The ‘New Normal’ at Target, Steadier Consumers, More Efficiency
Brian Cornell sees a “new normal” at Target Corp. as retail transitions away from the wild swings of the pandemic.
But that doesn’t mean there’s not work to do.
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The discounter is moving to take advantage of its newfound scale and become more efficient — an effort that apparel is front and center on.
Target wrapped up 2022 with an unexpected gain in fourth-quarter sales. Softness in discretionary categories, including apparel, offset strength in beauty. Profits dropped, but not as much as Wall Street projected after a year of inventory realignment, inflation and skittish consumers.
At an investor day in New York, Cornell, who is chairman and chief executive officer, painted a picture of a company that has had a dramatic growth spurt and is now ready to retool to consolidate those gains.
“Since 2019, our store base has only grown slightly but total sales grew nearly 40 percent in that time frame,” Cornell said at the investor meeting. “Our digital business nearly tripled in size and our sales per square foot increased by 37 percent. And fulfilling substantially all that growth through essentially the same asset base was nothing short of incredible on the part of our team.
“We’re starting 2023 on a revenue base of $109 billion, not the $78 billion we had back then,” Cornell said. “But unlike 2019, our three-year revenue growth is $30-plus billion, not just $8 billion. And our digital penetration now stands at nearly 19 percent. During the pandemic, guests became more attached to Target.
“Standing here today, my sense is that the new normal is on the horizon, it will be much more like 2019 than the last three years,” he said. “And as we plan prudently to invest in 2023, we see a return over time to solid and consistent growth.”
As Cornell played the part of Target cheerleader at the meeting, there were also some moments of corporate candor.
“While we gained incredible scale by continuing to prioritize our guests, I acknowledge we’re still developing some of the tools to marshall that scale efficiently,” the CEO said.
And apparel is a prime example of that.
Target has a $17 billion apparel business that has grown by $3 billion over the past three years. But that puts the category at growth of 21 percent — impressive, but nonetheless just more than half the corporate rate.
While the retailer is investing behind growth, pouring money into faster e-commerce deliveries, drive-up returns, 20 new doors and updates to another 175 stores, it is also looking to drive efficiencies to cut costs by $2 billion to $3 billion over the next few years.
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Mike O’Neil, senior vice president of enterprise efficiency, pointed to apparel as an example of Target’s efforts to streamline.
O’Neil said apparel has “unique complexities from the fact that we partner with vendors to source materials to the fact that we have unique fixtures in store for presentation to all the geographical and weather considerations that go into assortment planning.”
“That growth combined with that complexity makes a tremendous opportunity to step back and say, ‘How do we run this business at a larger scale and how do we position it for future growth?’” he said. “So we’re focused right now on driving simplicity, speed and consistency across the entire apparel value chain. And in doing so we expect to see benefits from assortment planning to supply chain all the way down to guest fulfillment. And the benefits will be across the P&L. We’ll see it in lower markdowns, we’ll see it in increased productivity, labor productivity, and we’ll see it in top-line sales.”
Meanwhile, Christina Hennington, chief growth officer and executive vice president, said beauty was “delivering the highest growth rates of any category we sell.”
“We’ve been seeing outsized growth across the entire portfolio, from everyday beauty assortments to new and exciting offerings like those we’ve added through our partnership with Ulta Beauty,” Hennington said. “In fact, last year’s sales from Ulta Beauty at Target were more than four times higher than in 2021. And this growth was almost entirely incremental. As such, we remain excited to continue opening additional Ulta Beauty at Target locations this year and beyond.”
RELATED: Target’s Indie Beauty Push
In the fourth quarter, Target’s earnings fell 43.3 percent to $876 million, or $1.89 a diluted share, down from $1.5 billion, or $3.21, a year ago. But earnings per share topped the $1.40 analysts had penciled in by 49 cents.
Revenues for the three months ended Jan. 28 increased 1.3 percent to $31.4 billion from $31 billion — much stronger than the 0.9 percent decrease analysts projected.
This year, Target has given itself a wide lane, projecting that comparable sales would range from a low-single-digit decline to a low-single-digit gain. Operating income is slated to grow more than $1 billion and earnings per share are seen rising to $7.75 to $8.75, compared with $5.98 last year.
Investors approved of the direction and sent shares of the company up 1 percent to $168.50.
RELATED: Target Tops Q4 Sales Estimates Despite Weakness in Discretionary
Arun Sundaram, an analyst at CFRA Research, kept his “hold” rating on the stock while lifting his target price by $18 to $180.
Sundaram noted that guidance for the year ahead fell below expectations and chalked that up to management’s “conservatism” and the past year of “unexpected surprises.”
“We see fiscal 2024 as the start of a multiyear turnaround for operating margins, although the pace of this recovery towards historical 6-plus percent operating margin will be reliant on the recovery in consumer discretionary spending, which has yet to bottom,” the analyst said.
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