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Target CEO: Price is the Lever ‘We Pull Last, Not First’

Target increased total revenue 9.4 percent to $31 billion on net income of $1.54 billion in its fourth quarter. For 2021, the mass merchant surpassed $100 billion in revenue for the first time.

Despite coming up short of analyst estimates of $31.39 billion in revenue, the earnings beat propelled Target stock as much as 11 percent in Tuesday morning trading.

In a Nutshell: Continuing an ongoing trend, more than 95 percent of Target’s fourth quarter sales were fulfilled by its 1,926 stores. The company revealed in an investor meeting that it expects to open 30 stores per year starting in 2022, with 200 stores currently under renovation.

The new stores are designed to be flexible based on community and therefore will range in size, from mid-size locations in dense suburban areas to small-format stores in city centers like New York City’s Times Square and Charleston, S.C.

Target says remodeled stores see a 2 percent to 4 percent increase in year one on average, and a 1 percent to 2 percent boost in year two. More than half of the retailer’s stores have been remodeled with design elements including brighter lighting and elevated merchandise displays. These locations feature enhanced hold space and pickup areas for online fulfillment.

With 100 Ulta Beauty at Target shop-in-shops opened in 2021, the retailer is planning to open more than 250 new locations by the end of 2022, with plans to eventually operate at least 800.

Sales through same-day online services, which include Drive Up curbside pickup; Order Pickup and home delivery service Shipt, grew 45 percent in the 2021 fiscal year. The Minneapolis-based company already has seen 400 percent growth in these services in 2019, accounting for more than half of the company’s $13 billion digital growth. Target will add Starbucks orders and more robust returns capabilities to its Drive Up service in select stores ahead of the holiday season.

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Customers will be able to purchase Supplemental Nutrition Assistance Program (SNAP)-eligible grocery items on this year, building on the SNAP payment capabilities it offers in stores.

Executive vice president and chief financial officer John Mulligan said Target has seen a 30 percent increase in average sales per store in the last two years.

Mulligan indicated that Target has currently four more fulfillment centers in development over the next few years, adding to the two distribution centers it opened last year. By April, the retailer will have opened five new sortation centers across Dallas, Houston, Austin, Atlanta and Philadelphia, which further the company’s fulfillment ambitions by collecting product from local stores and allocating them for delivery. Target plans five more sortation centers in various metropolitan areas by the end of this year.

“This capability isn’t something we built overnight,” Mulligan said. “It’s the result of many strategic decisions we’ve made over time in a model that’s unique to Target. It works hand-in-glove with our ‘stores as hubs’ strategy. It leans on technology we’ve acquired and further developed like (last-mile fulfillment providers) Grand Junction and Deliv to optimize the most efficient route for every package. This in unlocked by integrating Shipt’s delivery capability into our last-mile operation.”

Average unit fulfillment costs dropped by more than 33 percent in 2021, prepping Target further for expanding next-day delivery at scale. Since 2019, these costs have tumbled 50 percent.

Combined traffic online and in stores increased by 8.1 percent, but the average transaction amount rose less than 1 percent compared with a year earlier.

The earnings report comes a day after the mass merchant said it would invest $300 million in boosting its starting wages and improve health care benefits. Starting wages will now range from $15 to $24 for hourly employees, based on role and local market.

Inventory at Target as of Jan. 29 totaled $13.9 billion, up 30.4 percent from last year’s $10.7 billion.

Fourth-quarter gross margin rate was 25.7 percent, down 110 basis points from 26.8 percent in 2020, reflecting pressure from increased supply chain costs due to increased compensation and headcount in the company’s distribution centers, alongside higher freight and merchandising costs.

For 2022, Target expects a more tepid year after its aggressive 2021 growth. The retailer anticipates low- to mid-single digit revenue growth in the upcoming year, with an operating margin rate of 8 percent or higher, low-single digit growth in operating margin dollars and high-single digit growth in adjusted earnings per share.

The company expects quarterly, year-over-year profit performance to vary throughout 2022, and “generally improve” as the year progresses. For the 2022 first quarter, Target projects operating margin rate will be “favorable” in relation to historical performance, but well below its first quarter 2021 rate of 9.8 percent.

CEO Brian Cornell said in the call that the variance is largely related to supply chain constraints and other cost increases, which will continue to pressure margins in the first half of 2022.

“As the year progresses, we’ll begin comping over the period of higher costs that emerged in the back half of last year, while our supply chain and merchandising strategies have more time to adjust,” Cornell said.

Target also introduced long-term financial expectations for the annual performance of 2023 and beyond. The retailer projects mid-single digit growth in total revenue, mid-single digit growth in operating income, high-single digit growth in adjusted EPS, capital expenditures of $4 to $5 billion, and after-tax return on invested capital in the high-20 percent to 30 percent range.

The business also will increase its quarterly dividend payment by an expected 20 percent to 30 percent.

Net Sales: Net sales at Target increased 9.4 percent to $30.6 billion, from $28 billion in the 2020 fourth quarter. Total revenue also increased 9.4 percent to $31 billion, from last year’s $28.3 billion.

Comparable sales grew 8.9 percent, on top of 20.5 percent in last year’s fourth quarter. Comparable traffic increased 8.1 percent on top of 6.5 percent in the 2020 period.

Digital sales went up 9.2 percent in 2021, on top of the 118.2 percent growth in digital throughout 2020.

Full-year sales increased 13.2 percent to $104.6 billion from $92.4 billion last year, reflecting a 12.7 percent increase in comparable sales combined with sales from “non-mature” stores. Full-year revenue of $106 billion grew 13.3 percent compared with 2020, reflecting sales growth of 13.2 percent and a 20.2 percent increase in other revenue.

Comparable sales grew 12.7 percent for all of 2021, on top of 19.3 percent in 2020. Similarly, comparable traffic grew 12.3 percent, on top of 3.7 percent last year.

E-commerce sales grew 20.8 percent in 2021, on top of the 144.7 percent growth in digital throughout 2020.

Net Earnings: Net income for the fourth quarter totaled $1.54 billion, or $3.21 per share, up 11.9 percent from last holiday’s $1.38 billion, or $2.73 per share, a year earlier.

When accounting for investments in its employees, price and inventory availability, fourth quarter adjusted EPS is $3.19, well ahead of the adjusted $2.86 per share expected by analysts surveyed by Refinitiv.

Operating income was $2.1 billion in the 2021 fourth quarter, up 14.1 percent from $1.8 billion in 2020. Fourth quarter operating income margin rate was 6.8 percent in 2021 compared with 6.5 percent in 2020.

CEO’s Take: Cornell stressed that the retailer will continue to focus on “values and affordability” in today’s inflationary environment, taking a long-term approach to pricing decisions.

“We have many levers to combat costs, and price is the one we pull last, not first,” Cornell said. “As a result, product costs within our assortment have risen faster than retail prices in recent quarters, reflecting this intentional approach and deliberate pacing. We expect this trend to continue, particularly in the first half of this year as we maintain our focus on affordability for our guests.”