Target Has a Warning for Retailers

Target Corp. is embarking on a $3 billion cost-cutting plan over the next three years as it looks to increase efficiencies and boost profits amid a "challenging economic environment."

The retailer cut its holiday quarter outlook on Nov. 16 after seeing a "significant change in shopping patterns" among its shoppers in late October.

During a third quarter earnings call, CEO Brian Cornell said, "If you look at some of the syndicated data that has been released, obviously you've seen a significant change in consumer shopping patterns as we ended October and moved into the month of November. So clearly, it's an environment where consumers have been stressed. We know they're spending more dollars on food and beverage and household essentials. They're looking for promotions and are looking for that great deal. And I would expect that promotional focus will continue throughout the holidays."

Grocery was a silver lining in an otherwise lackluster quarter for Target.

The company said food and beverage comps grew by the low double digits as shopper keep spending more on must-haves such as groceries rather than hard lines. Essentials grew in the low single digits, fueled by sales of pet and health items. Beauty had same-store sales growth in the mid-teens.

During the earnings call, Chief Growth Officer Christina Hennington said the company’s innovative own brands grew at double the rate of its total business in terms of dollar sales.

Overall, same-store sales at Target increased 2.7% during the third quarter ended Oct. 29, on top of 12.7% growth last year. Comp sales growth was driven by 1.4% traffic growth and a 1.3% increase in average ticket. The company saw unit share gains across all five core merchandising categories.

The company reported third quarter earnings per share of $1.54, down 49.3% from $3.04 in 2021. Total revenue of $26.5 billion grew 3.4% compared with last year, reflecting total sales growth of 3.3% and a 9.5% increase in other revenue. Operating income was $1 billion in third quarter 2022, down 49.2% from $2 billion in 2021, driven primarily by a decline in the company's gross margin rate.

In light of an increasingly challenging operating environment, the company lowered its top-line and bottom-line expectations for the fourth quarter.

Based on softening sales and profit trends that emerged late in the third quarter and persisted into November, the company said it believes it is prudent to plan for a wide range of sales outcomes in the fourth quarter, centered on a low-single digit decline in comparable sales, consistent with those recent trends. Similarly, the company is now planning a wide range for its fourth quarter operating margin rate centered on 3%.

“As we look ahead, we expect the challenging environment to linger beyond the holiday season and into 2023,” said CFO Michael Fiddelke.

During the earnings call, Target said retail theft has jumped about 50% year over year, resulting in about a $400 million decrease in gross margin so far in 2022. 

The company also announced an enterprise initiative to simplify and gain efficiencies across its business, representing an estimated cumulative savings opportunity of $2 to $3 billion over the next three years.

"While we’re ready to deliver exceptional value for our guests this holiday season, supported by the decisive inventory actions we took earlier this year, the rapidly evolving consumer environment means we’re planning the balance of the year more conservatively," Cornell said. "We’re also taking new actions to drive efficiencies now and in the future, optimizing our operations to match the scale of our business and drive continued growth. The strides we have made in recent years to build a truly differentiated, guest-centered retail offering, punctuated by a balanced, multi-category portfolio, positions us well to navigate in any environment. Looking ahead, we remain laser-focused on delivering the best of Target to our guests, and continuing to invest in our long-term, profitable growth.”

The company's cost-cutting plan aims to support investments in driving deeper guest engagement and long-term growth while also delivering on profit goals.

"This opportunity is enabled by the rapid growth since 2019, in which Target’s total revenue has grown approximately 40%. In light of this growth, this effort is focused on fully leveraging the scale that’s been gained to best-position the company to continue growing efficiently over time," the company said in a statement.

The company paid dividends of $497 million in the third quarter, compared with $440 million last year, reflecting a 20.0% increase in the dividend per share, partially offset by a decline in average share count. The company did not repurchase stock in the third quarter.  As of the end of the third quarter, the company had approximately $9.7 billion of remaining capacity under the repurchase program approved by Target’s Board of Directors in August 2021.

New Store Strategy and Store Design

Earlier this month, Target unveiled plans for its next-generation store design. At nearly 150,000 square feet, Target’s new larger-format stores will optimize additional space in an effort to support same-day fulfillment services and deliver on its stores-as-hubs strategy for digital fulfillment.

The new store format recently debuted in Katy, Texas, outside Houston, and is more than 20,000 square feet larger than the chain’s standard locations. Design elements include increased light, more natural elements, community-focused features, additional sustainability measures and more space for associates.

The larger stores will offer a full range of merchandise, including an expanded grocery section, while also featuring backroom fulfillment space that is five times larger than previous spaces. According to the retailer, Target stores fulfill more than 95% of the retailer’s digital orders and same-day services account for more than 10% of its overall sales.

The retailer will continue opening stores of all sizes, but starting in the new year, more than half of Target’s approximately 200 full-store remodels and almost all of its estimated 30 new stores will include elements of the new design. Beginning in 2024, all of Target’s remodels and new stores will feature the majority of the new store design elements.

Minneapolis-based Target Corp. is No. 6 on The PG 100, Progressive Grocer’s 2022 list of the top food and consumables retailers in North America, with nearly 2,000 locations.