Local ShoppingTarget profits continue to slide as discretionary purchases slow

Target profits continue to slide as discretionary purchases slow

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Dive Brief:

  • Same-day services – which include in-store pickup, drive up and Shipt – increased 4.3% in Q4, making up more than 10% of Target’s sales, the retailer reported on a Tuesday earnings call. Increased customer traffic drove comparable sales up 0.7%. Revenue for the quarter was nearly $31.4 billion.
  • Target said its full-year sales increased 2.8% to $107.6 billion from $104.6 billion last year. Full-year total revenue of $109.1 billion was up 2.9% compared with 2021. Comparable sales for the year grew 2.2% on top of 12.7% growth in 2021. 
  • Target’s 2022 operating income of $3.8 billion was down 57% from $8.9 billion year over year. The retailer said higher freight, and supply chain costs, along with increased compensation and headcount in distribution centers drove its full-year gross margin rate down to 22.7% from 25.7% year over year.

Dive Insight:

Target achieved comparable sales growth in Q4 despite a challenging economic environment. CEO Brian Cornell said strength in food and beverage, beauty and household essentials offset softness in discretionary purchases.

However, the Minneapolis-based retailer’s profits continued to slide, with operating income down more than 50%. In the third quarter, while Target posted comp sales growth of 2.7%, operating profit dropped by about half from the same time last year.

During the earnings call, Target executives referenced how unexpectedly difficult the economic environment was in 2022, even compared to the height of the pandemic, and how inflation and supply chain challenges affected retail.

“If you had told me in late 2020 during the height of the pandemic that 2022 would be the most challenging operating environment in my career, well, I would have assumed you were joking,” Chief Operating Officer John Mulligan said. Looking ahead, “our environment remains volatile and we expect 2023 will have its own unique set of challenges.”

In its first quarter guidance, Target said it expects comp sales to range from a low single-digit decline to a low single-digit increase, and an operating income margin rate of 4% to 5%.

Target’s Q1 and 2023 guidance is below expectations, Telsey Advisory Group analysts led by Joseph Feldman said in a note.

“In 2023 and beyond, Target should benefit from a gross margin recovery, assuming better inventory control, fewer markdowns, and supply chain tailwinds,” Feldman said. “In addition, Target expects to return to a 6%+ operating margin over the next three years, with a possibility to achieve the goal in 2024, depending on the pace of the macro and its own recovery. In our view, Target’s guidance is prudent, given the tough macro environment, but we believe it could prove conservative, based on the gross margin recovery opportunity.”

For the near term, Cornell said that the company plans to lean into growth in its nondiscretionary categories, “given [that] value is absolutely top of mind right now.” Christina Hennington, Target’s chief growth officer, echoed that sentiment.

“While our business has been generating growth on top of growth for years now, the mix of last year’s sales looked vastly different than what we had expected,” Hennington said. “Throughout 2022, changing attitudes toward COVID followed by the pressure from persistent inflation caused demand for discretionary categories to slow meaningfully.”

In response, Hennington said the company is taking a “cautious” approach to this year’s inventory commitments in many categories. Hennington said Target saw “incredible growth” in its food and beverage, and essentials and beauty businesses. That growth offset consumer pullback in discretionary items like home, apparel and hard lines. Despite the pullback, Hennington said Target’s discretionary category still generated $55 billion in sales last year.

Hennington attributed the growth to Target’s customer base, who “are attracted to all things trendy and new. We believe our commitment to newness is a key reason why we continue to generate traffic growth and why we drove broad unit share gains last year.” At the same time, Hennington said a reliable shopping experience is a foundational element of success in retail. To advance that initiative, Hennington said investments in remodeling and new stores will continue.

Mulligan also announced Tuesday that Target will expand its drive-up offerings that accept returns. Target began accepting returns via drive-up as a pilot program last year. That service “will be available across the chain by the end of the summer,” Mulligan said Tuesday.

Because Target owns its same-day capabilities, pickup and drive-up are more economical and flexible than other forms of digital fulfillment. As a result, Mulligan said average fulfillment cost per unit has come down 40% over the past four years. 

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