Target’s Tough 2017

Christmas may be the most wonderful time of the year – for most consumers and retailers – but this year it seems the holidays were less merry and bright than would have been ideal over at Target Corporation.  The latest Target earnings results are in – and they are not good. In fact – going by the various write-ups on offer – financial journalists seem to have favored words  like “terrible,” “dreadful” and “totally missed the bull’s eye.”

Worse than the quarter of soft numbers – however – is the news that comes carried with them: i.e., that the rest of 2017 may not look all that much better for Target earnings.

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

So just how soft – and how will Target turn this earnings train around?  Well, as of right now, it looks like the answer to the latter is time – and lots and lots of treasure.

By The Numbers

There was plenty of red ink to around in the earnings figures. Comparable sales sales dropped 1.5 percent – the bottom of Target’s projected range. Physical stores had a sadder story to tell: a 3.3 percent decline at locations open for at least a year.

The holiday shopping quarter also saw revenue drop 4.3 percent to $20.7 billion, which was the predicted decline by S&P Global Market Intelligence estimates.

Net earnings at Target Corporation saw the biggest miss — down 42.7 percent to $817 million, reflecting an earnings per share of $1.46. Those figures trailed expectations of $854 million and $1.51. The retailer’s revenue also missed expectation – $20.69 billion versus $20.7 billion expected by Thomson Reuters.

Target’s gross margin also took something of a beating during Q4 – the combined outcome of heavy discounting and pick-ups in digital sales. The web accounted for 6.8 percent of the company’s sales in the fiscal fourth quarter, up from just 5 percent one year earlier.

And, in the even rougher news department – Target Corporation is expecting it is going to get darker before it gets brighter. The retailer is predicting earnings of $3.80 to $4.20 a share in 2017, a notable step-off from from  $5.37 a share Wall Street was looking for. That reflects expectations for a low-single digit decline in comparable sales.

Then there is simply the uncomfortable reality that this weakness is not new to Target – which has seen its share price fall consistently for three years.  The stock hit a record high of $85.81 in 2015, as of the writing of this story it is trading at $59 per share.

What’s Next (A Turn Around Effort)

Target – which most analysts believe is feeling the strongest imaginable version of the squeeze between an Amazon-shaped rock and a Walmart-shaped hard place – is now looking to make a turn around.

Price will be an important component there.

“We will invest in lower gross margins to ensure we are clearly and competitively priced every day,” Cornell said. “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.”

That price chop will come as part as Target moves on its $7 billion spending plan over the next three years —and forfeit $1 billion in annual operating profit – money that will go toward massive e-commerce upgrades and capital improvements to physical stores.

“Some buildings just don’t reflect the brand—we have some old, tired stores that haven’t been updated in years,” Cornell told the analysts.

Target will remodel 100 stores this year and 250 next year and hit 600 by 2019.

Whether or not it will work is a different story—and analysts have their doubts.

“What they’re doing is right, but the devil of the details is always going to be in the execution,” Craig Johnson, president of Customer Growth Partners, told CNBC. “The jury’s still out as to whether they have a detailed plan to build back traffic.”