Michael Fiddelke
Executive Vice President and Chief Financial Officer at Target
Thanks, John. As John mentioned, we often ask our team to be mindful of both short-term and long-term considerations when making decisions. And given the unique circumstances we've been facing, this quarter, we faced a decision with meaningful implications for both. As Brian outlined earlier, if we had decided not to deal with our excess inventory head on, we could have avoided some short-term pain on the profit line, but that would have hampered our longer-term potential.
Instead, because of the path we took, our quarterly profit took a meaningful step-down, but our future path is brighter. Our operations are healthy, our store in DC teams have more flexibility to maneuver, and we're ready to feature both the fresh assortment and uncluttered shopping experience our guests expect and deserve. That passionate commitment to the guest experience is one of the many reasons we've now seen 21 consecutive quarters of comparable sales growth.
While normally our income statement gets the most attention, I want to start my remarks today with the balance sheet and specifically our inventory position. And as I dig into the detail, I want to acknowledge upfront that this kind of analysis is a relatively complex exercise because of the growth and volatility we've experienced over the last couple of years, because of the broad and diverse assortment that we sell and the fact that our business is seasonal from quarter to quarter. More specifically, given that our inventory position throughout the pandemic was far from optimal, focusing on year-over-year growth numbers isn't very helpful right now. As a result, we often base our inventory analysis on growth trends compared with 2019, a pre-pandemic year when our inventory and sales trends were much more in sync.
With that as context, I want to zero in on one of the questions I'm sure you have, which is why our inventory on the balance sheet remained roughly constant at around $15 billion between the first and second quarters. The simple answer is that while that single number didn't change much, we accomplished exactly what we intended to do during the quarter, which helped change conditions significantly below the surface. More specifically, because of the inventory actions we executed, unit growth compared with 2019 in our discretionary categories decelerated by more than 15 percentage points between the first and second quarter, a change we estimate would have reduced our inventory position by more than $1 billion if taken in isolation. However, a couple of offsetting changes moved our quarter-end inventory in the other direction.
First among them, we leaned into our frequency categories during the quarter, accelerating three-year unit growth versus Q1 at a double-digit rate, resulting in stronger in-stock metrics compared with 90 days ago. Another factor that drove inventory dollars higher is the continued increase in unit costs we've been seeing across all of our categories, which caused the dollar value of our inventory to grow faster than unit growth in the second quarter. So, where do we stand today? At the end of the second quarter, inventory on the balance sheet was about $6 billion higher than we reported three years ago. Of that dollar growth, about $3 billion or approximately half of that total growth is the result of higher unit costs across our assortment.
Of the remaining $3 billion, our analysis indicates another $1 billion to $2 billion is related to our decision to move receipt timing earlier, given the volatility we continue to expect in the supply chain. And also importantly, beyond reshaping the inventory we already have, our Q2 inventory actions also included the removal of more than $1.5 billion of fall receipts in our discretionary categories, reflecting our continued focus on reducing risk in the current environment. That's why we feel good about our inventory position as we head into the back half of the year.
So now I'll turn to a review of our second quarter financial results. Total sales increased 3.3% in the quarter, driven by a 2.6% increase in comparable sales combined with the impact of new stores. Total revenue increased 3.5%, reflecting sales growth along with the benefit of nearly 15% growth on the other revenue line, driven by continued strength in our Roundel ad business.
Just as Christina pointed out that unit share is a key measure of Target's relevance versus competitors, traffic growth is another important indicator of the relevance of our brand. Our continued traffic growth in the second quarter clearly demonstrates the ability of our balanced multi-category assortment to deliver continued relevance in a rapidly changing environment like we're seeing today. So that even as our guests preference for individual categories has been changing dramatically so far this year, that hasn't affected their preference for Target.
As a result, traffic accounted for 100% of our comparable sales growth in the second quarter, increasing 2.7% on top of 12.7% a year ago. Average ticket remained essentially flat in the quarter as low-single-digit increase in average retails was offset by a similar reduction in the number of items per transaction. Across our sales channels, store comps grew 1.3%, on top of 8.7% a year ago, while digital comps grew 9% on top of 9.9% last year.
Digital growth continues to be led by our same-day services, which saw double-digit growth overall and mid-teens growth in Drive Up. On the gross margin line, we saw a nearly 9 percentage point decline compared with last year. Merchandising accounted for more than 7 points of this pressure, driven primarily by our inventory reduction efforts along with the impact of higher fuel and transportation costs, product cost increases, and higher shrink, partially offset by the benefit of retail price increases.
In addition, digital fulfillment and supply chain drove about 1.5 points of pressure, reflecting increased compensation and headcount in our distribution centers combined with the cost of managing excess inventory and higher last mile shipping costs. Consistent with the first quarter, mix accounted for approximately 10 basis points of pressure. The softness in higher-margin categories like apparel and home was largely offset by softness in lower-margin discretionary categories, most notably electronics.
On the SG&A line, we continue to benefit from fixed cost leverage and efficiency gains across our operations, which helped to offset the impact of cost inflation across multiple expense lines. Within overall compensation, lower incentive compensation more than offset continued investments in pay and benefits for our hourly team members. Altogether, our second quarter operating margin rate was 1.2%, down from an unusually high 9.8% a year ago, driven entirely by the decline in our gross margin rate. This operating margin performance was below the midpoint of our most recent guidance as the cost of our inventory actions was somewhat higher than expected. While an operating margin rate of just over 1% is well below anything I've seen in my career and something I never expect to see again. I have no doubt that it was the right outcome, given the unusual circumstances we've been facing this year. Our focus throughout the second quarter was to ensure that we took care of the excess inventory of our network and adjust future receipts to reflect the rapid change in sales trends we've seen so far this year. We accomplished this goal to the benefit of our operations, our team and our guests.
Finally, one note on our tax rate. In a period like this year when our operating profit is unusually low, tax benefits have a larger-than-normal impact on our tax rate, which helps to explain why our year-to-date tax rate has been lower than expected. Looking forward, given that we anticipate a meaningful improvement in our operating performance in the back half of the year, we continue to expect our full year effective tax rate will be in a range around 21%.
Now, I'm going to turn to capital deployment and begin where I always do by articulating our priorities, which we've supported consistently for decades. Our first priority is always to invest fully in our business in projects that support our strategic and financial criteria. Once we've met this first priority, we support our dividend and look to extend our 50-year record of annual increases. And finally, once we've supported the first two priorities, we return any remaining excess cash by repurchasing our shares over time within the limits of our middle A credit ratings.
Regarding the first priority, second quarter capex was approximately $1.5 billion, bringing our year-to-date total to just over $2.5 billion. As you'll recall, at the beginning of the year, we guided to an expected full year capex range of $4 billion to $5 billion. And at the time, I indicated my hope that we'd reach the high end of the range with the outcome depending on how many capital projects could stay on schedule.
So I'm happy that, as John mentioned, the team is doing a great job of keeping projects on track despite facing multiple headwinds, all while inflation in the cost of equipment materials and labor is driving project spending above initial projections. As such, we now expect our full year capex will be $5 billion or more for the year, reflecting both the number of projects that remain on track and the expected impact of cost inflation. Of course, while we prefer not to face the cost pressure on these projects, I'm encouraged that so many value-creating projects remain on track to be completed this year, projects that will benefit our operations and our P&L for years to come.
Turning to our second capital deployment priority. We returned $417 million in dividends to our shareholders in the second quarter, up from $336 million a year ago, driven by a 32% increase in the per share dividend, partially offset by a decline in average share count. And finally, in June, we reached the final settlement for the accelerated share repurchase agreement we initiated last March. Under this ASR, we invested $2.6 billion to retire 12.5 million shares of our stock. Looking forward, just as our inventory commitments reflect continued caution for the remainder of the year, we're taking a similar cautious stance in terms of our share repurchase activity. And of course, any repurchase activity will be consistent with our long-term goal to maintain our middle A credit ratings.
So now, I want to close my commentary on the quarter by covering our after-tax return on invested capital, which measures both our near-term profitability and the efficiency of our capex decisions over time. In the second quarter, our trailing 12-month after-tax ROIC was 18.4% compared with 31.7% a year ago. And it's notable, while the current number is well below where we expect to operate over time, an after-tax number in the high-teens would have been considered aspirational for our business only a few years ago.
So, for us to temporarily move down to this level in an environment as challenging as we're facing is a vivid confirmation of the underlying strength and resilience of our business model and the reason we continue to be incredibly optimistic about our future prospects. And that confidence starts and ends with our team, so I want to pause and express my gratitude to the best team in retail. Without your efforts, we couldn't have achieved the remarkable growth in traffic and sales that we've seen over the last few years and why even in a tough year our business remains strong.
Now let's turn to our guidance. And based on the hard work of our team in the second quarter, we feel really good about how we're positioned going into the back half of the year. At the same time, given that we've been experiencing volatile economic conditions so far this year, and that volatility appears likely to continue in the months ahead, we're maintaining a cautious stance as we plan our business, given the potential macro and consumer risks that might emerge. That's why, as you've heard throughout our remarks today, our second quarter inventory actions were specifically designed to reduce our level of risk in discretionary categories. And in terms of our operations, the team has focused on building flexibility into our plans, placing a premium on staying nimble and adjusting quickly in the face of any potential change in macro trends.
Regarding the top line, our expectations have remained consistent so far this year with guidance for full year total revenue growth in the low to mid-single-digit range. With the front half of the year behind us, both our Q1 and Q2 results have put us squarely in the middle of that range. And today, based on our current performance and plans for the back half of the year, we remain positioned to deliver full year revenue growth in the low to mid-single-digit range.
On the operating margin line, our most recent guidance anticipated a fall season operating margin rate and a range centered around 6%. This expectation is nearly double our spring result. And notably, if we hit that rate in the fall, it would exceed the fall season rates we were delivering prior to the pandemic. And today, similar to my commentary on the top line, based on the success of our Q2 inventory actions and our current performance, we remain positioned to deliver an operating margin rate in a range around 6% in the fall season.
Between the last two quarters of the year, we expect our third quarter rate will be well below our Q3 performance over the last couple of years, while our fourth quarter rate should be much more in line with our recent Q4 experience. Most notably, in the third quarter, we'll continue to experience some spillover impact from our inventory actions in the range of $200 million. In contrast, in Q4, we'll be annualizing meaningful cost headwinds that surfaced a year ago, which will make the year-over-year comparison more favorable despite the current headwinds we're facing.
All that said, while we typically anticipate something closer to a balance of upside and downside potential when we make any forecast, the macro and consumer risks in the back half of this year feel skewed to the downside. That's why, even in the face of consistent business trends in recent months, we've undertaken the significant cost and effort to remove risk from our inventory commitments. It's why we're stubbornly focused on real-time monitoring and communication of evolving conditions, and why we've asked our team to build flexibility and agility into their plans. With that mindset, if trends move away from what we're seeing today, we're ready to quickly adjust.
So now, before I turn the call back over to Brian, I want to emphasize why we're so confident in our long-term potential, even as we navigate a very challenging environment in a year of multiple challenges, including rapidly changing consumer preferences, inflation at 40-year highs, volatile supply chain conditions and rising fuel and transportation rates that are expected to add well over $1 billion of cost this year. Our business continues to generate historically strong traffic increases, low to mid-single-digit revenue growth and unit share gains across all of our core merchandising categories.
And even in the face of unprecedented profit rate pressure driven by the host of factors I just listed, we remain profitable with an after-tax ROIC in the mid-teens. In fact, if our performance in the fall is consistent with the revenue growth and operating margin rates I outlined earlier, we remain positioned in 2022 to generate higher operating margin dollars than we did in 2019. That's what we mean when we say we have built a durable model.
And today, while we expect conditions to remain challenging in the near-term, the operating margin rate improvement we're projecting in the back half of the year should serve as an early indicator of the continued rate improvement we should deliver in the years ahead. With the potential for additional rate expansion and continued growth in traffic and revenue in the years ahead, we're facing a compelling financial picture as the economy and consumer eventually recover.
That's why I've never been more confident in our long-term prospects than I am today. With that, I'll turn the call back over to Brian.
