Target CFO: 'Remarkably resilient' consumers in tough backdrop

Shares of Target (TGT) are trading higher on Tuesday as the company posted its fourth quarter earnings, easily beating Wall Street expectations on both the top and bottom lines. The company also revealed adjusted net earnings jumped 57.8% year over year to $1.38 billion.

Target COO and CFO Michael Fiddelke joins the Live show alongside Yahoo Finance Executive Editor Brian Sozzi to discuss Target's performance and how the company has organized its business model and inventories for better growth. He also teases Target's potential forthcoming membership program, noting, "We're listening to our consumers...how we can make them fall more in love with Target."

Fiddelke explains that Target has seen a remarkable growth in foot traffic, a gain he partially attributes to consumer resilience to inflation: "Over the last couple of years, inflation has been stubbornly high and we know the impact that's had on American families. If you're shopping for your grocery run and the food and beverage products cost 20% to 30% more than they did a couple of years ago, that's a real pain point for the American consumer. You add that to higher interest rates and we're excited to see inflation start to normalize. We think that's a good thing for the consumer. A consumer that's been remarkably resilient against that tough backdrop and within our business I think we see some signs of that rebalancing of the consumer spending portfolio with improvement we saw in our discretionary categories in Q4."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

[AUDIO LOGO]

BRIAN SOZZI: Big moment for investors in Target. The discounter blew away fourth quarter profit estimates and we'll share a lot about its forward outlook at a key New York City investor day. Let's get to Target COO Michael Fiddelke. Michael, great to see you. As always, thank you for joining us. So really strong positive reaction to what Target had to say. And if I unpack this quarter, Michael, I see sales down-- comparable sales down 4.4%. But I see margins up. I see a big earnings beat. Do you think the street is underestimating how serious Target is about taking costs out of its business to improve margins?

MICHAEL FIDDELKE: Well Thanks for having me, Brian. And maybe starting with that fourth quarter, and you hit a couple of these points. But to me, the headlines are first, if you add Q4 to the progress the team's made this year on profit, which was an important goal for us heading into the year, growing operating income by nearly $2 billion this year is a great step forward on a line where we had some work to do after last year.

But importantly, what we're talking about and what we'll share today is our excitement for the growth in the year to come. And even within our fourth quarter, where to be clear, we're not satisfied with the top line. We won't be satisfied until we see strong positive comps. That's what we expect to deliver in 2024, but within the fourth quarter, we saw some sequential improvement. We saw traffic being relatively stronger than it was earlier in the year. We saw a step forward in our digital business.

And importantly, we saw a nice step forward in our discretionary categories. So we're excited to build on that into next year. And the way we drive value over time is with a strong top line and great profit performance. And we're excited to pair those two things in 2024.

BRIAN SOZZI: Michael, Target pulled out, what? $500 million in costs from it's business last year, how much costs are there left to pull out of the Target model?

MICHAEL FIDDELKE: One of the things we're excited about, if you look back over the last several years, is we grew faster than we ever intended in the first couple years of the pandemic. And that's scale going from a $70-some billion retailer to an over $100 billion retailer brings so many opportunities to take that higher volume and find ways to take out waste, do things more simply, and that's what the teams have been hard at work at.

That half a billion dollars in efficiency work this year is a credit to the teams getting after that work in a real way and it paying off. And we think there's more runway there. And another example of where productivity comes from is great inventory management. And we've really seen that this year. With inventories materially down year over year, important, we had some work to do there after last year, but importantly, in stocks are as strong as they've been in years right now.

And that too for lower inventories, better in stocks, so much productivity comes with that. Our stores are more efficient when their back rooms aren't full, our DCs can be more efficient when they're able to manage just the right amount of product, and our teams have done a wonderful job managing a great inventory position this year.

BRIAN SOZZI: You mentioned that the traffic started to come back. What do you attribute that to?

MICHAEL FIDDELKE: I think it's a handful of things. And, you know, a lot of what I'm excited about in the business that we'll do even more of next year, I think, contributes. There are some things that have worked really well for us for a while. A strong Drive Up business. Double digit growth in Drive Up in Q4, double digit growth in Drive Up for the year, that's clearly a way to shop that consumers have fallen in love with.

And, you know, we don't just take that for granted. We work every day to make it better. And so this was the first quarter where we had both a full quarter of-- we can bring Starbucks out with your Drive Up order, you can do returns via Drive Up, and the guest response to those services have been great.

BRIAN SOZZI: When does Target get back to growth mode for comparable sales? Is that a spring break quarter type thing or we're talking-- we're having this conversation for the holiday season in the second half. And that's when Target starts growing sales again.

MICHAEL FIDDELKE: Well, in aggregate for next year, we expect to grow. We've got to do a sales decline in Q1, but would expect in Q2, 3, and 4, we're returning to growth.

BRIAN SOZZI: And you will still be able to-- so the target-- I just want to get back to the cost. Is the target is still $2 billion in cost out?

MICHAEL FIDDELKE: Yes. We've said in efficiency work over time, we expect $2 to $3 billion of sustained efficiency improvement from that work. And we got a great down payment on that progress with a half a billion this year. And again, the theme of that efficiency work, so much of it goes back to growth in two ways. It's the growth we've seen that opens up the efficiency opportunities, and when we do that right, that gives us the fuel to invest in all the things that drive our growth going forward.

And we're excited for the investments we'll continue to make in the business. You've heard me say in past conversations, Brian, those investments we make in our team are some of the most important investments we make as a business. They're high returning investments that we know work is hard for us as anything else we do. We'll invest in new stores. We'll invest in remodels. You'll see us bring more altas to the market next year. And those investments in growth have served us well over time and we think will in 2024.

BRIAN SOZZI: The last time I talked to you, Michael, inflation was still-- it was still high. It was accelerating, but not the same rates as it was during the height of the pandemic and then in the early part of last year. With deflation now setting in a lot of product categories, are consumers putting that extra item in their basket? Is that what's driving some of the traffic improvement?

MICHAEL FIDDELKE: Well, if we step back and look at the consumer, over the last couple of years, inflation has certainly been stubbornly high. And we know the impact that that's had on American families. If you're shopping for your grocery run and your food and beverage products cost 20% to 30% more than they did just a couple of years ago, that's a real pain point for the American consumer.

You add that to higher interest rates. And we're excited to see inflation start to normalize. We think that's a good thing for the consumer. A consumer that's been remarkably resilient against that tough backdrop. And within our business, I think we see some signs of that rebalancing of the consumer spending portfolio with the improvement we saw in our discretionary categories in Q4.

BRIAN SOZZI: What has also been resilient, Michael, it's the big box retail model. A lot of retailers that you compete with, and some I'll call out like a Home Depot, they're back to opening stores at a rate that, I think, has really is coming as a surprise to many investors. How many stores will you open this year? And will they be in that supercenter or that large format model?

MICHAEL FIDDELKE: Now, we'll share more about that this morning. But we get really excited about our prospects of opening stores. We opened 21 new Targets this year. And to bring a new Target to a market that didn't have one before and the guest response we see, that's work we get excited about. Wearing my CFO hat, the returns on those projects look as strong as ever. And you will see us mix more to some of those big boxes stores where we can bring the entire Target experience to a new market.

BRIAN SOZZI: Also Target is supposed to announce some form of membership program. What can you share on that front?

MICHAEL FIDDELKE: More to come in our remarks this morning on some of the specifics. But what I can say is we start with a great foundation. Our Target Circle program with 100 million members has been really valued as a loyalty program by those that participate in it. That kind of free to join great value brought by Target Circle every day is a fantastic base.

But like always, we're listening to the consumer to find ways-- we can make it better, we can make it easier, we can provide even more value. And so we'll share more today about what our plans look like to take that great starting program and make it even better.

BRIAN SOZZI: I imagine what, after you announce this program, Michael, the comparison is going to be right to Amazon Prime. How far does Target want to push this? Does it want to get into content? Does it want to get into cloud services? What is Target's lane? And how serious you are about taking that Amazon Prime member away.

MICHAEL FIDDELKE: Well, like all things, we're listening to our consumers. How can we make their shopping experience even better? How can we make them fall more in love with Target? With the products we sell with our owned and national brands, with the ways to shop that make getting those products easy.

And so, you know, that's what you can expect us to pay attention to. We've seen, like I said, a great response to some of those easy ways to shop like Drive Up. We think we have a real opportunity to capitalize on a strong foundation. And our Shipt will shop the store and bring it straight to your doorstep that same day offering. And we think there's runway to grow that offering too.

BRIAN SOZZI: Real quickly, Michael. Before I let you go, what is it like to go from CFO to COO? And how are you spending your days differently?

MICHAEL FIDDELKE: Well, right now, I'm wearing both hats and they're both hats that I'm allowed to wear.

BRIAN SOZZI: I hope they're paying you double, Michael. I hope they really have doubled your paycheck.

MICHAEL FIDDELKE: The thing that I'm excited about, and my finance team would tell you this is true, is nothing fills my cup more than spending time with our teams. In the field, in our stores, in our distribution centers. And so as I step into working with the operations team even more, it's a chance to get to do that day in and day out even more than I have in the CFO role. And I couldn't be more honored to be leading an incredible team.