NEW YORK (AP) — Target, stung by the migration of its customers elsewhere, pledged Tuesday to spruce up some “tired” stores and make other investments in its business after delivering weak quarterly results and an outlook far below what analysts were expecting.
The retailer’s profit for the quarter that includes the holiday season fell 43 percent, with strong online sales failing to offset weaker business at its stores. Target’s stock tumbled more than 12 percent, and other retailers dipped as well.
Target said it will spend $7 billion over the next three years to remodel more than 600 of its 1,800 stores, speed up its expansion of small-format stores, bolster its online operations, and launch new brands. The company usually spends about $2 billion a year on such capital investments.
CEO Brian Cornell acknowledged that many of Target’s stores are “old and tired” and haven’t been updated in years.
The company also plans to treat its stores as local distribution hubs — using the backrooms not just to store merchandise until it moves to the sales floor, but also to house products that will be sent directly to online shoppers’ homes or be picked up at stores by them. Target is now using about 1,000 stores to ship directly to customers, as it and other retailers try to match Amazon’s two-day free deliveries for Prime customers.
Executives said the investments would help Target regain its foothold in a market where shoppers are moving online more and more. Target said it expects profits to start growing again in 2019, but wouldn’t be more specific.
“Our industry is in the midst of a seismic shift,” said Cornell, noting that Target would take a hit of $1 billion to its profit margins this year as it bolsters its online business and lowers prices to be more competitive.
Cornell said Target wants to return to more consistent low prices on essentials to deepen loyalty among shoppers, a shift from the temporary discounts it had been promoting. That might look like Target is stealing a page from Wal-Mart’s playbook. But Cornell said Target’s focusing on delivering more than price, such as with exclusive brands and store experience.
All traditional retailers have struggled as Amazon and other online retailers draw shoppers away. Under Cornell, Target had been cutting costs, testing smaller formats, and expanding online services. But Cornell told investors those efforts weren’t enough, and Target has seen three straight quarters of declines for a key revenue measure and declining customer counts.
In contrast, Wal-Mart Stores Inc. posted another quarter of higher customer traffic and same-store sales as its efforts to merge its online services with its vast number of stores have clicked. Back in 2015, Wal-Mart had warned that stepped-up investments in stores and in its employees would hurt profits. But those investments eventually paid off as Wal-Mart has been able to revive traffic and sales at its stores, and its reemphasis on low prices has also helped to attract shoppers.
“Target is trying to cater to both ends — the lower-middle class with everyday low prices and upper middle-income with more fashion-oriented merchandise,” said Ken Perkins, president of research firm Retail Metrics LLC. “I think they are coming out swinging in terms of what they need to do, but they have a tough road ahead. Amazon and Wal-Mart are very formidable competitors.”
Target plans to open more than 100 small-format stores in cities near college campuses. It currently has 32 of these stores, which are tailored to their communities and post twice the sales productivity as larger stores. Remodeling elsewhere will mean re-organizing products that go together, such as putting swimsuits, beach hats and sunglasses near each other.
The company also announced the launch or relaunch of a dozen homegrown brands, hoping to add $10 billion in sales in the next two years. It noted that its Cat & Jack children’s clothing brand is on track to generate $1 billion in sales in its first year. But Target’s grocery business remains a work in progress. Cornell told investors the company is not a full service grocer and competes more in the convenience area with self-serve items.
Target earned $817 million, or $1.46 per share, for the three months ended Jan. 28. Adjusted earnings were $1.45 per share, less than analysts had projected. Sales dropped to $20.69 billion, also short of Wall Street projections. Sales at stores open at least a year, a key measure of a retailer’s health, fell for the third straight quarter. For 2017, Target Corp. is projecting an adjusted profit of $3.80 to $4.20 per share, far below what Wall Street was projecting.
The pain has been spread across much of the retail sector. J.C. Penney swung to a profit for the fourth quarter, but total sales fell slightly. Kohl’s Corp. reported a lower fourth-quarter profit and total sales declined. Earnings at Macy’s, the nation’s largest department store chain, slid 13 percent.
Cornell said he hasn’t seen as many troubled retailers since the recession nearly a decade ago. But he believes that will provide room to pick up market share.
Shares of Target fell $8.14 to close at $58.77 on Tuesday.
Chapman reported from Newark, New Jersey.
Elements of this story were generated by Automated Insights (http://automatedinsights.com/ap) using data from Zacks Investment Research. Access a Zacks stock report on TGT at https://www.zacks.com/ap/TGT
Keywords: Target, Earnings Report, Priority Earnings