Retailer spending more on people, less on stores

MINNEAPOLIS —  Target Corp. said on Wednesday  that it is slowing the pace of remodels and new store openings as it focuses on dealing with the surge in store traffic and sales associated with the COVID-19 outbreak.

“We are prioritizing the work that’s in front of us to support our team, store operations and supply chain as families across the country rely on Target for everything they need in this challenging environment,” Target chairman and CEO Brian Cornell said in a statement. “I want to thank our entire team for their efforts, which have been nothing short of heroic. Over the past few weeks we’ve experienced an unprecedented surge in traffic and sales, as guests rely on our stores and same-day services. Ensuring we can take care of our team and deliver for the millions of guests who are counting on us remains our top priority.”

Target has raised the pay by of the hourly full-time and part-time employees in its stores and distribution centers by $2 an hour, and says that increase will  for its store and distribution center hourly full-time and part-time team members until at least May 2. The company is offering a new paid leave option for employees who are 65 or older, pregnant or those with underlying medical conditions. Target is also paying out bonuses for 20,000 hourly store team leads that manage individual departments in its stores across the country.

Target said it is scaling back its store remodeling and opening plans for the year as it ramps up support for its team members. The retailer now expects to remodel 130 stores this year, down from the previous plan of about 300. Remodeling projects that are already underway will be completed this year, while all others will be pushed into 2021. Similarly, the company now expects to open 15 to 20 new small format stores in 2020, instead of the 36 previously announced. In addition, the effort to incorporate fresh grocery and adult beverages into the Company’s Drive Up and Order Pickup services is temporarily on hold.

These strategic moves come against a backdrop of surging sales as consumers have stocked up in response to the COVID-19 outbreak.

For the first three weeks of the first quarter, which began on February 2, Target recorded comparable sales and a category mix that were in line with expectations and prior financial guidance.

But beginning with the fourth week of February and into the first part of March, the retailer saw an increase in traffic and comparable sales across its multi-category portfolio. For the month of February, total company comparable sales increased 3.8%. And beginning in mid-March, the company experienced an even stronger surge in traffic and sales, with a category mix heavily concentrated in the Essentials and Food & Beverage categories. Around that time, the retailer also sales surge within the part of the Hardlines business to such in-home activities as Home Office and Entertainment, while performance softened meaningfully in Apparel & Accessories.

Month-to-date in March, overall comparable sales are more than 20% above last year, with comparable sales in Essentials and Food & Beverage up more than 50%. During that same period, comparable sales in Apparel & Accessories are down more than 20% compared with last year.

Target said it has maintained its low everyday prices during this period, but stronger-than-anticipated quarter-to-date sales have led to gross margin dollar growth ahead of prior expectations.

Continued sales declines in higher-margin discretionary categories could result in lower-than-expected gross margin dollar performance for the remainder of the quarter, though. In addition, certain first quarter costs will likely be higher than expected, driven by investments in pay and benefits, the spike in merchandise volume in stores and the supply chain, and the impact of additional hours dedicated to more rigorous cleaning routines in stores and distribution centers across the country. Collectively, these changes are expected to add more than $300 million of incremental costs to the company’s prior outlook for the first quarter.

Given the highly fluid and uncertain outlook for consumer shopping patterns and government policy related to COVID-19 , Target on Wednesday withdrew its prior guidance for first quarter and full year 2020 sales, operating income and earnings per share. The retailer is also suspending share repurchase activity.

“During these unprecedented times, the benefits of our strong balance sheet and diverse, multi-category assortment are particularly important,” said Michael Fiddelke, executive vice president and chief financial officer. “With the best team in retail focused on serving our guests, and ample financial capacity to navigate a highly uncertain outlook, we are confident that Target will emerge from the current environment with an even stronger guest relationship and continue to operate from a position of financial strength.”