Target Corporation TGT looks quite disciplined in approach when it comes to tackling prevailing headwinds in the retail landscape — sluggish store traffic, stiff competition from online retailers and aggressive pricing strategy. The company’s initiatives such as the development of omni-channel capacities, diversification and localization of assortments along with emphasis on flexible format stores bode well. These are going to play a major role in 2018.
Despite the tough retail landscape, shares of Target have surged 27.3% in the past six months, compared with the industry’s growth of 24.3%. Further, this Zacks Rank #3 (Hold) stock’s VGM Score of B portray its inherent strength.
Endeavors Undertaken
No wonder Target is trying all means to rapidly adapt to the changes in the retail ecosystem. The company intends to deploy resources to significantly develop online platform as well as store facilities to make shopping more convenient for customers. Further, it intends to launch 12 new brands across signature categories. The company plans to expand merchandise assortments with special emphasis on Style, Baby, Kids, and Wellness categories that are performing well.
This general merchandise retailer recently launched curbside pickup program, at 50 Twin Cities stores. This program gives customers an option to get ordered items without leaving the comfort of their cars. It has also rolled out Target Restock program that allows customers to restock their shipping box with essential items online and get them delivered at door steps by the next business day for a nominal charge. Further, in order to improve supply chain and expand delivery capabilities, the company had acquired Grand Junction.
To tap digital sales this holiday season, Target strengthened relationship with Google by allowing customers nationwide to shop through Google Express, including voice-activated shopping. Target has also made a concerted effort on the front of same-day delivery services by acquiring internet-based grocery delivery service Shipt for $550 million.
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Short-Term Impediments
Shares of Target did come under pressure following third-quarter fiscal 2017 results. Despite a positive earnings surprise, investors remained concerned about the year-over-year decline registered in the bottom line and management’s commentary about highly competitive environment in the fourth quarter.
The competition has intensified following Whole Foods Market’s buyout by Amazon AMZN. Further, the fourth quarter coincides with the holiday season, which is often a make-or-break time for retailers, as it accounts for a sizeable chunk of yearly revenues and profits. Target also did not provide an encouraging earnings outlook for the final quarter due to increased spending related to stores, lower pricing and higher wages that are likely to weigh upon margins.
The company has been jostling with waning margins for quite some time now. In both the first and second quarters of fiscal 2017, gross margin contracted 40 basis points to 30.5%. In the third quarter, gross margin contracted 10 basis points to 29.7% on account of pricing and promotions, as well as cost of digital fulfillment. Maintaining the same chronological order, operating margin shriveled 80 basis points, 90 basis points and 120 basis points to 7.4%, 6.8% and 5.2%, respectively.
Wrapping Up
Certainly, Target is leaving no stone unturned to attract consumers and attain incremental revenues. We believe that these strategies are likely to bolster the company’s performance and help overcome impediments, thus positioning it for 2018.
Interested in the Retail Space, Check These
Ross Stores, Inc. ROST delivered an average positive earnings surprise of 5.5% in the trailing four quarters. It has a long-term earnings growth rate of 10% and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Wal-Mart Stores, Inc. WMT delivered an average positive earnings surprise of 2.2% in the trailing four quarters. It has a long-term earnings growth rate of 6.1% and carries a Zacks Rank #2.
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