“Regarding our outlook for inventory shrink. Consistent with our prior commentary, we expect that shrink improvements will account for approximately 80 to 90 basis points of gross margin rate favorability for the full year.”

In context

“James Lee: Thanks, Rick. Our financial results in Q3 were in line with our expectations as our team continues to focus on what we can control and manage the business with discipline, despite continued softness on the top line, volatility in weekly and monthly trends, and uncertainty in the external environment. Third quarter net sales were 1.5% lower than a year ago, slightly better than our year-to-date performance, but about 60 basis points softer than in Q2. Category sales trends were relatively consistent between Q2 and Q3, with the exception of hardlines, where we saw continued growth but at a slower pace, following an outsized boost from the launch of the Nintendo Switch 2 in the second quarter. Across our selling channels, comp sales in our stores were down about 4%, while comparable digital sales grew 2.4% on top of nearly 11% a year ago. Within our first-party digital sales, we saw mid-single-digit growth in our same-day services, led by more than 35% growth in same-day delivery. Beyond our first-party digital platform, we saw a significant step up to nearly 50% growth in GMV of our Target Plus marketplace and mid-teens growth in Roundel ad sales, demonstrating the breadth and growing relevance of our digital ecosystem. Top line results during the quarter were quite volatile with net sales close to flat in August and October and down about 4% in September. This pattern reinforces many of the consumer themes we've been highlighting for some time. as guests shopped around back-to-school and back to college in August and around Halloween in October, but pulled back in September in between those key seasons. In addition, September apparel sales were hampered by unusually warm weather across the country while October benefited from the response to our most recent Target Circle week as consumers continue to focus on value. On the gross margin line, our Q3 rate of 28.2% was about 10 basis points lower than last year. Among the drivers, we saw about 1 percentage point of pressure in merchandising, reflecting the impact of higher markdowns. This pressure was offset by about 70 basis points of favorability from lower inventory shrink versus last year. In addition, we saw about 20 basis points of favorability from supply chain and digital fulfillment as the benefit of higher productivity and the lapping of last year's supply chain challenges was partially offset by the deleveraging impact of lower sales. Regarding our outlook for inventory shrink. Consistent with our prior commentary, we expect that shrink improvements will account for approximately 80 to 90 basis points of gross margin rate favorability for the full year. This would bring it fully back down to pre-pandemic levels, marking a dramatic turnaround over the last 2 years. One other note, our Q3 ending inventory was about 2% lower than a year ago. This is in line with recent trends in our Q4 sales outlook and reflects growth in our frequency businesses that was more than offset by lower levels in our discretionary businesses. Moving back to our third quarter P&L. Our SG&A expense rate of 21.9% was about 60 basis points higher than a year ago. However, this rate reflected about 60 basis points of impact from onetime business transformation costs. Excluding these costs, our third quarter SG&A expense rate was approximately flat to last year. On the bottom line, our business delivered third quarter GAAP EPS of $1.51 compared with $1.85 a year ago. Adjusted EPS, which excluded business transformation costs was $1.78 in the third quarter, about 4% lower than a year ago. While this is far short of where we aspire to be over time, it is solid profit performance in a quarter where our top line was down more than 1% and reflects stronger relative performance versus the first half of the year, consistent with our prior commentary. I'll turn now to capital deployment and reiterate our priorities, which we've consistently followed for decades. First, we look to fully invest in our business in projects that meet our strategic and financial criteria. Second, we look to support the dividend and build on our record of more than 50 years of consecutive annual increases. And finally, we look to deploy any excess cash beyond those first 2 uses to repurchase shares over time within the limits of our middle A credit ratings. Regarding our first priority, we've invested about $2.8 billion in capital expenditures so far this year and continue to expect full year CapEx of around $4 billion. Regarding the second priority, we paid $518 million in dividends in Q3, which was $2 million higher than last year as a 1.8% increase in the per share dividend was mostly offset by a lower average share count. Regarding the last priority, we deployed just over $150 million to repurchase our shares in the third quarter, following a pause in Q2. While we ended the quarter with a healthy cash position and expect to have continued capacity within the limits of our middle A ratings, we'll continue to exercise caution in our repurchase program in the face of continued uncertainty in the external environment. Now I want to turn to our outlook for the fourth quarter and the full year. While our Q3 results were consistent with our expectations, we've continued to see a high degree of volatility in our business. In addition, we're mindful of the challenges facing consumers as exemplified by recent declines in consumer confidence. As such, while our top line expectations for Q4 are in line with our prior guidance and recent performance, we've narrowed our full year EPS ranges and moved our adjusted EPS range to the bottom half of the prior range. With that as context, on the top line for the fourth quarter, we're continuing to expect a low single-digit decline in our comparable sales. in line with our year-to-date performance. On the adjusted EPS line, our updated range is from $7 to $8 for the full year. The expected range for GAAP EPS is about $0.70 higher than for adjusted EPS reflecting the benefit of the first quarter litigation settlement, partially offset by business transformation costs. Against the backdrop of a very difficult environment, I am proud of the team's hard work this year to navigate a very high level of complexity including their work to mitigate the impact of tariffs and navigate challenging consumer conditions. Over the past several months, we've also been hard at work to drive prioritization and outline key investments to return Target back to sustainable growth. Looking ahead to next year, we expect to ramp up our capital spending meaningfully in support of our store experience and remodel program, a step-up in technology and digital fulfillment capabilities and investment in new stores. Our current plan envisions 2026 CapEx dollars increasing by approximately 25% or $1 billion versus 2025. In addition, we are planning to leverage a continuous pipeline of productivity initiatives and approximately $180 million of expected annualized savings from our recent business transformation efforts to invest in key areas in support of our 3 strategic priorities. We will share more details on our plans for 2026 and beyond at our financial community meeting in March. While we know there's much more work to do, I'm confident that we are rapidly moving in the right direction and positioning our business to get back to sustainable, profitable growth in the years ahead. With that, I'll turn the call back over to Michael.”