The stock of retailer Target (TGT 66.91) is down 12% in pre-market action after the company reported its fourth quarter results and issued fiscal 2017 guidance. Clearly, investors did not like what they heard. That has a lot to do with what Target said and partly to do with what Walmart (WMT 71.74) said when it reported its fourth quarter results on February 21.
Briefly, the Walmart connection is tied up in the recognition that Walmart's report was mostly the antithesis of Target's report. Walmart posted better than expected same-store sales, led by increases in traffic and ticket size, and held the line with its guidance.
The one commonality of note is that Walmart's adjusted earnings were down from the year-ago period. The key difference, though, is that Walmart's same-store sales success conveyed the impression that the investments it has been making in its stores and e-commerce business are paying off as a traffic driver and are positioning Walmart for long-term success in the face of heated competition from Amazon.com (AMZN 848.64) and other online competitors.
Target, on the other hand, has left investors with the impression that it is still searching for answers to protect its market share and that it is far behind the competitive curve at the moment.
Frankly, disappointment abounded with the latest earnings update from Target.
Its fourth quarter adjusted earnings of $1.45 per diluted share were down 4.6% year-over-year and below analysts' average expectation. They were also at the low end of the retailer's guidance range, which had been revised lower in the wake of a disappointing holiday sales update in mid-January.
In terms of Target's fourth quarter sales, they were down 4.3% to $20.7 billion. Comparable sales declined 1.5% despite 1.8 percentage points of comparable sales growth for digital channel sales. That means comparable sales at Target's brick-and-mortar stores, which accounted for 93.2% of fourth quarter sales, were down 3.3%. Altogether Target saw a 0.2% increase in the number of sales transactions, yet the average transaction amount was down 1.6%.
Target's gross margin rate for the period fell 100 basis points year-over-year to 26.9%, driven by markdown pressure and clearance activity and costs associated with the mix shift between its stores and digital channels.
It doesn't sound as if there is going to be any near-term relief on the gross margin pressure either. Management said it will be investing in lower gross margins so that the retailer is clearly and competitively priced each day. That approach is part of a shift in Target's business and financial model, which it is going to discuss in further detail on today's earnings conference call.
The shift in business model, the company said, is reflected in its fiscal 2017 guidance, which featured big warnings for both the first quarter and full year relative to analysts' average expectations.
For the first quarter, Target expects a low-to-mid single digit decline in comparable sales and adjusted earnings per diluted share to be between $0.80 and $1.00.
For fiscal 2017, Target expects a low-single digit decline in comparable store sales and adjusted earnings per diluted share to be between $3.80 and $4.20. The midpoint of the latter guidance range is 20% below the adjusted earnings per diluted share of $5.01 reported for fiscal 2016.
Analysts were expecting much more out of Target for fiscal 2017, as their average estimate was roughly 33% above the midpoint of the 2017 guidance range.
Target's guidance, though, is well off the mark, which is why its stock is, too. Fortunately, Target still has good brand equity, but for now, it is being branded as a show-me story in a tough retailing climate.
Entering today's trade, shares of TGT were down 7.4% since the end of 2016.