Target 2018 plan includes new delivery options, second wage hike

Free two-day delivery. Rapid expansion of curbside pickup. Raising its minimum wage again this spring.

These were among the highlights of Target's game plan for the coming year that executives laid out on Tuesday to more than 100 financial analysts, making the case that their strategy would keep the Minneapolis-based retailer competitive in the fast-changing retail landscape.

"We're accelerating the pace, pushing even harder, moving faster than ever before," CEO Brian Cornell said at the company's annual investors meeting, held this year at a downtown Minneapolis hotel. "Putting it all together, this is a strategy that is going to make Target America's easiest place to shop."

The changes are on top of the nationwide rollout of same-day delivery, hundreds of store remodels, dozens of new small-format outlets, and several new private-label brands it had already announced for 2018.

While company executives were bullish on the retailer's prospects, Target's stock was on a downward slide for the day, closing down nearly 4.5 percent, as Wall Street expressed concerns about how such investments will continue to put pressure on its profits in the coming years.

"This is what other leading retailers are doing — investing to find growth," said Greg Melich, an analyst with MoffettNathanson.

The heat is on as retailers chase Amazon's dominance online and as the online juggernaut continues to make billions of investments of its own, said Brian Yarbrough, an analyst with Edward Jones.

As they laid out their plans for the year, Target executives went to great lengths to show they were trying to be as cost-effective as possible.

For example, many of the retailer's growing array of fulfillment options to meet the rapid growth in online shopping leverage its existing network of 1,800 stores. Target now ships online orders from 1,400 of its stores instead of just relying on its more remote warehouses as it used to do.

"Shipping from our stores moves product faster, and we do it at a significantly lower cost," said Chief Operating Officer John Mulligan. "I'm confident none of you need a spreadsheet to see that's a really good thing."

That ship-from-store capability is one of the main reasons Target is able to launch free two-day delivery on hundreds of thousands of items for its Redcard holders or on orders of at least $35 among non-Redcard holders. In doing so, Target is now more in line with free two-day delivery offers from Walmart and Amazon. Target executives noted there is no membership required, as with Amazon Prime, to be eligible for Target's deal.

Target has been dramatically cutting its shipping times in recent years and has started reaching the two-day time frame in recent months, but the company waited to make sure it could meet that promise before talking more publicly about it on Tuesday.

Next month, Target will begin expanding Drive Up, a service it began testing at 50 stores around the Twin Cities last year, to nearly 1,000 locations by the end of this year. Under this program, customers who prefer to stay in their cars can place online orders in advance and have a store employee load the items into their trunks within a few minutes of their arrival in the parking lot. Walmart has a similar service and is also ramping it up to more locations this year.

Last year, Target began an urban same-day delivery program trial at a handful of Manhattan stores. This year, it will expand it to its stores in all five boroughs of New York City as well as other big cities such as Boston, Chicago, San Francisco and Washington, D.C. In those urban markets where many customers may travel by subway, foot or cab, customers are charged a flat fee to have items they pick out in stores delivered to their doorsteps.

Shipt, the same-day delivery service Target recently rolled out in the Twin Cities, is already up and running in 440 stores with plans to have it working in a majority of Target stores by the holidays. The company also is bringing Target Restock, its next-day delivery program for household essentials and dry groceries, to 30 more cities this year.

In addition to the proliferation of delivery options, Cornell also said Target will raise the minimum wage for its store workers to $12 an hour this spring. The company already set it higher, to $11, last fall, leading to a 30 percent spike in applications for seasonal workers, and pledged to raise it to $15 an hour by 2020.

The change has brought a strong pool of talent to Target stores, Cornell said.

And after the strong response to the 10 new brands Target rolled out last year, Cornell said the company is going to continue to introduce more this year.

"While our design and marketing team would tell you we set an incredible pace in 2017, we're only going to move faster and faster in the months to come," he said.

Savings from a lower federal tax rate passed in December will help pay for some of the investments, with Target's capital expenditures increasing this year to $3.5 billion, up from $2.5 billion last year.

In a nod to some of the skepticism among investors, Chief Financial Officer Cathy Smith said she knows Target remains a "show-me story" to some of them. She added that some of the initiatives have already begun to pay off.

Before the investors meeting Tuesday, Target posted its full fourth-quarter results showing its strongest sales gains in recent years, with comparable sales up 3.6 percent. The company said the growth was driven by higher traffic to stores and its website and was enjoyed across all of its categories of merchandise.

However, Target's shares began to drop after the earnings release because of lower-than-expected gross margins, due in part to a 29 percent jump in online sales.

The recently enacted tax law helped boost Target's quarterly profits to $1.1 billion, a 35 percent increase from $817 million in the same quarter a year ago. When adjusted for one-time items, its earnings per share were $1.37, a penny shy of analysts' expectations.

For the coming year, Target said it expects comparable sales, including during the first quarter, to grow in the low single digits.

In the meantime, Cornell said the jeans that store workers are wearing on weekends this year is another sign of the company's progress. Last March, Target told employees that if they helped the company pull off comparable sales growth in 2017 after a rough 2016, they would get a reprieve from having to wear khakis.

"If you were in a Target store on Sunday, you saw a lot of denim," he said.