Target Plans Price Cuts as Sales Slump Again

The retailer's shift to a new business model "will present headwinds to our sales and profit performance in the short term."
Matthew HellerFebruary 28, 2017
Target Plans Price Cuts as Sales Slump Again

Target’s shares dropped to 2-1/2 year lows in heavy trading on Tuesday after the retailer reported a larger-than-expected decline in same-stores sales and announced it would cut prices to address what it called a “seismic shift” in the retail industry.

Chief Executive Brian Cornell said Target is planning “aggressive promotional activities” that would erode its operating profit by $1 billion this year. The lower margins, he explained, would be necessary “to ensure we are clearly and competitively priced every day.”

Target’s new “business and financial model” will also include investing in its online business, updating brick-and-mortar stores, and adding more small stores in cities and near college campuses.

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Cornell cited a “seismic shift” in the retail industry as customers spend more on experiences and demand quicker, more convenient ways to shop. “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,” he said in a news release.

In the immediate term, Target’s fourth-quarter earnings report delivered another blow to its stock price, which has lost a quarter of its value since the holiday shopping season started in November. The stock dropped 12.1% to $58.77 in Tuesday’s trading.

The earnings report showed that Target’s same-store sales fell 1.5% in the fourth quarter, more than the 1.3% drop analysts estimated, while a 34% jump in digital sales was not enough to keep overall net sales from falling for the sixth straight quarter, to $20.69 billion. Adjusted profit of $1.45 per share was below analysts’ estimates of $1.51.

“Target didn’t do its job of trying to engage its customers and the theory is they may have lost the ability to do it,” Kim Forrest, senior equity research analyst at Fort Pitt Capital Group, told Reuters. “That’s what the [stock] market is telling you.”

Target forecast full-year 2017 earnings of $3.80-$4.20 per share from continuing operations, while analysts on average were expecting profit above $5.00, according to Thomson Reuters I/B/E/S.