Target Corporation (NYSE:TGT) certainly tickled the ears of investors today, announcing it would be boosting an existing stock-buyback program of $10 billion by buying back an additional $5 billion worth of Target stock. Not bad for a company with a market cap of only $39.5 billion.
And yet, beyond the headlines of the Target buybacks, shareholders know the retailer has lingering problems.
To its credit, TGT has introduced some solutions as well. It developed a new small-store format, unveiled a wider array of groceries and delivered some heart-felt pleas to all its employees. It’s all falling flat so far with shoppers though, and by extension falling flat with investors and analysts.
Target Stock Fizzling Out
As a refresher, last quarter, Target managed to boost its year-over-year bottom line per share of TGT stock, though by most other (more important) measures it hit a wall. Same-store sales fell by 1.1%, and total company revenues fell 8% year over year.
There was more than one reason for the headwind.
Arguably the biggest one is the boycott of Target by a few million consumers who are less than pleased with the retailer’s April decision to allow transgender people to use the stores’ restrooms of their choice. At least 1.4 million have signed a petition to stop shopping at Target, and countless more have stopped patronizing the company’s stores without signing the petition.
It’s not just the transgender bathroom issue that has proven to be a headwind for the company and Target stock, however. Target is also losing relevancy as the “cheap chic” movement it largely helped define is now becoming increasingly fragmented.
Rather than replace or rekindle that business though, the company is reworking its product mix and footprint.
Struggling Initiatives
One example of these initiatives is a recent effort to scale-up its existing grocery business. Shoppers haven’t bitten so far though.
The impasse may be that Target isn’t seen as an alternative to more established grocer names like Wal-Mart Stores, Inc. (NYSE:WMT) or Kroger Co (NYSE:KR). Its stores may also be in the wrong locations for a grocery store.
The scaled-up grocery business remains a work-in-progress. Most people remain unimpressed.
Target has also introduced a small-store format now that — between it and Walmart — the large-store format has pretty well saturated most markets. Chief Executive Officer Brian Cornell recently announced the retailer could be opening hundreds of these stores in the foreseeable future, building on the 32 such locales that should be up and running before the end of this year.
Walmart has already tried something similar, though, and ultimately decided to abandon the idea. In June it reported it would be closing all 102 of its so-called “Express” stores. It’s not likely Target will fare significantly better.
Even more recently — as in last week — Cornell delivered a clear but concerning message to store workers:
“Competition has been fierce and we have had a few bumps on the road this year… We have 137 days to turn this into a winning year… (comparable sales) are flat year-to-date. I’m disappointed with that… we own that.”
While it’s not unusual for a company to share ideas and be frank with its employees, it is unusual for Target to do so. Plus, the message seemed to put the onus on in-store workers themselves, who actually have very little control over a customer’s in-store experience. The merchandise selection, staffing levels and foot traffic are out of the most employees’ control.
The fact that Cornell would send such a desperate message in the first place — not to mention the unspoken implication — is alarming in itself.
Bottom Line for Target Stock
Still, does the corporate-sponsored buyback of Target stock bode well? Maybe, but don’t look for a big impact anytime soon.
The newly approved $5 billion will only kick in after the current $10 billion buyback program is completed. Just for the record though, it could take a long while for that $10 billion buyback to end.
Aside from the fact that Target has only generated $3.1 billion in net income for the past (fairly typical) four quarters, it has also only got $1.5 billion in the bank. And, of the $3 billion or so it earns every year, it has to pay part of that as dividends, and hold into the rest for initiatives like smaller stores, or even just for a rainy day.
In other words, it could take several years to buy the first $10 billion worth of TGT stock back — never even mind the fact that neither approved buyback program is an actual obligation.
Said another way, the buyback announced this week looks more like a public relations move aimed at taking the focus off the retailer’s myriad of problems.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
