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Target: Getting Its Mojo Back, Inventories Look Good

Thomas Paulson
Mar 3, 2023
Target: Getting Its Mojo Back, Inventories Look Good

Target’s Q4 2022 sales increase was less than Walmart’s, but this largely reflects its lower consumables mix (45% compared to 67% at Walmart). What wasn’t expected in a time of high inflation, was a flat comparable store ticket compared to a year ago. A "flat" ticket reflects the extent to which they lowered clearance prices and increased the “value” of its assortment with more entry-level priced items and more sales of owned-brands. Viewed from a different perspective, overall sales increased +1.2%, cost of goods sold (COGS) increased +5.2%, and units sold grew ahead of that.

Additionally, Target's inventory turns improved from 4.9X to 6.3X. With inventory levels “clean”, Target enters 2023 with more agility for what is likely to be a more dynamic consumer environment. Getting inventories clean before 2023 was management’s objective for Q4 2022 and they accomplished that. (See the economics section below and our comments on Target’s Q3 2022 update here.)

For Q1 2023 and 2023, Target offered an outlook for flattish comparable-store sales  growth. As shown by, Target--like most retailers--saw visitations pick up in the second half of December. However, unlike the many that experienced a fade during January, Target’s momentum continued due to a combination of steep clearance deals and management’s intense focus on driving traffic.

  • Target’s 4Q 2022 earnings release quotes CEO Brian Cornell saying:

“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. We’re pleased that we entered the year in a very healthy inventory position, reflecting our conservative approach in discretionary categories and our commitment to reliability in our frequency businesses.”

  • In conjunction with its 4Q 2022 update, Target hosted a Capital Markets Day event this past week where senior management offered additional thoughts on the current state of the consumer and longer-term strategic initiatives. Their characterization of the current consumer mindset was consistent with Walmart’s. Cornell said, “consumers constrained by inflation and have to be very selective about where they shop and what they buy." Chief Growth Officer Christina Hennington also noted, “We're in an environment where consumers are making trade-offs. More of the same is not going to get it done. And so really investing in innovation and something that excites them.” (This aligns with our Holiday 2022 & Beyond Outlook.)
  • Regarding the best way to connect with consumers in this environment, Cornell noted that, "value is absolutely top of mind right now, being able to deliver affordable joy, differentiates us in the marketplace." For 2023, Target is going to put more emphasis on “deepening customer connections” and less on “acquiring new customers,” with Hennington stating, “Over the last couple of years, we've gained a tremendous amount of new guests into the Target ecosystem. Our focus right now has been to deepen our engagement with the guests. Of course, we always want more guests, but the opportunity in front of us is much more to convert them into using the suite of capabilities because they become much more loyal. They understand the Target value proposition more deeply once they experience the ease and convenience of Drive-Up or once they recognized what an incredible food and beverage offering we have. That's our primary focus right now.”
  • Target’s service and consumer-connection strategy going forward remains consistent with the past three years; namely, “put stores at the center of everything.” On future stores, COO John Mulligan shared, “last year, we introduced a new store prototype in Katy, Texas...We plan to open about 20 stores this year in a mix of sizes, from the shores of the outer banks in North Carolina to the heart of Inglewood, California. We're also planning to invest in about 175 stores throughout the year, ranging from full remodels to the addition of shop-in-shop experiences like Ulta Beauty and retrofitted fulfillment spaces to support our same-day services.”
  • Target’s trailing-twelve-month (TTM) sales per square foot was $439 compared to $616 at Walmart. Stores fulfilled 96.7% of orders and curbside remains a growth driver. Target’s and Walmart’s 3-year comp CAGRs have remained remarkably steady; this demonstrates that not only are they retaining sales densities, but they have also remained highly relevant to consumers despite significant shifts in consumer priorities for their spending. Given the size of their stores and revenue base, that is an exceptional achievement.
  • Driving traffic is Target’s guiding light and its measure of “success.” For Q4 2022, comparable traffic increased +0.7%, which puts it +16% above 2019’s level. This is a level of traffic growth that is highly atypical, as most retailers are down. Mulligan noted, “We've seen ebbs and flows across the categories in our assortment over [my 20 years with the company]. And to us, the long-term winners will be the ones that build engagement in the moment now. That's why we're so focused on traffic. Apparel and Home will have their time in the sun again, and we'll be well-positioned when they do.”
  • Management seeks to rebuild earnings (+$1B) during 2023 with an EPS target of $7.75-$8.75; that is still far below the 2021 level of $13.38. Some of this gap reflects “conservatism and caution.” However, we suspect that it also allows “flexibility” and the resources to move quickly with market changes, which were a headache for the company in 2022. Mulligan also noted, “if you had told me in late 2020, during the height of the pandemic, that 2022 would be the most challenging operating environment in my career, well, I would have assumed you were joking. Yet shifting consumer preferences, supply chain volatility and rising inflation created a set of conditions that called for flexibility, responsiveness and resilience. Our environment remains volatile, and we expect 2023 will have its own unique set of challenges.”
  • On the Ulta Beauty shop-in-shops and the beauty category (a category that we wrote about two weeks ago), Hennington shared, “we've been seeing outsized growth across the entire portfolio from everyday beauty assortments to new and exciting offerings like those we've added through our partnership with Ulta Beauty. In fact, last year's sales from Ulta Beauty at Target were more than 4x higher than in 2021, and this growth was almost entirely incremental. As such, we remain excited to continue opening additional Ulta Beauty at Target locations this year and beyond….and really excited about the performance, really excited about our partnership and we're looking to accelerate. We're already at 350 stores, and we'll add more.” (800 locations remains management’s longer-term aspiration.)
  • On the home category, Hennington shared, “We believe that there's opportunity in the Home business, and we'll be launching more brands in the back half of this year, both on the national and owned brand side that have the potential to grow share in that category.”

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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