This Is What Everyone Demands to Know From Struggling Target

 | Feb 27, 2017 | 8:00 AM EST
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Tuesday has all the makings of being a strange day for Target (TGT)

The discount retailer will hold its annual meeting with the financial community in New York City on the same day it releases what is likely to be a disappointing fourth quarter. Yours truly will be in attendance, and will be looking forward to hearing what caused the fourth quarter to be under-whelming and what the team is up to in order to try and turn things around. Indeed, there will be two different messages likely to emerge from this event.

One is that results could stay under pressure in the first half of the year amid tax refund delays and lingering struggles in the food and electronics departments. Secondarily will of course be one of optimism on Target's future, headlined by an in-depth plan to overhaul the groceries business and compete more effectively online.

 

Handicapping how Wall Street will come away from the event is very tough. If forced to guess, Target's shares could stay in the penalty box until it delivers on jump-starting same-store sales and starts beating guidance. Based on Target's stock price -- shares have fallen about 15% over the past year -- Wall Street is in full wait-and-see mode.

Here are three areas to focus in on.

How bad is Target doing compared to Walmart (WMT)

Target's same-store sales for November and December decreased a disappointing 1.3%. Sales in Target's stores dived 3%, while sales online rose more than 30%. Target saw sales declines in most of its product categories, led by a high-single-digit drop in electronics and entertainment.

"While we significantly outpaced the industry's digital performance, the costs associated with the accelerated mix shift between our stores and digital channels and a highly promotional competitive environment had a negative impact on our fourth-quarter margins and earnings per share," Target Chairman and CEO Brian Cornell said.

Target slashed its fourth-quarter same-store sales estimate in early February, saying it expects a decline of 1% to 1.5% compared with an outlook for as much as 1% growth.

The results look especially soft compared to what Walmart just reported. It could be a clear signal that Walmart's efforts to lower prices and introduce things like online grocery pickup are really being noticed by customers. In turn, Target could be forced to respond, at the expense of profit margins. 

Walmart's e-commerce sales gained a whopping 29% during the fourth quarter, helped by the $3.3 billion September acquisition of Jet.com. Same-store sales at Walmart U.S. rose a solid 1.8%. 

What's up with the grocery aisle?

Food sales represent more than 20% of Target's business, and it's vital it finally gets this business right. Same-store sales were pressured throughout last year, as the company battled with pricing strategies in a competitive backdrop. Further, Target continues to deal with not having a broad enough assortment in fresh categories such as fruit, vegetables and meat and deli (would like it if they sold some fresh fish and more grab-and-go sandwiches at my local Target, for example). 

The retailer has to decide whether it wants to be a grocery store and, if so, how it could do it more effectively. Becoming a successful grocer could lift sales throughout the store. As I have said in the past, Target should consider outsourcing its grocery department to a Whole Foods (WFM)  (using its new 365 value banner) in the same fashion as it outsourced its pharmacy business to CVS Health (CVS) . Let someone with the expertise in food service handle the business, freeing up Target to focus on what it does best -- higher quality general merchandise vs. Walmart at good prices.

Does the store base need to be pruned?

While most of retail has been in store-closing mode over the past three years (including 100 Walmart store closures in early 2016), Target has stayed relatively firm with the number of stores it operates. But as J.C. Penney's (JCP) thought reversal on the size of its store base signals, even profitable retailers should be rethinking the sizes of their businesses right now. And seeing as Target has been underperforming its plan, one can't help but to think there are clusters of stores that deserve to be shuttered for the greater good of the bottom line. 

It would be nice to get some clarity on that on Tuesday. 

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