Target adding more brick-and-mortar stores, including some the size of convenience stores

Target CEO Brian Cornell told investors Tuesday that the retailer will continue to focus on stores, where most Americans still shop.

The Minneapolis-based retailer will add new stores in urban areas and near tourist attractions as well as expand its store-pickup options to include fresh groceries and alcoholic beverages.

Target also will test a 6,000-square-foot convenience-store concept, about half the size of its smallest store, while the company also works to further strengthen its assortment of private-label and national brands.

"Because our strategy is working, others are taking note and applying some of our pages to their own playbooks," he said at Target's annual investors' meeting, without naming any names.

Coming off three strong investment years in which Target spent a total of about $9 billion in capital expenditures, executives said they will continue a similar pace of spending this year and next on store remodels and new initiatives such as adding robotics to more of its supply chain.

But some investors seemed a bit skeptical, wondering if Target will be able to repeat its blockbuster sales and profits from last year. Target's shares dropped 3% Tuesday, on what was also a down day for the market when concerns about the effect of the coronavirus continued to send shares tumbling.

Some retailers such as Richfield-based Best Buy have said they expect depressed sales in the coming months as production delays in China because of the coronavirus outbreak is leading to some product shortages in consumer electronics.

But on Tuesday — after hustling to switch the investors' meeting from New York to a webcast from its headquarters in Minneapolis because of the coronavirus — executives said they don't see the outbreak having a significant effect on sales this quarter or the rest of the year.

Last month, Target formed a coronavirus team that meets daily and has been closely monitoring purchase orders, production levels in China and the state of the ports. While acknowledging there could be some delays in getting products in from China, Cornell said the company has been working closely with vendors and adjusting plans for its assortment, promotions and displays to work around the supply constraints.

"We feel confident in our plans to manage through this situation," he told analysts.

Nodding to news reports of consumers flocking to stores for hand sanitizer, toilet paper and other supplies, Cornell added that Target has seen "aggressive shopping" across the U.S. in recent days as consumers have been stocking up their pantries amid heightened concerns about the spread of the coronavirus. He said Target is working closely with domestic vendors to bring in more inventory of such items as he expects high demand for such items to continue for at least the next few weeks.

Neil Saunders, an analyst with GlobalData Retail, said there were no surprises in Target's guidance for the year, which aligned with its long-term goals for growth of single-digit comparable sales and mid-single-digit operating margins. But because Target exceeded those expectations last year, some investors are feeling a bit let down.

"Perhaps it's unfair, but Target in 2019 was the star of the retail show," he said. "It remains to be seen what Target can do, but a general perception is that a lot of the gains we've seen in 2019 have now maxed out."

While Amazon raised the bar on fast delivery by rolling out free next-day delivery to its Prime members last year, Cornell said Target's customers are more interested in same-day options, where the company sees more opportunity for growth. Target's same-day offerings of in-store pickup, Drive Up and delivery through Shipt continue to account for more than three-quarters of Target's digital growth and have been leading to an uptick in incremental sales, executives said.

Walmart and other grocers have offered curbside pickup of fresh and frozen groceries for awhile now. But Target's Drive Up and store-pickup services have not up until now included those categories, even though customers have been asking for it.

So starting this spring, Target will add fresh groceries to its pickup services, in the Twin Cities first with plans to roll out the expanded offering to about half of the chain by the holidays. Also in response to customer requests, Target will make alcoholic beverages available for pickup at more than 100 stores in Florida and Oregon this spring with plans to have it up and running at most stores by the holidays.

This year, Target also will open 36 new small-format stores, a record high number for the retailer, including a new store near the University of Iowa. The retailer has been opening about 30 such new stores a year — a pace it expects to continue for the foreseeable future, focusing on cities such as New York City and Los Angeles as well as college campuses.

"And if you watch closely, you might detect a new trend," Cornell told analysts. "We're opening stores near America's most iconic tourist destinations: Times Square, Walt Disney World Resort and the Las Vegas Strip. We learned from our store in Herald Square [in New York City] that there are few places that make travelers feel more at home than Target."

At the same time, Target is looking at an even smaller convenience store-size concept that could be tucked into urban neighborhoods, where customers can grab health and beauty items while also picking up online orders.

"This year, we're exploring designs that redefine our idea of just how small our stores can be," said John Mulligan, Target's chief operating officer. "This design could open up hundreds of additional site options to serve even more people in new trade areas."

The company plans to sign a lease for its first super-small store later this year and expects it to open next year.

Executives also continue to be pleased by the higher-than-expected sales lifts they are seeing from Target's store-remodel program. The company has poured about $4 billion over the last three years into refurbishing 700 stores, with another 300 stores slated to get top-to-bottom makeovers this year. The pace is expected to slow down to 150 to 200 store remodels a year after that.

As part of the store revamps, executives said they are working on a redesign of the electronics department with TVs displayed lower to the ground. The changes will roll out to 200 stores this year as well. There also will be a new front-of-the-store design.

Executives are also addressing some of the problems they faced during the most recent holidays in which Target's sales came in lower than expected. For example, they didn't have enough inventory of some products, an overcorrection for having too much the year before. As a result, Target couldn't capitalize on demand in sales and had less clearance inventory available in January, they said.

After nearly doubling in price last year, Target's shares tumbled in January when the company reported comparable holiday sales that rose 1.4%, well below the 3% to 4% the company had forecast. It blamed the weakness on softness in toys and electronics.

On Tuesday, Target released its full fourth-quarter results in which comparable sales grew 1.5% as sales picked up a bit in January. Its net earnings grew 4.4% to $834 million. When adjusted for one-time items, it earned $1.69 a share, which was better than what analysts were expecting.

For the full year, Target saw comparable-sales growth of 3.4%.

Executives added that the first quarter has been off to a stronger start with sales strengthening in several categories in February.

Kavita Kumar • 612-673-4113