By Khadeeja Safdar
Target Corp.'s chief vowed to invest billions of dollars to
lower prices and remodel hundreds of stores, an admission that the
retailer's focus on trendy merchandise wasn't enough to attract
shoppers.
Chief Executive Brian Cornell defended his strategy of focusing
on physical stores amid an industrywide shift to online sales. On
Tuesday, Target reported sales and profit declines for the holiday
quarter, and gave an even gloomier outlook. The company said its
2017 profit would fall as much as 25% below what Wall Street had
forecast.
The warning sent Target shares down 12% to $58.87, a new 52-week
low and the biggest one-day decline since 2008. The shares now have
erased nearly all the gains since Mr. Cornell took the reins in
August 2014 in the wake of a massive customer-data breach.
Investors sold off other retail stocks after Target's downbeat
report, including department- store chains and discounters. J.C.
Penney Co. and Dollar General Corp. fell about 5%, while Macy's
Inc. and Wal-Mart Stores Inc. slipped 1%.
Calling 2017 "a year of investment," Mr. Cornell said Target
would spend $7 billion over the next three years to improve its
stores, launch exclusive brands and develop its supply- chain and
digital capabilities. The company also said it was prepared to
sacrifice about $1 billion worth of potential profit, by cutting
prices and driving lower-margin digital sales.
Mr. Cornell said he expects Target to return to earnings growth
in 2019. This multiyear plan "is the right path for the company
now," he added. "It will be the right path for the company 10 years
from now."
The changes come more than a year after rival Wal-Mart began
pouring money into revamping its stores, lowering prices and
expanding its e-commerce operations -- changes that reversed a
sales slump. Target also has been squeezed by the expansion of
Amazon.com Inc., which shares many customers and products with
Target.
For decades, Target's formula of offering stylish but affordable
merchandise helped set the retailer apart from competitors. Under
Mr. Cornell, Target has centered much of its growth strategy on its
roughly 1,800 stores and regaining its cachet for selling
fashionable products. He pushed the addition of specialty foods and
trendy labels developed in-house, such as children's apparel brand
Cat & Jack.
Although Mr. Cornell said Target would continue to push style
and new brands, on Tuesday he took a page out of Wal-Mart's script
by saying Target needed to return to "everyday low pricing."
Analysts at Credit Suisse said the retailer essentially admitted
it has pursued a flawed strategy to avoid competing on price. "The
announcement represents confirmation of the company's difficult
position, and it's unclear if there is a winning strategy at this
point given how far behind it is from competitors like [Amazon] and
even [Wal-Mart] now."
Mr. Cornell said Target plans to revamp as many as 600 locations
over the next three years and open 100 smaller locations in college
towns and urban areas.
There are no plans for mass closings, he said, and the retreat
of department stores was an opportunity for Target to grab market
share. "We are not mall-based," he added.
Since he became CEO, Mr. Cornell helped Target regain its
footing after the credit-card breach. He exited the Canadian market
and sold the company's pharmacies to CVS Health Corp. But the
former PepsiCo Inc. and Sam's Club executive's turnaround efforts
began to stall last year, as fewer shoppers visited Target's stores
and spending moved online.
Analysts predict that Target will continue to lose market share
to Amazon and other online sellers if it doesn't increase the size
of its digital business. In a recent study, Goldman Sachs found
that Target customers are more likely to have an Amazon Prime
membership than those of Wal-Mart and other discount retailers.
Some analysts have suggested drastic cost-cutting moves. Target
needs to consider closing stores and exiting underperforming
categories like CDs, DVDs and other media, John Zolidis, an analyst
at Buckingham Research Group, wrote in a research note this
week.
Brick-and-mortar chains are struggling with dwindling foot
traffic and shrinking profit margins as more U.S.consumers do their
shopping online. Several retailers, including Macy's, Sears
Holdings Corp. and J.C. Penney, have recently announced plans to
close hundreds of stores to combat weak sales.
"We believe structural changes have been at Target's doorstep
for years, but the company's strong connection with next-generation
consumers and moms led us to believe it could steadily move its
business more online," wrote Piper Jaffray analysts Sean P.
Naughton and Dan R. Wesser. "That was clearly too optimistic."
Comparable sales in Target's digital business rose 34% in the
fourth quarter from a year earlier but still make up only a
fraction of overall revenue. Mr. Cornell initially targeted 40%
online sales growth over five years, but the company didn't reach
that goal in 2016, falling short at 27%.
During the fourth quarter, Target's sales at stores open at
least a year fell 1.5%, which was the low end of the company's
guidance. The company also predicted that comparable sales, which
include online revenue, would fall this year.
Target said it would use more of its stores to fulfill online
orders and work to cut its inventory -- something its operating
chief, John Mulligan, said Target had too much of. "We need to get
faster and more reliable," he said.
Overall for the quarter, Target reported a profit of $817
million, or $1.45 a share, down from $1.43 billion, or $2.32 a
share, in the year-ago period. Sales fell 4.3% to $20.69
billion.
--Joshua Jamerson contributed to this article.
Write to Khadeeja Safdar at khadeeja.safdar@wsj.com
(END) Dow Jones Newswires
March 01, 2017 02:47 ET (07:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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