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Shoppers exit a Target store in Brooklyn, N.Y., on Nov. 26, 2021.BRENDAN MCDERMID/Reuters

Target TGT-N plans to invest as much as $5-billion this year expanding services for customers, including a drive up service for returns, renovations at 175 stores and improvements in online shopping.

The Minneapolis retailer announced the investments Tuesday during its annual investor meeting as it reported a 43 per cent tumble in profits for the holiday quarter, reflecting the ongoing challenges of balancing more cautious consumer spending and rising costs.

Target issued a cautious outlook for the year as inflation squeezes household budgets, but it topped Wall Street expectations for the fourth quarter and shares rose nearly 3 per cent in midday trading, reversing an earlier sell-off.

“We recognize that the landscape is unpredictable, and there are plenty of challenges in the near-term horizon,” Target’s CEO Brian Cornell told analysts at the meeting on Tuesday.

Target’s more modest expectations for 2023 follow weaker outlooks from Walmart WMT-N and Home Depot HD-N last week. Higher costs for everything from food to gas is weighing on Americans, though there has been some easing of inflation in recent months.

Part of the reason inflationary pressures have eased, at least for some things, is a campaign by the Federal Reserve to cool spending, and the economy. Those efforts make using credit cards more expensive, which can negatively impact retailers.

But how Americans spend is changing, too. More people are spending money on travel or going out for dinner than they were during the pandemic, which can mean they are spending less at stores.

Walmart said it expects sales at stores opened at least a year for its U.S. business to rise 2 per cent or 2.5 per cent for the year, while Home Depot forecasts growth for that metric to be roughly flat this year compared with a year ago.

For the full year, Target expects comparable sales – those from stores open at least a year and online channels – will range from a low single-digit decline to a low single-digit increase.

“We’re planning our business cautiously in the near term to ensure we remain agile and responsive to the current operating environment,” Cornell said in a statement.

Target’s total comparable sales inched up 0.7 per cent in the fiscal fourth quarter compared with a year ago. That was fuelled by increased customer traffic, but customers are shifting their spending to necessities like food and paper towels over discretionary items like fashion. Groceries typically have a much smaller profit margin. Still, Target said that shoppers are attracted to new and trendy clothing, and that’s a key reason for increased store visits.

Cornell noted that the company entered the year in a “very healthy inventory position,” reflecting its conservative approach in discretionary items. Inventory in categories like fashion was roughly 13 per cent lower in the fourth quarter than a year ago.

Target has taken a bigger hit to its business compared to other big box retailers likely because it relies more on discretionary items like clothing and home furnishings. More than 50 per cent of Walmart’s U.S. business comes from groceries; that number is 20 per cent at Target.

It was the fourth consecutive quarter that retailer’s profit has slipped. Target reported a 52 per cent drop in third quarter profits, 90 per cent in the second quarter and a 52 per cent decline in the first.

In early June, Target warned that it was cancelling orders from suppliers and aggressively cutting prices because of a pronounced spending shift by Americans.

Last November, Target said it was slashing expenses with a goal of saving $2-billion to $3-billion over the next three years. At that time, it said shoppers were waiting to buy on sale, purchasing smaller packages and trading down to store brands instead of national labels, which tend to be more expensive.

But even as Target projects lower sales, the retailer is pushing ahead to accelerate its e-commerce strategy. It announced last week that it will spend $100-million to develop a larger network of package sorting centres that cut the cost of delivering online orders while increasing the speed of delivery.

Target said that its drive up service for returns will be rolled out to all stores by the end of this summer. Customers will be able to return most new, unopened items within 90 days of purchases without leaving their car.

Target also plans to open about 20 new stores in addition to renovating 175 of them. One of the big attractions has been its partnership with Ulta Beauty to have shops at the store. Last year, its sales from Ulta Beauty at Target were more than four times higher than in 2021, the company said.

Target also aims to launch or expand more than 10 owned brands. In addition, the retailer will appeal to price sensitive shoppers with more items starting at $3, $5, $10 and $15.

Fourth-quarter profits fell to $876-million, or $1.89 per share, for the quarter that ended Jan. 23. That compares with $1.54-billion, or $3.21 per share, in the year-ago period.

Sales rose 1.3 per cent, to $31.4-billion. Analysts were expecting earnings of $1.40 a share on sales of $30.7-billion, according to FactSet.

Fourth-quarter gross margin rate was 22.7 per cent compared with 25.7 per cent in 2021, reflecting pressure from higher markdowns, net merchandise costs, and so-called shrink, which reflects inventory losses related to such factors as theft, fraud or damage.

The company expects adjusted earnings per share to be in the range of $7.75 to $8.75 for the year. Analysts were expecting $9.18, according to FactSet.

Target said that over the next three years, it expects its operating income margin rate will reach, and begin to move beyond, its pre-pandemic rate of 6 per cent as early as fiscal 2024, depending on the economic recovery and consumer demand.

Shares rose $4.42 to $171.23 Tuesday.

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