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Target CFO talks earnings, inflation, and consumer trends

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Target CFO Michael Fiddelke joins Yahoo Finance Live to discuss the company's fourth quarter earnings, consumer trends amid inflation, and supply chain challenges.

Video Transcript

BRIAN SOZZI: Target is out with better-than-expected earnings as consumers shopped, shopped, and shopped some more during the holidays. The company is warning on margins for the first quarter. We talked with Target CFO Michael Fiddelke about the quarter and the road ahead.

MICHAEL FIDDELKE: So when you look at the quarter, our 9% growth, the headline I'd leave you with is that it was driven by traffic. Almost all of that growth came from traffic, and so that means consumers with their feet and their clicks picking Target more often. And so that's an incredibly healthy sign for our business. If you step back and look over the last two years, we've now crossed the $100 billion threshold as a retailer, grown by over 35%, $27 billion over two years, and so we see a lot of strength in the business and that gives us confidence as we look ahead to grow next year too.

BRIAN SOZZI: As a CFO of Target, does inflation keep you up at night?

MICHAEL FIDDELKE: We certainly are watching the inflationary cost environment closely. But I'll tell you, Brian, where we tackle that challenge is through the lens of our guests, and we're focused on protecting value. We have a lot of levers we can pull in our business to combat inflation, and price is the lever we pull last not first.

So making sure our guests find incredible value at Target is our focus day in and day out. You can see the evidence of that in costs going up faster than retails at Target, and it's working. That traffic growth that we saw in Q4 is a testament to guests finding Target with more and more engagement over time.

BRIAN SOZZI: But out of the many other things you should be worried about is inflation. You know, there's also life, et cetera, et cetera. But yes. First quarter-- you mentioned that operating margins will be well below last year. What's driving that?

MICHAEL FIDDELKE: Yeah, there's some unique things in last year's results that I think is going to make profit choppy quarter by quarter. But if you step out from the quarter-to-quarter volatility, the thing that I'm encouraged by is the growth we expect on the year. We expect to grow the top line. We expect to grow the bottom line, and the thing powering that growth is our investments.

We'll remodel more stores. We'll open more new stores. We'll invest in some of those fulfillment services that guests have come to love. Drive-up is a perfect example of that, where we launched that service several years ago. We've made it better over time, adding fresh and frozen products that we didn't have in the assortments to start with. And as we listen to our guests, they've said, gosh, it would be great to get a Starbucks as I complete that drive-up order, and so that's something we'll be testing this year too.

BRIAN SOZZI: Does it also reflect though the outlook-- you know, a cautious consumer spending environment? Listen, Target does not have stores in Russia and Ukraine. Supply chain is not exposed there. I get it. But we've seen a big rise in gas prices in this country the past week, the past month. What's your view on the consumer?

MICHAEL FIDDELKE: Yeah, so there's probably not one single view on the consumer. We see a consumer that's, you know, wrestling with the current global challenges. We see a consumer that's focused on this last phase of the pandemic that we're in, but also seeking a return to normalcy. We see a consumer that's feeling the impacts of inflation but also has a pretty strong personal balance sheet. We see a consumer that's focused on price and value but also willing to splurge in important events like Valentine's Day that was just really strong for us.

And so, you know, we found success by really listening to the consumer and making sure that we're finding ways within our multi-category model and within the ways we make it easy for guests to shop to put forward an offering that has guests continuing to choose Target, and they have.

BRIAN SOZZI: There's a lot of sticker shock out there, Michael. I talk to a lot of the consumer products CEOs. They're out there raising prices. This morning I came across-- gas prices in California are hovering around $5 a gallon. Do you think US shoppers are likely to trade down this spring?

MICHAEL FIDDELKE: Yeah, we're monitoring the consumer really closely as we go into next year, and it's tough for me to predict exactly what consumer trends will play out for the year or what might be at the top of the guests' shopping list. We know it'll be a consumer that's focused on value, and that's why protecting value is so important to us.

We also know we've got a really durable model because we have strength in so many categories. It's easy for us to stay relevant no matter what's at the top of that guest shopping list. So in my house, it might be a kid who's outgrowing their clothes that drives a trip to the apparel floor pad for that trip, or it might be restocking the pantry with a heavy food and beverage order. And so there's so many ways for us to stay relevant. That served us really well over the last couple of years, and I would expect it to next year as well.

BRIAN SOZZI: As you know, I'm a frequent Target shopper, and I have seen-- and it's not just dedicated to you guys. But empty shelves. I guess it's a high-class problem to have that, of course, in part reflects supply chain challenges. How far are you along to addressing this?

MICHAEL FIDDELKE: Yeah, over the last couple of years we've been making progress quarter by quarter. We're never happy when the guest finds an empty shelf, but I feel like we've made good progress as the pandemic has played out over the last couple of years. And we're working really closely with some of our vendor partners to shore up any places where we've got work to do.

I will say, stepping back, we feel really good about our inventory position as we head into 2022. Our inventories are up about 30% to last year, and so the teams have done a wonderful job navigating what's no doubt a complex supply chain to have us in a strong inventory position as we step into the year.

BRIAN SOZZI: As part of fulfilling and getting those products on the shelves, are the workers themselves-- now Target has come out here saying they're lifting their wages where you have led in the past. But still, $15 to $24, depending on location and job-- how hard is it to attract talent in this market here?

MICHAEL FIDDELKE: So I'll tell you, Brian. Those investments in team are the best investments we make, and they aren't just here-and-now investment. We've been on our journey for years to invest in the team, laying out a path to get to a $15 starting wage which we did a couple of years ago, adding investments in wage to the increases that we talked about just yesterday, expanding benefits offerings, adding tuition-free education support. All of that is an investment in the team to deliver that exceptional experience that's driving growth.

And right now, that's serving us well. We track things like the metrics around our ability to attract and retain a great team, and those metrics look for us stronger today than they did pre-pandemic. And so that investment is paying off, and the team is paying off that investment with their support of the growth we see.

BRIAN SOZZI: You're in New York City for your first Investor Day as CFO of Target. I believe now you put out a longer-term outlook. And one thing that caught my attention is Target looking to spend $4 billion to $5 billion on CapEx. I believe you spent 3.5 billion in 2021. If an analyst came to you and asked you, Michael, where are you spending that additional money over the next few years, where are you spending it?

MICHAEL FIDDELKE: Well, the headline for all of it is it's about growth. I'm excited for some of the projects we have in store for next year and beyond, and it starts with our stores. So investing in remodels-- we've laid out a plan to remodel the chain. We're only about halfway through that journey, so there's a lot of Targets waiting for us to put our latest and greatest thinking in your local store, and we know the guest response when we do that is strong.

I'm excited about the new stores that we'll continue to build, find markets that don't have a Target today and be able to add one. We'll continue investing in our fulfillment capabilities-- you know, again, drive-up is a service we've seen guests flock to over the last couple of years, and we're excited to make that service even better by testing Starbucks and returns.

BRIAN SOZZI: So hundreds of remodels over the next three years, and how many stores will you open this year?

MICHAEL FIDDELKE: Yeah, we'll accomplish more than 200 remodels in the year to come. We expect to open in the neighborhood of 30 stores next year, but that's a multiyear journey to make sure we're refreshing our stores with our latest and greatest thinking and to find those markets that could benefit from a Target that doesn't have one today.