Target’s new strategy pays off in largest sales bump since 2005

The retailer saw comparable store sales grow 5.3 percent during the fourth-quarter holiday shopping period.

By Jackie Crosby

Star Tribune

MINNEAPOLIS — Target Corp. is embracing the blur — and it paid off in its best full-year sales growth since 2005.

The blur is the way America shops these days. Sometimes we walk the aisles of a store, sometimes we shop online. We get things shipped to our homes or decide we can’t wait that long and drive to the store and pick it up ourselves.

Target now offers at least seven ways to shop, including same-day delivery and curbside pickup — all of it has boosted sales and traffic at its stores and online.

The Minneapolis-based retailer saw comparable store sales grow 5.3 percent during the vital fourth-quarter holiday shopping period, according to fiscal year-end results released on Tuesday.

The broad array of options helped the retailer gain market share in every major category — apparel, home, toys and entertainment, beauty and grocery.

“Our stores-as-hubs strategy isn’t putting our core business at risk,” Target Chief Operating Officer John Mulligan told a couple hundred investors gathered at an annual meeting in New York City. “It’s simply helping us grow faster.”

Two years ago, investors weren’t so sure. CEO Brian Cornell had stood on the same stage and laid out a three-year plan to spend $7 billion plus $1 billion in annual operating profits to overhaul stores, update supply-chain technology and prepare for the digital age.

Consumers were starting to shop differently, he said, and the company wasn’t moving fast enough. Investors sent the stock price tumbling, at a time when Amazon was grabbing market share and retailers were closing stores to invest in digital sales.

On Tuesday, Target stock surged after outperforming expectations, finishing the day at $76 a share, up nearly 5 percent.

“Two years ago, Target was a retailer that stood at a fork in the road,” said Neil Saunders of GlobalData Retail. “It chose the difficult path of investment and modernization rather than short-term profit maximization. It is now reaping the rewards and, in our opinion, will continue to do so over the year ahead.”

By turning its stores into mini-shipping centers, executives said the retailer was able to fulfill online orders at least a full day faster than when relying on distribution centers, which often are located on the outskirts of population centers.

More than 400 stores have undergone end-to-end transformations, with another 300 on the docket each of the next two years.

The strategy enables the retailer to spend less on freight and other fulfillment costs, averting $2.5 billion in new warehouse costs, according to the company.

Digital sales, which include those from and a mobile shopping app, accounted for about 10 percent of overall sales during the fourth quarter, a boost of 31 percent. Stores fulfilled nearly three-quarters of those orders.

Shipping directly from stores costs 50 percent less on an average unit than shipping from a warehouse. When customers come to the stores to pick up their online orders — the click and collect option — it slashes the cost more.

A relatively new store drive-up option, in which Target employees deliver online purchases directly to shoppers’ cars, quickly went from a small pilot project in the Twin Cities to a coast-to-coast option at more than 1,000 stores before the holiday season.

Executives said it has been one of the most popular services for consumers and highly profitable for the company.

“The convergence bTarget’s performance seemed to allay concerns that the investment in stores along with a promotional holiday season, rising labor costs and a free, two-day shipping offer might have eroded profit margins.

On the books it came out that way, but Wall Street took it in stride this time.

Net income fell to $799 million, or $1.52 a share in the quarter that ended Feb. 2, compared with $1.99 a year ago, in part because there was an extra week in sales last year.

Adjusting for the calendar and other one-time costs, earnings per share were $1.53, up from $1.36 a year ago and at the high end of Target’s forecast.

Executives explained that the sales mix as well as fulfillment costs also contributed to the result. Target made an aggressive play for toys and baby goods to capture sales after Toys ‘R’ Us and Babies ‘R’ Us stores closed. Sales of these lower-margin items outpaced those of higher-margin categories, such as home furnishings and beauty.

On the year, Target’s reported net earnings of $2.94 billion, or $5.51 a share. Adjusted for the calendar shift, earnings were $5.39, setting an all-time high for the company.

Moody’s analyst Charles O’Shea said in a research note that the company’s strategic initiatives are “clearly bearing fruit.”

“Target continued to build momentum in January, resulting in an exceptional fourth quarter and fiscal year, with margins holding steady despite a heavily-promotional holiday season combined with significant strategic investments across the board,” he wrote.

Target’s results came amid a busy earnings season for retailers, an industry that’s considered a bellwether for consumer confidence and economic resilience.

Kohl’s also reported that store traffic was up for the holiday shopping season. Same-store sales were up 1 percent, compared with the anemic 0.3 percent analysts had expected. Costco Wholesale will report Thursday.

Talk to us

More in Herald Business Journal

Members of Gravitics' team and U.S. Rep. Rick Larsen stand in front of a mockup of a space module interior on Thursday, August 17, 2023 at Gravitics' Marysville facility. Left to right: Mark Tiner, government affairs representative; Jiral Shah, business development; U.S. Rep. Rick Larsen; Mike DeRosa, marketing; Scott Macklin, lead engineer. (Gravitics.)
Marysville startup prepares for space — the financial frontier

Gravitics is building space station module prototypes to one day house space travelers and researchers.

Orca Mobility designer Mike Lowell, left, and CEO Bill Messing at their office on Wednesday, Aug. 16, 2023 in Granite Falls, Washington. (Olivia Vanni / The Herald)
Could a Granite Falls startup’s three-wheeler revolutionize delivery?

Orca Mobility’s battery-powered, three-wheel truck is built on a motorcycle frame. Now, they aim to make it self-driving.

Catherine Robinweiler leads the class during a lab session at Edmonds College on April 29, 2021. (Kevin Clark / The Herald)
Grant aids apprenticeship program in Mukilteo and elsewhere

A $5.6 million U.S. Department of Labor grant will boost apprenticeships for special education teachers and nurses.

Peoples Bank is placing piggy banks with $30 around Washington starting Aug. 1.
(Peoples Bank)
Peoples Bank grant program seeks proposals from nonprofits

Peoples Bank offers up to $35,000 in Impact Grants aimed at helping communities. Applications due Sept. 15.

Workers build the first all-electric commuter plane, the Eviation Alice, at Eviation's plant on Wednesday, Sept. 8, 2021 in Arlington, Washington.  (Andy Bronson / The Herald)
Arlington’s Eviation selects Seattle firm to configure production plane

TLG Aerospace chosen to configure Eviation Aircraft’s all-electric commuter plane for mass production.

Jim Simpson leans on Blue Ray III, one of his designs, in his shop on Friday, August 25, 2023, in Clinton, Washington. (Ryan Berry / The Herald)
Whidbey Island master mechanic building dream car from “Speed Racer”

Jim Simpson, 68, of Clinton, is using his knowledge of sports cars to assemble his own Mach Five.

Inside the new Boeing 737 simulator at Simulation Flight in Mukilteo, Washington on Wednesday, Sept. 20, 2023. (Annie Barker / The Herald)
New Boeing 737 simulator takes ‘flight’ in Mukilteo

Pilots can test their flying skills or up their game at Simulation Flight in Mukilteo.

An Amazon worker transfers and organizes items at the new PAE2 Amazon Fulfillment Center on Thursday, Sept. 14, 2023, in Arlington, Washington. (Ryan Berry / The Herald)
Amazon cuts ribbon on colossal $355M fulfillment center in Arlington

At 2.8 million square feet, the facility is the largest of its kind in Washington. It can hold 40 million “units” of inventory.

A computer rendering of the North Creek Commerce Center industrial park in development at 18712 Bothell-Everett Highway. (Kidder Mathews)
Developer breaks ground on new Bothell industrial park

The North Creek Commerce Center on Bothell Everett Highway will provide warehouse and office space in three buildings.

Dan Bates / The Herald
Funko president, Brian Mariotti is excited about the growth that has led his company to need a 62,000 square foot facility in Lynnwood.
Photo Taken: 102312
Former Funko CEO resigns from the Everett company

Brian Mariotti resigned Sept. 1, six weeks after announcing he was taking a six-month sabbatical from the company.

Cash is used for a purchase at Molly Moon's Ice Cream in Edmonds, Washington on Wednesday, Aug. 30, 2023. (Annie Barker / The Herald)
Paper or plastic? Snohomish County may require businesses to take cash

County Council member Nate Nehring proposed an ordinance to ban cashless sales under $200. He hopes cities will follow suit.

A crowd begins to form before a large reception for the opening of Fisherman Jack’s at the Port of Everett on Wednesday, August 30, 2023, in Everett, Washington. (Ryan Berry / The Herald)
Seafood with a view: Fisherman Jack’s opens at Port of Everett

“The port is booming!” The new restaurant is the first to open on “restaurant row” at the port’s Waterfront Place.