Target of Tomorrow unveiled, long road ahead

Target Chairman and CEO Brian Cornell unveiled a wide-ranging growth strategy that combines familiar concepts with dozens of new initiatives related to merchandising, digital, expense control, process improvement and a major shift in corporate culture designed to drive growth for the next five years.

In a highly anticipated presentation to investors late Tuesday, Cornell outlined five priorities that will guide the company in the coming years. Members of his senior leadership team elaborated on specific strategies, store formats, digital integration and huge investments in supply chain and information technology to accelerate growth in 2015 and beyond.

“Following a thorough, strategic review of our business, coupled with a careful evaluation of the changing retail landscape, we have identified the key initiatives that will put Target on a clear path to growth,” said Cornell. “We’re focused on our future and building the capabilities that will take us further, faster. Redefining Target will require a renewed emphasis on prioritization and innovation, and above all else, putting our guests first in everything we do.”



Cornell said the company has identified five priorities, beginning with a channel agnostic approach to serving shoppers in which mobile serves as a virtual front door to the brand. A second priority involves an emphasis on four key categories of style, baby, kids and wellness that Cornell said represent sales of $20 billion and are areas Target has historically been known for.



A third area of localization and personalization refers to both product assortments in stores and marketing communications in the digital age. “Today’s consumers expect us to have locally relevant assortments. This is not a new concept in retail, but it represents a meaningful opportunity over time as we deliver a much more relevant experience in stores and online.”



New urban formats was identified as a fourth priority with Cornell noting that Target has a compelling opportunity to deliver a differentiated experience with its City Target and Target Express stores. City Target stores, the first of which opened in 2012, are about 25% smaller than a typical 135,000-sq.-ft. Target store, but they enjoy twice the sales productivity with a 30% gross margin and generated an 8.6% comp increase last year.



“We are also very excited about the Target Express format,” Cornell said, noting that only one unit is open so far with eight more locations planned for this year.



The fifth priority area involves simplicity and cost control. Cornell is intent on finding new ways for Target teams to be more nimble, quickly establish priorities and restore an entrepreneurial spirit to the company all the while cutting a whopping $2 billion from the expense structure in the next two years. The savings will be realized through operations, technology and process improvements, supply chain and sourcing efficiencies and corporate restructuring. Roughly $500 million is expected to come from a reduction in cost of goods.



Target said the restructuring will be concentrated at the company’s headquarters where the effort to become leaner and remove complexity means the elimination of several thousand positions over the next two years.



More immediately, Target expects to take a $100 million restructuring charge during the first quarter, according to CFO John Mulligan, who provided a bevy of financial targets for 2015 and longer term. This year, Target expects same store sales to increase between 1.5% and 2.5% and with modest improvement in margins and expense rates full year adjusted profits per share are forecast to range from $4.45 to $4.65 compared to $4.27 last year.



During the next five years, Mulligan said Target’s forecast calls for same store sales growth of 1% and total sales growth of 3% annually with gross margins of 29.5%. Expenses as a percent of sales are expected to range between 19.5% and 20% resulting in an operating margin of 9.5% to 10% that is slightly below the company’s peak rate of profitability.



Between future dividend increases and billions of dollars in annual stock buybacks complementing forecast earnings per share growth of 10%, Mulligan said Target’s total shareholder return would be solidly in double digits.



“We are confident this plan is achievable,” Mulligan said.



His confidence stems from the loyalty of Target’s customers, multiple merchandising initiatives to drive sales and new ways of connecting with shoppers outlined by Kathee Tesija, chief merchandising and supply chain officer and Jeff Jones, chief marketing officer. Tesija said considerable shopper insights work had resulted in Target identifying a new core customer she described as a “demanding enthusiast,” who is digitally connected, loves to shop and demands great value. She also described a new framework for how Target is thinking about categories and developing assortments based on whether a category is defined as signature, outperform, perform or reposition.



“Nothing is sacred. We are putting every part of our go to market strategy on the table,” Tesija said. In addition, she highlighted several areas where the company would be looking to reassert its style leadership after losing its edge. The recipe for doing so, Tesija said, has three ingredients; exciting and differentiated products, more inspirational and compelling presentation and more engaging marketing.



The investor conference followed what was a good holiday season for Target. The company regained traffic and faced easy comparisons from a year earlier when it had to get super aggressive with pricing and promotions after suffering data breach. Cornell said he was excited about the progress the company has made, but conceded Target is in the very early stages of a transformation that will have it looking very different three years from now.