TARGET Q4 PROFIT DROPS 43 PERCENT
Retailer plans $5 billion investment in expanded customer services
Target plans to invest as much as $5 billion this year expanding services for customers, including a drive-up service for returns, renovations at 175 stores and improvements in online shopping.
The Minneapolis retailer announced the investments Tuesday during its annual investor meeting as it reported a 43 percent tumble in profits for the holiday quarter, reflecting the ongoing challenges of balancing more cautious consumer spending and rising costs.
Target issued a cautious outlook for the year as inflation squeezes household budgets, but it topped Wall Street expectations for the fourth quarter.
“We recognize that the landscape is unpredictable, and there are plenty of challenges in the near-term horizon,” Target’s CEO Brian Cornell told analysts at the meeting on Tuesday.
Target’s more modest expectations for 2023 follow weaker outlooks from Walmart and Home Depot last week. Higher costs for everything from food to gas is weighing on Americans, though there has been some easing of inflation in recent months.
Part of the reason inflationary pressures have eased, at least for some things, is a campaign by the Federal Reserve to cool spending, and the economy. Those efforts make using credit cards more expensive, which can negatively impact retailers.
But how Americans spend is changing, too. More people are spending money on travel or goa
ing out for dinner than they were during the pandemic, which can mean they are spending less at stores.
Walmart said it expects sales at stores opened at least a year for its U.S. business to rise 2 percent or 2.5 percent for the year, while Home Depot forecasts growth for that metric to be roughly flat this year compared with a year ago.
For the full year, Target expects comparable sales — those from stores open at least a year and online channels — will range from a low single-digit decline to a low single-digit increase.
“We’re planning our business cautiously in the near term to ensure we remain agile and responsive to the current operating environment,” Cornell said in a statement.
Target’s total comparable sales inched up 0.7 percent in the fiscal fourth quarter compared with a year ago. That was fueled by increased customer traffic, but customers are shifting their spending to necessities like food and paper towels over discre
tionary items like fashion. Groceries typically have a much smaller profit margin. Still, Target said that shoppers are attracted to new and trendy clothing, and that’s a key reason for increased store visits.
Cornell noted that the company entered the year in a “very healthy inventory position,” reflecting its conservative approach in discretionary items. Inventory in categories like fashion was roughly 13 percent lower in the fourth quarter than a year ago.
Target has taken a bigger hit to its business compared to other big box retailers likely because it relies more on discretionary items like clothing and home furnishings. More than 50 percent of Walmart’s U.S. business comes from groceries; that number is 20 percent at Target.
It was the fourth consecutive quarter that retailer’s profit has slipped.
Target reported a 52 percent drop in third quarter profits, 90 percent in the second quarter and 52 percent decline in the first.
In early June, Target warned that it was canceling orders from suppliers and aggressively cutting prices because of a pronounced spending shift by Americans.
Last November, Target said it was slashing expenses with a goal of saving $2 billion to $3 billion over the next three years. At that time, it said shoppers were waiting to buy on sale, purchasing smaller packages and trading down to store brands instead of national labels, which tend to be more expensive.
But even as Target projects lower sales, the retailer is pushing ahead to accelerate its e-commerce strategy. It announced last week that it will spend $100 million to develop a larger network of package sorting centers that cut the cost of delivering online orders while increasing the speed of delivery.
Target said that its drive up service for returns will be rolled out to all stores by the end of this summer.
Customers will be able to return most new, unopened items within 90 days of purchases without leaving their car.
Target also plans to open about 20 new stores in addition to renovating 175 of them. One of the big attractions has been its partnership with Ulta Beauty to have shops at the store. Last year, its sales from Ulta Beauty at Target were more than four times higher than in 2021, the company said.
Target also aims to launch or expand more than 10 owned brands. In addition, the retailer will appeal to price sensitive shoppers with more items starting at $3, $5, $10 and $15.