Can Target Survive the Retail Apocalypse?

Target (NYSE: TGT) seems to be one of the most vulnerable brands to the retail apocalypse. The discount icon’s revenues shrank by $4.28 billion over the course of 2016.

Disturbingly Target’s revenues fell during every quarter of 2016. It started the year with $73.87 billion in revenues in January 2016; and finished with $69.5 billion a year later. To make matters worse the revenue decline continued straight through the holiday season.

Target went into the 2016 Holidays with $70.43 billion in revenues and finished with $69.50 billion. That means its sales shrank by nearly $1 billion during the all-important Christmas shopping season. For the record, Target finished the holidays with $930 million less revenue than it reported on Halloween Day, 2016.

Target is Still Making Money

Many investors will wonder if Target is still making money in the light of the revenue shrinkage. The answer is yes, Target reported a net income of $2.737 billion and a profit margin of 3.95% on January 31, 2017.

The problematic aspect of that is the income was lower than in December 2016, when Target reported $3.363 billion in income. That means Target’s income fell by $626 million over the course of 2016. Target’s income and revenues are like a balloon that is slowly deflating.

Despite that Target still has a float for a retailer it reported $5.436 billion in cash from operations, assets of $37.43 billion, cash and short-term investments of $2.512 billion and a free cash flow of $2.192 billion on January 31, 2017.

Some of those numbers are still lower than last year, back in January 2016, Target reported $5.844 billion in cash from operations and $4.046 billion in cash and short-term investments. Only the free cash flow increased over the year, Target reported $1.69 billion in free cash flow on January 31, 2016, and $2.192 billion this year.

What can we learn from Target’s Earnings Report?

Okay so what should retail observers take away from Target’s earnings report? Here are some very casual observations:

1. Target has a really good business that still makes a lot of money.

2. That business is steadily shrinking and the shrinkage is speeding up.

 

3. Target is having a hard time keeping its cash.

 

4. Unlike Walmart (NYSE: WMT) Target is not holding its own against Amazon (NASDAQ: AMZN). Walmart’s revenues increased slightly over 2016, while Target’s shrank.

 

5. Target is far more vulnerable to Amazon than Walmart is. My guess is that this is because Target’s customer base is younger, more urban and more upscale than Walmart’s. Those groups are more likely to shop online and buy from Amazon.

6. Amazon Prime is hurting Target badly. Such features as Prime Basics and the fashion line Buttoned Down are aimed directly at Target’s core customer base. That is younger, urban and suburban consumers.

 

7. Target’s fashion focused business strategy is very vulnerable to Amazon. Amazon is now the second largest fashion and apparel retailer in the United States.

8. Target’s ecommerce push does not seem to be working. In July 2016 Statista found that Walmart.com received 101 million visitors a month making it America’s third most popular ecommerce destination. Amazon was number one with 183 million visitors and Target was number five with 61 million visitors.

 

9. Target is still a pretty good investment its’ shareholders received a 23.16% return on equity on January 31, 2017. They also took whom a 60¢ a share dividend on February 13, 2017. That was a four cent increase over 2016’s 56¢ dividend.

 

My take from all that is Target is a good short term investment that will keep paying off for two or three or years. Despite that its prospects beyond 2020 are limited unless major chances are made to the company.

One reason for this is that Target has not taken the changes in the retail industry seriously and not adapted to the new environment. A good example of this is the thoughtless approach to ecommerce; namely build a website and put a bunch of stuff online. Another is the failure to adapt stores for specific markets and circumstances as the debacle in Canada demonstrated.

All this shows that Target’s first need is for new management. It needs to take a chance and bring in outside help the way Walmart did by hiring Jet’s Marc Lore last year.

Can Target Turn Around?

It is possible for retailers to undergo complete transformations. Target itself underwent such a paradigm shift in the 1960s transforming from Dayton & Hudson a Minneapolis department store chain into a mass market discounter.

During the mid-20^th century the catalog merchants Sears & Roebuck and Montgomery Ward successfully transformed themselves into department store operators. Sears was even America’s largest retailer by volume for a long time. In the 1960s, S.S. Kresge made the leap from dime store operator to mass discounter and successfully turned itself into Kmart.

Walmart has successfully evolved from a local dime store to a regional discounter, to a national discounter, to the nation’s largest grocer. Even Amazon grew from a limited specialty retailer into a true mass merchant.

Yet even large well-capitalized merchants can fail at transform. Sears and Kmart have met with total catastrophe over the past decade despite Eddie Lampert’s largess. F.W. Woolworth & Co. was never able to make the leap from dime store to discount mass merchant the way Walmart and Kmart were. Its Woolco discount stores were eventually sold to Walmart.

It might be possible for Target to achieve such a paradigm shift but it will be tough. That will require creativity, strong leadership, bold decision making and imagination.

What’s next for Target?

My prediction is that Target will continue to make money but the revenue losses will keep growing. At some point; probably in 2019, Target will have to start closing stores and possibly reducing its national footprint much like JC Penny’s and Macy’s are to survive.

During that period its share value will keep shrinking unless revenue increases dramatically. A lot of investors will dump the stock, which might make it a bargain. Expect to see a major share value collapse at Target if it starts announcing store closings.

The only way Target will be able to survive the retail apocalypse, is with a dramatic transformation. Unfortunately, I’m not sure that’s possible with its present structure and leadership.