Good morning, everyone, and thank you for joining us on our Q1 2016 earnings conference call. On the line with me today are Brian Cornell, Chairman and Chief Executive Officer John Mulligan, Chief Operating Officer and Kathy Smith, Chief Financial Officer. This morning, Brian will discuss our Q1 performance, including results across our merchandise categories. Then John will provide an update on our efforts to improve in stocks and build our supply chain capabilities. And finally, Kathy will offer more detail on our Q1 financial performance and our outlook for the Q2.
Following their remarks, we'll open the phone lines for a question and answer session. As a reminder, we're joined on this conference call by investors and others who are listening to our comments via webcast. Following the call, Kathy and I will be available to answer any follow-up questions you may have. Also, as a reminder, any forward looking statements that we make this morning are subject to risks and uncertainties, the most important of which are described in our SEC filings. Also, in these remarks, we refer to adjusted earnings per share, which is a non GAAP financial measure and return on invested capital, which is a ratio based on GAAP information with the exception of adjustments made to capitalize operating leases.
Reconciliations to our GAAP EPS and to our GAAP total rent expense 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 comments on the Q1 and our priorities going forward.
Brian? Thanks, John, and good morning, everyone. Before I start with prepared remarks, let me set up the structure for our call this morning. We're going to make sure we spend significant time talking about our Q1 results and Kathy and John and I will cover both our Q1 performance, but also talk about the Q2 outlook. But we are going to make sure we leave significant time for Q and A.
We want to make sure we have time today to address your questions, provide additional insights into our Q1 performance and the factors that are guiding our outlook for Q2. Let me start with the Q1. Our team delivered outstanding Q1 financial results in a very challenging consumer environment, which became softer and more volatile as the quarter progressed. Our Q1 adjusted EPS of $1.29 was well beyond the high end of the guidance for the quarter and more than 16% ahead of the $1.10 last year. These results demonstrate the value of our strategy in the face of a more challenging consumer landscape.
1st quarter comparable sales growth was driven by an increase in both traffic and average ticket, as traffic grew in both our stores and digital channels. Comparable digital sales grew 23% in the Q1 on top of 38% a year ago. We generated very healthy profit margins on our sales in the quarter, as our team did a great job managing the business in the face of a number of headwinds, particularly following the Easter holiday. As planned, our Q1 gross margin rate reflected the benefits of the sale of our pharmacy business, favorable merchandising mix and our cost savings initiatives. These benefits allowed us to offset markdown pressure in a very promotional environment.
The team also delivered on the expense line, which benefited from the pharmacy sale and cost initiatives, offsetting pressure from investments we've made in our business, including our team. Kathy will provide more detail in a few minutes. Sales in the quarter came in lighter than expected and daily and regional shopping patterns were more volatile than in prior periods. While guests generally maintained their pattern of larger pantry stocking visits, we saw a slowdown in growth of smaller convenience strips. Against that background, our results show that our strategy continues to resonate with our guests as comparable sales in our signature categories, style, baby, kids and wellness grew more than 3 times as fast as the company average.
Given the concentration of signature categories in home and apparel, comparable sales in both categories outperformed the company, driving market share gains in both areas. Cost in home grew nearly 4%, led by strength in domestics, decor and seasonal areas. Highlights included our kids' home assortment, which saw comp sales in the mid teens, driven by the successful launch of our new Pillar Fort brand. We were also pleased with the results from our partnership with Marimekko, which attracted guests to explore our assortment in stores and digital, driving sales in both home and apparel. Overall comps in apparel grew between 2% 3%, led by sales in baby, kids and women's ready to wear.
Rapid growth in ready to wear is especially notable given the tough comparison from last year. Specifically, the 2 year stack of the Q1 comp sales in ready to wear is more than 16% higher than 2 years ago. 1st quarter comps in food were down slightly as an increase in perishable was offset by a decline in center store grocery. While results were impacted by deflation in some categories, they also reflected a meaningful disruption from the reset of our center store grocery area, which was executed in stores across the country in April. Despite the disruption, this effort better positions us for success over the longer term as we've implemented changes to assortment, presentation and category adjacencies.
Specifically, we've updated assortment and segmentation to align with local demographics and showcase wellness. And we integrated nutrition bars into the center store floor pad, creating an industry leading destination for these items. In total, we added about 1,000 new items with this reset, including 55 new better for you brands across 25 categories. And we've incorporated our Simply Balanced brand into an additional 30 categories. This represents an important step in the reinvention of our grocery business.
Following the reset, we received very positive guest feedback and the subsequent results have been better than expected. Within Hardlines, we saw a high single digit increase in the Q1 of comparable sales in toys, even as we comped over high single digit growth last year. Offsetting the growth in toys, we saw declines in electronics and entertainment, reflecting the secular challenges these categories continue to face. These declines put about 70 basis points of pressure on our Q1 comparable sales growth. I want to pause and welcome Mark Crittend, who will be joining our team as the EVP and Chief Merchandising Officer, overseeing our enterprise buying, sourcing, product design, development and merchandising operations.
We've conducted an exhaustive search for a new CMO and I'm confident Mark is the right leader for our merchandising team. Mark comes to us with a wealth of retail and merchandising experience, including positions at Nike, Timberland and Nordstrom, where Mark doubled their private label business. Mark is a bold, decisive and visionary retail leader and we're excited to have him on our Target team. Once again this quarter, we were able to return a compelling amount of cash to our shareholders through dividends and share repurchase. Altogether, we returned more than $1,200,000,000 to our shareholders in the Q1, up from just under $900,000,000 a year ago.
In addition, given our strong financial position, this quarter we were able to refinance some high cost debt by issuing new debt at very attractive rates. Kathy will provide more details in a few minutes. As we look ahead, we're approaching our business with appropriate caution as sales trends at Target and many of our key competitors weakened and became more volatile in the Q1. In addition, many of our competitors are sitting on meaningful excess inventory, which we expect will extend the very intense promotional environment into the months ahead. Despite our near term caution, we'll continue to execute the long term strategy vision that we laid out 18 months ago.
The vision which has been shaping our results ever since. We're very excited about the launch of our new kids apparel brand, Cat and Jack, which will roll out in the Q2. And we'll continue to invest in quality through our owned and exclusive brand assortment with a particular emphasis on signature categories. We'll continue to work to enhance our food offerings to become more fresh and local with more natural and clean label offerings. And we'll continue to partner with our colleagues at CVS to complete the rebranding of our pharmacies within our stores.
Following the rebranding effort, we'll collaborate with CVS on an awareness campaign to ensure that both our guests and members of their PBM businesses are aware of the change within our stores. As John will describe in a few minutes, we're also investing in store experience and flexible fulfillment capabilities, while modernizing our supply chain to become more agile in the way we serve our guests. We're very excited to be near completion of our LA 25 remodels, which began more before the holiday season. And we're eager to gain guest feedback to determine which enhancements will roll out more broadly in the future. And finally, we're making investments in our team, adding specialized talent like new visual merchandising leaders.
We're ensuring the store presentation in our style categories highlight the investments we're making to enhance quality and innovation. Going forward, we'll continue to look for ways to simplify processes in our stores, freeing up time for our team to focus on serving our guests. Before I turn the call over to John, I want to thank the entire Target team for their tireless work on behalf of our business and our guests. As we've said many times, we have the best team in retail, both in our stores and our headquarters. And I'm continually inspired by their passion to drive Target's success by better serving our guests.
With this outstanding team, a strong brand, great looking stores, a resilient business model and a strong balance sheet, I'm confident we'll successfully navigate the near term retail environment as we implement strategies that will drive Target's long term success. With that,
I'll turn
the call over to John who'll discuss his team's efforts to modernize our supply chain and improve our operations. John?
Thanks, Brian, and good morning, everyone. Today, I'm going to provide an update on our efforts to reduce out of stocks and improve inventory flow throughout our supply chain. Then I'll cover our current work to enable our existing supply chain infrastructure to operate more flexibly in support of our strategy. And finally, I'll turn to our efforts to elevate the store experience on behalf of our guests, including enhancements to the order pickup process. Many of you have told us that you noticed the improvement in our in stock position in our stores and our internal measures confirm what you have been seeing.
Specifically, in the Q1, we saw a 27% improvement in out of stock measures compared with the Q1 last year. This represents a sequential acceleration from our 4th quarter performance and we are seeing improvements across all of our merchandise categories. Some of the in stock improvement is being driven by additional inventory investments in essential categories, which drove a portion of our year over year increase in our inventory at the end
of the
quarter. However, we have opportunities to make other changes that will allow us to streamline our inventory position over time. Specifically, team is taking a data driven approach to reduce the number of SKUs in our assortment, making room for additional facings of the best selling, faster turning items on our store shelves. In addition, the team is collaborating with vendors to reduce case pack sizes, which will reduce backroom inventory while increasing store labor efficiency by reducing the number of times an item is touched before it's displayed on shelves. Beyond these improvements, the out of stock team has successfully tested other enhancements that will roll out later this year.
One test applied new replenishment algorithms for items with irregular demand patterns, like seasonal sporting goods. And the results of the test were dramatic as out of stocks improved by 50% on test items. Another test involves updates to our presentation standards for items that are typically purchased in multiples. This ensures that our minimum standards reflect the way guests are shopping today, allowing us to better optimize the trade off between inventory investments and out of stocks. And with our vendor partners, the team has worked to meaningfully reduce shipping windows, which will enhance speed and reliability throughout the supply chain.
We're very pleased with the collaboration we've seen from our vendors on this effort and improving shipping windows will be implemented across all merchandise categories by this fall. Beyond our work on in stocks, we're making changes in our distribution centers to modernize our capabilities. These changes will allow our existing infrastructure to operate more flexibly, simultaneously reducing shipping times, while efficiently leveraging our entire network inventory on behalf of our guests. At our Financial Community Meeting in March, I outlined the conversion of 3 of our traditional regional distribution centers into delayed allocation centers, which can house slower turning items with more variable demand, allowing the remaining DCs to process faster turning SKUs more efficiently. In addition, these delayed allocation centers allow us to pulse the right amount of seasonal inventory across the country throughout the season as demand patterns emerge, keeping us in stock longer in areas of unexpectedly high demand or reducing excess inventory in areas of unexpectedly low demand.
We successfully completed the conversion of all 3 delayed allocation centers in the Q1 and early results indicate that these additional nodes are improving product allocation compared with our past performance. Among our other regional DCs, this year we're making changes to 3 facilities to enable them to ship directly to guests. This requires a meaningful transformation in the capabilities of these facilities as direct to guest shipments require the team to pick and pack individual items, while shipments to stores require fast moving shipments of case packs and pallets. Despite the challenge, we are excited about this work because like our ship from store capability, the ability to ship from our regional DCs directly to guests provides deeper access to network inventory, enhancing our digital in stocks, while allowing us to reach our guests more quickly while controlling costs. In addition, adding direct ship capability to one of our existing facilities requires 85% lower capital investment compared to the construction of a new dedicated web fulfillment center.
As you know, a meaningful portion of our capital expenditures in recent years has been devoted to technology and supply chain. And we've said that we expect these investments to continue in the future. At the same time, we know that investments in our store experience are more important than ever. And as a result, nearly $1,000,000,000 of our CapEx this year will be focused on the store experience. In addition to our store remodel program, which includes the LA 25 stores Brian highlighted earlier, we continue to roll out new flexible format stores in dense urban and suburban areas and we're really pleased with the performance of these new hyper localized stores so far.
In addition, we continue to invest in presentation and experience across a broad set of our stores. This year, we're investing in self checkout lanes, operational enhancements and merchandising innovations across a meaningful portion of our store base. A key area of focus in our stores is the elevation of our digital order pickup and the team is taking steps to make the process more convenient and less transactional for our guests. Our goal in these efforts is to increase satisfaction with the order pickup experience leading to more repeat usage of this capability by our guests. Speed is key and our store teams continue to improve the speed with which they fill pickup orders.
In the Q1, approximately 90% of orders were ready for pickup in less than an hour, up nearly 10 percentage points from last year. This is one reason that guest satisfaction regarding the pickup experience is up meaningfully from last year and repeat usage is increasing as well. Despite this progress, we have more work to do and we intend to continually improve our performance in response to guest feedback. To maintain our momentum, we rolled out streamlined order pickup communication to our guests this month. And in select stores, we are testing a separate pickup area with additional holding capacity, dedicated team members and enhanced merchandise presentation to encourage additional shopping on their store visit.
While we are still early in our efforts, I am really pleased with the progress we've made in a short amount of time. By focusing on downstream outcomes and improving handoffs between every part of the supply chain from vendor to distribution center to our stores, we are making systematic repeatable improvements, which will sustain better operating metrics over time. Now I'll turn it over to Kathy, who will share her insights on our Q1 financial performance and our outlook going forward. Kathy?
Thanks, Sean, and good morning, everyone. As Brian mentioned, we generated very strong financial results in the Q1, even in the face of an unexpectedly choppy and weak environment. Our first quarter adjusted EPS of 1.29 dollars was $0.19 higher than last year and $0.04 better than the high end of our guidance. 1st quarter GAAP EPS from continuing operations was $1.02 $0.27 lower than the adjusted EPS, reflecting $0.26 of losses related to our debt tender offer and $0.01 of expense related to the sale of our pharmacy business. Our Q1 comparable sales increase of 1.2% was driven by growth both growth in traffic and ticket average ticket.
As expected, total sales declined from last year, reflecting the sale of our pharmacy business, CVS. Within the quarter, we experienced solid results through the Easter holiday. Post Easter, sales and traffic trends softened noticeably, consistent with what you've heard from many of our competitors. Also notable in the Q1, we saw a meaningful increase in the volatility of our weekly sales performance compared with last year. Not surprisingly, weather patterns caused some of this volatility as we saw a meaningful correlation between sales and temperature trends in different regions of the country.
We continue to invest in our digital and flexible fulfillment capabilities to drive sales in all channels, and we continue to see strong results. Comparable digital sales increased 23% in the Q1, on top of a 38% increase a year ago. Credit card penetration was 23.4 percent in the Q1, up nearly 200 basis points from last year. This represents the addition of nearly 700,000 new credit and debit accounts in the quarter, combined with the impact of the sale of the pharmacy business. Excluding the impact of the pharmacy sale, penetration was up about 80 basis points from a year ago.
Our team delivered a stronger than expected 11 5 percent EBITDA margin rate in the Q1. On the gross margin line, we saw about 50 basis points of improvement from last year. This growth reflects the benefit of the sale of the pharmacy business and continued positive merchandise mix driven by strength in signature categories. These benefits offset markdown pressure in an environment which continues to be very promotional. On the SG and A line, we saw the benefit of strong discipline across the organization, along with the benefit from the sale of the pharmacy business.
This allowed us to offset strategic investments we're making in our business, including our team. Altogether, Q1 SG and A expense was about 50 basis points better than last year. Quarter end inventory was up a little bit more than 4%, rising faster than sales. As John mentioned, some of this growth reflected intentional inventory investment to support in stock and essential categories. However, given the recent slowdown in our sales and our caution regarding the Q2, we are planning to manage inventory carefully throughout this quarter and beyond.
Turning to capital deployment. We returned $336,000,000 to shareholders in the form of dividends this quarter and invested nearly $900,000,000 in share repurchase. As Brian mentioned, we also took the opportunity to refinance some high coupon debt during the quarter with the issuance of 10 year and 30 year bonds at very attractive rates. As a result, we recognized $261,000,000 in debt retirement losses in Q1 GAAP EPS. And given that the settlement of on the last tranche of the debt tender occurred at the beginning of the Q2, we expect to continue to recognize another $161,000,000 of debt retirement losses in 2nd quarter GAAP EPS.
Beyond these accounting losses, we expect this refinancing to reduce our ongoing interest expense by $5,000,000 to $10,000,000 per quarter. I want to pause here and discuss our quarter end cash position. We ended the Q1 with about $4,000,000,000 of cash on our balance sheet, essentially the same as when we started the quarter. However, this was the result of timing, and we expect to reduce our cash position by more than 50% by the end of the second quarter. In fact, already this quarter, we've deployed nearly $1,000,000,000 to retire the final tranche of the debt tender, and we expect to apply another $750,000,000 to fund a debt maturity in July.
When you combine these uses with continued investments in the dividend and share repurchase, we expect to end the Q2 with a cash balance of between $1,000,000,000 $2,000,000,000 I want to emphasize that our capital deployment priorities remain the same. We invest first in our business to support projects that meet our strategic and financial criteria. 2nd, we support the dividend and expect to maintain our record of consecutive annual dividend increases since 1971. And finally, we invest in share repurchase within the limits of our A long term credit rating. One of our longer term financial goals is to increase our after tax return on invested capital, and we expect to reach the mid teens or higher in the next 5 years.
And I'm pleased that we are already making meaningful progress on this metric. For the 12 months period through the Q1, we reported an after tax return on return of 16%, including the gain on the pharmacy sale in the Q4 last year. Excluding that gain, our after tax return on invested capital was a very strong 14% in the first quarter, up about 150 basis points from a year ago. On another note, our effective income tax rate from continuing operations was unusually low in the Q1 at 31.6%. This was the result of the adoption of a new accounting standard for employee share based payments, which reduced our tax expense by $17,000,000 combined with the impact of lower pretax earnings resulting from the loss on debt retirement.
Now let's turn to our outlook for the Q2 and the implications for the full year. While we're coming off a quarter of outstanding financial performance, Brian mentioned earlier, with elevated short term volatility and softer sales trends since Easter, it's clear that consumers are behaving more cautiously. With that backdrop, we are planning for 2nd quarter comparable sales of flat to down 2%. This would represent slower than 2nd quarter performance than we were planning at the beginning of the year. But we believe this outlook is prudent given the trends we see as many others have been seeing.
Given slower than expected sales, we are planning for a moderate year over year decline in our 2nd quarter EBITDA margin rate in the range of 40 basis points in the mid at the midpoint of our comp guidance. Compared with our plan going into the year, our updated expectations reflect continued gross margin pressure from a very promotional environment, combined with the deleveraging of SG and A expense on floor sales. Altogether, we expect to generate Q2 adjusted EPS in the range of $1 to $1.20 Given our performance over the last year and a half, we believe we're pursuing the right strategy, and our strategy is working. We have many levers we can deploy to drive our performance, even if the environment remains challenging. As a result, even with a more tempered view of the Q2, we are still focused on achieving full year adjusted EPS within the guidance range we provided at the beginning of the year.
As we progress through the Q2, all of us will gain more perspective, which will inform our outlook for the latter half of the year. As I mentioned at our financial community meeting, one of my first priorities on joining this team last year was to dig in and understand in detail the factors that drive Target's financial performance. As a result of that view, I am confident in the resilience of our business model, which sustains our business through all consumer and retail environments. Importantly, our financial strength combined with our business model enable us to continue investing in our long term priorities even when others are having to pull back. It's one of the many reasons I was so excited to join this team and this company last September.
With that, we'll conclude today's prepared remarks. Now Brian, John and I are happy to take your questions.
Your first question is from Greg Melich from Evercore ISI.
Hi. I have two questions. Thanks, Brian. I think John and Kathy all gave a nice overview there. When you described how the quarter progressed, could you help us understand where April was?
Was it actually negative? And also any geographic distinctions that you saw in the quarter? And then I had a follow-up on the margins for you.
Hey, Greg, I'll start. We did see obviously, we had a very strong February March and felt really great around our performance in Easter. We saw that we took share in apparel in Easter, and so we're really good there. But we did see a slowdown in April. A lot of it though is that ad shift that we were seeing.
So that's part of what we're seeing with regards to April. But we did see slowdown throughout the course of April.
And Greg, let me provide some color as far as the geographic volatility. And I'm going to be really transparent with some of the examples. And as we looked at business in April and again in the start of May, Now we've seen a significant performance difference between our West Coast markets and particularly our Northeast markets and significant variability where we've seen some very positive growth performance across our entire portfolio in Los Angeles and San Francisco and many of our core West Coast markets offset by significant slowness in the Northeast, in Boston, in New York, in Philadelphia, in DC. In given categories, we've seen dramatic performance differences. In the ready to wear category on the West Coast and in parts of the Midwest where we've seen an earlier spring.
We're seeing double digit growth in ready to wear offset by fairly significant declines in the Northeast. We had a review with our team yesterday. We looked at categories like fans. We have markets that are up 20% and markets that are down 90%. So we're seeing volatility driven by certainly climate, but I think a number of other factors that we're certainly analyzing.
Kathy talked about an earlier Easter. We've certainly looked at weather patterns. We recognize that year on year fuel prices have increased and our guests and the consumer spending more than they did a year ago at the pump. And we certainly recognize that within overall categories, today's consumer, our guests is reinvesting in their homes. They're spending money on home improvement.
We've seen that in our home category, which was up 4% in the Q1. So a lot of volatility and it's both geographic and within category mixes.
That's great. That's helpful. I guess that's also a transition into the margin. If I got your guidance right, the midpoint of it, if I take the comp and to get to that EPS, I get EBIT margins down in the second quarter. One, is that right?
And 2, it sounds like the real reason for that might be a little bit of deleverage and then basically markdown risk on inventory given the rest of your comments. Is that fair?
Greg, I'm really sorry, but you literally cut out right when you said that what you were trying to ask about EBIT margin. So I'm sorry, can you please repeat? Yes. It looks to
us from guidance, EBIT margin is down 50 bps in the 2nd quarter at the midpoint. I guess how much of that is just deleverage and how much of that is markdown risk from the elevated inventories and categories?
Yes. So we did talk about gross margin. We expect gross margin to be 40 basis points at the midpoint and we still expect a promotional environment and we're planning for that.
Yes. Again, Greg, I think under the circumstances as we've looked at our competitors' reports, we recognize there's significant inventory in the marketplace. We expect the Q2 to continue to be very promotional and that's factored into our guidance for the Q2.
That's great. Thanks a lot. Good luck.
Thanks, Greg.
Your next question is from Oliver Chen from Cowen and Company.
Hi, thanks for all the details. We had a question regarding the smaller convenient trip slowdown. Could you just help us understand as you looked at the data, if there's patterns there that give you some insight into how that dynamic may be playing out and what's the opportunity there? And secondly, on the promotional pressure that you're seeing, what's the axis from which that may be happening in terms of A, categories and B, Amazon versus bricks and mortar competition? Are there different aspects of competition that you're facing as you look to determine what's optimal from an executional and strategic point of view?
Thank you.
Sure. Oliver, let me address the trips and we talked about in the prepared comments. We continue to see very strong performance in what we'll describe as that stock up trip, where as a company we performed very well throughout 2015 and again in the Q1 of 2016. Where we have seen some trip erosion is with the guests who is coming in for that fill in trip. So as we think about actions we're taking in our business right now, we want to continue to make sure we're serving the guests who's looking for that stock up item, that stock up trip.
And we're going to be even more focused as we manage through the quarter and the balance of the year to make sure we're winning and driving more fill in trips. So you'll see us enhance and change both our promotional calendar, our in store presentation of more fill in items to make sure that we're doing both, continuing to win with the guest whose shopping target for that stock up occasion, but also making sure we're capturing more of that fill in trip throughout the quarter. So those are actions that we're taking right now. The team is working on making adjustments in our promotional cadence and presentation to make sure that we're doing both. We're continuing to win with the stock up shopper, but we're also capturing more share of wallet with that fill in guest.
From a promotional standpoint, we would expect to see most of the intensity in the apparel space, where we certainly recognize that many of our competitors are sitting on high levels of inventory. We've got to be prepared for continued promotional intensity in that space. And I think we're well positioned as both Kathy and John have noted to manage through that throughout the quarter.
Okay, thank you. Just a quick follow-up, as you've been monitoring and you've been really ahead of thinking in terms of the omni channel experience. Brian, are there any little changes that you've been seeing in terms of how customers view convenience or what you're seeing now in terms of the online plus offline experience that are different in terms of like the trends you've been recognizing?
Well, I think, Oliver, the one thing that we continue to see and we've embraced as an organization is whether our guest is shopping in store or online, it starts digitally. So we continue to make sure we're investing in our digital assets to make sure we're providing the ease and convenience for our guests whether they're in store or shopping online. It's why we've made such a commitment as John talked about to enhancing our order online, pickup in store capabilities. It's why we've elevated our focus on making sure that we provide an easy shopping experience for our guests online. We continue to build out those capabilities.
So we recognize that even as we look at the start of 2016, the majority of the retail business in the United States continues to be done in stores, but it starts online. So we better have great digital capabilities to make sure when our guest is shopping Target, no matter how they shop, we make it a convenient, easy experience. So that has not changed dramatically. And one of the numbers that we feel best about in the Q1 is the fact that on top of a very strong 38% growth in the Q1 of 2015, we grew our digital sales by 23%. So we're continuing to connect with that guest that wants to shop Target online and we'll continue to invest and build our capabilities in that space.
Thank you. Best regards. Thank you.
Our next question is from Joe Feldman from Telsey Advisory Group.
Yes. Hi, thanks for taking the question. I wanted to ask, Brian, if you could talk a little about the infill trips again. Wanted to go back to cartwheel, if I recall, I don't think you even mentioned it on the call this time. And I'm just wondering if there's any changes going on there or what you're doing.
Presumably, that would be a way to help stimulate the infill trips like localization, personalized marketing. I know you guys do a great job with that with your mobile effort. So just did something kind of fall apart on that front or maybe some things weren't as effective? Could you talk about that a little? Yes.
Well, Joe, in some ways you're looking inside of our current playbook. And certainly, as we think about winning more trips with that fill in guest, cartwheel plays an incredibly important role. And we'll continue to make sure that we activate cartwheel to drive those trips and meet that guest's need. I think one of the things that we're certainly recognizing as we look at 2016 shopping patterns is there is a consumer and a guest who continues to look for value. And that value is expressed in more fill in trips, buying smaller packs, smaller baskets.
So again, it's not a shift in our strategy. It's a recognition that we have to do both. We have to continue to delight the guests when they come to Target for that big stock of occasion and we have to have the right assortment, the right value, the right presentation for that guest who's coming to us for the fill in trip. So, Heartwheel plays a very important role in that. And as we think about adjustments and modifications we're making to our plans, Heartwheel plays a very important role in driving more trips, back to our stores and certainly meeting the needs of our guests who's coming to us for that fill in occasion.
Got it. Thanks. And then you guys mentioned that the center store disruption and all of the efforts you made that you are making to improve the healthy living and that category. I guess were you able to quantify how much of an impact that had? Presumably it was a decent disruption in April that could have had a bit of a drag.
Yes. Joe, it was a significant disruption. You know our stores, you know the layout. And for all of our center store dry grocery items, we moved every one of those aisles in all of our stores. So significant disruption for the guests.
Short term, it certainly has an impact on our performance in grocery and food. But as we've made the changes, the response we're seeing from the guests is very encouraging. They're recognizing the new assortment, the new brands, more local items, the fact that we have more organic and gluten free items on our shelves. And in many of these categories, like the significant change we made in bars, we're seeing very strong sales results coming out of the reset. So it was an investment we had to make in both labor and in disruption to make sure we continue to move forward in the reinvention of food.
So short term, it had a meaningful impact on our food sales, but we certainly expect to see the recovery over the balance of this year as we provide a more relevant assortment to our target grocery shopper.
Got it. That's helpful. Thank you guys and good luck with this quarter.
Thank you.
Your next question is from Kate McShane from Citi Research.
Hi, this is Chris filling in for Kate. With the comp coming in below your expectations, is there a reason why you didn't choose to get more promotional this quarter? Could you walk us through how much of your gross margin was impacted by promotions? And was it more than last year?
Yes. We were as promotional as necessary. We drove, as we shared, a 4% comp in our signature categories, which are the areas that tend to be more promotional. So we feel very good about our promotional cadence. Continue to work on being more and more effective, but still have a long way to go there.
So I wouldn't say that we saved any on promotions in particular. We were as promotional as we thought was appropriate and it showed up in our comps.
Yes. And Chris, I'd only add that as we look at individual category performance,
we felt like
we were very competitive in categories like apparel, where as we look at the NPD data, we look at the market share results, we were one of the big market share winners in the Q1. And clearly, in apparel, we picked up market share the 2 weeks leading up to Easter, during the Easter week and the week following. So our assortment, our presentation, our promotions certainly connected with the guests. And in important signature categories, we continue to advance market share. But we feel particularly good in a tough apparel environment that we posted positive comps, we grew market share and importantly, we grew market share before, during and after the important Easter holiday, which is a critically important holiday for the apparel category.
And just looking ahead, you mentioned, I guess apparel is going to be very competitive. Are there any other categories you see that will also face pricing competition? And also just really quickly, for your in stock initiatives, how much did the improvement in those initiatives contribute to the comp in Q1?
Well, on the in stock question, I think it's hard to parse that out, a very difficult question to answer. Certainly, we have some estimates internally, but it gets into trading behavior as you know and how guests will trade out. But overall, I think the in stock is definitely having it there when the guest wants it. But more important than that is ensuring that they trust us that no matter when they come in the store, we'll have what they want. And that's about building trust for the brand over the long term.
And so there is an immediate impact, but this is much more about being sure we're reliable all the time for the guests.
Okay. Thank you.
Your next question is from Peter Benedict from Robert Baird.
Hey, guys. Just a clarification. Just on the second quarter gross margin outlook, I think you said down 40 basis points. I assume that's on a reported basis, right? So excluding the pharmacy impact, it would be down maybe closer to 100, am I right on that?
No. I thought I had said gross margin, I asked. We really I meant 40 basis points on EBITDA. So we should see actually a slight uptick in gross margin, a slight a downtick in SG and A and then the EBITDA was the 40 basis points. So thanks for asking that for clarification.
No, perfect. Okay, thank you. That's helpful. And then on just on SG and A, is it I mean, it's fair to say that the SG and A dollars, if you exclude the pharmacy comparisons, were down slightly year over year in Q1? And I'm just curious if that's a trend that you think could persist over the balance of the year, given the tougher sales environment?
Yes. We the team did a great job of managing expenses in the Q1, and we'll continue to do that. And yes, it was down year over year. We'll continue to manage our expenses.
Okay. Last question, I apologize if I missed this. Any change to the CapEx plan for the year, which I think was around $1,000,000,000 or $1,800,000,000 sorry?
No. 1.8, no change at all.
Okay, terrific. Thanks guys.
Peter, thank you.
Your next question is from Bob Drbul from Nomura.
Hi, good morning. I guess I just follow on Peter's last question, but when you look at the sales results that you had the last few weeks and especially April, Does that make you rethink your longer term sales views that you laid out back in March? Bob, it doesn't. And obviously, it's been a question that we've asked ourselves. And as Kathy and John have both mentioned, we feel very good about the progress we're making from a strategic standpoint.
We've talked multiple times now, certainly we talked to most of you on the call during our March Investor Day. Our continued focus on building out our digital capabilities, we're making very good progress there. We think those are going to be essential to our future. We feel very good about the progress we're making on signature categories where we continue to build market share and drive differentiation. We're very excited about the early results of Pillow Fort and feel as if when we launch our new Cat and Jack brand for kids, that is going to be another potential $1,000,000,000 brand in our portfolio.
So great progress from a category role and signature category standpoint. As John mentioned during his remarks, our Flex formats continue to be very well received as we move into new urban markets. We're excited about our Tribeca store that will open up in October. But we've been excited about every one of these new formats and they've been well received in both urban and college markets. We continue to think we've got significant opportunities in localization and the work we've done in Chicago and now Los Angeles just continues to confirm that.
So our strategy continues to reform well. John and the team continue to enhance our store and supply chain capabilities to continue to meet the needs of our guests. So as we sit here today, there's no significant change in our strategy. But tactically, we recognize the consumer environment is tougher. We've got to make sure we're delivering the right value.
We're winning with both the stock up and the fill in trip. We're making sure that we have the right experience for our guests, whether shopping in store and online. And we don't see any structural change in the consumer environment. We think this is a short term bump in the road, but we think we're well positioned and everything we see from a GDP and consumer confidence standpoint gives us the confidence that this is going to be a short term impact and we're going to see very solid results in both the 3rd Q4 and keep us on our long term guidance track. Great.
Thank you very much. Good luck. Thank you.
Thank you.
Your next question is from Scott Mushkin from Wolfe Research.
Hey guys. Thanks for taking my questions. So I just wanted to clarify the resets in the dry grocery, when did that take place? Was that in during the quarter or was that after the quarter closed and if it was during April, what was the drag you guys know?
Yes. Scott, it took place right after Easter during the month of April. So a major effort inside of our stores. We touched, as I mentioned earlier, all of those center store grocery aisles. We added a number of new items over 1,000.
We brought new brands into those categories and we've expanded our Simply Balanced line. So all that took place and it was very disruptive and we planned for it in April, we now have the work behind us. And I'm very excited about the feedback we're receiving and the responses we're seeing in many of these categories and certainly expect that we'll see those businesses accelerate
now that
we have more relevant assortment and we've significantly increased the representation of organic and natural and gluten free and local items in those aisles.
So Brian, the weakness you continue to see into May is, because I think you say that reset went really well and that's a chunk of sales. So the weakness you see continuing into May would be non consumable areas that are just, as you say, have the inventory in some of these signature categories. Is that a good way to frame it?
Yes. I think it's largely the case, Scott. Again, as I said earlier, and I want to make sure we're really transparent about this with examples. We've seen very slow sales performance in the Northeast. And we have the same presentation.
We have the same ad. We have the same value. We have the same great in store experience. But on a day in day out basis, we're getting very different outcomes. So on one hand, it gives me confidence to say what we're doing is working because it's working in many parts of the country, but we have isolated geographies where whether it's late spring, whether it's a change in short term consumer behavior, we're not seeing the same results, but we're delivering the same great content.
So I expect the Northeast to recover. I think spring will arrive there. And I think when the guest is out shopping, they'll continue to choose Target and we'll continue to provide them a great in store and online experience. But we are seeing very significant geographic volatility unlike anything I've seen in many, many years.
Interesting. And so then I just wanted to touch on the fill and trip situation and I think you talked about promoting a little bit more to try to get those trips.
Is that promotion different?
Is that promotion more in the consumable side of things as you look at it? It seems intuitively that would be, but I just wanted to kind of get your thoughts.
Scott, you're spot on. It's much more about consumables, household essentials. And to be very clear, it's probably less about promotional intensity, but ensuring that we are promoting and presenting the right items, particularly at the back end of the month when the consumer and our guest is more likely to look for single unit items, more items that have value. So we've got to make sure we're making the tactical adjustments to what we advertise, what we present in store and making sure that we're winning both with the stock up guest, but also with the guests that's looking for value and looking for smaller single unit packs at the right value.
So then I had just one last and I want to sneak in because I was in your store in Long Beach, which I thought was wonderful, that small Target.
It's a fabulous store.
How close are you from test to actually maybe rolling out more of those and then I'll yield? Thank you.
Yes. So I'm smiling and I may turn this over to John, but we've all actually visited our Bixby store in Long Beach over the last few weeks. The store really captures the best of Target in a smaller 30,000 square foot environment and very positive reaction from the guests. So as we think about future flex formats, that is a model that we're excited about, a model that certainly seems to be connecting with the guest and you should expect to see more of those as we go forward. But let me hand it over to John who's been intimately involved in the rollout of Flex formats and specifically the work we're doing in Long Beach.
Yes. Well, I would just add, obviously, we're very excited about the performance of the stores. I think the financial performance certainly, but I think like Brian mentioned, really it's the guest reception of those stores. And while they are very conveniently placed like the Bixby store, they're not convenient stores. The intent is to lead forward with what Target does well, home, apparel, our signature category and that's what you're really seeing at Bixby store.
So we will continue to increase the number we're doing as we go forward, but continue to test geographies and sizes of stores and how those 2 work together. Obviously, the Bixby store is quite large and that's a little bit different neighborhood than we've done in the past. And so the Tribeca store that Brian referenced, again, very different, very dense urban store, 2 level store. So we continue to test kind of configuration and neighborhood, but feel very, very good about what we found so far. And you'll see us continue to grow those number of stores that we open over the next several years.
Just to finish up on that Scott. I think the Long Beach store that you visited is a great example that really shows how we're approaching each of these initiatives. We are testing, we're learning, we're refining, the team is getting better and better at layout and assortment. And you've seen that when you walk the Long Beach location. And the feedback that we've received from the guest is even in a smaller box, it feels like Target and it feels like the best of Target.
The work that the team has done in the center of that store to merchandise our soft lines is really outstanding. We're getting great feedback around our food presentation in that store. We've got the right home assortment. So we're tailoring that for the local market. But it's an example of the fact that we've been disciplined.
We're not sprinting. We're making sure that we're really thoughtful. We're learning. We're adjusting. And you're seeing each of the new Flex format get better and better in layout, assortment and tailoring to meet the local market.
So we are very excited about it and we'll continue to take that learning and build it into new Flex format that will be opening up over the balance of this year and into next year.
Thanks guys.
Thanks Scott.
Your next question is from John Zolaitis from Buckingham Research.
Hi, good morning. Thanks for taking my question. I wanted to ask about the second half of the year. You've already addressed this a little bit, and you've provided us a lot of evidence, I think, that points towards weather as a significant culprit in the volatility in the sales at the end of the Q1 and the start of the Q2. But you also alluded at some points that maybe there's something else going on with the consumer.
So I was wondering if you could just talk about what else might be negatively impacting the consumer or your consumer that you're aware of? And do you have any data for example if you look by segment of consumer income levels or red card usage that would help you understand the trends to a greater extent? Thanks.
Well, John, as you might imagine, we're spending a lot of time and have spent a lot of time as a team looking at performance from a number of different vantage points, both internally, but also certainly incorporating external data. So certainly it was an earlier Easter. We recognize the impact of that. Certainly weather in many major markets has been a factor. It's not an excuse.
We've got to figure out how we perform under any circumstances. We know as the guest and our consumer has moved through the course of 2016, prices at the pump, fuel prices have risen and that's certainly an impact. And then when we look at a macro basis on overall spending, we certainly recognize that consumers are spending more on travel, on leisure activities. They've been investing in their homes as I mentioned before. But there's no structural change that gives us pause and has us changing our strategy altering our outlook for the full year.
We think we're continuing to improve our digital capabilities. I think our store experience is improving each and every week. The response we're getting from the guests based on changes we've made in apparel and home and recently in food are very encouraging. As John mentioned, our Flex format is performing quite well. So we feel confident that the content we have in place, the plans we have for the second half of the year, some of the enhancements we've made from a branding and in store and online standpoint are going to continue to deliver solid results.
So we see this as a momentary speed bump, but we see no reason to alter our strategy. These are tactical adjustments we have to make. And market by market, we've got to make sure we're well positioned to compete going forward.
Thanks very much. Good luck.
Thank you.
We've got time for one more question, operator.
Okay. Your last question comes from Chris Hulvers from JPMorgan.
Made it in. Thank you. So following up on that question and that just that threat of question. So outside of the Northeast in California, has it been more consistent? And then related to that, as you think about the Q2 guidance, are you basically extrapolating current trends, which have been weather impacted or are you taking a directional view either more conservatively, expecting to pick up as the quarter progresses or in either direction?
Thanks.
Yes. So we obviously have insight into where May is at today. And then we've got Memorial Day coming. We've got great plans around leading into Memorial Day and have every confidence we're going to have guests come to Target whether in our stores or online. And then we summer and warmer weather will come and so we have an expectation that the trend we see today doesn't change overnight, but it does improve throughout the quarter because we've got some really great plans to deliver for our guests.
And then also in the latter part of this quarter, we have Cat and Jack launching and we're very excited about Cat and Jack launching before back to school season. And we expect that to be a leading Target only brand that will be a $1,000,000,000 brand in time.
So Chris, thanks for your question. And I really appreciate everyone who called in today. We tried to make sure we allotted significant time for your questions. Hopefully, we had a chance to answer your questions, address some of your concerns. So that will conclude our quarter.
I appreciate your time today and thank you for dialing in.
This does conclude today's conference call. Thank you for participating. At this time, you may now disconnect.