Target Corp. is reinventing itself yet again — and trying to do it even faster.
After a 2016 that even Brian Cornell, the retailer’s chairman and chief executive officer, admitted “was not our best year,” the retailer plans to spend $7 billion over the next three years on a capital investment program and sacrifice $1 billion in annual operating profit this year to grow sales faster and capture market share against better-performing rivals such as Wal-Mart Stores Inc. as well as off-pricers such as TJ Maxx.
Target will renovate more than 600 stores over the next three years. “They’ll look and function differently. They’ll be reconfigured with more space for fashion storytelling and table settings in home. They’ll be digitally connected,” Cornell said. “Order pickup and bridal registry in 2018 will touch 250 stores — 600 by 2019, and that’s just the beginning.”
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Citing the success of new children’s brand Cat & Jack, which is expected to do $1 billion in sales this year, Cornell said Target will launch more than 12 brands in the next two years, “representing more than $10 billion of our sales.” The majority will be in Target’s home and fashion categories, which represent $26 billion in combined sales.
“In some cases, it will be a new branch or a relaunch of an existing brand,” Cornell said. “The consumer told us that some of our brands have gotten a little tired and a little bit old. We’ll go from a series of labels to a collection of brands. We now have a portfolio with a lot of labels but very few brands.”
The retailer even will make acquisitions, Cornell said. “We’re opportunistically looking at different business, including services and capabilities,” he said. “We have the flexibility and the balance sheet.”
Target’s initiatives aren’t new, Cornell said, adding, “The inflection point is the piece that’s changed. We just have to go faster.”
But Wall Street wasn’t necessarily buying the plan after Target’s disappointing results. The retailer’s shares dove 12.2 percent Tuesday to close at $58.77.
Cornell did his best to atone for the lackluster performance last year, telling analysts at the retailer’s annual meeting for the financial community that “we’re making some headway in 2017. We’re asking shareholders to make an investment to build a strong company for the future. Our goal today is to demonstrate that the investments we’re making are the right decisions for the long term.”
He added, “We’re operating in an incredibly challenging environment. All across our industry, our competition is closing stores and cutting costs just to keep their heads above water. We haven’t seen this amount of distressed retailers since 2009 and the Great Depression. Our efforts weren’t enough to win in this environment, and you see that in today’s results.”
Target’s net earnings for the fourth quarter ended Jan. 28 plummeted 42.7 percent to $817 million, or $1.45 a diluted share, from $1.4 billion, or $2.32, a year earlier. Sales for the three months declined 4.3 percent to $20.69 billion. That left the company with an earnings drop of 18.6 percent for the full year, to $2.74 billion, on a sales decline of 5.4 percent, to $20.6 billion. Comp-store sales decreased 1.5 percent in the quarter — even as Wal-Mart registered comp-store sales increases for the fourth quarter of 1.8 percent, and 1.2 percent for fiscal 2016.
Digital sales jumped 34 percent jump in the fourth quarter, but it wasn’t enough to offset the soft trend in stores.
Target’s digital sales doubled to 14 percent of revenues in 2016, from 7 percent in 2013. The retailer re-platformed its web site to achieve greater speed, stability and capability, and it withstood the holiday season’s biggest shopping days, Black Friday and Cyber Monday, the site buckled under the weight of heavy traffic the previous year.
Stores are filling 68 percent of digital orders, Cornell said, adding that Target’s Cartwheel savings app will be combined with the retailer’s flagship app to create a streamlined, simple shopping solution.
The retailer’s 32 small format stores are a success, claimed the ceo, who said the units sales per square foot are higher than average. Target is ramping up the rollout with 30 new units this year with a goal of 100 set for 2020.
“We see them expanding our footprint in key urban areas and college campuses, customized for each community,” he said. “We left this massive opportunity on the table because we didn’t have a solution for fitting into Manhattan. In the last six months, we’ve opened stores in Manhattan [TriBeCa], Queens and Brooklyn. You can expect to see more and more. In New York, we’ve been very disciplined in our approach, but I can tell you it’s time to accelerate this new format.”
Some existing full-line stores are old and tired and many haven’t been updated in 10 years, Cornell said.
Target’s 1,800 stores are within 10 miles of 85 percent of customers, and the units will be leveraged with back rooms functioning as hyper-local distribution centers. “Our supply chain has been a major focus,” Cornell said. “We’re slow and we have too much inventory. We’re changing how we move product. When a store wants shampoo for a client, we put it in a truck and send it to the store. Nothing sticks around. Our distribution centers will be faster and more efficient. We’ll operate with less inventory, less working capital and better shelf availability.”
Cornell said the $1 billion investment in operating margins is driven by the fact that online sales have significantly lower gross margins. “We’re moving away from the data breach practice where we were high promotional to a more consistent everyday low price,” he said.
Earnings before interest and taxes will generate $1 billion less than last year due to enhanced store services, the continued channel shift from stores to digital, the launch of new brands and an everyday value proposition, said Cathy Smith, executive vice president and chief financial officer, explaining that about $500 million will be in SG&A and $400 million, gross margin.
Target’s gross margin rate in the fourth quarter was 26.9 percent, compared with 27.9 percent in 2015, while the SG&A expense rate was 17.5 percent in the 2016 period, compared with 18.1 percent in 2015. Fourth-quarter EBITDA, or earnings before interest, taxes, depreciation and amortization, and EBIT margin rates were 9.5 percent and 6.5 percent, respectively, compared with 9.8 percent and 7.2 percent, respectively, in 2015.
In the first quarter of 2017, Smith said Target expects a low- to mid-single-digit decline in comparable sales and earnings per share of 80 cents to $1; EPS of $3.80 to $4.20 is expected for 2017.
“We’re not providing explicit guidance beyond this year, but we’re positioned to deliver superior Return On Invested Capital over time,” Smith said, adding, “Let me be clear, this will be a multiyear, multiphase program.”