Target warns of slow growth but plans to spend up to $5 billion on store upgrades

On Tuesday, Target is forecasting subdued earnings growth in 2023 and is warning that additional discounts are needed to convince shoppers to cut back on their discretionary spending due to rising inflation.

The retailer’s discounting strategy saw its holiday quarter sales and earnings beat market expectations for the first time in a year, sending its stock up 2%.

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

The major retailer warned that promotions could increase in 2023 due to a “limited consumer spending environment”.

According to Refinitiv, the company’s annual earnings will be between $7.75 and $8.75 per share, below analysts’ estimate of $9.23.

“Target had to downgrade pretty quickly last year, so they don’t want to make the mistake of targeting forecasts too aggressively again,” said John Tomlinson, senior analyst at M Science.

Retailers are cautious about 2023

Retailers including Walmart and Home Depot also released conservative full-year forecasts last week on fears of a sharp economic slowdown in the second half of the year due to higher borrowing costs.

“We are planning with caution, and we think that is the right thing to do given the economic challenges we expect this year,” said Target chief executive Brian Cornell.

Target said it won’t be repurchasing shares until its cash flow improves, but will spend $4 to $5 billion this year to revamp stores, expand same-day fulfillment capabilities, and launch new private label brands. .

The company has been making similar investments in its business for the past two years. But this time it comes as Target is looking to cut costs to save between $2 billion and $3 billion over three years.

The company’s like-for-like sales for the quarter ended Jan. 28 rose 0.7%, while analysts had expected a 1.5% drop.

The company said it expects full-year like-for-like sales to range widely from a slight single-digit decline to a slight single-digit increase.