Target Corporation (NYSE:TGT) Q4 2022 Earnings Call Transcript February 28, 2023
John Hulbert: Well, good morning everyone, and welcome to our 2023 Financial Community Meeting. I’d like to start by welcoming the investors and others who are attending this meeting remotely and of course we’re happy that so many of you have joined us here in person today. Before I turn it over to Brian to start the meeting, I have a couple of important disclosures. First, any forward-looking statements that we make this morning are subject to risks and uncertainties, the most important of which are described in our SEC filings. And second, in today’s remarks, we refer to non-GAAP financial measures, including adjusted earnings per share. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measure are included in our financial press releases, financial presentations, and SEC filings, which are posted on our Investor Relations website. With that, I’ll turn it over to Brian to begin the meeting.
Brian Cornell: Well, good morning and thank you for joining us. Looking forward to spending this time with you. We’re eager to share our plans, including how we’ll continue to grow, how we’ll continue to rebuild profitability on that growth, and how we’ll strengthen our business in conditions that have changed a lot, since we gathered here at the Time Center last year. At that time, we had just passed a crucial milestone. We had just become a $106 billion company. For the full year 2022, which we’re reporting today, we placed another $3.1 billion of revenue growth on top of that growth. We grew traffic by 2.1%. We gained unit share across our core merchandising categories, which means that consumers were constrained by inflation and have to be very selective about where they shop and what they buy, continue shopping and buying at Target and despite difficulties throughout the year, we close the books on 2022 with our 23rd straight quarter of comp sales growth.
However, the path between last year’s Time Center meeting and this one was anything but predictable. When we last gathered here, New York was still under a mass mandate, and though although consumers had started moving towards post-pandemic behaviors, with families returning to travel and restaurants and shifting some dollars out of retail, we are just beginning to see how volatile and uncertain 2022 would become. As spiraling inflation forced families to put discretionary purchases on hold and focus most of their spending on necessities and there was a rapid escalation to the most expensive operating environment we’ve seen in decades, all of which was made worse by the spike in fuel prices caused by Russia’s war on Ukraine. Those variables and many others continue to have a profound effect on the retail landscape.
So this morning we want to take stock of that situation. We want to speak clearly about Target’s planning to stay on our growth path for the years ahead. We’re keeping this morning’s agenda very focused on our strategy, operations, growth investments and financial expectations. We see this as a time to combine steady leadership with our long-term strategy and a continued focus on agility and strong focus on retail fundamentals. Our goals this morning are to show you how we’re navigating near-term challenges, how the durability of our business model lies in its flexibility. We’ll share what we’re prioritizing to stay in step with our guest and how we’ll flex across our multi-category portfolio, which means in the near term, leaning into growth in non-discretionary categories.
We’ll also reinforce how the trust and loyalty we’ve built with our guests shows in our traffic and share gains. Given value is absolutely top of mind right now, being able to deliver affordable joy differentiates us in the marketplace and that’s a clear advantage in the near term and remains our focus over the long term. With those factors in mind, we also want to use this time to set clear and realistic expectations. Social shareholders and stakeholders can track what progress looks like in 2023. Taking a step back, I might start by recognizing that our growth in ’22 didn’t come easily. It wasn’t nearly as profitable as we expected to be over time. In 2020 and 2021, our team put in the effort and the hustle to keep pace with the most turbulent business environment many of us have ever seen.
They brought the expertise and excellence to take the company to a new level, but while we gain incredible scale by continue to prioritize our guests, I acknowledge we’re still developing some of the tools to marshal that scale efficiently. Yet as we think about what growth looks like from here, it’s helpful to anchor back to what we were saying at yearend 2019. At that time, we were putting up proof points on a strategy that was and still is unique in retail, when we built to reliably deliver low single digit increases in sales year after year. It started by investing in our team, in part because we believe human interaction is the key to growth in a digital age. As we move into 2023, we’ll continue to support our team and lean into our culture, knowing they’re at the heart of our overall success.
The 2019 strategy puts stores at the center of everything because when we remodeled or added a store and improved the guest experience, comp grew. At the same time, turning stores into fulfillment hubs was and still is the most efficient and least costly way to grow omnichannel sales. As you’ll hear today, we’re not standing still on our store remodel and expansion plans or investments in a bigger supply chain or ongoing improvements in digital. It’s no surprise that 100% of our store sales are fulfilled by stores, but in our case, more than 95% of all sales, including digital, are too. Since 2019, our store base has only grown slightly, but total sales grew nearly 40% in that timeframe. Our digital business nearly tripled in size and our sales per square foot increased by 37% and fulfilling substantially all that growth through essentially the same asset base was nothing short of incredible on the part of our team.
So as we hold on to those gains and look to put growth on top of them, we’ll continue to invest, in stores in supply chain, in digital, through our stores as hubs model. Our 2019 strategy prioritize the differentiation and profit performance of an own brand portfolio that is simply unmatched in retail. At the same time, we’re curating national brands our guests love, and in 2019 we had just started our premier partnerships with Levi’s and Disney. Since then, both those partnerships have expanded as a partnerships with Apple and Starbucks and as you know, we’re in the middle of building out an incredibly exciting partnership with Ulta Beauty. Meanwhile, our team has built on our position of strength in own brands, adding 17 of them since 2019.
That includes two more billion plus dollar brands in good and gather and all in motion, but we’re not slowing down with own brands. In fact, just the opposite. As you’ll hear from Christina, we’re planning a steady cadence of newness in own brands and national brands across our multi-category portfolio in the year ahead. What else within the 2019 strategy? Well, that was a year we introduced Target Circle. At that time it was a powerful new asset for guest engagement, personalization, loyalty and sales that quickly attracted 50 million users. Since 2019, the user base has doubled and has still growing meaningfully and Circle has become the heart of our increasingly connected loyalty ecosystem. Since 2019, our media company Roundel has grown significantly, with great additional growth and profit potential on the horizon.
It’s sought after by advertisers for its relevance and reach and it’s growing each year because our guests appreciate the engagement and the value it delivers. Roundel makes for a more deeply engaged guest and partners, and because it gives us better understanding of our guest preferences, it makes us an even better and more profitable retailer. So we intend to place additional emphasis and investment towards Circle and Roundel in 2023, given the growth potential they’ll unlock. So let’s pause here and I’ll start to put all this together. While I’m deliberately drawing a connection between 2019 and the year ahead, there’s one giant difference. We’re starting 2023 on a revenue base of $109 billion, not the $78 billion we had back then. There are other big differences too.
Today we’re reporting a full year comp increase in the low single digits similar to 2019 and unit shared gains across all five of our core merchandising categories. But unlike 2019, our three year revenue growth is $30 plus billion, not just $8 billion, and our digital penetration now stands at nearly 19%. During the pandemic, guests became more attached to Target, and as we deepen engage with guests, more moved into the ranks of our most engaged, measured by spend, trips and cross-category purchases. Guest engagement is also reflected in a significant increase in transactions since 2019. In fact, those increases started as far back as 2017 and we’re positioned to keep growing engagement levels across our guest base, even as we focus on expanding that base overall.
So standing here today, my sense is that a new normal is on the horizon. It’ll be much more like 2019 than the last three years, and as we plan prudently to invest in 2023, we see a return over time to solid and consistent growth with operating income margin rate that should move towards and to begin to move beyond our pre-pandemic rate of 6% in the next few years. Today we’ll show you our work for how we arrived at that conclusion, but a spoiler alert, it starts with a strategy. You’ve seen it many times before and while the facets on this slide haven’t changed, we’re prioritizing to accelerate key growth drivers and making changes that will help us respond to the short-term environment while continuing to advance all elements of our strategy.
They all work together to keep our growth trajectory rolling. Christina will cover that in greater detail, including the focus this year we’re placing on the magic of Target on affordable joy and on digital growth Target Circle, Roundel and our enterprise sustainability strategy Target Forward. Then John will cover what we’re learning from an ongoing operational evolution, what we’re testing, what we’re in the process of optimizing, what benefits we see from the standpoint of efficiency as we continue to scale. Michael will describe how we’re planning cautiously and we believe appropriately given the economic challenges we anticipate this year. But caution doesn’t mean cut-off from continued growth and progress. In fact, some of the most exciting progress we anticipate will be translating our newfound scale in a simpler, more efficient way is to run Target.
The difference between an enterprise-wide efficiency mindset and a cost cutting program starts with what questions you ask yourself. For us, the question isn’t what can we cut? It’s how do we make things easier for our team to more efficiently deliver a guest experience that continues to live up our brand — to our brand promise. So we’ll invite Michael O’Neal, the leader we tap to coordinate these efforts across Target to offer his perspective on efficiency. What it is, what it isn’t, how we can drive continuous improvement and what we can unlock with this focus. We’re looking forward to the next hour or so. We recognize that the landscape is unpredictable and there are plenty of near term challenges on the horizon. We believe 2023 will be a year in which the durable model allows us to flex up the categories and the value proposition that are most relevant to our guests today.
We’ll double down on execution. So our guests get all they’ve been promised every time they turn to target. And we’ll stay focused on gaining share across our portfolio. Underpinning all that with the work we’re doing around efficiency, to provide fuel for longer-term growth. We’re optimistic about what this team can deliver and realistic about how 2023 will keep challenging us to be agile, resilient and responsive for our guests, our communities, for each other and for our shareholders. Before we leave here today, our goal is to take you along. So you can see exactly what we’re seeing. And with that, let’s get going.
Christine Leahy: Thanks, Brian. Despite the challenges of the past year, Target’s differentiated position in retail has never been stronger, with a great assortment, compelling value, an unmatched suite of fulfillment options and a joyful shopping experience, Target continues to drive preference with American shoppers in the face of a turbulent economic and consumer backdrop. We have continually adapted to the environment around us, delivering ease, value and inspiration to our guests all the time when daily doses of joy are needed more than ever. And amidst this volatility, we continue to hone the foundational elements that it takes to be a long-term winner in retail. Fourth quarter comparable sales grew 0.7% on top of nearly 9% last year.
And for the full year, comparable sales grew 2.2% on top of nearly 13% in 2021. While our business has been generating growth on top of growth for years now, the mix of last year’s sales looked vastly different than what we had expected. Throughout 2022, changing attitude towards COVID, followed by the pressure from persistent inflation, caused demand for discretionary categories to slow meaningfully. With this in mind, we’ve taken a cautious approach to this year’s inventory commitments in many of these categories. And we’re focusing on the agility of our operating model to adjust should sales trends exceed our expectations. In light of the volatility we’ve experienced, I often get the question, what did Target learn from the past year? What I’ll share with you today are some of the lessons learned.
In short, we’ve learned that our strategy is working. At the same time, we’ve come to further appreciate the importance of strong day-to-day execution, combined with the agility required to react even quicker to changing consumer trends. And of course, last year, reinforced the importance of providing every guest with a great shopping experience. Most of what I’ll share today likely won’t sound all that different from the playbook we’ve used for the past few years. That is intentional. For example, our multicategory assortment continues to resonate with our guests, even as consumer demand continuously evolves. The unique balance we’ve achieved across all five of our core merchandising categories continues to be a key differentiator in the market, with each category serving at times as a trip driver, at other times as a basket builder, and oftentimes as both.
Throughout 2022, we saw and continue to see incredible growth in our Food & Beverage and Essentials and Beauty businesses, offsetting a meaningful pullback in discretionary categories like home, apparel and hard lines. But despite this pullback, these discretionary categories still delivered around $55 billion in sales last year. In both our Food & Beverage and Beauty categories, 2022 delivered the third consecutive year of double-digit sales growth, stemming from increases in both traffic and average ticket. And while we’re thrilled to have driven unit share gains across all of our major categories last year, we saw the strongest gains in these rapidly growing frequency categories, a proof point of the relevance and value found in these assortments.
![Target, market, sales](https://imonkey-blog.imgix.net/blog/wp-content/uploads/2023/03/marques-thomas-NfqrnYdZzq8-unsplash.jpg?auto=fortmat&fit=clip&expires=1755993600&width=&height=)
Photo by Marques Thomas on Unsplash
In Beauty, we continue to be a market leader, delivering the highest growth rates of any category we sell. 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. Of course, we don’t build an assortment for a given snapshot in time. Rather, we flex across our categories as consumer demand shifts. And even in tough times, our discretionary assortment provides a unique opportunity to connect with guests in key moments from major life changes, to seasonal celebrations and everyday moments in between.
Now I want to be clear that despite our cautious inventory position in discretionary categories, we’re still focused on delivering newness throughout the portfolio and placing select bets in businesses where we believe market share opportunities are strongest. That’s because despite continued volatility and the path the Target guests are attracted to all things trendy and new. We believe our commitment to newness is a key reason why we continue to generate traffic growth, and why we drove broad unit share gains last year. Our focus on balance can be found within each category as well, where we continue to offer both industry-leading national brands and high-quality affordable owned brands that are unmatched by our competitors. Our owned brands have long been a source of pride and differentiation for Target, offering great style and quality, all at incredible value.
So it’s no surprise that our owned brands have continued to outpace total enterprise growth and why we have plans to launch new or extend assortments in more than 10 owned brands this year. Recently, a study listing the 10 fastest-growing private label brands in 2022 included three found exclusively at Target. Target was the only retailer to have more than one brand on the list, and two of them were the only nonfood brands to make the cut. Many retailers were not focused on newness in 2022, but the opposite was true at Target, where we continue to excite our guests with innovative and trendy products. For example, we launched Future Collective, a first-of-its-kind apparel owned brand, featuring collections in partnership with a rotating roster of diverse influencers.
This innovative approach blending the strength of Target’s own brands with the excitement of our limited-time partnerships and collaborations has been a huge success, particularly with Black guests, furthering our commitment to ensure all guests see themselves reflected in our assortments. Most recently, we launched a new line with actor and influencer, Tabitha Brown. Tabitha’s energy and passion absolutely shines in this new line, and our guests are loving it. Tabitha serves as the latest example of the endless possibilities that comes from bringing together the incredible talents of diverse designers and the power of Target’s multi-category portfolio. Take a look and see what I mean. The passion of these designers is so inspiring. The emotion and pride is palpable, and we love the way that Target magic of these partnerships cut across categories, including last quarter’s launch of Marks & Spencer and Tampa has recent extension into food.
And while these collaborations offer joy for our guests, recent history has reinforced that focusing on the basics of retail is just as important as the latest innovation or new offering. In fact, nailing the fundamentals is the bedrock of a successful retailer, from the overall shopping experience to ease and convenience, relevance, everyday value and more. Of these fundamentals, we know that a strong and reliable shopping experience is the surest way to build trust and affinity. So we aim to provide a consistent, joyous and easy experience, both in stores and online, making Target a shopping destination, not just a means to an end. To do this, we’ve invested heavily in new stores, our remodel program and our same-day fulfillment services, as John will highlight shortly.
We led the way in comprehensive pay and benefits, attracting and retaining the best team in retail, allowing us to provide a level of service unmatched by our competitors. We’ve invested in one-of-a-kind brand partnership experiences like those with Levi’s, Apple, Disney and Ulta Beauty. And while some of these partnerships are newer, we featured Starbucks in our stores for decades, proof that when we work with iconic brands, we build lasting relationships. With a Starbucks in nearly all of our stores, they have become part of the shopping ritual for many of our guests. In fact, we’ve served up more than 170 million Starbucks beverages last year alone. A strong digital shopping experience is every bit as important as the one we create in our stores.
So we’ve been investing to ensure that the experience is seamless across every channel, regardless of how our guests shop. Whether searching for an item or browsing for inspiration, we continue to elevate their experience, providing personalized and relevant content using our incredible data and guest insights. This will include more customized homepages, improved search functionality and even more personalized offers from Target Circle. It will also include more relevant content from our digital advertising business, Roundel. Our digital success won’t be driven by a single service or offering, but through a comprehensive set of experiences designed to be greater than the sum of the parts. Target Circle is one of the nation’s leading loyalty programs with over 100 million members and growing.
Through continuous learning and application of guest insights, Target Circle served up 3x more personalized offers in 2022 and Target Circle members spend 3x more on average this past holiday season. We also continue to invest in the tools team and capabilities of Roundel. To us, Roundel is more than a digital advertising platform or another revenue source in the P&L. The goal is for our guests to have a tailored, relevant experience, while helping our vendors reach the guests who are most likely to be interested in their products. Said simply, Roundel makes us better merchants, more consistently serving our guests with the products they want. This is why our approach to digital advertising looks different than others. We put our guests at the center of this strategy, just as we do in every other aspect of our business.
It’s no wonder we continue to see such explosive digital growth, why Roundel grew by more than 60% over the past two years, and why we’ll continue to leverage the risk rich guest insights. And regardless of whether our gas or shopping is online or in store, they are looking for comprehensive value now more than ever. That means offering great everyday prices and promotions and offering quality and inspiration. After all, Target invented affordable joy decades ago and is still a key differentiator in a crowded retail market. Our guests see value in countless ways from our competitively priced and high-quality owned brand offerings to multiple red card benefits, including 5% off on every trip and free shipping for all online orders, all with no annual fee.
We offer compelling value at every turn, and we are continuously listening to our guests to understand what value means to them. And beyond these retail basics, we continue to hear from our guests that they prefer shopping with companies who prioritize people and planet. That’s why we’re so focused on our target forward strategy. This isn’t a stand-alone strategy, but rather Target Forward is fully integrated throughout our business, fueling our growth potential, while bettering the world. As part of this strategy, we’ll continue to elevate Black voices and brands and are on track to spend $2 billion on Black-owned businesses by 2025. We’ll also continue to focus on designing products for a circular future like in our owned brand, Universal Thread, where we are using materials such as recycled cotton and polyester.
These are just a few of the countless examples of how we push ourselves and industry partners to grow sustainably. Our purpose is to help all families discover the joy of everyday life, requires a balance of quality, value and innovation that sets us apart from competitors. We are relentless in ensuring every decision supports this delicate balance. It’s easy to say, but takes incredible diligence to execute. And while you’ve heard me say it before, it bears repeating now. We truly have the best team in retail. I’m so grateful for the many efforts of our team to serve our guests and each other, day in and day out. With that, I’ll turn things over to John.
John Mulligan: Thanks, Christina, and good morning, everyone. So Brian talked about the last few years being unpredictable. To put a finer point on that, 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. But if I’ve learned anything over the past three years, it’s never underestimate the power of a purpose-driven team and the culture they create.
2022 offered more examples of Target teamwork than I can count, but two will stick with me for quite a while. Five months ago when Hurricane Ian devastated communities across Florida, our team sprang into action. It didn’t wait for me or Brian or anyone else on the leadership team to tell them what to do. Instead, they gathered input from those on the ground and told us what they needed. Pop-up resource centers that provided laundry, food, gas, restroom, showers and Wi-Fi-enabled laptops to 700 team members in their families. Extra inventory to stock local stores with essentials guests would need to weather the storm, and financial support, $5 million to fund local relief efforts and up to $3 million in matching donations to our team member giving fund, which provides assistance to team members affected by natural disasters.
It was about the same time that our inventory action plan was in full swing. You’ll remember, we announced bold measures last summer to quickly take action to rightsize our inventory in response to shifting consumer demands. This is a big ask of our team, one that required them to move quickly and aggressively to reduce existing inventory and cut back on receipts for the back half of 2022. And the team responded as they always do with heart and hustle. They worked through 8 distribution centers worth of inventory in a matter of months, putting us in a strong position heading into the critical holiday season. That’s our culture in action, bottom-up ingenuity, centered on caring for our team and our guests. And it’s that culture that fuels our strategy and growth.
For years now, we’ve shared our vision of using our stores as fulfillment hubs to get closer to our guests. It was an idea that was novel when we first introduced it, but it’s been widely adopted as others expand their view of what stores can do. I’m an engineer to my core. So it gives me great satisfaction to see the way Target built our stores as hub strategy from the ground up and how our operating model gets stronger with each passing year. We don’t have a rigid road map. Instead, we use a highly repeatable process to test concepts, refine them, test them again until we can replicate them with confidence, efficiency and scale. And then and only then do we ask ourselves what’s next? And how can we make this even better? And the whole process begins again.
Let’s take Drive-Up. You can trace the origins of Drive-Up to the launch of our store pickup service a decade ago. It took a few years to get store pickup where we wanted. And when we did, we were able to take it one step further with Drive-Up. We launched Drive-Up as a test in our Minneapolis market in 2017. By the following year, the service was available in more than 1,000 stores around the country, and it reached all 50 states in 2019. With the foundation in place and operating at scale, we started to explore new capabilities. In 2020, we made fresh and frozen groceries available. In 2021, we added adult beverage and expanded our app to give guests a more customized experience. Last year, we began testing Starbucks at Drive-Up. And today, we’re announcing the next phase of our Drive-Up services with drive up returns, which started as a pilot last year and will be available across the chain by the end of the summer.
Not only is this a huge one for our guests who can now do even more at Drive-Up, but it brings more efficiency to our returns process, with more resale opportunities and fewer expenses for mail and returns. We’re combining the strength of our digital self-service returns process with our industry-leading Drive-Up experience to meet our guests where they are. This is what it means to be a truly omnichannel retailer, giving our guests the flexibility, ease and convenience to shop the way that works best for them and scaling capabilities across every facet of our business. online, in-store, Drive-Up, it doesn’t matter how they choose to shop with us. We’re here to make their Target run better than ever. Looking back, the evolution of Drive-Up may seem like it was a natural progression, easy to predict and implement.
But you’re bringing to market new ideas in an environment that is anything but stable, you have to be ready to adjust course and explore alternatives. Our team has gotten really good at moving in step with the needs of our guests. That flexibility and a commitment to the fundamentals that make or break a retailer, things like hiring the right people, offering the right products and delivering the right experiences to our guests, underpin our store as hub strategy and contribute to our larger story of growth. Same-day services like Drive-Up are a great example. They grew nearly 7% last year as more shoppers appreciate the convenience and speed with which they can check off everything on their list. And because we own our same-day capabilities, pickup and Drive-Up are much more economical and flexible than other forms of digital fulfillment.
In fact, our average fulfillment cost per unit has come down 40% over the past four years as our same-day services have grown to account for over half of our digital sales. Again, these results don’t happen overnight, and they aren’t achieved in a vacuum. They are the product of steady investment and listening to our guests. Take our stores, which sit at the heart of our stores as hub strategy and play a dual role of shopping destination and fulfilment hub. Our stores are not only beautiful, with open floor design, plenty of natural light and design elements that reflect the communities they serve. They’re built to keep inventory moving through our system and support Target’s trajectory of growth. Late last year, we introduced a new store prototype in Katy, Texas.
From the front entrance to the back room, this 150,000 square foot store is a stunner. Beautiful design elements reflect the local environment and community. Features like natural refrigerants, electric vehicle charging stations and rooftop solar empower our Target Forward sustainability ambitions and get us closer to our goal of net zero emissions by 2040. And a backroom 5x bigger than our average store allows us to ramp up same-day fulfillment, while preserving a seamless experience for our guests and our team. 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.
Our ongoing investment in our suite of stores is just one way we’re building for the future. What might be less evident to our guests is how we’re building facilities behind the scenes to make their experience even better. We built upstream capacity by opening flow centers in Chicago and New Jersey, with several more slated to open over the next few years. And a new food distribution center that opened in Maryland this past October expand support for our growing food and beverage business. This additional capacity gives us more flexibility to manage inventory and keep our stores stocked with the items guests want when they want them. We’re also making investments downstream. Earlier this month, we announced the expansion of our sortation center network to more than 15 facilities by the end of 2026.
These facilities have transformed how we move inventory with speed and precision to guests’ doorsteps. We started with a prototype less than two years ago to see how we might bring more efficiency to how we sort, batch and route packages. Today, we have nine sortation centers open across the country, allowing us to deliver packages to guests within two days. Up to 40% are delivered one day when using our last-mile delivery capabilities was shipped. And because Shipt is fully integrated into our last-mile operations, we benefit from significantly lower delivery costs. To give you a closer look at how these sortation centers have become core to our business, we ask leaders from Target and Shipt to give you a brief tour and talk about how our test and learn approach applies to last-mile delivery.
Let’s take a look.
John Mulligan: As you heard from Dori, Sad and Comau, we’ve learned a lot over the past few years, using every opportunity to improve speed, cost and quality. And in regards, our sortation centers are just hitting their stride. We delivered more than 25 million packages through sortation centers last year, and we expect to double that amount in 2023 with the help of our local and national carriers. Together, the investments we’re making create a more nimble sourcing, inventory management and fulfilment capability at Target, and they continue to help us navigate tough times, prepare for the unpredictable and fuel steady growth, all thanks to our incredible team. We’ve made huge strides in recent years to connect with our guests through our stores. The momentum continues to build, and I look forward to sharing progress with you and our guests in the quarters to come. Michael, I’ll turn it over to you.
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Q&A Session
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Michael O’Neil: Thanks, John. As Brian mentioned, it was exactly a year ago that we were on this stage, talking about our 2021 financial results, a year in which our business generated double-digit growth in comparable sales and even faster growth in EPS. And as Christina discussed, we knew on that day that the environment was likely to change, but we didn’t yet know how dramatic those changes would be. The rapid pace of this transition led to multiple profit pressures on our business, including markdowns and other costs related to last year’s inventory actions, significantly higher shipping and domestic transportation costs and higher inventory shrink. So as we focus on our business plans, both for 2023 and the longer term, it’s important to consider how the environment will continue to evolve.
On the one hand, many things about life and consumer behavior already look a lot like they did before the pandemic. Students are back in school, sports arenas are full, people are eating out again and consumers are embracing in-store shopping. At the other extreme, certain aspects of life appear to have changed forever. Many office jobs are now hybrid, with remote work and virtual meetings playing a much more significant role. That means many of us are spending a lot more time working at home, which has implications for long-term buying patterns in multiple categories, most notably our food business. Fulfillment mix has also seen a permanent shift. Our same-day services have seen explosive growth. They now account for more than half of our digital sales and more than 10% of our total sales.
And that trend shows no signs of reversing. Even as people have remixed their trips in favor of in-store shopping, guest engagement with these digital services has continued to grow on top of the huge expansion that’s occurred over the last few years. Most importantly, our guests overall engagement with Target has increased significantly over the last few years, and it continues to grow. Think about it this way. In 2021, guests made about two billion trips to Target, which was about 300 million higher than in 2019. And last year, even as consumer spending moved away from products into services, traffic grew again. The deeper relationship we’ve established with our guests and our proven ability to deepen it further are some of the many reasons we’re so well positioned to deliver profitable growth in the years ahead.
Beyond the factors that have changed permanently, there are several others that are clearly still in transition. These include transportation in the global supply chain, where we’ve already seen remarkable improvement, but what we’re still facing elevated costs and variability compared to the pre-pandemic period. Another factor is inventory shrink, which has increased broadly across U.S. retail over the past two years. And finally, the most significant and important driver of uncertainty today is the fact that the broad macro economy is still in transition, leading to an inflationary period, more pronounced than we’ve seen in decades. As Christina mentioned, rapidly rising prices have put pressure on discretionary spending as consumers make room for higher prices on necessities.
In addition, higher interest rates have further pressured budgets by increasing the cost of mortgages and car loans. So where does that leave us today? Despite all of the recent turmoil and the pressures facing our business, we remain in a very strong position to drive healthy growth in the coming years. Our guests are more engaged than ever, and that engagement continued to grow even during a tumultuous year. And even after a year in which we experienced unique and unexpected headwinds to both our profitability and cash flow, our business is sound. It remains strong, and we’re laser-focused on the path forward. In 2023, we’ll focus first on agility and strong execution. Most notably, we’ll take a cautious stance on our inventory commitments and markdown-sensitive categories, with the flexibility to sell into our base inventory and expand receipts over time.