Target earnings slump, shares plummet

By Beixi (Bessie) Xu

Target Corp.’s net income decreased 37 percent in the fourth quarter from the prior-year period due to a progression of changes in its business model. The earnings fell short of analysts’ expectations, sending the shares tumbling 12.2 percent Tuesday.​

The stock decline was due to the “significant reduction in guidance and increased risk from shift in business strategy,” wrote Claire Chamberlin, an analyst at Stifel Financial Corp., in a note. “The stock market is inline with historical averages and a discount to big-box retail peers, and I believe is appropriate given weak fundamentals and the noted shift in business strategy.”

Target revenues increased modestly in both 2015 and 2016.

Target’s new business and financial model includes investing in its online business, revamping existing stores, and opening more small stores in suburbs and near college campuses.

“The strategy could work. We like that they are doing some improvements in in-store services. People don’t want to shop in Wal-Mart, because they have great experience, so people will pay more,” said Brandon Fletcher, senior analyst at AllianceBernstein, in a phone interview.

Target’s net income in the fourth quarter ended Jan. 28 was $ 817 million, or $1.45 per diluted share, down from $1.43 billion, or $2.32 per diluted share, in the year-earlier quarter. The consensus estimate was $1.50, according to Zacks Investment Research.

“Our fourth quarter results reflect the impact of rapidly-changing consumer behavior, which drove very strong digital growth but unexpected softness in our stores,” said Brian Cornell, chairman and CEO of Target, in a press release.

Revenue decreased 4.3 percent to $20.69 billion from $21.63 billion, reflecting a 1.5 percent decline in comparable-store sales combined with the removal of pharmacy and clinic sales. However, comparable digital sales grew 34 percent, contributing 1.8 percentage points to Target’s comparable sales.

The cost of sales and selling, general and administrative expenses decreased 3.1 percent and 7.8 percent respectively, contributing to profit.

In New York Stock Exchange trading, Target’s shares closed at $58.77 Tuesday, down $8.14.

Target announced it will lower prices in more of an everyday low price approach similar to Wal-Mart’s. Also, it will remodel 600 stores and launch more than 12 new brands over the coming year.

Analysts expressed concern about Target’s pricing strategy.

“This is similar to the path Wal-Mart chose in late 2015,” wrote Chamberlin in a note. “Target’s size relative to Wal-Mart suggests increased risk in focusing on everyday low prices. We think an increased focus on exclusive brands increases risk as Target needs to stay ahead of consumer trends.”

Fletcher, of AllianceBernstein, said, “I don’t like what they talk about things like investing and price, which they don’t have a competitive advantage for, so we get nervous about this kind of thing. If their prices are lower than Wal-Mart’s, it’s really bad.”

Target reported full year earnings of $2.73 billion or $4.70 per diluted share, a decrease of 18.6 percent from $3.36 billion, or $5.31 per diluted share, a year earlier. Annual sales decreased 5.8 percent to $69.5 billion.

For the current year, Target expects a low-single digit decline in comparable sales, and both GAAP EPS from continuing operations and Adjusted EPS of $3.80 to $4.20.

“Price investments could make Target’s market share losses look worse in 2017, but either way they will pressure both top-line and gross margin,” wrote Simeon Gutman, analyst at Morgan Stanley. “It is difficult to discern how conservative the 2017 guidance may be, but for the time being, the market will not likely be focused on possible upside to their range.”

​Photo at top: Target on State Street in Chicago. (Beixi Xu/MEDILL)​