Target faces a future of more modest growth

In August 2011, Gregg Steinhafel, then CEO of Target Corp., stood before a room of analysts and said the Minneapolis-based retailer aimed to grow sales by 5 percent a year and climb from $70 billion to $100 billion in sales by 2017.

It was a lofty goal that Target came nowhere close to hitting.

Instead, Target sales are up 7 percent from $67.4 billion in 2010 to $72.6 billion last year.

When Target's new CEO, Brian Cornell, convened a similar meeting last week, he set the retailer on a more modest course. The company would now aim for just 3 percent growth a year, with 1 percent coming from stores and most of the rest from digital sales.

And when Chief Financial Officer John Mulligan laid out the details for analysts, he used the word "modest" six times. He said the company expects modest annual growth, a modest improvement in gross margins, and a modest number of store openings.

"It's the get-rich-slow plan," he said in an interview at the company's Nicollet Mall headquarters. "Nothing sexy. Just keep on doing what you know works."

It's a more humble road map for the company, which saw double-digit sales growth as recently as 2007 fueled by lots of new stores.

With a more modest view of the future, Target will also become a leaner company. The retailer said last week that in the next two years it will slash several thousand jobs from its Twin Cities headquarters, where it currently employs about 13,000 people. Some vice presidents were shown the door last week. Bigger cuts are expected in the coming weeks.

Analysts said the financial targets laid out last week are more realistic, if a bit cautious. To attract and reward shareholders, the company is also planning to raise its dividend and to resume share buybacks.

"Cornell doesn't want to set out these grandiose expectations like Steinhafel constantly did and then miss them," said Brian Yarbrough, an analyst with Edward Jones. "They were a little bit out of touch. They were too bullish."

Target is being more practical, he added. The retailer has shown signs of momentum in the two most recent quarters, but it was up against fairly easy comparisons in the fourth quarter given the data breach from the previous year. And the economic recovery has been plodding along slower than expected.

Yarbrough said it's unrealistic to expect Target to match the impressive numbers posted by rivals such as Costco, which is one of the stars in the retail industry and often posts 7 and 8 percent increases in same-store sales. Costco is still building on a younger store base and opening dozens of stores a year. "I would never expect that from Target," he said.

In 2013, Target pulled back on its initial forecast, saying it expected U.S. sales to grow 3 to 4 percent through 2017.

But it didn't back down from its hopes that the Canadian stores would contribute $6 billion in sales within the next few years. Instead, those stores racked up billions of dollars in losses. Cornell decided in January to stop the bleeding and exit Canada.

Last week, Cornell said the more humble outlook is "appropriately conservative" given that it will take time for the new initiatives he's rolling out to take hold. For example, he's tinkering with an overhaul of the grocery department that he hopes will drive more shopper traffic to stores, but that will not begin rolling out to stores next year. And he's doubling down in Target's signature categories such as apparel and home goods, but it will be a while before that hits stores.

"We're still in the early stages of that reinvention," he told reporters. "When you talk about [adding] mannequins, well, today we're in 400 stores. We're on our way to 1,000."

He added that he expects sales to accelerate over time.