E Brian Cornell’s Aim Has Been Way Off Target

Last week, Target Corp. (TGT) offered a rather gruesome outlook for 2017 that came on the heels of a very weak Q4 2016 performance. Much of the Q4 results were offered in a preliminary warning to investors on January 18^th in a press release. At that time, the company had experienced an underwhelming and below guidance holiday period with comparable sales in Target stores declining more than 3 percent, partially offset by digital sales growth of more than 30 percent. But at less than 5% of total sales for the retailer, digital sales simply couldn’t offset where greater than 95% of sales are transacted, in stores. Target was forced to lower their Q4 2016 guidance as follows:

When Target finally reported the consolidated results for the Q4 period, the lower end of the ranges for both revenues and EPS were achieved as offered in the previously revised guidance. Additionally, the reported total net sales of $20.69bn for the quarter missed analysts’ estimates by roughly $50mm and resulted in a YOY sales decline of roughly 4.3 percent. But the Q4 results were not the worst aspect of the reporting period for Target and its shareholders, as I will further outline. So buckle yourselves in, because this is going to be a long body of work. 

Target’s guidance for 2017 was abysmal!It was the worst guidance from the company since it fell into the calamity surrounding the 2008-2009 Financial Crisis. At the crux of Target’s 2017 guidance, the company has forecasted EPS to fall all the way back to levels expressed in 2014.In 2014, Target earned an adjusted EPS of $4.22. It grew to $5.01 in 2016. That growth was highly artificial in nature and somewhat financially and operationally engineered with share repurchases, selling of assets and closing of certain operations. Finding the Target Canada venture to come at a high cost to profits in 2013 and 2014, CEO Brian Cornell with the Board’s approval, decided to forgo the Target Canada venture and closed down all Target Canada operations.I reported on this discontinuation of Target Canada operations in an article titled Target Did Not Have A Snowball’s Chance In Canada. 

Post this capital-depleting venture, all that previously disposed of profit that went into Target Canada, now flowed through to the bottom line and artificially grew earnings into 2015. One would naturally believe that without the Target Canada overhead and overhanging issues plaguing the retailer in 2015 and 2016 management would have been more focused on the core Target business, but obviously, that belief fell short on profit and sales performance. With respect to the offered 2017 earnings guidance, Target expects GAAP and adjusted EPS of $3.80 to $4.20. As it pertains to sales/revenues, Target is planning for a low single-digit decline in comp sales this year. While the average analyst estimate for sales presently only anticipates revenues to decline by ½ percent in 2017, I would be of the opinion that this average estimate will be modified over the coming weeks and months.

In the last three years, Target has more than doubled its digital sales from $1.4 billion in 2013 to more than $3.4 billion last year. While Target’s digital sales are growing at one of the fastest clips amongst its peers, it won’t be enough to stem the downfall from its storefront sales. Furthermore, Target is investing roughly $1bn in operating margins in 2017 to position itself to invest for the future while taking market share, as the retailer assumes. This all but ensures that earnings will decline significantly in 2017.These investments are aimed at returning to growth possibly in 2019 and assuming all goes according to plan.So for those investors who are of the opinion that the initiatives and investments taking form will bring with them a turnaround soon enough, you may be better served by adjusting that expectation with a long-term focus.

The situation for which Target finds itself was well forecasted and destined to occur.I’ve been chronicling Target’s operations for several years. In 2012, I warned long-term investors about the dangers that surround Target as a supposed darling of the retail industry.Below are my two initial analytical works on Target that began in 2012:

Within these linked publications lay the root of the issues that plague the retailer on a continuous basis. They have been in place for decades and if you believe that the company has changed its tune or methodologies, a simple reading of the most recent transcript speaks to the contrary. Target is and will be just as it has been for many decades, a smaller and less trafficked Wal-Mart operation, with it’s own unique flare mixed into the business for differentiation. You don’t have to be a Wal-Mart fan or a Target antagonist to recognize this point of fact as the two retail operators have clearly demonstrated it for decades. Target is a great business nonetheless and will carry forward over the next several decades as it has throughout its history, exhibiting peak and trough periods for which it aims to return profits to shareholders.

In speaking about Target’s transcripts/conference calls, nothing has changed despite the tone of “change and adjustment” to the seismic shift in the retail industry that has been proposed by Target. In other words, don’t believe management’s hype. I warned investors about Target’s management team in the past, and how the team employs their so-called initiatives aimed at addressing its need to change and adjust to business challenges. For the most part, the executive team preys on unwitting investors and analysts’ lack of knowledge on how the general retail operation works. In my article Target Augments Merchandising And In-Stocks After Q1 2016 Shortcomings I take aim at Target’s management team quite directly and with concern for its so-called in-stocks performance initiatives. Again, this is one of those analytical pieces that has not only proven to be most accurate, it is also most informative and like nothing else found in freely published works. The main warning I offer in this publication is the misrepresenting of how incremental its in-stocks improvements can be to in-stocks and the bottom line performance. My many warnings about the company’s operation that would lead to many shortcomings and investor outcry have unfortunately come to pass. From here, Target hopes to return to its so-called glory days. Having said that the reality is that Target is, at the very least, better positioned to improve upon its past performance than most if not all of its peers. A bit late to the “improvement party” comes Target, but better late than never. So let’s take a look at a direct message from Target’s executive team to investors noted below and found in its Q4 2016 transcript: