Yahoo Finance 4 Things to Know About Buying Target Corporation Stock (TGT)
The holiday season makes or breaks the year for most retailers. For Target Corp. (ticker: TGT) this holiday season could determine whether its multi-year turnaround effort has started to show momentum.
And it's pulling all the stops to entice shoppers, increasing the number of exclusive toys, which will rise to more than 1,800 by the time the holiday rush is at full speed. The Minneapolis-based company has also launched its free shipping program for the holidays, which excludes minimum purchase requirements through the end of Hanukkah on Jan. 1. And, like last year, it will offer its 10 Days of Deals promotion, which provides an opportunity for extra savings.
Yet, none of this has helped the company's moribund stock price, which has fallen 11 percent over the past three months and nearly 13 percent over the past year. This holiday season has become a litmus test for CEO Brian Cornell's strategy to revamp sales and find a way to get the stock moving in the right direction again.
[See: 7 Ways to Tell if a Stock is a Good Price.]
Redesigning for online. In releasing second-quarter results, Target indicated it wouldn't perform as well the rest of the year as it hoped. It lowered expectations for comparable store sales growth, saying that at best growth would be flat, while also reporting a 1.1 percent loss in second-quarter sales.
"The company has been hurt by the shift in sales to the e-commerce channel," John Zolidis, an analyst at Buckingham Research, wrote in a research note.
Target was late to adjusting to the digital shift, which has led to less people visiting the stores. It's been trying to adjust to this new normal for a couple years by increasing its presence online. It has encouraged greater use of Cartwheel, its digital coupon app, and now offers in-store pickup of online orders. And while the efforts seem to show promise -- digital sales increased 16 percent in the third quarter compared to 2015's numbers -- online still only accounts for about 3 percent of sales.
At the same time, Target officials hope that by opening smaller stores in more urban areas, the company can increase foot traffic. In October, TGT opened this miniaturized version in New York City, offering a true test for the concept. While Target has opened just more than 25 of these stores, which run 25 percent to 50 percent smaller than its average stores, Cornell believes it could eventually have hundreds. They have the added bonus of supporting digital efforts in cities, adding a more convenient spot for in-store pickup.
"Sales productivity levels are double those of traditional stores, and the product mix is more attractive," Morningstar analyst Erin Lash says in a research report.
Pharmacy customers. Last year, Target sold its in-store pharmacy business to CVS Health Corp. ( CVS) for $1.9 billion. Now, CVS handles the pharmacies located in all Target stores.
Investors applauded the move because the pharmacy arm was losing business, and it was competing against the likes of CVS, which had four times more stores at the time of the transaction.
[See: The 9 Best ETFs for Retail Power.]
But now that the deal is done, a customer doesn't have to go into a Target store to refill their prescription. Instead, they could go to a CVS store elsewhere and pick up other items, as well.
"While we believe the potential reward outweighs the risk, we think there's a very real chance that TGT could lose some customers through this deal as well," Michael Lasser of UBS says in a recent note.
Focus back on best sellers. Target's grocery business has never quite caught on. While grocery accounts for 21 percent of sales, Target is not considered a weekly shopping spot, despite its attempts to increase its level of organic products or perishable items.
"Consumables can drive store traffic, but they are not a differentiator for Target as Wal-Mart ( WMT) and Kroger ( KR) have enormous scale in food," Lash writes.
Instead, Target has looked to cut costs and focus on the areas of the business where it does do well, including style, baby, kids and wellness products. In 2014, the company set out to reduce $2 billion in costs by the end of this year, which it's on pace to achieve. And it's increasing investment in the best-performing segments, which already account for more than 25 percent of the store's sales.
This should help Target "differentiate itself" from competitors, Lash says.
Valuation. The battle Target has faced over the past two years has resulted in a struggling stock price, but not necessarily an underpriced one. While at 13.4 times price to earnings, TGT is far below its five-year average of 17. But recent downgrades in the rest of 2016 have some investors worried the trend could continue into 2017.
"In the short term we'll be watching to see if it needs to moderate its (2017) guidance as well," Lasser writes.
[See: 7 Ways to Avoid Financial Stress Over the Holidays.]
That's something a strong holiday season won't necessarily keep away.
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