Supply Chain Matters provides highlights and added perspectives to U.S. retailer Target’s recent reporting of Q4 and Fiscal 2024 financial and operational performance.

 

Introduction

Our Supply Chain Matters blog commentaries reflecting on retail industry supply chain performance have been focused on the various market, supply chain and customer fulfillment challenges that retailers have been addressing in the pre and post-pandemic period.

Specifically, high inflation and economically stressed consumers have been more selective in their household budgeting and in their purchase decisions. At the same time, post pandemic consumers have demonstrated that they again seek the in-store shopping experience, but continue to value the convenience of online shopping for certain purchases.

The recently completed 2023 holiday fulfillment period, along with 2023 full year performance are now providing added evidence of retail trending in all three dimensions. We have specifically indicated to our readership that three specific U.S. based retailers would provide the best indicators of retail industry customer fulfillment trends including various changing strategies in inventory management and customer fulfilment efforts, along with restoring higher profitability levels.

We have further pointed to three bellwether retailers, Amazon, Walmart and Target as the best indicators of consumer preferences and buying behaviors that occurred in 2023. They should be indications of what retailers and their supply network fulfillment teams can anticipate in 2024.

 

Target’s Q4 and Full Year 2023 Financial and Operational Performance

Target’s holiday fulfillment and full year financial performance were generally received positively from investors in terms of profitability growth. However, underlying concerns linger regarding declines in retail sales growth.

Q4 holiday period financial performance was headlined by:

  • Total quarterly revenue growth of 1.7 percent to $31.9 billion.
  • Operating income growth of 60.9 percent to $1.9 billion
  • Comparable same store sales volume declines of 4.4 percent

Full Year financial performance was that of leveraging higher profitability. Highlights included:

  • Total retail sales revenue decline of 1.7 percent to $105.8 billion. The 1.7 percent decline was offset by a 5.1 percent increase in other revenue.
  • Operating income growth of 48.3 percent to $5.7 billion, reflective of lower merchandise markdowns and lower inventory, supply chain, and digital fulfillment costs.

The retailers full year revenue decline, the first in seven years, was headlined succinctly by The Wall Street Journal’s analysis: “as it (Target) struggled to entice shoppers to splurge on items like home goods and electronics.” In essence, this was an acknowledgement that economically stressed consumers were spending the bulk of their household budgets on food and essentials.

Outlook and New Initiatives

Company executives further indicated an expectation that consumers will remain cautious in spending into the first half of 2024.

In conjunction with the reporting of financial performance, the retailer has announced added efforts to recapture customer traffic and overall sales growth.

Plans include a ten year investment in upwards of 300 larger stores, along with continuing to invest in select existing stores, which can stock added food and grocery items along with supporting online customer fulfillment and pick-up from store locations.

The retailer will further unveil a paid online shopper loyalty program reportedly similar to Amazon and Walmart to expand free shipping options.

Supply Chain, Inventory and Customer Fulfillment Actions

Regarding prior inventory bloat, the message was that overall inventory levels have now improved and that with balanced inventory to meet expected demand, lower discounting on items should be sustained. According to a published report from Bloomberg, this retailer reduced inventory levels by 12 percent in Q4, better than what analysts were expecting. However, online sales and store traffic declined 1.7 percent in Q4. That was a noted improvement from a 4.1 percent decline that occurred during Q3.

Executives reportedly indicated that investments in supply chain capabilities and supporting technology are continuing, but with less emphasis on larger warehouses.

Newly appointed Chief Operating Officer Michael Fiddelke, the retailer’s existing Chief Financial Officer, indicated to investors that the retailer is now focused on placing smaller replenishment orders for inventory with faster delivery times in an effort to be more flexible to consumer demand trends.  As an added note, Fiddelke’s prior roles at Target including Senior Vice President of Operations to include merchandising and supply chain.

Prior Published Retailer Performance

Amazon’s Blowout

In early February, we highlighted Amazon’s blowout financial and operational Q4 and 2023 results.

Holiday quarterly performance included total revenues rising 14 percent to $170 billion. Bloomberg, in its reporting  equated such performance to the strongest online sales growth since the early days of the pandemic. The reported profitability for the holiday quarter of $10.6 billion was considerably improved from the $278 million reported in the year earlier quarter. Profitability performance was further noted as the strongest performance over two years.

For the 2023 full year, net sales reportedly increased 12 percent to $574.8 billion, compared with $514.0 billion in 2022.

Annual operating income increased to $36.9 billion in 2023, compared with $12.2 billion in 2022. Net income was reported as $30.4 billion in 2023, compared with a net loss of $2.7 billion in 2022.

The company’s retail business unit indicated that it was able to decrease its cost to serve an individual online fulfillment order for the first time since 2018. That number, according to published business media reports, was 45 cents per item. The milestone was attributed to the far reaching restructuring of Amazon’s operational fulfillment network across the U.S. that differs from the former hub and spoke network structure.

Walmart’s Financial Performance

Walmart, the second bellwether retailer, reported fiscal 2024 Q4 and full year financial performance that was headlined as topping Wall Street expectations from multiple dimensions.

Performance headlines for the holiday fulfillment quarter ending in January were headlined with:

  • Quarterly year-over year revenue growth of 5.7 percent to $173.4 billion.
  • Operating income growth of 30.4 percent with adjusted operating income increasing 13.2 percent.
  • Consolidated gross margin rate up 39bps due to improvement among Walmart U.S. operations.
  • Global online eCommerce sales growth of 23 percent.
  • Same store sales growth (excluding food) increased 4 percent during the quarter vs. equity analyst consensus expectation of 3.1 percent.

Performance headlines for the full 2024 fiscal year were highlighted with:

  • Consolidated revenue growth of 5.5 percent to $648.1 billion.
  • Consolidated operating income growth of 32.2 percent to $6.6 billion.

Regarding industry trending, In the briefing to investors, Walmart executives highlighted the following:

  • The retailer is garnered added market share, particularly in the higher more than $100,000 income bracket because of merchandizing strategy that leverages lowest prices on food, grocery and stable items.
  • Consumers have been resilient but at the same time, selective in seeking more cost affordable products while pulling back from discretionary products.
  • Consumers shopped more frequently, but were spending less per visit.
  • Regarding the online retail segment, more shoppers reportedly elected same-day or express deliveries. Walmart has further trimmed the losses associated with online orders by continuing to leverage physical stores inventory to fulfill both in-store and online buying needs.
  • Overall inventory declines of 4.5 percent on an annual basis coupled with higher in-stock levels.

 

Summary Thoughts and Takeaways

We now have indications from all three of these bellwether retailers.

Consistent themes are reflected by

  • Economically stressed consumers continue being very selective and watchful in product purchases, and continuing to value digital and in-store fulfillment options.
  • Consumer buying intentions remain motivated by price, merchandise promotion and/or delivery options. The Q4-2023 holiday fulfillment period demonstrated that consumers have become quite savvy in the timing and mode of their holiday purchases. Better timed promotional events can influence reduction in fulfillment operational peaks, with noteworthy reductions in fulfillment costs.
  • The post pandemic in-store shopping experience is back will serve as a component of a total channel wide merchandizing and fulfilment strategy.
  • Bellwether retailers are discovering more effective means to reduce online digital fulfillment costs that do not involve a proliferation of large footprint warehouses.
  • More advanced overall inventory management leveraging customer fulfilment centers closest to consumer population centers are providing meaningful benefits in supporting retail revenue growth needs supplemented by enhanced inventory management practices. That includes online orders fulfilled from physical stores.

Readers are welcomed to share their observations and insights.

 

Bob Ferrari

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