Target Beats Expectations in Q4 But Remains Cautious

It wasn’t quite a bullseye, but it wasn’t off the mark, either. In a performance that reflects the current operating environment, Target reported better-than-expected revenue and earnings tempered by lower-than-anticipated profits during the fourth fiscal quarter. The mixed results were attributed to big discounts offered in the wake of high inventories, a move that slightly cut into profitability.

On the positive side, Target wrapped up a mostly-steady fourth quarter after previous lagging quarters for earnings and after issuing a warning in November that it seeks to slash $3 billion in costs over the next three years. Comparable sales rose 0.7% during the fourth quarter, an increase that the company credited “entirely” to a bump in traffic. Revenue was in the black, growing 1.3% compared to the previous fourth quarter to reach $31.4 billion. Fourth-quarter earnings per share came in at $1.89, below the EPS of $3.21 in 2021 but above the $1.40 that Wall Street analysts had projected.

In the e-commerce space, Target shared that its same-day services, including pickup, drive-up and Shipt, expanded 4.3% in the final period of its fiscal year. Same-day services now comprise more than 10% of total sales.

The company’s full year performance had several upticks as well. Total revenue in FY2022 climbed $3 billion to $109.1 billion. Full-year sales went up 2.8% to top $107.6 billion, while comps rose 2.2% following a 12.7% leap the previous year. The numbers were less rosy for operating income, down 57% during FY2022, and for the gross margin rate, which fell from 28.3% in 2021 to 23.6% in 2022 due to markdowns and clearance rates.

Operational highlights for the recently-concluded fiscal year include the addition of 23 new stores and the remodel of 140 locations. Target opened six new sortation centers in FY2022 and broadened its drive-up enhancements. Those enhancements include the pilot testing of drive-up Starbucks orders; Starbucks has been a boon for Target, as the company reported that it sold 170 million Starbucks orders during the 12-month period.

Grocery remains a bright spot for Target, as food and beverage netted double-digit comps for the third consecutive year. "We're pleased that our business delivered comparable sales growth in the fourth quarter, in what continues to be a very challenging environment. Strength in food and beverage, beauty and household essentials offset ongoing softness in discretionary categories,” said Chairman and CEO Brian Cornell. “This performance highlights the benefit of our multi-category merchandise assortment, which drives relevance with our guests in any environment, and is a key reason we grew traffic every quarter last year.”

As for fiscal 2023 guidance, Target reported that it expects comps to range from a low-single digit decline to a low-single digit increase. The company also anticipates an EPS somewhere between $1.50 and $1.90.

That pragmatic outlook was underscored by Cornell. "Looking ahead, we're focused on executing our long-term strategy, including continued differentiation through affordability, assortment, ease and convenience. At the same time, we're planning our business cautiously in the near term to ensure we remain agile and responsive to the current operating environment,” he explained.

Target shared some of those business plans at its annual financial community meeting this week. As part of a $4-5 billion investment, the retailer will expand its guest services, its operations network of stores and supply chain facilities and digital experiences, among other improvements.

In a value-centric marketplace, the company that has honed its reputation on “affordable joy” will introduce or expand more than 10 private label brands, add more items starting at lower price points of $3, $5, $10 and $15 and enhance its Target Circle loyalty program. Target is also making changes to improve convenience for e-comm shoppers, debuting drive-up returns that allow shoppers to return new, unopened items within 90 days of purchase. In addition, the company will add at least six new sortation centers by the end of 2026, to widen next-day delivery capability in many markets.

Meanwhile, reiterating its balance of cutting costs and sustaining growth, Target shared that will expand its recent enterprise efficiency efforts to simplify its operations and save between $2-3 billion over the next few years. At the same time, the chain is carefully planning to broaden its footprint, with 20 new stores.

Minneapolis-based Target Corp. is No. 6 on The PG 100, Progressive Grocer’s 2022 list of the top food and consumables retailers in North America, with nearly 2,000 locations.