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Target Corporation (TGT) Stock Will Keep Sinking Without This Change

TGT needs to invest more in its digital infrastructure

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Target Corporation (NYSE:TGT) released its fourth-quarter and full-year 2016 results before the market opened on Feb. 28. Target stock investors were not happy with the results.

Fourth-quarter earnings came in at $1.45 per share, well below analyst expectations of $1.51. Revenue also slumped, falling to $20.7 billion, a 4.3% decline versus 2015’s final quarter.

Guidance for TGT stock was even worse. Target currently projects a full-year profit for 2017 of between $3.80 and $4.20 per share, well below analysts expectations of $5.34 per share or 2016’s adjusted earnings, which ended up at $5.01 per share.

Revenue was also projected to take another hit.

Target stock ended that day down more than 13%, closing at $58.77. TGT stock has since declined even further, currently trading hands at $54.25. Shares haven’t been this low since 2014.

Value investors are likely taking a serious look at Target stock at today’s levels. After all, it trades at less than 14 times the midpoint of 2017’s earnings guidance. It also trades at a price-to-sales ratio of just 0.43.

Despite those attractive metrics, TGT stock is likely to be a value trap for years to come, unless the company really starts getting serious about growing its online presence.

Time for TGT to Take Online Seriously

One of the lone bright spots of Target’s abysmal fourth quarter were online sales. Digital sales skyrocketed 34% higher during the all-important holiday season.

As part of its turnaround program, TGT announced it was going to spend $7 billion between now and 2020 on long-term improvements. These include remodeling some 600 stores, introducing 12 new brands across the housewares and clothing departments and increasing its small format store count to 130. Naturally, there will be investments made in the digital platform as well.

By the time Target remodels 600 stores, most of that $7 billion will be used up. Is that really enough to compete in a world where, Inc. (NASDAQ:AMZN) dominates?

Let’s put Target’s digital sales in perspective. In its most recent quarter, 6.8% of total sales were done digitally. Its top line was $20.7 billion, putting digital sales at $1.4 billion. Amazon did $43.74 billion in sales during the same quarter, all digitally. It took TGT a whole quarter to accomplish what Amazon did in three days. It’s hard to compete with that.

Remember, Target’s sales declined 4.3% in its most recent quarter, despite being buoyed by its online business. And its reaction is to invest more money into its stores? Wouldn’t a savvy management team realize online has all the growth potential?

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