Target (TGT) Q1 2023 Earnings Call Transcript

Target (TGT 0.70%)
Q1 2023 Earnings Call
May 17, 2023, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Target Corporation first-quarter earnings release conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will invite you to participate in a question-and-answer session.

At the close of prepared remarks, we will open the queue for the Q&A session. [Operator instructions] As a reminder, this conference is being recorded Wednesday, May 17th, 2023. I would now like to turn the conference over to Mr. John Hulbert, vice president, investor relations.

Please go ahead, sir.

John Hulbert -- Vice President, Investor Relations

Good morning, everyone, and thank you for joining us on our first-quarter 2023 earnings conference call. On the line with me today are Brian Cornell, chair and chief executive officer; Christina Hennington, chief growth officer; John Mulligan, chief operating officer; and Michael Fiddelke, chief financial officer. In a few minutes, Brian, Christina, John, and Michael will provide their perspective on our first-quarter performance along with our outlook and priorities for the second quarter and beyond. Following the remarks, we'll open the phone lines for a question-and-answer session.

This morning, we're joined on this conference call by investors and others who are listening to our comments via webcast. Following the call, Michael and I will be available to answer your follow-up questions. And finally, as a reminder, any forward-looking statements that we make this morning are subject to risks and uncertainties, including those described in this morning's press release and our most recently filed 10-K. Also, in these remarks, we refer to non-GAAP financial measures including adjusted earnings per share.

Reconciliations of all non-GAAP numbers to the most directly comparable GAAP number 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 thoughts on the first quarter and his priorities for the second quarter and remainder of the year. Brian?

Brian Cornell -- Chairman and Chief Executive Officer

Thanks, John, and good morning, everyone. In the first quarter, our team's discipline and dedication to staying in step with our guests drove results that met or exceeded the expectations we set at our financial committee meeting back in February. Q1 total sales increased 0.5%, reflecting flat comparable sales at the midpoint of our guidance range, combined with the benefit of sales and new locations. Profitability for the quarter was ahead of expectations.

We came into the year clear-eyed about what consumers are facing with persistent inflation and rising interest rates, and we were determined to build on the trust our guests have had in Target by unifying as a team to deliver affordable joy each and every day as consumers and businesses navigate a third straight year of dynamic challenges. We knew this year would demand agility and teamwork and the ability to flex across our multicategory portfolio as we emphasize the categories our guests need most now. Well, our team did all of that in Q1, taking another step forward on our long-term growth trajectory. I might point to three unbroken years of traffic growth as a proof point.

In the first quarter, comparable traffic grew 0.9% even as consumers were becoming more cautious in their overall shopping behavior. That's a healthy indication of the trust, loyalty, and relevance we've created, especially given how much and how frequently consumers and the world circumstances have changed over those 12 straight quarters of traffic growth. Very few others can point to anything like that. This growth in guest engagement is the product of deliberate investments we've been making for many years.

In all we do, we put the guest at the center, listening carefully to them and finding innovative ways to make their lives easier, more convenient, and more joyful. And here again, both the balance of our multicategory portfolio and the flexibility of our stores' hub model are helping us stay in step with our guests. The mix of in-store shopping has been growing for well over a year now as consumers have become increasingly comfortable in public places. This has led them to choose more in-store visits, causing in-store sales growth to outpace digital in the first quarter, both this year and a year ago.

Notably, even within the digital channel, our same-day services, which rely entirely on our stores, expanded more than 5% during the quarter. As usual, this increase was led by our drive-up service. We saw growth in the high single digits as more and more of our guests embrace the speed, convenience, and reliability it provides. In total, for the quarter, more than 97% of our sales were fulfilled by our stores.

As it did throughout last year, pressure from inflation and rising interest rates affected the mix of retail spending in Q1 with a further softening in discretionary categories in the March and April time frame. This coincided with a deterioration in consumer confidence, reflecting recent events such as the banking crisis that emerged in March. These continued signs of caution among consumers have reinforced why we enter this year with a conservative inventory position. And as Michael will cover in more detail, we maintain that cautious stance throughout the first quarter and feel good about our current positioning in light of the trends we've been seeing.

Plus, as Christina will highlight in a few minutes, our cautious posture has not reduced our commitment to offering fresh, on-trend merchandise throughout the year. We know that newness is a critical element of what our guests expect when they shop with us. And even as they manage their household budgets and make disciplined buying choices, our guests continue to respond when we offer the right combination of newness, trend-right fashion, and affordability. That's what we mean when we talk about affordable joy.

It's something that's core to our brand and a key differentiator in the marketplace. Beyond macroeconomic challenges, we continue to contend with significant headwinds caused by inventory shrink, building on a worsening trend that emerged last year. While shrink can be driven by multiple factors, theft and organized retail crime are increasingly urgent issues impacting the team and our guests and other retailers. The problem affects all of us, limiting product availability, creating a less convenient shopping experience, and putting our team and guests in harm's way.

The unfortunate fact is violent incidents are increasing at our stores and across the entire retail industry. And when products are stolen, simply put, they're no longer available for our guests who depend on them. And left unchecked, theft and organized retail crime degrade the communities we call home. As we work to address the problem, the safety of our guests and our team members will always be our primary concern.

As a result, we are engaged in a variety of mitigation efforts, which begin with significant resource investments to protect our team and our guests. In addition, we're installing fixtures to protect merchandise and adjusting our assortment in affected stores. Beyond safety concerns, worsening shrink rates are putting significant pressure on our financial results. More specifically, based on the results we've seen so far this year, we expect that shrink will reduce our profitability by more than half a billion dollars compared with last year.

And while we're doing all we can to address the problem, it's an industry and community issue that can't be solved by a single retailer. That's why we're actively collaborating with legislators, law enforcement, and retail industry partners to advocate for public policy solutions to combat organized retail crime. As we communicate with those partners, we emphasize that we're focused on keeping our stores open in the markets where problems are occurring. Our stores create jobs, serve local shoppers, and act as critical hubs in communities across the country, and we'll continue to do everything in our power to keep our doors open.

At the same time, we'll be closely monitoring the safety of our team and guests as well as the financial impact to our business as we determine the right path forward at Target. Even as we navigate through multiple short-term challenges, we remain focused on making Target stronger and better for all our stakeholders over the long term. Right now, our team is rallying around a focus on retail fundamentals to ensure we're staying reliable and affordable for our guests and that we're translating key points of difference like our physical proximity to the vast majority of your shoppers and our emphasis on a joyful guest experience into unmatched ease and inspiration for our guests as we continue to grow and scale. We're also intently focused on creating easier and more efficient ways for our team to deliver on our strategy and fuel our ongoing growth ambitions.

Underpinning all of this is our continued commitment to disciplined return-based investments that will benefit stakeholders both today and well into the future. This goes well beyond our physical capital. As John will outline, we'll continue to make important investments in our team. This begins, of course, by building on the robust investments in wages and benefits we've made in recent years.

Because of those past investments, today, we offer starting wage range of $15 to $24 across the country. We significantly enhance the health and wellness benefits we provide, and tens of thousands of our team members are enrolled in our industry-leading, debt-free college educational program. But our efforts extend well beyond the wages we pay and the benefits we offer. We are committed to building a culture of growth, providing our team with strong foundational learning, enhancing their skills and preparing them to excel, not just at their current role, but their next role on the Target team as they continue to build a rewarding career with us.

I want to close my remarks by thanking our team. Nothing is more energizing than the time I spend with them from visits to our stores and distribution centers across the country to the time I recently spent with our headquarter team in Bangalore, India. Our team is proud to work at Target, and they show that pride through their actions every day, all in support of our guests. I'm proud to work alongside them, and it's a privilege to represent their efforts in venues like these.

With that, I'll turn the call over to Christina.

Christina Hennington -- Executive Vice President, Chief Growth Officer

Thanks, Brian, and good morning, everyone. In many ways, the themes of the first-quarter operating environment were very similar to what we've outlined in recent quarters. So, it likely comes as no surprise that we continue to face elevated volatility and see a reprioritization of spending away from discretionary categories in the face of persistent inflation in groceries and essentials. Despite the near-term challenges facing the retail industry in our business, we remain confident in our ability to generate long-term results, largely driven by the unwavering commitment displayed by the Target team to our guests, each other, and the communities where we operate.

Guests continue to place their trust in Target, choosing to shop with us more and more often at a time when consumers are hyper-focused on managing their budget. As Brian mentioned, American consumers continue to face difficult trade-off decisions as they juggle the wants and needs of their families. Consumer saving rates are down, and while inflation rates are finally declining, so is consumer confidence. The fear of a looming recession weighs heavily on many American families.

And though discretionary spending remains soft, our guests are still looking to sprinkle some affordable joy into their regular shopping at Target. In the first quarter, comparable sales were flat to last year, which was squarely at the center of our expectations. As you heard from Brian, we continue to benefit from traffic and sales growth in our frequency categories: food and beverage, household essentials, and beauty, which helped to offset softer year-on-year sales in our more discretionary home, apparel, and hardlines categories. Within the quarter, total sales were strongest in February, began decelerating in March, and softened further near the end of April.

Q1 performance was led by beauty, which delivered comp growth in the mid-teens in light of continued strength in both core beauty and Ulta Beauty at Target assortment. Food and beverage grew in the high single digits, reflecting broad-based strength across the category. Household essentials delivered low single-digit growth, reflecting notable strength in both the health and pet care categories. Apparel, home, and hardlines all experienced sales declines from the mid-single digits to low double digits as guests continue to pull back on discretionary purchases.

Notably, guests are shifting to shop more just in time in these categories as they wait until the last moments before key events to invest in new decor or wardrobe refreshes. As we've been noting for some time, despite overall softness in discretionary categories, seasonal moments and newness in apparel, home, and hardlines continue to be bright spots, prompting great responses from our guests. Within the first quarter, we had strong Valentine's season and Easter holiday across multiple assortments ranging from food and hosting solutions to decor and giftables. New offerings in apparel, including the latest wave of our designer dress collection and new sets in women's athleisure, have seen incredible responses from guests.

And this year's major theatrical releases such as Super Mario Bros and the upcoming Disney film, The Little Mermaid, are driving outsized share gains and sales momentum. These examples demonstrate that when our assortments are fresh, seasonally relevant, and affordable, that's a winning formula to engage and delight our guests. Given that consumers are cautious when buying discretionary items, we are being more declarative than ever about affordable joy and leaning into value messaging across all our media channels, in-store signing, merchandise displays, and through our digital platforms. With a balance of strong opening price points, timely and relevant promotions, as well as a mix of competitively priced national brands and high-quality and affordable own-brand offerings, we have an opportunity to boldly demonstrate the power of Target's value proposition to our guests.

As I've shared in prior calls, this is where the power of Roundel and Target Circle really shine through, creating collective value for our guests and for Target. With consumers more price-conscious and focused on promotions right now, we know they're willing to search for a deal but appreciate when we make the hunt easy for them. By utilizing our rich guest insights, we are best able to match the right product to the right guests with the right promotion. This is why we take such a differentiated approach with Roundel, thoughtfully and selectively connecting vendors and their products to our guests.

Roundel's interconnection with the broader target digital ecosystem means we are uniquely positioned to inspire the millions of users of our website, the Target app, and other diverse media platforms. This helps vendors find consumers that are most likely to be interested in their products, creates awareness and conversion to new products for our guests through compelling deals and ads, and drives top-line and bottom-line benefit to Target, all with an eye to enhancing the guest experience. Similarly, we know this personalized touch is why active Target Circle users make 2.5 times the trips in Q1 compared to non-Circle guests, and spent three times more. Whether through everyday offers or member-exclusive events like Target Circle Week in March, we see incredible guest response to Target Circle promotions.

Roundel and Target Circle provide opportunities for us to connect with guests in both the short and long-term, offering instantly gratifying promotions in the now and a tailored and elevated experience that builds lasting affinity tomorrow and beyond. And beyond promotions and product placements, we know that when guests try our own brand offerings, they love the value and quality they receive, and this leads to repeat purchases. We also know that simplified, easy-to-understand pricing promotion removes friction from the shopping experience, both in stores and online. This explains why our guests are responding to affordable home decor selections, where we are expanding our assortment of items priced under $10.

It's why we recently launched new swim assortments starting at just $12. And to help our guests get ready for summer celebrations of all kinds, our only at-Target Sun Squad brand offers everything needed to be outside the summer with more than 60% of the entire assortment priced under $10 and nearly 90% of the assortment priced under $20. But our comprehensive view of affordability extends beyond compelling price points. In particular, our own brand portfolio offers an unmatched combination of quality and price.

For an example, look no further than our $3 billion own brand, Cat & Jack, featuring on-trend, durable, and affordable kids clothing. With everyday essentials like $4 T-shirts, $5 leggings, and $8 dresses and jeans, Cat & Jack offers both affordability and style. And because we stand behind not just the price but the quality of these items as well, we guarantee all Cat & Jack apparel for one full year with free returns should anything not meet our guests' expectations. This is just another example of how we offer comprehensive value for our guests, giving them affordable options without skimping on quality.

As we look to the second quarter and beyond, we will continue the steady drumbeat of newness and value, all while maintaining a cautious inventory ownership position in our discretionary categories. In terms of seasonal moments and holidays, Target teams are focused on helping our guests celebrate all summer long. Starting last weekend, we kick things off by celebrating Mother's Day with affordable and inspiring ways to thank the moms in our lives, and we have plans to continue celebrating key summer moments all quarter long, wrapping up with everything needed to host the perfect 4th of July barbecue. With new summer food and beverage offerings, including more than 100 new Good & Gather items to Target-exclusive pickleball sets for amateurs and pros alike, we are listening closely to our guests and providing the hottest trends across our entire assortment.

In apparel, guests will find vibrant color palettes across our offerings, helping all families celebrate summer in style. Best of all, these apparel items provide amazing value with clear, compelling opening price points. For kids and kids at heart, the summer's roster of exciting movie blockbusters will find their way into multiple assortments, ranging from apparel to toys to collectibles featuring familiar characters from Disney, Marvel, Teenage Mutant Ninja Turtles, and more. And because you can never have too much of a good thing, the latest assortment drop from Tabitha Brown just launched a few days ago.

Already off to a fabulous start, this collection celebrates the joy that comes from gathering alongside friends and family, recharging in the summer sun and pausing for fun and games. The assortment includes over 60 items ranging from backyard entertaining essentials, games, tableware, outdoor furniture, as well as guests' favorite food items, back by popular demand. As we navigate this challenging environment, we will continue to lean into flexibility and focus on retail fundamentals while remaining vigilant in monitoring changing trends with the consumer and the economy. It's only because of our incredible team that we are able to stay nimble, listening for and quickly applying guest feedback into our operations.

So, our teams and stores, supply chain, and headquarters, locations around the world, thank you for sharing your talents and passion and support of our guests. You are truly the best team in retail, and you bring Target's values to life each and every day. With that, I'll turn the call over to John.

John Mulligan -- Executive Vice President, Chief Operating Officer

Thanks, Christina. Through all of the rapid and unexpected changes we've experienced over the last three years, teams throughout our operations have done an amazing job, maintaining their energy, staying agile, and doing everything in their power to serve our guests' ever-changing needs. And today, with two years of unusually rapid growth behind us and last year's excess inventory in the rearview mirror, we are focusing this year on training and development for our team with an emphasis firmly centered on retail fundamentals. Our goal is to reinforce the reliability and consistency of our shopping experience as we help our team members to succeed in their current job and build the right skills to prepare for the next one.

More specifically, every store this year is engaging in assessments to reinforce consistently strong execution throughout the country and every day of the year. These assessments are centered on the factors most essential to operating great stores and delivering a consistent experience, ranging from staffing and scheduling to inventory management, in-store signing, digital fulfillment, guest and team member safety, and the checkout experience. In support of these efforts, we're investing in training and development across every level of our team, from entry-level team members to the store leaders. Beyond the reinforcement of everyday best practices, we're preparing our team to support new services, including the upcoming rollout of drive-up returns and the opening of additional Ulta Beauty at Target locations.

In addition, to develop our store supervisors and leaders, we're investing in a cohort-based peer-learning model in which participants engage in classroom experiences, one-on-one coaching, and on-the-job practice. All of this training is designed to help our teams succeed today and build our pipeline of future leaders. Of course, a foundational element of our team development effort is our education assistance program called Dream to Be, which enables our U.S.-based part-time and full-time team members to pursue tuition-free undergraduate and associate degrees, certificates, and boot camps. This industry-leading program features tuition-free options in more than 250 business-aligned programs across more than 40 schools, colleges, and universities.

Since the rollout of Dream to Be in 2021, tens of thousands of our team members have successfully participated in this program. As you saw in today's release, we ended the first quarter of a 16% less inventory than a year ago. This decrease reflects our current cautious position and discretionary categories combined with the impact of excess inventory on last year's balance sheet. Those factors are being partially offset by some purposeful inventory investments.

These include investments in support of our frequency categories in light of the rapid growth we've been seeing and to ensure we're in stock. And I'm happy to say that these investments have been paying off. In the first quarter, out of stocks of our most important food and beverage and essentials items were running at three-year lows and trending in a favorable direction. In addition to support of our frequency businesses, we're also making strategic inventory investments where we believe we have a long-term market share opportunity, most notably in the upcoming back-to-school and back-to-college seasons.

As you know, in our supply chain, we're engaged in a multiyear journey to modernize how we replenish inventory in our stores. When I moved into this position eight years ago, store inventory replenishment was a standardized inflexible process that placed a heavy burden on our store team members. With this modernization effort, our primary goal is to reduce those labor demands on our stores. We achieved that result by moving work upstream to a distribution center where we can apply the appropriate processes, technology, tools, and automation to accomplish the work at scale.

This results in higher labor efficiency for the company overall while allowing our store team members to spend more time in the front of our stores with our guests. In the upstream distribution centers we've opened over the last two years, we've implemented technology and capabilities that improve how product is sorted and loaded onto trailers headed for our stores. These improvements reduce the necessary time for the store team to unload the trailer and for them to move the inventory to where it's needed in the store. In these new buildings, we've also invested to automate the sortation and packing of break-bulk items, facilitating the shipment of quantities smaller than a full case pack.

This automated process makes the shipment easier to unload, reduces sorting time for the store team, and lowers the amount of inventory in our store back rooms. Outside of our new facilities, we're working to roll out similar capabilities to our legacy distribution centers. In addition, throughout our legacy network, we continue to focus on reducing the overall cost of store replenishment by implementing automation along with other improvements. For example, we've been testing ways to improve the lead time and accuracy of our deliveries from several of our existing buildings and have seen an increase in speed and lower out of stocks in stores serviced from these facilities.

But I want to stress, automation is only one way to deliver value to our business. Consider our sortation centers which are positioned downstream from our stores to provide speed and efficiency in support of last-mile delivery. Our sort centers are not highly automated. Instead, they use technology and sophisticated process logic to sort packages and provide a faster and better guest experience at a significantly lower cost.

In fact, it's because of the relative simplicity in the design of these buildings and the efforts of an incredibly innovative and energetic team that we've been able to scale the number of these buildings so quickly from three a year ago to nine today and an expected total of 15 or more in 2026. Beyond rapidly scaling the number of sort centers, our team continues to innovate around the existing processes in those buildings, finding ways to deliver additional value to the business. One example is a new facility that we opened earlier this month in Smyrna, Georgia. This new facility, which cost very little to open, serves as an extension of the existing sortation center in the Atlanta market, extending the reach of our next-day delivery capability.

With this new facility, online orders that have been packed by Atlanta area stores continue to flow to the sortation center where they're sorted and delivered via our national carrier partners or a ship driver. However, a portion of local orders falling outside the sortation center's last-mile delivery area can now be transferred to the Smyrna extension where ship drivers can pick them up and serve additional neighborhoods. With the opening of this extension facility, our next-day delivery capability is now reaching more than 3 million guests in the Atlanta market. As we mentioned at our recent financial community meeting, in our Dallas and Minneapolis sortation centers, Target and Shipt have been testing the development of high-capacity van routes that enable us to bring last-mile delivery to a larger number of guests.

In addition, over the past year, across all of our markets served by our sortation centers, we have shifted more routes to larger passenger vehicles, and early results have been positive. Compared with routes previously served by sedans, SUVs and minivans can deliver more than double the number of packages per route, while high-capacity vans can serve as nearly five times as many packages. And beyond capacity, the use of larger vehicles enables further route optimization, increasing the number of packages that can be delivered per hour. With these changes, in the first quarter, approximately 65% of our last-mile delivery serviced by Shipt were made with larger vehicles compared with zero a year ago.

This resulted in meaningful cost savings for our last-mile delivery program overall. Based on the success of these efforts, we're developing plans to begin testing high-capacity vans at a larger scale. In addition, we're developing a standardized faster way to load those vans, enabling packaged containerization and easy identification of the correct packages at delivery. In addition to simplifying the load process for the drivers, this new process will enable us to safely move a larger number of Shipt drivers in and out of our sort centers in a given amount of time, expanding our last-mile delivery capacity in these markets.

While there are many different ways our team is working to gain efficiencies and deliver value to the business, all of our projects have some things in common. First and foremost, they're all designed and implemented with a focus on our guests and continuing to build their engagement with Target. In keeping with that guest focus, we design processes and deploy technology and automation as a way to highlight the human element in our business rather than minimizing it. It's an essential element of our purpose to help all families discover the joy of everyday life.

As I get ready to close, I want to pause and thank our team for bringing that purpose to life every day for both our guests and for your fellow team members. You're the reason that guests trust and love our brand and why they choose to shop at Target. With that, I'll turn it over to Michael.

Michael Fiddelke -- Executive Vice President, Chief Financial Officer

Thanks, John. In many ways, the environment today feels completely different than three years ago when the pandemic was just beginning and no one knew what to expect. But today, even as the pandemic feels further and further behind us, we continue to face elevated macro uncertainty and volatility as the world continues to transition toward a new normal. From a macro perspective, inflation remains high and stubbornly persistent, having recently peaked at decades-high levels.

To control this inflation, the Federal Reserve has been raising interest rates at an unprecedented pace. But for now, despite the building economic pressure from both inflation and higher interest rates, the U.S. unemployment rate is lower today than it's been in 50 years. And as Christina mentioned, consumer spending patterns continue to evolve, putting significant pressure on our discretionary categories.

While I'm guessing we're all looking forward to the day when economic conditions begin to stabilize and normalize, I'm pleased that, today, even in the face of all these challenges, we're continuing to see deeper engagement from our guests. That's most visible in our traffic, which grew just under 1% in Q1 and has now grown for 12 consecutive quarters. In fact, since 2019, prior to the pandemic, first-quarter total sales have increased more than 43%. The vast majority of that growth is the result of an increase in sales per square foot over that time, of which a significant portion has been driven by traffic.

Total sales grew 0.5% in the first quarter, reflecting flat comparable sales combined with the contribution from new locations. Total revenue growth of 0.6% reflected sales growth combined with double-digit growth on the other revenue line led by our Roundel ad business. As Brian mentioned, sales trends softened over the course of the first quarter. More specifically, we began the quarter with positive comp growth in the month of February and then saw the trend soften into low single-digit declines by the end of April and, so far, into May.

Our first-quarter gross margin rate of 26.3% was about 60 basis points higher than a year ago. Among the drivers, we saw more than a percentage point of favorability in merchandising, driven primarily by a reduction in freight and transportation costs, along with the benefit of retail pricing and a lower clearance markdown rate as we compared over last year's inventory actions. We also saw a small gross margin rate benefit from lower digital volume and a more favorable mix of lower-cost same-day fulfillment. Offsetting those two sources of benefit, shrink reduced our gross margin rates by a full percentage point compared with a year ago.

As Brian highlighted, pressure from shrink has continued to increase, and we now expect that, if current trends continue, shrink will reduce our full-year profitability by more than $500 million compared with last year. One note, the impact of merchandise mix on our first-quarter gross margin rates was approximately neutral as the rate impact of sales declines in our highest-margin categories was offset by sales declines in lower-margin rate categories. Consistent with the guidance we provided for the quarter, our first-quarter SG&A expense rate was 19.8%, up about 90 basis points from a year ago. This increase reflects our continued purposeful investments in pay and benefits for our team combined with inflationary cost pressures throughout our business against a backdrop of flat comparable sales, partially offset by the benefit of productivity increases and strong expense discipline across the company.

Our first-quarter D&A expense rate was down about 10 basis points, reflecting lower accelerated depreciation related to our remodel program compared with last year. Altogether, our first-quarter operating income rate of 5.2% was higher than expected due primarily to upside in our gross margin rate as the benefits from lower freight and transportation costs and our efficiency efforts offset a higher-than-expected impact from shrink. As John mentioned, Q1 ending inventory was about 16% lower than a year ago. Within that inventory number was a decline of more than 25% in discretionary categories, reflecting the excess inventory we were carrying last year and the cautious approach we are taking this year.

Partially offsetting the decline in discretionary inventory are the purposeful inventory investments we're making in our frequency categories along with some strategic bets in support of long-term share opportunities. We believe our cautious inventory approach has served us well so far this year and will continue to be the right approach going forward. As I turn now to capital deployment, I'll start where I always do by reiterating our long-standing priorities. First, we fully invest in our business, in projects that meet our strategic and financial criteria.

Second, we support the dividend and look to build on our record of annual increases which we've maintained since 1971. And third, only after we've supported those first two priorities we deploy any excess cash to repurchase shares over time within the limits of our middle A credit ratings. Regarding the first priority, we made capital investments of $1.6 billion in the first quarter as we continue to remodel stores, open up new locations, build upstream inventory replenishment capacity, and ramp up our sortation center strategy. With one quarter of the year behind us, we continue to expect our full-year capex will be in the $4 billion to $5 billion range.

Regarding the second priority, we paid dividends of $497 million in the first quarter, up from $424 million last year, driven by a 20% increase in the per-share dividend, partially offset by a decline in average share count. And finally, given the impact of the current environment on our financial performance, we didn't repurchase any shares in the first quarter. In the near term, we'll maintain that approach and don't intend to resume repurchase activity until it's compatible with our long-term credit rating goals. On that note, I'm pleased with our progress in strengthening our balance sheet.

Even as profitability remains well below our long-term potential, we've already seen an encouraging improvement in our operating cash flows. More specifically, our operations generated $1.3 billion of cash in Q1 in stark comparison to a year ago when our operations absorbed $1.4 billion. This dramatic year-over-year improvement was driven almost entirely by changes in our inventory investment compared with last year. And finally, I want to end my review of the quarter with our after-tax return on invested capital.

For the trailing 12 months through the first quarter of this year, our after-tax ROIC was 11.4%, compared with 25.3% a year ago, reflecting both the change in profitability and the increase in working capital we began to see a year ago. As we move further into the year, we expect to see higher profitability than a year ago and continue to benefit from the inventory efficiency reflected in this quarter's cash flow. Based on these expectations, we anticipate a recovery in the ROIC metric this year and expect to continue building back toward our longer-term potential in 2024 and beyond. So, now, let me turn to our expectations for Q2 and the full year.

As I mentioned, on the sales line, we experienced notably softer comp trends as we exited the first quarter and moved into May. As a result, we're anticipating second-quarter sales in a wide range centered around a low single-digit decline, consistent with those recent trends. In terms of profitability, we're expecting a range of possibilities as well. On the gross margin line, we believe that many of the same trends that emerged in Q1 will continue in the second quarter, including a meaningful tailwind from freight and transportation costs and a significant headwind resulting from inventory shrink.

Similarly, on the SG&A expense line, we'll continue to face broad-based inflationary pressures and expect to benefit from efficiency efforts and cost discipline across our team. However, if our second-quarter comp sales end up declining in the low single digits, which is where they are trending currently, we'll see greater SG&A rate pressure related to cost deleverage than we experienced in Q1. In light of all of these expectations, we believe our Q2 operating margin rate will be much higher than the very low rate we earned a year ago but lower than the 5.2% we saw in Q1. Altogether, our expectations translate to a second-quarter GAAP and adjusted EPS range of $1.30 to $1.70.

As we look beyond Q2, we continue to believe that we entered this year with the appropriate level of caution, planning conservatively in light of a tough macro environment and rapidly changing consumer trends. While we're facing some clear headwinds in the short term, we also have multiple actions underway to mitigate them, including ongoing efficiency work and cost-saving efforts that we expect to flow into the P&L in the second half of the year. While we feel good about these efforts, we also remain cautious on the overall environment in light of the macro and shrink pressures we've outlined today. Taking this all into account, we are maintaining the full-year guidance we provided at our financial community meeting in February, namely, we're planning for full-year comparable sales in a wide range, centered around flat.

We expect to grow our full-year operating income by $1 billion or more, and we expect our business to generate full-year GAAP and adjusted EPS of $7.75 to $8.75. As I get ready to turn the call back over to Brian, I want to reiterate my confidence in our longer-term prospects for profitable growth. Even today, against a very challenging backdrop, we're starting to assemble the building blocks for a recovery and our operating margin rate back toward its longer-term potential. And while spending pressures in discretionary categories are currently outweighing the continued strong growth we've seen in our frequency categories, we're confident that the economy and the consumer will stabilize over time and we'll once again benefit from growth in the more discretionary portion of our assortment.

In the meantime, we have the capacity to navigate this environment with a strong balance sheet and a resilient business model. We have the right long-term strategy, and we're privileged to work with the best team in retail. I want to express my sincere thanks to our entire team. You are, by far, our most valuable long-term asset.

With that, I'll turn it over to Brian.

Brian Cornell -- Chairman and Chief Executive Officer

As Michael just mentioned, we don't build our strategy based on a single moment but focus on the best way to serve our guests over time. We take that approach when we invest in our stores, in our supply chain, in digital fulfillment, and our team. And as we've said many times, we also build our assortment to serve the long-term needs of our guests. And the benefit of this flexible assortment strategy has been clearly evident over the last few years.

Following the onset of the pandemic, we saw unprecedented traffic and sales growth in our discretionary categories. And now, this year, even as guests are pulling back on discretionary purchases, we still grew traffic just under 1% in the first quarter as guests increased their spending in beauty, food and beverage, and household essentials. But a short-term pullback in discretionary purchases doesn't mean we'll turn away from our apparel, home, and hard-line categories. Instead, we'll continue to invest in them and deliver fresh, new items throughout the year.

That's because our guests continue to love these categories, and we're focused on building our guests' engagement with them. Think about it this way. When I arrived at Target just under nine years ago, our food and beverage category was underperforming and losing market share. But rather than turning away from that part of our business, we decided to lean in.

We committed to the long term and engaged in the hard work that we needed to improve our performance ranging from our relationship with vendors to our fresh food supply chain, store labor model, assortment strategy, and our own brands. Much of that work happened behind the scenes, and it took time before business trends in food and beverage started to change, but the work paid off over time. We entered 2023 following three straight years of unprecedented growth and market share gains in food and beverage, having grown that category by more than 61% between Q1 2019 and this year's first quarter. Beauty is another category where past investments are paying off.

It's been performing well for years because we continually invested in the store experience; in passionate, talented, and well-trained team members; in our digital experience; and our assortment. Our growing partnership with Ulta Beauty is the latest example of how we're finding innovative ways to further enhance our beauty assortment and experience. And our business results clearly demonstrate that our investments are paying off. We've experienced double-digit growth in beauty sales for the last three years in a row and just saw mid-teen growth in the first quarter.

These examples demonstrate why we're investing and maintaining a long-term focus across the board on every one of our merchandising categories: fulfillment options, stores, services, and our team, all in service to bringing affordable joy to our guests. If we do that right, we'll always be ready to serve our guests as their needs change, further deepening our long-term relationship with them. With that, we'll move to Q&A. Christina, John, Michael, and I will be happy to take your questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Ed Kelly with Wells Fargo. You may go ahead.

Edward Kelly -- Wells Fargo Securities -- Analyst

Hi, guys. Good morning. I wanted to start with -- you know, with the guidance. I mean, clearly, you know, you're beginning to see increased consumer pressure now in Q2.

And I think those signs of, you know, weakening, you know, are broad out there. But you know, the midpoint of your guidance implies, you know, a pretty good back half, you know, improvement. I'm just kind of curious how you thought about, you know, Q2 with, you know, the reaffirmation of the full year. And is it realistic for us to think that, you know, the back half, you know, would be in the, you know, low $2 range given what -- you know, what Q2 guidance is? Thank you.

Brian Cornell -- Chairman and Chief Executive Officer

I'll let Michael start by talking about Q2, and then I'll talk about our focus on the balance of the year.

Michael Fiddelke -- Executive Vice President, Chief Financial Officer

Yeah, and thanks for the question. You said part of the answer right in your question. We continue to take a cautious approach to the top line. We think that served us really well in the first quarter.

It's one of the reasons we got the profit outcome we did in the first quarter is that with inventory positioned conservatively, that gives us flexibility and agility. And so, you'll continue to see us take that posture for the balance of the year. And, you know, that comes with an impact on the top line and the bottom line. Our leverage looks different at a slightly negative comp than it does when we're running a positive comp.

A couple of other things that I would lie to mention is kind of in how they'll paginate over the year, though. One is shrink. With the current trends continuing, that year-over-year pressure from shrink is certainly front-half loaded in the year. And so, you see that impact in Q2 as well.

And then, we're excited about the continued work on our efficiency initiatives, and you'll see some of that come to bear in the back half of the year too. So, taking that all together, we feel good about the full-year positioning, and we're appropriately cautious for the second quarter.

Brian Cornell -- Chairman and Chief Executive Officer

And you heard Christina talked about the changes we've taken from an inventory standpoint, the benefits that it's going to provide over the balance of the year, that gives us optimism as we think about the full-year guidance. The combination of reduced inventory allowances to bring newness into our assortment, make sure we're on trend with the items we know our guests are shopping for, continue to leverage the traffic gains we've seen now for 12 consecutive quarters, and balance the strength we're seeing in food and beverage, household essentials, in beauty with the seasonal moments where Target shines. So, as we sit here today, we're excited about back to school and back to college. We've got great plans for the holiday season.

And Christina and her team have done a fabulous job of making sure we've got new, on-trend items that are going to delight our guests and provide that affordable joy we're looking for each and every day.

Edward Kelly -- Wells Fargo Securities -- Analyst

Just to follow up, you know, at the Investor Day, you mentioned that 6% is, I guess, potential for '24. And the backdrop is shifting, though. Can you just sort of update us on your thoughts, you know, around that building blocks considering, you know, the macro? Thank you.

Michael Fiddelke -- Executive Vice President, Chief Financial Officer

Yeah, nothing new to share on that front today. I mean, as we sit here one quarter end of the year with a comp that played out kind of exactly as we expected and a full-year guidance that we think is still appropriate, I -- I think we're -- the underlying work in front of us to build back profitability, a meaningful piece of which is part of our plan here in 2023, will be the first step along that path.

Edward Kelly -- Wells Fargo Securities -- Analyst

Thank you.

Operator

Thank you. Our next question is from Chris Horvers with J.P. Morgan. You may go ahead.

Chris Horvers -- JPMorgan Chase and Company -- Analyst

Thanks. Good morning, everybody. So, a follow-up to the -- to the first question there. So, on the comp side, is it your expectation that despite disinflation in consumables that clean inventory, some new newness, and easier compares, you're expecting general merchandise performance to, I guess, maybe get less worse as we get into the back half of the year?

Christina Hennington -- Executive Vice President, Chief Growth Officer

Hi, Chris. Maybe I can start this one. We acknowledge that there's a lot of volatility and that we cannot predict the future, but our expectation is that some of the strengths of Target really amplify during the back half of the year. And it starts with, as Brian said, back to school, back to college, where the full value proposition of Target is really put on display.

You can -- you can leverage all five multicategories -- or all five categories in our multicategory portfolio to achieve what you need for your family, buying backpacks and lunches and new outfits for school. And that really then sets up into a cadence of the fall. With --we start new fashion trends in September. We go into October with Halloween, followed by Thanksgiving and Christmas.

And those are big moments for Target. On top of that, we do believe that there's some market share upside in key categories, especially in home where we believe back to college will benefit strongly from market disruptions in categories like domestics and kitchen appliances. So, we're betting on some of those things, as well as the newness and the agility that both Michael and Brian have spoken to that having the right fresh assortment and continuing to lead into the affordable side of that will give us momentum in the back half.

Michael Fiddelke -- Executive Vice President, Chief Financial Officer

Chris, the only thing I might add to that is that's all underpinned by a clean inventory position. I mean, one of the benefits of planning inventory cautiously is we've got the flexibility to lean into all the good stuff Christina just talked about. And so, into the quarter, down 16% on a year-over-year basis, that's over 25% in the discretionary categories, gives us a lot of room to maneuver as we get into the back part of the year.

Chris Horvers -- JPMorgan Chase and Company -- Analyst

Got it. Then as a follow-up, just thinking about the -- the puts and takes as you move through in the back half of the year on the margin, particularly on the gross margin front. So, it sounds like the shrink kind of sort of dissipates. As you hopefully catch up on an accrual here, does freight also improve? And then, as you think about the -- the benefit of freight rise into the back half, and then, as you think about the efficiency efforts, can you talk about how they're proceeding and where you expect those efficiency efforts to play out in the P&L?

Michael Fiddelke -- Executive Vice President, Chief Financial Officer

Yeah, you're hitting on some of the key -- three key big factors as we get into the back part of the year. We're pleased to see headwind on a year-over-year basis from freight. We're in a better place now than we were a year ago certainly on that front. And that'll continue as we get into the back part of the year based on how we currently have things projected.

On the efficiency side of things, I mean, there's -- there's a lot within that. Some of that will come to bear this year. As we've shared before, importantly, some of that will come to bear over the next few years. But, you know, as an example of something that we'll see more benefit from in the back half of this year, sortation centers are a perfect example.

We've got many more facilities open this year. They'll do a lot of business in the back half of the year. And so, that's -- as more sort centers helping deliver goods faster in a sort center market and save us some last-mile shipping costs with our Shipt drivers delivering those brown boxes. And so, you know that's one of many initiatives that'll start to bear fruit as we get into the back part of this year and in the years to come.

Chris Horvers -- JPMorgan Chase and Company -- Analyst

Thank you very much.

Operator

Thank you. The next question is from Michael Lasser with UBS. You may go ahead.

Michael Lasser -- UBS -- Analyst

Good morning. Thanks a lot for taking my question. So, one of the key debates right now on Target is what's a sustainable gross margin rate moving forward. And the first-quarter performance is going to help inform the various perspectives on that.

So, with that being said, can you help bridge the gap in your first-quarter 2023 gross margin performance versus 2020 -- excuse me, 2019, I know you said that 100 basis points to the gross margin decline versus last year was shrink. I think you've previously said that heading back to last year, there was 150-basis-point drag. So, is it right to think that the two -- more than two-thirds of the decline from this quarter to 2019 was -- was just shrink-related?

Michael Fiddelke -- Executive Vice President, Chief Financial Officer

So, I'll take a swing at that, Michael. The -- as I said in my remarks, the big drivers, speaking on a year-over-year basis, of margin in the first quarter, we had a tailwind from freight. We already talked a little bit about the benefit we're seeing there on a year-over-year basis versus 2019. Freight is still a headwind, to be clear, but on a year-over-year basis, we're seeing some benefit.

We also saw some benefit, on a year-over-year basis, on the markdown, and think salvage front, as we recover from some of the inventory actions that we started to take last year. And then, we saw the headwind from shrink, a full percentage point in the first quarter on a year-over-year basis. Like I said, if the current trends were to continue, we'd see that drag from shrink be front half of the year loaded in kind of how it shows up throughout the year. But you're hitting on the key -- three key drivers on a year-over-year basis.

Michael Lasser -- UBS -- Analyst

OK. My follow-up question is the other area discussion is going to be how do you hit this flattish comp for the full year in light of what's perceived to be a deteriorating macro situation. So, perhaps you're going to make some purposeful choices, trading off some margin in order to drive traffic. And if that's the case, how much are you willing to sacrifice the profitability in order to maintain the top-line performance as we move into the second half of the year and beyond? Thank you so much.

Michael Fiddelke -- Executive Vice President, Chief Financial Officer

I'm happy to start. Christina, feel free to chime in. We think about it a little differently than that, Michael, in that as we think about the back half of the year, I mean, we're going to drive traffic in a lot of ways, but it's not a simple trade margin for traffic play. It's about being relevant for our guests in the moments that matter.

And as evidenced by the strength and traffic we saw in Q1, with the balance we have across categories, we can appeal to whatever is at the top of the guests' shopping list. And first and foremost, that's how we think about staying relevant and driving traffic. So, our -- our guide for the year, unchanged at the end of Q1 versus what we said 90 days ago, incorporates our best view of how we see all of those puts and takes playing out. And, you know, it's a -- it's a wide range on the top line and the bottom line, but we believe is appropriate from the -- the variables as we digest them in one quarter into the year.

Christina, feel free to -- if there's anything you add.

Christina Hennington -- Executive Vice President, Chief Growth Officer

Yeah, I agree with Michael 100% that we aren't looking to make those two trade-offs. What we do instead is we look at where is there potential for us to take share because our unique proposition in the market might play really well in -- under these circumstances. But in the discretionary categories, we're going in with a very conservative posture. And so, it's the strength of our multicategory portfolio and the guests choosing food, beverage, household essentials, and beauty that's creating the majority of the traffic gains that we're seeing right now.

And I'm very confident about what that means in terms of what the guest is saying. In the categories where there's the most price inflation and the most price sensitivity, they're choosing us disproportionately often, which I think is -- is a very good sign of the relevance that we created. Now we will lean into newness. We will lean into affordable joy.

We will lean into areas where the guests also are telling us that they're finding our value proposition to be relevant. That showed up in the first quarter in key seasonal moments and is why I'm excited about the back half because we have more of them and there's more disruption in key categories like home.

Brian Cornell -- Chairman and Chief Executive Officer

Michael, The only other thing I would add is, as we think about leveraging our multicategory portfolio in this environment, we have the advantage of a nice balance between national brands and the continued strength we see in own brands, particularly at a time when our guests are looking for that affordable joy from Target. So, we do think we're uniquely positioned to continue to maneuver through a challenging 2023 through the strength of our multicategory portfolio, the great national brand partnerships we have complemented by our own brands, and the flexibility we built into our system by reducing inventory and giving us the ability to flow fresh, new items that are trend-right for our guests.

Michael Lasser -- UBS -- Analyst

Thank you very much and have a great day.

Brian Cornell -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Karen Short with Credit Suisse. You may go ahead.

Karen Short -- Credit Suisse -- Analyst

Hi. Thanks very much. I just wanted to ask a little bit about your -- you had a lot of discussion in terms of price points that are going to be lower in discretionary. So, I guess my question is, how much of their -- how much of your weakness in discretionary is just a misperception on your actual price point and your value proposition? That's my first question.

And then, my second question is, when you obviously have more of an extreme issue on shrink than some other retailers, how much are you losing sales based on some of the measures that you're taking?

Brian Cornell -- Chairman and Chief Executive Officer

Karen, why don't I start and address the last point? Because as we sit here today, we think about what's happening from a theft and organized retail crime standpoint. It's an urgent issue, not just for Target, but across the entire retail industry. It is a problem that impacts availability of product. The shopping conditions are less convenient.

And unfortunately, what I'm most concerned with is it puts our team and our guests in harm's way. So, we are working right now with NRF, our partners at RILA, other retailers across the country to make sure that we can talk to legislators, that we can work with law enforcement to make some industrywide changes. And we're advocating for public policy changes to address the growing issues that surround all of us in retail today with theft and organized retail crime. And see, if we talk about our approach to discretionary categories, I think we've been very clear about the fact that we've been trying to bring fresh, new items and at a great price point and value that our guests are looking for.

And, Karen, I think that's been really consistent throughout the last couple of years as we've seen an overall decline in apparel sales in the industry and home and hardline-related categories. But Christina can talk to the fact that, in many cases, we're holding a growing share in categories that have been soft but where we've continued to see strength and our ability to hold share and bring newness that's relevant to the guest.

Christina Hennington -- Executive Vice President, Chief Growth Officer

Yeah, that's absolutely right. We have been talking about unit share for many, many, many quarters in a row because, in many cases, we didn't actually raise our prices as much as the market, and we maintained that affordability. And so, that has continued to help contribute to traffic gains that we've seen and the performance that we've seen in aggregate. Our value proposition is always a balance between expect more and pay less, and we're always going to play up that end.

And so, the opportunity for us to make sure that we are cutting through in our -- with the clarity of our promotions that we continue to put those great items in front of the guests and our merchandise displays and that our website reflects the incredible value that we do offer. I would tell you, though, that something that we're leaning into that has the potential to continue to create relevance for our guests is Target Circle. Target Circle is our loyalty program. It's free, and it offers personalized promotions.

And it has -- we've seen that that is generating better returns than -- than mass promotions. And so, our ability to not only create relevance for our guests but deliver better returns for the business is -- is a big priority for us, and that is part of the ecosystem, the way we deliver value. The last part that I'd offer up, though, is because the way we deliver value and our value proposition is about balance, it comes through a lot in the assortment, and own brands play a particular role here. Not only are they great, quality products that have been designed with specific guest needs in mind, they're also incredibly accessible from a price point perspective.

And that's why you hear us talking a lot about that, particularly in this environment.

Karen Short -- Credit Suisse -- Analyst

OK, great. Thank you.

Operator

Thank you. Our next question is from Rupesh Parikh with Oppenheimer. You may go ahead.

Rupesh Parikh -- Oppenheimer and Company -- Analyst

Good morning and thanks for taking my question. I just want to get your perspective in terms of what you're seeing right now in the promotional backdrop. And then, for Q2, just curious if you guys have assumed a more promotional backdrop in Q2.

Christina Hennington -- Executive Vice President, Chief Growth Officer

Right now, there's no question that guests are seeking deals. The opportunity to balance their budget by finding deals is very visible. As I just talked about, the way that we're continuing to evolve our proposition is make sure that the deals that we do offer are certainly competitive with the market but that they're increasingly more personalized. And as has been said a couple of times now, the inventory position that we're in right now gives us the ability to compete with the market but not chase the market down, and so that's what we're really excited about.

We have an agile playbook that will allow us to continue to go after creating relevance for our guests and offering value but keep it rational.

Rupesh Parikh -- Oppenheimer and Company -- Analyst

Right. And then, my follow-up question, just on the shrink, I think, you know, per estimates, I think shrink is now $1 billion-plus headwind over -- over a two-year basis. Did your team feel that you can fully recover that headwind over time? And then, you know, with some of the efforts that you already have in place, are you starting to see traction with any of those efforts even if they're maybe in the early stages?

Brian Cornell -- Chairman and Chief Executive Officer

John, why don't you talk about some of the mitigation efforts we put in place?

John Mulligan -- Executive Vice President, Chief Operating Officer

Yeah. I think, as we think about mitigation efforts, I would go back to first what Brian said. It starts, first and foremost, with creating a safe environment for our team and for our guests. And there are multiple approaches to that that also have a financial impact.

So, clearly, there is what we do with merchandise and how we display it and how we make that available to a guest. There is assortment changes that we can make to -- to improve that performance as well. And then, finally, there's security changes in the store that we can make. You put all three of those together.

And as you said, we introduced some of those last year, and over time, we do see the impact of that. We see improvement in the safeness of the store, we see improvement in sales, and we see a reduction in out of stocks, all of which, to us, are positive indicators that we can make progress. And we'll continue to implement those. Now some of those create additional friction for our guests.

It's on us to create the right environment with our team so that we reduce that friction as much as possible. But we do see overall -- again, through time, we see those things improve.

Rupesh Parikh -- Oppenheimer and Company -- Analyst

Great. Thank you.

Operator

Thank you. Our next question is from Simeon Gutman with Morgan Stanley. You may go ahead.

Simeon Gutman -- Morgan Stanley -- Analyst

Hey, thanks. Good morning, everyone. Brian, it's been said a few times the consumer is becoming more cautious. Can you talk about the competitive backdrop? I think it's natural that it's gotten more competitive.

It sounded like that in Christina's remarks. Can you maybe give perspective on how it compares maybe to last year or even pre-COVID?

Brian Cornell -- Chairman and Chief Executive Officer

I think we've seen pretty consistent trends year on year. One of the things, as we think about discretionary categories -- and I mean, we talked about this in February at our financial community meeting -- while we have seen some softness, last year, we generated almost $55 billion of revenue in those discretionary categories. And if we go back to pre-pandemic, we've seen sizable gains across all three of our major discretionary categories: apparel, home, and hardlines. So, there's still a consumer who's shopping those categories.

There's certainly a competitive activity that we're watching carefully. But to Christina's point, we're trying to make sure that we're not leading the market down. We're using the benefits of Target Circle, the personalized offers to those guests that we know are looking for those items at Target, and blending the balance of our national brands with our own brands that provide great value each and every day. So, those categories are still relevant to the consumer.

As Christina mentioned, we see, certainly, dislocation in the retail market. That's going to open up market share opportunities for us. I think we're going to start realizing some of that during the back-to-college season. But we'll also see opportunities over the balance of the year and as we go into the holiday season, to continue to make sure guests are turning to Target for those discretionary purchases they are looking to make.

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks, Brian. And then, a quick follow-up maybe for Michael. The negative flow-through in Q2 looks like it's higher than that of Q1, and there is some movement in math given the comparisons here. Curious why shouldn't there be more margin recovery in Q2 even on the negative comp -- or potentially negative comp.

Michael Fiddelke -- Executive Vice President, Chief Financial Officer

Yeah, I think I've hit most of the key themes there already. Just to repeat a couple, we're positioned in the top line conservatively, and that means, you know, what leverage looks like in an inflationary cost environment throughout the P&L looks different, planning for a slightly negative comp in our guide for Q2. So, you see some deleverage there. And then, we've talked a few times the headwind of shrink will be present again in Q2, and that's more of a front half of the year thing than a back half of the year thing.

But those would be some of the key things that we'll watch as the quarter plays out.

Brian Cornell -- Chairman and Chief Executive Officer

Operator, we have time for one final question today.

Operator

Thank you. Our final question is from Dean Rosenblum with Bernstein. You may go ahead.

Dean Rosenblum -- AllianceBernstein -- Analyst

Hey, guys, thanks for taking my question. To just follow up on the gross margin question, first, so you mentioned that relative to 2019, freight's a headwind, shrink is a headwind, etc. When we talked, back in the fourth-quarter event, we asked about the notion of permanent sort of impairment to gross margins. You know, we're -- we're looking at gross margin historically in the second quarter, merch gross margin above 30.

Can you give us some idea of where you might expect gross margins to come in for the second quarter, what might you consider middle slice and maybe ambitious for gross margin for the second quarter?

Michael Fiddelke -- Executive Vice President, Chief Financial Officer

Yeah, our expectations for both margin and SG&A and the rest of those are all baked into that EPS guide. And so, as you guys know, we don't break out the specific components in our -- in our guidance. And the other thing I'd note, you probably heard me say this before, quarterly margins have more noise in them than I think sometimes the group here might appreciate. And so, stepping back and seeing the margin trajectory over a longer period of time, I think is going to be important, and we've got some work to do on that front.

That's baked into our guide for the year to recover some of the margin pressure that we saw last year.

Dean Rosenblum -- AllianceBernstein -- Analyst

All right. Cool. And a follow-up --

Brian Cornell -- Chairman and Chief Executive Officer

That concludes our first-quarter call. And we appreciate all of you joining us and look forward to talking to you later this year. So, thank you.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

John Hulbert -- Vice President, Investor Relations

Brian Cornell -- Chairman and Chief Executive Officer

Christina Hennington -- Executive Vice President, Chief Growth Officer

John Mulligan -- Executive Vice President, Chief Operating Officer

Michael Fiddelke -- Executive Vice President, Chief Financial Officer

Edward Kelly -- Wells Fargo Securities -- Analyst

Chris Horvers -- JPMorgan Chase and Company -- Analyst

Michael Lasser -- UBS -- Analyst

Karen Short -- Credit Suisse -- Analyst

Rupesh Parikh -- Oppenheimer and Company -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Dean Rosenblum -- AllianceBernstein -- Analyst

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