Michael Fiddelke
Executive Vice President and Chief Financial Officer at Target
Thanks, John.
As Brian mentioned, it was exactly a year ago that we were on this stage, talking about our 2021 financial results, a year in which our business generated double-digit growth in comparable sales and even faster growth in EPS. And as Christina discussed, we knew on that day that the environment was likely to change, but we didn't yet know how dramatic those changes would be. The rapid pace of this transition led to multiple profit pressures on our business, including markdowns and other costs related to last year's inventory actions, significantly higher shipping and domestic transportation costs and higher inventory shrink.
So as we focus on our business plans, both for 2023 and the longer term, it's important to consider how the environment will continue to evolve. On the one hand, many things about life and consumer behavior already look a lot like they did before the pandemic. Students are back in school, sports arenas are full, people are eating out again, and consumers are embracing in-store shopping.
At the other extreme, certain aspects of life appear to have changed forever. Many office jobs are now hybrid, with remote work and virtual meetings playing a much more significant role. That means many of us are spending a lot more time working at home, which has implications for long-term buying patterns in multiple categories, most notably our food business.
Fulfillment mix has also seen a permanent shift. Our same-day services have seen explosive growth. They now account for more than half of our digital sales and more than 10% of our total sales. And that trend shows no signs of reversing. Even as people have remixed their trips in favor of in-store shopping, guest engagement with these digital services has continued to grow on top of the huge expansion that's occurred over the last few years.
Most importantly, our guests' overall engagement with Target has increased significantly over the last few years, and it continues to grow. Think about it this way. In 2021, guests made about 2 billion trips to Target, which was about 300 million higher than in 2019.
And last year, even as consumer spending moved away from products into services, traffic grew again. The deeper relationship we've established with our guests and our proven ability to deepen it further are some of the many reasons we're so well-positioned to deliver profitable growth in the years ahead.
Beyond the factors that have changed permanently, there are several others that are clearly still in transition. These include transportation in the global supply chain, where we've already seen remarkable improvement, but where we're still facing elevated costs and variability compared to the pre-pandemic period.
Another factor is inventory shrink, which has increased broadly across US retail over the past two years. And finally, the most significant and important driver of uncertainty today is the fact that the broad macro economy is still in transition, leading to an inflationary period, more pronounced than we've seen in decades.
As Christina mentioned, rapidly rising prices have put pressure on discretionary spending as consumers make room for higher prices on necessities. In addition, higher interest rates have further pressured budgets by increasing the cost of mortgages and car loans.
So where does that leave us today? Despite all of the recent turmoil and the pressures facing our business, we remain in a very strong position to drive healthy growth in the coming years. Our guests are more engaged than ever, and that engagement continued to grow even during a tumultuous year. And even after a year in which we experienced unique and unexpected headwinds to both our profitability and cash flow, our business is sound. It remains strong, and we're laser-focused on the path forward.
In 2023, we'll focus first on agility and strong execution. Most notably, we'll take a cautious stance on our inventory commitments and markdown-sensitive categories, with the flexibility to sell into our base inventory and expand receipts over time.
At the same time, we'll continue investing in our long-term strategic initiatives that propel our market share and profit growth, including our remodel program, our new store pipeline and projects to add replenishment capacity and increased efficiency in our supply chain.
We'll also focus on strengthening our balance sheet. In 2022, our business was a net user of cash for the first time in many years. This was driven by a host of unique factors, including unexpectedly low profitability, higher-than-expected capex driven by inflation and project costs, and a rapid slowdown in inventory turns due to excess inventory and longer lead times in global shipping.
This year, we expect each of those factors to become more favorable. More specifically, we're expecting an increase in profit dollars in a somewhat slower pace of capex. And given our cautious inventory positioning and rapidly improving lead times in global shipping, we're planning for faster inventory turns in 2023, driving higher payables leverage and recovery in working capital as we move through the year.
In the near term, until those expectations play out and our cash generation increases, we're not planning to repurchase any shares consistent with our goal to maintain our middle A credit ratings. Over time, as our cash flow recovers and our debt metrics improve, we expect share repurchases will play a meaningful role within our broader, long-term capital deployment priorities. But as always, those repurchases will only occur after we've fully invested in our business and supported our team after we've supported our dividend goals and within the limits of our middle A ratings.
Now I want to share some thoughts on our 2023 outlook, and I'll start with our expectations for the first quarter. Given the current conditions we're facing, we expect our business to generate first-quarter comparable sales in a wide range, from a low single-digit decline to a low single-digit increase. This reflects our expectation for continued strength in our frequency businesses, offset by softness in discretionary categories.
On the operating income line, we're expecting a first-quarter rate in the 4% to 5% range, higher than what we saw in the fourth quarter, but down somewhat from the 5.3% our business generated in last year's first quarter. While there are a number of factors driving this expectation, I'd note that our first quarter SG&A expense rate is expected to be about 1 percentage point higher than a year ago, reflecting continued investments in our team and guest experience, without an expected leverage benefit from higher sales. Altogether, on the bottom line, we expect our business to generate first-quarter GAAP and adjusted EPS in a range from $1.50 to $1.90.
Now I'll turn to our full-year expectations. And I'll first note that the range of potential outcomes gets wider as the year goes on, given the high degree of uncertainty regarding the strength of the economy and the consumer. Given this uncertainty, we firmly believe caution is the appropriate posture, especially when planning sales and inventory in discretionary categories.
On the frequency side of the business, our full-year plans envision continued share gains and strong sales growth. But we're mindful that inflation in these categories may begin to moderate, pressuring dollar comps across the industry. In light of those considerations, along with our outlook for discretionary categories, we're planning for the same wide range on the top line that we're planning for the first quarter, from a low-single-digit decline to a low-single-digit increase in our comparable sales.
In terms of profitability, the range of potential outcomes is similarly wide. As I mentioned earlier, we're positioned to benefit from a number of significant tailwinds on the gross margin line, most notably as we cycle over last year's inventory actions. In addition, we're expecting hundreds of millions of dollars of additional opportunity from lapping last year's unusually high freight and transportation costs.
At the same time, we're also preparing for some notable headwinds on the gross margin line. These include inventory shrink, which may continue to rise before we see rates begin to moderate over time. We're also expecting some pressure from soft sales in our highest-margin discretionary categories. And finally, we see the potential for increased promotional intensity across the industry this year, given that we're competing in a constrained environment for consumer spending.
On the SG&A line this year, we expect continued strong discipline in managing costs across the enterprise, but we're also not backing away from investments in our team and guest experience, and we'll face potential rate deleverage given our outlook for comparable sales. In light of these considerations, we're planning for a wide range of potential outcomes for our full-year operating income. But even at the low end of those expectations, we expect to grow our operating income by more than $1 billion this year.
Altogether, our expectations translate to a full-year GAAP and adjusted EPS range of $7.75 to $8.75, which represents growth of about $1.75 per share at the low end of the range. On the capex line this year, we're expecting to invest between $4 billion and $5 billion. While this range is somewhat lower than last year's capex, it's quite strong relative to our history. This year's plan reflects the optimal level to invest in the current environment and our expectation that we'll continue to earn higher returns on our long-term growth investments, including our remodel program and new store pipeline and our continued work to build capacity and capabilities in our supply chain.
As we think about the longer-term trajectory of our business, we expect that as external conditions normalize in the next several years, our operating income margin rate should reach and begin to move beyond our pre-pandemic rate of 6%. This return to pre-pandemic levels could happen as early as 2024, depending on the speed of recovery for the economy and consumer demand.
I want to pause and emphasize that this year's guidance does not reflect how we expect our business to perform over the longer term. Once we see a normalization of consumer demand and a resumption of growth in discretionary categories, you'll see that reflected in a stronger top-line performance and a meaningful increase in our operating margin rate beyond what we're planning for this year.
I also want to reiterate something we've said many times. While we often talk about rates because it's helpful for analytical purposes, our goal is to find the optimal rate that maximizes profit dollar growth over time. In other words, we'll continue to focus simultaneously on top-line growth and the rate we earn on it without focusing on either metric and isolation.
So now before I invite Brian and Mike O'Neil to join me on stage, I want to pause and thank our team for their continued optimism and resilience through a turbulent year. Last year presented a host of unexpected and unprecedented challenges that all seemed to arrive at once. Through it all, our team maintained a long-term focus, serving our guests and taking care of each other.
As a result, we saw continued expansion in guest traffic and engagement throughout the year and historically strong hiring and retention metrics across our team. Those are some of the most important factors in determining our long-term success and why I feel so confident about Target's potential in the years ahead.
Now I'd like to invite Brian and Mike O'Neil to join me on stage so we can have a brief conversation about the enterprise efficiency work we've asked Mike to lead.
