- Target executives took a victory lap on Tuesday, pointing to various performance improvements they traced back to a multi-billion dollar investment blitz taken three years ago.
- CEO Brian Cornell said in an online investor presentation that the retailer is "changing consumer behavior" through its suite of same-day services, which include store pickup, drive-up and Shipt.
- Those services were behind most of the company's 20% digital comparable sales growth in the fourth quarter, as well as growth in the full 2019 fiscal year during which same-day services expanded 90%, Target said in a press release.
CEO Brian Cornell noted that Q4 marked Target's 11th straight quarter of positive comparable sales growth. In the release, he said that the company has "built a sustainable business model that drives strong topline growth and consistent bottom line performance" and that, going into 2020, "we are well positioned to build on this strong foundation to further differentiate Target and drive long-term, profitable growth."
For the full year, Target's comparable sales were up 3.4%. Included in that figure was a 29% spike in digital sales growth that marked the company's sixth consecutive year of digital comp growth above 25%, Target said. Operating profits also rose during the year. Three-fourths of that digital growth came from Target's same-day services, the company said.
The retailer has seen a 50% increase in order pickup, 500% increase in drive-up use and has 100,000 Shipt shoppers, Cornell said in the investor presentation. As the retailer has built out its services around digital shopping, it's muscled its way to become one of the top 10 e-commerce players, according to eMarketer.
Target's Q4 performance
|Operating income||$1.2 billion||+7.3%|
|Gross margin||26.3%||+60 BPS|
|Net earnings||$834 million||+4.4%|
|Inventory value||$9 billion||-5.3%|
|Long-term debt||$11.3 billion||+10.9%|
Source: Target press release
Once again analysts credited the mass merchant's physical locations as a key driver of the retailer's success. "Stores continue to be significant contributors to Target's online growth, and the various same-day product availability options are clearly resonating with its shoppers," Moody's lead Target analyst Charlie O'Shea said in emailed comments on the retailer's results.
Store remodels, same-day and digital services, and the company's private label revamp have all helped boost Target's gains in sales and market share. Cornell pointed to a $2.5 billion increase in apparel and beauty sales, a $1.7 billion increase in toy and baby sales — helped by the disappearance of Toys R Us from the market — and $160 million increase in food sales since 2017.
Going forward, the retailer is expanding its assortment, testing a new front-of-store experience, working to transform a new layout for electronics to highlight brands and testing fresh grocery pick up, Cornell said. The retailer also said it has been opening around 30 small-format stores a year, and plans to keep investing in them going forward.
Yet with all that positive growth, Q4 may have revealed the long-term limits to Target's comeback. The company's sales growth fell below executives' initial expectations. Earlier this year, Target said it had negative comparable sales in electronics over the holiday period and toy comps came out flat. While it beat FactSet analyst consensus estimates on profit and comps, Target fell short of revenue expectations, according to MarketWatch. For fiscal 2020, Target expects comp sales growth in the low single digits and operating income increases in mid-single digits.
Those are strong numbers in the current retail environment, but represent less frenetic growth than recent years. "Looking ahead, we remain positive about Target, mostly because the company has got a lot of the retail fundamentals right," Neil Saunders, managing director of GlobalData Retail, said in emailed comments. "However, it is also clear that Target is now on a lower-growth trajectory and will not deliver the same kind of sales gains as it did over 2019."
Some of that, Saunders added, is because of competition from Amazon, Walmart and other retailers, but it's also due to "the fact that gains from things like store refurbishment and new own-brands have already been made and will not keep delivering at the same pace." In place of transformational investments, Saunders said to expect a "greater focus on the bottom line," including cost cuts.
"More will be made of the Target Circle loyalty scheme and renewed efforts will be made in food," Saunders added. "Because of these things, Target will remain on top, even if its star won't shine as bright."