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Target Corp (NYSE:TGT)
Q4 2019 Earnings Call
Mar 3, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, everyone. Thanks so much for joining us today. And thanks for your flexibility as we have adjusted our plan for this meeting.
Before we get started, I have a couple of important disclosures that we need to cover that will apply to all of our remarks and Q&A today. First, any forward-looking statements that we make this morning are subject to risks and uncertainties, the most important of which are described in our SEC filings. And second, in today's remarks, we refer to non-GAAP financial measures, including adjusted earnings per share. Reconciliations of all non-GAAP measures to the most directly comparable GAAP measure are included in our financial press releases and SEC filings, which are posted on our Investor Relations website.
With that, I'll turn it over to Brian who can get us started.
Brian Cornell -- Board Chairman and Chief Executive Officer
First I want to thank all of you for dialing in this morning. While we would have loved to have seen you in New York today, given the circumstances, we wanted to make things easier for out-of-town travelers who might want to stay closer to home.
For the first part of the meeting, John, Michael and I will walk you through the highlights of our recent performance, the continued evolution of our long-term strategy and our outlook on the future. After that, we'll open things up and take your questions for the balance of the meeting. Again, I want to thank you for your flexibility and look forward to an engaging conversation with all of you this morning. And with that let's get started.
[Video Presentation]
By any measure, 2019 was another very strong year at Target. You've seen that in our financial results and in the media coverage, but it's this chart that really tells the story. Trace those bars back to this very meeting three years ago. That morning we said, we'd invest more than $7 billion in capital to reengineer our supply chain, to reimagine our stores and to reinvent our own brand portfolio.
We said we take $1 billion in operating income and invest in our team and our pricing. And we said this, while many others were headed in the opposite direction; closing stores, cutting jobs, trying to stay their way to success. But we've never been the kind of company that follows the herd. And this was no time to start. But we also weren't placing bets just above conventional wisdom. We had every reason to believe this would work because we've been doing our homework, testing these bets and listening to our guests. And for them, stores weren't dead; they were just boring and uninspiring. Our guest still loved our brand. They just wanted us to do more. And it was this dose of tough love that inspired our team to redefine the Target Run and change the future of our company.
We started by unpacking the big questions. What would it take to combine the hallmarks of the physical experience, discovery, inspiration and service with the ease, convenience and personalization made possible through digital? In an age of AI and robotics, where do people fit in? When everyone's talking endless aisles, what's the role of curation? In an on-demand world, could digital ever become more than a drag on the P&L? There were lots of theories, but nobody had the answers. And there certainly wasn't a playbook. So we started writing our own.
We set off on a different path. We used our purpose as a guide and the rest is now history. Today, nobody is doing what Target is doing, nobody. Target is a category one. In three years' time, we've redefined the Target Run. We built a durable financial model that consistently drives top-line sales and strong and sustainable bottom line growth. And today, Target's among the top performers on retail's leaderboard, a competitive position we intend to keep for many years to come.
Our teams love to win. They will tell you the same thing. We're proud of what we've accomplished. But we've got to stay humble and we're going to stay hungry if we want to stay ahead. That means ensuring our winning strategy continues to evolve as we test, as we scale, as we refine our multi-year initiatives, constantly challenging ourselves to develop new pathways for growth and innovation.
If you look at our playbook, we've done just that by elevating the shopping experience and winning with high-touch service, by curating at scale across our multi-category portfolio, a great mix of our guests' favorite national brands and Target exclusives. And of course, by delivering ease and convenience with the most comprehensive set of fulfillment capabilities in the industry. Each piece of the strategy is working, creating value for our guests, differentiating us from our competition and delivering profitable growth and consistent returns for our shareholders.
So I thought I'd start today talking about our progress, where we're investing and what's next. John Mulligan will share a deeper look and how we're driving stronger operational performance. And then you will hear from Michael Fiddelke, our new CFO who will share his perspective on the business and our outlook for the year ahead.
While I had a brief opportunity to introduce Michael during our Q3 call, you should know, like John, he is an engineer by training whose heart belongs to finance. In his 16 years for the company, he's worked in every part of the business, tackling many of our most stubborn challenges, countering them all with a rare combination of logic, curiosity and grace. I'm confident, as you get to know Michael, as I have, you will see he possesses all the qualities you'd want in a leader for a role like this.
And with that, let's dig a little deeper into the business. So you've heard me say many times, we're putting our stores at the center of our strategy. In the last three years, we spent more than $4 billion remodeling our stores, completing hundreds each year, transforming them into showrooms, fulfillment hubs and service centers. With these projects, we're seeing an average sales lift between 2% and 4% and we're getting smarter with each cycle, enhancing the shopping experience, driving operational improvement and driving down costs through efficiencies of scale.
I can't tell you how many times I've heard guests say how much they love the broader range of merchandise and all the new categories we're putting in these stores. The truth is, we're not adding categories, we're not adding SKUs, in fact, in many cases, we're taking them away. But it's the way we cross-merchandise product and the improving presentation that's making these stores more inspiring and easy to shop.
We've also continued to grow our store network, opening about 30 new small format stores each year in key urban markets and college campuses. And just like our remodel program, we're fine-tuning our approach with each project. Like any new neighborhood, you have to really live in it to figure out the daily rhythms and routines.
In Tribeca for example, we knew there will be a steady stream of office workers over the lunch hour and tourists on weekends, but we didn't realize just how much room we need to accommodate all the double jogger strollers in our aisles. Trust me, they're huge.
So we spend a lot of time flexing our merchandising, replenishment and operation strategies to match the unique shopping patterns in each store. Collectively, these stores are well past the $1 billion threshold for annual sales. Per square foot, they're much more productive than our average stores. And if you're watching these closely, you might detect a new trend.
We're opening up Target stores near America's most iconic tourist destinations, Time Square, Disney World and the Las Vegas Strip. Because we've learned from our store at Herald Square, there are few places that help travelers feel more at home than Target.
Bringing stores at the center of our strategy goes a lot further than the physical experience or proximity to our guests. Stores gives us the opportunity to make human connections with tens of millions of guests who shop each week. So we've reinvented our store model. We're investing in high-touch service, using technology for task-based work and giving our people the time and training they need to better take care of our guests.
From the industry-leading commitments we made on wage to the expansion benefits like family leave, we're incredibly proud of the investments we're making in our team. Today Target is an employer of choice and an even better place to build a rewarding career. In 2018, we promoted more than 6,000 people and invested almost $7 million payroll hours and training.
This is an organization designed for advancement. In fact almost 500 of our store directors started its hourly team members on the sales floor, almost half of them are women. They're leading huge teams, multi-million dollar businesses and serving its leaders and their communities. Last year, the average store director earned about $182,000. These are good jobs. These are important jobs. And we're more committed than ever to providing the development opportunities to help our store team members thrive.
When you look across the retail landscape, department stores, discounters or DTC, there is not a single competitor with the category mix like ours. Five key categories, each generating roughly a fifth of our sales, a healthy balance of guest favorite national partners and a robust portfolio of brands all our own. Said another way, we are a category one. But the real key to our success has been our unbending focus on building an assortment our guests can't find anywhere else.
Since 2017, we rolled out dozens of new own brands. They've generated billions of dollars in sales, sparked excitement in the marketplace and helped our guests fall in love with Target all over again. And the year-over-year growth has been phenomenal. So you're probably wondering, Brian, what's the secret? Well, the truth is, we've always had a world-class product design and development team. What's changed is our approach. We've gone from designer brands for our guests to design brands with them. Let's take a look.
[Video Presentation]
I spent 30 years working with CPG companies all over the world. And I can tell you, I've never seen this kind of care and connection anywhere else. In fact, this approach is what earned Target a top spot on Fast Company's list of the World's Most Innovative Companies. And this philosophy was the driving force behind our new brand, All in Motion, a brand created with everybody in mind. Of course, own brands are only one prong of our assortment strategy. In 2019, we struck premier partnerships with two of the most recognizable brands in the world, Levi's and Disney. And we're attracting more and more new brands across the assortment, including most recently, Boar's Head in food.
We also continue to be the preferred distribution channel for America's most innovative DTC brands like Harry's, Native and Quip who see Target's platform as a launch pad for scale and mass market appeal. When companies like P&G, PepsiCo, L'Oreal, Dyson or Mattel want to introduce innovation to the market, Target is the first call on their list. Add it all up, these partnerships, combined with our 20-year legacy of limited time only collaborations make Target the retailer of choice for great companies who want to extend their reach and see their brands shine.
Perhaps the most game-changing element of our store-centric strategy is our approach to fulfillment. It wasn't that long ago that our Target Run involved a hand written shopping list and a Sunday afternoon with a shopping cart. And spoiler alert, millions of millions of guests still really, really like to do that when they have time, but sometimes they don't. That's why we built the most comprehensive suite of same-day services in the marketplace. Now we can put tens of thousands of items in your basket, in your trunk-or on your kitchen table within a couple of hours max. It's really that simple.
Of course, Professor Mulligan who will walk you through the economics and believe me they're incredibly favorable compared with any other option in the last mile system. But beyond cost, frankly more important than cost, we're changing consumer behavior with same-day. Same-day shoppers are making more trips, spending more money and putting Target first in their consideration set. You could call it our very own operations-based loyalty program.
Today, our guests are letting our team pick the bulky stuff like bottled water and paper towels. And then they are coming in to shop the categories that are just a lot more fun. Once a guest tries a service, three out of four times, they'll do it again within three months. In fact, our adoption rates are continuing to outpace expectations. In 2019, Pick Up was up almost 50%, Drive Up more than 500%. And today, we have more than 100,000 Shipt shoppers delivering orders from Target and almost 100 other retail brands.
When you pull back the frame, what we're really after is ensuring that Target is our guests' first choice no matter what's going on in their lives on any given day. And to do that, we had a focus on the entire end-to-end experience, not just the store trip or a digital trip, but new ways to lace them together.
If you talk to our friend Kevin Johnson over Starbucks, he is really clear. They are investing to create experiences based on occasion. Sometimes you're on the run. Order in the app, skip the line, grab the drink. Sometimes you're on the road, you've got time to kill, Starbucks is a pretty great place to hang out. Kevin will tell you, you have to design your experience to fit either occasion. At Target, we see the world exactly the same way. It's our job to create the kind of experiences that inspire guests to spend a couple of hours or a couple of seconds, and that's exactly what we're doing.
So let me give you an example of how this plays out in real life. I know a lot of you are parents. Your kids are heading off to college, probably perfect schools, maybe out of state. So let's say your daughter get accepted at Emory, great school, right outside of Atlanta. You can either hit a Target in North Jersey, pack up the SUV and drive south or you can order literally everything on target.com and have it delivered to campus or you can order a six month supply of essentials, pick them up at our store near campus and spend moving weekend shopping for dorm room decor. A couple of weeks later, you can send her anything she needs via Shipt. Whatever you need, we have you covered because our physical stores and digital platforms are seamlessly working together.
Three years ago, we set out to become America's easiest place to shop. And today, we are. So you can see a lot of progress, a lot of momentum. This work has created a renewed sense of guest love and loyalty. And it's translating into tangible financial results on the top and bottom line, proving each quarter that our durable model works.
I showed this slide up top, but I'm happy to show it again, 11 straight quarters of positive comp growth. But what could get lost in this view is our total revenue growth. Between 2017 and 2019, we grew the total revenue $5.4 billion. Dig into those numbers a bit further and you see broad market share gains in multiple categories.
Over the last three years, we've captured more than $2.5 billion in apparel and beauty, with almost $1.5 billion coming in the last year alone; baby, essentials, food, electronics. Since TR use market exit, we picked up more than $1.7 billion in toys and baby. And there's not a day that goes by where you don't see a headline predicting another share donation of Target from a struggling competitor.
And then there is this chart, which I think is remarkable. For six years running, digital has grown at least 25% each year. And given the magic of compounding growth rates, since 2014, we doubled the business and then nearly doubled it again. More and more guests are gravitating to our more cost advantage fulfillment methods. In fact, today, our stores are fulfilling 80% of the digital volume, which is relieving a lot of margin pressure despite the aggressive sales growth. And that's just one example of how we're managing growth with a keen eye on profitability.
When you look at our ROIC for the past three years, you can see strong, efficient and responsible growth in this key metric. And finally, like this first chart, our bottom line story looks a lot like the top. Our model is turning out steady EPS growth quarter-after-quarter, year-after-year and healthy returns for shareholders as well.
Up next, John and Mike will share more about our long-term confidence in our model. How you can expect to see low-single-digit sales growth, produce mid-single-digit operating income and high-single-digit EPS over time. They will also give you a sense for where we're going to continue to invest to fuel this momentum and propel our strategy forward.
And without stealing their thunder, I'll tell you because of our results, because our strategy is working, we're going to keep investing in each piece. For example, in addition to our remodel work, we're going to start testing new ways to reimagine the front of store experience, not only to create a more engaging and inspiring first impression, but to enhance guest service.
With small formats, we're starting to explore new ways to shrink the box even smaller, half the size of our small stores so we can fit into even more spaces around the city. With same-day, our teams are going to work around the clock to optimize the experience for ease and convenience. Today Target can put a gallon of milk in your fridge, but not in your trunk. In 2020, that's going to change as we start to test our fresh Pick Up and Drive Up capabilities and scale as we go.
When you think about curation, you'll see more investment in our brand management capabilities. We'll continue creating new brands when white space opportunities arise, like you saw with Open Story. But we'll also focus on building equity in our more established brands and ensuring they continue to thrive. Continue to expand our assortment across key categories in Good & Gather or ensuring Cat & Jack, which is now in year four continues to evolve with the trends. In electronics, a category dominated by a few global players, brands really matter. So we're rolling out plans to transform the physical environment to give them a bigger stage. We'll create more interactive experiences that allow our guests to play and explore.
As we think about curation, in the digital space, we'll also continue to expand our digital offering through Target Plus. But we're taking a very different approach with this third-party marketplace than others in the industry. As a brand built to serve busy families, our guests have a good idea what they can expect to find at Target and what they won't. If you're looking for farm equipment, Target is probably not your spot. That said, we have a lot of parents whose kids play baseball. We see it in our search data every day. And if you were to visit our store, you'd see a carefully curated selection of bats and gloves. But if you're looking for more specialized equipment, you had to look elsewhere until now.
With Target Plus, we can partner with Mizuno, one of the best brands in baseball and they'll fulfill the order directly. Mizuno is just one of nearly 100 brands we brought on to the invitation-only platform. Each one carefully vetted and aligned with our high standards. No question about authenticity or origin. Target Plus is just another way we're using what we know about our guests to offer them more value and the shopping experience.
Another is Target Circle. We rolled out this new loyalty program in October and it already has more than 50 million members. Many of you are already familiar with the program. Guests opt-in for personalized deals, earn 1% back on purchases, endpoints that let them direct charitable giving in their community. No membership fee required.
In the year ahead, we'll build an even deeper relationship with Circle members and our offers and promotions will only get more meaningful and personalize as we go forward. And that concept is a good one to end on, because if you think about what we've accomplished during the last three years, the most important thing we've done is strengthen the relationship we have with our guests. It's a relationship rooted in trust and integrity.
We understand what a privilege it is to be welcomed into their families' busy lives and what it takes to honor that responsibility every single day. It is because of the strength of our relationship that we've earned the invitation to keep creating new products, services and solutions that will keep inspiring our guests to make that Target Run today, tomorrow and well into the future.
John J. Mulligan -- Executive Vice President and Chief Operating Officer
Good morning, everyone. As you heard from Brian, the path we've set for Target is different than what you see across retail and we've designed a strategy around the unique capabilities that set Target apart and built an operation to support our durable financial model. It's all about having the right assortment with great service and easy fulfillment options that keep our guests coming back. The difference maker for us, our stores.
We put our nearly 1,900 stores at the center of how we offer inspiration and convenience. As you know, we spent the last few years investing to do that from opening new stores to making our existing ones work harder. In 2019, we continue to scale those capabilities. We opened small formats by the dozen and completed remodels by the hundreds, just like the year before. We expanded same-day fulfillment options to millions more guests. Took our new operating model to every store and laid out more automation, robotics and artificial intelligence throughout our supply chain to help our stores run better than ever.
By leaning into our stores, we've emerged as an omnichannel leader with competitive fulfillment options and a differentiated store experience. This year, we'll take it to the next level and use our foundational capabilities rooted in our stores to serve guests in new ways. We'll get closer to new guests, continue to elevate the store experience and redefine ease and convenience to serve guests in ways no one else can.
Remember when we opened just one small format store back in 2014 and then opened only a few more the next year, we took it slow to learn and build the right foundation so we could scale those store successfully. We refined how to find sites to balance population density and local needs. We've built a process to localize the assortment for each neighborhood, but at scale. And we reoriented our supply chain to replenish these stores as the backroom space gets smaller and smaller.
Because of those learnings, we keep growing. We plan to open about 30 of these stores a year for the foreseeable future. And this year we'll open nearly three dozen, making 2020 our highest year ever for small format growth. We'll keep expanding in key markets like New York and LA, and we'll reach new guests on campuses, making shopping even easier for Boilermakers and Georgia Bulldogs. And for our resident Hawkeye fan, Michael Fiddelke, we'll open our doors right off the Ped Mall in Iowa City.
Every small format store is unique and comes with its own set of complexities, but we've built the capabilities to be successful in a wide variety of sites and sizes. This year we're exploring designs that redefine our idea of just how small our stores can be. I'm not talking about a new format, but in another turn of the dial that gives our strategy even more flexibility to reach new guests. While our smallest location today is about 12,000 square feet, our team is exploring sites half that size. Think a convenient store size box that's in the neighborhoods across Chicago, Philadelphia or New York or right in the middle of a bustling campus.
With still enough space to offer the categories guests want from Target, like beauty, home and grab and go food, this design could open up hundreds of additional site options to serve even more people in new trade areas and to give guests a nearby pick up spot for online orders. We expect to sign the first lease of this kind this year with plans to open and test in 2021. And just like our first small formats, we'll go slowly at first to learn and refine before moving faster.
While we're opening new stores, we keep remodeling the rest of the chain to modernize the in-store experience. We've topped 700 remodels over three years and this year we'll expand the count to 1,000. Guests tell us they love our store design after remodel and the sales lift prove it. Beyond the average 2% to 4% lifts we see in year one, we're seeing over a 2% bump in year two. Not only are they buying more, they're adding more discretionary items to their baskets and it's giving us a meaningful improvement in gross margin rate that we hadn't planned. In 2021, we'll continue to remodel stores, but we'll rightsize our pace to touch 150 stores to 200 stores every year going forward.
Beyond our remodels, we're continuing to test new design elements like our latest front of store concept. The moment a guest walks in the store, our layout sets the tone for the rest of their trip. So we redesigned that first impression to be even more welcoming with fresh flower displays, hot coffee and relevant products to create a friendly greeting right from the start.
We've also lowered walls and removed counters to make it even easier for our team to connect with our guests and offer help; from registry and returns to pick up and checkout. We're testing this design to learn first, like we always do, before applying them to our remodel efforts going forward. Our store investments will never be done, but the remodel itself is only part of our strategy.
In a digital age, we need to give guests a compelling reason to come into a store and shop. For us, it's wrapping store design, compelling product and guest service together to create an experience that you can't get online. And at the heart of that is our team, which is why we invest in them year-after-year. We continue adding millions of paid training hours to help our team build deep retail knowledge and skills. And we're on track to reach a $15 starting wage by the end of this year to keep attracting and retaining the very best talent. But beyond training and pay, we've long seen the potential of engaging our skilled and passionate team to make a difference for our guests and manage the growing volume moving through our stores.
To do it, we fully rolled out a new operating model to all stores last summer. This change meant that more than 300,000 people got new roles, new titles and new routines. It was without a doubt, the largest organizational change in our company's history. In a world where technology is everywhere, we know our guests are looking for help and human connection, while also creating even more ease and convenience in their lives. So we redefined what it means to work in a Target store to better serve an omnichannel guest with expertise in ownership that leads to really great service and tools and tech that knock out the task so our team can take better care of our guests. As much as I could try to give you a picture of that philosophy, I think our team can say it much better themselves.
Just six months in, this new model has shown tangible proof in guest satisfaction. During our busiest time, the Net Promoter Score for our Black Friday experience rose 12 points over last year because our team was staffed and trained to help guests find products and check out quickly. Led by our new Chief Stores Officer, Mark Schindele, a 20 year veteran leader across operations, our teams will always be refining what a truly guest focus service model looks like. That bring even more joy to our guests, while streamlining how we keep shelves stocked and back rooms organized. This new operating model is also how we enable our growing suite of fulfillment services. From Drive Up to Pick up and delivery from Shipt, our stores are serving up a whole range of options to meet guests however they want to shop in as soon as an hour.
Last year, as you know, we made our same-day options available to millions more guests. We took Drive Up even further, now in 1,750 stores across the country. And this year, we'll turn it on at many small format stores with parking lots to make shopping even easier for local guests. Remarkably, even as Drive Up grew more than 500%, sales from our more mature order Pick Up services rose nearly 50%. And a third of the time those Pick Up guests made additional purchases when they came inside.
We also continue to grow Shipt same-day delivery offering with two and a half times the sales from the year before. And we integrated that delivery option to our target.com checkout. Now guests can use their RedCard to get 5% off and pay for order if they don't have an annual membership. Outside of Target, Shipt continues to establish itself as a leader in the delivery space. It's steadily growing its membership and broadening its marketplace of regional and national retailers, which now include PepCo and CVS. Shipt's momentum shows the growing consumer demand for fulfillment in minutes not days.
At Target, sales fulfilled by our same-day options grew more than 90% last year, far outpacing the demand for shipping and drove the majority of our digital growth. And because all of our same-day services have better economics than two-day shipping, our average fulfillment cost per unit has come down nearly 25% over the past year, and that's played an important role in our margin performance.
The engine behind our same-day operation is no doubt our stores, and a more than 300,000 people running them to serve our guests every single day. There is no one else who will run an order out to your car in less than two minutes and throw in a Good & Gather sample just to say thanks. And our guests are loving our same-day options because they make an extra Target Run that much easier. Take a look.
[Video Presentation]
This convenience is giving our guests new reasons to shop at Target. Last year, only one in three people who placed a same-day order had never before shopped on target.com. And our existing guests are shopping us more frequently. On average, nearly a quarter of our Drive Up sales and all of our same-day delivery sales are incremental, which shows that as we give guests new ways to shop with us, they're actually spending more.
Combining our curated assortment and great service with the ease and convenience of get it in an hour has broadcast to shop us more often. No one else is doing that at scale like we are and it's building loyalty with our guests that will sustain our growth over the long-term. This year we will expand our assortments where our services are even more essential and fit with how guests are shopping at Target. Time and time again they tell us they love Drive Up, but it sure would be nice to pull up for their order, hand the gallon of milk, not to mention adult beverages. Whether it's a six pack and chips on the way to a party or a bottle of wine to go with the box of diapers and crying kids in the back seat, our guests want that option.
Starting this spring we'll test a curated assortment of fresh grocery and adult beverage items available for order Pick Up and Drive up. We'll start in a few states and learn how to do it well before we scale fresh Pick Up to nearly half of our stores and take adult beverage in the majority of the chain all by fourth quarter, just in time for holidays with the in-laws. All of this is possible because of the supply chain investments we've made to support our stores, so they're both shopping destinations and fulfillments hubs. That only works when there is a solid replenishment operation behind the scenes. Sending stores the right amount of product when they need it and simplifying how it moves from truck to shelf. Using our stores as local hubs continues to be the right strategic for us. You heard Brian say that our stores today are handling about 80% of our online volume. And for Target, that's the sweet spot. As our digital business keeps growing at a rapid pace, our stores still have a very long runway of capacity.
I'll reiterate how the productivity of our top stores today demonstrates just how much more our average store can handle. Last year on average, sales per square foot in our top quartile of stores was more than $100 higher than our chain average. And the math says that for every additional $1 billion fulfilled by our stores, the sales productivity goes up by $4. That's only just over a 1% increase in productivity of an average store. So it makes only a marginal difference for our operation and our teams. It means our stores still have the capacity to manage many, many billions of additional sales with our current footprint.
At the same time, with all the growth we've seen and still see ahead of us, we need to invest in our upstream capacity to replenish those stores. So between this year and next, we'll open a handful of new warehouses near key markets, like New York and Southern California to serve the growing needs of our stores. We've long said that like any business, we've been making these investments to support our future growth. And importantly, we've built that need for excess capacity into our original capital plan. While we're adding capacity to support replenishment, we'll continue to improve the end-to-end supply chain operation. We're using machine learning to predict what product we'll need and where we'll need it. It applies automation to an age old inventory problem, having the right product, in the right place at the right time.
In 2019, we used it to position about 30% Essentials' merchandise. We saw out-of-stocks and our back room inventory dropped by more than a third, which was a win for the guests and our operation. We'll keep adding new categories to this system and learn how this improves the guest experience. Strategic positioning is just one of our many efforts to reduce out-of-stocks, which continue to be a major priority. For the past few years, we've gone deep into the supply chain to make improvements in how we move and position our inventory and we've made a lot of progress. We'll stay focused on building solutions then improve the guest experience for the long-term.
And of course, the robots. For several years we've been talking about the robotic capabilities we're building to support the work of our warehouse team and make our supply chain even faster and more efficient. We spend time testing and learning, and this year we're ready to start scaling. The robotics solution we've been building in the Minneapolis market over the past few years is designed to sort and organize millions of individual units. It fills boxes with the exact amount of product we need in a store. So we keep the shelf full and the back room clean. Each box is organized by aisle, so it's literally minutes for our team to unload and restock. Here is how it works.
[Video Presentation]
The solution you just saw is about organizing what goes into every box. We've designed it to sync up with the systems we showed you last year from Perth Amboy facility, which is about organizing those boxes, sorting them by store and then sequencing them on the truck for easy unloading. When those two solutions work together, we will revolutionize how our store teams receive inventory and get the products our guests want on the shelf as quick as possible. By summer we'll use the robotics to send pre-sorted units to hundreds of our stores. And we'll take the box sort and sequence operation to another facility where the two systems can work together in service of our stores before we expand it further across our network.
This year all of our supply chain investments, the systems, robotics and processes that make each individual part of our operation better will start working together and our stores will really start to feel the impact. Inventory positioning will be even more precise. Replenishment will be even faster. Our back room inventory levels will keep declining and out-of-stocks will continue to improve. We have spent the last several years building capabilities that would support our strategy to put our stores at the center of how we serve our guests. We said physical was the answer to digital and knew it wouldn't be easy for others to imagine. We'd have to put up the points to prove our case.
This year we showed quarter-after-quarter how our stores are driving growth, profitable growth for our business. We still have a lot of work in front of us, but the foundation is set. From here we'll use our capabilities to keep building an experience that sets us apart from the pack and it will be our stores, powered by our supply chain and brought to life by our team that sits at the heart of the fastest and easiest Target Run yet.
Michael Fiddelke -- Executive Vice President and Chief Financial Officer
Good morning, everyone. We're grateful that you've taken the time to listen to our remarks today and I'm looking forward to having many more in-depth discussions with you in the months ahead.
Today I'm going to share a little bit of my perspective on our business. How we work to create a healthy and sustainable model and how we plan to build on that success over time. But you shouldn't expect any big surprises in my remarks today because our long-term financial algorithm remains the same as we first shared with you a year ago. Specifically, we have built a business and financial model that's positioned to generate low-single-digit growth in comparable sales, mid-single-digit growth in operating income, high-single-digit growth in earnings per share and continued expansion of Target's after-tax return on invested capital.
But before I get to the model, I want to share a little bit about my experience here at Target and how it's informed by perspective on our business. As Brian mentioned earlier, I began my career in finance and that's always been my passion. However, I've also been able to benefit from several experiences outside of finance, which helped me to gain a deeper understanding of our business and operations.
Now that I'm back leading the finance team, I plan to leverage those insights in support of the organization as we help our business partners solve problems and evaluate trade-offs and we face potential trade-offs all the time, focusing on our quarterly numbers or investing in the future, focusing on profit rates or profit dollars, minimizing the cost of a single transaction or maximizing the lifetime value of a guest relationship, investing in promotions or in everyday prices or managing the cost of labor on the P&L versus making deliberate investments in the team, the company's most important asset.
Analysis of all these questions involves in some way the question of whether to focus on the short-term or the long-term. And if every choice was completely binary, we would naturally choose the option in the right hand column, but that perspective is too narrow. We should always ask if we can replace the word or with the word and. If we can do that successfully, we will generate superior performance today and over time. Put another way, we should always focus first on the long-term, but deliver it through strong execution one quarter at a time.
When I think about the long-term trajectory of our business, the one thing that's clear is the need to focus first on strong top-line growth. When a retailer is growing, there are so many more levers to pull, more ways to build a model from the top-line to the bottom line that makes long-term financial sense. The benefits of growth go well beyond the straightforward reasons like fixed cost leverage. Growth makes Target a more attractive partner for our vendors, which helps us control costs and attract new partners.
Growth makes us a more desirable member of a retail development which opens up more potential sites for our small format stores. And most importantly, growth is confirmation that we're deepening our relationship with guests, keeping Target top of mind when they decide where to shop. So for instance, when I think about the potential trade-off between profit rates and top-line growth, I'm very mindful of the risk that occurs when companies focus only on expanding rates. Now obviously, if we can generate healthy growth in traffic and sales, while some rate expansion comes along for the ride, that's an ideal outcome. It's what happened in 2019 and it explains the outstanding year our business just delivered. But as we plan for the future, we have to be careful not to take our primary focus away from relevance in growth.
We've all seen it. Companies who focus too much on rates and then realize only too late that growth is slowing, traffic is stagnating and customer loyalty is beginning to evaporate. The message from that experience is clear. The best path to long-term profit dollar growth is healthy top-line growth. And if our priority is growth first, the only path is to focus on our guests. If we work to learn more and more about them and find ways to deepen our relationship with them, they'll reward us with more trips and more sales. That creates the right foundation for a sustainable business and financial model. It's what we've created over the last few years and the reason we're in such a healthy position today.
I think it's worthwhile to pause and take an example from our own history and look back at our journey in digital. 10 years ago, Brian hadn't yet joined our team, but John and I know firsthand. We were very hesitant to invest in digital. Like today, we were fortunate to have great stores and a great team. And like today, we had millions of loyal guests who loves Target. We thought that was enough, but it wasn't. Even though our guests still loved us, they began shopping at Target a little less often and elsewhere a little more because we stopped winning on convenience. It happened slowly, but we lost a trip here, another trip there and growth became harder and harder to generate.
The good news is we realized the need for change before it was too late. Beginning five or six years ago, we committed to being a leader in digital and began investing. It took patience and dollars. And we took the time to develop a strategy that makes sense for Target, given our assets, our assortment and our brand. And now, as you've seen over the last several years with the right strategy and renewed growth, we've built a business model that's delivering strong top-line and bottom line performance.
Once we committed to investing in digital, new fulfillment possibilities emerged and we proved something that wasn't obvious five years ago. It turns out that digital isn't just about delivering cardboard boxes to your house; it's really about ease, convenience and reliability. Sometimes that can mean a box on your front porch, but more and more guests are telling us that our same-day services are the new model of convenience.
Brian covered the statistics on repeat usage earlier. Our same-day guests are making a choice. After all, they are intimately familiar with how to order a box for delivery and we're still happy to provide that service when it's preferred. But in many cases, our same-day services are faster and more convenient and that's what guests are choosing. Whenever we roll out new products and services, we typically see two distinct changes in guest behavior. The first is a change in the way they shop as they embrace the new product or service, but importantly, we also see an increase in their overall level of engagement.
So for instance when guests find out about our same-day services, we see a meaningful change in the mix of their shopping as they begin choosing same-day services as a replacement for other options. However, as John mentioned earlier, that's only part of the story. We also see incremental growth in spending from guests who begin using our same-day services which benefits all categories and channels.
Take for instance, the changing behavior among guests who use Drive Up for the first time. Following that first Drive Up trip, we see their overall spending go up by nearly 25%. This increase is the result of higher digital spending which grows by nearly 50%, as guests begin using Drive Up and also spend more on order pick up, ship-to-home and Shipt. However, this increased digital engagement doesn't come at the expense of store sales, which also increased by 9%. The causation is clear. This new service drives engagement, which in turn leads to higher sales in all channels.
I witnessed the impact of Drive Up on my own family's behavior. With three kids between the ages of six and 13, my wife and I sometimes feel like Uber drivers as we shuttle our kids between different sports and activities. So Drive Up is the perfect solution. When we realized we need something like post-game snacks or a placement water bottle, we don't need to wait. We place the Drive Up order and it's ready in less than an hour. The next time we're passing the store, and I can assure you that happens multiple times on a typical Saturday, we Drive Up and the order is in our car in less than 2 minutes. Because the service is so fast and convenient, it allows us to make an additional last minute trip, that wouldn't be possible in any other way. This is the essence of our digital journey.
By designing solutions focused on our guests and investing in capabilities that makes sense for our business, we reestablished Target's credibility and delivering convenience which drove growth across our business. With that growth, our team was able to develop capabilities and a business model that also makes financial sense. So as we think ahead and evaluate our long-term financial algorithm, which we first articulated a year ago, it starts with our focus on growing the top-line. To do that, we'll continue to invest in our store experience, digital fulfillment, supply chain, our brands and our team to ensure we stay relevant with our guests.
In a typical economic environment, we believe these investments will enable target to generate low-single-digit growth in our comparable sales with additional growth coming from our new stores. And here, I want to pause and address the question that we hear a lot which pertains to whether we can isolate the impact of each of the drivers of our growth? And the honest answer is, we can't. All of the initiatives that we are pursuing right now are working together to drive our growth, and these investments build momentum over time.
Beauty is a great example where our continued investments are driving an acceleration in performance. As we've rolled out new brands, invested in our presentation and staffed the area with specialized team members who have passion and expertise, the categories performance has gone from strong to even stronger. Specifically, comp growth in beauty accelerated from 1.7% in 2017 to 7.1% in 2019 out comping the company by approximately 1.5 percentage points over that three-year period. This demonstrates something Brian says all the time. We should never confuse performance with potential. Year-after-year investments in beauty are driving sustainable profitable growth in our business.
When we move down the P&L to consider our long-term operating margin rate, we think it's optimal to plan for only a small amount of leverage over time driven by the DNA line. Otherwise, we are planning for generally small and offsetting changes in our gross margin and SG&A expense rates. This expectation is first informed by our bottom up analysis of the drivers of both our gross margin and SG&A expense rates and an expectation that we can generally balance the headwinds and tailwinds over time.
On the gross margin line, we expect to continue to benefit from the ongoing efforts of our merchant teams to optimize performance within categories including assortment, cost, pricing and promotions. These efforts were a meaningful driver of favorability in 2019 and we expect they will continue to contribute to our gross margins in 2020 and beyond. Second and important factor in our gross margin performance is the mix of our sales. In 2019, with unusually strong growth in our apparel category, sales mix was a meaningful driver of our overall gross margin rate. As we look ahead, we believe it's prudent to plan for our margin mix to be neutral to slightly favorable with periodic opportunities for outperformance like we saw in 2019.
And finally, growth in digital fulfillment will continue to put cost pressure on our gross margins. The reason for this expectation is simple. Digital fulfillment involves incremental costs compared with the traditional store transaction. While our same-day services are much less costly than traditional digital fulfillment and we continue to increase efficiency within each of those fulfillment modes, we expect those benefits will service mitigating factors rather than driving an overall rate benefit.
The analysis of the SG&A line is similar, but the drivers are different. And while there are hundreds of separate expense lines that can affect SG&A in a given quarter or year, there are two factors that will be most important over time. The first is the cost of labor, including both pay and benefits.
We expect that growth in these expenses will continue to be a headwind in the years ahead for a couple of important reasons. First, we continue to make strategic investments in team member hours, wages and benefits to position Target as a leading employer of choice, allowing us to hire and retain a high quality team. The second is overall wage inflation in the U.S. driven by labor market conditions, which remain very tight when compared to historical averages.
To help offset this cost pressure, we expect to continue to deliver productivity improvements like you've been seeing in recent years. These productivity gains will happen in our stores where we continue to benefit from a variety of efforts to eliminate non-guest facing work combined with the benefits of the operating model, John highlighted earlier.
A portion of those store savings will be driven by our supply chain efforts as we transform our store replenishment model and rollout automation which will help us control hours, while we take on many of the activities that used to be completed in store backrooms. But importantly, beyond these specific drivers of efficiency in our stores, we will continue to work to prioritize all of our activities across the company, concentrating our efforts on core initiatives that are most important to our business. This focus and disciplined prioritization will play an important role in controlling costs in the years ahead.
So when we put it all together and consider the factors likely to affect gross margin and SG&A rates over time, we expect the pluses and minuses to remain essentially balanced with very little net impact to our operating margin rates. As a result, based on a small amount of expected leverage on the D&A line, our plan envisions a similar amount of annual leverage in our operating margin rate as well. This rate performance will allow us to deliver mid-single-digit annual increases in operating margin dollars on a low-single-digit increase in comparable sales.
But let me be clear, we will continually monitor our performance to ensure we are optimizing our business for the long-term. If, like in 2019, rates can expand while traffic sales and market share all growing, we will be happy to deliver another year above expectations. And if, on the other hand, down the road we see an opportunity to grow long-term profit dollars faster by allowing rates to go lower, we can certainly take a hard look at that opportunity. But that's not what we expect to happen. Based on what we know today, we believe that small increases in our operating margin rates based on leverage on the D&A line will continue to be optimal for Target over time.
Moving on to capital deployment, our priorities remain the same as they have been for more than 20 years. We focus first on investing in our business, then we look to support our dividend and build on our 48-year record of consecutive annual increases. And finally, we look to deploy any excess cash beyond those first two uses to share repurchase within the constraints of our middle-A credit ratings.
Turning first to capital spending. Our long-term expectations have not changed. However, based on our revised outlook for the timing of certain expenditures, we have an updated view of the cadence by year. Specifically, in 2019, our capex was lower than expectations at about $3 billion compared with our original plan of $3.5 billion. This performance was driven by unexpected project savings combined with the benefit of timing changes in certain expenditures.
In 2020, we continue to expect capex of approximately $3.5 billion as we maintain our recent pace of about 300 remodels for one more year. And in 2021, capex is expected to move down somewhat into the $3 billion to $3.5 billion range, which is a little higher than our prior expectation. Beyond 2021, we expect our annual capex will settle down to a level of approximately $3 billion or perhaps a little less based on our bottom up plans for investments in stores, supply chain and technology.
Regarding dividends, for some time, we've had a longer term goal to maintain a dividend payout ratio of around 40%. However, if you've been following us over the last decade, you've seen that ratio peak at more than 50%. The reason for that peak was simple. During that period, we encountered some temporary headwinds to our financial performance and we chose to continue to build on our record of annual increases.
Today, following renewed growth in our profitability over the last couple of years, our dividend payout ratio has moved back down toward 40%. And given that we are now operating near our goal payout ratio, we expect to begin growing the annual per share dividend at a somewhat faster rate in the years ahead.
Regarding share repurchases, you've seen our pace change a lot over the last five years to 10 years based on variations on our cash flow and level of capex. As we look ahead, our plan anticipates additional capacity for share repurchases compared with the last few years, beginning this year. This ability to reduce share count will allow us to deliver high-single-digit growth in earnings per share on a mid-single-digit increase in operating income.
I want to stress that we will continue to govern the pace of our share repurchases in support of our goal to maintain our middle A credit ratings. Those ratings ensure we have the financial flexibility to invest when there are opportunities in our business even in challenging times.
And finally, before I get to our 2020 guidance, I want to consider the implications of our long-term algorithm for our return on invested capital. I can tell you that ROIC has long been an important metric at Target because it reflects both our operational performance and the effectiveness of our investment decisions. Because of this long-term focus on ROIC, our business is already generating very healthy performance, it's 16% on an after-tax basis. That's a high bar to clear, but if we deliver performance in line with our long-term algorithm, we will continue to build on that ROIC performance over time as we grow Target's operating income on a relatively stable base of invested capital.
So now, before I turn it back over to Brian, I want to briefly cover our guidance for the first quarter and full year 2020. But first, I want to address the question of whether we've accounted for any known or anticipated impact related to the coronavirus. And the answer is that as of today, we haven't seen a large impact on our business or outlook. Of course, we are monitoring our import programs down to the purchase order and we've already made some slight adjustments to our plans to ensure we are well positioned throughout the year. But because of our size and the flexibility that comes from our multi-category portfolio, we haven't seen anything so far that would cause our financial expectations for 2020 to deviate from our longer term algorithm.
Regarding recent sales trends, we experienced solid results across the month of February, which support our expectations for the first quarter. As you recall, when we announced our holiday performance, we came out of the holidays with very low levels of clearance inventory, which held back our January comps due to a lower than average level of clearance sales. However, that same lack of clearance sales played a key role in our fourth quarter profit performance, which was strong despite the shortfall in sales. Since then we have seen the strengthening of sales trends we expected to see broadly across categories and across multiple weeks of the month of February.
So back to the question of what's reflected in our outlook. The answer is that we've included everything that we know about today. Obviously, in every quarter, there is some uncertainty about trends going forward and that's only exaggerated by the fluid situation regarding the coronavirus. So to reiterate, we've built in everything we know today, but we haven't incorporated a placeholder for anything we haven't yet seen.
So with that as context, I'll provide our current guidance, starting first with the full year. We are planning for a low-single-digit increase in comparable sales. Total revenue is expected to grow nearly a full percentage point faster driven primarily by the contribution from non-mature stores. We expect our gross margin rate will be essentially flat for the year in line with our longer term algorithm.
We expect a moderate increase in our SG&A expense rate based on our bottom-up forecast across all of the items within SG&A. This increase is being driven by anticipated labor cost increases reflecting investments in store service and training combined with a continued growth in average wages across the country.
On the D&A line, we expect to see a small amount of favorability for the year consistent with our longer term algorithm. Altogether, we expect our operating margin rate will be flat to up slightly in 2020, resulting in a mid-single-digit increase in operating income dollars. And for both adjusted EPS and GAAP EPS from continuing operations, we expect performance in the $6.70 to $7 range. Performance at the midpoint of this range would result in high-single-digit EPS growth on top of mid to high-teens growth in 2019.
For the first quarter, our expectations look very much like our view of the full year. We expect to generate a low-single-digit increase in comparable sales. Total revenue should grow more than half a percentage point faster driven by the expected contribution from non-mature stores. We expect a moderate increase in our first quarter gross margin rate driven by favorability and clearance markdowns compared with last year.
We expect this gross margin favorability will be offset by an increase in our first quarter SG&A expense rate. This expected increase will be driven by continued growth in labor costs along with pressure from remodel expenses driven by the timing of projects compared with a year ago.
On the D&A line, we expect to see a small amount of rate favorability, similar to our view of the year. Altogether, we expect a small increase in our operating margin rate for the first quarter, resulting in a mid-single-digit increase in operating income dollars. And for both adjusted EPS and GAAP EPS from continuing operations, we expect performance in the $1.55 to $1.75 range. The midpoint of this range would result in high-single-digit growth on top of last year's first quarter when our business delivered record high EPS performance.
After working at Target for nearly 16 years, I have developed a strong appreciation for our culture and our people. And one thing our entire team has in common is a lot of pride in working at Target. We're proud of our brand, proud of what we do and proud of the positive role we play in our guests' lives. I've seen it throughout my career during both the good times and the challenging ones. That's why it's been so amazing to have played a part in the turnaround of our business over the last few years. Because we care so deeply about this company, we all work hard to ensure that Target stays healthy and continues to thrive, well beyond each of our individual careers.
Today, we're growing again. And all of our stakeholders are sharing in the benefit from our guests to our team, from communities to vendors and of course our shareholders. It's our job to build on this success and ensure Target generates sustainable profitable growth both this year and for many years to come. And we're confident we have the right plan in place to do just that.
So now, I want to thank you for your time today. And I'll turn it back over to Brian for some final remarks. Brian?
Brian Cornell -- Board Chairman and Chief Executive Officer
Thank you, Michael. By now, I hope you have a sound understanding of the strategic choices we're making. I hope you have a keen sense of our disciplined investment agenda. And I hope we've made clear all the ways our durable financial model and industry-leading capabilities position Target to capture more market share, deliver more profitable growth and earn more love and loyalty from the tens of millions of guests who we've asked to expect more from our brand.
But before we turn to Q&A, I want to underscore what I think is the most important point. Target is different. We've always been different. That's what our guests love about our brand. We're not like everyone else. We are Target. And it was that simple fact that inspired us three years ago when the fate of the industry was far from certain, we asked our guests what more could we do? What matter most in their lives? And then we took what they told us and we reimagined our company with them putting them first in every decision we made. That meant leaning into our purpose, pursuing our own path, writing our own playbook, betting on our brands, our team and the millions and millions of guests who shop Target every day.
Three years later, it's clear that was the best bet we could have ever made because today our guests are choosing Target more than ever before. They're depending on us to bring a little bit of joy every time they shop. And look, I know you read the headlines and keep close tabs on our competition. Because our strategy is working, others are taking note and applying some of our pages to their own playbooks. But for us, the hole is greater than the sum of the parts.
It's our stores and our digital channels, plus our approach to high-touch service, our expertly curated assortment plus our scale plus our balanced multi-category portfolio. It's Drive Up plus Pick Up plus Shipt. It's ease plus convenience plus inspiration. It's families plus joy that make us who we are, that make us Target. We are a category one, a competitive position we intend to keep for a long, long, long time to come.
And with that, we're going to take a 10 minute break to allow some of you to dial into a conference line for the Q&A portion of this meeting. John Hulbert will provide more detail shortly. But before we transition, I know you have questions about the coronavirus and the potential impact we see to our business and our team. Michael has already addressed how we're considering this situation in light of our guidance. Like all of you, we're monitoring the situation hour by hour as conditions evolve.
At Target, we've been prioritizing our team, starting by ensuring that all of our China-based team members have been able to work from home. More broadly, we spent considerable time focused on the best way to support our team members all around the world to make sure they stay healthy and safe.
On the business front, we've been continuously planning for weeks with our vendors and team members, both here in the States and overseas. As you know, we have a highly sophisticated sourcing and supply chain organization. And like Michael said, we're tracking this by category and by factory even at the PO level to ensure we're on top of it and able to plan accordingly. We feel confident in our plans to manage with this situation. And most importantly, I want to thank our team members around the world for all they're doing to take care of our guests.
So now, I'll turn it over to John Hulbert who will cover a few logistical details before we take a 10-minute break. John?
John Hulbert -- Vice President, Investor Relations
Before we break, I wanted to pause and make sure everyone understands what's going to happen. And the good news is that most of you can simply stay on this webcast and you'll hear the Q&A session beginning in about 10 minutes. However, if you receive the conference call invitation and you want to ask a question during Q&A, you will need to leave this webcast and dial into the number for the conference line which was sent with your invitation. But again, even if you receive the invite, but don't intend to submit a question, you want to stay on this webcast to listen in.
With that, we can begin a 10-minute break. Thanks.
Questions and Answers:
Duration: 31 minutes
Call participants:
Brian Cornell -- Board Chairman and Chief Executive Officer
John J. Mulligan -- Executive Vice President and Chief Operating Officer
Michael Fiddelke -- Executive Vice President and Chief Financial Officer
John Hulbert -- Vice President, Investor Relations
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Target Corp (TGT) Q4 2019 Earnings Call Transcript - Motley Fool
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