Target decides to broadcast investors' meeting from Minneapolis because of coronavirus concerns

Target was initially going to spend at least $7 billion over the past three years to refresh hundreds of stores, open dozens of new ones and upgrade the company's technology and supply chain.

The cost for capital expenditures over that time span ended up coming in closer to $9 billion as it decided to remodel even more stores.

Investors aren't complaining.

Those investments — along with others to roll out new private-label brands, increase employee training and roll back prices — have been heralded as some of the key reasons for the Minneapolis-based company's resurgence as one of the best-performing retailers in the industry.

That strategic plan was unveiled in February 2017 at Target's annual investors meeting.

On Tuesday, executives will lay out the latest updates to that road map at their annual investors' meeting.

That meeting was originally scheduled to be held in New York. But given the growing concerns about the spread of the coronavirus, the company decided over the weekend to broadcast it from Minneapolis instead.

Among those making Target's case will be a new face in the C-Suite: Michael Fiddelke, 43, a 15-year company veteran who was promoted to chief financial officer in November. Investors will also likely have lots of questions for him and the rest of the team about the retailer's surprisingly soft holiday sales and the impacct of the coronavirus epidemic on Target's ability to keep shelves stocked.

While Target will slightly decrease its capital expenditures as the pace of new store remodels slows after this year, Fiddelke said Target will continue to make significant investments in technology, supply chain and new stores.

"That's the thing that we think has driven our success and so we'll continue to keep an eye out for what are the right places we can continue to invest," he said in an interview. "We want to play offense."

Being able to invest "with conviction," he added, is one of the key differentiators, as CEO Brian Cornell also often likes to say, between the winners and losers in retail today. But being able to do so requires a strong balance sheet and cash flow.

In retail, the role of the chief merchandising officer often gets the limelight because the products companies sell is what distinguishes them from one another.

But CFOs also play an important role in balancing smart investments with cost controls in order to keep investors happy. That's something that Target has been able to do well the last few years, said Neil Saunders, an analyst with GlobalData Retail.

"But that's a very difficult thing to do, because there's no shortage of people who want to spend money on all sorts of different things," he added.

Coming off an impressive year, the road ahead for Target won't be easy, especially since it's up against tough sales comparisons from the last year.

"There's definitely still a lot of opportunities, but also a lot of headwinds and potential challenges — coronavirus, tariffs are still lurking, potential disruption from elections, danger of slowdown in consumer economy, and competitive challenges from Walmart and Amazon," Saunders said.

In his first few months on the job, Fiddelke has already experienced firsthand both the highs of being at Target as well as some of the road bumps.

A couple of weeks into his new role, Target reported third-quarter sales and profits that blew away analysts' estimates, shooting its stock up 14% to an all-time high. Target's shares ended 2019 up nearly double where they started at the beginning of the year, a blockbuster performance unmatched by its rivals.

But 2020 has been off to a rockier start. In January, Target reported disappointing holiday sales, sending its shares tumbling. Target's stock was knocked down another 10% last week as the spread of the novel coronavirus led to a global sell-off.

Nonetheless, Fiddelke is optimistic about Target's future.

"I've got a ton of confidence in the strategy we've laid out," he said. "2019 was a banner year for Target. I think we have a ton of runway to accelerate against that strategy in the years going forward."

Target will continue to focus on curating a strong mix of owned and national brands, elevating the physical shopping experience with plans for 300 more remodels this year, and enhancing its suite of fulfillment options that include in-store and curbside pickup as well as same-day delivery, he said.

As for the coronavirus, he said Target's teams are closely monitoring the situation, and will decide based on the best information they have before Tuesday's meeting how to factor it into the retailer's guidance.

Last week, executives at Richfield-based Best Buy said they are expecting first-quarter sales to be depressed from anticipated product shortages in the coming months because of coronavirus.

During the holidays, Target's comparative sales growth came in at 1.4%, much lower than the 3% to 4% that had been forecast. Fiddelke said it was mostly about softness in toys and electronics where there wasn't a lot of newness.

"So we'll work with our vendor partners on that, and then we'll build off some places where we saw some real strength and where we think we can lean in even more and be bolder," he said, noting that apparel, beauty, and food and beverage all saw decent gains in the holidays.

The good news for Target is that Walmart also came up short of expectations with its holiday sales, said Brian Yarbrough, an analyst with Edward Jones.

"It definitely alleviates the concern that Target is losing share to Walmart," he said. "But I don't think it alleviates the concern around Amazon. It heightens it because Amazon had a pretty blockbuster quarter."

Even with the disappointing holiday results, Target still plans to report strong full-year results with comparable sales growth of more than 3% and record-high earnings per share.

Those numbers align with the financial model that Target is now using to benchmark itself against for the future. That road map calls for growth of low-single digits in comparable sales, mid-single digits in operating income and high-single digits in earnings per share, the latter being achieved mostly through share buybacks.

"That is the algorithm we will use as the right north star over the longer term," Fiddelke said.

But Yarbrough said that while admirable targets, those will be tough metrics to hit. The company has managed strong sales growth in the past few years from big jumps in categories like apparel and home. But it's unclear if they can continue to grow at that same rate.

And other categories where it has opportunities, such as grocery, are lower-margin areas where higher sales won't translate as well to the bottom line.

In 2018, Target saw a big surge in its toy sales in the wake of the demise of Toys 'R' Us. In 2019, it saw sharp increases in its clothing sales as department stores and specialty retailers struggled.

This year, Papyrus and Pier One are among retailers announcing a large number of store closures.

Without naming names, Fiddelke said he sees more opportunities for Target to gain market share from other retailers.

"Given the investments we're making that our guests are responding to, I expect continued share opportunities on the horizon for us," he said.

Kavita Kumar • 612-673-4113