It has been a mixed year for Target (TGT) .
Without question, there have been several successes heading into the company's quarterly earnings report Wednesday morning. Target's continued push into urban areas is giving it a real leg up relative to Walmart (WMT) in the next generation of retailing. That next generation is characterized by a generational shift of millennials back into urban areas from suburbia. These millennials want to be in and out of stores as quickly as possible, and have the ability to pick up mobile orders on the fly. They truly hate shopping at the expensive Walgreens (WBA) and CVS Health (CVS) for their daily needs, and yearn for a discounter in the mold of Target. (Walgreens is a holding in TheStreet's Action Alerts PLUS portfolio.)
In total, Target has 27 of its smaller store formats scattered across the country in urban areas such as Chicago and Philadelphia. It plans to open several more -- including one on Gold Street in downtown Brooklyn -- later this year. The company may add about 16 smaller-format stores in 2017. Again, this is a good story for Target that the stock market isn't yet appreciating. Meanwhile, another win for Target has been its high-margin apparel business. In short, the apparel racks at Target have come back to life this year and it shows in the category's sales line.
But there have also been several well-documented misses. The company's grocery business has recently undergone a leadership shake-up as sales trends have not improved. It's not that Target doesn't have the correct assortment of groceries per se, it's just that it's missing many key items in fresh food (fish in many stores, an expansive selection of fruit as seen in many Walmart stores). Moreover, the company continues to have difficulties keeping shelves stocked, based on my observations.
A great example of this is during the evening hours at Target; the stores I often visit are devoid of basics such as yogurt, fresh fruit and in some cases bottled water in the hours when people are shopping on the way home from work. Go to any traditional grocery store and this is definitely not happening. Target has to get this fixed somehow. I have floated the ideas in the past of Target outsourcing its grocery business to a Whole Foods (WFM) . It would make a ton of sense for Whole Foods to open one of its new 360 by Whole Foods value concepts -- in a smaller format, of course -- inside a Target.
The company has also lost the price leadership message this year to Walmart, which has gone full-on beast mode in marketing its low prices. And it has also lost the wow factor of its investment thesis to Walmart. Whereas Walmart has been delivering very solid results and nudging up its guidance, Target lowered its full-year profit outlook back in August.
Ultimately, the negative aspects of Target's year have outweighed the positive in the minds of Wall Street. Shares of Target are down about 0.6% on the year vs. a 5.8% gain for the S&P 500. So here's the biggest thing that Target must show investors when it reports third-quarter earnings on Wednesday: Can a renewed effort to be more competitive on price begin to claw back consumers this year? It was in August that Target execs promised to get a little more aggressive on price (likely at the expense of margins) to jump-start traffic, which had fallen about 0.9% through the second quarter. I indeed saw evidence of that aggressiveness in the stores throughout the quarter, but am unsure if it materially impacted Target's traffic for the better.
Given Target's year so far, and where we are right now as a country post-election (just weeks before the holiday season kicks off), it may be wise to sit this one out into earnings. A good report from Target would show less of a traffic decline vs. the second quarter and a reiteration of full-year earnings guidance.