Retailer Target surprised Wall Street on Tuesday morning with an earnings report that beat expectations from both analysts and the company's own leaders.
Target said it earned $876 million, or $1.89 cents a diluted share, from November through January. It was considerably better than the $1.40 analysts forecasted. Its fourth quarter revenue of $31.4 billion, a change of a little more than 1% from the year before, was also higher than expected ($30.7 billion). Target shares were up more than 2% in midday trading Tuesday.
Yet profits for the general merchandiser still plunged 60% this past fiscal year compared to the year before from $6.9 billion to around $2.8 billion, as the store has weathered more discerning shoppers amid high inflation.
Target's same-store sales, or sales from stores open at least a year, were up a modest 0.7% this past quarter, which was still an improvement from the single-digit decline the company said it expected after sales began to sour in the fall. Target leaders on Tuesday said incremental growth didn't come easy.
"Consumers, who are constrained by inflation and have to be very selective about where they shop and what they buy, continue shopping and buying at Target," said Brian Cornell, Target's chairman and chief executive officer, in a Tuesday presentation he gave from New York City. "And despite difficulties throughout the year, we closed the books on 2022 with our 23rd straight quarter of comp sales growth. However, the path between last year's Times Center meeting and this one was anything but predictable."
Even though inflation is forcing consumers to budget, particularly when it comes to extras like entertainment and new electronics, shoppers have continued to turn to Target for necessary goods, including groceries. That helped Target overcome low expectations when some of its other merchandise like clothing wasn't selling as fast.
"That's the beauty of the Target model," said Brian Yarbrough, an analyst with Edward Jones. "When it's slower economic times, it is not as beneficial as it is for, like, a Walmart. ut you still have the beauty, the essentials and the food categories and beverage categories that can grow nicely and help offset some of the declines in those discretionary categories."
For the second time, Target surpassed the $100 billion in annual revenues milestone. Total revenue grew $3 billion to $109 billion. But even with an upbeat ending, the last year has still been challenging for Target with plenty of hurdles on the horizon.
One of the major reasons for Target's big profits drop is because a lot of the categories that remain popular at Target are low-margin products like food, which grew in sales by double digits last year. However, shoppers in general are spending less on discretionary items to be able to afford necessities which have ballooned in price. In the last year, food prices in the Twin Cities have gone up more than 12%.
At the same time, Target, like many other businesses, has needed to manage higher costs. That ranges from higher merchandise and freight costs to more expensive labor, as it has increased its employee compensation and headcount to continue to grow. To attract more budget-conscious consumers and shed some unwanted inventory, Target has also had to offer higher markdowns.
Throughout the last year, Target stumbled as it tried to deplete a bloated inventory by canceling vendor orders and cutting prices on discretionary items like furniture. Target is in a better inventory position to start off this fiscal year, with inventory at the end of January valued at about $13.5 billion, a 2.9% decrease from January 2022. Inventory in discretionary categories was about 13% lower than a year ago.
"That's one of the biggest keys to me because that has been such a massive drag on profitability on 2022," Yarbrough said, about the lower inventory levels.
The company announced it would continue to make capital investments up to $5 billion for the year, similar to what it announced last year, to expand its services, stores and supply chain facilities. To appeal to value-oriented shoppers, Target plans to launch or expand its Target private-owned brands and add more items starting at $3, $5, $10 and $15.
Target leaders said the company will update 175 stores with full remodels and additions of its shop-in-shop special sections like Ulta Beauty. It will also open 20 new stores this year, grow its "sortation center" network and expand its same-day services to allow customers nationwide to return unwanted items via drive up.
A year ago, as it emerged from the pandemic victorious after solidifying itself as one of the most forward-thinking retailers in the country, Target leaders already knew they had their work cut out as consumer demand normalized. At that time, executives said in the coming years the company would aim for yearly revenue growth in the mid-single-digit percentage range, which would be a little better than its performance before the pandemic.
That goal turned out to be a tad harder than originally envisioned, with Target's total revenue only up nearly 3% last year as inflation spiked.
Looking into the future, Target is more conservative with its forecast. The company announced it expects comparable sales from February through April and for the full year to range from a low-single-digit decline to a low-single-digit increase.
Mega-retailer Walmart, which also reported better than predicted earnings last week, said it expected its comparable sales in the United States to rise between 2% and 2.5% this fiscal year.
