And on behalf of Target, I want to thank you for joining us today. As you just saw, it's been quite a year. And I have to say, I'm really proud of our team and what they delivered during one of the most intense period of changes in our company's history. Looking back on this meeting a year ago, Target was in a very different place than where we are today. Last March, we were discontinuing our Canadian operations, restructuring our U.
S. Headquarters, and reworking our core operations. Most of you remember the state of play all too well. In 2015, when we gathered here together, we laid out an ambitious plan to put Target back on a path for profitable growth. And if you look at the results today, one thing is clear, our team delivered.
We said that we would drive traffic back to our stores and we did. We finished 2015 with our 5th consecutive quarter of positive traffic growth. We hit the high range of our comp guidance. Signature categories led the way, growing almost 3 times faster than the rest of our business. We set a highly ambitious growth goal for digital and our sales topped 30%, shattering holiday records and lapping the industry for the year.
We also said everything was on the table and we meant it. We announced a $1,900,000,000 deal with CVS Health last June and we closed it 6 months later. We said we'd bring more industry expertise to Target and we welcomed world class experts in virtually every aspect of the business from technology to stores, supply chain to merchandising and marketing. Taking it all together, given the results we expected, we said we'd deliver adjusted EPS between $4.45 $4.65 When we closed out the year, again our team delivered, dollars 4.69 of adjusted EPS, well above our range, and importantly, 11% higher than the year before. That's a growth story, a growth story that we're very proud of.
Our focus on the fundamentals is driving this performance. And I can tell you headlines like these certainly give our team a little spring in their step. But really this is the most important measure of all. Our guests are falling back in love with Target all over again. So are we declaring victory?
Not even close. Most of you know me all too well. No doubt, we're very proud of the momentum and I'm proud of this team. But we've got a lot of work left to do. And I'm very confident in the plan that's going to guide us going forward.
Our ultimate goal to drive profitable growth today, tomorrow and well into the future. So I also know that you've got a job to do. You've got to dig in, better understand what's driving our current performance and ultimately determine if we've developed a strategic framework that will sustain our current growth. We laid out a bold multi year transformation agenda last March. And you're going to see that the plan is consistent from 1 year to the next.
From the onset, we rallied our team around 5 key enterprise priorities and we'll be laser focused on those same initiatives in 2016. If anything, you'll see that the road ahead will bring even greater focus, clarity, prioritization around the things that matter most to our guests. And that includes enhancing target.com and mobile performance, offering a richer digital experience that deepens engagement, reduces friction no matter how our guests choose to shop. We're creating more locally relevant experiences and bringing our new format strategy into key urban markets and college campuses. We're developing a meaningful rewards program that engenders love and loyalty.
And we're implementing merchandising strategies based on category roles and growing share in those critically important Signature businesses. We've made a lot of progress against each one of these priorities. But before we go on, I think it's important to step back and paint the bigger picture to show you exactly where we're headed, what it will look like, what it will feel like to shop Target in the not too distant future. So let's spend a few minutes and look at it through the eyes of a guest. Anna, she's a busy mom.
She has 2 kids. Her youngest is turning 6 and the party is tomorrow. Hannah works nearby in Midtown, takes the train home to North Jersey every night. Many of you know this all too well. Her routine is consistent.
She picks up the kids at school and shuttles them off to an evening activity before returning home for dinner. Tonight, it's swimming lessons. It's been a hectic week and Anna hasn't had time for anything but the invitations. So while she's on the path train, she pulls up her Pinterest board, taps the Target app and thumbs through her list. It's going to be a Star Wars party.
Everything is easy to find all in one place. Balloons, streamers, even the cake crawling with stormtroopers. She picks out the blue lightsaber that belongs to her daughter's hero. 2 more taps, she's done with her list. Her order will be waiting when she gets to the store.
Anna has 30 minutes to get to the school, make her Target run and get the kids in the pool. When she gets to the store, she gets a text message to let her know the order is ready. She grabs some chicken wraps, fruit for dinner, fills her basket with a few other things she remembered along the way and Anna checks out. She collects her cartwheel deals. The party, it's a hit And all is well in that galaxy far, far away.
So now you're probably wondering, Brian, is that the future? It is because everything worked and it was really easy. Aside from her children, Anna's most treasured thing in life is time. She had 30 minutes to plan a party. She had no margin for error.
She had to pick 1 retailer that could make it all happen. No blue lightsabers in the tri state area. We let Anna down. And in the past, we might have missed the mark on any one of those things. And it cost us sales and it cost us a guest.
Our future depends on getting the fundamentals right. And that means modernizing supply chain. It means enhancing our technology, taking complexity out of our systems, elevating the use of data and driving productivity savings across the entire business. John Mulligan will be the very first to tell you this doesn't sound like the sexy stuff, but these are the things that make Target work. These are the building blocks for our future.
And these are the things that will drive growth at Target for years to come. So we've said many times that for us transformation starts with the guest. It starts with people like Anna. Every decision, every action, putting the guest at the center of everything we do. And right now, I don't think we've ever been closer to understanding, truly understanding what our guest expects.
Not long after I arrived at Target, it was clear we've been spending a lot of energy, a lot of resources on guest research. But we really didn't know the guest. While different teams across the enterprise have been working to improve the guest experience, they'd all been doing it through an individual lens. No one was looking at this from an enterprise standpoint. So we established our first ever guest center of excellence, which brought together all the teams, all the inside teams across the company.
Now Carolyn Stachsrup, who leads this effort, certainly brings a unique vantage point to the job. Before taking on the role, Carolyn took this guest first challenge to heart. She and her family of 4 only shopped at Target for a year. That's right, for a whole year. And then blogged about the things we got right and things we didn't.
Let's take a look.
My family and I attempted to shop only at Target for an entire year. The inspiration was to see how much money we could save. And I knew almost immediately that saving money was not actually the purpose of the year. The purpose of the year for me was to be able to get closer to our guests and what they experience on a daily basis. My relationship with Target in that year as a guest fundamentally changed.
So here I am in store feeling like I know this place better than I ever have, but the place doesn't know me in any different way than a guest who comes in once a year. The only way to know more about our guests is to get to know our guests. The overall mandate of the guest center of excellence is to help instill guest centricity for everyone who works at Target. We aspire to enable all of our headquarters team members to have more empathy for our guests. So we have conducted guest immersions.
What that looks like is 1 Target executive, 1 interviewer, 1 guest, 3 hours. We sit down and say, tell us about yourself.
Tell us
about your family. What does a typical day look like? And what you hear from all of this is you hear the stories that the guests choose to tell. We have to make our decisions in the context of our guests' lives. And the context of our guests' lives will constantly be changing.
The work is not done. The work will never be done. So an example, in style, you know, we thought to position ourselves as our guests' style accomplice. What we learned was guests are not looking to Target to be the advisor or accomplice or that person who they're going to look to like they would a friend or their social network. Our style guests have a strong sense of their own style.
They give that will give the most to these guests who we just talked to you? And simultaneously, almost as like a nice side benefit, do the most for us competitively because
we're talking about an opportunity space where we are
best positioned to meet the needs of our guests.
Over the past several months, we've met with 100 and 100 of guests. And for me personally, these immersion trips have been an invaluable window into the lives of the folks who shop our stores and sites and also those who don't. And there's no better way to understand what makes our guests tick than sitting in their living rooms or standing next to their kitchen sink. And when I walk into someone's home, they don't know I'm from Target. They certainly don't know I'm the CEO.
They just know my name is Brian and I'm there to try to understand how retailers can do a better job of making their lives a little easier. And that's where the truth starts to come out. When we ask them about their favorite retail brand, I can tell you nothing lifts our spirits more than when they say Target. But on the other hand, nothing cuts deeper than when you hear we're letting them down. And sometimes we hear both.
But with each visit, we're walking away with new insights. Sometimes it's clarifying a simple nuance. Sometimes it's a really big provoking shift in our thinking. We thought we knew the guest. We really thought we knew the guest.
But we've gained some valuable new lessons. For example, we used to use the term, you heard it last year, on demand when we talked about the guest expectation in the digital world. Turns out that phrase does not connect with the guest. When we say on demand, they think about their cable box, not retail. But it's bigger than just getting the terminology right.
It's really important that when we talk to the guests, they understand that we're listening to them, that we hear them, that we're not just talking past them. It's a really big difference. And we'll continue to listen to our guests and draw on these insights to further shape and refine every aspect of our strategy today. So I recognize this is an election year. Last night was Super Tuesday.
And I'm going to steer away from anything to do with state by state results. But I'll tell you that this year at Target we're placing our events in California. This spring we're taking 50 of our top enhancements that we've been testing across the country and putting them together in 25 stores in Los Angeles, a pilot we're calling LA 25. And the goal is to see how we can improve the guest experience and grow sales when all of these elements are working together. We're making product improvements the hero with more impactful presentations, fixtures and signage.
We'll make it easy for the guests to pick up online orders with dedicated service stations. Guests will see a floor pad filled with reinventions across the store. One of the things we were hearing loud and clear during our immersion visits is that there's absolutely no substitute for human interaction. A genuinely helpful team member can literally save the day or at least save the sale. So as part of the test, we're adding more specialized team members to pilot more personalized services.
We know a trusted advisor can let a guest know how many gigs they really need when picking out a new iPad or which moisturizer is the right one for them if they have sensitive skin. We're also rolling out a new team of digital service advisors to help our guests get the most out of cartwheelandtarget.com. Looking ahead, we'll take everything we learn from LA25 and apply it to the designs for our next generation prototype store. But we won't wait until we wrap up LA 25 before we take the proven winners and roll it to the rest of the chain. For example, when it comes to style, our guests say context really, really matters.
They need help seeing how items fit together. Right now, we're already deploying visual merchandising leaders to tell product stories and customize in store presentations. Another prominent enhancement is Bullseye's Playground. We've already repositioned the front of the store as a family friendly showcase for seasonal items. It's the exact same space, the same price points as the old section, but we're already seeing more than 25% growth in a large and very profitable part of our store.
Just last month, we were honored when Fast Company called Target one of the most innovative companies in retail for using our stores as laboratories. And you can expect we'll continue to keep testing, learning and iterating in the year ahead. Now by any measure, Cartwheel is a success story many times over. 22 +1000000 downloads, dollars 3,000,000,000 in sales. We know our guests love the thrill of a great deal.
But as you know, Cartwheel is just one element of what today amounts to a piecemeal loyalty strategy that includes our RedCard and Red Perks, which we've been piloting in North Carolina. We believe we can simplify the whole experience. We believe we had a huge opportunity to identify more guests and bring them a broader rewards portfolio. We're focused on acutely understanding the guests' lifetime value, getting to know them more deeply, their attitudes, their preference, their behaviors and then give them more personalized experiences and more personalized promotions, all in service of finding that sweet spot. What do we need to offer to make sure that guests choose this target again and again?
We've hired Keith Colburn as our new Senior VP for Loyalty and Lifecycle Marketing to lead this effort. And while it's early days, I can tell you Keith's off to a great start. Another key priority this year will be continuing to implement clear category roles. Now you don't need to be a golfer to know you'd never want to play a round of golf with 1 club. You keep 14 clubs in the bag and every one of them they count.
A driver can take you 100 of yards off the tee, but it's generally useless in the sand. A good player, well, she uses her putter more often than anything else. Every club has a different role. And we look at our merchandising categories the same way. We will never be famous for selling bottled water or laundry soap.
But we've got to have the right brands, the right pack size and we have to always be in stock because we know these items are key. They're essential to that target run. But we also know there are 4 categories, categories we've deemed signature businesses where our guests want us to play and inspire them. Style, baby, kids and wellness, they represent about a third of our business and we're putting significant resources behind them. In 2015, those Signature businesses grew 3 times faster than the rest of our assortment.
And today we're expecting aggressive growth as we go forward into the future. But there's also important insights that are coming back from that guest. We shouldn't think about each one of these categories as independent trip drivers or the singular reason why a guest chooses Target. Our guests have multiple categories on their lists. So the power behind our strategy is that our job is to make sure we give the guests every reason to shop, discover and explore each of these signature categories.
And here's just a few highlights of what you can expect. When we're playing at the top of our game, there's no greater manifestation of our brand promise than our style categories. So we've made big investments to elevate product and improve presentation in all of our channels. And the strategy is paying off, we've seen in the past 10 years. And given the long lead time and production cycle in these businesses, our guests are going to continue to see marked improvements in quality in our own brand home and apparel throughout 2016.
While our teams work hard to stay out in front of trends and offer guests a variety of aesthetics in every collection, we're also going to continue to innovate and reinvent our design partnership model that we pioneered. Just in January, just a few months ago, we teamed up with the founders of fashion site Who What Wear to co create a fresh style collection. Each month we'll update that collection using social media feedback from our guests. And I can tell you this line is off to an exceptionally strong start selling twice as much product as we expected out of the gate. As you know, our teams travel the world seeking design inspiration.
They're always on the hunt for new partners we know our guests will love. And for those of you who caught Good Morning America today, you saw some really big news. This season, we're pairing with another amazing brand, a Finnish design house made famous through bold, eye catching prints. Marimekko for Target, which will debut in April, will include a collection of more than 200 items, celebrating the possibilities of Scandinavian's endless summer nights. Now we can only offer you a sneak peek, but I can absolutely assure you our guests are going to love the unexpected nature of this partnership.
Last year, we bet big on swim, both in digital and in store. And we're seeing those investments bear fruit. We reclaimed our number one spot, the number one market share position in swim and we've grown the business 15% over the past 2 years. We think we'll make us and inclusivity. So far, we're really encouraged with the early results in digital, which sets the tone for the rest of the season.
By any measure, we're really pleased with our performance in kids. But we know better to mistake good performance for potential. And we think there's tremendous opportunity here for new growth. This year, we're introducing a pair of amazing new brands. And we've taken our guests and their kids as partners every step of the way.
Let's take a look.
When we decided to develop a new kids brand for home, we really wanted to involve our guests, moms, dads, and kids to find out what they really want and what inspires them. I'm Julie Gugamos, and I lead Target's internal design team, and I am thrilled to introduce Pillow Fort. We did a lot of research to develop this line. So this is a brand we truly co created with our guests. We had them vote on the print and pattern.
We had them vote on their favorite pieces. What we heard from moms and dads alike, they want their kids' room to feel like an extension of their home. When we talk to kids, we found out they're fearless. They wanna express their individuality, and they're not afraid to reflect their personal style. Pillow Fort is 3 times bigger than our current kids' line.
It's well designed, it's high quality, and best yet, the value is unprecedented in the market. All of Pillow Fort's designs can be mixed and matched, so every kid can truly make the room one of a kind. We're starting with Pillow Fort. And then in the summer, we launched with our new brand for kids apparel called Cat and Jack. In 2016, we're
We believe Telefort has the potential to double our kids' home business over the next 3 years. And I can tell you I personally love this brand and I think our guests are going to love it too. In fact, this weekend we're hosting an interactive experience on the Highline stage about a mile from here and we're inviting guests to come play and have some fun with this new brand. And while it's still too early to reveal too much about Cat and Jack, which will launch in June, of being a multi $1,000,000,000 brand and could help us grow twice as fast as the industry average. These brands are just a couple of the examples of the phenomenal work coming out of our product design and development team.
And that team for a long time has been a huge competitive advantage for Target. What really makes this team tick is the way they put the guests at the center of the design process and build their teams to include a wide and very diverse set of experiences. Our teams include textile engineers, sustainability experts, trend spotters, even philosophers who develop products that make guests' lives feel better. Julie Gugumos is sitting right up front here who you saw in that video is here today to give you a firsthand look at the work during the reception after the presentations. Last year, we also put a stake in the ground around wellness.
We've had a unique opportunity to use our scale to help our teams and our guests eat better, be more active and find cleaner label products. As a category, wellness continues to outperform the industry. But as you know, wellness is a very crowded space. The key for us is to focus on offering differentiated merchandise and solutions and only Target can. So this year, we'll lean into programs like Made to Matter.
We'll continue to pursue partnerships with other great brands like we paired up with Soul Cycle for a 10 day city tour or a 10 city tour that we kicked off right after the New Year. We saw a big opportunity to evolve our C9 Activewear and the early read on our performance is really strong. And we'll bring new food options into our Target cafes with some new partners. But during the year, you'll see wellness play a more prominent role in our corporate social responsibility efforts in communities around the country. All right.
So I know all of you are eager to hear us talk about our plans for grocery. At $18,500,000,000 in sales, it's already a huge business for Target. And last year, we promised we'd redefine our position in food. While our guests certainly have told us they appreciate the convenience of having fresh foods, we also heard that too often they were leaving underwhelmed and disappointed. So over the last 12 months, we've talked to guests.
We've certainly assessed our competitive set. We've done deep dives into the business and we've been tearing down every category and every process. What we quickly realized, the deeper we dug, the more fundamental challenges we found. We know repositioning food is going to be a much bigger task than just categories with the least growth potential. Too much of our assortment is in the center of the store, while the true growth opportunities exist around the perimeter.
We found we were touching product far too often, driving up operational costs and complicating our out of stock position. The bottom line, until we address the fundamentals, things like consistency and reliability that start with offering fresh produce, our guests won't give us credit for the overall progress we're making. So we're doubling down on food fundamentals. And we know given where we're starting, given where we are today, we've got lots of room for growth. And while this won't start with a big one time reset, a one big time reveal, we think we will transform virtually every element of the business.
This year, you'll see us working to earn more credit for organics and dramatically improving freshness across the assortment. We're moving through the assortment item by item, starting in the fields and carrying it all the way to the sales floor. We're also focused on driving penetration with our own brands, including the newly relaunched Market Pantry. And we brought in a lot of external talent. They are also laser focused on business basics.
They're focused on assortment and pricing and promotion and presentation. And they've zeroed in on those key seasonal moments when we absolutely need to shine. And the good news, the strategy is working. Our guests are noticing a better experience every time they shop. They're noticing that we're adding more organics, more specialty items, more exclusives.
They've noticed that freshness is improving. Overall, our comps in grocery outpaced the rest of the store in both the third and again in the Q4. It's a big turnaround after lagging our overall performance for several years. We know grocery is highly complex, but it's also very important to our guests. And there's a ton of work going on right now behind the scenes that you'll never see, but we look at each and every day.
Importantly, as our business continues to perform, we know our guests are voting with their feet and they're telling us that we're heading in the right direction. But turning this business around will be a multi year effort and it's not going to be easy. But our team's mantra overall is that it's better to get it right than to get it done fast. And that's the approach we're going to take as we move forward with food. So we've spent a lot of time today talking about the fundamentals and the things we need to do to position Target for the future.
But I think everyone in this room would agree the path to long term prosperity must include a renewed commitment to innovation, creating a culture of curiosity and exploration within our organization. I can tell you innovation is in our blood. It's part of the company DNA. But we have to put the right conditions in place to encourage innovation and allow it to thrive. So we intentionally assemble a small but mighty team and ask them to think well beyond the box.
We've hired experts. We've brought in entrepreneurs and residents, people with a proven track record of success. Their jobs are to hunt down new ideas, forge new partnerships, teach our teams how to bring new products, solutions, brands and business models to market. Their pursuits are tightly aligned with our signature businesses and laser focused on driving profitable growth for our core. You might have seen the coverage of our partnership with IDEO and MIT's Media Lab around the future of food.
The reason we're doing this, well, it's simple. We're operating almost a $20,000,000,000 food business and we know we haven't tapped the full potential. We need to understand where the market is headed and we need to ensure we get there first. You'd be hard pressed to find a better use case for the Internet of Things than in a baby's nursery. But we owe it to our guests to curate the best products, wade through all the digitally enabled gimmicks that are out there and find items that actually solve problems.
So our team is taking a portfolio approach and our investment strategy will continue to be highly disciplined. But we're also giving this team a little room to run. Some of the bets will pay off over the longer horizon, but some will start showing up in our assortment in a matter of months. Of course, these are just a few initiatives that we have underway in 2016. We've made lots of progress.
But as I've said many times now, we know we've got a lot of work left to do. So in a moment, John Mulligan will share more details around the fundamentals and Cathy Smith will walk you through a careful analysis of our 2016 algorithm. But before I go, I want to make it clear, the path we're laying out today is a path for profitable growth. And this is how we're going to build the foundation to sustain it. So let me turn it over to John who's going to walk you down that path to profitable growth in the future.
John?
So you just heard from Brian that this part of the program isn't about the sexy stuff. Fair enough. Unfortunately for all of you, I'm afraid I'm about to make you demonstrate to you exactly what he meant by that. But Brian also said and what I firmly believe is that Target's future rests on getting the fundamentals right. Over time, we've been adding stress and complexity to systems that frankly were built for another time to keep pace with our changing guests.
To consistently deliver what our guests expect and position Target for the future, we must 0 in on critical pieces, supply chain, stores, technology and put our guests at the center of all of it. For 50 years, we are working off a pretty linear system. It started by moving product from our vendor partners into distribution centers and then out to our stores. The whole system moved from the left hand side of the page to the right. Today, the world couldn't be more different.
Today, guests can still shop our stores to get the products they need and even pick up a few they didn't know they wanted. They can also shop online and have the order delivered to their home or in the case of Anna planning a birthday party on the train, they can order online and pick up in store without missing a beat. Our guests are calling the shots and we want them to do just that. We continue to send product to stores to support an in store shopping experience. But we're also shipping directly to guests from stores, DCs, even vendors.
And we're sending products to stores for online order pickup. In fact, the number of target.com orders our guests chose to pick up in stores grew by 60% in the past year, almost double our full year digital sales growth. Sure, overall digital demand is growing, but this also reflects our guests increasing desire for the convenience of picking up their orders in store, usually within the hour. All these changes are in the name of making sure we can deliver the products our guests want fast. In our stores, they are more important than ever.
They've become showrooms, fulfillment centers and pickup locations. And the people inside them are there to help. Sounds great, right? But here's the rub, we can support it. Earlier, you had heard a little bit about our guest immersion experiences.
And I can tell you from my own guest conversations that Brian summary was right on. Hearing from guests was both uplifting and humbling to realize how much they love us and how much work we still have to do to deliver the experience they expect. We've talked to guests all over the country. But let me relay what I heard from a young man in Chicago, a newly engaged millennial sharing his first apartment with his fiance. He didn't think about a store experience or a digital experience, whether he's making a Saturday morning Target run, browsing cartwheel offers or making his list on our mobile app, he thinks of it as a target experience.
And he's not unique from so many of our guests. Our operations through that lens, where channels don't matter and our delivery is seamless regardless of what the guest chooses. Fortunately, we already have an arsenal of assets that work to our advantage. We have 40 well positioned distribution centers, a widespread network of 1800 stores and a team that knows the business and the guest. The main task ahead of us is modernizing how we put those assets to work in ways that help us meet guests' expectations now and well into the future.
And that's where my team's work begins. I've been in retail for nearly 20 years and I've worked walked thousands of stores. And here's a secret a lifelong numbers guy never wants to admit. You don't even need to look at the data to determine the operational health of the store. I'm not giving you permission to do this, but all you have to do is poke your head in the back room.
It's well organized and relatively empty, simple, A plus. And it's packed full of product, we've got a problem on our hands, because ironically lots of inventory typically correlates with lots of out of stocks. So in the past year, we've put a lot of thought into tackling these challenges. And we found it doesn't necessarily require investing in new, but often entails using what we have like systems and talent more effectively to deliver a better experience to our guests, to reduce backroom inventory sales floor and surgically reducing the number of SKUs in particular categories. We're also optimizing case pack sizes to cut down on the number of times our teams are touching a product.
Imagine for a minute, our store receives 24 jars of peanut butter in a case, but the shelf only holds 18. So instead of being able to pull a case pack directly from a delivery truck to the sales floor, teams have to break open the package and store the extra 6 jars in the back room. And as soon as we sold through the shelf, they have to make an extra chip to the back to replenish. You don't need an advanced degree to see the math on that scenario is not good. Three times the tip touches and a huge drain on payroll productivity.
So we're working with vendors to send case tax sizes that match each product's rate of sale and a lot of shelf. When you talk to our guests, the number one pain point is that we're out of stock. And when it's for an item we've promoted, it's a double whammy in disappointment. We've offered a great deal. They came to the store and when they got there, they couldn't buy what we said we would sell them.
So we established an action team last summer, has been digging category by category into the root causes of persistent out of stock challenges and the results have been very positive. We finished 2015 without a stocks 40% lower than the year before. And for a set of focus items, we've designated in essentials, our out of stocks are better than we have ever measured. On top of that, those results came from process changes that are simple, repeatable and sustainable. So in many cases, we can apply the same fixes across the business.
What we've done to reduce out of stocks and paper towels for instance is working for us in diapers, given they're both high frequency, large pack size products. The solutions we've started to put in place are helping to address some of the fundamental issues, but we've uncovered other parts of our operations that need more fundamental change. It was clear we needed a dedicated team that could focus on transforming our supply chain to lay the foundation for tomorrow without the burden of the all consuming responsibility of running day to day operations. As a result, we carved out a small team last fall comprised of functional experts from across the organization. And we asked Karl Bracken to head up this effort.
He had led several parts of our supply chain and merchandising functions and set up our flexible fulfillment capabilities. After identifying a lot of focus set of priorities that would have the biggest impact. For example, work is already underway to solve for the variability of when our products arrive in our distribution center. Some products arrive late, some products arrive early and in general the windows we specify for our vendors are far too wide. That inconsistency upstream makes it harder to keep our stores in stock or provide tight shipping windows downstream.
And we're working with merchants to change planogram designs, cutting the number of times we have to replenish our fastest turning products, which reduces out of stocks and the amount of inventory needed in our back rooms. Ultimately, the biggest opportunity is to optimize how we forecast, allocate and replenish products across our supply chain. Years ago, we knew exactly how to plan for in store demand and move product to the right store at the right time. As we started to use our network in many different ways, fulfilling guest orders that come from a variety of channels, we needed to improve how we plan and move product, so it's ready as soon as the guest needs it. Nailing this core part of our supply chain operation will unlock incredible growth potential.
There's a lot of great work underway and we are pleased this week to announce a new leader of our global supply chain operation, who will bring proven experience and fresh thinking to help build on our progress. Arthur Valdez will join our team later this month as EVP and Chief Supply Chain and Logistics Officer. He spent his more than 20 year career in operations for a variety of brands and products, but comes to us most recently from Amazon, where he led the company's international supply chain expansion and worldwide logistics function. Based on his background and my conversations with Arthur, there's no better way to describe him than a creative supply chain strategist. He has designed efficient, cost effective and fast operations and developed innovative ways to move product closer to the consumer.
His expertise and proven track record have signaled that he's the right person to help move Target forward and I can't wait for him to come on board. While our teams are focused on the entire supply chain, we're also paying specific attention to food. Brian mentioned our evolving grocery strategy and our teams are adjusting our operations to support that vision. As part of that effort, we brought in experts to assess our fresh food supply chain and are dedicating new resources to raise the bar with in store presentation. At the same time, we're working to shore up the fundamentals.
We've also begun to develop smarter ways of using our distribution network to move product to our guests. For years, we've used our regional distribution centers or RDCs to send frequent shipments in bulk only to stores. And we used our online fulfillment centers to ship individual target.comordersdirectlytoguests. But today we're blurring those lines of distinction. Internally, we've integrated our digital and stores inventory systems, so we can look at where we have product across our network and fulfill an order using merchandise that's closest to the guests who placed it, regardless of what type of building it's in.
We recently equipped one of our RDCs to send target.comorders to guests, and we'll add that capability to more buildings throughout the spring. The ability to use product that's already close to the guests improves our delivery time and reduces our shipping costs, good for guests and good for business. As we add more capabilities to our DCs, we're also turning 3 of our existing buildings into warehouses for slower turning more seasonal products that have variable purchase patterns like apparel. Storing that type of merchandise separately clears the way to process our fastest turning product even quicker, while also giving these us the ability to post the right amount of seasonal product to the right store at the right time based on real time demand. The advantage we get from adding these special nodes to our network is certainly related to reliability, but also enables us to be more agile in how we respond to guest demand.
Take rain boots, sales are dramatically impacted by weather patterns. While we know we'll sell more in Seattle than Arizona, exact quantities are much less certain. Rather than pushing out a predetermined amount of products to all of our DCs around the country, we can store rain boots in the DC designated for seasonal product and ship the right amount to the areas of the country where they're needed as they're needed. This winter, California has seen a lot of much needed rainfall. Rain boots and umbrella sales are much higher than we had predicted a year ago.
By keeping product like this separate from our fast moving network, we can more easily move additional product to California rather than leaving it in hundreds of stores back rooms and avoid markdowns in areas where demand is lower than expected. Last month, we opened the first of our repurposed buildings in Rialto, California, and have announced plans to open 2 more, 1 in Illinois and 1 in Virginia this spring. When you think about the things that target that give Target our most significant competitive advantage, you'd have to put our nearly 1800 stores at the top of that list. And while there is a lot of talk about the future being digital, physical stores still account for more than 90% of all retail sales across the industry. For Target, we have no doubt that our stores will continue to be a key differentiator well into the future.
We just need them to serve our guests in a new way. In fact, our stores filled about 30% of our total target.com sales in 2015 and nearly 50% of our digital electronic sales in Q4. Ship from store when we ship a target.com order from our store back rooms is the flexible fulfillment options that seem months. A year ago we are shipping online orders from fewer than 150 of our stores. This fall we more than tripled that, meaningfully reducing transit time and putting us within a 2 day delivery time for 99% of U.
S. Guests with store eligible items. And we plan to increase our capacity to ship even more orders from these locations in the future. Today, these capabilities are capturing sales we otherwise would have missed without needing to build any new distribution centers. In fact, more than a third of last year's ship from store orders saved to sale when our fulfillment centers were out of stock.
Here's a closer look at how it works.
Ship from store is a win for Target because we're able to leverage assets that are already well positioned in our supply chain. Our stores are already close to our guests. When we first started shipping from store in 2014, we rolled it out to 100 and more than 4 50 locations. It all starts with the guests placing their order on target. The system will automatically lead the team member on the most productive path through the store.
Once the team member is done picking the orders, they bring it back to the pack and ship workstation to securely pack the items for the guests. Once they complete packing, they stage the items to await carrier pickup. This process is completely invisible to the guests. All they know is that they're getting their online orders faster than ever before.
As we continue to place higher expectations on our stores, we need to keep investing in people, processes and technology that help them do the job. As Brian mentioned, our LA-twenty five pilot is testing improvements to the order pickup experience. But we're also making enhancements across the chain, rethinking the store layout and the technology systems, as well as simplifying the back end operations to reduce workload for the team. We hear this all the time. It's the in person interaction with Target's team members that can make the in store experience so valuable.
Which iPhone model is on sale? How do I pull these home decor pieces together in my own space? I brought the wrong size sweater online, can I return it? Here let me show you or yes, I can help you are some powerful words and go a long way making easy for our guests to get what they need. As we're working to move product more efficiently, we also have to remove some of the operational tasks, so teams can spend more time helping the guests with those questions.
In fact, the work we're doing to improve out of stocks and reduce backroom inventory is already showing big potential to help those in store team members to devote more time to service than checklists. As we follow through on those initiatives, we were excited to bring Jana Potts and her more than 25 years of experiencing managing our field operations and leading our teams to the helm of the stores organization. Janet and team are designing a strategy that will shift a one size fits all approach to service in every category toward elevating service levels in our key growth areas. And overall, they're focused on making it easier for our teams to find guests as soon as they need something, instead of waiting for the guests to even ask the question. Now let's talk about a topic you all know well.
Our guests more and more are choosing to live and work in cities. And if you know an undeveloped 10 acre site in Manhattan, a couple of 100 parking spots at a reasonable cost, let's talk because sites like that simply don't exist. So we're testing more flexible formats designed to bring Target closer to our urban dwelling guests. In 2015 of the 15 new stores we opened, 9 of them were flexible formats. We put a target in Chicago Streeterville, not far from Navy Pier, in Boston with actual sight lines into Fenway Park.
And we just announced a future store about a mile from here in Tribeca. It's not over selling it to say that our guests really love these stores and not just because they love Target. We hear over and over again that's because of the care we put into building unique assortments made to order for their neighborhoods. Neighborhoods with young family want diapers and birthday decor, office workers want snacks and grab and go meals, college kids want solo cups and ping pong balls.
By the
way, whether you understand that last combination is likely related to your age or the age of your kids. We're also paying attention in these markets and making changes to assortment and presentation, like setting end caps with water bottles, coolers and expanded game day merchandise in our Boston Fenway store just in time for this year's opening day. Let's take a look at Streeterville.
We're in the Streeterville neighborhood of Chicago, most famously known for Navy the city of Chicago. And so, we're very excited about the opportunity to see the Evenings. What you'll find is an expanded variety of food options as well as beer or wine. Our guests that shop at our store are usually walking on foot or traveling by the train or the bus. So you'll see a lot of grab and go options
as well as
a lot of healthier snacks, knowing that our guest is really looking to live a healthier life. We've been really open to our guest feedback. From that we've been able to refine what our guest is looking for. So when they come and shop at our store, it's their target, it's what they want, it's what they need.
Now while the in store experience is carefully designed to fit a variety of sizes even then down to 10,000 square feet, services like order pickup and ship to store put the entire Target assortment within reach and turn these stores into urban fulfillment centers. Flexible fulfillment makes shopping at Target even more convenient, especially for a guest who'd rather not have a new iPad sit in their foyer of their 8 unit apartment building all day long, hoping it's still there when they get home from work. And it brings new guests into our stores. In addition to concentrating these formats in urban densely populated areas, we also see big opportunities near college campuses. Guest research tells us college age students already love our brand and want to be able to shop our stores.
And market research shows us that the lack of overall retail options on and around campus from basic apparel to fresh food is a real concern. Our campus strategy allows us to better serve a particular market, while also building a stronger relationship with guests at a critical life stage. These students are newly independent adults on the verge of becoming our core guests, digitally minded millennial families who love to shop. Our first foray into campus life started with a test near the University of Minnesota. Since then, we've opened new stores near Berkeley, USC and the University of Maryland.
And in 2016, we'll be at Penn State near several colleges in Boston with more to come in 2017. A lot of time today on the big physical stuff, supply chains and stores, but the technology that keeps it all humming is just as important. It's the central nervous system of our entire operation. So to enable the changes we're putting in place, we need to make the right investments, working in close collaboration with our CIO, Mike McNamara. Last year, we were thrilled to bring Mike on board from Tesco, which has some of the most sophisticated retail infrastructure in the world.
And he has a very clear philosophy on pursuing fewer, more impactful projects. So as team can accomplish substantial results in a shorter period of time. Case in point, our in store service tool. A year ago, when a team member needed to look up a product or answer a guest operation question, excuse me, the system would crash far too often. And that meant the guest was out of luck.
Safe to say the tool needed significant improvements in stability. Mike's team zeroed in on fixing this and within a few months cut the number of incidents in half. Across the company, Mike and his team are prioritizing investments in systems that help our supply chain better forecast and allocate product, enhancing the back end functionality that enables us to grow our flexible fulfillment options and continue to build our available to promise technology to give guests a clear view of inventory and delivery timing. And as we learn from our incredible success during Cyber Monday with traffic more than 2 times what we planned, we have an opportunity to serve even more guests as digital demand continues to rise. So just as we're building an operational foundation for the future, we're making sure to build the capacity to support digital growth.
I've talked a lot about some of our specific priority areas, especially within the supply chain. But across the organization, we're applying a focus on being more efficient, so we can be more effective. This fall, a proven industry leader in operational excellence, Anu Gupta joined Target to improve how we operate as an organization. Her team is partnering across the company to build a consistent lean process culture. Highest impact work within the business, such as designing processes that increase our inventory accuracy, so we can fulfill even more of our guest orders or planning promotions that are both meaningful to our guests and support profitable growth.
We're in the early stages, but I'm really pleased with the team's initial progress. For example, after just a few months on the job, we've already reduced the number of steps it takes to add new product to our inventory. Now you might think that sounds like small potatoes, but we set up tens of thousands of items every year and making sure it's done fast and done right is critically important. Dimensions, attributes, weight, color, pack size, it all has to be exactly right, especially because it affects every aspect of a guest journey from how our store teams find helpful product details to the quality of our site search function to how we ship guest orders. In the short time since they formed, while also improving data integrity, bringing benefits to the guest experience as well as our business.
This is only one example of the many ways this team is working to make our operation more productive, cost effective and efficient. As we're putting our existing assets to work in new ways and building capabilities we need to support continued growth, we're setting the foundation to help us deliver an unparalleled guest experience, no matter what the future holds for retail. Our priorities and vision are no longer just a strategy. We've moved from conceptualizing what we need to do to putting that work in motion. We're becoming more agile.
We're increasing reliability and we're simplifying the parts of our business that are unnecessarily complicated. We're building the bedrock for innovation and sustainable growth only for today, but well down the road. And now that you look at it and how all of this operational work will unlock future growth for Target. I think it is actually kind of sexy after all. With that, I'll turn it over to Kathy to talk about our financial performance and long term goals.
Thank you, John. At this meeting last year, Brian and John first presented our strategic plan, along with the details of our financial algorithm. Obviously, after I arrived, one of my first priorities was to work with the team and immerse myself in the details of our business plan and financials. As a result of our work, I am very confident that the plans we have in place today will allow us to continue to deliver on our goals, just like we did in 2015. Not that long ago, growth in retail meant adding a lot of stores.
Today, our growth plans are focused on using the assets we have differently. And at Target, we are fortunate to have many great assets to build upon. We have one of the strongest brands in the world and a unique relationship with our guests. We have 1800 well located, well maintained stores that are fun to shop. We have a guest focused team headquarters and in our stores that differentiates us from all other companies, not just retailers.
Our product design, development, sourcing organization keeps us ahead of the trends and allows us to offer beautifully designed, innovative and fashionable merchandise at an amazing value. And we have built an impressive array of owned and exclusive brands, many of them $1,000,000,000 brands that our guests love and trust. Target has an enviable set of assets and our growth plans today are focused on using all that is Target to serve our guests in new ways and more reliably. Brian and John have already taken you through a host of initiatives we are pursuing to continue delighting our guests, which will drive profitable growth for Target. And I can tell you after reviewing each of these initiatives in detail, I am confident they will support our growth consistently and our goal to deliver a 3 plus percent comp sales growth.
In our Signature categories, we see amazing potential in our 2 new kids brands, Pillow Fort and Cat and Jack. Specifically, we believe that Pillow Fort has the potential to double target sales in the category over the next few years. And we expect Cat and Jack will become one of our biggest brands. In food, just think about the opportunity we have in front of us. If guests who already shop our food assortment added just one extra food item into their baskets, we would see 1,000,000,000 of dollars of incremental sales.
With the sale of our pharmacies and clinics to CVS, more than 80,000,000 members can now of their PBM network can now fill their prescriptions in a Target store. And even if we capture only a fraction of their pharmacy visits, we will increase traffic into our stores. Based on our initial work to create a more seamless and holistic loyalty program, we believe we have the potential to double the number of guests we are reaching with our loyalty vehicles today, while deepening our relationship with our guests. Let's look at the benefit of reducing out of stocks. Consider this example from the holiday season.
About 40% of our digital orders fulfilled by our stores consisted of items that we were out of stock in, in our web fulfillment centers. This allowed us to preserve sales we would have missed without the access to our store inventory. In our Chicago test last year, we demonstrated the potential from test stores. As a result, we are making changes to our systems and processes that will allow us to scale our work in Chicago more broadly, harnessing this potential over time. And finally, are in the early days of realizing the potential from our new flexible formats.
We have a huge opportunity of untapped markets we can reach with these new stores, bringing Target to new guests and new guests to Target. Each store is made to order with a unique assortment tailored to its neighborhood. I visited several of these stores around the country and I'm always impressed by how they continually test and learn and actively seek feedback from their guests. For instance, in our downtown San Francisco store, they've added more healthy grab and go snacks and more party supplies in response to guests in nearby office buildings. In addition to these initiatives, digital will continue to play an important role.
As you know, more and more often, guests start their visit to Target on a mobile device. They research products and prices on our site or mobile app and on social media platforms like Pinterest. They make lists, order items for store pickup and search for coupons and explore Cartwheel. They do this before and during a trip to one of our stores. Our guests want a great Target experience in all the ways they interact with us, regardless of how they choose to transact with us.
This means we will continue to invest in digital capabilities that will help our team members to better serve our guests and enable our guests to seamlessly experience Target. Altogether, we have a powerful set of growth initiatives that we will continue to pursue in 2016 and beyond. Some of them, like category roles, have already proven their ability to shape our business results and others are still in early stages. But they have some common elements. They start with a focus on our guests.
They leverage modern retail fundamentals. They incorporate digital capabilities and harness our existing assets. Altogether, they support our goal to grow comparable sales by 3% or more over time. While growth is the most important part of the financial algorithm, sustainability of earnings is next. So in addition to evaluating our growth initiatives, I've worked with the team to understand the drivers and sensitivities of our operating margin.
And I've really gained an appreciation for the resilience of our business. Those of you who have been following Target for a longer period of time already know operating margin rates in our U. S. Business have been amazingly consistent over time. I've spent a fair amount of time in retail, so I am well aware of the challenge of maintaining profit margins in an incredibly competitive space.
But Target has a proven model supported by a team that continues to innovate, offset challenges with opportunities, evolve with our guests changing behaviors and leverage our assets in new ways, all the while supporting our expect more, pay less from promise. In 2015, the team made a lot of progress on the $2,000,000,000 cost savings goal that Brian and John first laid out last year. These savings create the capacity to invest resources that support growth initiatives and deliver on our longer term financial goals. As we enter 2016, we are on track to meet or exceed that $2,000,000,000 savings goal by the end of the year. And we believe we have more opportunity ahead of us.
For example, we invest a lot in promotions to provide compelling value to our guests, 1,000,000,000 of dollars annually. As I mentioned last week on our earnings call, I believe we have an opportunity to enhance their effectiveness, especially in the Q4. As a result, we are taking a comprehensive look at last year's promotional activity and I am confident we will be able to find additional savings we can reinvest into the business. Now, let's turn to capital deployment, beginning with our long standing priorities. First, we always invest in the business on projects that meet our strategic and financial criteria.
2nd, we support the dividend and plan to build on Target's legacy. We've paid a dividend every quarter since we went public in 1967 and increased that dividend every year since 1971. Finally, we use share repurchase to return the excess cash beyond what's necessary to support those first two priorities, within the limits of our A credit rating. So now, we can combine all of the plans we've discussed today into a longer term financial algorithm for Target. And for those of you who were here last year or saw this presentation, this should look pretty familiar.
We expect to grow our comparable sales 3% or more annually in 2017 and beyond. While new Flex format stores should contribute additional sales, the lion's share of our growth is expected to come from existing assets. Over time, we are planning to maintain EBITDA margin rates in a range around our expected 2016 rate of 10.5%, plus or minus. This reflects recent trends adjusted for the sale of our pharmacy business. Within the drivers of EBITDA, we are expecting annual gross margin rates in a range around 30% and SG and A in a range of 19.5%.
These rates are broadly consistent with 2015 performance adjusted for our pharmacy sale. Beginning in 2017, we expect some leverage on the depreciation and amortization line, providing about 5 to 10 basis points a year, given our sales growth and capital plans. We expect to invest $2,000,000,000 to $2,500,000,000 in capital expenditures per year, focused on technology, supply chain investments to modernize our operations and to support flexible fulfillment. We expect to grow dividend 5% to 10% annually with the goal of moving to a 40% payout over time. And we expect to return $3,000,000,000 annually to our shareholders through share repurchase within the limits of our current single A credit rating.
All of this means we will deliver an annual adjusted earnings per share growth of about 10%. About half of this growth will come from our earnings with the other half coming from share count reductions. And of course, when you consider the dividend yield on top of our EPS growth, we are positioned to deliver a total return of well over 10% annually. And finally, John told you last year that our financial algorithm is designed to deliver after tax return on invested capital in the mid teens or higher in the next 5 years. Last year, excluding the gain from the pharmacy sale, this metric was already a very healthy 13.9%.
And if we meet our goals over the next several years, we will be well positioned to deliver one of the highest after tax return on invested capitals in retail. Now, if you're like me, you focus most of your time thinking about the long term. But I know you have a job to do, and I promised last week I'd give you a little bit more detail into our 2016 financial plan. Beginning with comparable sales, we expect to grow 1.5% to 2.5% in 2016, which is prudent given the current environment. Of course, because of the sale of our pharmacy business, total sales are expected to be down 3% to 4% in 2016.
On those sales, we expect our 2016 EBITDA margin rate will increase meaningfully from last year, reaching approximately 10.5% this year. This reflects a small increase in our underlying profitability combined with the benefit of the pharmacy sale. And it's expected to be entirely driven by an increase in our gross margin rate due to the removal of the pharmacy sales. On the SG and A line, we are expecting a slight increase in the rate this year, reflecting intentional investments in our team. These intentional investments include things like the Visual Merchants that Brian mentioned earlier, as well as investments in headquarters talent in technology and data science areas.
Also, this expense this year will include the cost of reissuing our chip and pen red cards to our guests. I want to add that both our gross margin and our SG and A expense rates will benefit from the cost savings I described earlier. These savings will allow us to continue to invest this year in product quality, store service and headquarters talent and maintain our EBITDA rate performance in line with our historical results. Moving to consolidated metrics, our 2016 interest expense in dollars is expected to be about flat to last year. And we expect our effective income tax rate to be between 35% 36% for the full year.
Regarding capital deployment, we are planning about to spend about $1,800,000,000 in CapEx this year. And I am confident we are investing in the right things with the right amount. Namely, we are investing in technology and our entire supply chain to modernize our operations, enhance the guest experience and build the foundation for Target's future growth. We will recommend to the Board a 5% to 10% increase in our quarterly dividend this year, and we are planning to invest about $3,500,000,000 or more in share repurchase in 2016. This is higher than our longer term capacity in light of the year our year end cash position.
Combining all of these metrics, we expect to generate full year adjusted earnings per share of $5.20 to $5.40 This EPS growth is a little higher than our longer term financial plan, reflecting the expected share repurchase benefit of the cash from the sale of our pharmacy business. Today, you've heard a lot about our business and how our strategic priorities remain consistent. You've also heard a lot of detail to support how we'll continue to deliver healthy top line growth and healthy shareholder returns. But what I hope you've heard most today is the voice of our guests. Our goal is to have our guests fall in love with Target all over again every time they shop.
I recently had the opportunity to sit with a guest in our home for several hours. It was so great to hear how many times Target has made her life easier. From ordering online and picking up in store to delivering a wonderful holiday experience for her family. Without knowing where I worked, she quickly blurted out, I love Target. I know I will never get tired of hearing that.
With that, I'll invite Brian and John back up to the stage and we'll take your questions. Thank you.
Thanks, Kathy. Thanks, John. All right. We have mic runners here in the room. So I would just raise your hand, look for mic.
And if you would, it'd be terrific if you could identify yourself before you ask the first question. Oliver, you look like you've got the mic and you're ready to go. I can see you from here. It's going to be more difficult when it gets into the back of the room. Thanks a lot.
Hi, Oliver Chen, Cowen and Company. Regarding the loyalty program and the opportunity for personalization, could you just speak to what you see as the next kind of opportunity in loyalty? And kind of related as we think about target for the long term and investors think about long term target, what would you say are your real competitive advantages as Amazon really seeks to also try to be very competitive in consumables and apparel?
Oliver, I'm going to start and we're fortunate enough to have Jeff Jones sitting right up front. So I'm going to turn it over to Jeff. But as Jeff looks for a mic, one of the things that we're clearly looking at and I talked about it from the stage is the fact that we think we have an opportunity to bring integration to our current programs. We've got a number of different vehicles out there today. And an overall theme you've heard from our team is simplification.
How do we make sure it's really simple? But how do we really build a different relationship with our guests? And make sure that they're not just loyal to us, but they recognize we're loyal to them. So with that, let me turn it over to Jeff.
Thank you. Nice to meet you. So you've heard so much about Cartwheel and RedCard. Those are 2 really important programs that work in different ways, but allow us to identify a large number of transactions. What you haven't heard a lot about is the pilot of Red Perks, which we completed in Raleigh Durham.
So Red Perks was an idea which was what's the value of a non tender loyalty rewards program in the target ecosystem. And we're really, really pleased with what we saw with Red Perks. So what you'll see us do as we move into this year is to simplify and integrate those programs. So the power of non tender rewards points, the power of 5% savings every day, personalized discounts with Cartwheel in a simple single sign on, one barcode checkout kind of program all in the mobile device. And the key to personalization for us has to start with identifying a substantially larger number of guests than we do today.
So the more we have our guests opt into a program like this that I'm speaking about, the more we learn about their attitudes, their preferences and their behaviors, the more we can really identify them, deliver individual value to them and start investing more of the markdowns that Kathy mentioned in the guests that matter most based on lifetime value. So that's the shift that you'll see us make based on 2 really successful programs in cartwheel and red card and what we have seen with the power of non tender loyalty in Red Perks.
Thanks, Jeff.
Hi, Robbie Ohmes, Bank of America Merrill Lynch. My question is on localization. It's something that has been talked about in the past by Target over the years and never has really happened. And Mr. Mulligan, I think I don't want to misquote you, but I think something like you said
93% of the items in a Target store or
in every Target store, of the items in a Target store or in every Target store, I think in the past, something to that effect. So the same assortment everywhere. I look at all the initiatives you guys are doing, they sound great. But what has changed that will allow Target to be more local? And why should we not worry that all these initiatives will play out and there won't be risk to you maintaining that 10.5% EBITDA margin.
Great. John, you want to talk about the work on localization?
Yes. On localization, I think you're right. We've done some in fits and starts. And we saw this in Chicago last year. We were able to maintain it.
But it is duct tape, bailing wire and a lot of heavy lifting, because we don't have great process technology sitting behind it and the supply chain to support it. So the difference is now we are working on the process, the technology and the supply chain to support it. And it's one of the reasons we've slowed down on localization. We're not rolling it out everywhere. We've said, okay, we tested it.
We certainly like the results, outstanding results. But we don't have the ability to roll this out everywhere and be successful. So we're working right now on the back end technology that will allow us to build planograms that are localized for every single store. There's a store element where we need the right team members in there who can help us identify what the right products are and how we get that information back to headquarters get the right product flowing through our supply chain. And then a supply chain that's capable of dealing with an enterprise assortment, but getting the right SKUs to the right part of the country at the right time.
And so those are capabilities we're working on building that we're in the process of right now.
The only thing that I would also add, and John has talked about the fact that we certainly tested this in Chicago. We're going to continue to test this in the LA 25 stores. And we've seen the results. But as we think about localization, we're not talking about changing tens of thousands of items. In many cases, we're changing 3000 or 4000 items that make us much more relevant in the local market.
But we've got to make sure we can do that 18000 times or 1800 times. So to do that, we've got to have the right back end technology. We've got to have the right processes and systems in place. But we know through the testing, we get a very powerful lift in comps. We get greater engagement with the guests because they recognize we've got the right local assortment.
And sometimes it's not what we add, it's what we take away. It's making sure that in Phoenix, Arizona or Miami, Florida, we're not sending them hats and scarfs and gloves. So it's also taking certain things out to make sure we are locally relevant. But with each one of these initiatives, we're carefully testing. We're validating the results to make sure that we are getting the right return on that investment.
But to do this right, to do it at scale, to do it 1800 times, we've got to have the right back end processes, we've got to have the right data science behind the choices we make. And we have to be able to make sure we can do it on a consistent basis. So we see significant upside. And as we build those capabilities, you'll continue to see that expand into local markets.
It's Michael Lasser from UBS. Mike, my question is on your longer term guidance of 3% comp growth and maintaining the 10.5% EBITDA margin. Hopefully, you can describe some of the factors that are going to allow you to maintain that level of profitability in a world where there's clear and obvious pressures on your margins over time given the price transparency of the retail landscape. The fact that you are now shouldering the burden of costs that historically been borne by the consumer like in store fulfillment, rising wages and the fact that your cost savings are going to reach your goal by the end of this year. So what are the factors that are going to drive your ability to sustain this 10.5% operating margin?
So let me try to toggle through the P and L and walk through different opportunities that we think are still certainly in front of us. And we've talked about localization. We think there's significant opportunities to make sure that as we localize, we're building the right assortment that certainly contributes to greater acceleration in our comps and supports that 3%. As we continue to see the guests respond to the changes we're making in signature categories, those categories like apparel and home and beauty, baby and kids, those happen to be some of the highest gross margin rate categories in our store. So gross margin rate will continue to help fuel our performance going forward.
While we're very pleased with the performance that we've seen in 2015 and our outlook in 2016 from a cost savings standpoint. We continue to identify future opportunities. Kathy talked about our promotional ecosystem, where today we spend 1,000,000,000 of dollars each year. We think we have an opportunity to continue to enhance and refine the effectiveness. John has talked about the work from a supply chain standpoint.
As a byproduct of that, we think we're going to drive greater efficiency. And whether it's reducing working capital as we reduce backroom inventory or flow product more effectively from our trucks to our shelves, we're still in the early stages of capturing some of that savings. So we've had a number of variables in play, but we're confident that with the priorities we have in place, we're going to continue to deliver very strong performance and maintain both the comp store growth rates and the strong returns we're seeing today.
Good afternoon. Paul Trussell from Deutsche Bank. Back here in the nose, please.
We see you now. Thank you.
Look, very much respect your decision to invest in growth, lots of exciting projects that you have on deck here at Target. But can you discuss in a little bit more detail the LA 25 initiative and broadly help us understand the cadence of the ramp in labor in the store for both the purpose of improving service as well as the purpose of supporting the supply chain BOPIS and the food initiatives that you all discussed.
Let me further describe where we are today with LA25 and I might have Jeff provide some additional insight and color. First of all, we haven't opened up one of our LA 25 stores yet. It is clearly under construction and we expect to complete many of those changes early on this summer. So think about the May June July period. It will be our first chance to understand how the guest reacts when we bring all of these different tests that on their own have been very well received by our guests together in one centralized location.
So we're going to use that as a very important test ground for our brand. We'll test a number of new initiatives there as I described today. And we'll decide what are the initiatives that work best for the guests that drive the right results for us from both the top line growth standpoint, but also drive greater satisfaction from our guests every time they shop. So we're in the early stages of testing that. We're going to learn over the next few months.
And as we learn, we're going to decide what we bring to the balance of our system. I'm not sure how much
more to add. That was very well said. I think the big point is it's an integrated approach to all the tests we've been doing individually. So a lot of great success in individual things around the country, but it's the first look at bringing them all together in one store with a very important guest in a state that matters a lot to the company. So more to come as we complete the test.
And I think embedded in your question was a question about the investments we're making in visual merchandising. And if you were to ask John or ask Kathy, if we think about investments we've made in the last year, one of the investments that's providing absolutely the best return is the additional focus we place on merchandising in our stores and the experts we now have merchandising our apparel, our home, those key vignettes throughout the store. And we're seeing the payback in guests that are clearly responding to our apparel offer in many cases like they haven't in years. And in 2015, we saw very strong apparel performance and we're proud to say that we grew market share throughout the year including in the Q4. We talked about home and the home performance not only in the Q4, but throughout the year in 2015.
Comps up 4%, the strongest performance we've seen in a decade. And so much of that is driven by an improved in store presentation. The fact that we're now taking some of the fabulous product that Julie and her team are designing, the product that we're sourcing for our guests, we're now presenting in a much more impactful way. And the guest is responding. And we're seeing those comps grow in categories that are clearly margin accretive for Target.
So we're seeing the guests respond to the investments we've made in apparel and home. And we talked about one of the highlights in our Q4 was the change we made when we reimagined one spot, the first thing you see when you walk into our stores, and created what we now refer to as Bullseye's Playground, bringing our mascot into that initial area that you see when you walk into the store, reimagining that for our guests. And we saw comps up over 25%. And I think we can say today, we're seeing that momentum continue as we go into the Q1. And our visual merchants, our visual merchandising leaders in store play a very important role in that very big highly profitable bull's eyes playground.
So we think those are the right investments. We monitor everything very carefully. But the investments in store labor and visual merchandising are driving comp increases in those important style categories like apparel and home and clearly are driving unique growth rates in the front of our store with Bullseye's Playground. So we're confident that we're getting the right return, but we'll watch that very carefully throughout the year.
Thank you, Daniel Fu. I had a question on gross margins. You're basically guiding 30% longer term. Last year, you broke out that in store gross margins were about 29.5%, online you said about 23.5%, 600 bps spread. So if longer term, are you basically guiding that online and store margins may go up?
Or are you saying that store margins may go up above 30? And then online will be less of a drag, which is about 3.4 percent of sales. And today, you're not commenting on digital growth, but are you basically guiding in store margins higher over time because of Signature and Home?
Yes. So let me help with a little bit there. So the first thing that we've learned or one thing that we've learned that's become very clear this year is our guest doesn't see a difference between the channels. And so if a store if an order is placed online, but picked up in store, is that a digital sale or a store sale? So we start there with thinking about literally a one target experience.
With regards to margin, so the biggest challenge with just a pure fulfilled online order is the shipping piece, as you know. As we use our stores more and more for flexible fulfillment, we are helping to offset that as well as when we have a guest in our stores oftentimes they actually take the opportunity to shop some additional things in the store. So the combination of that shift is helping with a little bit of that what was once thought of as just a pure drag on margin with the shipping expense. In addition, as we continue to see our digital or dotcom business pick up across the entire target offering, we are seeing more and more of those signature categories as well. So that helps with the margin too.
So in aggregate, we see a 30% margin as we suggested in gross margin. And we really do see it as a single target experience.
And again, in the short term, our gross margin rate in 2016 will benefit from the sale of our pharmacy assets.
Dan Binder at Jefferies. I just wanted to talk about food for a little bit. Obviously, the industry has some stores that are more convenient than yours, some stores that have greater assortments. And many are doing organic and wellness already. I realize that these initiatives may be incremental to you and help with sales.
But it seems like longer term to really drive traffic, you would need to expand the fresh areas of the store, including meat, produce, bakery, deli, etcetera. And I'm just curious your thoughts on why you wouldn't do that and shrink some of the less productive parts of the store or those that may eventually be going away over time like physical media?
Well, on an annual basis, we regularly sit down and look at how we purpose space throughout our store. And that's a conversation we're going to continue to have. But as we sit here today, we're clearly focused on making sure we lead with those signature categories that are really going to define and differentiate our brand going forward. So as we think about space expansion and we think about the future layout of the store, we've got to start with making sure we properly position our style categories, apparel, home and beauty. We're investing in spaces like baby and kids.
We're enhancing wellness and considering what the right footprint should be for food. So we want to make sure that as our guest comes to Target, we provide them a convenient, trusted, reliable experience when they shop our food department and recognize that a lot of that traffic is going to be generated by the fact that they've come to us because they've started their Target run. And while they are there, we want And while they're there, we want to offer them a convenient, trusted, reliable assortment of products in food. Sitting here today, we think that's the winning formula for Target going forward over the next few years.
Hi, Matt Niemeyer from Wells Fargo. Thank you. As you think about broadening and simplifying the loyalty program, is there any potential to have a buy in membership program where you might offer not only something like free shipping, but an array of other services to increase wallet share with your guests? Thanks.
Jeff, you want to give them a sneak peek? Well, I think the
My back on there you go. Where are you, Matt? There you go. I think the simple answer is we have to consider I think the simple answer is we have
to consider both the high end buy in and getting
more people to enroll in non tender. And so right now, given the success of Red Perks, we think the biggest opportunity to scale the number of guests we can identify is by thinking about how to simplify and integrate cartwheel and Red Perks and that's definitely step number 1.
Good afternoon. It's Matt Fassler from Goldman Sachs. So over the past year, you've cut, I guess, a year or 2, a $1,500,000,000 of SG and A. You said you'll be there by the end of the year. That's a lot to cut, but it's also a lot to redeploy.
And it sounds like the redeployment is coming essentially at the same pace as the dollars coming out. So can you talk about the pace of that cost takeout and really where we are seeing those dollars show up in your spending plan?
Kathy, do you want to walk?
Yes, I am happy to start there. So we did lay out a plan a year ago for $2,000,000,000 of cost savings, an opportunity that John and Brian laid out. We did achieve a lot of that SG and A piece of that, a lot of it started in last year in 2015. So we will get the benefit of that run rate savings coming into this year. And it was a lot of things, it was around making more efficient organizations, but it was also just in efficiency in our business and the team has done a great job there.
About $500,000,000 of it was in cost of goods sold. So that's going to show up as we think about sitting down with our vendors and having a stronger partnership relationship there, thinking about how we source things, all of that's been coming through. Both of those will be throughout 2016, we will be able to declare victory on that $2,000,000,000 in savings. And to your question about where is it showing back up and you are absolutely right, the delicate balance between making sure that we are taking out efficiency or things that aren't as important and making sure we are investing in the things that we absolutely want to stand for. And so that's what the team has been doing brilliantly through last year and into this year is figuring out where do we want to invest, whether it's in product quality or in data scientists.
And we're doing it's pretty much across the board there.
Kathy, I think one thing that might be helpful for this group to understand is some of the changes that Mike McNamara has made in his department. If we can get Mike a microphone, I think it would be helpful for him to provide a perspective. I will tell you one of the great things that Mike has brought to us is a very objective approach, but a very knowledgeable approach to how to lead the business. And one of the first things Mike did probably 90 days into his role is come to me and say, Brian, one, I think I have too many outside contractors. I think I can do this much more efficiently if I build engineering talent within.
I think we're working on far too many projects. I think we can set much tighter priorities and deliver stronger results and impact the business more effectively. And for the first time perhaps in my career, I had someone walk into my office and say, Brian, I bet too much capital to spend. I can actually deliver this much more efficiently. I want to give you some dollars back.
And that's certainly fueling some of the changes we've made and that you're seeing in our algorithm going forward. So Mike, why don't we get a chance to introduce you to the group. Mike is sitting right upfront. And why don't you offer perspective on what you've seen and the approach we're taking as we go into 2016 from a technology standpoint. Can we line them up?
No, not yet.
Trade them for Jess, Mike. There we go.
Well, good afternoon. Yes. So I've been in the business about 8 months. I joined in June of last year as the guys introduced me again from Tesco. I guess my perspective is this is that the reality people have asked, do we always spend enough money on technology?
And we're spending pox of money on technology. We are spending definitely enough money on technology. So and it really is about actually where it's our bidding focused. So my first outing with the Board happened probably 2 or 3 months in and then I explained to them what I wanted to do and they said to me, Well, what do you need? And I said, Well, what I need is less money and fewer people, which I think took them aback a little bit.
Because in reality, we had last year, we were doing 8 80 projects simultaneously. Now we've got lots of good ideas about where to invest our technology dollars, but I assure you, we don't have 8 80 great ideas running simultaneously. So this year, what we're trying to do is we're taking actually we are spending less money. We're spending it more internally, less on third parties. And we're going to focus in on fewer than 100 projects.
So from 8 80 projects down to fewer than 100. And those 100 projects are far more focused than on what John and Kathy and Brian have been talking about. So the money is going to go on supply chain, it's going to go on e commerce, it's going to go on guest loyalty and it's going to go on store productivity store operations. So the approach really has been about actually focusing our investment on the strategic initiatives rather than spending on a slew of initiatives that may not make a great long term impact on the business. So we'll spend less, be far more focused, bigger in house team, less reliance on third parties.
Chris Horvers, JPMorgan. So you're expecting same store sales to accelerate 2017 plus, 3% plus. And actually, it's a little bit better than what you guided to last year. So it's a step up. Over the past year, your execution has been much stronger as a company.
You also have had a pretty favorable macro backdrop, at least relative to where it's come from with accelerating wage growth at the low end, lower gas prices. So can you talk about what drives the confidence in getting to that 3% plus and perhaps put some weight around what initiatives you think are going to be the most impactful to drive that acceleration?
Hopefully for most in the room, my answer is not going to surprise you. I think it's the exact same initiatives we've been talking about for the last 2 years. But over time, those initiatives are going to mature and we're going to expand them to a broader base of our assets. So we expect to continue to see our signature categories outperform our overall comps. And as we continue to see great new brands like PillowFork come to market to support the growth in our kids business or Cat and Jack Fuel accelerated growth in baby, continue to mature our offerings in wellness, continue to invest and bring great design and quality and innovation to apparel and home, we think that's going to only get better over time.
And those are longer lead time categories. So we'll see some of that certainly in 'sixteen. We'll be seeing more in 'seventeen and 'eighteen. We've already talked several times about localization. Today, we're doing it in a handful of stores.
We would certainly expect based on the work that Mike and his team are doing, John and his team are doing, that as we get into 'seventeen and beyond, we'll be localizing more and more of our stores around the country. We certainly expect to continue to build our digital capabilities and make it even easier going forward for our guests to shop at Target no matter how they want to interact with the brand, either in our stores, clicking and coming by to collect or having product delivered to their home. So those capabilities are only going to mature over time. We're very excited about the reaction we've seen with our smaller flexible format. We're opening up a handful of additional locations in 'sixteen, but we're building a very strong pipeline in 'seventeen and 'eighteen and beyond.
So it's those core initiatives that are going to accelerate our growth in 'seventeen, 'eighteen and 'nineteen, fueled by the commitment to having the right retail fundamentals, to having a loyalty program that builds even greater engagement with our guests. And while we like the progress we're seeing and we expect more of it in 2016, those capabilities and initiatives are only going to mature in the years to come. And we think that's going to continue to drive our overall company performance.
Hi, John Zalaitis, Buckingham Research.
So when
you came in, they very quickly decided to exit Canada for a given the unlikelihood of getting adequate returns. And then not that long after the sale of the pharmacy business, which is also having a very strong impact on return on invested capital and margins. So as you look at the business now, are there any other kind of bold stroke decisive type moves that you're considering that could potentially also have some kind of a positive improvement on the overall company's return on invested capital that perhaps we can look forward to hearing about in the future?
I think it's how we define bold. And I think some of the changes we've already talked about today are very bold steps for us. The approach that Mike just laid out from a technology standpoint is a very different path than we've been on in the past. The approach that John and the team are taking to retail fundamentals, to improving supply chain, in store processes and operations for us are very important and very bold steps. Today, we introduced 2 exciting new brands.
Those we expect to be $1,000,000,000 brands going forward. For me, those are pretty bold choices and steps that we're really excited about. Jeff's talked about the commitment we have to building a very different approach to loyalty. Those are bold commitments for us. And when we start adding them up, those are the elements that start to transform our company and continue to bolster the brand.
So there may not be the changes that you talked about, the one time events like Canada and the transaction with CVS. But we think these are the right initiatives for the company. We think they are bold choices. We're doubling down behind each and every one of them. And fundamentally, we think those are the right steps for our guests, the right steps for our business and certainly the right things for our shareholders.
And over time, they're going to deliver very strong returns and results for the company. So we actually as a leadership team think those are very important and very bold choices. And we're not talking about 100 initiatives. We're talking about a very focused and finite group of initiatives that we think when we bring them together will redefine our company for years to come. Thank you.
Bob Drbul from Nomura Securities. Two questions. The first one is, I think last year you laid out a clear plan of 40% digital sales growth. Is there a plan that you can share with us in terms of the next few years on that segment within your sales plan? And the second one is that CapEx was I think $1,400,000,000,000 below the $2,000,000,000 The plan is going from $2,000,000,000 to $2,500,000,000 Is that all supply chain investment increases because the Amazon guys they like to spend money.
So I'm just curious how you think about that. Yes.
Let me talk about capital and then go to digital. And as you think about our capital spending in 2016 and going forward, we'll be spending behind technology. We'll be spending behind supply chain. We're reinvesting and remodeling our stores. And we're going to have ongoing maintenance and repair work.
So those buckets are going to stay fairly constant. And obviously, as we continue to perfect and refine our Flex format, you should see us expand our investment there. But we think those are the key areas that are going to underpin the company going forward. From a digital standpoint, if we go back a year ago when we talked about our expectations, we said we wanted to be in a position where we were industry leading. We wanted to make sure we had a very bold objective not only for our investment community, but importantly for our own team to make sure everyone realized how committed we were to digital.
And we go back to what Kathy has talked about today, what John has talked about today, what Carolyn talked about in the video, in every one of those guest immersions, whether we've been sitting in San Francisco or Boston, Dallas or Chicago, different parts of the country, we clearly recognize that our target guests, in fact today's modern shopper, they are absolutely digitally enabled. And that enables them whether they're coming to one of our stores, looking to click or collect or looking for product to be conveniently delivered to their home. So we're absolutely committed to driving accelerated growth from a digital channel standpoint. But as opposed to putting a number out there, we said we just want to make sure we're in an industry leading position and we want to make it really easy for our guests to decide just how they want to shop with us. But as Kathy mentioned, we realized it's really hard to keep store.
A significant portion of our digital growth in the Q4 where we grew 36% was a guest who shopped online and then conveniently came to our store to pick up their order. And while they were there, they'd continue to shop other categories. A significant portion of our digital growth in the Q4 was store enabled. Those over 4.50 locations that are delivering the last mile, that are partnering with an outside vendor after we pick, pack and ready the product. Is that a online order?
Is that a store order? It all ends up being a way that Target fulfills the needs of our guests. But we are more committed than ever to the importance of ensuring our business is digitally enabled, that we have the right tools and capability, that we make it really easy. And to quote many members of our team, we just want to make sure it works. So we're going to continue to focus on driving strong digital performance.
We'll report it every quarter. We just don't think today we have a line of sight to saying here's how we're going to forecast it. But we certainly want to be leading the industry as we go forward and continue to make sure we deliver the right experience for our guests.
And we have time for one last question.
Wayne, you've been patient because I've seen your hand up for a while now.
Last but not least. So I had a question for you, Brian, and one for you, John, as a follow-up. If the customer work you're doing around grocery points to a path where they say to you, we would like you to see, we would like you to offer fresh cut meat, fresh fish, those more labor intensive businesses that you haven't offered in the past. Would you be willing to go down that path? And if you were, how much of a lower EBITDA margin would you be willing to accept?
And then John, maybe related to all of this as you think about food 5, 10 years out that you look at your fulfillment on the fresh side, can you really get it accomplished with produce without localized distribution centers getting away from 3rd party? And if you do so, does that mean that in 5 years, we're looking at a step up in capital spend, get your food assortment, localized, fresh, get away from 3rd party?
John, you want to start and I'll finish off.
Yes, I'll start. Well, a lot of speculation there in your question, Wayne. So I think the first thing for us is to get what we're doing right. We're doing today right for our guests, right. The fresh food we do have in our store needs to be fresh every day and it needs to be local every day.
We've done a lot of work. We've brought in some experts to help us think about the fresh food supply chain. We're not ready to tell you what our plans are there, but we think there's an opportunity for us to improve that. I think Kathy and I have talked about this several times and she has asked me that exact same question, right? Is there a bingo coming for capital investment around food?
And I think everything we see today would lead us to believe that we feel really good about the capital plan we put in front of you. And that 2 to 2.5 I think is the range we put around it that we feel good that we'll operate within that for the foreseeable future. So we feel good about that. But I think our focus today is on getting what we do right do in the store today right for our guests. And that's what they expect from us today.
If we learn more down the road, we'll adjust. But really what they're looking for from us today is what we have, just do it well. Do it the way Target should do it, what we come to expect from Target.
And Wayne, I think that's really the answer. We want to make sure that in food, we're focused on getting the fundamentals right. We think we can differentiate through assortment. We've also got to be clear about who we are and who we're not. And we're going to be true to the drivers of our strategy and how we differentiate the brand.
So we're going to make sure that we get the right fundamentals in place in food. We clearly recognize we have to improve freshness, whether that's in a Super Target or a P Fresh. But we're going to be really careful about moving into new spaces that add greater complexity to the business model. So why don't I just take a couple of seconds to wrap up and I certainly appreciate the time that you've spent with us this afternoon. Hopefully, you recognize that our plan today is very consistent with the ambitious plan we laid out last year.
And we've put together a multiyear plan designed to make sure we drive consistent profitable growth. And I want to underscore the point consistent. As you look at 2015 and again in 2016, and we're really focused on driving consistency. We've seen very positive comp store performance over the last 5 or 6 quarters. We're really pleased with the traffic we're driving.
And we certainly think we're making some big strides from a digital standpoint. But as we go forward, I hope you recognize that the plan that we have in place starts with the guest. And that will clearly drive the choices we make. Hopefully, you walk away today recognizing that that plan will be supported by even stronger retail fundamentals in the future than we have today. It will be a business that will clearly be enabled digitally.
And it will be led by our signature categories that we think define the brand and really define the essence of our brand promise. So we've got a very clear set of priorities. It starts with making sure each and every day we're thinking about the guests. We're thinking about how we serve the guests no matter how they shop. And it's driving our performance.
So our team today is really proud of the progress we've made, but we recognize we have a lot more work to be done. So it's a very proud but humble team. We know we've got a lot more work that has to be done. We feel like we're just getting started. But we think we put together a plan, an algorithm that will guide this company over the next few years.
And it's going to allow us to build off of these choices we've made to consistently drive profitable growth, improve our market share position, endear even greater loyalty with our guests and set the company up for growth for years to come. So thank you for joining us again this year. We have a reception that we'd like to welcome you to and we'll end with one last closing video. So again, thanks for your time today.