Target posts lower digital sales despite $600 mn for IT spending

Target, one of the leading retail store chains in the world, could not enhance its digital sales in the first quarter of 2023 despite spending $600 million per year in information technology (IT) and other areas in 2022 and 2021.
Target digital sales in 2022Target said sales were flat in the first quarter, reflecting growth of 0.7 percent in store sales and 3.4 percent drop in digital sales. Target’s first-quarter revenue grew 0.6 percent to $25.3 billion compared with last year.

In Q1 2023, Target has generated 82.5 percent of its revenue from stores, while 17.5 percent came from digital channels including its online website. This compares with 81.8 percent from retail stores and 18.2 percent from online sales in Q1 2022.

Target has reported sales of $109.120 billion and operating income of $3.848 billion in 2022. Last year, retail store business accounted for 81.4 percent of its revenue, while digital business contributed 18.6 of its sales.

Target reported operating income of $1.3 billion in first quarter 2023, was down 1.4 percent from last year, driven by an increase in the company’s SG&A expense rate.

Target has revealed that first-quarter operating income margin rate was 5.2 percent in 2023, compared with 5.3 percent in 2022. First quarter gross margin rate was 26.3 percent, compared with 25.7 percent in 2022.

Target in its earnings report said this year’s gross margin rate reflected the benefit of lower freight costs, retail price increases, lower clearance markdown rates, and lower digital fulfillment costs driven by lower digital volume and a favorable mix of lower-cost same-day services.
Target Information Technology investment in 2022Brian Cornell, Chairman and Chief Executive Officer of Target, said the mix of in-store shopping has been growing for well over a year now as consumers have become increasingly comfortable in public places. This has led them to choose more in-store visits, causing in-store sales growth to outpace digital in the first quarter, both this year and a year ago.

Digital transformation

Target is one of the few companies that reveal its IT spending. Target has spent $600 million per year in the last two years for IT and other areas as part of its digital transformation initiatives.

Brett R. Craig is the Chief Information Officer (CIO) of Target, responsible for strategies for digital transformation.

Target’s 2022 annual report has revealed that it made significant investment in store-remodel and expansion plans, in supply chain and in digital and same-day fulfillment through stores-as-hubs model.

Capital expenditures of Target increased in 2022 from the prior year as it invested in strategic initiatives, including an increase in investments in both stores and in supply chain. Beyond full-store remodels, Target invested in optimizing front-end space in high-volume locations to increase the efficiency of Same-Day Services, and built-out and opened approximately 250 Ulta Beauty shop-inshops.

Target has completed over 1,000 full-store remodels since the launch of the current program in 2017, including 140 in 2022.

Target is expecting capital expenditures in 2023 of approximately $4.0 billion to $5.0 billion to support full-store remodels and other existing store investments, new stores, and supply chain projects. Supply chain projects will add replenishment capacity and modernize network, including the use of sortation centers to enhance last-mile delivery capabilities.

Target expects to complete approximately 70 full-store remodels, open about 20 new stores, and add additional Ulta Beauty shop-in-shops during 2023. Additionally, Target will invest in optimizing front-end space. Target also expects to continue to invest in new store and supply chain leases.

“Notably, even within the digital channel, our same-day services, which rely entirely our stores, expanded more than 5 percent during the first quarter. As usual, this increase was led by our drive-up service,” Brian Cornell said.

Target’s first-quarter gross margin rate of 26.3 percent was about 60 basis points higher than a year ago. Main drivers were favorability in merchandising, driven by a reduction in freight and transportation costs, along with the benefit of retail pricing and a lower clearance markdown rate. Target also noticed a small gross margin rate benefit from lower digital volume and a more favorable mix of lower-cost same-day fulfillment.

Rajani Baburajan