“The Easiest Place to Shop.”
That is what Target Corp. wants to become as Brian Cornell, its chairman and chief executive officer, outlined his strategy Tuesday at the company’s annual meeting for the financial community at its Minneapolis headquarters.
“We want to deliver in hours, not days,” he said. “Target is a company that’s built on speed, but focused on service. We’re going to get Target to be the first retailer with same-day delivery.”
With Amazon casting its shadow over retailers, it’s no surprise that Target is doubling down on delivery. Drive-up, a service offered through the retailer’s app for picking up orders, is rolling out from 50 units to nearly 1,000 stores by the end of the year. Same-day delivery of groceries, home goods, electronics and essentials through Shipt is expanding from about 440 stores in the Southeast and the Twin Cities to the majority of Target’s 1,828 units.
Same-day delivery of store purchases to shoppers’ homes for a flat fee will expand beyond four Manhattan units to encompass all stores in New York’s five boroughs, as well as four new cities — Boston, Chicago, San Francisco and Washington, D.C.
Cornell unveiled a new option — free two-day shipping — available on thousands of items when customers pay with a Red Card or spend at least $35. This brings the retailer into line with Amazon’s Prime customers, as well as with rival Wal-Mart Stores Inc.
Target plans capital investment of $3.5 billion in 2018 to accelerate the pace of store remodels, with the goal of completing 325, more than three times as many as last year.
Moving closer to the goal of operating 130 flexible-format stores by 2019, Cornell said Target will unveil more than 30 of the smaller units this year. A new store design features two entrances — one for shoppers looking to be inspired by seasonal displays and exclusive brands — and the other for quickly picking up online orders and groceries.
“We had ambitious plans to launch 12 new brands in 18 months,” Cornell said. “We’re well ahead of schedule. Each brand is focused on replacing an existing brand.”
Cornell cited A New Day for women, Goodfellow & Co. for men, Joy Lab activewear and Hearth & Hand for the home, as among the introductions. Universal Thread, a women’s lifestyle brand focused on denim, launched last month, and Opalhouse, an eclectic home collection with more than 1,300 pieces, is launching in April. There’s also a hookup with British Hunter boots bowing in the spring.
“In a world that’s increasingly commoditized, our own brands give us a point of difference,” Cornell said. “Each brand is delivering incremental sales and encouraging cross-shopping. We’re going to roll out one new brand after another all year long.”
Prior to the meeting, Target released fourth-quarter and full-year 2017 results. Despite stronger-than-expected holiday sales and the benefit of recently enacted federal tax reforms, Target shares fell in pre-market trading and hadn’t recovered by Tuesday afternoon as the retailer missed earnings targets and its investment in wages and store hours offset an increase in sales. Shares ended the day down 4.5 percent at $71.79 on the New York Stock Exchange.
Cornell was not deterred by Wall Street’s reaction to Target’s wage hike. With the goal of elevating service in stores, he revealed that the retailer will raise its minimum hourly wage to $12 for existing team members in the spring. Target in October increased to $11 the minimum hourly wage and has committed to raising it to $15 by the end of 2020. A starting wage of $12 is higher than the state-level minimum wage in all 50 states.
“We’re placing people in departments based on their interests and background,” the ceo said, adding, “We’re committed to paid training. We’re giving them tools. Last year, we launched an app on the team member device. When checkout lanes are full, team members can use the device for checkout.”
Net income rose 34.7 percent in the fourth quarter ended Feb. 3 to $1.1 billion, or $2.02 per share, from $817 million, or $1.45 per share, in the 2016 fourth quarter ended Jan. 28. Net income in fiscal 2017 increased 7.2 percent to $2.93 billion, or $5.33 per share, from $2.74 billion, or $4.70 per share in fiscal 2016.
Excluding onetime items, Target earned $1.37 a share, one penny below analysts’ estimates, compared to $1.45 in 2016’s fourth quarter. The company said higher wages dented profit margins. Full-year adjusted EPS was $4.71, compared with $5.01 in 2016.
Revenue climbed 10 percent to $22.8 billion in the fourth quarter of 2017, from $20.7 billion in last year’s period, beating analysts’ consensus of $22.5 billion, reflecting the impact of an additional week in this year’s fourth quarter, a 3.6 percent increase in comparable sales, and sales in non-mature stores.
Comp-store sales in the fourth quarter increased 3.6 percent increase, while traffic grew 3.2 percent in the period, reflecting healthy increases in stores and digital channels. Fourth quarter comparable digital channel sales rose 29 percent, on top of 34 percent last year, contributing 1.8 percentage points of comparable growth.
The retailer said it saw healthy comparable sales growth across all five of its core merchandise categories.
The fourth-quarter earnings before interest and taxes margin rate was 5.1 percent, compared with 6.5 percent, in 2016. Gross margin rate in the fourth quarter was 26.2 percent, compared with 26.6 percent in 2016, reflecting pressure from digital fulfillment costs. The impact of the retailer’s pricing and promotional efforts was offset by cost savings. The expense rate of fourth-quarter selling, general and administrative expenses was 18.5 percent in 2017, compared with 17.5 percent in 2016, driven by higher compensation costs. Those costs included team member incentives and investing in store team member hours and wage rates, partially offset by cost saving initiatives.
For the trailing 12 months through the fourth quarter of 2017, after-tax return on invested capital was 15.9 percent, compared with 15 percent for the 12 months through fourth-quarter 2016.
In first quarter of the year, Target expects a low-single-digit increase in comparable sales, and GAAP EPS from continuing operations and adjusted EPS of $1.25 to $1.45.
The retailer said it expects a low-single-digit increase in comp sales for full-year 2018 and EPS from continuing operations $5.15 to $5.45.