(Bloomberg) -- Target Corp. soared after unveiling a forecast for new profit gains on top of the pandemic-related boom that has already sparked robust growth.
Operating profit will post a percentage increase in the low single digits this year, the retailer said Tuesday, bucking Wall Street's expectations that the closely watched number would decline. Target also predicted steady financial gains beyond 2022 as it expands e-commerce capabilities and bolsters its store network.
“We see a growth horizon for years to come,” Chief Executive Officer Brian Cornell said at a meeting with analysts in New York -- the company's first such in-person event since 2019.
The upbeat outlook signaled that Target expects to build on the extraordinary sales boom of the last two years while protecting profit margins from supply-chain snarls and rising wages that are stoking the highest inflation rate in four decades. The company vowed to limit price increases as it seeks to make further inroads against rivals.
“The highlight of the release is the 2022 guidance,” Michael Baker, an analyst at D.A. Davidson, said in a note to clients. “This shows that the operational improvements, which were taking hold prior to the pandemic, along with the share gains over the last two years, are proving to be sustainable.”
The shares jumped 9.8% to $219.43 at the close in New York, the biggest gain since an August 2020 rally that was also sparked by an upside earnings surprise, according to data compiled by Bloomberg. The advance erased much of the company's 14% decline this year through Monday, which was slightly worse than the 12% drop in an S&P 500 retail index over the same period.
Long-Term View
Target's new “financial algorithm” brings back a long-term view that the company abandoned during the pandemic. Starting next year and beyond, the company envisions revenue growth in the mid-single digits, compared with an expectation in the low-single digits under the old framework.
After taxes, return on invested capital will be “in the high 20% to 30% range” instead of the mid- to high-teens, Chief Financial Officer Michael Fiddelke said. The improved outlook underscores Target's ability to use its stores to ship products to nearby customers and serve as pickup points for online purchases.
“This change highlights the asset efficiency of our stores-as-hubs model, which has unlocked the full potential of our store locations to flexibly serve our guests,” he said.
Operating income is expected to rise in the mid-single digits over the long term, with adjusted earnings climbing in the high-single digits.
Margin Pressure
Target still faces plenty of hurdles this year as it seeks to show it can keep growing profitably. Operating margins in the first quarter will be well below last year's rate of 9.8%, the Minneapolis-based company said. Target said Monday it would add $300 million in wage and benefit expense amid a tight U.S. labor market. Rising inflation and higher freight costs threaten all retailers.
“Gross margin may be pressured in 1Q on persistently high product and transportation costs,” Jennifer Bartashus, a retail analyst at Bloomberg Intelligence, said in a report. “Investments to drive supply-chain efficiencies will persist in 2022.”
Target said it was taking a cautious approach to the first quarter and said performance would “generally improve as the year progresses.” That echoes Walmart Inc.'s outlook and signals Target's belief that demand will hold in spite of soaring inflation and slumping consumer confidence.
Operating income will amount to at least 8% of sales this year, Target said. That outlook eased worries expressed by analysts including Steven Shemesh of RBC Capital Markets, who had warned before the report of a risk that Target would reset expectations with a lower forecast.
Cost Control
“It's now clear that the company has more control over costs than the Street gave it credit for,” Shemesh said in a note to clients after Target reported results.
During last year as a whole, Target's sales surpassed $100 billion for the first time, up by more than a third since the pandemic began.
In the fourth quarter, earnings excluding some items climbed to $3.19 a share, topping the $2.88 average of analyst estimates compiled by Bloomberg. Comparable sales rose 8.9%, trailing expectations for a gain of more than 10%. Most of the advance came from an increase in traffic, while the average transaction amount rose less than 1%.
“We certainly see the inflationary cost pressure,” Fiddelke said in an interview with Bloomberg TV. “We have a lot of levers to pull within our business to make sure we're protecting value for our guests. Price is the lever we pull last.”
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