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 Amazon.com, 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?
The Solution? Just Copy a Competitor
That kind of error in judgement is even worse when we look at what Wal-Mart Stores Inc (NYSE:WMT) is doing.
In October, the world’s largest retailer announced it would be doubling down on its digital investments and slowing store openings. It pledged to spend $11 billion in capital expenditures annually over the next two years. Just 20% of that amount will go towards opening new stores. Most will end up being spent on digital initiatives, including new distribution centers to get online purchases out quickly.
Also keep in mind Walmart has been making acquisitions to bolster its digital business, including buying Jet.com for $3 billion last summer and Moosejaw, a Michigan-based specialty apparel retailer with a strong online presence, in February. It also has a 10.8% stake in JD.com Inc(ADR) (NASDAQ:JD), which is worth approximately $5 billion at today’s prices.
It’s obvious these digital investments are working. Walmart’s digital sales increased by 29% in its most recent quarter. Yes, that’s less than Target’s percentage increase, but keep in mind Walmart is a larger player online today than TGT is. It’s delivering 29% growth on a much bigger base.
The Bottom Line on Target Stock
The difference in attitude between Walmart and TGT is amazing. Target is much more worried about its stores, while Walmart is investing aggressively into its digital platform.
Until the company really starts to take its digital sales seriously and dedicate most of its capital expenditures to that part of the retail world, it’s easy to avoid Target stock. The company just isn’t embracing the future.
As of this writing, Nelson Smith did not hold a position in any of the aforementioned securities.
