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Will Expansion Help Target Turnaround & Race Ahead of Amazon?

Zacks

On Tuesday, Target Corporation TGT reported fourth-quarter fiscal 2017, missing on earnings after surprises on the positive side in three straight quarters. The company’s shares too fell 5% in late trading despite a 10% jump in revenues. The dismal showing was largely attributable to an increase in cost of sales and higher SG&A expenses, for which higher compensation costs were hugely responsible.

However, it might be too early to write off the Target stock just on the basis of an earnings fiasco and investor concerns. This is because Target has extensive expansion plans, ranging from increasing minimum wages to expanding its shipping services and even drive up delivery to 1,000 stores by the end of 2018. Plus, another good news is that Target’s sales are improving, thanks to stronger traffic both online and in stores.

Target Misses Q4 Earnings Estimates, Sales Beat

Target reported fiscal fourth-quarter adjusted earnings of $1.37 per share, missing the Zacks Consensus Estimate by a couple of cents and declining 5.8% from the prior-year quarter. However, the company generated total sales of $22,766 million, surpassing the Zacks Consensus Estimate of $22,463 million for the fourth quarter in a row, and increasing 10% from the prior-year quarter (read: Target's Q4 Earnings Miss, Sales Beat Estimates).


It was a rise in cost of sales and higher SG&A expenses that weighted on the company’s bottom line. Target’s SG&A expenses rate was 18.5% in the fourth quarter compared with 17.5% in 2016. SG&A expenses were primarily pushed up by higher compensation costs, which included both an increase in incentives of team members and an impact of investments in store member hours and wage rates. However, even higher sales could not act as a savior and Target’s shares plunged 5% in late trading on Mar 6.

Surviving the Amazon Onslaught

One of the key areas where Target is spending a lot is online order delivery. This is definitely in a bid to push into e-commerce and compete with Amazon. Moreover, Target also intends to invest further in 2018 in order to stay in the race. Amazon, on the other hand, has been constantly making smart moves both in the online and offline retail space.

Over the last few years, Amazon.com AMZN has redefined the retail space and the online and offline gap is fast disappearing. In doing so, it is giving stiff competition to all retail behemoths that include the likes of Dollar Tree DLTR, Dollar General DG and Walmart WMT. And much like other retail giants, Target’s bid to compete with Amazon is affecting its profits.

The company recently announced that it would be offering free, two-hour delivery from Whole Foods stores to its Prime members in four cities. The move came within a year of the e-commerce giant’s $13.7-billion acquisition of supermarket chain Whole Foods. While Target and other retail behemoths like Walmart, Dollar Tree and Dollar General are trying to push into e-commerce, Amazon is fast capturing the offline space too (read: Will Amazon's 2-Hour Whole Foods Delivery Skew Retail Pitch?).

Target’s Extensive Expansion Plans

Target’s earnings may have raised concern among investors but the retail gaint seems confident about making a turnaround. Target announced Tuesday at its annual investor conference in Minneapolis that it will raise hourly minimum wage from $11 to $12 this spring and expects it to reach $15 by 2020. The American job market has heated up in recent times and Target’s move is a response to a tighter labor market.

The company has also announced plans of expanding Drive Up to almost a thousand stores in the United States by end 2018. Drive Up allows customers to place online orders using the Target app brought out to their cars by a store team member, minutes after arriving.

Moreover, Target, in order to compete with Amazon, will also be starting a free, two-day shipping service for hundreds of thousands of items on Target.com, with a $35 minimum threshold unless a shopper has a Target credit card. The company’s decision last year to add muscle to its delivery wing by acquiring Shipt will help it to manage costs as it launches its free-shipping initiatives.

The company will also expand Restock, its next-day essentials delivery service, to around 40 markets. Naturally, the company is leaving no stone unturned to stay in the race.

Shares of Target have gained 18.2% in the last three months. Target has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

All’s Not Lost for Target

It goes without saying that Target has been performing well amid stiff competition. Investors might feel a shade jittery after the company missed on earnings but the stock has enough potential given that both its online and in-store sales have risen. Moreover, Target looks sure of making a turnaround and has massive expansion plans that include increasing minimum wages as well as investment in shipping and drive up delivery services across the country.

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