Target to Invest $4 Billion Annually to Grow Its Ecosystem

The retailer plans to accelerate the pace of new store openings, update fulfillment capabilities and add more local distribution centers.

By Kellie Ell on March 2, 2021 WWD

Target continues to set the pace for how consumers shop in the era of coronavirus. The big-box retailer revealed fourth-quarter and full-year earnings Tuesday morning before the bell, registering more than $1 billion in profits for the third quarter in a row due to growth throughout Target’s ecosystem, including increased demand for same-day services like drive-up and home delivery. Now the retailer is set to embark on the next leg of its growth strategy. Target plans to invest roughly $4 billion annually over the next several years to continue scaling the business. The specifics include accelerating the pace of new store openings and remodels, including adding additional small-format stores to the fleet; updating fulfillment capabilities, such as enhancing features in the Target app and increasing the assortment of products available through drive-up, and opening local fulfillment hubs, or “sortation centers.” “Following years of investment to build a durable, scalable and sustainable business model, we saw record growth in 2020, as our guests turned to Target to safely provide for their families throughout the pandemic,” Brian Cornell, chairman and chief executive officer of Target, said in a statement. “With the strength of our unique, multicategory assortment and the flexibility we offer through our reliable and convenient fulfillment options, we gained nearly $9 billion in market share in 2020 and grew our revenue by $15 billion, which is more than the 11 prior years combined. As we look ahead to 2021 and beyond, we see continued opportunity to invest in our business and our team, building on the strong foundation we’ve established to drive market share gains and deliver profitable growth for years to come.” Michael Fiddelke, Target’s chief financial officer, added that the continued investments will help solidify Target’s place in the retail landscape as “the preferred one-stop-shop for millions of guests.” Investments such as the new sortation centers, for example, will allow Target to move product faster for cheaper as the demands for delivery continue to surge. (Target’s own delivery service Shipt grew 300 percent in 2020, year-over-year.) The inaugural sortation center in Minneapolis will serve as a trail run, but the company plans on opening five more centers later this year.

Meanwhile, the retailer also plans on entering new markets, such as urban areas and college towns, by way of its small-format stores. In 2020, Target added 29 new small-format stores to its fleet — the most in a single year to date — and plans on adding another 30 to 40 a year over the next few years. “We remain extremely bullish on our college sites,” Fiddelke said during Tuesday morning’s Financial Community Meeting with analysts. “Even as the pandemic sent students to online classrooms and sales softened at many of those stores, we see them as a long-term play to serve the college guests, many of whom are on the brink of adulthood and building lifelong shopping habits.” In fact, Cornell said even before the pandemic started, Target’s team was mapping out how it would respond to the inevitable changes in the retail landscape. “But 2020 accelerated everything,” the CEO said on the call. “As we designed our strategy and invested accordingly, we relentlessly asked ourselves what products and services those stores should offer, where they should be located, how their operations should be tailored to meet neighborhood needs and ultimately how to make our stores work together with all of our other assets as one shopping platform that would keep guests turning to Target however they want to shop. And in answering those questions, we did two things at once: We placed the physical store more firmly at the center of our omni-channel platform and we created a durable, sustainable and scalable business model that puts Target on a road of our own.

“When we began this journey, we didn’t know we would be facing a global pandemic, mass quarantines, rapid unemployment and the need to limit the number of people in public spaces,” Cornell continued. “And yet, when those threats emerged in 2020, we were ready. And without hesitation, millions of American families turn to Target like never before. That happened because of decisions we made four and five years ago.” The formula seems to be working, with Target growing on all fronts during the recent quarter and a year of uncertainty. Total revenues for the three-month period ending Jan. 30 grew 21.1 percent to $28.3 billion, up from $23.3 billion the same time last year. That’s 20.5 percent growth in comparable sales for the quarter, year-over-year, while comparable traffic grew 6.5 percent. Store comparable sales increased 6.9 percent during the quarter, while digital comparable sales surged 118 percent. And consumers spent more each time they shopped at Target, whether in stores or online: average ticket value increased 13.1 percent during the quarter, year-over-year. Same-day services — which include buy online, pick up in stores, drive-up and Target’s delivery service Shipt — were up 212 percent for the quarter, with drive-up growing 500 percent, year-over-year. The company logged $1.38 billion in profits for the quarter as a result, up from $833 million the same time last year. For the year, total revenues were $92.4 billion, up from $77.1 billion in 2019. Target registered $4.36 billion in profits in 2020, up from nearly $3.3 billion a year earlier. “Target’s ability to manage the COVID-19-related surge in revenue during Q4 and for the full-year while maintaining margins validates the soundness and effective execution of its continuing strategic multiyear investment program,” said Charlie O’Shea, Moody’s vice president. “A $15 billion increase in revenue for the full-year with stable margins is staggering, particularly when core competitors Walmart and Amazon are also running on all cylinders. We believe [Target’s] foundation has strengthened to the point that it will continue to excel regardless of the environment.”

Target’s mix of essential and discretionary items, including a growing assortment of fashion, beauty and other coveted third-party products also helped the retailer grow. Brands that once competed for space in department stores are now vying for a spot in Target stores and The list includes luxury lingerie designer Journelle, Levi’s Red Tab products, New Zealand beauty brand Monday Haircare, Thinx period panties, Ulta Beauty, Priyanka Chopra’s new hair care brand Anomaly and Disney, which opened about a dozen shops-in-shop in select markets in late 2019. Earlier this month, the Minneapolis-based retailer revealed Apple shops-in-shop were launching in 17 Target stores, possibly more this fall. In addition, Target has a number of its own in-house labels. The company’s All in Motion activewear brand surpassed $1 billion in revenues after only a year on the market. In addition, Target is growing out its food business, expanding adult beverage pickup to 800 more stores in the next few months.

The company has also recently updated its senior leadership team and continues to invest in its workforce. The retailer ended the quarter with 1,897 stores, cash and cash equivalents of $8.5 billion and $11.5 billion in long-term debt. Target is not providing forward-looking guidance, but said product assortment will remain a focal point as Target continues to take market share. Cornell told reporters during a media call Tuesday that the company captured about $3 billion in share during the holiday period alone, a combination of gains in electronics, home, essentials, food and beauty. “But we also took share in the apparel category where guests continue to come to us to shop for their apparel needs,” Cornell said. “[Shoppers] are looking for the opportunity to shop our stores and find new items. They’re tired of the yoga pants and really appreciate some of the new assortment we have in apparel.” The CEO added that the company’s gains have been “broad-based,” coming from a number of players in the fashion world. “We moderate where we’re gaining that share very carefully and we’re picking it up from both our traditional competitors, some of the department store players and specialty,” Cornell said. “We always begin by talking to the guests and understanding what they’re interested in. The categories and the brands that they’d like to see in our assortment.” When Target was considering adding Ulta Beauty shops-in-shops, for example, Cornell said more than 90 percent of shoppers surveyed “absolutely loved that idea.” “They thought it was absolutely the right brand and they were excited about Ulta Beauty and a shop within a shop being part of their Target experience,” he said. “So, when we get really strong cues like that — as we did with Levi’s or Disney or Apple — that the guest loves seeing that brand as part of our portfolio, we’ll move forward. We’ll be very selective. But it always starts with what’s right for our guests, what’s right for our brand and partners that have the same values and beliefs that we do.” Shares of Target, which closed down 6.71 percent to $173.61 on Tuesday, are up more than 61 percent, year-over-year, leaving the company with a market cap of nearly $87 billion.