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Target will drop prices at the expense of profits

February 28, 2017 03:40 PM
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Target Corp. will cut its prices at the expense of profits.

Target, No. 22 in the Internet Retailer 2016 Top 500 Guide, announced its strategy shift  Tuesday in conjunction with its fourth quarter earnings release. The retailer says it will spend $1 billion in operating profits as part of a $7 billion effort during the next three years aimed at taking back market share. Target posted a net operating profit after taxes of $3.392 billion.

“Our investment in our operating profits will help us pass along the savings to our guests, but bigger picture: More guests will rest easy knowing that Target isn’t just a great place to shop, it’s a great place to shop the best prices,” Target writes.

Target reported online sales accounted for 6.8% of total sales during the fourth quarter ended Jan. 28, or $1.407 billion, up 30.2% from $1.081 billion last year, when e-commerce accounted for 5.0% of sales. For fiscal 2016, e-commerce accounted for 4.4% of Target’s overall sales, or $3.058 billion, up 21.9% from $2.509 billion last year.

Meanwhile, store sales during the fiscal fourth quarter were $19.283 billion, down 6.1% from $20.545 billion in the year-ago quarter. For fiscal 2016, store sales were $66.437 billion, down 6.8% from $71.276 billion in fiscal 2015.

Part of Target’s growth plan involves making better use of its stores to fulfill online orders, including expanding its ship-from-store capabilities to all of its 1,802 stores and equipping all associates with mobile point-of-sale devices.

Target’s pivot drew mixed reactions from analysts.

“We are stunned—we thought they were going the other way, with higher-margin stuff,” said Brandon Fletcher, an analyst at Sanford C. Bernstein & Co. “We believe there is a better path, and we want to know why they stepped off into the wild.” 

Moody’s lead retail analyst Charlie O’Shea sees it another way: “We believe that Target’s decision to absorb some hits to profits in 2017 due to price investments, and the acceleration of investments in physical assets and new brands, as well as online, are sensible long-term strategic moves to enhance its competitive position, and recognize the changing landscape of retail,” he wrote..

“This is similar to the path Wal-Mart chose in late 2015,” Stifel Financial Corp. analyst Mark Astrachan said in a note. “That said, Target’s size relative to Wal-Mart suggests increased risk in focusing on everyday low prices.”

For the fiscal fourth quarter ended Jan. 28, Target reported:

  • Net sales of $20.690 billion, down 4.3% from $21.626 billion a year ago.
  • A year-over-year comparable sales decline of 1.5%, compared with a 1.9% gain.
  • Net earnings of $817 million, down 42.7% from $1.426 billion.

For fiscal 2016, Target reported:

  • Net sales of $69.495 billion, down 5.8% from $73.785 billion in fiscal 2015.
  • A year-over-year comparable sales decline of 0.5%, compared with a 2.1% gain.
  • Net earnings of $2.737 billion, down 18.6% from $3.363 billion.
 

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