Target Corporation (NYSE:TGT) stock is down 23% year-to-date. It has been a difficult year for the sector, and the SPDR S&P Retail (ETF) (NYSEARCA:XRT) has fallen 9% while the Dow Jones Industrial Average is up 18%.
Target recently reported its third-quarter results. The stock is down 8%, despite beating on earnings and sales.
The Minneapolis-based firm describes itself as the “second largest general merchandise retailer in America”, with 323,000 employees worldwide and 1,834 stores in the United States.
The 2004 article “Bullseye: Target’s Cheap Chic Strategy” reviews Target’s strategy. Target has long sought to differentiate itself from the much larger Wal-Mart Stores Inc (NYSE:WMT) by offering an upscale alternative for discount shoppers.
To do this, Target emphasizes clean stores, shorter waiting times and exclusive partnerships with celebrity designers such as Nate Berkus.
Target’s website states that their “guests” have a median age of 40, a median household income of $64,000 a year, and 57% have completed college.
But in recent years, Target’s performance has disappointed. According to Target’s 2016 10K Filing, the company has underperformed both the S&P 500 and a other large retailers since 2012.
Target’s executives have long sought to change this. After a strategy review in 2015, they unveiled a roadmap for cutting costs and accelerating growth at Target. In February this year, Target announced that it would spend $7 billion to improve its website and stores.
Competition in Groceries Heating Up for Target
Target will probably face tougher competition in grocery sales going forward.
In June, Amazon.com, Inc. (NASDAQ:AMZN) purchased Whole Foods Market. Amazon is a formidable competitor, and news of this wiped billions off of grocery stocks.
In May, Aldi announced that it would spend $1.6 billion to expand its 1,300 stores in the U.S. and add 400. Then in June, Aldi piled on an additional $3.4 billion, aiming for 2,500 U.S. stores by 2022.
Like Target, both Aldi and Lidl emphasize private label brands and organic foods.
And Walmart is also stepping up, offering more upscale groceries and trying to improve its image as a source of fresh and quality food.
Walmart is also adding private label brands such as Sam’s Choice Italia, offering Italian foods such as risotto and gnocchi.
Walmart is also making good use of its Jet.com brand, which it bought last year for $3 billion in cash and $300 million in Walmart stock. Jet.com is targeting urban millennials with its Uniquely J brand, offering everything from coffee to laundry detergent.
Conclusion for Target Stock
The impacts of this are already being felt. German retailers and Amazon are squeezing the market.
According to NPR, grocery prices fell for 19 months, the longest decline in 60 years.
A recent article in the Orange County Register attributed a drop in grocery prices in southern California to Aldi entering the market.
Burt Flickinger, a retail sector expert and managing director of Strategic Resource Group, stated that:
“Given Aldi’s expansion, Lidl’s entry, Wal-Mart’s response and Amazon’s growing ambitions in this space, it is fair to expect a significant acceleration in the bankruptcy and liquidation cycle in this sector over the next few years.”
Now, Target doesn’t depend entirely on groceries; according to its 10K, food, beverage, and pet supplies accounted for only 22% of its sales in 2016.
But, as Sarah Halzack notes, grocery shoppers often end up buying items from Target’s other segments when they visit the store.
If they find somewhere else to go grocery shopping, this will lower not only grocery sales for Target, but also sales of other items such as clothing.
Given these problems, Target stock doesn’t seem to be much of a bargain.
As of writing, Lucas Hahn did not hold a position in any of the aforementioned securities.