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Target Has ‘Several’ New Private Brands in the Pipeline

Target has the green light to spend $4 billion annually on supply chain and fulfillment enhancements, encouraged by the same-day delivery success it has enjoyed in the past year.

In a Nutshell: The retailer’s decision to invest in the necessary systems infrastructure years ago facilitated last year’s pandemic pivot to curbside and in-store pickup in addition to Ship’s same-day delivery.

CEO Brian Cornell said Tuesday after the company reported Q4 and full-year results that Target achieved record growth in 2020, gaining nearly $9 billion in market share and growing revenue by $15 billion—more than the 11 prior years combined, he noted.

“The enormous investments we made in supply chain, store operations and technology capabilities are already powering exponential growth and digital commerce enabled us to use our stores and showrooms and service centers [also] as hubs for digital fulfillment,” Cornell said during an investor day presentation Tuesday, adding that Shipt grew by more than 300 percent last year, a trajectory that’s likely to continue.

Target now has 10 company-owned brands, such as Cat & Jack, that each generate $1 billion or more, with four now at $2 billion. Last week the mass merchant launched the limited-time Levi’s for Target collection of home goods, apparel and more. “This is the first foray by Levi’s into this category. And it’s a great example of combining their strengths with ours, including our incredible sourcing and product design and development capabilities to forge new potential for both our brands,” Cornell said.

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Kristina Hennington, chief growth officer, said company-owned brands represent about one-third of total sales and even more of gross margins, which help to sustain Target’s enterprise investments.

Hennington addressed how athleisure private label All In Motion needed just one year to become a billion-dollar brand. Target homed in on customers wants through workout classes that employees attended, and also consulted fitness experts. That extra mile in R&D helps Target build brands that resonate with customers, she said.

“This year, we’ll announce and launch several new owned brands in areas where we know Target can make a difference,” Hennington said.

Chief operating officer John Mulligan said Target leveraged a focus on replenishment in order to weather 2020, “because the whole operation relies on getting the right product to the right place at the right time.”

Ninety-five percent of all quarterly sales online and in person was fulfilled through Target stores, “which is why it’s critical to have enough of the inventory” that customers want to buy, he added. “Without that piece, the operation simply stops.”

Because shopping behaviors changed nearly overnight and moved online, Mulligan said Target sent “hundreds more deliveries than we planned every day to replenish stores fast and often.” And when certain goods sold out, Target worked with vendors to expedite deliveries and re-allocate inventory. The chain front-loaded seasonal merchandise deliveries in preparation for the holiday, applying lessons learned earlier in the year, he said.

Mulligan said shipping online orders from stores saved about 40 percent of the cost of fulfilling from a warehouse. Order pick-up, which has been around for years, saw 70 percent growth in 2020.

“I’ve said countless times that a benefit of using our stores as hubs is our ability to ramp up in peak times and ramp back down based on demand,” Mulligan said. “This last year, the stores ramped up and stayed there.” He credited technology process improvements with inflating the average sales per square foot by nearly 30 percent between 2016 and 2020. Target plans to open two distribution centers this year, and another two in 2022.

“We’ll also continue to simplify the unload process once product reaches the store. In a nutshell, it all comes down to how we sort and organize millions of items before they arrive at the stores’ loading dock,” he said, noting that two solutions are being tested, one for slower-moving products and the other using robotics to sort and sequence inventory. Target uses analytics to order and restock products 25 percent faster than previous systems. This year the retailer plans to expand pickup options for categories including apparel and fresh food, and to also number the drive-up spaces in parking lots so employees can quickly locate a customer’s vehicle.

Michael Feddelke, chief financial officer, said that 2020’s $15 billion growth equates to adding more than 300 new Target stores. The retailer plans annual capital expenditures in the “$4 billion range in each of the next few years,” he said, noting plans to ramp up store remodels that were paused last year. Target continues to focus on opening smaller-footprint stores and investing to enhance replenishment capabilities.

Net Sales: For the three months ended Jan. 30, total revenue rose 21.1 percent to $28.34 billion from $23.40 billion, including a net sales gain of 21.0 percent to $28.0 billion from $23.13 billion. The balance was from other revenue.

Target said comparable store sales rose 6.9 percent, while quarterly digital sales grew 118 percent. Average tickets climbed 13.1 percent.

Target said its quarterly operating income margin rate was 6.5 percent in 2020, versus 5.1 percent the prior year. Gross margin rate was 26.8 percent, up slightly from 26.3 percent in 2019, “reflecting the benefit of merchandising actions, most notably the unusually low markdown rates, partially offset by the impact of higher digital fulfillment and supply chain costs, along with the impact of category mix,” it said.

Cornell said Target in 2016 had just 30 small-format stores, up to 140 today. Target will add up to 40 per year over the next several years, he added.

For the year, total revenue was up 19.8 percent to $93.56 billion from $78.11 billion, which included a net sales gain of 19.8 percent to $92.40 billion from $77.13 billion. The balance was from other revenue.

Earnings: Net income was up 65.6 percent to $1.38 billion, or $2.73 a diluted share, from $834 million, or $1.63, a year ago. On an adjusted basis, diluted earnings per share was $2.67.

Wall Street expected adjusted diluted earnings per share of $2.54 on revenue of $27.48 billion.

Feddelke said Target wasn’t providing guidance but noted potential changes ahead in consumer behavior. Consumer spending is likely to evolve if remote working remains the norm, he added. Home-friendly categories could slump as some consumers return to offices. However, the beauty and apparel sectors, which sagged in 2020, could benefit from a return to social and professional activities.

For the year, net income rose 33.1 percent to $4.37 billion, or $8.64 a diluted share, from $3.28 billion, or $6.36, a year ago.

CEO’s Take: “Target is as synonymous with same-day and safety as it is with style and swagger,” he told Wall Street analysts. “That is a very strong position to be in. And here’s where we intend to go with it. First, we’ll continue to focus on market share over the long term. We believe our experience including our fulfillment options, inspiring assortment…safety and personal service will convert more and more consumers” into customers.