Stock of the Day
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Target Corp. (TGT)
Target Better Change its Strategy
Target is in danger of seriously denting its reputation of a business that can always be expected to deliver on numbers. Last quarter (which ended November 3rd), the fifth largest retailer in the country lowered its sales outlook and warned that it would miss same-store sales on numerous occasions. And today while announcing that its November sales were tepid, it warned that things will have to appreciably improve in order for it to meet its fourth quarter forecasts, which essentially amounts to issuing a profit warning with as much as 9 weeks in the quarter still to go. To be far, it's not like the overall retail sector is performing off the charts, but there are retailers out there experiencing better growth than Target and right now, the company's chief competitor, Wal-Mart (WMT: Charts, News, Offers) is one of them. So what's plaguing Target and has the street overreacted today by shaving close to 8% off its stock price?
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Target has unquestionably been one of the success stories in retail over the last few years. The Minneapolis based company has managed to preserve its status as a discount retailer while successfully attracting higher end consumers with larger discretionary incomes by offering trendy apparel and goods. In some ways, it has done what Wal-Mart has been unsuccessful at doing. Wal-Mart's business model is rock-bottom low prices. But every so often, especially in good times, when the consumer has more to spend, the Little Rock, Arkansas retailer will make noises about achieving growth by selling more upscale items (e.g. high-end women's apparel). However, after a few months, Wal-Mart will realize that it's not working and it will go back to the mantra of 'always low prices'. But Target, on the other hand, has been able to enjoy the best of both worlds.
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That is why Wall Street always felt confident that Target would deliver on numbers as expected. But after reporting a surprise 4% fall in third quarter net income on November 20th, investors have become more skittish. That nervousness is apparent today as Wall Street did not take kindly to the announcement this morning that same-store sales in November rose just 1.1% (after adjusting for more post-Thanksgiving shopping days in November of this year compared to '06). Target had previously said that it expected to kick-off the all-important holiday season by recording a 2-4% increase in same-store sales in November. So it missed by a sizeable margin and it is suffering the wrath of investors today, justifiably so. It doesn't help matters that Wal-Mart posted a 1.5% rise in November same-store sales beating analyst expectations, most of which were around 1.2%. Target blamed the soft November numbers on weaker than expected sales of holiday items (e.g. toys) during the post-Thanksgiving week and admitted there is a good chance that it won't meet Q4 forecasts.
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So what's wrong with CEO Bob Ulrich's company? One possible explanation is that in an effort cultivate its more upscale status while preserving its rep as a discount retailer, it has gone too far. Therefore, customers are viewing Target as a more expensive option than Wal-Mart. Also, Target hasn't done a good enough job of touting low prices during this holiday season. It has certainly been less vocal than Wal-Mart in this regard. Perhaps, management figured that they could get away without offering cutthroat prices in return for a better shopping experience, which as a strategy, might have worked in any other environment besides the current one. More and more indicators are pointing to the fact the consumer is stretched with a slowing economy, high gas prices and mortgage issues, and is turn, cutting back on discretionary and holiday spending (especially when consumers can't look at their houses as ATMs). In this environment, people want the lowest possible prices (i.e. Wal-Mart). So either the economists at Target miscalculated how weak consumer spending would be during the holiday season or management at Target overestimated how insulated Target is from cutbacks in spending. Either way, Target would be well-served by aggressively cutting prices during the remainder of the holiday season if its wants to save its quarter and the stock price because the $10 billion share buy-back program announced last month will not be able to provide enough of a floor to the stock especially since a chunk of it is being financed by debt. Also, it doesn't look like the company is going to sell its credit card receivables business (though a final decision has not been announced) thereby removing another positive catalyst for its stock.
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