New York (AP) — Target plans to invest up to $5 billion this year to expand services for customers, including boost sales service for returns, renewals at 175 stores, and improvements to online shopping.
The Minneapolis retailer reported investments Tuesday during its annual investor meeting as it reported a 43% dip in profit for the holiday quarter, reflecting the ongoing challenges of balancing cautious consumer spending and rising costs.
Target issued a cautious outlook for the year as inflation squeezed household balance sheets, but it beat Wall Street’s forecasts for the fourth quarter and shares were up nearly 3% in mid-day trading, reversing an earlier sell-off.
“We realize the landscape is unpredictable, and there are a lot of challenges on the horizon in the near term,” he said. Target CEO Brian Cornell told analysts at the meeting Tuesday.
Target’s more modest 2023 forecasts follow weaker forecasts from Walmart and Home Depot last week. Rising costs of everything from food to gas are weighing heavily on Americans, though there has been some easing of inflation in recent months.
Part of the reason for the easing of inflationary pressures, at least for some things, is a campaign by the Federal Reserve to cool spending and the economy. These efforts make it more expensive to use credit cards, which can negatively affect retailers.
But how Americans spend is also changing. More people are spending money on travel or going out to dinner than they were during the pandemic, which could mean they are spending less in stores.
Wal-Mart said it expects sales in stores open for at least a year for its U.S. business to rise 2% or 2.5% for the year, while Home Depot expects growth for that metric to be roughly flat this year compared to last year.
For the full year, Target expects comparable sales — those from stores open for at least a year and online channels — to range from a low single-digit decline to a low single-digit increase.
“We plan our business prudently for the near term to ensure we remain flexible and responsive to the current operating environment,” Cornell said in a statement.
Target’s total comparable sales increased 0.7% in the fiscal fourth quarter over a year ago. It was driven by increased customer traffic, but customers are shifting their spending to essentials like food and paper towels rather than discretionary items like fashion. Grocery stores usually have a much lower profit margin. However, Target said shoppers are drawn to new, trendy clothes, which is a major reason for the increase in store visits.
Cornell indicated that the company entered the year in “Stock position is very good”, Its conservative approach is reflected in discretionary items. Inventories for categories like fashion were nearly 13% lower in the fourth quarter than they were a year ago.
Target has had more success with its business than other large retailers likely because it relies more on discretionary items like clothing and home furnishings. More than 50% of Wal-Mart’s business in the United States comes from grocery stores. That number is 20% at Target.
This was the fourth consecutive quarter that the retailer’s profits have declined. Target reported a 52% decline in profits in the third quarter, a 90% decline in the second quarter, and a 52% decline in the first.
In early June, Target warned that it was canceling orders from suppliers and cutting prices sharply due to an apparent spending shift by Americans.
Last November, Target said it was cutting expenses with the goal of saving $2 billion to $3 billion over the next three years. At the time, she said, shoppers were waiting to buy on sale, buying smaller packages and trade-in store brands rather than national brands, which tend to be more expensive.
But even as sales decline at Target’s ventures, the retailer is moving forward to accelerate its e-commerce strategy. It announced last week that it would spend $100 million to develop a larger network of parcel sorting centers that would reduce the cost of delivering orders online while increasing delivery speed.
Target said its payment service for returns will roll out to all stores by the end of this summer. Customers will be able to return most new, unopened items within 90 days of purchase without leaving their car.
Target also plans to open about 20 new stores, in addition to renovating 175 of them. One of the biggest attractions was its partnership with Ulta Beauty in having in-store stores. The company said its sales from Ulta Beauty at Target last year were four times higher than they were in 2021.
Target also aims to launch or expand more than 10 owned brands. Plus, the retailer will entice price-sensitive shoppers with more items starting at $3, $5, $10, and $15.
Fourth-quarter earnings fell to $876 million, or $1.89 per share, for the quarter ended Jan. 23. This compares to $1.54 billion, or $3.21 per share, in the same period last year.
Sales rose 1.3% to $31.4 billion. Analysts had expected earnings of $1.40 per share on sales of $30.7 billion, according to FactSet.
The gross margin rate for the fourth quarter was 22.7%, compared to 25.7% in 2021, reflecting pressure from writedowns, net merchandise costs, and so-called deflation, reflecting inventory losses related to factors such as theft, fraud, or damage.
The company expects adjusted earnings per share to be in the range of $7.75 to $8.75 for the year. Analysts had expected $9.18, according to FactSet.
Over the next three years, Target said it expects the operating income margin rate to reach, and begin to exceed the pre-pandemic rate of 6% as early as fiscal 2024, depending on economic recovery and consumer demand.
Shares rose $4.42 to $171.23 on Tuesday.