Earnings Call Transcript - TGT Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation First Quarter Earnings Release Conference Call. As a reminder, this conference is being recorded Wednesday, May 20, 2020.

John Hulbert, Vice President, Investor Relations

Good morning, everyone, and thank you for joining us on our first quarter 2020 earnings conference call. On the line with me today are Brian Cornell, Chairman and Chief Executive Officer; John Mulligan, Chief Operating Officer; and Michael Fiddelke, Chief Financial Officer. In a few moments, Brian, John and Michael will provide their perspective on the first quarter and our continued focus on our guests and our team as we navigate through the current environment. 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, Michael 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, the most important of which are described in our most recently filed 10-K and the 8-K we furnished this morning. 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 for his thoughts on the first quarter and the short-term and longer-term implications for our business.

Brian Cornell, CEO

Thanks, John, and good morning, everyone. We appreciate that you've joined us on this morning's call, and we hope that you, your family, and friends are safe and healthy. This quarter was unlike anything we've seen in our company's long history. While we didn't establish another all-time record for this quarter's EPS, I have never been more proud of our performance. Over the last few years, we built a strategy and operating model that's designed to generate strong performance in a wide variety of environments, and the first quarter demonstrated the strength of that model. Unprecedented volatility within the quarter presented the most extreme test of our business and operations that I could have imagined, and in that environment, we drove industry-leading growth with a total comp sales increase of 10.8% and digital comp growth of more than 140%. As I reflect on all that's transpired since the quarter began in February, there were two key factors in our success: our strategy of positioning stores and fulfillment hubs and our incredible team. When guests began flocking to our stores to stock up, our team was ready. When digital demand exploded as guests began to shelter in place, our teams had the tools, processes, and capability to flex to meet that shift in demand. But it goes well beyond processes and tools because our team's efforts on behalf of our guests and communities have been monumental. The pride our team has shown and their willingness and ability to deliver essential products and services to our guests is humbling and inspiring. Our guests are putting their trust in Target. The team is delivering, and they deserve our enduring gratitude. At our financial community meeting at the beginning of March, we highlighted multiple dimensions of flexibility built into our operating model. We offer a balanced merchandising assortment that is unique in retail, allowing Target to serve our guests' rapidly evolving demands for wants and needs. We have a unique digital strategy based on a curated assortment of the categories and items that our guests expect from us. We deliver this digital assortment through a comprehensive suite of fulfillment options, including our rapidly growing same-day services, in-store pickup, Drive-Up, and Shipt. In support of our digital strategy, we place our stores at the center of fulfillment, which gives us both speed and efficiency. This structure also allows our teams to pivot seamlessly when our guests' channel preferences change. We have teams at headquarters, stores, and throughout the supply chain who are relentlessly focused on our guests and who place a premium on agility and adaptability. With a strong balance sheet and a business model that generates robust cash flow, we have the financial flexibility to handle difficult times like this, allowing us to fund investments in the safety of our guests and our team while serving a critical role in communities as a trusted essential retailer. Given our unique assortment and comprehensive suite of fulfillment options, we could see firsthand how our guests' mindset rapidly evolved during the first quarter. While it already feels like years ago, during the first three weeks of February, we experienced a relatively normal mix of sales across merchandising assortment and a typical mix of sales between our stores and digital channels. Towards the end of February, we saw an acceleration in traffic and sales, particularly in our stores. However, we continued to see a lot of cross-shopping in the more discretionary categories when guests made trips to stock up on food and essentials. Around the middle of March, the mix of guests' purchases became much more focused on food, beverages, and household essentials, and we began seeing much softer trends in discretionary categories, most notably in apparel. Additionally, as shelter-in-place rules were adopted across the country, guests began to pull back on store trips, and we saw a dramatic surge in digital traffic and sales. We also began seeing higher demand for products oriented around staying at home, including home office products, video games, puzzles, and board games, along with essential housewares and kitchenware in our home assortment. Finally, around the middle of April, we experienced a rapid increase in traffic and sales in our stores and a broad surge in sales of more discretionary categories, including apparel, which persisted throughout the end of the month. The surge in stores occurred while our digital growth continued at unprecedented rates of 200% to 300% above last year. As a result, over the last couple of weeks of April, we saw some of the strongest comparable sales growth we've experienced in our history. When you put all these chapters together and look at the first quarter in total, our comparable sales grew nearly 11% with a wide range of performance across categories as guests changed their shopping patterns in response to the crisis. Among our five core merchandising categories, we saw the strongest performance in Hardlines, which grew comparable sales by well over 20%. Growth was particularly strong in electronics where comps grew more than 45%, reflecting high demand for video games and home office items. Essentials & Beauty saw high-teen comp growth while comps in Food and Beverage grew by more than 20% as guests trusted Target for both their stock-up trips and their everyday needs. In Home, we saw high single-digit comp growth, led by kitchen, which saw comp growth in excess of 25%. Apparel saw a decline in first-quarter comparable sales of about 20%, reflecting soft sales in late March into early April, followed by a resumption of growth in the last two weeks of April. Overall, we're seeing unprecedented share gains across every measure relative to U.S. retail. Clearly, in portions of our business, share statistics reflect the fact that nonessential retailers across the country have remained largely closed. We sincerely look forward to the day when our retail colleagues can reopen. A healthy retail sector is critical to the overall health of the U.S. economy. Employees of our competitors often shop at Target too. More fundamentally, we believe recent share numbers reflect the trust that our guests have placed in our stores, our digital capabilities, our team, and our brand. In particular, our teams have risen to meet our guests' needs and deliver friendly, reliable service during this unprecedented time, and we believe that our guests' level of trust has deepened throughout this crisis. From a channel perspective, first-quarter store sales grew about 1% while digital comp sales increased by 141%. Of course, these quarterly numbers mask how quickly trends changed within the quarter. Specifically, we began the quarter with a relatively normal February, in which we saw overall comp growth of 3.8% and digital comp growth of 33%, and ended in April with total company comp growth of more than 16% and a jaw-dropping 282% increase in digital comp sales. I want to pause and comment on that April digital performance for a moment because I suspect many of you might have wondered whether our operations could sustain such a strong increase for an entire month. To put this volume into perspective, on an average day in April, our operations were fulfilling many more items and orders than last year's Cyber Monday, a day for which we had planned months ahead of time. In contrast, this unprecedented surge in volume was completely unexpected at the beginning of the quarter, and it ramped up from normal trends in a matter of weeks. By design, our stores enabled this surge in digital volume, fulfilling more than 80% of our digital sales in April. Even more impressive, within our April digital sales growth of just over $1.1 billion compared with last year, store fulfillment accounted for more than $950 million of that growth as both our same-day services and shipments to guests' homes saw significant increases. How is this accomplished? John will provide more details in a few minutes. I reiterate that it comes down to our strategy of using our stores as hubs and the ability of our team to quickly pivot to meet shifting demand. While we incurred extra costs to accommodate this incredible surge in digital fulfillment, we expect to gain a long-term benefit in terms of guest loyalty. During the first quarter, more than 5 million guests shopped on Target.com for the first time, with more than 2 million of those guests making their first Drive-Up trip. Our amazing team has ensured consistently strong levels of satisfaction with the Target.com shopping experience, even in the face of a crushing increase in demand. Now I want to turn to our focus going forward, which won't change. We continue to focus on serving our guests while providing for their safety. We will continue to focus on our teams, investing in their safety and well-being while working to remove obstacles and allowing them to serve guests during this critical time. Throughout this evolving crisis, we have continually adapted our operations and processes to enhance guest and team member safety. Looking ahead, we'll continue to quickly adapt to changes in the environment and emerging guidance from the CDC and other authorities. Already during the first quarter, we took numerous steps to protect our guests, Shipt shoppers, and our team members, including enhanced cleaning standards, providing personal protective equipment to our team members and Shipt shoppers, installing plexiglass dividers at checkout, and implementing metering protocols in our stores where appropriate. For our team, we rolled out a wellness checklist for them to perform before each Shipt and provided free thermometers to team members who needed them. We invested hundreds of millions of dollars in extra pay and benefits for our team, adding $2 to their hourly wage, investing in enhanced backup daycare options across the country, and offering enhanced paid leave for team members with vulnerable health conditions. Consistent with our long-standing commitment to the communities where we live and work, we donated personal protective equipment to over 50 healthcare organizations and shared tools and expertise with government partners and other businesses to help protect healthcare workers and assist other businesses in reopening and operating safely. Additionally, we recently announced our foundation's biggest single donation in company history, $10 million, to assist team members, communities, national organizations, and the global response to this pandemic. Beyond our corporate commitment, thousands of team members are volunteering in their local communities, including a group of 3D-printing enthusiasts on our technology team who are using their personal devices to produce and donate plastic face shields to local hospitals. Recently, we announced the extension of higher pay and enhanced benefits for our team through the end of June. Initially, these temporary changes were supposed to end in April, but we announced they were extended through May. As the country begins to discuss how things will look when we return to normal, our teams continue to face unprecedented challenges as they serve families and their communities. We are proud to support our amazing team members as they navigate these challenging times. Regarding our financial expectations, Michael will offer his perspective shortly, but we're maintaining our recent suspension of financial guidance. Currently, the one thing that seems most certain is continued volatility, and whenever possible, we're building flexibility into our plans and commitments. But let me be clear, the expectation of continued volatility in the external environment doesn't translate to a lack of confidence about our future. If there's one thing our team and operators have demonstrated, it's the ability to adapt to rapid change while continuing to deliver outstanding service to our guests. During times like these, we can all see the benefit of a strong balance sheet and a fundamentally sound business model. This financial strength provides us with the flexibility to focus on what matters most, our guests and our team, assuring us that we'll emerge from this crisis as a stronger, more relevant retailer with an even higher level of affinity and trust among our guests. As I turn the call over to John, I want to once again thank the entire Target team, from headquarters to our operations and offices around the world. I've never been part of a stronger team, and I share your pride in the essential role that Target is playing in the lives of our guests. Thank you for your inspiring efforts every day. John?

John Mulligan, COO

Thanks, Brian. On these calls over the last few years, I've described our long-term journey in operations to completely transform our supply chain and fulfillment infrastructure, moving from our prior linear model based exclusively on store shopping to a unique modern structure designed to support a broad array of fulfillment choices; to position our stores as the hub for guest fulfillment, whether a guest trip is based on traditional shopping, use of one of our same-day services, or delivering a package to their front door; to invest in technology, data, and analytics to increase our inventory accuracy and better forecast demand throughout the network, leading to improved in-stocks, higher guest satisfaction, and ultimately, stronger sales; to transform how we select and build store sites, moving from a rigid, large-format prototype model to a model in which we focus first on the neighborhood we want to serve, design a store to fit within the available space and then curate a merchandise assortment to fit that particular neighborhood; and finally, to transform our store team, moving from a model based on general athletes to one in which different parts of the team have accountability for individual businesses, supported by tools and processes that allow them to make decisions in real-time and focus on serving our guests in new ways. One goal of all these changes was to make our operations and our team far more nimble and agile in support of our guests. While this journey is far from over, this quarter demonstrated the benefits of everything we have already accomplished. As Brian mentioned, over the course of the first quarter, our team had to pivot dramatically and rapidly in response to multiple changes in shopping behavior: comps in essentials and food and beverage moving from single digits in February to peaks above 50% in March before settling down into the teens in April; apparel trends moving just as rapidly in the other direction, from positive single digits at the beginning of the quarter to trough declines of more than 50% beginning in late March, before resuming growth in the last half of April. With this volatility in category sales, managing our inventory has also presented a significant challenge. In apparel, given the recent dramatic slowdown in sales, teams have been working closely with vendors to make appropriate changes based on our current inventory and future purchases. Across our core merchandising categories, we've seen a dramatic increase in the pace of sales causing out-of-stocks to rise well above where we'd like them to be. In need-based categories like food and beverage and essentials where comps have accelerated into the 20% range, we have been on allocation from multiple vendors as they work to ramp up production to cover the higher level of demand. Among some categories like paper, in-stocks have been recovering in recent weeks. But across many portions of both essentials and food and beverage, we continue to sell out quickly when we receive shipments of products from our vendors. In other categories like home and electronics, we have been increasing order quantities to match the higher pace of sales. However, given that many of these categories are primarily imported, we will likely see persistent out-of-stocks until we can receive replenishment inventory from overseas producers. Beyond categories, the volatility in shopping channels has been just as extreme, with store comps moving from positive numbers to double-digit declines in late March and early April, then back to growth towards the end of April; digital comps moving from around 30% in February to nearly 10x that pace in April. Through all of these extremes, the team maintained a positive attitude and demonstrated their pride in the positive role that they're playing in our guests' lives. I am humbled and inspired by what they've been able to deliver on behalf of our guests. The ability of our team and our network to attain and sustain digital comps of nearly 300% for the entire month of April has been incredible to watch. There are too many stats to share, but I'll tick through a few because they're helpful in understanding how remarkable it's been. Multiple measures of unit volume, including ship-from-store, Target orders fulfilled by Shipt, and overall digital, were higher in the first quarter of 2020 than in the first three quarters of 2019 combined. Units provided through Drive-Up in the first quarter were higher than in all of 2019. Sales of orders shipped from stores or picked up in stores increased nearly 150% in the first quarter. Target sales fulfilled by Shipt were up more than 300%, and sales through Drive-Up were up more than 600% compared to a year ago. In April, sales on Drive-Up increased nearly 1,000% compared with a year ago. These growth numbers reflect the fact that Drive-Up continues to be our most popular service and that the number of guests trying and repeatedly using Drive-Up continues to increase rapidly. Specifically, more than 5 million guests used our Drive-Up service in the first quarter, with 40% of these guests new to the service. Amazingly, despite this unexpected explosion in first-quarter digital volume, the team continues to execute with amazing speed. Both the percent of orders shipped from stores on time and the percent of pickup and Drive-Up orders completed on time was approximately 95% in the quarter, and both measures were higher than the first quarter a year ago. One observation we've made during this crisis is that it is causing an acceleration in consumer trial and adoption of digital shopping. The ability of our operations to handle this unexpected acceleration has given us even stronger conviction that we have the right model and ample capacity to handle continued change in the future. Part of our long-range plan at the beginning of 2020 anticipated our first-quarter digital volumes a few years out, but our operations have accommodated this extra volume without any advanced planning. Like Brian said, it was an extreme test of our model, and our team performed admirably in the face of the challenge. Another area where the crisis has accelerated existing trends pertains to the amount of retail square footage in the U.S. We've long understood that the U.S. market is over-stored, and we've all noticed the rationalization of unproductive retail space in recent years. Still, I want to emphasize our belief that the future of U.S. retail will be based on an omnichannel model, allowing quality retailers to serve their customers through both physical and digital capabilities. That's why we've consistently pursued a strategy focused on investments to enhance both physical and digital shopping. While we have temporarily slowed down our plans for remodels and new stores due to the crisis, this doesn't signify diminished enthusiasm for these projects. Rather, we've slowed down our plans for two specific reasons. First, we wanted to remove obstacles and distractions for our team so they could focus exclusively on day-to-day execution amid extreme volatility across multiple dimensions of our business. Second, we adjusted our plans anticipating changes needed in construction processes to ensure social distancing and other measures, which we expect will slow down timelines in some cases. Furthermore, we expect that more time will be required for inspections and permitting related to these projects, given the additional demands local governments now face due to the crisis. While it's too soon to lay out longer-term timelines for our remodel and new store programs, we look forward to re-engaging with these projects when appropriate, allowing us to continue transforming our real estate footprint through modernization of existing spaces and selective addition of productive new small-format locations in neighborhoods that couldn't be served when we primarily relied on larger stores. A strategic initiative we temporarily paused during the first quarter involved integration of fresh, refrigerated, and frozen items into our pickup and Drive-Up capabilities. While we're eager to add this capability, we decided not to introduce this test during this peak volatility period. However, we've recently resumed the test in the Twin Cities market, where it had already begun last year, and recently expanded into the Kansas City market. Operational results have been positive so far, and while we will continue to manage the pace of rollout based on our team's circumstances, we are committed to expanding this capability to as many stores as possible this year. Another exciting strategic development is our recent acquisition of local route optimization technology from Deliv. After encouraging results from recent tests with this new capability, we decided to acquire the technology and hired members of their team to assist with integration into our existing systems and processes. We're enthusiastic about this new technology as it offers the potential to increase capacity within our fulfillment network while also reducing last-mile delivery costs, which is the largest cost driver related to digital. This opportunity to manage those costs will significantly impact our operating margins over time. With this new technology, we can begin testing the addition of sort centers downstream of our stores within our fulfillment network. These centers, which we expect will be smaller than our average store, will be placed in select markets where we have a high density of packages being sent to guests' homes. By eliminating the need to sort packages in individual stores, the throughput of packages from these locations will naturally increase, allowing us to achieve lower shipping costs through scale and route optimization that these downstream centers provide. Since we only recently acquired this new technology, we don't yet have a timeline for testing. What I can say today is that we plan to test the first of these centers in the Minneapolis market and will follow our normal practices of testing and iterating before we decide to scale up. I want to conclude by thanking our store, distribution, and fulfillment center teams. Society has long recognized the sacrifices of essential workers in the health care industry and public service, like police officers and firefighters. This crisis has highlighted the essential role of team members at Target and other retailers who ensure that families have access to food and the necessities to maintain their health and households. I've long appreciated the work of these teams since I've been fortunate enough to work alongside them for more than 20 years. With our efforts now in the spotlight, I couldn't be prouder to see their significant contributions acknowledged. Thank you to everyone on our team for your hard work and sincere desire to serve all the families that place their trust in Target every day. Michael?

Michael Fiddelke, CFO

Thanks, John. As you've already heard several times today, this quarter was far different than anyone would have modeled 90 days ago across multiple dimensions of our business. And like everyone else, for the last few months, our team has been deeply involved in the details, helping our business respond effectively to rapid changes in category and channel performance. When you pull back from all the detail and daily volatility, a few themes have clearly emerged. First, this environment has provided an accelerated real-time test of the investments we've made in our longer-term strategy and operational model. Our business has performed better under these conditions than we ever imagined. Second, this environment vividly illustrates why quarterly profitability isn't always the best indicator of long-term potential. If you solely looked at our first-quarter EPS, which was down more than 60% compared with last year, you might be tempted to say that our performance was disappointing and that our long-term prospects were weakening. I would assert the opposite. Our team's accomplishments and the service we've provided for our guests indicate our long-term prospects have strengthened over the last 90 days. Simply put, I wouldn't trade Target's future prospects for anyone else's in the marketplace. Now, I will run through our financial results, providing our long-term perspective before I hand over the call back to Brian. Overall, our first quarter comparable sales grew 10.8%, reflecting some of the strongest growth our business has ever seen. Total sales grew 11.3%, about 50 basis points faster due to sales from our non-mature stores. Among the drivers of our comp growth, comparable traffic was down 1.5%, and the average ticket was up 12.5% as guests consolidated their shopping trips into larger baskets. Among channels, store comparable sales increased 0.9% while digital comp sales grew 141%. As Brian and John highlighted, quarterly averages for category and channel growth don't show the volatility we experienced throughout the quarter. On the gross margin line, our business delivered a rate of 25.1%, down about 450 basis points from a year ago. Obviously, this is well below what you would expect in normal times, but these times have been anything but typical. There are three major drivers contributing to this quarter's decline. First, we incurred hundreds of millions of dollars in incremental costs, including inventory impairments stemming from the severe slowdown in apparel sales. For context on these costs, prior to the first quarter, comp sales in Apparel & Accessories had been growing over 5% but quickly decelerated to more than a 20% decline in the first quarter. If the prior trends in Apparel & Accessories had continued, first-quarter sales in that category would have exceeded $800 million more. A second source of pressure was category sales mix, as we saw wide divergences in sales trends across our business. Our three lowest-margin categories, Hardlines, essentials, and Food and Beverage, each saw first-quarter comp increases in the high teens or higher. In contrast, our two highest-margin categories, Home and apparel, saw slower trends with Home in the high single digits and apparel experiencing a decline of over 20%. Altogether, category sales mix accounted for over 150 basis points of this quarter's gross margin decline. The third major factor was digital fulfillment and supply chain costs, as digital penetration more than doubled relative to last year, driving nearly 10 percentage points of our sales growth. As John mentioned earlier, we were already planning to reach this level of digital sales penetration over time, but this crisis has rapidly accelerated the pace of digital adoption among U.S. consumers. Importantly, given the outstanding performance of our team and operations in the face of this unprecedented surge in volume, we've continued to see high guest satisfaction levels with our digital fulfillment, which is a positive leading indicator of guest loyalty, engagement, and market share over time. Moving down to the SG&A expense line, our first-quarter rate was 20.7%, about 10 basis points lower than a year ago. Expense performance was driven by numerous factors, but two primary drivers stood out. The first was the incremental costs incurred as we responded to the crisis, including higher pay for hourly team members in our stores, extended paid leave, backup daycare provisions across our team, and enhanced cleaning routines and other investments to protect the health of our guests and our team across the country. Against these higher costs, we realized a meaningful rate benefit from sales leverage due to our unusually strong comparable sales growth in the quarter. On the D&A line, first-quarter dollars were nearly flat compared to last year, resulting in about 40 basis points of rate improvement on higher sales. Altogether, our first-quarter operating margin rate of 2.4% was approximately 400 basis points lower than last year. On the interest expense line, we experienced a slight decline in dollars, reflecting the benefit of lower average floating benchmark interest rates. Income tax expense declined about 80% compared with last year, driven primarily by the decline in our profitability. On the adjusted EPS line, we earned $0.59 in the first quarter, more than 60% lower than last year, while GAAP EPS was about $0.03 lower at $0.56 due to losses on our investments in Casper Sleep. Now, I want to turn to cash flow and capital deployment. But first, I want to outline a number of actions we've taken this quarter in response to the environment. The first change, as John already outlined, was a reduction in the number of remodels and new stores we plan for 2020. John made it clear that this decision was based on removing distractions from our team, along with some factors in the external environment. While we haven't changed our view of the ultimate long-term value of these projects nor was the decision to slow them down made to preserve capital, this shift will indeed affect our anticipated CapEx for the year. At this point, we expect our 2020 CapEx will be $3 billion or lower, a decrease from our prior expectation of about $3.5 billion. Given the uncertainty in the environment, we cannot currently provide a view of our plans for future year remodels, new stores, and overall CapEx, but we expect to provide more clarity over time. The second change occurred in March when we announced the suspension of our share repurchase program in light of the high level of uncertainty surrounding the current environment. This decision was prudent and consistent with our long-term capital deployment priorities, in which share repurchase only occurs when we have surplus cash, within our established limits after investing in our business and supporting our dividend. Finally, during the first quarter, we issued $2.5 billion in new debt and added an additional $900 million revolving credit facility to supplement our existing $2.5 billion revolver. We took these actions out of an abundance of caution given the high degree of uncertainty in the environment and the possibility of a challenging external climate throughout this year. We entered this crisis in a very strong position, with ample cash on our balance sheet, strong credit ratings, and a business model that can generate strong cash flow across a wide range of conditions. Our modeling indicated we would have sufficient liquidity across many potential economic scenarios, even without the extra capacity resulting from these actions. Nevertheless, issuing new debt at historically low rates proved to be prudent insurance, providing us with greater financial flexibility to accommodate even more extreme downside scenarios if they arise. Turning to cash flow, we experienced strong performance in the first quarter as operating cash flow rose nearly $1 billion compared to last year. This strong performance reflected multiple factors, including an increase in payables and a decrease in inventory compared with last year, combined with timing issues that outweighed the earnings decline we faced this year. While the year-over-year decline appears favorable on the cash flow statement, it reflects the lack of availability and elevated out-of-stocks we're seeing in several categories. We elected to invest more cash and ended the quarter with a higher level of inventory in those categories if it had been available. In terms of cash deployment, our first-quarter CapEx was approximately $750 million, nearly $100 million higher than last year. Additionally, we paid dividends of $332 million to our shareholders and returned another $609 million through share repurchases prior to suspending the program in March. On the ROIC line, our business delivered a trailing 12-month after-tax return of 13.4% in the first quarter, down from 14.3% a year ago. This decline reflects the dramatic drop in profitability during the quarter, which does not reflect our expectations for future performance. However, even with the decrease, a 13.4% after-tax return remains strong on an absolute basis and favorable compared to results across a wide array of companies in retail and beyond. Now I want to leave you with a few important thoughts. First, our long-term priorities for capital deployment remain unchanged. Our top priority is to invest fully in all projects that support our long-term strategic and financial goals. Second, we will continually support the dividend, aiming to maintain our long-standing record of quarterly dividends since becoming a public company. Finally, over time, we expect to return any excess cash beyond these two uses through share repurchases within the limits of our middle A credit ratings. These capital deployment priorities have served the long-term interests of our business and our shareholders for many decades. Our investments in our stores, fulfillment capabilities, assortment, and team have positioned us to succeed now and will drive our future growth. Another crucial point relates to the resilience of our business and the strength of our balance sheet. As I mentioned earlier, I believe our long-term prospects have only strengthened as our operations and team have reliably served guests during this crisis. Our multi-category portfolio allowed us to pivot swiftly as guest demand shifted from stocking up on food and essentials to focusing on home and electronics while sheltering in place. By the end of the quarter, we saw a broad-based acceleration across multiple categories. Our curated digital assortment and store-based fulfillment model allowed our operations and team to adjust seamlessly as guests increasingly opted for digital fulfillment, resulting in digital sales accounting for nearly 10 percentage points of our first-quarter comparable sales growth. Because of the strength of our business, we could invest hundreds of millions of dollars in additional team member wages, benefits, and actions aimed at enhancing the safety of both our guests and our team. As we look ahead, we will focus on delivering for our guests and team throughout this crisis while preparing to emerge strong and ready to capitalize on opportunities when our economy recovers. We anticipate many potential investments, including possibilities in real estate, brands, capabilities, and our ongoing strategic initiatives. While we closely monitor our short-term financial results and emphasize strong execution, maintaining a long-term focus is increasingly important as we expect unprecedented opportunities to create value for all our stakeholders. I'd like to conclude by thanking our team for their endless energy, alignment with our values, and caring for one another. It's often said that you don’t recognize your team's strength until they face challenges. I could not be prouder of how our team has risen to the challenge, serving our guests and communities over the past few months. Now I'll turn it back over to Brian for some closing remarks. Brian?

Brian Cornell, CEO

Thanks, Michael. Before we move to your questions, I want to close by reiterating some of the points we shared today. I want to start with something Michael said earlier. These times are anything but normal. Guests are facing unprecedented changes in the way they're living and working. In just weeks, the economy has shifted from historically low unemployment levels to some of the highest ever recorded. Not surprisingly, consumer shopping patterns have changed significantly and frequently as everyone tries to navigate through these changes. Things we once took for granted have become front and center in our minds. We have a renewed appreciation for essential items we need at home every day, such as food, paper goods, and cleaning products, which are now more important than ever as we shelter in place and work remotely. We also have a renewed appreciation for the individuals ensuring we have access to those products, including those who produce them, the supply chains delivering them, and the teams providing them in stores and bringing them to our homes. The crisis has underscored the essential roles our team members play as they deliver compassionate, friendly service and do everything possible to ensure their neighbors have the essentials. Like John mentioned, it's humbling and inspiring to work alongside our team and feel their passion and resolve as they navigate this crisis. They're the heart and soul of Target and the reason I'm confident about our future. With that, we'll move to Q&A. John, Michael, and I will be happy to take your questions.

Operator, Operator

[Operator Instructions] Our first question comes from Edward Kelly.

Edward Kelly, Analyst

Congratulations on strong execution in what is obviously a challenging environment. Brian, I want to start with comps. You saw a significant acceleration in the back half of April. What are you seeing so far in Q2? Any category color here would be helpful. What do you think drove this acceleration? Is it stimulus? And what does it tell us about how to think about Q2 comps overall at this point?

Brian Cornell, CEO

Ed, thanks for joining us. We did see an uptick, as we reported, starting on April 15 as stimulus checks arrived across America. We noted the return of guests shopping in our stores while also continuing to utilize our digital fulfillment channels. We started to see normalization across all categories, an uptick in categories like apparel and Home, but continued strength in our entire portfolio. That stabilization and normalization of category shopping has continued into May as we see an uptick in digital fulfillment. While we aren't providing guidance today, we are seeing a more normalized shopping environment both in our stores and online, with guests shopping all of our categories, including discretionary ones like Home and apparel.

Edward Kelly, Analyst

Maybe just one follow-up to that. In terms of where you have stores in states that have begun to reopen, how has performance compared to states where restrictions are still high? I'm curious what you're learning and how we should contextualize the business once a broader reopening trend truly emerges.

Brian Cornell, CEO

Ed, we're observing it closely. It's early days, but over the last few weeks, we're witnessing the trust we've earned with American consumers who continue to turn to Target for their household essentials, food, and beverage, as well as apparel and home items, while seeing strong performance in Hardlines throughout the quarter. As Americans work from home and educate their families at home, we provide essential services throughout the pandemic, and we're seeing that continue as states open up across the country.

Christopher Horvers, Analyst

So a couple of financial questions. The first one is can you discuss the gross margin drivers, especially the markdown in inventory reserve and the digital Shipt component of the decline? You said hundreds of millions of dollars for the inventory component, which is $300 million, that's 150 basis points. So how close are we? And looking ahead to Q2, given what you've seen in apparel over the past month, has your inventory cleaned up? How do you think about potential markdown risk in the second quarter?

Michael Fiddelke, CFO

Alright, Chris, can you hear me? To decompose margin a little more, if I had to dimensionalize into three biggest drivers of what we saw in Q1, the first would be a set of merchandising actions taken throughout the quarter, with the biggest being the inventory write-downs in apparel given the sales deceleration. This is probably the largest factor. The category mix was the second biggest contributor, followed by supply chain pressures. A portion of our investment in the team shows up in margin because supply chain labor is included there, and the mix shift to digital also contributes. However, I want to emphasize the importance of looking beyond the single transaction when assessing digital economics because for the vast majority of digital transactions, particularly for sales using our same-day services, the total sales dollars and variable profit dollars from those sales are indeed beneficial. Additionally, digital growth fosters stronger customer relationships and relevance with our guests. When guests engage with more of our fulfillment options, it generally leads to greater overall spending at Target. We had 2 million guests utilize Drive-Up for the first time this quarter, further supporting our long-term digital growth prospects.

Brian Cornell, CEO

Chris, it's Brian. I can speak to Q2 and share our perspective, which is shaped by the significant volatility and rapid changes we observed throughout Q1, complicating our ability to project consumer behavior for the second quarter and beyond. However, we feel optimistic, as our guest continues to see the benefits of the stimulus check and are shopping across all categories, alongside increased store traffic. Although we cannot predict precisely how shopping will evolve over the quarter or the year, we’re keenly aware of how our teams have adapted quickly to changing consumer needs. We have demonstrated a flexible and adaptable system throughout the first quarter, something we plan to continue leaning on in the second quarter and beyond.

Edward Yruma, Analyst

You have successfully ramped Drive-Up services. Could you assess the current throughput and limiters there? Are issues related to staffing, social distancing, or parking spots? Looking ahead, how do you see the retention of customers trialing this service?

Brian Cornell, CEO

Ed, I'm going to let John answer this question, but I am smiling at the fact that our same-day services grew by 278% in the first quarter and I think that John's team has really demonstrated the ability to scale effectively.

John Mulligan, COO

Sure. As Brian mentioned, Drive-Up saw phenomenal growth, particularly in April at nearly 1,000%. From a constraints perspective, we focus on a couple of elements; while we don’t view them as limiters since they are aspects of scaling, parking spaces, in-store space for additional storage, and our process efficiency are all areas we're looking to enhance. We are already working to add additional parking spaces and flexible storage for store teams to handle the surge in demand. Our scalability has shown strong promise, and we will continue to expand our capabilities in the coming months. We are excited about the opportunity to enhance Drive-Up services with temperature-controlled items and are actively testing processes in Minneapolis and Kansas City to roll out effectively based on customer demand.

Brian Cornell, CEO

Ed, I'm confident we'll see a long-lasting impact on customer awareness and utilization of our same-day fulfillment capabilities, especially given the current enhancements in customer service and the accelerated digital fulfillment methods we’ve implemented.

Matthew McClintock, Analyst

Congrats to you and the rest of the Target team. Brian, I want to consider the uncertainty in the macro environment from the perspective of consolidation in the industry, both through digital capabilities and the failure of some retailers to reopen. How does this crisis compare with prior economic difficulties, and how can we assess risk going forward in this scenario?

Brian Cornell, CEO

Thanks, Matt. Consolidation has been a topic we've discussed for several years now, and unfortunately, I believe the pandemic is likely to accelerate the existing bifurcation trend in the retail sector. We’ve already seen several retailers filing for bankruptcy and expect more closures in the next few years. This scenario should present opportunities for companies like Target to capitalize on market share while growing profitably in this environment. Additionally, in conversations with our guests, we're seeing shifts in consumer behavior; shoppers are increasingly inclined to consolidate their shopping trips, which places Target in a strong position thanks to our multi-category offerings. I maintain that while we navigate this crisis with humility, we are optimistic about Target's future and believe market consolidation and changing consumer preferences will work in our favor.

Karen Short, Analyst

I want to circle back to the gross margin for a moment. Skeptics often focus on the potential for significant inventory liquidations across retail that might affect pricing in-store. Can you elaborate on your thoughts regarding markdowns, and do you believe this has pulled forward some markdowns you anticipated in Q2? How do you perceive inventory going into Q3 and Q4?

John Mulligan, COO

Sure. As Brian noted, we feel strongly about our inventory positioning, particularly in apparel. We believe the actions we took during Q1 position us well to capitalize on forthcoming sales opportunities. Regarding the pricing and promotional landscape, we have a solid history managing those situations, and we'll commit to being competitively priced regardless of the external environment. We monitor competitor actions closely, but we’re optimistic given that we've seen some strength return to apparel at the end of the quarter.

Brian Cornell, CEO

Indeed, we should also commend our Target sourcing team for their exceptional work in navigating through the volatility during the quarter by adjusting inventory as trends shifted. Their strong vendor relationships enable us to stay agile and adapt quickly to market changes. This team successfully supported our inventory needs during Q1 and will be critical as we navigate the remainder of the year.

Tracy Kogan, Analyst

I was curious about the new customers you mentioned gaining during the quarter. Are there any particular demographic trends among them? Also, could you comment on repeat purchases from these new customers?

Brian Cornell, CEO

Yes, during the quarter, we noted 5 million guests shopped on Target.com for the first time, and John spoke about 2 million first-time Drive-Up users. We are analyzing the profiles of these new shoppers, and the signs show promising retention rates. Consumers overwhelmed by the pandemic have a heightened interest in quality, convenience, and contactless services, such as Drive-Up, which aligns perfectly with the flexibility we've built into our services and offerings.

John Mulligan, COO

Exactly, Brian. The high Net Promoter Scores for our Drive-Up, Shipt, and in-store experiences affirm this too. We are pleased to report that 40% of our Drive-Up guests returned for repeat purchases, highlighting the strong guest experience our team has continued to deliver amidst heightened demand.

Robert Ohmes, Analyst

Could you discuss growth in Shipt and membership during the first quarter? We've seen significant downloads for the Shipt app. Additionally, are you onboarding many more partners on Shipt?

John Mulligan, COO

Absolutely, Robby. Shipt experienced significant growth, with order volume doubling during the quarter, and a 60% increase in membership. Our partnerships have expanded significantly as we added over 100,000 additional shoppers to meet demand. Notably, sales through our Shipt channel soared by over 300% compared to the previous year, reflecting our team's adaptability as they met the increased customer demand.

Michael Fiddelke, CFO

Across all digital platforms, we've also noticed that high digital volumes will enable us to optimize operations and potentially drive increased efficiency over time. Enhanced engagement with fulfillment options will yield greater loyalty and affinity regarding purchasing patterns and habits.

Brian Cornell, CEO

Indeed, the core of our strategy remains focused on leveraging our stores as fulfillment hubs. While we've reported a remarkable 141% digital comp growth for this quarter, it's essential to highlight that the store-fulfilled comp increased by over 9%, reflecting their critical role in driving our productivity. Our guests turned to Target because of the trust and reliability we demonstrated during this period.

Oliver Chen, Analyst

Brian, what would you observe as some of the most surprising or potentially permanent changes stemming from this crisis? John, I'm interested in your thoughts on automation and robotics. Given your success leveraging stores as hubs, how do you envision that evolving regarding Drive-Up and inventory management accuracy?

Brian Cornell, CEO

Oliver, the importance of stores has been underscored during this quarter. Early in the pandemic, we noticed a significant uptick in customers turning to Target. We observed a strong demand for essential household items and food, reinforcing the role our stores play in people's lives. As we progress, I believe that stores will continue to be crucial for us going forward.

John Mulligan, COO

In terms of automation, we're advancing our use of analytics and technology, with an ongoing pilot for automation in Minneapolis. We also plan to broaden our analytics deployment for inventory management, which is pivotal in enhancing our operations. While we assess our timelines in light of safety constraints, our existing systems have been effective in driving productivity, allowing us to support upscale operations efficiently.

Brian Cornell, CEO

Indeed, John makes an excellent point—while automation is vital, execution remains paramount. We are committed to providing a safe shopping environment centered on trust. Thanks for joining us today. We hope you stay safe and healthy and look forward to meeting again face to face.