The Minneapolis-based chain, which has more than 1,900 stores, described the $8.3 billion in capital investments it has already made or has in the works for its store fleet and distribution network during a third-quarter earnings call Wednesday.
Company officials also talked about the success and expansion of its partnership with Ulta Beauty, Disney and Apple for so-called shop-in-shop sites for those retailers within Targets. A number of national chains have similar arrangements to bring outside companies into stores, such as Sephora setting up shop at Kohl’s locations and Macy’s planning to have dedicated Toys R Us areas.
The pandemic put a damper on in-store holiday shopping last year, but several retail trade groups and real estate brokers have forecast record sales this year because of pent-up consumer demand. Even as inflation rises, Americans are still spending, with the Commerce Department clocking a 1.7% rise in retail sales in October alone.
The outbreak gave a number of retailers, such as Bed Bath & Beyond and Party City, time to spruce up their stores. And not only Target but a bevy of national chains, disrupted by COVID-19, pivoted to bolster their logistics capabilities and deliver goods quickly.
This holiday season Target has the inventory, despite supply chain disruption, and the infrastructure in place to satisfy shoppers at its brick-and-mortar locations, according to John Mulligan, the retailer’s chief operating officer. He also said the company is ready to fulfill online orders for delivery at home or pickup at stores. Walmart, the largest U.S. retailer, signaled similar preparedness this week.
Target expects to complete about 145 store remodels this year, having finished more than 40 prior to end of the third quarter, with “more than 100 additional projects slated to wrap up before the holiday,” Mulligan told Wall Street analysts.
Several Dozen New Stores
The retailer also opened up 15 stores in the third quarter, bringing the year-to date total of new stores up to 30, he said. It's experimenting with small-format stores, while still opening large outlets when the need arises.
“Among those projects, we’ve opened new stores ranging from 11,000 to 160,000 square feet, which demonstrates the flexibility we’ve developed to design the optimal store size for an individual neighborhood based on their local needs and available real estate in the market,” Mulligan said.
To facilitate in-store and drive-up merchandise pickups, Target has undertaken capital projects to add permanent storage capacity in more than 200 high-volume stores, as well as “investing in flexible fixtures to provide temporary storage areas to support seasonal” demand, according to Mulligan.
The changes at the chain include doubling the number of drive-up parking stalls for pickups from last year.
Target has also taken several other steps to boost its logistics network.
“To increase the capacity and efficiency of our supply chain, our team has also opened two new distribution centers this year,” Mulligan said. “In addition, we have two new sortation centers set to open in fourth quarter, with two more on track to open early next year.”
Target needs to be able to handle its online sales, which have soared, according to analysts.
“Despite lapping some very tough prior year numbers, Target has managed to pull another rabbit out of the hat with stellar third-quarter growth,” Neil Saunders, managing director of GlobalData, said in a report. “Overall sales are up by 13.2% over last year; compared to 2019, they are up by 37.3% or by $6.9 billion in cash terms. ... Growth has come from both stores — where sales grew by 10.7% — and online, where sales were up by a whopping 26.9%. On a two-year basis, Target has more than tripled its digital sales with growth of 222.3% compared to 2019. This makes it one of the fastest growing mainstream retailers in the digital space and means it has taken a significant amount of online share over the past couple of years.”
Ready for the Rush
Target strives to be fully prepared for the holidays, when it handles its largest sales volume of the year, according to Mulligan.
“That’s why every year we construct our plans with the fourth quarter in mind, so we can remove distractions and roadblocks in advance of the holiday peak,” he said. “That means on the properties’ team we plan our remodel and new-store projects so they’re completed before the holidays. And our technology team rolls out new systems and tools on the same timeline.”
Target said it will be hiring an additional 30,000 permanent workers for jobs across its supply chain network. The employees plan to support new buildings in the company’s regional Washington, D.C., operation, staff and support new sortation centers for last-mile fulfillment and help add replenishment capacity to stores.
“Our team is looking ahead and not slowing down,” Target CEO Brian Cornell said. “We continue to invest in new stores and existing stores, our supply-chain and fulfillment capabilities and our own and national brands and the safety and well-being of our team.”
The company’s capital expenditures were $2.5 billion in the first three quarters and are expected to reach $3.3 billion for the full year, according to Chief Financial Officer Michael Fiddelke. Target anticipates $4 billion to $5 billion in capital expenditures next year, he said, as new stores are added, existing ones are remodeled and more sortation stations debut.
The spending has paid off, according to Saunders.
“Improvements in stores, to online services, and to products have all allowed it [Target] to take advantage of prevailing conditions to a greater extent than many other retailers,” he said. “Investments have also paid off on the bottom line, where net income increased by 46.8% this quarter. Utilizing stores for fulfillment and using improvements to push a higher margin mix have helped to offset many of the pressures in staffing, distribution and supply chains that are now affecting all retailers. Essentially, Target has put itself in a favorable position that means it is more insulated, although not immune, from inflation in costs and overheads.”
During the conference call, Cornell noted that Target will open more than 100 Ulta shop-in-shops, while Christina Hennington, the retailer’s chief growth officer, elaborated on the expansion of some of of the company’s similar collaborations.
“With each partnership, we’re adding excitement, convenience and newness for our guess, while unlocking incremental growth for each of the partners,” she said. “So it’s no surprise we’re building on this momentum for the holiday season. We are tripling the number of Disney stores at Target locations, and doubling our Apple shop-in-shop experiences. On top of that, of course, this will be our debut holiday season featuring Ulta Beauty at Target.”