Economy First Look

Retail operations continue to flounder against e-commerce, but Target may have a workable plan

Target shares plunged in late February after executives issued a profit forecast that fell well below expectations. But the company has plans to turn its business around that could prove successful.  

Shopping carts are lined up outside a Target store in Palm Coast, Fla..
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As large retailers continue to struggle in a highly competitive e-commerce age, several, including Target, have embarked on a rethinking of their offerings and price points in an uncertain market where customers have left department stores behind for the allure of discounted online shopping.

While the future of the company may seem uncertain, some say Target's plan moving forward and the power of brand recognition could push the company into a successful future. 

Target's shares plunged 13 percent at the end of February, marking the largest single-day drop in 18 years and the lowest rate in two years. The hit follows a downward trend in which Target shares lost a quarter of their value since the 2016 holiday shopping season kicked off in November.

Those results countered profit forecasts, as analysts had expected to see same-store sales get a boost of about 0.4 percent this year.

Once a central part of the shopping experience, large stores have suffered in recent years, steadily losing market share to Amazon and other heavily discounted online retailers. President Trump’s pledge to levy high taxes on imported goods are also threatening the chains, which depend on low-cost imports.

“Our fourth-quarter results reflect the impact of rapidly changing consumer behavior, which drove very strong digital growth but unexpected softness in our stores,” Brian Cornell, chairman and chief executive of Target, said at the time.

"Our industry is in the midst of a seismic shift," he added.

On Tuesday, Payless Shoe Source filed for bankruptcy and unveiled a plan to restructure its business model, and Ralph Lauren announced plans to shutter its flagship store and pivot toward a focus on e-commerce. 

Confusion over Target's branding could be contributing to its losses, say experts. While the stores seem to offer a bit of everything, they have yet to make their mark by diving head-on into certain ventures.

"Target is neither a full-line grocer nor a player with lots of niche specialty products; it is neither a high-end player nor a price-focused discounter," Neil Saunders, managing director of GlobalData Retail, told Reuters.

But as department stores such as Macy’s or J.C. Penny keep shuttering physical locations, Target executives say they hope to remodel their older stores to attract new customers. Nationwide, the chain plans to tackle 600 of its 1,800 locations in the next two years.

To counteract the losses, Target announced it would invest $2 billion in 2017 on analytics, supply chains, and opening 100 small-format stores such as TargetExpress in urban communities and colleges. It will also unveil 12 new brands that will offer merchandise exclusively through Target.

Some of that mirrors action taken by Wal-Mart in recent years, as the company focused on remodeling its aging stores and bolstered its online presence with exclusive new products. Wal-Mart has since seen nine quarters of consistent growth.

February's quarterly report did have a silver lining: Target saw a 34 percent jump in online sales, and vowed to continue to grow its offerings there. Success online has come after Mr. Cornell increased the total stores that ship products directly to shoppers, hoping to match the two-day Amazon Prime deliveries that make the online retailer so appealing.

While Target seeks to copy the successful path laid down by Wal-Mart and Amazon, experts warn the retailer could encounter new challenges.

"Target’s got bigger issues" than Wal-Mart had, analyst Brian Yarbrough of Edward Jones told the Associated Press.

"They’ve struggled since Brian Cornell’s come on to figure out what to do with their grocery department.... I think Target’s turnaround could take a little bit longer than Wal-Mart because it’s a different situation and probably a little more difficult.”

But forecasts for the company still call for earnings of $4 per share in 2017, which could cover its dividend. The company also has a recognizable and well-received brand, popular among both Millennials and older generations. 

Its plans to reduce store size and open smaller, convenient locations in cities and densely populated areas could prove a successful tactic as well, allowing the company to reach more customers seeking to buy groceries and every day essentials. 

Those shifts, coupled with the drop in shares value, could make now the optimal time to invest in the company. 

"Now that Target shares have been beaten down, the upside going forward is that expectations are very low," Bob Ciura of Wyatt Investment Research in Richmond, Vt., wrote in March. "With such a low valuation multiple and a high dividend yield, investors could earn strong returns, even if the company simply treads water."

This report contains material from Reuters and the Associated Press.