Target Stock On The Decline, But Hold On To Those Shares

With most retailers in the US suffering revenue drops, due in large part to reduced spending over the holiday period, the question now on investor’s minds is whether to buy, hold or sell their stock options.

The latest victim of the negative holiday spend has been giant retailer, Target Corporation (NYSE:TGT). The company reported that it recorded $20.69 billion in its fourth quarter revenue, which means a 4.3% decline from the $21.63 billion in sales the previous year. More alarming is the bottom line earnings that dropped by 43 percent year on year.

The Boston Globe notes that only 35 percent of US households shopped at Target in December, compared with 53 percent who did so in December 2007.

The announcement led to a dramatic drop in share prices by 13 percent, and investors are still running scared. Target's share price went down as low as $57.30 on Tuesday.

What went wrong with Target

The company blames the drop in earnings on the reduced foot traffic through its stores and a move towards online purchasing.

Chairman and CEO, Brian Cornell, said in his statement, “Our fourth quarter results reflect the impact of rapidly-changing consumer behavior, which drove very strong digital growth but unexpected softness in our stores.”

Part of Target's revenue decline could also be explained by its decision to sell its pharmacy business to CVS Health (NYSE:CVS) Corporation in late 2015.

What is going to be done

Target seems to have taken a long and hard look at its future prospects, in the short term the company says they will offer lower prices, while in the long term the company is looking at the growing online shopping market.

In terms of a better pricing structure, Cornell says, “we will invest in lower gross margins to ensure we are clearly and competitively priced every day.”

The retailer also plans to invest $7 billion over the next three years. This includes the introduction of more than a dozen new brands to the retail company, and investment in new stores. The retailer will open at least 100 new smaller stores and refurbish 600 existing ones.

Target also acknowledged the growing online retail market as the company saw an increase of 34 percent in online purchases. The company wants to capitalise on this gain. Cornell said, “We will accelerate our investments in a smart network of physical and digital assets as well as our exclusive and differentiated assortment.”

Will the company recover

Online shopping in the company grew at a rapid pace. The company saw this part of the business grow by 34% in the fourth quarter. This growth has outpaced even Amazon (NASDAQ:AMZN).

In addition, Target plans to attract more foot traffic at its stores by introducing more than 12 new brands with a special focus on Style, Baby, Kids, and Wellness. The company hopes this will enhance the in-store experience.

While the refurbishments, which features new solar lights, and competitive pricing is expected to attract more foot traffic, analysts are not sure it is the right direction. Brandon Fletcher, an analyst at Sanford C. Bernstein & Co. told the Boston Globe, “We are stunned — we thought they were going the other way, with higher-margin stuff, we believe there is a better path, and we want to know why they stepped off into the wild.’’

Buy, sell or hold

The capital expenditure of $7 billion into new stores, refurbishments and new brands, is risky, and will drive the share price down in the short term. Cutting margins is also likely to see investors running for the hills.

The investment, however, means that the company will in the long term pick up consumers, either through their online shopping mechanisms or through foot traffic because of lower prices. In the short term, share prices may drop, while long term investments could yield a significant return.