• Target To Accelerate Real Estate Expansion Plans Amid Sales Growth

    Target To Accelerate Real Estate Expansion Plans Amid Sales Growth

    Retailer Says It Needs New Sortation Centers, More Major Distribution Hubs and Stores

    More than 95% of Target's first quarter sales were fulfilled by its stores, a total that includes the majority of its burgeoning e-commerce business, via its drive-up and in-store pick-up services. (Target Corp.)
    More than 95% of Target's first quarter sales were fulfilled by its stores, a total that includes the majority of its burgeoning e-commerce business, via its drive-up and in-store pick-up services. (Target Corp.)

    Target Corp. said it is planning to keep its strong sales momentum going by upping the ante on building out its logistics network over the next 24 months.

    The retailer, based in Minneapolis, reported another stellar quarter of sales Thursday, suggesting that the past year of growth could continue as pandemic fears ebb. Executives announced plans to accommodate increasing demand by adding more properties than they anticipated just months ago, including at least five experimental sortation centers, four distribution centers and 30 new stores.

    "Our performance in the first quarter was outstanding on every measure, and showcased the power of putting our stores at the center of our strategy," said CEO Brian Cornell during a Wednesday earnings call.

    Like Walmart and Amazon, Target is one of the few retailers that has flourished through the coronavirus pandemic, which brought down many less nimble and less diversified competitors. Target was one of a limited number of essential retailers, which were largely purveyors of food and household goods, that were allowed to stay open by many communities during quarantining. Consequently, its sales soared over 2020, buoyed first by a spate of survivalist-style shopping sprees by panicked consumers followed by an explosion in online ordering — facilitated by in-store and curbside pick-up services — as the illness lingered and social distancing became the norm.

    Target's first quarter results suggest that its gains in sales and customer base could outlive the health crisis, but executives said the company needs to to act quickly and expand physically in industrial and retail real estate if it is to keep up with higher baseline demand.

    Target's comparable in-store sales grew 18% in its first quarter of 2021, which ended May 1, over the first quarter of 2020, when the arrival of the coronavirus pandemic spurred consumers into a survivalist-style shopping spree and hyper-charged the retailer's sales. Comparable digital sales over the first quarter of 2021 increased 50% over the year-earlier period. Cornell said that Target captured another $1 billion in market share over the first quarter of 2021 as well, further underlining his contention that Target's performance over 2020 was not a fluke of circumstance.

    Chief Operating Officer John Mulligan said Target intends to add four new regional distribution centers by the end of 2022, an expanded and more specific plan than the one Target executives outlined in March. At the time, Target disclosed plans for the first two: a 1 million-square-foot facility at 3501 S. Pulaski Road in Chicago and a 1.11 million-square-foot building at 2858 U.S. Route 322 in Logan, New Jersey.

    These are expected to open over the next few months, Mulligan said on Wednesday. He did not provide information about the locations of the two additional facilities, but said they are expected to be in high-volume, high-growth regions.

    "Once these buildings are operating at scale, they'll meaningfully shorten lead times to nearby stores, improving in stock levels while reducing the need for safety stock in those locations," Mulligan explained.

    'Opportunity in Front of Us'

     

    On the other end of the size spectrum, Target executives said the company was pleased with the performance of a pilot project, a new sortation center at a 399,000-square-foot building at 2600-2800 NE Winter St. in Minneapolis.

    The facility is far smaller than a traditional retail warehouse, and was intended to work as a rapid-fire through-put, rather than a storage space.

    The sortation center model is "designed to receive and sort packages from a large group of surrounding stores multiple times a day, which allows for more optimized, granular sortation," Mulligan said on the Wednesday call. "This precision reduces cost for our delivery partners, meaningfully reducing what we pay for delivery. In addition, these facilities eliminate the need for sortation at the stores they serve, while freeing up packing capacity at those same locations."

    Given the success of the Minneapolis location, Target said it intends to build up to five more sortation centers this year, with more to come in 2022. Those new sortation centers are designed to be smaller than the pilot location, and smaller than even a typical Target store, Mulligan said. For reference, Target stores are about 130,000 square feet on average, according to statistics provided by the company.

    Mulligan did not provide specifics as to the locations in play, but did say Target would focus on "markets with a high concentration of local package delivery."

    He added that Target is still taking a conservative approach to the expansion of sortation centers, and still had a lot of runway for the roll out of the model.

    "It's early days for us still. We always talk about crawl, walk, run [at Target]," Mulligan said. "I'd say we’re still firmly in crawl here in Minneapolis. And so we see a lot of opportunity in front of us."

    On an even smaller scale, Target executives said the company is investing in updated fixtures inside its existing facilities to create additional capacity. The new equipment is not expensive, but is expected to free up "a substantial amount" of capacity in Target's existing logistics network, Mulligan said. He estimated it was enough to equal about 1.5 new distribution centers.

    Target is also ramping up its building program on the consumer-facing side, its fleet of about 1,900 stores. Over the second quarter, Target intends to remodel about 30 stores, with 100 more planned for the second half of the year, Mulligan said.

    The company plans to open about 30 additional stores across the country this year. Most are meant to be small locations in densely populated areas, with footprints of 50,000 square feet or less, Target's format of choice over the last five years.

    However, Mulligan said that some of these would be reminiscent of the big box stores of the late 1990s and early 2000s.

    "Given the local real estate conditions in dense suburban markets, we're also finding compelling opportunities to open somewhat bigger stores between 50,000 square feet and 100,000 square feet, which weren't available in the past," Mulligan said.

    In terms of total investment, Chief Financial Officer Mike Fiddelke said during a Wednesday earnings call that Target had put about $500 million in capital expenditures over the quarter that just closed. Target plans to put about $4 billion into capital expenses by the end of the current fiscal year, Fiddelke said.

    Overall, Target's total quarterly revenue hit $24.2 billion, a 23.4% increase year-over-year. Its earnings skyrocketed as well, clocking in at $3.69 per share on an adjusted basis, up 525% compared with $0.59 in first quarter of 2020.