Target's (TGT +2.63%) fourth-quarter earnings announcement included some of its weakest operating metrics of the year. But the management team isn't worried. In fact, CEO Brian Cornell and his team are predicting faster growth and higher profitability in 2020.
Executives discussed the factors supporting their optimism about Target's long-term potential in a conference call with investors. Below are a few highlights from that chat.
Image source: Getty Images.
It was a good quarter
We came out of the holidays with very low levels of clearance inventory, which held back our January comps due to a lower-than-average level of clearance sales. However, that same lack of clearance sales played a key role in our fourth-quarter profit performance, which was strong despite the shortfall in sales.
-- CFO Michael Fiddelke
As expected, Target's sales slowed considerably during the holiday quarter, with comparable-store sales, or comps, rising just 1.4%. That result translated into comps of 3.4% for the full year, down from 5% in 2018. Customer traffic growth slowed as well, dipping to 2.7% from 5%.
Yet management saw the slowdown as a temporary factor driven by a few seasonal merchandise categories, particularly video games and toys. They pointed to several metrics that suggest high and growing customer satisfaction, including surging engagement with same-day delivery services and rising shopper traffic.
Getting good returns on investment
Beyond the average 2% to 4% lifts we see in year one, we're seeing over a 2% [sales] bump in year two. Not only are [customers] buying more, they're adding more discretionary items to their baskets, and it's giving us a meaningful improvement in gross margin rate that we hadn't planned.
-- COO John Mulligan
Target spent over $4 billion remodeling roughly 700 of its U.S. stores over the past three years. In the call, executives detailed a few tangible results from that investment, which has made stores more attractive to shop in while also making them double as fulfillment centers and distribution hubs for online deliveries. The remodels have pushed sales growth higher, they said, but are also boosting profitability by spurring more consumer discretionary purchases in areas like electronics.
That helps explain why Target is aiming to continue with the initiative by remodeling around 300 stores in 2020, which will push capital spending up to $3.5 billion.
Faster dividend growth ahead
We expect to begin growing the annual per-share dividend at a somewhat faster rate in the years ahead.
-- Fiddelke
Target reiterated that it expects another year of modest comps growth in 2020, with all its positive growth drivers likely making the year look more like early 2019 than the year's final quarter. That outlook depends on continued economic stability, which might be threatened by changing shopper trends in response to the coronavirus.
Yet while short-term sales trends will be volatile, one thing investors can be confident about is rising capital returns. Target's operating margin is expanding again, and the company is set to scale back on its five-year elevated spending project beginning in 2021.
Meanwhile, earnings growth has pushed the dividend payout ratio down to roughly 40%. That means shareholders can expect to see faster dividend hikes in 2020 and beyond, which will bring the ratio back up toward 50% without sacrificing Target's credit rating or its investments in long-term growth initiatives.
