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Target Pledges to Reinvest in Business After Weak Quarter

February 28, 2017 05:46 PM

Target, stung by the migration of its customers elsewhere, pledged Tuesday to spruce up its stores and make other investments in its business after delivering weak quarterly results and an outlook far below what analysts were expecting.

The $7 billion investment comes as the retailer said profit for the quarter that includes the holiday season fell 43 percent, with strong online sales failing to offset weakening business at its stores. Target's stock tumbled more than 12 percent and rattled Wall Street, as shares in Wal-Mart, Macy's and other retailers fell as well.

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Target said it will spend the $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, 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 store are "old and tired" and haven't been updated in years. The company also plans to use the backrooms not just to store merchandise but to double as mini-distribution points as Target increases the number of stores that ship directly to online shoppers as it tries to match Amazon's two-day free deliveries for Prime customers.

Executives who laid out the plan said the spending was necessary in the long term for the company to 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, who added Target would do better by giving shoppers compelling value as well as great products and a good 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 given the accelerating shift of shoppers to online. Instead of seeing momentum in business, 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. Its reemphasis on everyday low prices have also helped to attract shoppers.

Cornell said Target's results reflect "rapidly changing consumer behavior, which drove very strong digital growth but unexpected softness in our stores."

As part of its investment boost, 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 specific communities. They have twice the sales productivity as the larger stores.

University of Saint Thomas retail expert Dave Brennan told 5 EYEWITNESS NEWS Target needs a turnaround.  

"When it comes to Target I think they've lost some of their pizzazz," Brennan said. "You want more people in the store, you want them to stay longer and buy more."

Target also announced the launch of a dozen new homegrown brands, hoping to add $10 billion in sales in the next two years. The company noted that its Cat & Jack children's clothing brand is on track to generate $1 billion in sales in its first year.

For 2017, Target Corp. is projecting an adjusted profit of $3.80 to $4.20 per share. That wasn't even close to the per-share earnings of $5.32 that Wall Street was projecting, according to FactSet. Neither was Target's first-quarter profit projection of 80 cents to $1 per share. Analysts expected $1.33 per share.

Target earned $817 million, or $1.46 per share, for the three months ending Jan. 28. Stripping out certain items, earnings were $1.45 per share, or 5 cents less per share than industry analysts had projected, according to Zacks Investment Research. It was also well below the $1.43 billion, or $2.31 per share, that the company reported last year.

Sales dropped to $20.69 billion from $21.63 billion last year, which was also short of Wall Street projections. Sales at stores open at least a year, a key measure of a retailer's health, fell 1.5 percent. It was the third straight quarter of declines and, like overall sales and profits, weaker than most had anticipated.

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.

Shares of Target fell $8.26, or 12.3 percent, to $58.65 in trading Tuesday.

The Associated Press contributed to this report.

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