and many years to follow, which will allow us to reach new guests in neighborhoods that we currently don't serve.

Already today, our base of nearly 2,000 stores is located within 10 miles of 75% of the U.S. population, and we expect to further extend our reach over time. Beyond our stores, as someone who came from the packaged goods space, I have huge appreciation for Target's product design, development and sourcing capabilities, which allow our merchant teams to innovate and deliver newness at a scale across all 6 of our core merchandise categories. Because of these unique capabilities, our portfolio of owned brands generates $30 billion of sales, delivers superior gross margin rates versus national brands and reinforces our differentiated position in the marketplace. And finally, on the digital fulfillment side, our strategy and assets make us both fast and efficient. All 3 of our same-day services, whether we're talking about Drive Up, in-store pickup or rapid same-day delivery through Target Circle 360 are already wicked fast, and they're getting faster.

And importantly, we know that our guests love these services because they receive some of the highest Net Promoter Scores of any service we provide. As a result, our same-day services generated more than $14 billion in sales last year, accounting for 2/3 of our total digital sales. I want to pause on that. 2/3 of our digital sales are in services that fulfill same day, and we're investing to make those services even faster and more efficient. For the other 1/3 of our digital sales, which are in the form of brown boxes delivered to your homes, most of our volume is in markets where we've already enabled next-day fulfillment, and we plan to expand this capability into many more markets this year. I wanted to lean into this point. We are already fast. We are cost competitive, and we're continuing to get more efficient, and we own all the core elements of our digital fulfillment. And as I mentioned in this meeting a year ago, when you look at all the elements of our digital ecosystem holistically, digital growth is healthy for our business and for our P&L overall.

So when I take a step back from a strategic perspective, we have all the critical assets in place, and our plans are centered on investing in and better leveraging those assets in the years ahead. So let me close. As we've been working hard behind the scenes in the face of last year's challenging performance, I want to assure you of 2 things. One, we haven't stopped investing and have kept our balance sheet very healthy. And two, we've been doing a ton of work over the last several months to bring strategic clarity to our business while stepping up our productivity and efficiency efforts. As you heard from Michael and Cara, you're going to see a lot of intentional change and investment beginning this year. And I am confident that with those changes, we're well positioned to deliver profitable growth in the years ahead. With that, I'll turn it back over to Michael for some closing remarks.

Thank you, Jim, and thanks to all of you for spending time with us today. I want to close where I started. This is a new chapter at Target, and it's all about growth. We're clear on the lane we're uniquely positioned to own in retail, one where style, design and value shine through in everything that we do. You heard that clarity in what we shared today, a purpose that's brought to life by being the most delightful experience in retail, a sharper focus on the guests who power our growth and strategic choices that play to our differentiated strengths. Those choices define the 4 priorities we're advancing together, leading with merchandising authority, elevating the guest experience, accelerating technology and strengthening our team and communities.

And you've seen and heard how those priorities translate into action. In 2026, guests will feel bold change from us. And it's not change for the sake of change. It's purposeful change in the categories and experiences where we have a real right to win and where our guests are asking us to raise the bar. You also heard the level of investment and the discipline behind it. We're making a more than $2 billion incremental investment this year, which includes an additional $1 billion in capital for new stores and remodels, $1 billion reinvested in our P&L to elevate the guest experience. Now we know we have work to do, and the team and I are excited to get after it.

A big thanks to team Target for all their hard work leading up to today and for the passion they bring to their work every day. It's our team that's at the center of everything we've shared this morning, and I'm so proud of what we're building together. We're playing our own game. We're confident we're on the right path. And our team is moving fast to build on the momentum we're already seeing. We're excited about this new chapter and look forward to having all of you on this journey with us. With that, I'll ask Cara and Jim to join me back on stage so that we can get to all of your questions.

[Operator Instructions]

All right. I think John is going to play facilitator here with Justin. Is my mic good, guys, clearer? Great. All right. Let's go.

All right. Let's go ahead and kick things off with Spencer at Wolfe Research. If you can raise your hand, we'll get a mic runner to come over to you.

Great. I'm just curious if you could frame the $1 billion of investment that you're making back into the stores. What are the biggest buckets there? How much in labor? How much incremental do you need to invest there? And then also on the remodel program, like what are you guys thinking about for the out years? Do you accelerate from the 130 you guys called out? And what do you think the lifts look like there as well?

Yes. I'm happy to start, and Jim, feel free to build. As we look at that $1 billion of investment, I think it's just important to recognize that's a deliberate choice. It's actually where we started with the plan for this upcoming year to say, all right, if we've got a crystal clear strategy, what do we need to do to move the needle against that strategy? And what that yielded was the investments that we shared today. You heard Jim talk about hundreds of millions of dollars in store payroll and that's critically important. I mean you heard, I hope, the passion that we have to make sure that our experience is elevated and delightful every single time a guest comes to our stores.

We need to make sure that our team has the resources that they need to provide that experience and investing in payroll is a key way to provide our teams with the resources to deliver that experience. The other things that you saw on the slide that was up when Jim was talking, investment in brand marketing, investment in technology and AI that goes hand-in-hand with great experience. We know those tech investments pay off with stronger experience, whether that's digital or whether that's in store when we're setting up our team to free up tasks so that they can support our guests even more. And then maybe I'll just touch on remodels briefly because remodels are important. I mean I've been at Target 23 years, and I've seen our remodel program ebb and flow.

And so the commitment to make sure that we're remodeling our stores with pace is an important one because we know our guests tell us clearly, when we remodel a store and bring our latest and greatest experience to bear, the response is reliably strong. We see 2% to 4% lifts in year 1. We see lifts in year 2 as well. And so getting back to a more aggressive pace of remodels brings some of the stores that, frankly, are due for a little bit of love back up to our current and greatest thinking. And so the 130-plus full-size remodels that we do this year are a good step in the right direction. Not bad rule of thumb as you can expect us to remodel a store every 10 to 15 years, a little sooner if it's shopped heavier, a little longer, if it's not shopped as heavy. Jim, what did I miss?

I mean I'd just emphasize, we talked a lot about the importance of our stores. So you'll see the majority of our investments go towards the stores, whether it's actually in the guest experience and the store labor, but also in the transitions, the new stores and remodels, the bulk of that investment will go towards the stores that are more guest-facing as well.

The -- maybe just to build once more on that. You heard throughout what Jim and Cara shared. New stores matter a ton, bringing a new Target store because the store matters so much to our guests. I mean the thing we hear play back to us is the delight when we bring a new Target to a new market that doesn't have one or to a growing suburb where the drive is a little bit longer than you'd like it to be. We see real share of wallet gains when we open up a new store, and those financials are strong. Remodels, you heard me talk about. But the thing that should feel slightly different this year is the broad-based chain change coming. The 2,000 stores that we're going to do, there will be more newness across the assortment in those stores in the next year than we've seen in any year in the last decade, and that's a part of where that investment is going. There's a little CapEx and a little expense to make sure that we're making the change across assortment that you heard us describe and some of you got to see some of in person through the vignettes this morning.

And while the microphone is over there, why don't we go to Michael Lasser on the end.

Yes, it's Michael Lasser from UBS. A lot of the elements of the plan are not that dissimilar from what we saw at Target around 10 years ago. So what is different and what structures are being put in place in order to ensure that the growth here will be sustainable over the next few years and not just lead to a temporary improvement only to lead to a bit of a drop-off after that. And also, you've talked about some of the recent wins and gains. What are driving those? Because the plan seems to be only as strong as the weakest link.

So it's a good question, Michael. And I'll start by saying, like to be crystal clear, we're playing the long game. And to play the long game well in retail, you have to be focused on exactly who you are. And so again, if there's one thing I hope you take from today's conversation, we are crystal clear on how Target wins. That's a North Star that we'll hold on to tightly. That's not just a this year thing for the changes that start this year or even the changes we have in 2026. We're going to come back to knowing who we are in the years to come. And I've seen Target at our best. I've seen us when we're not at our best. The ingredients that have always fueled us at our best when we're design-led, when we're winning with differentiation and when our experience is top notch. And so if we keep pouring decision-making and investments against those priorities, I've got the confidence that we're building a foundation that won't yield just 1 month of good trends or 1 year of growth, but sustainable profitable growth over time.

Why don't we go to Kate McShane in the front row here next.

Kate McShane, Goldman Sachs. It seems like a lot of the changes that we saw this morning are coming post June. So I was wondering why we shouldn't think about the same-store sales differently by first half versus back half.

So Jim, you can add a little more on kind of what we're expecting quarter-by-quarter. But I'd think of the change is starting now and then building over the course of the year. I mean there are some categories where we've already gotten to see the early, early returns on some of the change that we've made. So beauty, if you walk our beauty assortment right now, it's set with 3,000 new items, 60 new brands and the early response to that type of change has been really positive so far from guests. I like to think of the year as us having these early proof points that thankfully are indicative of some of the change that we have planned through the balance of the year. And every category is going to move at a different pace. It will take us a little longer in a category like home to get to where we want to be, even though we'll have a great infusion of a reinvention of Threshold this year. But some other categories like beauty and food and beverage, we're already after it.

I would just maybe add to this coming in. We weren't able to share all the changes today, but we do have a consistent cadence as we think about that, the store changes to all 2,000 stores, places that we haven't touched in a decade. If you think about the back of the store, we haven't really remodeled and touched that floor pad in over a decade. Those changes are happening on a consistent cadence kind of throughout the year. And so to Michael's point, you'll continue to see that build. Some are already done, but much more is ahead of us, really starting now.

Just as we talked about like a continuous productivity pipeline, you should expect us to have continued newness in our stores and merchandising transition. So this is just an evolution that will continue. It's not just even about the second half, it's about 2027 and beyond. It's constantly renovating and refreshing what we have in the store.

And the other thing that you can expect that we'll be committed to is we'll learn. We're not going to get every single change right this year, but you're going to see change. And we'll iterate from there in the quarters and years that follow.

Great. Let's go to Simeon next in the front row, middle.

Simeon Gutman, Morgan Stanley. So if you look back at the financial performance of this business, it's been cyclical and somewhat variable. And I think a lot of that is due to merchandise authority that has waned at times. I know a lot of the focus is on recapturing it. And I think today's presentation makes a strong case for why you're going to recapture it. It's more on how do you keep it, which we've heard you're going to do X, Y and Z, but how do you change this company in order to do that X, Y and Z?

At the risk of being a broken record on this one, clarity of strategy that we hold on to is the most important thing, Simeon, like we need to stay centered on who we are. And I feel more aligned as a leadership team and as a company on what our unique path is to win than I probably ever felt in my 23 years. It's on us to make sure that we don't lose that. And it's a fair criticism of some of the categories where we have fallen off the leadership role where we used to be strong in a pacesetter in a category like home. We haven't been for the last few years. But I'm confident we've got the right team, the right plans, the right agenda to drive change there that will get us back to a better place. And you have my commitment that we won't ever forget who we are, and we'll lean into where we uniquely win, not just in 2026, but in the years to come.

Right. Let's go to Chris Horvers there in the second row.

So if you look back in the history of retail, discretionary retailers that see a period of negative comps tend to overearn on gross margin. Clearance levels go down to low levels because they tighten the inventory markdown rates. As you think about coming back to positive trends in discretionary categories, often we've seen debt on the margin side come through. So my question is, to what extent are you baking in more normalized promotion levels, more normalized markdown levels into the guide? And if the answer is the offsets the tariff cost, can you maybe dimensionalize how much was actually explicit tariff costs versus levels of clearance post tariff?

Yes. So I mean I actually think about it differently, Chris. I think about the times when we've seen slowdowns in discretionary, they usually come with a rough P&L because the excess inventory and clearing it has hurt us. We like to have the business in chase mode. We'd love to see demand just a little ahead of what we've bought to. And so that's kind of guiding how we're thinking about getting back to growth in some of those categories and doing it wisely. When the high-margin categories, think apparel and home are humming on the top line, they throw off a ton of profit for us. And so I get excited about kind of bringing back to life some top line performance in categories that haven't seen enough of it over the last few years.

Yes. In terms of some of the overlaps we saw from 2025, when I talk about tariff-related costs and inventory adjustment costs, there was a significant portion of that was inventory adjustment costs related to the significant dropoff we saw in sales in Q1 last year, which we don't expect to repeat. As Michael said, one of the most important things is actually just getting the forecast right and buying accordingly. It's easier to chase harder when you miss the other way. And so we're making sure we're appropriately planning that way.

I mean the overarching takeaway for all of that is we got to have the growth. Like there's only one path. It's top line growth and top line market share growth. So all the decisions we're making are betting on the right levers to pull to get that growth. Once we have that, our ability to put together the rest of the P&L that's respectable is quite high. I've got a ton of confidence there.

Let's go on the left side or on my left side here with Mike Baker.

Mike Baker from D.A. Davidson. One criticism maybe is that it's the same management team. I think at some point, people would have -- some investors wanted people from the outside. But clearly, there's a lot of change going on here. I mean that was very clear from the day. I guess I don't really know how to ask this, but why now? Why suddenly? I mean it's the same faces, new strategies. What happened to all of a sudden realize, oh, we need to do something different?

Yes. So I've got a couple of thoughts there. One is knowing who we are as a company, I think, is a real advantage. And so understanding how the levers of the business work and when Target at its best, what that's looked like, like I'm proud to bring that to stepping into this role for sure. The second thing I'd offer is that I think it's on all of us as leaders across the company, to step in with candor and assess where are we at and what do we need to do about it. And that's what we've done. And that means stepping back and taking a hard look at everything and drafting off of the strengths that we have, making sure we're maximizing the assets that serve us so well and saying where it wasn't good enough and what are we going to do about it to make it better.

And a lot of what we believe that looks like for 2026, we've had the chance to share with all of you today. And then maybe the last thing I'd offer is it's always important when building a team to have a healthy balance of folks like me that have grown up with over 2 decades of time at Target and folks that can bring in a fresh perspective like Jim has certainly done over the course of the last year plus. If I look across my leadership team just for starters, I think over half the team is either new to role or new to Target in the last 18 months. And so I feel really good about the team that we'll take the field with, both for the leadership team and across all 400,000 of our incredible team members that are going to power the growth we expect in '26.

Great. Next, let's go to Rupesh here in the front row.

So you guys went through a ton of new efforts. We walked through all the merchandising displays. But what gives you overall confidence to be able to execute on so much at the same time, whether it's a beauty reset, baby reset, some of the home efforts? So just curious on some of the guardrails and confidence to being able to do it all.

It's actually a really important question because a lot of change comes with a lot of change to execute well. And you guys have seen it, I'm sure, sometimes when we have the most change in a part of the store, it's when we might have the bumpiest in-stock experience or a lot has to go right. We are betting on the change. We believe that even though there's a lot that we're working every day on across the team to make sure we can manage through the execution of, we think the upside of being aggressive and making the changes that we know and have the early proof points of success that tell us are going to drive growth, leaning into that change makes sense. But it's a totally fair question because it's something that occupies a lot of our mind share is how do we make sure we're setting up the team to execute big year really well.

I would just maybe pile on being a few weeks into my role, it's really clear that one of my top 3 priorities is execution for that reason because we can have the most amazing -- get a stronger assortment point of view, be really distinct, which we're really focusing on sharpening our differentiation. If we can't execute it, we can actually bring it to life. And that's an all play, thinking about how we actually bring an idea all the way through execution. And so top priority, and I will say we have teams and extra teams, frankly, in this moment focused on execution because of the amount of change that we have in place this year.

Next, let's go to Chris at BofA.

Chris Nardone, Bank of America. So what are the changes, if any, you're making to the overall pricing architecture across each of your key categories? And do you think your current product value equation needs to be refreshed for over the long term to return to structural growth?

Yes. So I'll start and hopefully leave you something here, Cara, because I've got some passion on this topic. I've led the pricing team twice in my time at Target. We've got to be sharply priced and the infrastructure we have in place to make sure that happens. I mean it's a great example of having both an incredible team and a ton of technology that lets us know where are we dialed in price-wise versus the competition at a specific store level. But for us, the value equation is always multiple parts.

It means being incredibly well priced every day, and it means making sure that, that price is connected with newness and differentiation because we want -- when you're -- if you've grabbed a Starbucks or walking through a Target store to see what's new on our floor pad, we want to draw you in with product like you saw for apparel that's coming, that's differentiated, that's high quality of real value. And we want that smile to get bigger when you flip over the price tag and see the value that's there. And so I feel really good that we've got the right teams on the right adjustments. And certainly, in the last year with some of the volatility, we've had a team working really hard to make sure we're well positioned. But for us, it's always not just price that delivers true value.

And you heard some of that this morning as we think through some of the foundational work that's needed in businesses like home, where we are looking at that price value equation. I love using an example like Cat & Jack. Cat & Jack phenomenal kids clothing brands. We design the leggings with reinforced knees. We really -- we design amazing style for $5. And by the way, you can return it. That is amazing -- that's the value equation that we expect of all of our own brands. As we go category by category, some of the foundational basics in home and apparel, you'll continue to see us evolve and make sure that we can provide that sharp value equation across all of our products.

I mean even just this last fourth quarter, we talked about lowering price on 3,000 frequently purchased items. And so when we see the opportunity to make adjustments that we think are the right ones, we'll do it.

All right. Next, let's go to Corey in the front row here.

Corey Tarlowe from Jefferies. I actually wanted to double-click on the pricing expectation for 2026. And I ask that in the vein of Jim, your former employer, publicly stated that they're going to be taking prices down by up to 15%. So I'm curious about how you think about the trajectory of pricing within your algorithm for this year. And then on the long-term framework, we had previously talked about, I think, mid- to high single digits for EPS growth. Is that a reasonable anchor as well to still think about?

Yes, I'll start a little bit on the pricing front. And Jim, if you want to talk about what profit looks like over time. The -- I mean, it's our role to make sure we're bringing the most value we can with every pricing decision that we make, even against the tariff backdrop of the last year. You heard us say time and time again, price is the very last lever we want to pull because we know price matters to consumers on a budget. That's the mindset we'll have for however the variables unfold this year. In any place we can bring more value through lower price, we'll lean in and do it. And we know that for us, for Target, that differentiation and style and quality has to be right there along with a sharp price.

I'd probably add 2 things. First, just on pricing on sort of the same products, like we are very competitive on pricing and have a whole lot of technology behind it to make sure we're always competitive. Relative to the EPS point, if you do the math, if we get to low to mid-single-digit sales growth with margin expansion, that basically gets you to the same place as we talked about last year.

Right. Next, let's go to Paul Lejuez.

Paul Lejuez, Citi. Curious if you could talk about the sales guidance for this year, comps up slightly, I think, is what you said. Can you talk about how digital versus stores would look around that -- relative to that guidance also by category, which will be the leaders, which are likely to be the laggards, how you guys are thinking about it? And then just separately, is $5 billion the new CapEx base case that we should think about go forward?

Well, I might head Jim off of the pass a little bit on this question because the -- we aren't going to guide specifically stores versus digital or by category. But importantly, I think the key point here is like the guest doesn't think about Target by channel either. We're focused on driving enterprise sales and the guest gets to choose today, how they want to receive all that incredible product from Target. And we love it when it's an in-store trip, you can hear us say we're betting big on stores mattering in a differentiated store experience being part of our growth algorithm going forward, no doubt. And having been in the shoes of a busy parent household myself, like sometimes you just need the very best of Target right to your doorstep.

And that's when same-day delivery, if you're a Circle 360 member, can bring the very best of Target right to your door in no time flat. Or if you've got, I've been there, a screaming toddler in the back seats, like not every day is a let's spend some time and go through the store day. And so you can throw all the orders you want at our stores. And when -- 2 hours, we'll have them ready for you to pull in the parking lot and have that Drive Up trip fulfill you. And so when we think about it, we're trying to do it through the lens of putting ourselves in the shoe of the consumer, what do they need right now, and we want to make sure we've got the options to support them for whatever their need state is or however they're choosing to shop today. In recent times, we've certainly seen the growth in the digital business. I'd expect that to continue, but we're betting on stores, too.

Related to the capital investment point, like I said, my first capital priority, we're always going to continually invest in ideas that give us strong financial and strategic return. We've talked in the past, and we mentioned again, we have a great pipeline of new stores coming, and we feel great about those returns as we do with the remodels as well. And obviously, we're going to continue to continue to invest in technology as well to make sure we're at the forefront as we talked about earlier today.

It's the -- you heard Jim say this, it's the benefit of protecting a strong balance sheet. That gives us the capacity to invest through thick and thin, and we're going to chase the returns. We could not be more excited to put $5 billion to work this year because we're excited about the returns.

Next, let's go to Kelly Bania in the front row.

Kelly Bania from BMO Capital. First, just wanted to clarify the payroll investment that you're talking about, how much of that is hours versus wages? And then I wanted to ask a bigger picture question about food. I think I heard double the CapEx to that category, 20% growth in square footage. Just curious where -- what that's coming at the expense of in terms of square footage in the store and how you think about mix within this algorithm, the margin mix specifically?

I'll maybe start on the team investment side and if you guys want to talk about some of the choices that we're making within the store and the excitement we have for supporting a category that's been on a tier for us in food with even more investment going forward. When you think about investments, wages or hours, the answer is yes. We'll continue to invest in the team. I think our long history of team investment has served us so well because it's the team that brings to life our strategy every day. And I'd be remiss not to give just a giant shout out to the team that's driving the momentum that we're starting to see in the business right now. And so you can expect us to continue to invest in things like we've done in the past, wages, benefits, programs like the Dream to Be program that so many of our team members have been able to take advantage of. And we want the team to have more hours to use on the sales floor. And those more hours are specifically focused on driving an even better guest experience. And so it will be both, Kelly.

On the margin side, Kelly, to your last question, I would think about it in 2 ways. One is we also continually drive productivity within the food/bev business, especially with all the growth we've had over the last several years, we're gaining more productivity, and we talk about internalizing our fresh delivery network, we're driving more and more margin expansion. But candidly, we look at it more like a portfolio. Food drives traffic to our store. It opens the box for our guests to come into our store and explore the rest of Target. So we're very comfortable to keep leaning into food because we know that drives traffic.

If you think about for some of these stores that we haven't touched remodel-wise and it might be 15-plus years, some of the stores that we're doing now. And what our food business looked like 15-plus years ago. I mean it was a shadow of what it's turned into now. And so we get excited to be able to arm those stores with the right resources to support a food business that we know has even more potential than we've let them unleash.

All right. Let's go to Peter Keith here.

Nice presentation today. Peter Keith with Piper Sandler. Just following up on -- a little bit on mix, but broadly on gross margin. How should we think about gross margin in 2026? It sounds like there's some tariff lapping that might help. And then longer term, how should we think about gross margin? Could we see Roundel, Target Plus drive expansion? Or should we think about gross margin flattish as you invest in price?

Yes, your question hits on a lot of the variables we're watching. Jim, you want to talk about margin?

Sure. Yes, there's probably 2 dynamics. I'll take 2026 and the long term. So 2026, yes, you should expect gross margin expansion because we're lapping -- the costs that we're lapping last year primarily sit in gross margin because those were tariff-related costs and the inventory adjustment costs, markdowns and clearance, as -- whereas the investments we're making, a lot of that sits in SG&A, when you think about stores, technology and marketing. So there's a bit of a dynamic that's happening in 2026. On an ongoing basis, I think you hit on the right points, which is including merchandising, mix management and expansion, we should have positive tailwinds from things like Roundel for sure. And then as you scale, as we say, growth drives scale, that drives a lot of productivity through our supply chain, which sits in the gross margin line as well.

Let's go to Joe Feldman in the front row here.

Joe Feldman, Telsey Advisory Group. I wanted to ask, you guys talked so much about merchandising and everything. What -- on the supply chain side, how are we thinking about that in terms of investment for the future? Presumably, some of the labor in the stores is going to be helping on the supply chain. But have you thought about centralization? And you didn't mention the word marketplace today. That was a big topic last year. So maybe that whole topic.

We can maybe come back to marketplace separately, but supply chain plays a critical role in all the elements of the strategy that you just heard us talk about. Like all of that great new product has to find its way to the right store at the right time for us to be positioned to capitalize on it. The work we're doing on store experience. You guys will get sick of me talking about we're going to get more in stock, we're going to get more in stock, we're going to get more in stock because it is a journey that we've been on that's encouraging, the arrow is pointed in the right direction, and we still haven't arrived and the supply chain plays such a critical role in helping us move in the right direction on that journey as well.

And so we see opportunity for supply chain to play that critical role. We also see the opportunity for efficiency within supply chain. You heard Jim touch on that a little bit in the answer to the last question. But we know through the use of technology, we know through the use of some of the process and teamwork that we're doing across the supply chain right now, we can get those better business outcomes and as we grow in scale, get them even more efficiently.

Yes. Maybe I would add. I mean, in terms of our supply chain, we think about it holistically as well. So it's not just -- we have the supply chain facilities that replenish our stores. And I would think that, that is one of the biggest drivers of making sure we can seamlessly get our products to the stores and replenish as quickly as possible. But the important thing is, for us, stores are a digital hub. So we are leveraging stores to drive that empower digital fulfillment. So we feel great about where we sit because we have 2,000 stores that are well located and then have access to most of the population.

To Jim's point, it's an important one. So I'm going to underline it. Store investment is supply chain investment for us because of the role the stores play. And so it's not just the stuff that hits upstream. That's exactly the right point, Jim. Do you want to talk about Target Plus, Cara?

I was going to say, I mentioned in my remarks when I was talking about home, Target Plus, but we shared last year's bold growth ambitions. We're well on our way, feel really pleased with the performance of Target Plus marketplace. Really, as we think about it, it's really an extension of our assortment strategy. And so the team is accelerating in places like home, where we've pulled back on big and bulky products in the stores in some cases. We're leaning full speed ahead in on categories like furniture, mattresses, rugs, places where the guest expects a broader assortment, and we're able to deliver that style and design authority, but do it in a more inventory and cost-efficient way. And so we didn't talk a lot about it today. Home is one example, but we're really leveraging the growth of Target Plus across our entire merchandising portfolio.

And you saw from this morning's earnings release, we posted more than 30% growth in marketplace last year, and we see that accelerating. We see great momentum in Target Plus marketplace. So if we excluded it, it wasn't by design. It's just we have so much to cover, but we're excited about the growth in marketplace.

Let's go to Greg Melich right here in the front.

Greg Melich with Evercore ISI. The real theme is traffic, it seems like getting that customer back, engaging with frequency. I guess if you could frame -- or 2 parts to the question. One, Jim, with the guide this year, do we expect traffic to be positive as part of getting to that low single-digit growth? And then second, if we are very different from that, let's say, the comp range is 0% to 2%. Well, one, is that a good number to use for this year's earnings range? And what would you do? What's the variable margin if we end up doing better than that and if we end up doing worse?

Maybe I'll start by just talking about the importance of traffic in general. You've heard us say before that growth that comes fueled by traffic is the growth that we like the most. I think it's the most durable and sustainable growth. So we're laser-focused on improving traffic trends that we are not proud of in the last year. And so we need to get to a better place. The -- we're seeing early momentum in the right direction there. The stronger performance we saw in the back half of Q4 was encouraging. We shared, again, 1 month does not make a full year trend, but we're encouraged by the healthy sales growth we've seen in February, and that's been broad-based and traffic has played an important role there.

And so we think that's momentum on which to build, Greg. And the whole store plays a role in driving traffic. You can come to Target because your kids outgrew their Cat & Jack and you need to refresh the wardrobe. You can come to Target because you're having the family stay with you and you want to freshen up that living room and we're a destination in the home category. And you can come to Target in categories like food and beverage that work harder than ever for us to reinforce frequency of trip. So traffic couldn't be more important. When I think about growth, I'm kind of stapling growth and traffic conceptually together always.

And related to -- I mean, we deliberately provided -- we have a range centered around 2% for net sales growth. And if you think about it, for a $100 billion company it makes the math a lot easier. So every 1 point on other side is worth about $1 billion of sales and just flow that through. We don't talk about our exact like variable profit margin rate, but you get leverage. So obviously, that return is going to be higher than our actual operating profit margin rate because we're going to get leverage from that increase in sales.

While we're on this side of the room, let's go to Brad Thomas here in the front.

Brad Thomas with KeyBanc. I'll ask hopefully an easy one. There's been a lot in the news around tariffs over the last month here. Can you just help us process what you're assuming in terms of the current tariff rates? And if the current rates from the way the Supreme Court has ruled and the way the administration has reacted, if those were to hold true, what would the impact be on your margins?

Yes. So a lot of variables moving on the tariff front, obviously. I think that we stepped into 2026 with those variables moving. We stepped into 2025 with some of those variables certainly moving. And so while I don't think any of us have a crystal ball for exactly how the path forward on tariffs is going to play out as we move through the year, I take a ton of confidence in how I saw our team lead through that volatility in 2025. And it was with a focus on the guests with every decision that we made. And to the point Jim made earlier, as we kind of rebaselined the business post Q1, there were still a lot of variables in the air, one of them being tariffs, and the team did a great job leading through that. And so my crystal ball is not perfect on where tariffs go, but I'm confident that we've got the right deep, talented team to position us with the right flexibility to react however we need to.

Yes. I would just emphasize your point. Our focus is going to be providing value to our guests. And so even if rates move up and down, we're going to be laser-focused on making sure we get the right value to our guests at all times.

Let's go to Jacob from Melius right here.

Jacob Aiken-Phillips from Melius Research. So 2 questions. First, last quarter, you talked about -- I think it was the Chicago market where you're testing some new operating standards, shifting some of the digital mix between stores to make it more efficient. So wondering if you could give some more color on that and the rollout across the rest of the system. And then separately, I wanted to key in on a comment you made about change management. It does seem like there has been a lot of change from a -- not just from a merchandising perspective, but from a people perspective. And that's from your seat all the way down to the hourly level employee. So just how do you think about that? What -- I guess, what stage or what inning are we in, in that? And where do we see that going forward?

Yes. So the -- maybe I'll start on the team side, and let's come back to your first question. I mean it all starts and ends with the incredible work of the team. And so we're focused on making sure that, a, we're an employer who's attracting an incredible team. And that's true from every role in this building to every single one of our 2,000 stores and supply chain facilities and sourcing offices around the world. And so it's our job to make sure we're creating the right culture and making the right investments to attract a great team. And then it's positioning that team effectively against the strategy in front of us. And on that front, I feel really good about how we're positioned heading into 2026. What was your first question?

Chicago.

Chicago market.

Chicago. The -- so it goes back -- what we did in Chicago, and we talked about some of this in the last quarter, but just a brief refresher. You heard me talk about some of the challenges that came with explosive digital growth. And that growth, don't get me wrong, I'm not wishing away for a second a $20 billion profitable digital business and the work our teams did to support that growth as it exploded through the pandemic and has continued to grow from there. Excellent work. I couldn't have done it without the store teams at the center of it for sure. And that made life way more complicated in a store for some stores. And we were adding capacity so quickly. I mean we were putting pack stations in stores everywhere where you could find an empty boom closet practically because the business was growing so fast. Now we're able to step back with the benefit of a little bit of time and some learning and optimize that.

And what we saw in Chicago is that by having some stores really lean into specialize for fulfillment in the market, they've got big backrooms and the capacity to specialize and equipping the team to be trained and support that volume well. And then having some other stores sit it out, like we don't need every store shipping boxes. For some stores, the size of the in-store business should be the one and only thing we ask that team to focus on versus shipping boxes. And so we're encouraged by what we've seen in Chicago. You'll see us, we already have expanded that to more and more markets. And that's one example, not the only example, but one example of how when we can simplify for the store teams that should translate directly into a better experience. And in that example, we're seeing benefits on the fulfillment side, and we're seeing benefits across stores as their role becomes more clear.

What I love about that is it drives faster and more efficient. So as we expand the Chicago test, that's one of the big unlocks for us to do next-day fulfillment. You drive scale with in a couple of core nodes in the stores, it allows us to fulfill that next day and cheaper. So it's pretty exciting when you see that growth happening.

One of the places to fund the investment we're talking about this year, getting more and more efficient in brown box fulfillment is one of the things helping us there for sure.

Let's go to David at Mizuho.

David Bellinger, Mizuho. My question is on agentic commerce and understanding this is exceptionally early. How do we think about the incrementality of those sales? And if more sales do shift out of the store to digital, what does that mean for the P&L? There's any early read on how the economics of these partnerships will work out for Target?

My hunch is we're a ways away from understanding every economic put and take. But the thing that we're laser-focused on is making sure we're where the consumer is. And that means being at the forefront of innovation when it comes to how the consumer purchase funnel is going to transform and AI is certainly going to play a role there. In some ways, I kind of like our advantages because we've got 2 that I think really matter. One is we've got great scale. We're at the forefront of innovation with some of the big tech partners in this space, and that allows us to make sure that just like we did with social as it exploded, we're staying front and center for guests as the way they shop evolves in the months and years to come in ways that probably none of us can fully predict. But we've got the scale to be relevant there, and we're already innovating with those partners.

Being one of the first retailers to have kind of an immersive shoppable experience in some of the Gen AI platforms, I think, is a good example of us leaning in, in the right way there. The second advantage that I think we have is we're curators by nature. And some of what AI does is try to bring you the best thing fastest. And we run the whole business that way because of the work we do to curate the very best in both in-store and online. And so I actually think that in many ways, we're kind of wired to think about the same way AI is going to think when it comes to curating what matters most. Like that's our mission every day is to make sure in our 2,000 stores, we've curated the thing that you're going to most resonate with at the right price. And so I have a lot of confidence we'll be able to continue to do that online, too.

Right. Let's go to Oliver Chen next here, TD Cowen.

Oliver Chen, TD Cowen. On the AI frontier, what are your thoughts about what will be most material in the near term to your financials and algorithm? And as you think about AI organizationally, customer-facing, supply chain, how is your approach in terms of centralization relative to the units? Also, Jim, on the comp store sales, what comp do you need to leverage fixed cost? And as we look at the year ahead, apparel has been quite negative and so is home. Which categories could drive comp upside? And how do you get to more consistent comps that aren't losing share in the 3% to 5% range consistently?

So maybe I'll start on the technology front, and I appreciate the question, Oliver, because technology has long played an important role at Target. And I mean, you heard it is my third priority. It's a place where we need to lean in even more going forward, and we will. We're putting real investment behind it. It shows up across the business, as you might expect. I mean when we're using AI to its fullest, it's personalizing a guest experience so that if you open the Target app, the offers you get are as relevant as they can be because AI is helping make that happen. We also talked a little bit today about the role technology plays to create efficiency within the team. And for our store team members, you heard us say the humanity of the store experience is part of our secret sauce. Well, every minute we can save a store team member unloading a truck or even in the steps they take across the store is a minute that they can reinvest serving our guests. And so you'll see us use technology in support of the humans. And the 2 humans we're focused on are our guests and our team members.

In terms of the comps and what kind of sales we need to deliver, clearly, the last few years, we've faced deleverage, and we've done the right thing to make sure we're stepping up our investments where we need to and trying to drive productivity. A lot of that goes down to the level of productivity we can continue to generate will also be sort of an offset to our ability to leverage growth. So obviously, getting to low to mid-single-digit rates over time on overall sales drives leverage. And I think we're going to start seeing that -- the beginnings of that this year.

And I think we have time for about one more question before we wrap up. And that can go to Zhihan right here at Bernstein.

Zhihan from Bernstein. I think, Jim, last year, this time, you were talking about e-commerce being profitable. Can you just give us an update on across the different fulfillment modes? What's the profitability looking like today? Is it going to be margin dilutive still compared to the brick-and-mortar growth from here? And what levers can you pull to improve profitability?

Yes. Happy to take that question. Like I said in my remarks today, first, nothing has changed from what I said last year. What's important for us to think about is the digital ecosystem. We feel very strongly because of the productivity we're driving within our e-commerce, different channels of fulfillment, our ability to scale Roundel and Target Plus, our marketplace, that whole ecosystem works really well for us. And I guess the way I look at it is growth in digital is great for our business. I'm not concerned that there's any type of dilution. Scale -- it drives scale and the ecosystem is profitable. We feel great about the growth in digital.

The thing we see over and over again that makes the point Jim made just so true is that the more guests lean into some of our digital services, the more they spend in total and perhaps unintuitively, often the more they spend in store. I think you've heard us tell this over time, but it's still true today. If you're a guest that hasn't used Drive Up and you use Drive Up for the first time, like we would have thought before we launched Drive Up, well, that probably costs us a store sale. Still the right thing to do, meet the guests where they are, but we're going to cannibalize some of the store sales. No. When you use Drive Up, you spend 20% to 30% more at Target in total and your store spending reliably actually goes up but not down.

And I think that's because of the role stores play for us with our guests is if we can save you time and some of that quick replenishment when you do have that screaming toddler in the back seat, like it's almost like our guests reinvest that time in the store experience because the sense of discovery and finding what's new is so important to them. And that's maybe actually a good place to wrap because I couldn't be more confident sitting here today that we've got a crystal clear view of how we win. And the shorthand is incredible product and incredible experience. And those are easy things to say. They're hard to do at the bar that I have for us, but the work is happening. And we're not going to get it all right, and it's not going to come all at once, but we couldn't be more confident that we're on the right path and couldn't be more pleased to have all of you on that journey with us. So thank you so much for the time today.

Thank you.

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation Third Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Wednesday, November 19, 2025. I would now like to turn the conference over to Mr. John Hulbert, Vice President, Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining us on our third quarter 2025 earnings conference call. On the line with me today are Brian Cornell, Chair and Chief Executive Officer; Michael Fiddelke;, Chief operating Officer; Rick Gomez, Chief Commercial Officer; and Jim Lee, Chief Financial Officer.

In a few minutes, Brian, Michael, Rick and Jim will provide their insights on our third quarter performance and outlook for the rest of the year. Following their remarks, we'll open the phone lines for a question-and-answer session. This morning, we're joined on this conference call by investors and others who are listening to our comments via webcast. Following the call, Jim and I will be available to answer your follow-up questions.

And finally, as a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, including those described in this morning's earnings press release and in our most recently filed 10-K. Also in these remarks, we refer to non-GAAP financial measures, including adjusted earnings per share. Reconciliations of all non-GAAP numbers to the most directly comparable GAAP number are included in this morning's press release, which is posted on our Investor Relations website. With that, I'll turn it over to Brian to kick things off. Brian?

Thanks, John, and good morning, everyone. This is my final earnings call as Target's CEO, and I plan to keep my comments brief this morning. but I wanted to take a moment to thank all of you for your ongoing engagement and support over the last 11 years. It's been the highlight of my career to lead this great company and our business has undergone many important changes since I arrived in 2014.

We entered into an innovative partnership with CVS to run our pharmacy business. We changed our operating model in food and beverage, paving the way for explosive growth in that part of the business. We invested in our product design, development and sourcing capabilities and launched several new billion dollar owned brands.

We pioneered the Stores & Subs model for digital fulfillment, remodeled well over 1,000 of our existing stores and added nearly 200 net new locations in the U.S. All told, this year's top line is expected to be well over $30 billion higher than the year I arrived. In that 2014 fiscal year, GAAP and adjusted EPS both came in around $4 a share. And the upper end of this year's expected range for adjusted EPS is double that number.

I am proud that our team could deliver this top and bottom line growth while building a solid foundation of operating capabilities, including one of the nation's largest [indiscernible] programs and Target Circle and a rapidly growing retail media business in Randell. That said, our business has not been performing up to its potential over the last few years.

And I am singularly focused on supporting Michael and the entire leadership team as they make changes to the way we work, enhancing our merchandising authority, our retail experience and investing in technology to accelerate our business. In the call today, you'll hear how the team is working quickly to get the company back to profitable growth. And while we're not there, yes, I'm confident we're on the right path and Michael is the right person to lead the next chapter of Target's growth.

So with that, I want to thank all of you for your participation today and for your thoughtful engagement over the years. And finally, I want to thank the entire Target team. It has been a privilege to work with you in support of this great brand. Now I'll turn the call and today's Q&A over to Michael.

Thanks, Brian, and good morning, everyone. We have high but achievable aspirations for Target's future, and we're acting with urgency to make the changes in investments to position Target for sustainable and profitable growth over time. While our third quarter performance came in as expected, we're far from satisfied with our current results, and we won't be satisfied until we're operating at our full potential.

To get there, we've set 3 distinct but highly interrelated priorities for our team. First, we must solidify our design-led merchandising authority leading with incredible product in a way that is distinctly target. Second, as a retailer that believes that the shopping experience is every bit as important as the products we sell, we need to offer a more consistently elevated experience across our stores and digital platforms.

And third, we need to more fully use technology to improve our speed, guest experience and efficiency throughout the business. Together, these priorities are in service of one goal, getting back to sustainable growth as quickly as possible. They guide every decision we make, and I want to spend a few minutes to help clarify what these priorities are, why each matters and share some of our progress to date.

Before I expand on these priorities, I want to pause and acknowledge our recent restructuring headquarters, in which we eliminated approximately 1,800 roles or about 8% of our headquarters footprint, a difficult but necessary step forward. While Jim will walk through some financial aspects of this decision, I want to make it clear that this move wasn't about cutting costs. Instead, by removing layers that have added complexity to the way we work, we're aiming to work with greater agility making it clear [indiscernible] decisions and empowering our team to operate with greater authority and speed in support of our strategy.

So let's discuss how we're making progress in solidifying our merchandising authority and elevating our shopping experience. And you'll also see the critical role that enhanced technology is playing in support of both, helping us progress quickly, efficiently in industry-leading ways. We are a design-led company. And that starts with our authority and merchandising.

Our ability to build a unique assortment of the right, stylish on-trend products at incredible value that's so central to who we are and key to our differentiation and future growth. At Target, we believe that offering an assortment that's distinctly ours is essential to maintaining our merchandising authority with our guests.

Not every category plays the same role towards these efforts, but together, they create an assortment and experience that feels unmistakably target. A great example is the transformation of our hardlines business into FUN 101 an evolution in bringing greater cultural relevance, style authority and trend-right energy to the assortment, reinforcing what makes shopping at Target so special.

And while we have much more change in FUN 101 to come, it builds our confidence to see the categories that have seen the greatest change driving some of the strong sales performance already. Rick will have more details to share later. And within each category, merchandising authority means staying incredibly close to our guests by knowing what they want next, reacting to, predicting and even setting new trends and tech will play a critical role in helping us get there.

We're enhancing our capabilities by equipping our teams with new tools that provide them with AI-enabled consumer insights at their fingertips. Our merchants now have real-time access to advanced data from what is currently trending on social media to which products and styles are resonating with consumers at Target and across the industry today, to what future trends our guests are most likely to care about, helping our team forecast needs, anticipate trends and buy both smarter and faster.

New tools also include our recently developed target trend brain, our new internal creative platform, which uses Gen AI technology to help our teams identify and react to emerging trends faster and predict future trends. By leveraging AI to capture color, material, style and product details in applying consumer research and our brand principles, we can deliver unique and on-trend products to our guests faster than ever before.

To further enhance our speed to market, we've also created synthetic audiences, AI-driven models that simulate real consumer populations to preview how different groups could respond to campaigns and products before they ever launch. This allows our marketing and design teams to test, learn and refine products, promotions and messaging with incredible speed and efficiency.

And while you'll see us continue to accelerate our use of technology, it's our talented team that brings this work to life, and we are investing intentionally in our team and how we approach our work. We're redefining roles throughout the cross-functional team that supports our assortment planning and buying decisions, what we call our merchant roundtable to better equip our teams to make bolder decisions even faster.

I'm also excited to share we welcome new leaders to the team in areas like our home business to bring new ways of thinking and accelerate change in the signature category. These steps forward are examples of how we're solidifying our design-led merchandising authority by using people, process and technology to drive greater levels of newness and differentiation across our entire assortment more quickly reacting to emerging trends and amplifying these trends faster than ever before.

Let's turn now to our team's efforts to elevate the guest shopping experience, both in stores and digital, a great guest experience means a lot of things, but it starts with a warm, friendly and helpful team. In stores, we're making changes to give our team members more time to focus on what matters most, spending time helping our guests. Through enhanced digital tools, we're reducing time devoted to backroom tasks through more efficient truck unloading and stocking.

Every hour we save is being reinvested to allow more guest interaction with a focus on friendliness and service that makes target. An elevated shopping experience also means consistently finding the products you want to need every time you shop. This holiday season, we're using our expertise and deep consumer knowledge in a new gene E-powered gift finder available on our website and our app, allowing guests to ask questions on the app and help them find the perfect gift this holiday season by simply asking something as generic as what is a good present for my mother in law, to something more specific like I have a 5-year-old son that loves Dynasores? What gifts are available for under $20?

Our app will provide recommendations or ask clarifying questions to quickly and easily help guests find the right presence for every person on their holiday shopping list. For guest shopping in our stores and online, we're also investing resources to ensure we have the right product in the right place at the right time all year long. This includes modernizing the technology that forecasts, orders and positions our inventory, using machine learning to optimize flow from supplier to shelf.

It's helping us move inventory more efficiently, improve reliability for everyday frequently purchased items and further improve in-stocks. We've coupled these tech enhancements with process improvements some great root cause problem solving by the team and clear measurements that show where we have the most room to improve. All in, we've seen meaningful progress on this front.

In fact, this past quarter, the on-shelf availability of our 5,000 top items, the ones for which being in stock is most important to our guests and which represent 30% of our total unit sales saw a more than 150 basis point improvement compared to this time last year. But even with this meaningful progress, I want to emphasize that we have much more room to improve and we're not slowing down. An elevated store experience also means meeting our guests when, where and how they want to shop.

To do this, we're reconfiguring the role each of our stores plays within a market to optimize fulfillment speed and capabilities and in the process also better supporting the in-store shopping experience. Our pilot in the Chicago market has demonstrated the effectiveness of new operating models that govern each location's mix of in-store and digital fulfillment, helping to improve the guest experience and operational performance at each store at the same time. For those stores with high foot traffic volume, reducing their mix of brown box fulfillment, allowing those teams to spend more time interacting with in-store guests.

For lower volume stores in the same market with big back rooms that are perfectly suited to ship product, we're pushing more digital fulfillment volume their way. And, of course, more labor hours to support this work, creating economies of scale in a more optimized workload for each node within a market. With the changes we've made, we're getting guests the products they want faster than ever while reducing average fulfillment costs.

As a reminder, we already reached around 80% of the U.S. population with same-day delivery powered by Target Circle 360, where sales grew more than 35% again this past quarter, and around 99% of the U.S. population is already eligible for 2-day shipping. And now with our evolving market fulfillment strategy that includes expanding these learnings to an additional 35 markets, more than half of the U.S. is eligible for next-day shipping, and we expect to meaningfully expand that reach in the coming year.

Elevating experience also means staying ahead of new ways our guests want to shop. We're leading in the next wave of digital engagement by partnering with the world's biggest Gin AI platforms, through an initiative we call conversational curation. Building on the apps for chat GPT experience previewed in early October, we're curating the shopping experience directly from the guest's own conversation.

Guests tell us what they want or even what they're trying to solve for, and open AI will offer personalized recommendations. Through this partnership, we expect to be one of the first retailers on Open AI platforms to offer the purchase of multiple items in a single transaction, offer fresh food products on the platform, and the ability to choose drive up and pick up fulfillment options in addition to the conventional shipping options offered by others.

Finally, I'd like to touch on important investments that will drive both merchandising authority and an elevated experience. Our investments in new stores, store remodels and chain-wide category changes aimed at providing greater inspiration in joy for our guests every time they shop. Our new larger-format stores are outpacing our initial sales expectations and continue to be a strong source of growth.

Given current real estate opportunities, we expect to continue opening these bigger boxes in more and more markets across the U.S. Additionally, we're formulating plans for next year that will bring greater changes to key floor pads throughout the store, which will accelerate both our merchandising authority and our experience. To support this change, we'll be increasing our CapEx plans for next fiscal year, spending about $5 billion, about $1 billion more than this year to bring the latest and greatest of target to new and existing markets.

Rick and Jim will have more to share on this in a moment. So now before I get ready to pass things over to Rick, I want to thank the Target team, you power our progress, and it is together as a team that will write Target's next chapter. While we're not yet where we want to be, we're making change to lay the foundation for a stronger, faster and more innovative target, one that's grounded in our purpose, fueled by our team and focused on growth.

I'm proud of the progress we've made and confident in the opportunities ahead. And to those of you listening this morning, if you leave having heard nothing else, I'd leave you with the following thoughts. We are not satisfied with our current results and are relentless in our pursuit of returning to growth.

Our 3 priorities around merchandising, experience and technology have us on the right path. And we know what needs to be done and are actively making progress towards being the best version of ourselves for our guests, our team and our stakeholders. With that, I'll turn the call over to Rick to share more about our third quarter performance and all we have planned for this holiday season.

Thanks, Michael, and good morning, everyone. Our third quarter results underscore that we still have work to do but they also show us that the actions we're taking are the right ones for our guests and for our business. We're focused on improving performance, particularly in discretionary categories, listening closely to our guests and moving with greater agility to bring them the newness and affordability they expect from Target.

In Q3, results were in line with expectations and similar to second quarter performance, with the exception of Q2 benefiting from the Nintendo Switch 2 launch, Q3 comp sales were down 2.7%, reflecting continued softness in discretionary categories like home and apparel, partially offset by growth in food and beverage and FUN 101.

Digital comparable sales grew 2.4%, fueled by more than 35% growth in same-day delivery, powered by Target Circle 360 and continued growth in Drive-Up. We saw the strongest sales around seasonal moments like back to school, back to college and Halloween, highlighting once again the importance of these holidays to our business. Across categories, one theme is clear. Our guests continue to respond to newness and style-forward assortments.

FUN 101 delivered another quarter of growth led by a nearly 10% comp in toys and double-digit growth in music, video games and our expanded selection of sporting equipment. All categories where we've invested in unique to target assortments that are clearly resonating. Food & Beverage also delivered another quarter of comp growth with notable strength in beverages, which were up nearly 7% in Q3 as guests leaned into our trend forward health and wellness assortment from prebiotic sodas to better-for-you energy drinks, we also saw strength in candy categories, particularly as the Halloween holiday approached.

While apparel comps were down 5%, we delivered meaningful growth in denim and sleepwear categories, driven by style, forward newness, that helped to offset softness across the portfolio. This tells us that while there is still plenty of work to do, where we have made our biggest bets in terms of on-trend, design-led newness, consumers are reacting positively giving us confidence in our approach and the path ahead.

Turning to the consumer. Many of the themes remain largely consistent with what we shared in prior quarters. Guest ARE choiceful stretching budgets and prioritizing value, they're spending it matters most, especially in food, essentials and beauty, while looking for trend-right deals in discretionary categories. They want quality and price to coexist, something we do particularly well through our balance of must-have national brands, our exclusive owned brand portfolio and our curation of emerging brands.

As part of our work to solidify our merchandising authority, we will continue to elevate our assortment to lead with trend while always considering affordability and value. As we approach the holidays, we know consumers remain cautious Sentiment is at a 3-year low amid concerns about jobs, affordability and tariffs. Yet they remain emotionally motivated. They want to celebrate with loved ones without overspending. Our job is to help them do just that.

Given our focus on affordability, we recently lowered prices on thousands of everyday food and essential items to help families further manage their budgets. And for the next major holiday around the corner, our Thanksgiving meal deal this year is one of our most affordable yet, feeding a family of 4 for less than $20 with Good & Gather Turkey at just $0.79 per pound as well as potatoes, staffing and other seasonal sides for less than $5.

And while we are, of course, standing tall for the traditional Thanksgiving Fair, guests are also embracing new food trends like Good & Gather seasonal empanadas, gourmet host gifts from Marks & Spencer, Stonewall Kitchen, Sugarfina, and Hearth and Hand with Magnolia Table and new to target brands like Little Spoon, everyday dose and protein pop.

As a percentage of our total Food & Beverage sales, we are selling twice the volume of new products compared to the industry, a sign that our trend bets are paying off. We're also accelerating newness in women's apparel, leaning into lux fabrics and trending athleisure at affordable prices. Inspired by our sourcing trip to the Swiss Alps, our latest Cashmerlike sweater start at just $30 and deliver the on-trend casual yet chic Opreski look. [indiscernible] at leisure fans, JoyLab is launching new patterns and fabrications in mid-December, earlier than ever this year. Perfect for gifting are those New Year fitness goals. In holiday decor, we're offering upscale and festive design at unbeatable prices from contemporary collections to nostalgic Christmas Classics, we have styles for every home.

Ornaments start at $1, $3 and $5 price points, with holiday throws at $10 in Reeves and Fo greenery at $12, bringing incredible design and quality within reach. And once the tree is trimmed, it's time to think about what goes under it. As I've shared before, trading cards have been a huge trend that we have been leaning into. And this holiday season, we will be offering new product drops nearly every week, including Pokemon, MAGIC: THE GATHERING, NFL, MLB and WNBA cards.

This includes highly anticipated exclusives, already hitting shelves and continuing to be released throughout December as well. This year, we've also expanded our assortment of affordable and on-trend toys, including thousands under $20 with many starting at just $5. As the #1 market share player for LEGO, we are partnering with this iconic brand to offer exclusive to target sets starting at just $10. And for Barbie fans of all ages, we're offering 2 exclusive Barbie collaborations with Joanna Gaines, a collectible doll and her perfectly designed townhouse to live in. All in, we are introducing 20,000 new items into this year's holiday assortment, twice as many as last year, with over half exclusive to Target.

Before turning it over to Jim, I want to share how Michael's new enterprise priorities are taking shape across our commercial organization. In partnership with the Enterprise Acceleration Office, we've been modernizing how our cross-functional teams support all buying decisions at Target, what we refer to as our merchant roundtable.

To clarify roles, streamline accountability and empower teams to make bold data-driven decisions allowing us to move faster and infuse newness into assortments more frequently. But not all newness is created equal. It isn't just about offering new products for the sake of newness. It's about leaning into the emerging trends in culturally relevant moments. When we do, this is when we see the strongest reaction from our guests.

For the perfect example, look no further than our Stranger Things 5 assortment. We have the largest assortment of exclusive products in retail in the U.S. along with throwback marketing campaigns that transport guests back to the 1980s Nostalgia. Plus, we're dropping new items into the assortment every week to align with the new episode releases.

This is yet another example of the incredible work we are doing to reimagine our hardlines assortment into FUN 101, a year-round celebration of culture, trend and style, served up in an only target way. And next year, we're planning to take these learnings and make bold investments to transform the in-store shopping experience and assortment. In fact, we already have plans to introduce more changes to our stores than we have in any year in the past decade. We will have far more details to share at our Financial Community Meeting this spring.

With that, I'll turn the call over to Jim to walk through our third quarter financial results and updated expectations for the balance of the year.

Thanks, Rick. Our financial results in Q3 were in line with our expectations as our team continues to focus on what we can control and manage the business with discipline, despite continued softness on the top line, volatility in weekly and monthly trends, and uncertainty in the external environment.

Third quarter net sales were 1.5% lower than a year ago, slightly better than our year-to-date performance, but about 60 basis points softer than in Q2. Category sales trends were relatively consistent between Q2 and Q3, with the exception of hardlines, where we saw continued growth but at a slower pace, following an outsized boost from the launch of the Nintendo Switch 2 in the second quarter.

Across our selling channels, comp sales in our stores were down about 4%, while comparable digital sales grew 2.4% on top of nearly 11% a year ago. Within our first-party digital sales, we saw mid-single-digit growth in our same-day services, led by more than 35% growth in same-day delivery.

Beyond our first-party digital platform, we saw a significant step up to nearly 50% growth in GMV of our Target Plus marketplace and mid-teens growth in Roundel ad sales, demonstrating the breadth and growing relevance of our digital ecosystem. Top line results during the quarter were quite volatile with net sales close to flat in August and October and down about 4% in September.

This pattern reinforces many of the consumer themes we've been highlighting for some time. as guests shopped around back-to-school and back to college in August and around Halloween in October, but pulled back in September in between those key seasons. In addition, September apparel sales were hampered by unusually warm weather across the country while October benefited from the response to our most recent Target Circle week as consumers continue to focus on value.

On the gross margin line, our Q3 rate of 28.2% was about 10 basis points lower than last year. Among the drivers, we saw about 1 percentage point of pressure in merchandising, reflecting the impact of higher markdowns. This pressure was offset by about 70 basis points of favorability from lower inventory shrink versus last year.

In addition, we saw about 20 basis points of favorability from supply chain and digital fulfillment as the benefit of higher productivity and the lapping of last year's supply chain challenges was partially offset by the deleveraging impact of lower sales. Regarding our outlook for inventory shrink. Consistent with our prior commentary, we expect that shrink improvements will account for approximately 80 to 90 basis points of gross margin rate favorability for the full year.

This would bring it fully back down to pre-pandemic levels, marking a dramatic turnaround over the last 2 years. One other note, our Q3 ending inventory was about 2% lower than a year ago. This is in line with recent trends in our Q4 sales outlook and reflects growth in our frequency businesses that was more than offset by lower levels in our discretionary businesses.

Moving back to our third quarter P&L. Our SG&A expense rate of 21.9% was about 60 basis points higher than a year ago. However, this rate reflected about 60 basis points of impact from onetime business transformation costs. Excluding these costs, our third quarter SG&A expense rate was approximately flat to last year. On the bottom line, our business delivered third quarter GAAP EPS of $1.51 compared with $1.85 a year ago.

Adjusted EPS, which excluded business transformation costs was $1.78 in the third quarter, about 4% lower than a year ago. While this is far short of where we aspire to be over time, it is solid profit performance in a quarter where our top line was down more than 1% and reflects stronger relative performance versus the first half of the year, consistent with our prior commentary.

I'll turn now to capital deployment and reiterate our priorities, which we've consistently followed for decades. First, we look to fully invest in our business in projects that meet our strategic and financial criteria. Second, we look to support the dividend and build on our record of more than 50 years of consecutive annual increases. And finally, we look to deploy any excess cash beyond those first 2 uses to repurchase shares over time within the limits of our middle A credit ratings.

Regarding our first priority, we've invested about $2.8 billion in capital expenditures so far this year and continue to expect full year CapEx of around $4 billion. Regarding the second priority, we paid $518 million in dividends in Q3, which was $2 million higher than last year as a 1.8% increase in the per share dividend was mostly offset by a lower average share count.

Regarding the last priority, we deployed just over $150 million to repurchase our shares in the third quarter, following a pause in Q2. While we ended the quarter with a healthy cash position and expect to have continued capacity within the limits of our middle A ratings, we'll continue to exercise caution in our repurchase program in the face of continued uncertainty in the external environment.

Now I want to turn to our outlook for the fourth quarter and the full year. While our Q3 results were consistent with our expectations, we've continued to see a high degree of volatility in our business. In addition, we're mindful of the challenges facing consumers as exemplified by recent declines in consumer confidence. As such, while our top line expectations for Q4 are in line with our prior guidance and recent performance, we've narrowed our full year EPS ranges and moved our adjusted EPS range to the bottom half of the prior range.

With that as context, on the top line for the fourth quarter, we're continuing to expect a low single-digit decline in our comparable sales. in line with our year-to-date performance. On the adjusted EPS line, our updated range is from $7 to $8 for the full year. The expected range for GAAP EPS is about $0.70 higher than for adjusted EPS reflecting the benefit of the first quarter litigation settlement, partially offset by business transformation costs.

Against the backdrop of a very difficult environment, I am proud of the team's hard work this year to navigate a very high level of complexity including their work to mitigate the impact of tariffs and navigate challenging consumer conditions. Over the past several months, we've also been hard at work to drive prioritization and outline key investments to return Target back to sustainable growth.

Looking ahead to next year, we expect to ramp up our capital spending meaningfully in support of our store experience and remodel program, a step-up in technology and digital fulfillment capabilities and investment in new stores. Our current plan envisions 2026 CapEx dollars increasing by approximately 25% or $1 billion versus 2025.

In addition, we are planning to leverage a continuous pipeline of productivity initiatives and approximately $180 million of expected annualized savings from our recent business transformation efforts to invest in key areas in support of our 3 strategic priorities. We will share more details on our plans for 2026 and beyond at our financial community meeting in March.

While we know there's much more work to do, I'm confident that we are rapidly moving in the right direction and positioning our business to get back to sustainable, profitable growth in the years ahead. With that, I'll turn the call back over to Michael.

Thanks, Jim. Before Rick, Jim and I take your questions, I want to emphasize some of what you've heard from us today and to underscore where we're headed as a team. There is no question that this is a period of transformation for Target.

The environment around us continues to evolve, whether it's shifting consumer demand, changing competitor dynamics or broader macroeconomic pressures. But let me be clear, we are not waiting for conditions to improve. We are driving the change ourselves right now. We are taking bold decisive steps to reshape how we work and reignite growth with urgency, focus and confidence in who we are and who we can be.

We know what makes Target special, an unmatched merchandising authority and the ability to create joy through an elevated and inspiring guest experience all enabled by the power of technology to amplify both speed and connection across every part of our business. These are more than ideas on a page. They are the pillars of our strategy, shaping every decision we make, and they are coming to life right now across the company.

We're hard at work to simplify how we work to make faster, smarter decisions. We're laser-focused on strengthening our foundation in our supply chain, our stores, our digital experience and our technology capabilities. We're relentlessly striving toward greater authority in merchandising by combining data-driven insight with a design leadership and creative spark that makes target.

And together, these actions are paving the way for what comes next, a return to sustainable profitable growth. While many out there have questions about where we'll go next, we are confident we're on the right path. That's because we're building from a strong foundation, a brand that guests love, a culture that's resilient and a team that's united behind a shared mission to help all families discover the joy of everyday life.

As we look ahead, we're not just talking about getting back to growth. We're talking about building a stronger, more innovative target that's ready to lead in the next era of retail, one that moves faster, connects deeper and stands taller in the hearts and minds of our guests. And to our investors, partners and the financial community, thank you for your continued engagement.

And if you're frustrated with our recent performance, we are too, and our entire team is working incredibly hard to return to growth and live up to our full potential. Finally, in the spirit of thinking and working differently, I'm excited to share that this year's financial community meeting will take place right here in Minneapolis on March 3. It will be a peak behind the curtain to help bring to life what we've talked about today in a more tangible way, providing a first-hand look at how we're evolving our assortment and technology, all in service of returning to growth.

We look forward to seeing you all in Minneapolis this spring, and we'll be sending out more information very soon. And now we'll move to Q&A. Rick, Jim and I will be happy to take your questions.

[Operator Instructions] Our first question comes from Simeon Gutman with Morgan Stanley.

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

Yes. Thanks for the question, Simeon. We've got a pretty big Q4 holiday season that we'll get through before we unpack the specifics for next year. But what I can tell you is we're committed to making the right investments to get the outcomes we want when it comes to leading with merchandising authority and elevating the experience. We also have a lot from which to draw on there.

The team is doing a wonderful job of finding efficiency within the business and changing some of how we work to reinvest. I mean, an example of that is some of what we found in elevating the store experience, we've taken a lot from our fulfillment market tests in Chicago. And as a reminder, that's about changing kind of how we organize stores against the work to be done.

We found that making some stores round box shipping specialists because they've got the capacity, they've got the big back room. They might be a little lower volume in general, let them ship that brown box product so that we can free up our busiest in-stores our busiest in-store guest experiences to focus on serving that in-store guests. And so changes like that, we've seen good results in.

We're rolling out some of the learnings from that test to 35 more markets here before the year is out. And that's the type of change we believe can fuel the step-up in experience that we want. And so we're excited about doing the work to get better outcomes when it comes to leading with merchandising authority and elevating the guest experience, and we feel like we're on the right path.

The other thing I might add is you heard us describe our capital investments for next year. And that's putting capital to work and direct support to the priorities that we've laid out. And like we always have, we invest capital where we see strong return. And so we're excited to make the investments in technology, supply chain, but especially store experience next year, more remodels, a strong new store pipeline, more change to the broader store. And so I think that's an example of us seeing the opportunity to invest to get growth and leaning into it.

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

And the things that I'm most excited about are some of the places where we're seeing momentum already. Take, for example, the work that we're doing in FUN 101. That's a perfect representation of us bringing real focused strategy to the categories that we used to call hard lines to say, what categories are what we do -- are the things that we do uniquely well, best positioned, how do we bring style and culture and design leadership to those categories.

And so we've made more change in those categories. And we see response in those categories. It's good to see categories like toys is running an almost 10% increase in Q3. It's good to see the places where we've applied focus moving in the right direction. I think the same is true on experience. The work we're doing to create a consistently elevated experience, we like the trajectory there.

That starts with the basic being in stock as part of a great guest experience, and we're seeing real meaningful progress from the team's incredible work to move the needle in the right direction there. And while on that front. We're not yet satisfied. We're not yet where we want to be. We like the direction of travel a lot.

And so we'll continue to do the work and apply the focus to get improvement in the direction that we want there. Rick, I don't know if you want to add anything on the product side for some of the places where we've got changed and where we're seeing a strong guest response.

Yes. I mean I can -- well, how about this. I'll talk a little bit about some of the capabilities that were the question addressed about which capabilities do we want to -- are a priority for us to evolve? And I want to highlight merchant -- roundtable evolution because it is so important to having those right products that are going to deliver the growth.

And it is a cross-functional team that we've had in place. But if you think about the decisions that we made a couple of weeks ago to reduce the footprint in HQ, a big part of that was around simplifying the organization so we could make decisions faster. The next step in that is to outline how we're going to work differently, clarify roles written responsibilities, clarify decision-making. That's the work the team is doing now.

And then what I'm really excited about is in adding in the automation and the technology so the team could spend less time doing the analysis and spend more time being creative coming up with those new ideas that are going to meet consumer needs and fuel growth like what we're doing in FUN 101.

To build on Rich's last point there. I think the role that technology plays -- the technology will play is going to be incredibly important across the enterprise, but a huge shout out specifically to the pace at which Pratt and team are moving. I like the acceleration of the path forward in technology.

I think you can see that in some of the AI examples that we shared today, but you can also see that in some of the core foundation base that we know we have work to do to make sure our teams have all the tools at their fingertips to build the right assortment, segment in that assortment, use technology more powerfully to automate how product moves through our supply chain. And so that continues to be a key area of focus for us. But the urgency with which we're moving that work along gives me a lot of confidence.

Our next question comes from Corey Tarlowe Jefferies. .

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

Yes. Great question, Corey. And I think about it in 2 ways, and this is a conversation that Jim and I have regularly with input across the team, obviously. But it's 2 things. One is it starts with a focused strategy, investments needs to follow the path that we think drives the most growth for Target, and that starts with clarity on the strategy.

And the second is we chase returns. And so the places where we're excited to step up investment are places where we expect really strong returns. That starts with investments in our stores, and those come in a couple of forms. You've heard us talk about the strength of our new store pipeline. That pipeline continues to be as strong as ever. It's been just a delight to watch the new store openings this year, especially those bigger boxes that continue to outperform our expectations.

And there's nothing more fun than walking a brand newly opened store in a market that maybe didn't have a target or didn't have a target close to that neighborhood and to see the response in the community when we open a store. And that response is great on the faces and voices of those guests, and it's also great in terms of the incremental sales it provides and the high returns we see in those new stores.

The second place where you'll see us continue to lean in is in store remodels and refreshing the existing fleet of stores. And while we've been talking about that for several years, we've been hard at work, as Brian even touched on in his opening remarks of remodeling the chain, that work isn't yet finished, and we want to make sure that we're investing in some of the stores that when we bring our latest and greatest store experience we see a reliable strong response from guests.

We continue to see strong sales lifts that justify the investment in those remodels. And so for the stores that haven't yet seen a remodel, we think it's imperative that we bring our latest and greatest thinking. That's a direct investment in the store experience itself back to the strategy. And the merchandising authority because when we do a remodel, we reallocate the space up to our latest and greatest thinking by strategy, and that helps the merchandising drive some of that sales lift.

And then importantly, technology will continue to be an area of focus for investment. We know the power of technology to help the humans and the humans that we focus on most there are obviously our guests and our team. And so wherever we can lean in and use technology. And again, it generates returns when we make things more delightful for our guests and the way technology can help with personalization on the app or help us get product to their doorstep faster and then for our team where we can allow the process-focused work of the team to get a boost from technology that frees up our store teams to better serve guests.

And so there's a lot of examples within that CapEx investment. But at its core, or does it directly support the areas of focus within the strategy and do we like the returns. And then the answer to those 2 questions is yes, you're going to see us invest.

Corey, if I can add just one more thing on top of that. When we add new stores, the added benefit for us is that we continue to build out our fulfillment footprint and capability and allows us to also expand our national digital reach as well, so that at a benefit of new stores.

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

So curious about how you think about the ability for the business to change today and how you're building for the future in that regard?

And Corey, if I zoom out change is going to be incredibly important. And you've heard us say quite plainly, we're not satisfied with our performance over the last few years. While the third quarter came in as expected, you're not going to get a ton of satisfaction for us until that's accompanied by the growth that comes with a positive comp. And so we've got to do the work. There's no shortcut.

And that means driving change to get different outcomes. We're starting all of that change with really clear priorities. We know how Target is best positioned to uniquely win. And when we lead with great product, when we're design-led and differentiated and we pair that with an excellent experience, that's what's driven Target's strength in the best of times before, and we think the modern version of that can get the growth outcomes that we want.

And so that does mean doing the work. That means doing the work to make changes like we are in FUN 101 to get different outcomes on the merchandising side. That means making the right investments and driving the change so that, that experience can be great in every store, every day in stores and online, but we're doing the work and a huge credit to the team that you can see the progress of that work in ways that get us excited about what's to come even within those third quarter results because we can see where we've focused and made change.

We're getting some of the outcomes that we want. And so next year, we'll be about expanding upon that to bring more of those wins across the business at greater scale.

Our next question comes from Joe Feldman with Telsey Vicari Group.

I wanted to drill in a little bit more there on some of the changes. When you're talking about the in-store changes for next year. Are there any examples you can give us? I know you mentioned there are key pads within the store maybe.

I'm assuming like the FUN 101, but broadening it out, maybe you could share a few examples.

I'd be happy to share a few examples. Let me start with FUN 101 because we talk about it as a success story, and we are delivering growth, but it's just beginning. We still have more changes to make to FUN 101 to truly make that a family destination that's full of style, trend, design, pop culture.

So you're going to see those changes come to life in '26. The other area that we're making some changes is in home. Home has been a challenged business for us. We are making changes to the product to elevate the style of the product but then we're also changing the store experience to facilitate more discovery to facilitate more inspiration and really stand tall for what will be a revamped a reinvented threshold brand.

So those are some of the -- we're making changes. Obviously, our contract with Ulta Beauty ends August '26. So teams are working really hard and coming up with some great ideas for how we will expand our assortment and then how we'll also elevate the experience. We'll be able to share more specifics on that at the Financial Community Meeting.

And we're making some changes in Baby. We think baby strategically is a really important category for us. We have historically done very well there. It's an acquisition kind of category, we bring people into Target and it starts kind of along several years of loyalty as their children grow up. But we have an opportunity to make that space a little bit more inviting, a little more inspiration and also bring more gifting into it.

So those are just some headlines of what we're looking at. We'll be in a much better position at financial community meeting to share more specifics on those plans. But I got to tell you, I am really excited about these changes. And I think as we said in the prepared remarks, this is the most change we have made to the store floor pad in 10 years. So we're -- it's a lot of work, but we're really excited about it.

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

Sure. I'd be happy to talk about Target Circle. What we love about Target Circle is it's huge size. It's one of the biggest loyalty programs in the country. And now with Target Circle 360, we have a membership component to it. And what's really exciting about that is it's really helping to fuel our same-day delivery.

Target Circle fueled a 35 comp growth in same-day delivery this past quarter, which is really encouraging. The conversations that we're having is now at, how do we continue to innovate and evolve on the platform. and things that we are looking at and trying or early access events with Target Circle 360. We did that this past October with Target Circle week, and it was really well received.

So we'll be doing a lot more of that this holiday season. And the last point I would make is we're really excited to have the first-party data that we get through Target Circle and be able to leverage that for personalization, particularly through this holiday season. So that will be one of the tools in the toolbox that we'll be using.

And Joe, if I can just build on the question also specifically on card. If you're referring to what you see in the results from profit sharing, we did see lower spend, a little bit lower penetration and overall lower balances in the card program. But what's important is what Rich has highlighted is that when you think about our whole loyalty program holistically across Circle 360 and the card program, and we're very pleased with the results we're seeing so far.

Where we do have an opportunity, Joe, is to use where Rick started with that big base of target circle. It's a better on-ramp to folks for whom a circle card makes a lot of sense. And so that's a place where we haven't yet achieved our potential.

And so making sure that we because we can know a guest and circle so well, that means we should be positioned to know which of them at the right point in time would most like a circle part too. And we've got work to do on that front. We haven't tapped into that to the degree that we would have hoped. And so you'll see that be an area of focus going forward for us.

Our next question comes from Mike Baker with D.A. Davidson.

Yes, can you hear me now? Okay. So I think you said -- correct me if I'm wrong, but October flat, yet you're guiding to down low single digits to the fourth quarter. Is that indicative of a little bit of a slowdown post Halloween? And I guess, as a follow-up to that, a pretty wide range in terms of EPS for the fourth quarter. Can you talk about what you're expecting in terms of margins within that fourth quarter range and how you get to the low end versus the high end, et cetera?

Yes. I'm happy to start, Mike, and Jim, feel free to add on. If you look at -- while the quarter came in where we expected it overall, we definitely did see volatility by month. You heard Jim describe that on a net sales basis, the quarter started with a relatively flat August. We saw a decline in September and then October was about flat.

And so as we step back and think about the fourth quarter, we do it, knowing that we saw more volatility by month in Q3 than we would have expected. And so that factors in to how we're thinking about our expectations, but we feel good that we've got the business positioned well heading into fourth quarter. We feel like our top line and bottom line guidance is prudent based on the volatility that we saw in Q3.

And we start the quarter in a really good place, something we haven't unpacked as much yet. So I'll touch on it briefly is that inventory is in a great place as we step into the fourth quarter. on the balance sheet, it's down 2%. It's up in our frequency categories, which makes sense given the investments that we're making there and stronger inventory reliability and in-stocks and it's appropriately down, I think, in an appropriately cautious position in the discretionary categories.

And so we start the quarter where we would want to be positioned from an inventory perspective, and we feel like it's the prudent place to be. Jim, feel free to add as we're thinking about profit for the fourth quarter or how we've reflected Q3 trends into that view.

Yes, Mike. And if I build up on that, I mean if you take a step back and look at Q3, obviously, we faced a pretty dynamic environment. And as our gross margins and percentage-wise was broadly flat, we're pleased with the performance, and that's in line with expectations and a big thank you to the team to manage and navigate and move quickly with agility to meet the needs of consumers and understand where things are heading.

We expect that dynamic to continue in Q4. We do expect a continued volatile environment, which is why there's a little bit still, I guess, a wider range in place because we want to make sure we are -- we have the ability to react quickly to change this new environment that will represent the range that we're looking at.

Only build I might have, and Rick, feel free to chime in here as -- we don't have a perfect crystal ball for exactly how it's going to play out by day or by week in Q4. But the thing we feel really good about is how we'll show up for the guests.

You've -- we've touched a little bit on some of the questions on making sure that we meet the guests where they're at. And for us, that's always a couple of things because there's a couple of ingredients of how guests view value. It's the combination of great prices, and you heard us invest in 3,000 price cuts across Food & Beverage and Essentials we're really excited about a Thanksgiving meal for 4 under $20 as we step into Thanksgiving here right around the corner.

And for Target, it's also pairing that great price with incredible product. And so I'm just as excited about the 20,000 new items that we'll have this coming fourth quarter, twice as many as last year as I am about the great pricing guests will find on those items. And so it's that combination for us that matters so much. And on that front, we feel really good about what guests are going to find as they travel the site and the store and the holiday season.

Our next question comes from Kate McShane with Goldman Sachs.

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

Yes, Kate, as I think about inventory broadly, we touched on a little bit of that, and Mike's question a second ago, but I do think it's important to spend a moment on in-stocks. And I would expect because being in stock matters so much to our guests, that's a topic you see us come back to over and over and over again in all of these earnings calls to come because it matters so much.

If you've trusted us with a trip to the store, we can't let you down by being out of stock and we haven't been good enough over the last several years on that front. And so we're laser focused on improving that. And a huge credit to the team for the progress that we've seen so far. I can dimensionalize that just a little bit more here in a second. But I also want to emphasize that work is not done.

The bar for the consumer for our guests is higher than ever before on that front. And so you're going to see us continue to lean in to make progress over time. Where we've started is with a really acute focus on those most frequently purchased items, where if we're out of stock, it hurts more, if you're a guess, and we've let you down. And so you heard in my remarks, the focus on our top items. So think of those as the 5,000 most frequently purchased items.

They account for about 30% of our unit sales. And so a big piece of what guests are finding and buying every day at Target. And as the team has leaned in to make progress on that subset of items, it comes in a whole bunch of ways. It comes with embracing the use of technology to help us forecast better and being more in stock that way. It comes with us having a better view of how we're really performing. We've described it before.

We've changed some of the measures we use for in-stocks that give us a clearer mirror than ever before where we're doing great and where we're falling down. And that's been really helpful because it's told us Okay, we might be okay on average in some places, but we're not good enough at the end of the day or we have a shortfall on weekends that we need to address. And so teams have been hard at work in moving the needle there.

And on the measures that we move, you heard me describe a 150 basis point improvement in Q3. If you're not close to the work, it's maybe tough to appreciate how big that progress is. But what I like is that better year-over-year improvement in Q3, performance versus last year than we saw in Q2, which was better than we saw in Q1.

And that trajectory gets me really excited that we're doing the right work to get a different outcome. And if we can keep that progress up and I have a ton of confidence that, that's exactly what we'll do. We'll be more and more in stock as we move through 2026 than we were in 2025. Operator, I think we have time for one more question.

Our last question will come from Michael Lasser with UBS.

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

Yes. Thanks for the question, Michael. Here's what I'd say. We're not satisfied with the top line performance of the business, even as it's come in as we expected in Q3. And so we're doing the work with urgency. As a team, our focus is to get back to growth. And we know that won't happen overnight, but we know what the path is.

We're focused on making progress. We see momentum where we're making that investment a huge credit to the team to do the work that's going to get that outcome over time. And so we'll unpack more what our expectations for next year look like when we get to the financial community meeting in March. But I feel really good that we've got a team focused on doing the work now that will lead to growth over time. And rest assured, we are tackling that work with urgency.

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

Go ahead.

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

Well, and Jim, feel free to pile on to this one if you'd like. You've heard us describe our support and strong support over time of the dividend, Michael, you shouldn't expect anything to change there. We've been consistent in our capital priorities for as far back as I can remember in my 23 years here.

And it starts with making the right investments in the business. The $5 billion we'll put to work next year. We're really excited. We'll generate the returns and the growth that warrant that level of investment. The dividend is always the second priority, and I think our track record speaks for itself in terms of our support of the dividend and share repurchases with what's left piece that we'll always adjust as appropriate, but the dividend sits second in that priority list for a reason. Thanks, Michael. That brings us to the end of today's call. Thanks, everyone, for your questions and engagement.