Target COO John Mulligan, during a fourth-quarter earnings call with analysts Tuesday, made clear just how frustrating the past year had been for the Minneapolis-based retailer.
“If you had told me in late 2020, during the height of the pandemic, that 2022 would be the most-challenging operating environment of my career, well, I would have assumed you were joking,” Mulligan said.
Mulligan blamed changing consumer behaviors, supply chain headaches and rising inflation for creating some of the struggles of the last year. Add in high shipping costs, widespread markdowns and a significant amount of inventory shrink, and it’s a recipe for extreme retail stress.
Unlike lagging discretionary categories, food and beverage held steady as a growth driver for Target, posting the third consecutive year of double-digit sales growth thanks to jumps in both traffic and average ticket.
But the retail giant’s fourth quarter and full-year numbers paint the picture of a challenging time:
- Q4 operating income fell 44.7%, to $1.2 billion, compared to a year ago
- Full-year operating income plunged 57% over the prior year, to $3.8 billion
- Full-year gross margins were 23.6%, down from 28.3% in 2021
“Last year presented a host of unexpected and unprecedented challenges that all seemed to arrive at once,” Target CFO Michael Fiddelke told analysts.
To reverse those trends, Target is embarking on a plan to cut $2 billion to $3 billion in costs, while at the same time investing $4 billion to $5 billion on customer-facing upgrades focused on delivering “affordable joy.”
For the cost-cutting, Target said it is not looking to sacrifice long-term growth for short-term profits. Rather, the company is hunting for ways to be more efficient, said Mike O’Neil, Target’s SVP of financial planning and analysis, who is leading the effort.
“We’ll look for ways to simplify the work, to streamline processes, to reduce redundancy, all with the mind of, ‘How do we make it easier for our team members to deliver a great guest experience?’” O’Neil said.
Target isn’t investing as much in its operations as it did last year, but Fiddelke said capital expenditures remain “quite strong, relative to our history.”
Some of those investments—and potential areas of growth—for Target include:
Owned brands. Target’s owned brands are huge for the retailer, and it said Tuesday that it plans to add 10 more of them this year. “Our Favorite Day brand that we’ve launched over the last couple of years, which is a sweets brand, has seen explosive growth over the last year or two,” Chief Growth Officer Christina Hennington said. “And this is a place where we’ve taken the liberty to innovated in basic categories, whether it’s cookies or ice cream and so forth, and the flavor profiles, the way that they brought the items to market have really shown that guests will engage across the board if we give them a reason to.”
Retail media. Target launched Roundel, its retail media arm, in 2019 and it has grown more than 60% over the last two years, the company said, though it didn’t express that number in actual dollars. “We are very engaged with a broad spectrum of vendors across the entirety of the portfolio and believe that Roundel is going to be an important part of the future, partly because of the guest-centricity that we bring to the model, but also because our guests want to know what’s new and relevant, both across owned brands and national brands and how it fits into their lives,” Hennington said.
Focus on price—and loyalty. Target said it will add more items at $3, $5, $10 and $15 price points to appeal to inflation-pressed shoppers. It said it will also debut some upgrades to its Target Circle loyalty program—which currently has more than 100 million users. Target Circle members spent three times more, on average, during the last holiday season, Target said. Program enhancements will focus on greater personalization, the company said.
Convenience. Target on Tuesday announced it would expand its drive-up returns pilot program, with plans to expand it systemwide by summer. The retailer is also remodeling about 175 stores to add Ulta Beauty and Apple stores-within-a-store as well as expanded same-day fulfillment services. Same-day services, including drive-up, grew nearly 7% last year for Target. And fulfillment cost per unit has dropped 40% over the past four years as Target’s same-day services have become more than half of all digital sales, the company said.
Next-day delivery. Target previously announced a $100 million investment in its sortation center network. The facilities help the retailer to deliver orders more efficiently.