Target warns of slow growth but plans to spend up to $5B to revamp stores

Target on Tuesday forecast muted profit growth in 2023 and warned of the need for more discounts to woo shoppers cutting their discretionary spending due to surging inflation.

The retailer’s discounting strategy powered its sales and profit in the holiday quarter to exceed market expectations for the first time in a year, lifting its shares up 2%.

Discounts boosted customer traffic in the fourth quarter but weighed on Target’s gross margins as retailers are forced to cut prices on everything from toys to electronics to clear stocks.

The big-box retailer warned that promotions could increase further in 2023 due to a “constrained environment for consumer spending.”

It forecast annual earnings of $7.75 to $8.75 per share, below analysts’ estimates of $9.23, according to Refinitiv data.

“Target had to lower guidance last year pretty quickly, so they don’t want to make the mistake again of getting overly aggressive with guidance,” John Tomlinson, senior analyst at M Science, said.

Retailers cautious on 2023

Retailers including Walmart and Home Depot had also last week issued conservative annual forecasts on worries about a steep economic downturn in the second half of the year due to rising borrowing costs.

“We’re planning cautiously, and we believe appropriately given the economic challenges we anticipate this year,” Target Chief Executive Brian Cornell said.

Target said it will not buy back shares until its cash flow improves, but will spend $4 billion to $5 billion this year to remodel stores, expand capacity for same-day fulfillment and launch new private label brands.

The company has been making similar investments in its business for the last two years. But this time it comes against the backdrop of Target looking to cut costs to save $2 billion to $3 billion over three years.

The company’s comparable sales in the quarter ended in Jan. 28 rose 0.7%, while analysts expected a 1.5% fall.

The company said it expects full-year comparable sales in a wide range from a low-single digit decline to a low-single digit increase.