Target's priorities change as growth opportunities diminish

For those who are still waiting to hear more from Target about its plans for growth, it's pretty obvious right now. Just look at how the company spends its money.

So far this fiscal year, Target has spent a lot more to buy back stock and pay dividends than it has earned in net income. Meanwhile, the total square feet of retail space in its stores grew by a percentage that rounds to zero.

If that all sounds like a disappointing future lies ahead for one of our region's legendary growth companies, that's not the right conclusion.

To state the obvious, Target has some work to do before really stepping on the accelerator. And even then, going down the same road to growth as it did in the past isn't the right way to go. Ten years ago, Target added 67 conventional Target stores and 22 SuperTargets, but there's no reason to think that kind of big capital investment in 2015 would lead to the same kind of returns.

Returning that money to shareholders this year sure beats wasting it.

Once Brian Cornell got to the company as CEO last year, there was no further talk on the past objective of getting to $100 billion in sales by 2017. It wasn't a realistic goal anyway, and Cornell needed to work on a different set of priorities.

Hitting that sales goal would've meant 2017 U.S. sales of at least $94 billion. The estimate in the financial community now is more like $78 billion. Same-store sales so far this year are not up at least 3 percent, a key assumption underlying the $100 billion plan, but about 2.4 percent.

What the Target team is doing instead of looking for sites for a lot of new stores is improving the performance of the stores it has now, sort of like fixing the foundation before trying to add a third floor.

To do that also means spending money. So let's be clear, the company hasn't been returning all the cash it generates to shareholders. Its capital spending this year is going to be about $2.1 billion, based on management projections earlier this year. That was about what was spent in 2010. What's different is what the company will be buying with that money.

Five years ago, roughly three-fourths of its capital budget was spent remodeling nearly 350 general merchandise stores, including expanded grocery, as well as building new stores. This year, the amount spent on new stores and remodels will be less than half that.

Just 15 new stores were in the store expansion plan announced for 2015, and most of them are smaller stores like one that opened last month in St. Paul in a space once occupied by a bookstore. Instead of stores, the company is spending a lot more money on software and other information technology, along with improvements in the capability to get products from suppliers to the stores and even into the homes of customers.

Even after spending $2.1 billion, though, there's still going to be a lot of excess capital left over. Target generates enough cash flow to actually afford to buy back $3 billion of stock per year, as it plans to do beginning next year, while also investing in new capital assets and maintaining its top credit rating.

The company clearly needs information technology to make it more effective at selling online and getting products to customers, but that spending category is already getting $1 billion this year. New stores don't generate the returns they used to, although the company also has said it would put a new store anywhere that one made sense.

It's doubtful this is the year anyone on Cornell's team proposes another try at a foreign expansion, after the company's failed attempt in Canada.

I once advised a CEO who usually ended a discussion on this topic by insisting that dividends and share repurchases are "defeatist." If we couldn't find good ideas for the shareholders' money, he argued, we should quit and let more capable executives take over.

I enthusiastically agreed. And so I helped buy companies that ended up getting written off or sold and supported research and development budgets that delivered results that ranged from not much to nothing. Well, at least we tried.

There are plenty of companies run by managers perfectly willing to try to invest all the shareholders' money.