Target plans investments; profit dips
NEW YORK >> 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% 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 going 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% or 2.5% 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% 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 discretionary 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% 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% of Walmart’s U.S. business comes from groceries; that number is 20% at Target.
It was the fourth consecutive quarter that retailer’s profit has slipped. Target reported a 52% drop in third quarter profits, 90% in the second quarter and a 52% 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.