Target shares swoon on spending plans, more wage hikes this spring

Key Points
  • Target promises to get to a $15 starting wage by 2020.
  • The retailer is rolling out free, two-day shipping for hundreds of thousands of items on
  • Target's same-day delivery service, which was being tested in New York, is expanding across the U.S.
Target CEO: We're on the right path
Target CEO: We're on the right path

Target on Tuesday said it's not backing off plans to invest $7 billion back into its business over the next two years.

The company plans to raise starting hourly wages for its employees to $12 from $11 later this spring, as it expects to reach a $15 starting hourly wage by 2020.

"I think the biggest investment we have made has been with our team, and our team is ready for the challenge," CEO Brian Cornell told CNBC's "Power Lunch" Tuesday afternoon. "I want to be an employer of choice."

Target's investments in its workforce are one reason the discount retailer's profit margins were hampered during the latest quarter. Shares fell nearly 7 percent amid concerns that the company's burgeoning expenses will overwhelm any sales gains it makes.

To some degree, the wage hikes planned by Target are a response to a tighter labor market, where U.S. unemployment remains low. Target said Tuesday, though, that it's seen a bigger pool of candidates applying for positions with the company since it announced a starting hourly wage increase to $11 in September.

But the company is also making other investments to lure shoppers to its stores and to keep pace with internet giant Amazon by improving the speed and ease of getting online orders to customers.

A $7 billion reinvestment strategy was outlined at the company's annual meeting with analysts and investors a year ago, where Target said it would use the money over the course of three years to open smaller-format stores, redesign existing locations and launch more private-label brands.

The bets have managed to boost traffic at Target stores, as evidenced by its fourth-quarter results, but they come at a cost.

"The trick is you want to have growth that is profitable growth," Customer Growth Partners President Craig Johnson told CNBC. "You don't want to just increase penetration when margins are heading the wrong way."

Cornell announced Tuesday at a meeting with analysts and investors that the company is bringing "Drive Up," a service available via Target's mobile app, to 1,000 stores by the end of this year. Currently, 50 stores have the service, which allows shoppers to have online orders brought directly to their cars.

"Your most profitable sales will almost always wholly take place in the store," Johnson said. "Second are the ones where you buy online and pick up in store ... in some places curbside."

Target still prefers for shoppers to pick up orders at its stores, even if the transactions begin online, according to Chief Operating Officer John Mulligan. This is one way the company has been able to cut expenses, he said, and bypass opening as many costly fulfillment centers.

Target is also rolling out free, two-day shipping for hundreds of thousands of items on, with a $35 minimum threshold unless a shopper has a Target credit card. The company's acquisition of Shipt has been viewed as one way for Target to manage costs as it embarks on the free-shipping initiatives. In some instances, it will be able to move away from third-party providers such as FedEx or UPS.

Meanwhile, Target's same-day delivery service of purchases made in stores will expand to five New York boroughs and select stores in Boston, Chicago, San Francisco and Washington, D.C. The service had previously only been offered at a handful of locations in New York, thanks to Target's acquisition of Grand Junction late last year.

"You can expect us to continue to invest in our team as our greatest differentiator and introduce and scale new experiences, services and brands, all in service to our guests," Cornell said.

Lastly, Target said "Restock," its next-day essentials delivery service that rivals Amazon's Prime Pantry, will expand to roughly 40 markets, serving three-quarters of the U.S. population, by the end of 2018.

Cornell said he aims to make Target "America's easiest place to shop."