Target's profit outlook sinks retail stocks

Target Corp (TGT.N) shares plunged on Tuesday after executives issued a full-year profit forecast that fell well below analyst estimates and said the retailer would lower prices to compete with deep-discounting rivals.

Target at its investor day conference vowed aggressive promotions and said new brands and investments in technology and small stores will allow it to eventually win back market share.

Although its e-commerce operation is growing quickly, Target reported its third straight quarter of lower sales from existing stores, citing “unexpected softness” and raising new questions about the health of large national retailers in the United States.

Target also forecast first-quarter profit well below Wall Street estimates. Shares sank 13 percent, on track for their biggest one-day percentage drop in more than 18 years.

Target’s stock has lost a quarter of its value since the 2016 holiday season started in November, and is now trading at its lowest level since August 2014.

The retail industry is under pressure from lackluster U.S. economic growth, intense competition from Amazon.com (AMZN.O) and other online rivals, and concerns about the impact of President Donald Trump’s planned border tax on imported goods.

Unlike rival Wal-Mart, which is able to draw in grocery shoppers, Target’s grocery offerings are “confusing,” said Neil Saunders, managing director of GlobalData Retail.

“Target is neither a full-line grocer nor a player with lots of niche specialty products; it is neither a high-end player, nor a price focused discounter.”

Target’s plunge prompted declines across the retail sector. Wal-Mart Stores Inc (WMT.N) was down 2.0 percent, with Kroger Co (KR.N) down 1.2 percent and Macy’s Inc (M.N) off 1.7 percent. Dollar General Corp (DG.N) fell 4.2 percent.

“It’s that drum beat of bad retail news of the big-box retailers. So in case you thought maybe that was over, Target certainly reminded us all that it didn’t,” said Mark Spellman, portfolio manager at Alpine Funds in Purchase, New York.

“(It) underscores the travails that have been going on in the industry.”

The retailer would undertake “aggressive promotional activities” that would erode its operating profit by $1 billion this year, Chief Executive Brian Cornell said at the company’s investor day.

Target said it planned to invest $2 billion in 2017 on analytics, supply chain and opening 100 more small-format stores such as TargetExpress in urban neighborhoods and college markets. It also laid out plans to launch more than 12 new brands exclusive to the retailer.

The changes echo moves by bigger rival Wal-Mart two years ago when it aggressively cut prices and boosted its online presence.

Target, however, was unable to act then due to high costs related to a massive data breach and its decision to pull out of Canada.

“Basically, (Target is) doing what Wal-Mart did about two years ago,” Edward Jones consumer analyst Brian Yarbrough said.

“I think they realized that they’re going to have to invest to be more competitive … Most people thought they were going to take guidance lower, but this is definitely much worse than feared.”

Target forecast full-year earnings of $3.80-$4.20 per share from continuing operations, while analysts on average were expecting profit above $5.00, according to Thomson Reuters I/B/E/S.

SALES DECLINES

Target’s same-store sales fell 1.5 percent in the fourth quarter, which includes the holiday shopping season. The decline was steeper than the 1.3 percent drop analysts had estimated, according to research firm Consensus Metrix.

Net sales fell for the sixth straight quarter, declining to $20.69 billion, while adjusted profit of $1.45 per share was shy of the $1.51 analysts’ were expecting.

One bright spot in the otherwise lackluster results was a 34 percent jump in Target’s digital sales.

Target said it expects same-store sales to decline in the low-single digit percentage range in fiscal 2017, after reporting a fall of 0.5 percent in 2016.

Analysts on average were expecting the company’s same-store sales to increase 0.4 percent in 2017.

(Reporting by Richa Naidu, Yashaswini Swamynathan and Nandita Bose; Additional reporting by Siddharth Cavale in Bengaluru; Writing by Nick Zieminski; Editing by Savio D’Souza)