Michael J. Fiddelke
Executive VP, COO & CFO at Target
Thanks Rick. I'd like to join Brian in welcoming you to your first earnings call. I'm excited about all of the long-term growth opportunities we have in front of us, as we work together to deliver more for our guests, for our team, and for our shareholders. As Brian mentioned, I'm temporarily wearing two hats right now, as I continue in the CFO role while preparing to fully move into the COO role. And while I'm looking forward to the day when I'm only wearing the COO hat, I'm privileged to be surrounded by exceptionally talented leaders and teams that are operating with a guest first, long term focus that's fueling our results. Every day I see their commitment to caring, growing and winning together. Whether I'm walking a store, a distribution center, or the halls in our headquarters, there's no doubt in my mind that our team members are the number one reason that Target is such a special place to work.
As we've been highlighting for some time, the operations team is focused on reinforcing retail fundamentals following an extended period of unprecedented volatility that began more than four years ago. While this effort encompasses many processes and metrics, nothing is more important than staying in stock and being reliable for our guests. And while our in-stock measures have been improving rapidly for some time now, we're going to continue our work to improve them even more.
In the second quarter, total out of stocks were more than 500 basis points lower than a year ago. Also, important, out of stocks on our top items in Q2, the ones with the highest unit velocity, were more than 50% lower than total out of stocks and also better than a year ago. Notably, these out-of-stock measures would have been even more favorable if our perishable food distribution facility in Denton, Texas, had not sustained major damage from a severe storm in late May, something I'll return to later in my remarks.
It's also notable that our total inventory investment at the end of Q2 was slightly lower than a year ago, meaning that the out-of-stock improvements we've been seeing are the result of operational improvements, not from simply flooding our network with more inventory. Of course, we're always focused on maintaining the right amount of inventory to deliver on our reliability goals, and we're already growing our inventory in categories where demand is strong. But overall, our business has been able to sustain stronger inventory turns than we've seen historically, something you'd expect to happen given the gains in sales per store we've seen over the last five years.
Another area of focus for our team is the store shopping experience, most notably in the front end at checkout. With the recent changes we've made to streamline self-checkout while ensuring we maintain adequate staffing at our full-service lanes, we're seeing notably faster checkout times in our self-service lanes. In addition, with more people using our full-service lanes, our team has been engaging with nearly 15% more guests at checkout compared with last year. And with all of these changes, we've seen a continued substantial improvement in our net promoter scores regarding the purchase experience, with scores related to wait times and interactions at checkout, the strongest we've seen in six years.
We're also making investments in technology to make it easier for our team members to serve our guests. Earlier this year, we integrated Gen AI into the handheld devices in our stores, providing our team with rapid access to best practice documentation, and the ability to quickly receive straightforward responses to common questions like how do I sign a guest up for a Target circle card? And how do I restart the cash register in the event of a power outage? Since the full chain rollout of this new tool, our team members have leveraged the technology more than 50,000 times, getting answers in a highly efficient average chat time of less than one minute. We will continue to refine this tool over time based on feedback from our team, but many are already telling us that it's enhanced their everyday work experience, making it easier and faster for them to help our guests. In addition, leaders in our stores are telling us they expect this new tool will be particularly helpful as we bring on new permanent and seasonal team members in advance of this year's holiday season, helping them to become more productive more quickly than in the past.
Of course, while well documented, efficient and repeatable processes are critical to maintaining quality in a large operation, it's just as important to help our team to stay nimble and able to react to unforeseen events, and our team had to deal with several weather-related challenges in the second quarter.
As I mentioned earlier, our Denton, Texas Perishable Food Distribution Center sustained significant physical damage from a storm in late May, resulting in a prolonged site closure and significant product loss at that location. Following the storm, the team reacted quickly to minimize the impact, temporarily realigning perishable food replenishment for 220 locations with other distribution nodes. While our construction and distribution teams rushed to get the facility repaired and operational before the end of the quarter.
Later in the quarter in early July, Hurricane Beryl hit landfall in Southern Texas, and our team responded quickly to help their neighbors in affected communities. When power was lost in multiple locations, our team successfully kept stores open using generators, providing food, supplies and a safe place for community members to take shelter and charge their electronic devices. Our team helped to organize and deliver donations of critical supplies to their neighbors while helping to clear debris from nearby roads and homes. And as always, our team members took care of each other, from cooking meals for displaced colleagues to making sure everyone had access to emergency supplies and shelter. To support these heroic efforts in the field, we maintain a robust infrastructure supported by a core team at our headquarters that's ready to provide communications and support when disasters happen. As part of these preparations, we reserve and preposition thousands of pallets of critical supplies throughout our distribution network, which can be quickly deployed to affected areas when events occur.
We also maintain a command center at our headquarters that's equipped to monitor weather and other conditions in the areas where we operate, helping our field teams to prepare and react quickly to minimize the impact when adverse events affect our communities, colleagues and our business. And of course, we're proud to continue offering financial support in affected communities, having already made proactive donations of $2.5 million so far this year in support of our domestic and global disaster relief partners. Following Hurricane Beryl, our donations helped the American Red Cross stand up more than 10 evacuation centers in Houston. We also supported Team Rubicon as they worked to clear fallen trees, helped homeowners navigate FEMA applications for disaster assistance, aided the footprint project in providing solar generators to power homes and medical machines, and provided food, medicine and other critical supplies to the hardest hit neighborhoods. So much of our Target forward sustainability strategy is dedicated to working across the business to address community needs and drive meaningful and positive impact.
Through Target's philanthropy and volunteerism, and by integrating business assets to meet the needs of our communities, we aim to be present in ways that help all families thrive, knowing the guests and communities we serve are critical to the success of our business. So, I want to pause and thank our entire team for their tireless efforts, both every day and especially during times of need. You serve as the face of the company in all of the communities where we live and work, and you're the biggest reason consumers love our brand. I'm proud to work with you, and grateful for everything you do to support our business, our communities and your fellow team members.
So, now I want to pivot and provide a quick update on our sortation center strategy, which continues to benefit our business in multiple ways. A critical aspect of the strategy is faster delivery speeds, as local orders process through a sortation center arrive more than a day faster than our network average. But notably, that increase in speed doesn't require more dollars, as our unit delivery costs from a sort center are about 20% lower than our network average. On top of that direct benefit, opening a sortation center in a market frees up processing space in the stores it serves, while delivering labor savings in those locations as well. With all of these benefits, you can see why we're excited to continue expanding the reach of this capability. And just this month, we're opening our 11th sort center in the Detroit market, where it's expected to serve more than 3 million consumers. By 2028, this facility is expected to process up to 60,000 packages daily, while operating in a smaller than average footprint. And beyond growth in the number of these facilities, our existing sort centers continue to ramp up their capacity, and we're finding new ways to integrate them into our broader network.
For example, our recently opened flow center in Chicago will be feeding the Detroit Sortation center, increasing the number of packages eligible for next day delivery in that market. Altogether this year, our sortation centers have processed 19% more packages than a year ago.
So now I want to turn to our second quarter financial results. As Brian highlighted earlier, the 2% increase in our Q2 comp sales was driven entirely by traffic. This traffic increase was partially offset by a decline in average ticket, which included a decrease in our average selling price when compared with a year ago. As Brian mentioned, our guests continue to shop around seasonal moments, leading to strength around the Memorial Day holiday as well as the 4th of July, and our most recent Target circle week later in the quarter. Within the quarter, comp sales were strongest in June and July, and trends were very similar between those two months on a reported basis. Most importantly, traffic grew in all three months of the quarter.
Beyond our comp sales, second quarter total revenue growth of 2.7% reflected the benefit from sales in non-mature stores, and double-digit growth in other revenue, driven primarily by strong growth in our Roundel ad business. Our second quarter gross margin rate of 28.9% was about 190 basis points higher than a year ago. About 90 basis points of this improvement was driven by our merchandising strategies, which included the ongoing benefit of our efficiency work. We also saw about 40 basis points of benefit from category sales mix, which was largely offset by cost pressures from digital fulfillment and supply chain.
Finally, our gross margin rate reflected about 90 basis points of benefit from lower inventory shrink, compared with a 20-basis point benefit in the first quarter. While our guidance assumed that the year-over-year benefit from shrink would increase this quarter, we've seen better than expected results in our most recent store inventory counts, resulting in a bigger than expected financial benefit in Q2. Based on these updated counts, we're now expecting our Q3 gross margin rate will also benefit from lower shrink costs, but expect the magnitude of that benefit will be less than half of what we just experienced in the second quarter.
And for Q4, given the financial benefit we were already seeing a year ago, we're expecting shrink costs will be approximately flat to last year. While it's encouraging to see this progress, we'll continue our work to move shrink rates down to more sustainable levels in the years ahead, given the steep increase in shrink that our business has absorbed over the last five years.
Our second quarter SG&A expense rate of 21.2% was about 30 basis points higher than a year ago. This increase reflected cost increases in multiple parts of our business, along with continued investments in our team, which were partially offset by lower remodel expenses, savings from our efficiency work, and continued disciplined cost management throughout the enterprise. Overall, our Q2 operating margin rate of 6.4% was about 160 basis points higher than last year, as we continue to build back our profitability from the significant headwinds we've encountered over the last couple of years.
Regarding our inventory, we continue to feel good about our position. As I mentioned earlier, Q2 ending inventory on the balance sheet was slightly lower than a year ago. However, given all of the volatility we've experienced since the pandemic began, one-year comparisons can be hard to interpret. As such, we still find it useful to compare relative growth rates back to 2019, and if you perform that comparison for the second quarter, you'll see that both our sales and ending inventory have grown about 38% over those five years, reinforcing our view that we're positioned appropriately as we enter the back half of the year.
Now I'd like to turn to capital deployment and briefly reiterate our longstanding priorities. First, we look to fully invest in our business in projects that meet our strategic and financial criteria. Next, we look to support the dividend and build on our more than 50-year record of increasing the annual dividend. And finally, we look to return any excess cash that's available after these first two uses by engaging in share repurchases over time within the limits of our middle A Credit ratings. Regarding the first priority, we've allocated $1.3 billion to capital expenditures through the first half of the year and continue to expect full year capex in the $3 billion to $4 billion range. Regarding the second priority, we returned $509 million to shareholders in the form of dividends in Q2, representing growth of about $10 million over last year. And finally, we returned to share repurchases in the second quarter, allocating $155 million to retire 1.1 million shares of our stock. Given the work of our team to strengthen our balance sheet over the last 18 months and the simultaneous improvements we've seen in our profitability and cash flow, we were happy to get back to repurchases this quarter. We expect to have continued repurchase capacity in the back half of 2024 and in the years ahead.
So now, I want to end my commentary on the quarter by covering our after-tax return on invested capital, which is an important measure of the quality of both our financial results and our capital investments. Through the 12 months ending in the second quarter, our after-tax ROIC of 16.6% was nearly 3 percentage points higher than a year ago. While this is already a very strong after-tax return, our long-term financial plans envision continued growth of this metric into the high teens over time.
Now I'd like to turn to our expectations for the third quarter and the full year. And while our performance has exceeded our expectations so far this year, and our view of the consumer remains largely the same, the range of possibilities and the macroeconomic backdrop in consumer data and in our business remains unusually high. Against that backdrop, our experience over the last several years has shown us that a prudent outlook, while maintaining the team's agility, is the best way to position our business. As such, we've taken a measured approach to our forward-looking guidance, and our team remains ready to respond if the pace of our business turns out to be stronger. With these considerations as context, we're planning for third quarter comparable sales growth in the zero to 2% range, and GAAP and adjusted EPS of $2.10 to $2.40, and while our full year comp guidance range remains the same at zero to 2% growth and the breadth of possibilities remains quite wide, our baseline plan for the fall season would put us in the lower half of that range for the full year.
However, in light of the strong financial performance, our business has already delivered in the first half of the year, we've raised our full year GAAP and adjusted EPS range to $9 to $9.70, compared with our prior range of $8.60 to $9.60.
At our financial community meeting earlier this year, we provided insight into our financial aspirations over the next 10 years. At their core, those aspirations are based on two basic assumptions -- healthy growth on the top line and reaching the appropriate level of profitability on the bottom line. In the second quarter in an environment where consumers are focused on value and making tough tradeoffs in their spending decisions, our team delivered newness, value and reliability to our guests, resulting in top line growth beyond our baseline expectations and even faster growth in guest traffic. And importantly, even in a challenging environment, we also expanded our Q2 operating margin rate. We are really proud of these results, which reflects the hard work and dedication of our outstanding team.
At the same time, this quarter was only the first step on a much longer journey, and we have a lot more work ahead of us. More specifically, with 2019 as a baseline, the second quarter was the first time in a while in which our EPS grew faster than the top line, with total revenue growth of 38% over that five-year period and EPS growth of more than 41%. Our guidance for the remainder of the year implies further expansion of both of those metrics, and based on our growth initiatives, ongoing efficiency work and continued opportunity to reduce the impact of inventory shrink, we expect to see additional progress in the years ahead. We have a clear vision of how we're going to get there and the right team in place to make it happen. With that, I'll turn the call back over to Brian.
