Target Corporation (NYSE:TGT) Q4 2023 Earnings Call Transcript

Target Corporation (NYSE:TGT) Q4 2023 Earnings Call Transcript March 5, 2024

Target Corporation beats earnings expectations. Reported EPS is $2.98, expectations were $2.41. Target Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

John Hulbert: Good morning, everyone, and welcome to our 2024 Financial Community Meeting. I’d like to start by welcoming the investors and others who are attending this meeting in person with us. And of course, we’re happy that many, many more of you are attending the meeting remotely. Brian’s going to kick off the meeting in a minute, but first 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 get things started.

Brian Cornell: Good morning, and thanks for joining us. We’re looking forward to providing our perspective on the results we shared this morning, and I can’t wait for you to hear from several of our top leaders, including Christina Hennington, Rick Gomez, Jill Sando, Cara Sylvester, and Michael Fiddelke. While Michael still has his hands firmly on the wheel as CFO, this is his first FCM in his new role as our Chief Operating Officer. I can tell you; we’re looking forward to discussing Target’s growth horizon and how it transcends volatility over any particular quarter or year. Our preference is always to think long term. It’s why for years now, we’ve emphasized the durability of our business model. And many of you have validated that orientation in the conversations we’ve had with you over the years.

So, our session today will focus squarely on the long-term thinking that has driven top and bottom-line growth over the last decade and positions us for continued profitable growth in the years ahead. You might be asking, why focus on decades? In part, because that feels like a long enough time frame to be meaningful. But it’s also because we look at longer horizons when evaluating growth potential for investments, like new stores, supply chain, and other assets. And it’s good to ask, what else would need to be true for those investments to succeed? So, we’ll analyze our 2023 performance in that context. We’ll provide insights on how our 2024 plans and guidance fit into that vision and we’ll spend time outlining our plan for sustained growth as well as our capacity to react to unforeseen realities.

Both have been important over the last 10 years. By designing for steady growth before 2020, we were positioned to absorb exponential growth during a demand boom that none of us could have anticipated. Even now, the country and the retail industry are in a prolonged post pandemic return to normal, which has been nearly as unpredictable as the pandemic itself from a consumer, social, political and economic perspective. By staying agile as a team, and by continuously refining our approach and innovating, we’ve been able to navigate this time frame. In fact, if you think back to our earlier algorithms and long-range plans, we’re well ahead of where we believe we’d be just a few short years ago. At the same time, we recognize this is a unique moment to clarify our road map for growth.

Let me be really clear. Our goal is to recapture profitable sales, traffic, and market share gains by expanding what makes Target different and better for our guests, amplifying our appeal to consumers beyond our existing guest base, and reinforcing the innovation and investment that drive durable and consistent results for our business and shareholders. So, I might start today with the elements of the overall strategy that have been staples all along, and will continue to be staples going forward. Starting with our stores, the most visible and tangible proof of our long-term planning and investment. When I arrived at Target, we had just over 1800 stores that didn’t quite cover all 50 states. Since then, we built more than 200 new stores. We’ve invested in more than 1200 existing locations through remodels and partnerships and our store footprint has expanded to cover the entire U.S. While retail is decades in the new digital era, on any given day 2/3 to 3/4 of all U.S. shopping is still done in stores.

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Q&A Session

And thanks to the stores as hub model, we invented in the last decade, nearly all Target shopping, including our significant digital penetration growth and our $30 billion plus in revenue growth was made possible by our stores. So, if you think store shopping will wind down anytime the next decade, we’ll politely disagree on that point once again. Over the next decade, we expect to open more than 300 new, mostly full-size stores, adding billions of dollars in incremental growth. We’ll continue to remodel stores with plans to invest in the vast majority of our nearly 2,000 stores in the next 10 years. We’ll also continue to invest in our supply chain and technology. In less than 10 years, we’ve created, acquired, and constantly advanced sortation centers, upstream distribution centers, food distribution centers, and a steady stream of replenishment, technology, and logistics innovation.

At least 10 additional supply chain facilities are in the pipeline and will be operating within the next decade. Underpinning all of this is our long standing and ongoing investment in technology. This includes a leading team of engineers, data scientists, and product managers focused on further integrating AI and machine learning and driving early adoption of generative AI, all geared towards making it easier for our team to best serve our guests across both the digital and physical assets. Take same day fulfillment. Our initial investments gave us an early lead in same day. Today, same day is much more competitive. But continued innovation and better integration with our Target ecosystem means we’re ready to expand same day delivery for our guests while also building on our next day capabilities.

You’ll hear more about this from Christina and Cara, including big moves we’re making with Target Circle. A program that didn’t exist 10 years ago, but today has well over a 100 million members. Cara will talk about the incredible progress the team has made with Target Circle and where we’re headed next. For now, I’ll just emphasize the focus we’re placing on unlimited, same day delivery. Through a new membership feature called Target Circle 360, which is launching next month. Here’s the takeaway. Without huge investments in stores, supply chain, and tech, there is no drive up or order pickup, which were monumental growth drivers during covid and today. And without stores, supply chain and tech, and providers like UPS, FedEx, and Shipt, there is no home delivery, which is ready for a step change in guest acquisition, satisfaction, and loyalty.

As we move forward, we’ll leverage our 2017 acquisition of Shipt to help us build unmistakable recognition for Target same day delivery. Target’s Roundel advertising business is another example of something that didn’t exist 10 years ago but today, it’s the fastest growing contributor to the other revenue line on our P&L. In a crowded field of similar offerings, we’re punching way above our weight, relative to the scale of our retail footprint. The unique relationship we have with our guests and the value our ad business unlocks for the brands that advertise with us are at the heart of Roundel’s performance to date. And since our roadmap for growth focuses on strengthening our relationship with guests and converting more consumers into guests, we see tremendous growth potential for Roundel for years to come.

There are a number of other points of continuity and cohesion in our strategy, but for this intro, I’ll focus on just one more. That’s the strength of our multi-category portfolio, and the balance and stability offered by our mix of frequency and discretionary categories. The way we bring those categories to consumers is a standout strength we’ll continue to build on. The curation, the authority in trend and newness, and the competitive advantage and assortment built around beloved national brands, world class brand partnerships, and a fleet of owned brands that drives about a third of our business and puts us in a league of our own. Ten years ago, our Starbucks and Disney collaborations were strong and growing, and we were building our partnership with Apple.

Those three relationships continue to grow throughout this time frame, and we added and expanded outstanding partnerships with CBS, Levi’s, Hearth & Hand with Magnolia, and Ulta Beauty at Target that drive traffic, sales and loyalty. This element of our strategy has been a bright part of our future. It will continue to play a big role in the decade ahead. And our team’s expertise in product design and development, and brand creation and management, they’re towering strengths that really fuel our own brand portfolio. Brands like Cat & Jack, Threshold, Good & Gather, they bring millions of guests to Target. They’re three of the 11 brands that generate $1 billion or more in sales each year, a lineup that looked much more modest a decade ago. And they laid a roster of Target brands that contribute to more than $30 billion in annual sales, plus outstanding margins for our bottom line.

A steady cadence of brand launches like Figmint last year and Dealworthy last month helped keep our edges sharp on the newness, discovery, and affordability consumers crave in the market and find at Target. I believe our own brand capabilities will only become more prominent in the decade ahead. Which is why we’ll spend time this morning taking you behind the scenes on where we’re headed with our own brands. Another area where we’ll continue to excel is our commitment to our team. In the last decade, we’ve taken a leadership position in both pay and benefits, and learning and development, and we’ll continue to be a pacesetter as we ensure our team has all the support they need to take care of our guests, themselves, and their families. So, if we start to pull all this together, you might be saying, Brian, clearly Target has some strong assets and advantages and cultivated a great team, but what does that mean for 2024 or 2034?

I can tell you, our team has been humble enough to ask that and many other related questions. We’re not taking anything for granted. There’s no complacency about our past success. And while we recognize that a rebound in discretionary spending will favor our brand and our business, we’re not waiting for economic changes or a different consumer outlook. I’ve been on the road nonstop since November, walking our stores, distribution floors, and I can tell you the energy and initiative of our frontline team, what they’re bringing to our business this year simply can’t be conveyed on the slides behind me. This team has shifted to their front foot and they’re changing the momentum of our business, which is why we’ve seen sequential improvement from Q2 to Q3 to Q4.

Discretionary declines moderated. Traffic trends rebounded. Our Q4 comps were at the high end of our guidance. We drove major gains in efficiency and outperformed our guidance of $1 billion in full year profit growth. Recognizing that we needed to clear the volatility and the challenges of the last two years, our team buckled down and said, go time. But in recent weeks, I’ve seen the spelling expand by two letters, and I’ve seen the ambition expand even more than that. What our team is talking about now is grow time. That’s the mantra I hear bubbling up from the front line. All of the commitment to recapturing top line growth, traffic, and share gains in the years immediately ahead. That starts with ensuring our team can deliver for our guests each and every day.

A major step is coming soon with the upgrades we’re launching in Target Circle. Upgrades that will make it even easier to unlock the best of Target. At the same time, a focused list of priorities, along with a continued concentration on retail fundamentals, like affordability and in stock reliability, will make our guest experience easy and dependable in every interaction. We’ll continue to focus on delighting our guests with the products, partnerships, and value that make Target feel both elevated and accessible. The hallmarks here are expert curation, style and trend authority, newness, great design, and incredible value. We’ll also accelerate our progress in omnichannel discovery. We’ve all seen how shopping is changing into an always on activity that’s integrated across several aspects of our lives, well beyond physical and digital stores.

Discovery and inspiration has always been a hallmark of our shopping experience. We started by providing inspiration and easy access at our stores with no barriers between impulse and purchase. But we see an opportunity to do even more, to think differently about the intersection of physical, digital, and social so consumers can discover Target products wherever they’re spending their time. So, you’ll hear from Christina and Cara this morning. We’re gonna keep building our capabilities in omnichannel discovery since we see this as an advantage that’s ownable over our retail rivals. So, I’ve thrown a lot on the table, and there’s more definition and detail to come. Having tackled both industry and in house challenges over the last couple of years, I can tell you I’m not satisfied and our team is not satisfied with our recent top line results.

We wanted to be even further along than we are today, but we’re confident in our path forward, and we’re eager to share what’s next. Target is not just a bigger company than it was 10 years ago. It’s stronger, healthier, and more resilient. A company that’s flipping the switch from go time to grow time. Over the next hour or so, I’ll ask Christina, Rick, Jill, Cara, Michael to add some texture to those claims. Thanks again for being here. Christina, over to you.

Christina Hennington: Thanks, Brian, and good morning, everyone. Continuing on what you’ve heard so far this morning, I wanna emphasize two key themes. First, we build the foundation for long-term growth with a strategy that is both unique to Target and durable and second, we’re committed to building on that foundation for years to come. So, this morning, I’ll walk through the ways we’re leaning into our core strengths, capabilities, and differentiators we’ve built and refined over time to make consumers where they are and drive long-term market share gains, sales growth, and profitability. I wanna start with an outlook on the consumer, which remains mixed. While there are some encouraging signs in the economy, there are also stubborn pressures impacting families and retails.

Consumers say they still feel stretched. They are balancing a lot and having to make tradeoffs to meet their needs of their needs of their families while sprinkling in the occasional luxury. And yet their affinity for style and newness, plus early signs of disinflation, contributed to a sequential uptick in discretionary category performance over the last two quarters, something we aim to build on and accelerate. At the same time, we expect consumers will remain highly value conscious, hunting for great promotions and seeking comprehensive value in their purchases. Consumers are also craving stability with small doses of everyday joy. After the volatility of the global pandemic, they’re now coping with geopolitical tensions, social and political divisiveness, and uncertainty around personal finances.

This all demonstrates that our purpose to help all families discover the joy of everyday life remains incredibly relevant. And the assets and capabilities we’ve cultivated over time, like new and remodeled stores, investments in digital shopping, supply chain, and loyalty, they’ve all increased consumers’ view of us as an omnichannel powerhouse. Those enhanced strengths were built on long established differentiators like design, curation, a well-balanced multi category assortment, and outstanding value. And those are just some of the elements we’ll build upon and amplify through our strategy as we move through 2024 and beyond. Think about the opportunities around something like omnichannel discovery. Designing experiences that support discovery has always been one of our strengths.

Our stores are famous or perhaps infamous for inspiring guests to discover more than they expected. Millions of guests have experienced the joy of entering a Target store for a few items and end up leaving with extra treasures they didn’t anticipate. This is a key aspect of how we set ourselves apart from our competitors and something we’ll continue to build on regardless of where or how the shopping trip begins. After all, shopping looks very different now than it did a few years ago. It’s no longer a point in time transactional event. Consumers today are constantly taking in new information and seeking inspiration from influencers and trendsetters. Target is already a trend shaper, but there’s an opportunity to accelerate this further on both the platforms we own and on external platforms like TikTok and Instagram.

Cara will share more specifics later, so I’ll just say that our team’s energy and engagement in building these discovery-driven experiences are truly inspiring. It’s indicative of an ambition to meet consumers where they are so that wherever and however a shopping journey starts, the path leads back to Target as the destination. We have long been known for delighting guests through a carefully curated set of products and partnerships. We believe that a well curated assortment isn’t just good for managing inventory. It can be additive to the shopping experience too. Here’s an extreme example. Imagine a restaurant with a seemingly infinite menu, with countless of pages of every type of cuisine and no cohesive point of view, endless choice creates decision fatigue, taking away from an otherwise joyful outing.

Sometimes, less is truly more. We make choices that allow us to offer a menu of products designed to serve a wide variety of guests’ needs, helping to guide their shopping journey while ensuring a joyful and productive trip. Now to be clear, this does take balance. We don’t offer an endless aisle, but we do offer a compelling range of choices and price points throughout our assortment. We think of our assortment like a three-legged stool. It works best when we develop own brands that offer unmatched value and quality, provide the best industry leading national brands, and cultivate partnerships that enhance our assortment. So, let’s start with our own brands. We’ve invested heavily over the past several years to continue to innovate and differentiate through our own brands, and we’re not slowing down.

Across the portfolio, we’re launching new brands and expanding upon those already loved by our guests. In fact, own brands are so core to who we are following my remarks, I’ve asked Jill Sando and Rick Gomez to join me and highlight how our unique skills and assets allow us to sustain and grow this massive own brand portfolio. And it’s because of these differentiated end-to-end capabilities that we’re able to rapidly scale affordable own brands without compromising quality. These capabilities also make us an attractive partner to some of the greatest designers around. Recently, we announced an upcoming partnership with iconic fashion designer Diane von Furstenberg. This collection will feature the signature patterns and colors that DVF is known for along with her iconic wrap dresses.

With a multi-generational appeal and offerings in extended sizes as well as options for kids, this collection features more than 200 items spanning apparel, accessories, beauty, and home, combining timeless fashion with only at Target prices and value. Our second priority is to extend our assortment with the best national brand consumers want from Target. Stanley drinkware is a timely example. Well before it became a cultural moment, we were early to recognize this brand’s potential, allowing us to get a big jump on this trend. We secured great allocations across the portfolio and partnered with Stanley to create exclusive colors for our guests, both in the core line and through our only at Target brand, Hearth & Hand with Magnolia. Similarly, celebrity founded beauty brands are taking over social media and our guests say they want to find them at Target, that’s why we partnered with Ashley Tisdale on our exclusive to Target launch of Being Frenshe, a line of personal care products powered by mood boosting sense and self-care rituals.

It’s also why we’ve recently added Lemme, Kourtney Kardashian Barker’s new line of vitamin and botanical supplements to our assortment. These trending brands add to the credibility we’ve built in the beauty space and will continue to support our leadership role in these categories. Our third priority is to round out our assortment with a focus on partnerships, which provide deeper expertise and brand recognition for our guests. We’ve had tremendous success attracting and cultivating these unique collaborations, and in the years ahead we expect they’ll play an even bigger role given the incrementality they’ve delivered. We continue to expand the presence of Ulta Beauty at Target, Levi’s, Apple, Disney, and more, bringing industry leading offerings and continued differentiation for Target.

And last year, we launched a new partnership with Kendra Scott, and our guests couldn’t get enough. These colorful jewelry and accessory pieces not only look good, but they do good too. With a shared vision for philanthropy, this collaboration shines bright on multiple levels. Expect plenty of new offerings in this partnership in 2024 and for years to come. Surrounding all our assortment choices is an unwavering focus on value, which starts with price but encompasses so much more. We continue to offer fantastic everyday low prices, and we’re focused on clearly and effectively communicating our value proposition. One way we’ve done this is by simplifying our end caps to feature single price points and promotions. This allows us to clarify the incredible value we offer while helping our guests to effortlessly recognize the value.

No games. No confusion. Additionally, our efficiency efforts and the greater size and scale we’ve achieved in the recent years have allowed us to further sharpen price points across our assortment. We continuously find ways to add quality and newness to our own brand portfolio without increasing prices. And of course, our focus on retail fundamentals serves as a through line supporting guests on their shopping journey before, during, and after they make a purchase. These efforts are an always on focus, and we continue to deliver a unique blend of physical and digital shopping. We’ll further leverage our fleet of nearly 2,000 stores to serve as inspiring shopping destinations and as fulfillment hubs for digital orders. And in the same way we focus on our store and digital assets, we continually invest in our team.

We took care of our team so they can take care of our guests. From providing world class service to ensuring we’re in stock, we want our guests to feel confident that they’ll be cared for and find what they seek on every Target run. In fact, it was a dedication of our team that allowed us to maintain leaner, healthier inventory levels last year, which positions us well as we enter a new year. This led to stronger profit outcomes, improved in stocks, and perhaps most importantly, increased flexibility, allowing us to react quickly to changing trends. We’re also using technology to reduce costs, increase delivery speed, and improve consistency in our operations. Years ago, we took a bold stance when we outlined our plans to invest in stores at a time when the role of brick and mortar was in question.

Investing to automate upstream replenishment and optimize last mile delivery, we developed new ways to increase our delivery speed and reduce operating costs. These technology investments, which increased the throughput of our existing store locations helped to quiet the store versus digital debate as we pioneered the stores as hubs strategy in support of the omnichannel services we provide. We’re excited about the impact of continued advancements in technology like generative AI and the additive ways these tools will empower our teams, but we also wanna make sure that human connection remains at the center of the Target experience. This is why we’ll continue to invest in technology while never losing sight of what makes life rich, the relationships and interactions we have with one another.

Just as we uniquely saw the importance of combining physical stores and digital capabilities, we wanna make sure we lean into emerging technologies and focus on placing them in the hands of our incredible Target team. And finally, we’ll continue to invest in technology to support segmentation and personalization. We love it when guests walk into one of our nearly 2,000 locations and says, this is my Target. In the same way, we want to design an experience in which a guest places an item in their cart and says, this was made just for me. This balance of scale and personalization is unique in retail, something we do well and can continue to build on. After all, we have an enviable consumer base that is highly engaged with our brand, and they shop us frequently across our multi category assortment, allowing us to gain invaluable insights across nearly all retail segments, not just one or two.

It’s also why our round aisle advertising business is so powerful. We’re constantly listening and learning from our guest space, allowing us to offer rich insights to our vendors, offer compelling and personalized advertisements to our guests, and grow this aspect of the business in meaningful and lasting ways. You’ll hear more from Cara on enhancements to our loyalty ecosystem, Roundel’s growing reach, and our digital experience aimed at enhancing digital discovery. It’s one thing to hear about these strategic initiatives, and it’s another thing to see them in action. I’m often on the road to witness firsthand how our guests are experiencing joy through our assortment, shopping experience, and our team’s dedication in serving them every day.

On a recent trip to Orlando, I visited one of our smaller stores near Disney World. Our segmentation and assortment planning work let us focus on serving two very distinct segments in this market. One segment consists of the many Disney cast members who utilize this Target store to meet their everyday wants and needs on their way to and from work. The other segment is comprised of families who are visiting the area, looking to get everything they need to support their family vacations. These guest segments have very different Target run missions and yet we’re able to provide cohesive experience that satisfies both of them. Similarly, a few weeks back, I traveled to Texas with members of my beauty and apparel teams. We heard directly from guests about the love of finding all their styling needs under one roof from cosmetics and skin care items in Ulta Beauty, to apparel assortments only available at Target to bold jewelry pieces from Kendra Scott.

These powerhouse brands have all come together to offer consumers at this store a sum that is greater than the individual parts. On another trip, I visited a store in Mississippi where we’d recently completed a wall-to-wall remodel. We elevated the shopping experience, refreshed the assortment, and even added a Starbucks, the first one ever in this area. Our local team is incredibly proud that their Target store has become the social hub of this tightknit community. These examples illustrate the interplay of our strategies, assortment, experience, and capabilities, showing how we’re positioning Target to play a unique role in American retail. So now before I turn things over to Cara, I’m gonna invite Jill and Rick to the stage for a discussion on the power of Target’s own brand capabilities and how they help Target stand out in a crowded marketplace.

Okay. Well, thanks for joining me. Why don’t we start Jill and Rick by telling us a little bit about yourselves and your careers?

Jill Sando: Good morning. I am Jill Sando, and I lead the apparel and accessories home and yard hardlines merchandising organization. I’ve been with Target for over 25 years. The majority of that time has been in merchandising, running different businesses across our discretionary portfolio. I also spent some time in planning and helped stand up our product design and development capabilities for our non-apparel businesses.

Rick Gomez: Hello. Good morning. I’m Rick Gomez. I lead Target’s food, essentials and beauty businesses. I’ve had the opportunity to lead a variety of different disciplines at Target, including marketing, digital, strategy and then before Target, I spent over 20 years working in the CPG industry developing, launching and managing a bunch of different food and beverage brands.