Target reveals new store, remodeling plans; Q4 sales, profits top estimates

Target Corp. beat fourth-quarter expectations amid a “very challenging environment” and said it plans to expand its owned-brands as consumers spending shifted away from discretionary items.

Chairman and CEO Brian Cornell said Target will focus on its long-term strategy while planning its business cautiously in the near term “to ensure we remain agile and responsive to the current operating environment.”

In a presentation at the company's annual Financial Community Meeting in New York, Target said it plans to open about 20 stores in a variety of sizes in 2023, with many of the locations including new design elements that reflect the local community, sustainable features and experiences that highlight new brands, assortment and services.

In addition, Target is making investments in about 175 of its existing stores, ranging from full remodels to the addition of Ulta Beauty or Apple shop-in-shop experiences, or expanded capacity for same-day fulfillment service

Last week,  the company announced it will spend $100 million  to expand its package-sorting network (dubbed sortation centers) to more than 15 facilities by the end of 2026. The expansion calls for the building of at least six new centers.

Also, beginning this spring, Target will expand its "Drive Up Returns" offering, which allows customers to return unopened items from the comfort of their car.  In addition to making the customer experience easier, Target said the program brings more efficiency to its returns process and reduces expenses for mail-in returns. 

In other 2023 initiatives, Target plans to launch or expand more than 10 owned brands.  In an appeal to an increasingly value-conscious shopper, the retailer said will offer more items starting at $3, $5, $10 and $15. It also plans to emphasize more markdown campaigns and add new features to its Target Circle loyalty program.

"Given value is absolutely top of mind right now, being able to deliver affordable joy differentiates us in the marketplace,” said Cornell. “And that’s a clear advantage in the near term and remains our focus over the long term.”

In all, the company plans to invest a total of $4 billion to $5 billion this year to expand its "guest-centric" services, operations network of stores and supply chain facilities, digital experiences and other capabilities.  

"Investments in our shopping experience and frontline team have deepened our guests' engagement with Target during the last few years, which is reflected in our continued traffic and sales growth," said Michael Fiddelke, chief financial officer of Target Corporation. "This year, we'll continue investing in our long-term strategic initiatives that propel our market share and profit growth over time. Coupled with our teams' ongoing efforts to scale our business with greater simplicity, we are confident in our ongoing ability to meet the evolving needs of our guests and deliver value for our shareholders." 

FOURTH QUARTER RESULTS 

Rising operating costs took a bite out of Target’s fourth-quarter profit, which fell to $876 million, or $1.89 a share, for the period ended Jan. 28,  from $1.54 billion, or $3.21 a share, in the year-go period. Adjusted earnings per share were  $1.89, easily topping the $1.40 per share analysts had expected.

Revenue rose 1.3% to $31.40 billion from $31.00 billion. Analysts had expected sales to fall to $30.68 billion. The company said strength in food and beverages, beauty and household essentials offset ongoing softness in discretionary categories.

Total same-store sales rose 0.7%, with comparable stores sales growth of 1.9% and a comparable digital sales decline of 3.6%. Analysts had expected comp sales to decline 1.6%.

Customer traffic (includes online and in stores) inched up 0.7% in the quarter. 

“We're pleased that our business delivered comparable sales growth in the fourth quarter, in what continues to be a very challenging environment,” stated Cornell in Target's earnings release. "This performance highlights the benefit of our multi-category merchandise assortment, which drives relevance with our guests in any environment, and is a key reason we grew traffic every quarter last year.”

For fiscal 2023, Target expects that comparable sales will range from a low single-digit decline to a low single-digit increase. The retailer expects full-year earnings per share of between $7.75 and $8.75, below Wall Street’s expectations of $9.23 per share.

Target’s cautious outlook was a familiar refrain sounded by other big retailers in recent weeks, including Walmart and The Home Depot.

Target noted that it entered the new fiscal year with its inventories in better shap then previous quarters.

“We're pleased that we entered the year in a very healthy inventory position, reflecting our conservative approach in discretionary categories and our commitment to reliability in our frequency businesses,” Cornell stated. “As we plan for the year ahead, we will continue to make robust capital investments and pursue efficiency opportunities in support of our long-term growth.”

During the next three years, Target said it expects its operating income margin rate will reach, and begin to move beyond, its pre-pandemic rate of 6 percent, and believes it could reach an operating income margin rate of 6 percent as early as fiscal 2024, depending on the speed of recovery for the economy and consumer demand.