Target accelerates omnichannel game plan

To spur its omnichannel transformation, Target Corp. this year plans to launch a new front-of-store layout and step up small-format store openings — including an even smaller concept — as well as expand fresh grocery pickup and the use of robotics for inventory replenishment.

Target Chairman and CEO Brian Cornell unveiled the strategy Tuesday as the company reported higher sales and earnings for the 2019 fourth quarter and fiscal year. The Minneapolis-based discount store chain, however, fell short of Wall Street’s consensus revenue estimates despite topping analysts’ earnings-per-share forecast.

“Target is winning in the marketplace because of our differentiated investment strategy, durable financial model and our team's incredible work in reinventing the ‘Target run’ to deliver a shopping experience like nothing else in retail,” Cornell said in a statement. “As we look to 2020, we’ll continue to elevate our popular same-day services and expand our ambitious small-format and remodel programs to create an even easier and more convenient experience that inspires our millions of guests to keep shopping Target in new and different ways.”

Target Chairman and CEO Brian Cornell (Photo courtesy of Target)

On the brick-and-mortar front, plans call for 2020 to be “the biggest year to date for Target's small-format expansion,” the retailer said. Slated to open are almost three dozen new small stores, which range from 12,000 square feet to around 40,000 square feet, with the latter representing less than one-third the size of a typical 130,000-square-foot Target store.

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Also coming this year will be micro-format stores. Target said it aims to explore sites for stores of about 6,000 square feet — or half the size of its most compact small-format store — to reach customers in urban neighborhoods and on college campuses. According to the company, the first lease for this smaller store format is expected be signed in 2020, with an opening date projected for next year.

Target opened its 100th small-format store last summer, and for 2019 these stores exceeded $1 billion in sales, the company reported. Also this year, dozens of the small-format locations with parking lots will be adding Drive Up pickup service.

“We've continued to grow our store network, opening about 30 new small-format stores each year in key urban markets and college campuses,” Cornell told analysts in a conference call on Tuesday. “And just like our remodel program, we’re fine-tuning our approach, with each project like any new neighborhood. You have to really live in it to figure out the daily rhythms and routines.”

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Looking at its broader store base, Target said it expects to complete over 1,000 store remodels nationwide by the end of 2020, with about 300 locations getting remodels this year. On average, remodeled Target stores experience a sales lift of 2% to 4% in the first year and more than 2% in the second year.

Remodels in 2020 will include a pilot of a new front-of-store layout that Target said “creates an even more welcoming first impression.” Enhancements include fresh flower displays, a curated product assortment, and lower walls and counters to make it easier for associates to serve customers. Plans also call for a new electronics department in 200 stores, with another 200 locations getting an electronics upgrade in 2021. Changes include improved showcases for top brands and dedicated spaces for tech consultants to help shoppers.

As of Feb. 1, Target had 1,868 stores overall, up from 1,844 a year earlier. Of those locations, about 80% were 50,000 to 169,999 square feet, 15% were 170,000 square feet or more, and 5% were 49,999 square feet or less.

“We’re putting our stores at the center of our strategy. In the last three years, we spent more than $4 billion remodeling our stores, completing hundreds each year, transforming them into showrooms, fulfillment hubs and service centers. With these projects, we’re seeing an average sales lift between 2% and 4%, and we’re getting smarter with each cycle, enhancing the shopping experience, driving operational improvement and driving down costs through efficiencies of scale,” Cornell said in the call.

“I can’t tell you how many times I’ve heard guests say how much they love the broader range of merchandise, and all the new categories we’re putting in the stores,” he added. “The truth is, we’re not adding categories. We’re not adding SKUs. In fact, in many cases, we’re taking them away. But it’s the way we’ve cross-merchandised product and the improving presentation that’s making these stores more inspiring and easy-to-shop.”

Online Target shoppers, meanwhile, will see more in grocery. The company said that this year it’s ramping up its assortment of fresh grocery and adult beverage items available through same-day Order Pickup and Drive Up service. Customers will be able to order popular groceries such as milk, eggs and bananas, among others, and have the items brought to their car curbside (Drive Up) or ready to be picked up inside a Target store (Order Pickup).

Expanded fresh grocery pickup will be tested in Minneapolis-area stores this spring, Target said, and nearly half of the retailer’s stores are slated to have the service for the holiday season. The company also plans to pilot adult beverage fulfillment via Order Pickup and Drive Up in more than 100 in Florida and Oregon in the spring, and most of the chain’s stores will offer the services in time for the holiday season.

In 2019, sales for Drive Up curbside service surpassed 500%, while Order Pickup saw sales growth of almost 50%, Target reported.

Target offers two same-day click-and-collect services: Drive Up curbside pickup and Order Pickup inside stores.

“We’re changing consumer behavior with same-day. Same-day shoppers are making more trips, spending more money and putting Target first in their consideration set. You can call it our very own operations-based loyalty program,” Cornell noted. “Today, our guests are letting our team pick the bulky stuff like bottled water and paper towels, and then they're coming in to shop the categories that are just a lot more fun. Once a guest tries to service three out of four times, they’ll do it again within three months. In fact, our adoption rates continue to outpace expectations. In 2019, Order Pickup was up almost 50% and Drive Up more than 500%. And today, we have more than 100,000 Shipt shoppers delivering orders for Target and almost 100 other retail brands.”

On the supply-chain side, to improve speed and efficiency, Target aims to start scaling robotics solutions — now in development and testing across the country — to replenish inventory to hundreds of stores by the summer of 2020. The company said these automated solutions allow for precise sorting on an aisle-by-aisle basis, helping store associates fill shelves more quickly while cutting down backroom inventory.

Also this year, Target said it plans to open new warehouses near key markets, including New York and Southern California, for more efficient replenishment of stores in high-volume areas.

“For six years running, digital has grown at least 25% [in sales] each year, and given the magic of compound growth rates, since 2014, we’ve double the business and then nearly doubled it again. More and more guests are gravitating toward more cost advantage within these methods,” Cornell said in the analyst call. “Today, our stores are filling 80% of the digital volume, which is relieving a lot of margin pressure despite the aggressive sales growth. And that's just one example of how we’re managing growth with a keen eye on profitability. When you look at our ROIC [return on invested capital] for the past three years, you can see strong, efficient and responsible growth in this key metric.”

For the 2019 fourth quarter ended Feb. 1, Target totaled revenue of $23.4 billion, up 1.8% from $22.98 billion a year earlier. Comparable sales rose 1.5% year over year, including comparable digital sales growth of 20%. Target said same-day services — Order Pick Up, Drive Up and Shipt — represented more than 80% of the quarter’s digital comp-sales gains.

Full-year revenue came in at $78.11 billion, an increase of 3.6% from $74.43 billion in fiscal 2018. Overall comp sales climbed 3.4%, with digital comp sales up 29% — the sixth straight year that the retailer has grown comparable digital sales more than 25%, Target noted. Same-day services for 2019 saw sales rise over 90%, or almost three-quarters of the company’s digital comp-sales growth.

At the bottom line, Target posted fourth-quarter net income of $834 million, or $1.63 per share, compared with $799 million, or $1.52 per share, a year ago. Adjusted earnings per share (EPS) for the 2019 quarter was $1.69 versus $1.53 a year earlier. Analysts, on average, had projected adjusted EPS of $1.65, with estimates ranging from $1.57 to $1.74, according to Refinitiv/Thomson Reuters.

Full-year 2019 net earnings were $3.28 billion, or $6.42 per share, compared with $2.94 billion, or $5.55 per share, in fiscal 2018. Adjusted EPS came in at $6.39 for 2019 versus $5.39 for 2018. Analysts’ consensus estimate was for fiscal-year adjusted EPS of $6.35, with projections running from a low of $6.28 to a high of $6.43. Analysts had forecast Target’s revenue at $23.49 billion for the 2019 fourth quarter and $78.18 billion for the fiscal year.

"With 11 consecutive quarters of positive comparable-sales growth, driven by healthy performance in both our stores and digital channels, Target’s results demonstrate that we’ve built a sustainable business model that drives strong topline growth and consistent bottom line performance,” Cornell said in a statement. “The strategic investments we’ve made over the past several years to elevate the shopping experience, curate our multi-category assortment at scale, and deliver ease and convenience through our fulfillment capabilities are deepening our relationship with our guests. As we look ahead to 2020 and beyond, we are well-positioned to build on this strong foundation to further differentiate Target and drive long-term, profitable growth.”