Good morning, everyone, and thank you for joining us on our Q4 2014 earnings conference call. Sorry about the technical difficulties that delayed us a couple of minutes there. On the line with me today are Brian Cornell, Chairman and Chief Executive Officer John Mulligan, Chief Financial Officer and Kathy Teshia, Chief Merchandising and Supply Chain Officer. This morning, Brian will discuss our Q4 performance and our priorities going forward. Then Kathy will provide insights into holiday and Q4 results across our merchandise categories.
And finally, John will provide more detail on our Q4 and full year financial performance. 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 this conference call, John and I will be available throughout today 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. A reconciliation to our GAAP EPS is included in this morning's press release posted on our Investor Relations website. Finally, given that we're hosting our financial community meeting in New York next week, our remarks today will focus on Target's 4th quarter performance and our guidance for the Q1 of 2015. At next week's meeting, we will describe in detail our longer term expectations, including full year 2015 financial performance. As a result, we are shorting today's call to 45 minutes and we'll look forward to spending another 2 and a half hours with all of you next week.
With that, I'll turn it over to Brian for his comments on the Q4 and holiday season. Brian?
Thanks, John, and good morning to all of you. Appreciate your patience this morning. We're very pleased with our Q4 financial results, which we announced earlier this morning. Our 4th quarter adjusted EPS of $1.50 was 14.9% higher than last year and above the high end of the updated range we provided in our January 15 press release. Our 4th quarter comparable sales increase of 3.8 percent was also stronger than the updated guidance we provided in January, as we saw unexpected strength in our store channel sales in the last 2 weeks of the quarter.
And of course, when we look back at our point of view going into the Q4, comparable sales growth turned out to be nearly double as our combination of products, promotions, holiday marketing, fulfillment capabilities and in store execution drove profitable growth in an intensely promotional environment. We're pleased that comps in all 3 months of the quarter were positive. And November strength was particularly notable given that we were annualizing a strong increase in November 2013. We're also pleased that traffic was the primary driver of our 4th quarter growth, as well as the fact that the digital channel growth contributed nearly a full percentage point to our 4th quarter comparable sales increase. Our 4th quarter gross margin performance was also very strong with a favorable mix reflecting strength in signature categories.
Our merchant teams did an outstanding job managing inventory flow, benefiting both in stock and gross margin, which was particularly challenging this quarter in light of the slowdown in productivity at the West Coast ports. Once again, our store team did an outstanding job of managing costs in the Q4, delivering productivity improvements along with outstanding service to our guests. As I've mentioned to many of you, one of our priorities going forward is to harness best practices from our stores and apply them to the rest of the organization to modernize the way we work and drive productivity improvements while maintaining quality in everything we do. If we look back at the full year, it's clear that 2014 was a year of transition in which we began to lay the foundation for the transformation we will accomplish in the few years. A year ago, we were in the recovery mode, working to repair guest relationships following the data breach, while we undertook an assessment of the long term prospects for our Canadian business.
Fast forward to today and we've ended the year with a data breach fully behind us. And now that we've made the tough decision to exit the Canadian business, our team is focused and aligned on 5 priorities I outlined in our 3rd on 5 priorities I outlined in our 3rd quarter call. The first priority is to drive industry leading digital sales growth as we build the capabilities to become a leading omnichannel retailer. Our digital growth led the industry in 2014 and we're working to build on that success in 2015 and beyond. Our second priority is to clearly define roles for each of our merchandise categories and build appropriate plans for each of them.
While we're in the early stages of this journey, I'm pleased with our efforts to invest in the growth of our signature categories like style, baby, kids and wellness. Are the categories we're most famous for and our guest has asked us to lead with them in the years ahead. Beyond these signature categories, we're defining appropriate roles for each of our categories and we'll invest in them appropriately to ensure we're providing our guests convenience through a differentiated, inspirational and one stop shopping experience. Our third priority is to become much more localized in the assortment and experience we provide in our stores and more personalized in our digital interaction with our guests. We are in the very early stage of these efforts and we see huge opportunity ahead of us.
We're investing in these capabilities we'll need to make progress on this priority over the next few years. Our 4th priority is adult intense new format that will help us better serve our guests over time. We're seeing strong financial results from our 8 city Target stores and we've seen very strong initial performance in the test of our first Target Express location, which opened here in the Twin Cities last August. In 2015, of the 15 new stores we're planning to open, more of half of these are new formats with 8 additional Express stores and a new city Target set to open in Boston next to Fenway Park. And finally, we're committed to reducing complexity and controlling costs in order to fuel our investments in the growth priorities I've just outlined.
As mentioned earlier, our stores have been leading the way in these efforts. So in the next few years, we're looking for opportunities outside our stores to become more agile, move faster, gain scale efficiencies in the way we work. We believe meaningful opportunities exist and the leadership team is committed to moving decisively to modernize the way we work and create the capacity we'll need to invest in the priorities that will drive growth and return on invested capital. At our meeting you next week, we're looking forward to providing you more specifics on how we're planning to advance these five priorities, while providing insight in how our plans will translate into financial results, both this year and over the long term. Our plan for the day is as follows.
I'll lead off the day by providing details on our strategic priorities, our approach to growth and the principles guiding our leadership team as we work to deliver on these priorities. Then John will provide more detail on our financial expectations for each line of the P and L going forward. And he will provide full year guidance for 2015 financial results from continuing operations, reflecting our plan to grow earnings per share this year. Casey Carr will follow with details on our digital progress and his plans to transform the organization by developing new capabilities that will support our growth, control costs and recapture the innovative spirit that's part of the company's DNA. Then Kathy Pesha will provide more insights into our core guests and our plans to develop products, experience and formats to serve those guests over time.
And then Jeff Jones will provide insights into the guest relationship with the Target brand and his teams work to modernize our marketing and the way we interact with today's core guests. Finally, we'll end with a Q and A session. We're looking forward to the opportunity to share these plans with you next week and we're confident that we can build on the early momentum we've seen over the last few quarters. We have a fantastic foundation to build on with a great brand, loyal guests and an outstanding ski team. And we're committed to maintaining our focus on our key priorities and making the tough decision to position target for long term success.
Now, I'll turn the call over to Kathy to recap our 4th quarter and holiday season performance.
Kathy? Thanks, Brian. Across the U. S. Retail landscape, this year's holiday shopping season began earlier and ended later than ever before.
This lengthening of the season reinforced a pattern we've seen for well over a decade, where we saw the strongest sales in the early and late portions of the season and experienced a period of softness in the middle. Specifically, throughout November, our comparable sales performance, including the Black Friday weekend, was very strong on both the 1 year and 2 year basis, driven by strong promotions throughout the month combined with in store events and cartwheel daily deals. In December, following the characteristic low that we've seen for more than a decade, we saw a very strong surge in traffic and sales in the days leading up to and after Christmas. And in January, we continued to see unexpected strong results throughout the month. As Brian mentioned, we saw particularly strong trends in 4th quarter sales in our signature categories, specifically health care, beauty, apparel and home grew faster than our overall sales.
Within apparel, results were
strongest in baby and kids and home
comps were led by domestics and seasonal items. In hardlines, our toy category had a fantastic quarter, recording a double digit increase in comparable sales driven by a strong lineup of Target exclusive items throughout the assortment. Average retails were up across all of our categories as guests were trading up within assortments and we saw strong regular price sell throughs in seasonal and markdown sensitive categories. Digital channel growth also contributed to the growth in the average retail, particularly in home and apparel, both of which saw digital channel penetration growth of more than a percentage point in the Q4. Throughout the holiday season, we were very pleased with the performance of our Q4 limited time partnerships with Tom's and Fairbow Willen Mill.
Guests responded to the stories behind these brands and we're delighted by the combination of quality and price we could deliver. I already mentioned the great quarter in toys, which we supported this year with the launch of our kids wish list app, a fun interactive way for kids to let their families know which gifts were at the top of their list. We saw strong guest engagement with this new app as nearly half the families who used it created a list for 2 or more kids. And by the end of the season, thousands of new target.com accounts have been created by WishList users. Our attention getting offer to ship all digital orders for free during the holiday season provided compelling value and convenience to our guests.
The offer created a surge in traffic and conversion on both our conventional site and mobile, which as expected was partially offset by a moderate decline in average transaction size. Because our guests responded so well to this holiday promotion, we were excited earlier this week to announce that going forward, we are reducing the order threshold for free shipping from $50 to $25 with virtually no exclusions. This new minimum is among the most compelling offers in digital retailing, putting us ahead of many of our key competitors. In our digital channel for the Q4 overall, we saw a high single digit increase in visits, driven entirely by growth in mobile, which includes both tablets and smartphones. Orders were up well over 50%, driven by very strong conversion increases on both the conventional site and mobile.
Mobile is becoming increasingly important to all digital retailers and given the profile of our guests, it's particularly important for Target as mobile accounted for more than 40% of our digital orders in the Q4. And notably on Black Friday, 10% of our iPhone app revenue was from guests purchasing on their phone while they were simultaneously shopping one of our stores. Our flexible fulfillment efforts play a key role in supporting our digital growth and we're pleased with results of our store pickup program and our recent rollout of ship from store capability. This was the 2nd holiday season in which we've offered store pickup and since last year we've added more dry grocery items, extended the pickup window from 2 to 4 days and we've begun testing dedicated parking spots. This year we had more than 400,000 store pickup orders on the Black Friday week alone and they accounted for half of our digital traffic in the last 4 days leading up to Christmas.
For the year in total, 84% of store pickup orders were picked on time and 35% of the time guests who picked up a digital order also shopped the store on the same visit. This was our 1st holiday season with ship from store capabilities having rolled out to 139 stores at the end of the Q3. This capability allows us to ship more than 60,000 items directly from stores to our guests' front doors, dramatically cutting shipping times, while reducing our shipping costs. We were pleased with the ability of this initial group of stores to handle the shipments from their back rooms, which peaked in the last week of November. And importantly, this capability allowed us to continue to fulfill holiday orders late in the season for items which were already sold through in our fulfillment centers, but still available in our stores, allowing us to capture incremental sales.
Before I move to our plans going forward, I want to pause and discuss the situation at the West Coast ports. As you know, the slowdown at these ports began several months ago and our 4th quarter performance clearly demonstrates that our team was effective in handling the slowdown by rerouting, expediting and pre ordering inventory to support in stock. We were very pleased with last weekend's news that a tentative agreement had been reached, but we know it will be some time before the backlog at these ports will be fully eliminated. In the meantime, we have contingency plans to continue to work around potential issues. But at times we may encounter periods of light inventory in some assortments.
Now I want to give you a few highlights of our plans going forward and of course we will have much more to cover with you next week. Last year, we began to test and roll out a variety of store presentation innovations to elevate the shopping experience and differentiate our brand. Based on the guest response to these changes, we are planning to accelerate our rollout in 2015. For example, following the addition of Manikins, the apparel floor pad in more than 600 stores last fall, we are planning to roll them out to another 400 stores this quarter. And based on the guest response to our enhanced entertainment and electronics experience, which is currently in 42 stores, we plan to roll this environment out to another 275 stores this year.
In home, we've begun testing highly inspirational vignettes to show product in lifestyle settings, which we're rolling out to another 15 stores this quarter. Further back in the testing phase, we are looking at innovations to bring even more fun to our toy area with easier navigation, interactive experiences, larger than life displays and floor graphics. We're always looking for creative platforms to engage guests in new ways that are meaningful to them. Snapchat provides a fun channel for us to quickly share exclusive behind the scenes content with our guests that they can't get anywhere else. If you were one of the fans who witnessed Target's Snapchat debut, you caught a glimpse of the first story, which teased our history making Grammy commercial with Imagine Dragons to announce the Target exclusive version of their new album containing 4 exclusive bonus tracks.
Jeff will have more to say about this groundbreaking Grammy moment at our meeting next week. Guests are excited about the recent launch of our new plus size brand Ava and Viv, which launched earlier this month. Designed by our own product design and development team, Ava and Viv features stylish basics along with trend driven statement pieces. Similar to Target's other apparel lines, Ava and Viv will be updated monthly with prices ranging from $10 to $80 And the anticipation is building for our upcoming partnership with Lilly Pulitzer. With a modern interpretation of the American resort wear brand's exuberant prints and patterns, the limited edition Lilly Pulitzer for Target collection features 15 exclusive prints, which are original works of art created by Lilly Pulitzer artists specifically for this modern collaboration.
Available exclusively at all Target stores in the U. S. And on target.com beginning April 19, the 250 piece collection includes apparel, accessories and shoes for women and girls, as well as home accents, outdoor entertaining accessories, beach gear, travel essentials and more. And finally, as Brian mentioned, wellness is one of the signature categories in which we're reinventing we're investing to differentiate our brand and our assortment from the competition. We have a huge opportunity in this space because our guests have told us it's particularly important to them.
Specifically, nearly every household that shops at Target buys natural and organic products, and more than half of them indicate that they prefer to purchase natural and organic products when available. These guest insights are reinforced by their behavior in our stores. While overall sales in the natural and organic industry are growing rapidly, sales of these categories at Target are growing even faster, outpacing the industry by 50% in 2014. The Made to Matter collection remains one of the most prominent and active examples of Target's focus on wellness, offering guests a selection of natural, organic and sustainable products across multiple categories. In 2014, sales of the brands featured in our Made to Matter collection grew twice as fast at Target than they did elsewhere in the market.
In 2015, we'll reinforce our commitment to newness and better for you choices with a refreshed Made to Matter Handpicked by Target collection. This year's collection will double in size compared to last year, delivering more than 200 new and exclusive products from 31 leading and upcoming brands. As we look ahead to the new year, our priorities in merchandising are clear. We will build appropriate plans for each of our categories based on the role they play in supporting our brand and delivering a superior shopping experience. In our Signature categories, we will invest in product development, marketing, fixtures and store service to elevate and differentiate both the assortments and the shopping experience, fully delivering on our expect more, pay less brand promise.
Our Q4 results demonstrate that we are making some early progress in this work and we are dedicated to moving much faster in this transformation in 2015. Now, I'll turn it over to John, who will share his insights on our Q4 financial performance and our outlook for Q1 2015. John? Thanks, Kathy. Our Q1 financial results were stronger than expected, driven by
better than expected sales performance in the U. S. Our adjusted EPS of $1.50 was better than the high end of the guidance provided in our January 15 update and about $0.11 better than our expectations for U. S. Performance at the beginning of the quarter.
4th quarter diluted EPS from continuing operations was $1.49 about $0.01 lower than adjusted EPS, driven by a combined $0.02 of dilution from the reduction of the beneficial interest asset, combined with net data breach expenses, partially offset by the benefit from the resolution of income tax matters. 4th quarter GAAP EPS losses $0 reflected $5.59 in losses from discontinued Canadian operations. Our 4th quarter comparable sales increase of 3.8% was above the guidance of around 3% that we provided in our January update and nearly double the 2% growth we expected at the beginning of the quarter. More than all of the sales outperformance in the last few weeks of the quarter was in our stores, as digital channel sales came in a bit softer than expected in those last few weeks, reflecting a slowdown in demand sales growth as we annualized over promotions from a year ago combined with returns which came in somewhat higher than expected. Even so, digital channel sales increased a robust 36% in the 4th quarter on top of a very strong increase in the Q4 of 2013.
And as Brian mentioned, digital channel growth delivered about 90 basis points of our 4th quarter comparable sales increase, up from a 60 basis point contribution in the 3rd quarter. U. S. RedCard penetration of 21.1 percent was about 20 basis points ahead of last year and in line with our expectations. As I mentioned last quarter, based on trends and new accounts, we believe this quarter represented a trough in penetration growth.
And we expect to see a moderate reacceleration in penetration growth in 2015. This growth should benefit later in the year from the introduction of chip and PIN technology for all of our red cards and the changeover to Mastercard on our legacy co branded credit card program. Our 4th quarter EBITDA margin rate of 9.9% was somewhat stronger than expected, driven by very strong gross margin rate performance, partially offset by a small increase in our SG and A expense rate. Specifically, our 4th quarter gross margin rate of 28.5% was nearly a percentage point higher than a year ago and the strongest Q4 performance we've seen since 2010. This year's rate benefited from a favorable mix of sales growth in our signature categories combined with better markdown rates as we annualized last year's clearance and promotional activity following the announcement of the data breach.
I want to pause here and comment on our inventory position at the end of the quarter, which was about 6% higher than last year. This increase was intentional and reflects 2 separate decisions. 1st, in the last 6 months, we've chosen to increase our inventory in commodity categories to enhance in stocks in these frequency driving businesses. And second, we are ahead in some import categories in light of the slowdown at the West Coast ports. Bottom line, the inventory increase is the result of specific decisions we've made and we feel very good about our overall inventory level as we enter the new fiscal year.
Getting back to the Q4 P and L. On the SG and A expense line, we benefited from productivity improvements in the stores and overall leverage on paying benefits, offset by higher marketing, technology and incentive expense rates compared with last year. Altogether, our 4th quarter SG and A expense rate was about 20 basis points higher than last year. Moving to consolidated metrics. 4th quarter interest expense was up about 6% for last year and we paid $330,000,000 in dividends in the quarter, an increase of 22% over last year.
As expected, we didn't repurchase any shares in the 4th quarter. However, as we discussed in our January update, the exit from the Canadian market will meaningfully improve our credit metrics going forward. And provided the wind down of our Canadian operations continues to operate to proceed as planned, we will be in a position to revisit the possibility of share repurchase later in 2015. As always, I will reiterate that we will only resume repurchase activity if we believe it can be accomplished within the limits of our current investment grade credit ratings. As we look back at full year performance in the U.
S, our 2014 adjusted EPS of $4.27 was down slightly from $4.38 in 2013, driven by early year challenges as we recovered from the data breach. However, the healing of our business has been evident in the progression of our financial results throughout the year. Specifically, comparable sales, digital channel growth and year over year gross margin rate performance all improved as we moved throughout 2014 and expenses remained well controlled throughout the year. Next week at our meeting with you in New York, we will outline in detail our plans to build on this early momentum over the next few years. Before I turn to the outlook for the Q1 of 2015, I want to cover a small change to our adjusted EPS reporting, which we present in order to reflect the results of operations from what is now a single segment business.
Given that we have now amortized $151,000,000 or 2 thirds of the original value of the beneficial interest asset related to the 2013 sale of our credit card receivables portfolio, beginning in 2015, we will no longer remove the amortization of the beneficial interest from our adjusted EPS calculation. This is because both the quarterly amortization amounts and the year over year changes in those amounts are expected to be immaterial going forward. And therefore, we believe our reporting will be streamlined if we make this change. In our reporting throughout 2015, prior year adjusted EPS results will also reflect this change to ensure consistency for comparison purposes. With that, let's move to our outlook for the Q1.
We expect our comparable sales to increase about 2%, driven by an increase in digital channel sales of 30% or more, combined with modest growth in store channel sales. While it's still early in the quarter, our results for the 1st few weeks of February are consistent with that forecast. On our Q1 sales, we expect our gross margin rate to improve 40 to 50 basis points from last year as we annualized last year's very intense promotions, which we use to recapture traffic coming out of the data breach. On the SG and A expense line, we expect our Q1 rate to be flat to down slightly from a year ago, as we expect that the benefit from store productivity improvements will be offset by higher marketing and technology expense rates compared with last year. We expect our D and A expense rate to be about 10 basis points higher than last year, reflecting the impact of continued investments in technology to support our digital and flexible fulfillment efforts.
Altogether, we expect an improvement in our first quarter EBIT margin of 30 to 40 basis points above last year. 1st quarter interest expense should be approximately flat to last year and tax expense is expected to be about $50,000,000 higher than last year, reflecting improved profitability and a higher consolidated tax rate compared with a year ago. Altogether, these expectations would lead to 1st quarter adjusted EPS representing results of continuing operations in our single segment business of $0.95 to $1.05 compared with $0.92 a year ago. As John mentioned at the beginning of the call, we're going to wait until next week's financial community meeting to provide specific guidance for full year 2015 earnings growth, as well as our expected financial algorithm over the longer term. This will allow us to present our financial outlook in the full context of our specific business which reflect necessary investments to accelerate growth and build capabilities along with the opportunity to reduce costs over time, providing fuel to fund those investments.
With that, we'll conclude today's prepared remarks. Now Brian, Kathy and I will be happy to respond to your questions.
Your first question comes from Simeon Gutman from Morgan Stanley.
Thanks. Good morning. It's Simeon Gutman. First question on gross margin for John or Brian. It was quite solid in the Q4.
Last year, you had a little pressure, but not nearly as much as I guess we all expected given some of the discounting. So can you talk about what drove the expansion year over year in this year's Q4?
Sure. I'll start and I'm sure Kathy will jump in. But I think overall what you observed is there's certainly some savings relative to last year with the clearance activity that went on. But I think much more important to that is you saw the acceleration of what we the signature categories home, apparel, style, kids, many of those with margin rates well in excess of our average margin rate. And I think for the first time, Kathy and I couldn't even remember the last time where both home and apparel out comped the company.
So we really saw a very strong mix in the quarter delivered by the product in the stores. Yes.
So on top of the mix, I would also say that regular price sell through was very high. So less on clearance or markdown and more at full retail, which also contributed.
Okay. And just one follow-up. I'm sure this will get addressed next week, but can you just tell us what the average wage for full time associates and or part time associates are at associates are at Target?
We don't disclose the average wage for our team members. What I would tell you is, the stores team has always been a point of differentiation for Target and we've always prided ourselves and believe we have the best team in retail. And so very focused on ensuring we have competitive wages and that we're developing our team members. We're all the time assessing the marketplace to determine competitive wages and making adjustments. And we feel very confident that we'll be paying the teams appropriately.
I think importantly, if you look at our team leaders, 60% of them came from team members. So development is a really big part of what we offer to our team as they progress. Overall, as we look at some of the announcements that have been made in the marketplace and the minimum wage legislation has been act really hasn't changed our view of the quarter or the year really at all and won't be material changes to us.
Okay. So let
me build on that.
I'm sure we're going to receive this question again next week. But to John's point and our goal is to make sure we have the very best team in retail. And we're going to continue to invest in their development and make sure that from a marketplace standpoint, we're very competitive with the wages we provide. So I've been very pleased to learn that over 60% of our team leaders actually started as part time hourly employees. That development is critically important.
It allows us to attract terrific team members. And as John stated, we do not expect to see any material change next year.
Okay. Thanks. See you next week.
Your next question is from Matt Nemer from Wells Fargo Securities.
Thanks for taking my question. I want to follow-up on that last comment around wages. Brian, could you just provide some context around how much opportunity you think there is to reduce complexity and improve efficiency in case you needed to respond to wages or you wanted to respond?
Well, it's certainly going to be an area that we'll highlight next week. And I think you've captured it really, really well. Our focus right now throughout the organization is to reduce complexity, simplify the way we work, the way we create an organization that's much more agile that moves with much increased pace as we go forward. And we deliver the right innovation and product that our guest is looking for. So it is a significant area of focus for us.
We're going to talk about it in great detail, but we think it's going to be a very important part of our strategy going forward. It's going to fuel the key growth priorities that we've been talking about and we'll go through in great detail next week. But our goal is to make sure we eliminate complexity of target, we simplify our operating model, we empower our team members and create an environment where we're agile, we're taking advantage of marketplace opportunities and we're bringing products and services to market that respond to the needs of our guests.
Thanks. And then just a quick follow-up on the higher online return rates. Do you think that's primarily a function of the free shipping offer? Is it more prevalent in certain categories? And is it related at all to error rates?
Actually the return rates were higher than our expectation, but they were essentially right on last year. We had seen some improvement throughout most of the year and they basically just returned to last year. So not a material change, just a little bit different than our expectation for the last couple of weeks.
Understood. Thanks so much.
Your next question is from Scott Mushkin from Wolfe Research.
Hey, guys. Thanks for taking my questions.
The first thing I wanted
to poke at was frequency. Brian, you mentioned that you were real pleased with the frequency going up in the quarter. Is that a focus for the company to drive frequency to the stores? And kind of maybe as a preview, how do you get it done?
Yes. Scott, while there's certainly a number of critically important metrics as we look at the business going forward, I can tell you that the entire leadership team has prioritized 1, increasing traffic to our stores and 2, visits to our site. Those are critically important as we go forward. So we're going to do that by executing many of the priorities that we outlined today. We certainly want to make sure we're building the right digital and importantly mobile capabilities that drive greater visits to our site and build greater engagement with our guests, not only when they're shopping at home, but also when they're shopping inside of our stores.
And Cartwheel is a great example of how we've used digital to drive greater engagement. I am really pleased and Kathy highlighted the fact that our signature categories drove our growth in the Q4. And it's critically important that while we're in the early stages, we're already seeing the guests react well to our focus on style, on baby and kids and importantly wellness. And the fact that health care and beauty and home and apparel outpaced our overall performance in the Q4 is a sign that we're connecting with the guests and we're certainly driving more of the traffic because of these great new offerings in store. So our focus on elevating signature categories, we think brings our guests back to Target more often.
They're going to be coming back in to see what's new and Kathy and her team have a great lineup in 2015 of new exciting products coupled with an improvement in our in store experience and merchandising. So those elements are critically important. We think localization allows us to build a more meaningful relationship with the guests, which will result in more traffic and more visits. And certainly as we expand our smaller formats, both Citi Target and Target Express,
it's a way
for us to engage the guests in these urban settings that are critically important. So all of those are focused on making sure we build greater engagement, but the metrics that are going to be important for us is to ensure it results in more traffic like it did in the Q4 and more visits to our site. So we're pleased with Q4, lots of work in front of us, but I felt very good as to the entire leadership team that our comp increase of 3.8% in the Q4 was primarily driven by traffic. And our industry leading growth in digital was certainly going to be fueled by more visits and better conversion from our sites.
That's perfect. And I just have one quick follow-up. I have a ton of questions, but I'm just going to do one quick follow-up to what you said, Brian. You didn't mention, although Kathy did, she mentioned food. How do you think of food in context to traffic?
And then I'll yield. Thank you.
Look, Scott, I think you already know the answer to that. We're going to talk about this specifically next week. Food is very important to our guests and they've confirmed that with us as we've gone back and researched the food category through the eyes of the guests recently. We all know food trips drive traffic and we want to make sure we complement our signature categories with guests that are coming to us for the great food products we can curate. We recognize we have a lot of work to do in food.
And Kathy and I were recently out in the market together. We spent several days visiting our stores, looking at competitive food retailers as we begin to build our reinvention plans for food. But as Kathy will talk about next week, we recognize we need to make changes to our assortment, made the matter and some of the changes we're making right now in our assortment that deliver more organic, natural, gluten free items critically important to the guests. And we also recognize we have to change the in store experience and really make sure our food and grocery merchandising complements the great experience we create at Target. So a critically important area of opportunity.
We won't get there overnight. It will be a multi year transition, But food is going to play a very important role in complementing our other signature categories and making sure we drive traffic to our stores and to our site.
Thanks. That was great. Great answer. I appreciate it.
Yeah. Thanks. Hopefully, we'll see you next
week. Definitely.
We'll see you next week. Looking forward to it.
Your next question is from Matthew Fassler from Goldman Sachs.
Thanks a lot and good morning. If you could frame some of the marketing and technology spending in the Q4, just let us know what that was directed towards. And I know you're holding back to some degree on 2015 guidance, but were some of those initiatives that you would expect to persist through the upcoming year?
Yes. Matt, we'll certainly go through much more of this next week. I think if you were to look at the changes we made from a marketing standpoint in the Q4, the big change would have been a significant increase in our digital support of our brands. So as we continue to make sure we're connecting with our guests, we're connecting with them the way they're looking to connect with the target brand, digital is going to play an increasingly important role. And we were very pleased with our overall marketing in the Q4.
We had some outstanding creative on air. It received very positive response from the guests and we complemented that with a very strong digital campaign. So I felt and the team felt very good about the progress we made from a marketing standpoint in the Q4. We had creative that broke through the clutter, connected with our guests, drove traffic to our stores. We complemented that with really impactful digital and online communication and tied that back in with great in store marketing.
So you'll see more of that as we go forward into 2015 and we'll take you through a lot more of the investments and the plans we have when we see you next week.
Thank you.
Your next question is from Sean Naughton from Piper Jaffray.
Hi, guys. Good morning. I just wanted to follow-up on the food question and then specifically inside of the fresh component of the business. This was supposed to be a big part of driving transactions to the store over the long term. Could you just maybe give us a little bit on where Target is with its fresh offering today?
How is it evolving? And are you happy with the performance of the sales and margins on this segment of the business? Yes. It's John and margins
on this segment of the business? Yes. Sean, we're going to talk about food in much
more depth next week. But fresh is a very important part of food, not only traffic and number of trips for our guests, but just in terms of what's important to them, in terms of wellness. Fresh food plays a very important part. And as Brian said, we've got a lot of work to do here. So, both in Super Target as well as in P fresh format.
And it centers around our assortments, how fresh the product is and ways that we can improve upon that, the presentation showing abundance and that great product. So we have a lot of work to do, but critically important to us because our guests have said, they want to be able to eat better both natural and organic. We see it in our results today and we know that there's much, much more opportunity.
Okay. And then maybe as a follow-up here. Just on the inflation front, can you just give us an idea of how inflation trended maybe across the store in the quarter and your expectations kind of in the near and medium term? Thank you.
Sure. Lots of variability across categories as is always the case. We saw some inflation in food. We saw some lot of deflation in electronics like we always do. But if you look at across the entirety of our business, essentially flat to last year.
So no net impact to the business from inflation in aggregate. But as I said, lots of variability within that.
That's helpful. Thank you.
Your next question is from Michael Lasser from UBS.
Good morning. Thanks a lot for taking my question. As you look back at the Q4, can you dimension what you think the or how the performance was driven by your own initiatives, the easy comparison versus last year and just an improving macro environment due in part to the lower fuel prices? If there's any way you could potentially quantify that, I think it would be really helpful.
Yes. Michael, let me start. I'll let Kathy and John jump in. I think you've certainly identified some of the big levers. And I think as we sit here today, we recognize that the consumer confidence has certainly improved.
Lower gas prices certainly helping the industry overall. We did have some favorable overlap certainly as we overlapped the breach, but I also think we made significant strides from a merchandising standpoint, from a marketing standpoint, and we continue to deliver great execution and service inside the stores. And when you look at the 2 year stacks, we had a very challenging November, a very strong November from 2013 that we overlapped and saw growth. And that to me was a sign that not only was the consumer healthier, but they were choosing to spend their dollars in Target stores. And they came back in December.
As Kathy alluded to, we had a very strong close to the holiday season. But importantly, we felt really good about traffic and our performance in January, particularly in the last 2 weeks of the quarter. So a combination of we certainly did have some issues from last year that we were overlapping. The consumer, we do believe is healthier and we're pleased that they're spending in our stores both in our stores and online. But I also think we made significant strides from a merchandising standpoint.
We had terrific marketing and a great digital connection with our guests. We were able to leverage both an improved in store experience, the convenience of shopping online and picking up in store, and we had industry leading online sales and we leveraged our stores to help make sure that we fulfill the needs of our guests. So I think the combination of all those elements added up to a very solid quarter.
Okay. Thanks for that. Please go ahead Kathy.
The only thing that I would add to that is just that a lot of that focus came in our signature categories, which is why you saw our growth there in particular. So major investment in product, both quality as well as aesthetic and number of SKUs, newness that we brought to the market. The marketing reinforced that and that was very well received by our guests. And then coupled with presentation both online with enhancements in our app and our desktop site and the presentation in our store driven by focus on signature categories really helped drive our growth.
That's helpful. The follow-up question I had is, are there any particular call outs you can offer about the strength in the last 2 weeks of the quarter? It just strikes us as interesting and we're curious about what drove that strength? Thank you.
I think we continue to see gift card redemption. We intentionally we had a significant gift card promotion on Black Friday that was very successful. We saw all of those come back in January. I think that helped. And we saw continued strength in the product in home and apparel, very strong sales in home and apparel and I think that was an element of it as well.
But I think it's a combination of both.
And our wellness business is healthy as we turn the corner into the New Year. We saw that continue. So as it's the trade up that we've had seen during Christmas, we saw continuing into January, which is just guest choice for products in our discretionary category. So I think lots of things drove it.
Michael, I think well summarized. I would put 4 elements on the list. John talked about gift cards. I think that was very important. And we certainly saw our guests come back to Target with gift cards after the holidays and through January.
Our focus on wellness certainly well received by the We had great newness in our stores to start the new year and our store team did a terrific job of recovering after the holidays. And we offered our guests a very strong in store shopping experience. So a lot of the basics, but our gift card plans were well executed. We saw the guests come back in January. Our focus on wellness, that's an important signature category well received.
We brought newness into the stores to start the year and our store teams did a terrific job of recovering after a very busy Christmas holiday season.
Thank you so much. I appreciate it.
Thank you. I think we've got time for one more question today.
Your next question is from Greg Melick from Evercore ISI.
That's great. Thanks. I had a couple of follow ups. It'd be great to know you said the signature category did well. Do you have the actual numbers like which ones were better than the by category for food and wellness, etcetera?
Well, health and beauty were both very strong. So, in the health categories that spread across many categories. I talked about Made to Matter. I talked about better for your product in food, but it was also in our health business. In our style business, both beauty was strong as well as in apparel, it was driven really by kids and by baby.
And in home, it was domestic and seasonal product. And then in kids, we had incredible season in toys with a double digit comp. We really were pleased with the overall holiday.
I think as we mentioned earlier in the call, wellness, home, apparel, all comped in excess of the 3.8 we reported for the quarter. So strength across all those categories. And to win in the 4th quarter, you have to win in toys. Well, our team won in toys and showing a double digit comp was critically important. So we felt very good about the early progress in those Signature categories and we'll build off of that momentum as we go into 2015.
And maybe to follow-up on that momentum and seeing the traffic get back to up 3%. When you look out to your Q1, that 2% expectation, do you expect traffic to be half of that comp or positive in the Q1? Or what's built in your expectation?
Well, I think Brian hit on it earlier, right? We continue to drive for positive traffic. I think positive in the store and growing digital online and that's part of our guidance. Great. And then John, maybe a
quick follow-up on SG and A.
It looked like and I could be backing the math out wrong here, but SG and A dollars in the 4th quarter, accelerated to maybe 4% or 5% growth. Was there anything that percent growth. Was there anything that caused that in particular? Yes.
I think like we said, a little bit of deleveraging. There were some marketing expense we talked about in November moved from November into or from Q3 into Q4. As Brian said, we made some investments in marketing. The other elements were ongoing all year. We had some technology.
And then the thing that really drove a lot of it relative to the other quarters was incentive expense. We I delivered our expectations and that will be reflected in our incentive expense.
So thanks for joining us today. That's going to conclude our Q4 2014 earnings conference call. We appreciate everyone's participation today and we really look forward to seeing you next week in New York City. So thank you again.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participating. At this time, you may now disconnect.