How Target plans to keep growing sales

Inflation is soaring. The war in Ukraine is roiling equities and energy markets. And as Covid cases wane, people are spending more on commuting and dining out.

But Target, which has been a big beneficiary of the pandemic economy, believes it can build on its already strong sales growth.

Target has become a $100 billion company during the global health crisis. The pandemic has highlighted investments the company made over the past several years, from sprucing up the look of stores to turning them into fulfillment hubs for online orders.

On Tuesday, Target argued that it can keep driving growth. It also shared a rosy forecast for the coming year: Revenue growth for the coming year in the low to mid single digits and projected adjusted earnings per share to rise by high single digits. That outlook surpassed analysts’ expectations, according to Refinitiv.

Here are five strategies the company plans to use as it works to live up to its projections:

Sipping a Starbucks coffee. Sampling lotion and lip gloss at Ulta Beauty. Trying out a new Apple device. A trip to Target stores can feel a lot like a trip to the mall — and that’s by design.

The retailer plans to add more shops and displays featuring popular national brands as it refreshes many of its roughly 1,900 U.S. stores. Target sees the destinations — such as Disney and Levi Strauss shops — as a way to draw customers and keep them coming back.

It has remodeled more than half of its stores and plans to remodel about 200 more this year, Chief Operating Officer John Mulligan said Tuesday. He said it plans to keep up that pace in the years ahead.

One of its major partnerships is with Ulta Beauty. It opened the first curated beauty shop inside of its stores in August and plans to add more than 250 new locations this year — to ultimately reach at least 800 total, said Target Chief Growth Officer Christina Hennington.

She said stores that include one of the mini Ulta shops have gotten a midteens lift in sales across total beauty and have higher rates of sales in complementary categories, too.

Hennington shared another way that stores will soon resemble malls: They’ll offer ear piercings. About 200 locations already pierce ears through a partnership with piercing company, Rowan, and more are coming soon, she said.

Shoppers may have tried curbside pickup as a way to avoid strangers and lower risk of getting Covid. Now, Target sees the popular option as a way to differentiate from competitors and encourage customers to buy more, from a hot coffee to a bottle of wine.

Target’s digital business has nearly tripled in the last two years. More than half of the company’s online sales come from its same-day services — which include Drive Up, its curbside pickup option; Order Pickup, its in-store retrieval of online purchases; and Shipt, its home delivery service.

The company is trying to give customers more reasons to use curbside pickup. Starting in the fall, select stores will allow customers to make returns or pick up a Starbucks order without unbuckling their seatbelt. About 80% of stores now offer adult beverages, such as beer and wine, through curbside pickup. Target has also added tech-based features, such as letting a shopper designate a family member or friend to pick up an order or select preferred substitutions if an item is out of stock.

“We’re leaning into the love our guests have for our digitally led same-day services because that’s sticking,” Cara Sylvester, chief marketing and digital officer, said at Tuesday’s investor day. “Routines developed early in the pandemic are now part of their lives, things they cannot live without.”

For Target, there’s a clear financial benefit, too: Customers who shop across its stores and website spend four times as much as those who only shop at stores.

Along with selling bananas and workout clothes, Target is selling more advertisements.

Its media company, Roundel, launched in 2007 with five employees. It’s grown to more than 500 employees and a more than $1 billion business, Sylvester said. She said the company expects that to double to $2 billion in the next few years.

For instance, she said, Clorox hired the media company to measure customer behaviors and ran a test to see which customer resonated with customers. It saw a 40% higher return on ad spend and a 25% increase in customer retention during an ad campaign.

She called it a “win-win-win” as Target taps a new revenue stream, clients see a bounce in sales and shoppers get more relevant, personalized offers when they browse the company’s website or app.

It’s the same playbook of some retail rivals, including Kroger and Walmart, that are looking beyond retail for other streams of revenue.

Nearly a third of Target’s total sales last year came from brands it created and sells exclusively. Those range from its pet food brand Kindfull to its activewear brand All in Motion.

Those private brands, which tend to have a lower price point for customers and a higher profit margin for the company, could give Target a leg up with value-conscious customers — especially as households are mindful of inflation.

One of the areas it’s bulked up on in private label is grocery, a heavily shopped category and one where prices have noticeably gone up in the U.S. Food costs are up 7% over the past year, according to the Labor Department. Its primary food and beverage brand, Good & Gather, launched in 2019 and has grown to more than $2 billion in annual sales.

Chief Financial Officer Michael Fiddelke said having affordable prices has long been a focus for Target — but will become even more important in an inflationary environment.

Cornell said Target could benefit in another way if customers watch their budget. If gas prices go up, he said shoppers may consolidate trips and buy more merchandise at stores such as Target, which carry a wide range of items in one place.

Target wants speed to be another reason that shoppers choose to buy from its website.

It’s opening up more special facilities called sortation centers that make it possible to get purchases to customers in about a day.

Last year, it opened the first sortation center near its headquarters in the Minneapolis area. Nearly all of Target’s online orders are fulfilled in the back of its stores. The special facilities help clear out those packages, sort by zip code and take them to customers’ doors more quickly.

By the end of April, Target said it will have six sortation centers.

Mulligan said in the past, packages would crowd the back of stores and linger for hours as Target waited for carrier partners like UPS and FedEx to pick them up for delivery. Now, he said, Target can sweep the back of the store three or four times per day, freeing up space for employees to keep picking and packing and moving the purchase closer to its destination.

In the Twin Cities, for example, he said 70% of the packages delivered over the holidays came from Minneapolis stores. He said at the sortation center nearby, the company created dense, cost-efficient routes and eliminated the need for packages to make more stops in the shipping journey.

For packages heading further away to Ohio or to Texas, the carrier partners continue to help Target, he said. For local packages, however, Target also uses contractors who work for Shipt.

The end result is also lower costs for Target, too. He said average fulfillment costs dropped by over a third.