At a time when the industry continues to feel the pain of store closures and bankruptcies — and even as its digital sales grew 31 percent in the fourth quarter — Target Corp. chairman and chief executive officer Brian Cornell sounded as bullish as ever about physical retail.
“The digital component is important, but at the end of the day the majority of guests go to stores,” Cornell told a room of retail analysts at Target’s annual meeting for the financial community. “The point of our investments is to put more team members on the sales floor. There’s new technology at their fingertips to improve service. It’s all about an elevated guest service and experience. We’re hiring experts and team members who are passionate.”
Stores are key to reducing shipping and delivery costs, Cornell said, with shipping from stores resulting in cost savings of 40 percent. A 90 percent savings with a lower average unit cost is realized through drive-up pickup, where a customer alerts the local store that she’s on the way, and a sales associate puts the order in the trunk.
“With our store base, our own brands and the investments we’ve made in service and fulfillment, we have lots of reasons to bring consumers into our stores. We know American consumers still enjoy shopping in stores and 90 percent of business is done in stores. We’ve modernized our stores and invested in our teams. Two years ago, you were questioning whether stores were the way to go,” Cornell told the analysts.
“I won’t name names, but two years ago, a few of you said, ‘Brian, are you sure this is the path you want to pursue?’ At that time, people were closing stores, not opening them, and they were cutting costs. Our stores and our people are at the center of our strategy. We think we’re on the right path.” Cornell said Target has the metrics to prove it. “When you look at our results, traffic, comps, net promoter scores and guest surveys, our strategy is working.”
Target’s financial results were released earlier on Tuesday. Same-store sales grew 5.3 percent in the fourth quarter ended Feb. 2, and 5 percent in the full year ended Feb. 2. Within that, comparable store sales grew 2.9 percent and comparable digital sales surged 31 percent. Stores fulfilled nearly three quarters of Target’s fourth-quarter digital sales. Total revenue was $23 billion, essentially flat compared with last year.
Adjusted earnings per share were $1.53 in the quarter, compared with $1.36 in the 2017 quarter. Full-year 2018 EPS was $5.39, establishing a new high for the company, compared with $4.69 in the 2017 period.
“This morning, we announced our most successful year-over-year performance in more than a decade,” Cornell said, noting that the fourth-quarter comp of 5.3 percent is “our strongest finish since 2005. Across the business, we’re growing market share in every major category.”
Shares in the retailer rose 6 percent in pre-market trading after the retailer’s comparable sales of $1.53 for the fourth quarter beat analysts’ expectations of 5 percent. By late afternoon, Target shares were up 4.58 percent to $76.
However, it wasn’t all rosy in the fourth quarter, with net income sliding to $799 million, or $1.52 a share, from $1.1 billion, or $1.99 a share a year ago.
The retailer is rolling out a new loyalty program, Target Circle, with personalized perks. The mass merchant is building its third-party offering, called Target +. Sellers in popular areas such as home, toys, electronics and sporting goods will be seamlessly integrated into target.com. There’s an expanded array of running shoes, patio accessories, outdoor decor and new musical instruments.
“How we expand our online assortment is different than our competitors,” Cornell said. “We’re known for curation. Target + will be by invitation-only for brands. We’re going to go very deliberately and very intentionally to get the right brands on Target +. It’s a profitable way to grow the target.com business.”
Digital sales, which in 2012 were $1.2 billion, grew to $5.3 billion in 2018, the fifth consecutive year that comps increased more than 25 percent. “Digital is making stores more relevant,” Cornell said.
Smaller flexible-format stores are the stars in Target’s retail constellation. The units, which average 40,000 square feet, are more productive than Target’s larger stores. Cornell said the retailer will double the number of small-format units to 200, although he didn’t give a time frame. “We’ll open a few more in Manhattan,” he revealed, adding that stores are planned for Los Angeles and Santa Barbara, Calif.; Seattle; East Lansing, Mich., and Cape Cod, Mass., among other locations.
“The stores continue to show strong financial performance and sales growth,” Cornell said. “We’ll open 32 stores per year over the next two years. We’re constantly making adjustments and learning things with the small formats. When we design them, we might get 85 percent right the first time. If you’d have asked me two years ago, we might have gotten 50 percent right. We learn about guests in the neighborhood and we have built in the agility.”
Target is using its own brands as points of difference to raise the style quotient. “The team’s done three to four years of work in 18 months,” Cornell said, noting that the retailer has launched 20 exclusive apparel brands. “We’re making sure we’re managing those brands. We saw sleepwear and intimates as one of the big white spaces and launched three new brands. We think there are still significant market share gain opportunities in sleepwear. We’ll grow market share, attract new guests and continue to fill white spaces.”
As reported, Target’s next design partnership will be with Vineyard Vines, launching on May 18.
Cornell singled out the retailer’s flexible-format store in New York City’s Herald Square, saying it does more sales per square foot than any store of any size in the country. The unit’s beauty business is a phenomenon. “Guests like the value and expertise,” Cornell said. “Herald Square is in the top five beauty doors in the U.S. Even though an iconic Macy’s is across the street and Sephora is next door, our beauty business has been a winner. Beauty is one of the [categories] where we’ve made the most progress with advancements in assortments with new national and local brands on our shelves. We’ve also invested in beauty concierges or experts, so it’s the combination of presentation, assortment, service.”
The strong consumer environment is only partly responsible for the retailer’s results, Cornell contended. Target, since 2016, has been laying the foundation with investments in fulfillment capabilities, and training and wages for associates, with a $15 minimum hourly wage set to be in place by the end of 2020. Target remodeled 400-plus stores in 2017 and 2018. Another 300 a year in 2019 and 2020 are planned, with the benefit of a 2 percent to 4 percent sales lift expected.
Target’s first-quarter guidance was for a low- to mid-single-digit comp sales increase, low single-digit increase in operating margin, and high single-digit growth in adjusted EPS. For the full-year 2019, Target expects a low- to mid-single-digit increase in comp store sales and mid-single-digit increase in operating income. CAPEX will be $3.5 billion per year in 2019 and 2020.
“This is one of the best consumer economies that I’ve seen,” he said. “There’s been a lot of positive news from a consumer standpoint. Unemployment is at a 50-year low. Consumer confidence has come down slightly in recent months, but we saw a really solid holiday season.”
Cornell said there’s been some confusion as to how consumers reacted during the holidays. “MasterCard data was conflicted by Department of Commerce data. We saw solid growth in the November-December period. The retail environment grew 2.5 percent to 3 percent. We significantly outperformed that and took market share,” Cornell said. “Our initiatives and investments had a great deal to do with that.
“Every piece of our strategy is working — and it’s working together,” he added.