Target (TGT, Financial) is one of the largest discount stores in the U.S., but it seems the company has been stuck in a time warp. Revenue growth has been stop-start for the last 10 years, and things look extremely weak for the company as it struggles to get more customers to walk in through the door.
With Amazon (AMZN, Financial) surging on the one side and an increasingly stronger Walmart (WMT, Financial) on the other, Target and other retailers are finding it hard to offer a differentiated value proposition that will keep customers flowing in.
Source: Target 2016 Annual Report
One major problem for Target is that the company generates all of its revenue from the U.S. Though the market itself is quite huge, it is a mature one with intense competition from big deep-pocketed players in the fray. The good thing is that Target can remain focused on getting its plans right for the single market in which it operates, but the bad news is that this is easier said than done, considering the rate at which Amazon keeps growing its U.S. revenues year over year.
As more people get comfortable ordering online, ably promoted by Amazon’s decreasing delivery timelines, companies like Target have no other option but to take the bait and jump into low margin e-commerce operations. With 1,802 stores spread across the U.S., Target has a valuable physical advantage; when you factor in its above-5% operating margins, Target has the ability to build its online operations.
Investors have come a long way from looking at profit margins and are more than willing to accept growing sales in exchange for lower margins. During the first-quarter earnings call, Target management seemed to be ready for a sustained multibillion-dollar, multiyear effort to get its sales back on track by focusing on e-commerce:
"At our financial community meeting, in February, we outlined our multiyear plan to position Target to deliver consistent growth, market share gains and outstanding financial performance over the long term. This plan includes capital investments of more than $7 billion over the next three years focused on continued investments in technology and our supply chain to build a smart network; a network that leverages all of our store and distribution assets to serve our guests more quickly and flexibly in every channel," Target CEO Brian Cornell said during the first-quarter earnings call.
Apart from increasing capital investments, Target is also planning to open 100 new small-format locations across the country, which could help ease some pressure on its delivery networks in high-density areas.
Target’s online sales have been ticking up nicely as the company saw its e-commerce revenues grow 22% during the first quarter of the current fiscal, but the company has a long way to go because online revenues accounted for less than 5% of its overall sales in 2016. But it is a step in the right direction. Its solid operating margins and store footprint are small advantages it has, but it should be looking at leveraging them as much possible. The results might take a year or two to come if Target stays committed during the period.
Expect Target stock to remain under pressure through 2017.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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