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Target Q4 Comps Dip Due to ‘Unexpected Softness’

As it struggles to contend with “rapidly changing” consumer behavior, Target Corp.’s shares tanked 14 percent on Tuesday – the steepest plunge in several years – after executives from the Minneapolis-based retailer issued a full-year profit forecast that badly missed its estimated bull’s eye.

After posting a third straight quarter of lower same-store sales due to "unexpected softness,” Target will galvanize its focus on lowering prices and absorbing lower profit margins to better compete with its most formidable rivals, Walmart and Amazon, to offset further erosion. The company said food/grocery, which has continued to be a challenging category, is one of its top priorities for price reductions. 

“Our fourth-quarter results reflect the impact of rapidly changing consumer behavior, which drove very strong digital growth but unexpected softness in our stores,” said Brian Cornell, chairman and CEO of Target.

Highlights of Target’s Q4 ended Jan. 28

  • Same-store sales decreased 1.5 percent, while 2016 sales decreased 4.3 percent to $20.7 billion from $21.6 billion last year, reflecting comp-sales declines as a result of removing pharmacy and clinic sales, which it sold to CVS last year, from 2016’s total-year results.       
  • Comparable digital-channel sales increased 34 percent, good for 1.8 percentage points of growth. Segment earnings before interest, expenses and income taxes (EBIT), which measure segment profit, were $1.3 million in Q4, a decrease of 13.5 percent from $1.5 million in 2015.
  • Comparable-sales growth in signature categories outpaced total comparable sales by nearly three percentage points.
  • Comparable traffic increased 0.2 percent.

Grappling With a 'Seismic Shift'

During a call with investors, Cornell affirmed that the retail industry is experiencing a "seismic shift," as the focus on digital and pricing strategies is putting tremendous strains on the traditional brick-and-mortar business.

As a way "to position Target for long-term, sustainable growth in this new era in retail,” Cornell said that the retailer will accelerate “investments in a smart network of physical and digital assets as well as our exclusive and differentiated assortment, including the launch of more than 12 new brands, representing more than $10 billion of our sales, over the next two years.”

Target’s increased focus on small-format stores will yield more than 100 such locations expected to open within three years. Another 600 stores are set for overhauls over the same timeframe, to better “reflect the brand. We have some old, tired stores that haven't been updated in years," Cornell acknowledged on the analysts’ call, during which he also noted that it’s unrealistic to “ask people to shop the way their parents did.”

Cornell noted that the chain’s investment in lower gross margins will “ensure we are clearly and competitively priced every day. While the transition to this new model will present headwinds to our sales and profit performance in the short term, we are confident that these changes will best position Target for continued success over the long term.”

On a call with investors, Target CFO Catherine Smith said that the company will funnel $2 billion into the business this year and $7 billion over the next three years to back its increased focus on digital, pricing and development, and support of new signature brands.

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