Target Eyes Slower 2022 Growth, Plans Sorting Center Expansion

After strong Q4 and full-year comparative sales growth of 8.9% and 12.7%, Target is projecting low- to mid-single digit growth for 2022 as it laps year-ago consumer spending trends fueled by COVID-19 government stimulus programs, said Chief Financial Officer Michael Fiddelke at the company’s Tuesday investor day, held virtually and in person in New York.

Some 95% of Q4’s $30.6 billion revenue was fulfilled by stores, said management, as the company continues to build out its stores-as-hubs strategy. Growth was split nearly 50-50 between stores and digital dollars, said CEO Brian Cornell. Target grew traffic by more than 12% in 2021 on top of about 4% in 2020, he said. 2021 revenue was $106 billion. Shares closed 9.9% higher Tuesday at $219.55.

Cornell recognized “financial hardships” consumers are facing from higher prices. Supply chain constraints are “working themselves out but will likely take more time,” he said. The crisis in Ukraine is exacerbating overall uncertainty, he said. Target has the “global scale to keep the product people want and need moving through our pipeline,” he said.

Target will concentrate on “value and affordability in this inflationary environment,” taking a “thoughtful, long-term approach to pricing decisions,” said Fiddelke. Target has “many levers to combat costs, and price is the one we pull last, not first,” he said. Product costs have risen faster than retail prices in the past few quarters, Fiddelke said, “reflecting this intentional approach and deliberate pacing.” He expects the trend to continue through the first half as Target focuses on "affordability" for customers.

To help consolidate consumers' stops while shopping, Target will pilot mobile ordering from Starbucks via its Drive Up service in select locations this year, said Mark Schindele, chief stores officer. The retailer is also testing product return capability via the Drive Up lane so customers will be able to “check everything off a shopping list and return a product that wasn’t quite right at the same time -- and without leaving the car,” he said.

Officials highlighted the company’s Roundel business, which targets advertising on Target.com to create a “more relevant, personalized” customer experience. The business drove more than $1 billion in value last year, and the company expects to double that in the next few years.

Executives underscored the retailer’s stepped-up efforts to be inclusive and relevant to different shopping groups. Chief Marketing and Digital Officer Cara Sylvester said the company expanded efforts to focus on Black-owned businesses during Black History month to make it an “always-on,” relevant approach so customers can easily shop Black-owned businesses all year round. Similar filters are available for Latino-, Asian- and women-owned brands, she said, citing “inclusive experiences where guests feel seen and heard.”

Cornell compared Target in 2022 with the company’s struggles five years ago when the stock price dived after the executive cited a plan to add and upgrade stores at a time when “retail was about closing stores, not opening them.” Target has grown from 1,800 to almost 2,000 stores in the period and is opening stores in a range of sizes, depending on the location. It’s focusing on mid-sized stores this year, a new footprint for the company, though it will move into larger locations where it makes sense, said Chief Operating Officer John Mulligan.

Since 2017, Target has remodeled stores across half the chain, with 200 more slated for this year. Remodels produce a 2%-4% sales lift in the year following the redesign, said Mulligan, and another 1%-2% in the second year. Mid-size stores in the 60,000-90,000-square-foot range, including “a lot of old Kmarts,” are big enough to provide the full Target store experience with a back room that supports digital fulfillment, he said. The retailer has a plan to open 30 small- and mid-size stores this year, including in Charleston, South Carolina, and Times Square in New York. It will also open a 144,000-square-foot store, he said, without giving the location.

Target’s average sales per store have risen 30% in the past two years, leading the company to build capacity to support further growth, said Mulligan. Before 2021, Target hadn’t added a new regional distribution center in over a decade, while sales grew 40% over the span, he said. Rather than adding buildings, it invested in automation and robotics to improve efficiency in existing sites, Mulligan said. “With an additional $27 billion in sales over the last two years, we can’t rely on that alone,” he said, noting Target opened two new distribution facilities last summer in New Jersey and Chicago and has four more in development that will open in the next few years. It’s also adding sorting centers to accelerate last-mile performance, Mulligan said. The first, a pilot outside of Minneapolis, has been operating for just over a year.

Before the sort center opened, store teams fulfilled online orders, which were picked up once a day. Now, Target trucks collect packages from the over 40 Twin Cities-area stores throughout the day, “keeping orders moving,” Mulligan said. The packages are organized by ZIP code at sort centers and allocated to partners for direct delivery. Target integrated Shipt delivery into the service last year. Packages are delivered in "just over a day on average," while the average unit fulfillment cost dropped by almost a third, he said. It plans additional sorting centers this year in Atlanta, Austin, Dallas, Houston and Philadelphia.