The retail industry has been in steep decline, and Target Corporation (NYSE:TGT) is no exception. Retailers have been closing stores and laying off employees as a way to cut costs and transition greater focus to online resources. Target has particularly struggled with the increase in online shopping and competition with Amazon.com, Inc. (NASDAQ:AMZN), and TGT stock has suffered as a response — down more than 20% year-to-date alone.
The company reports first-quarter earnings on May 17, and we predict further downside in Target stock. Amazon and Wal-Mart Stores Inc (NYSE:WMT) are increasingly stealing market share in the e-commerce space, and Target appears to be left behind in the dust.
On Feb. 28, Target reported highly disappointing fourth-quarter results, and TGT shares dropped nearly 13% in response. Holiday expectations fell short. Margins came under pressure, with gross margin dropping to 26.9% (100 bps from last year) and EBIDTA margin down to 9.5% (30 bps drop). Target also lowered guidance for 2017.
TGT is expected to report first-quarter earnings before the bell on Wednesday, May 17. Analysts are expecting earnings of 91 cents per share and have a quarterly revenue target of $15.6 billion.
However, given indicators of recent performance, we expect Target earnings to be similarly disappointing as its prior results, and we expect TGT stock to continue its 2017 slide.
Target’s New Concept Stores Are a Flop
After reporting its disappointing Q4 results, Target announced plans to spend $7 billion over the next three years on improving its e-commerce presence and redesigning its stores. The objective was to remodel 100 stores in 2017, 250 in 2018, and 250 in 2019.
The purpose of the new store format was to make it easier for customers who were in a rush as well as appeal to those who like to browse.
In October 2017, Houston will be home to TGT’s first fully redesigned store that will include two separate entrances: one for customers who want to browse beauty or fashion, and another for time-crunched shoppers. The latter will also lead customers to the store’s redesigned grocery aisle, which will include grab-and-go products, as well as self-checkout lanes, a wine and beer shop and a counter dedicated solely to picking up online orders.
According to Chief Executive Officer Brian Cornell, the revitalization plans will increase sales by 2%-4% in each location.
However, the new concept stores don’t seem to be off to a good start. Chief Innovation and Strategy Officer Casey Carl, who was leading the new concept stores, announced he was leaving the company in April. His departure comes shortly after Target canceled the launch of its “store of the future” which was expected to open in Silicon Valley and offered innovative and futuristic features.
Carl, who has been with the company for nearly 20 years, was overseeing that project, among others.
With the update of old stores, TGT also announced plans to expand its smaller format stores in urban environments, which currently comprises 32 of their 1,800 stores. Comparable-store sales are nearly double at the smaller format stores in urban settings compared to their bigger locations in suburban settings. The goal is to quadruple their small-format stores in urban areas by 2019.
We are cautious on the idea of opening new stores at time when Target’s store sales are falling and most retailers are closing shops.
Executive Departures and Pay Cuts
Casey Carl is just one of many in the long list of executive-level departures that have hampered TGT stock over the past year. The head of human resources, grocery, digital and marketing, among others, have also left as pressure from falling sales continues to mount.
With Target struggling with its financial performance and launching new initiative these executive departures could not have happened at a worse time.
Those remaining with the company have faced cuts to pay and bonuses. Cornell received no bonus from the company and a one-third paycut. Chief Financial Officer Cathy Smith saw her compensation for 2016 fall by 41.3% to $4.4 million, and Chief Operating Officer John Mulligan’s compensation fell by 32.7% to $7 million.
These significant pay cuts highlight the dire situation Target is in.
Target Tests Online Stocking Service
Target is now testing a program that allows consumers to order household essentials such as peanut butter, paper towels and laundry detergent, then have them delivered to the house the next day.
The service is currently just being tested with employees, but it comes at a time when TGT is in overdrive to learn how to compete with online retail leader Amazon.
The plan, called “Target Restock,” is limited to employees at TGT’s headquarters in Minneapolis, but the company plans to pilot the service this summer to consumers who participate in its Redcard loyalty program. According to the company’s blog post, the service is intended to save busy guests time, making it easier to have household essentials delivered quickly without needing to make a run to the store.
TGT intends to set competitive pricing compared to services like Amazon Pantry, which charges $5.99 per box and does not offer expedited shipping.
Losing Market in Apparel
At the same time, Amazon and Walmart have been quickly gaining traction in apparel, an area Target had historically led. In a survey highlighted in Barron’s, 46% of surveyed consumers indicated that they’d purchased clothes on Amazon in the last 12 months, versus 60% at Walmart.
With more consumers comfortable shopping online, for anything from electronics, to groceries, and clothes, Target needs to improve its e-commerce presence if it’s going to compete with these two giants.
Bottom Line on TGT Stock
Target has enacted numerous initiative in an attempt to turnaround performance. However, as of now, these initiatives seem to be eating into Target’s already shrinking profit margins without garnering much return.
Its new concept stores have hit several obstacles, and we expect comps will continue to slide this quarter as Amazon and Walmart steal ground in apparel and beauty and Target continues to work out the kinks with its new store layout.
It’s still too early to say long-term whether the new initiatives at Target will be successful, but as of now it looks like things are off to a rough start. We expect bad results from last quarter to continue, and we expect TGT stock to take a dip in response.
As of this writing, Don Dion did not hold a position in any of the aforementioned securities.
