Has Target’s Turnaround Stalled?

The much ballyhooed turnaround at Target (NYSE: TGT) seems to have stalled or even reversed. The most recent financial numbers indicate that Target’s revenue has begun to shrink again.

Target’s revenue actually fell during the fourth quarter of 2015, a period that includes the critical holiday shopping rush. Target reported a TTM revenue of $73.91 billion for the third quarter on Oct. 31, 2015 and a revenue of $73.78 billion on Jan. 31, 2015.

By my calculation, Target’s revenue fell by $13 million during the fourth quarter. That is hardly a major loss, but it is still worrying, particularly during the year’s peak shopping season. If this number is true, Target’s sales volume has begun to drop, yet it is still making a lot of money and doing better than some of its peers.

Target’s Income is Increasing

What’s truly interesting though is that some of Target’s other numbers improved significantly. Target’s net income shot up by $4.066 billion during the fourth quarter; the discounter reported a loss of -$703 million for the fourth quarter and an income of $3.363 billion for the fourth quarter. The big losses came from Target’s Canadian debacle, which ended last year.

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It looks as if Target has recovered from the mess in Canada. It reported a profit margin of 6.59%, a free cash flow of $1.775 billion, $5.855 billion in cash from operations, and $4.046 billion in cash and short-term investments for the fourth quarter of 2015. This makes Target that rare animal, a retailer that actually has quite a bit of float.

The problem at Target could be a significant drop in revenue, like the one which has plagued Walmart (NYSE: WMT) over the past year. Target had been treading water in terms of revenue, but now it seems to be losing ground again.

Why is Target’s Revenue Falling?

It is not clear why Target’s revenue has dropped, but one strong possibility is that it is losing market share to Amazon (NASDAQ: AMZN). Amazon’s revenue grew by $6.42 billion during the fourth quarter of 2015, rising from $100.59 billion in September 2015 to $107.01 billion in December.

Another cause of the revenue drop could be Target’s decision to sell its pharmacies to CVS Health (NYSE: CVS). The pharmacies could have been contributing more revenue to Target’s business model than the management acknowledges.

A final problem at Target is that its impressive online sales growth is not translating into additional revenues. Target’s online sales grew by 30% in the fourth quarter of 2015, yet its overall revenues fell. That puts Target’s strategy of aggressive expansion of its online business into serious question.

Is Target a Value Investment?

Naturally, many people will wonder if Target is a value investment; it has a very strong brand that has been able to hold its own in a brutal industry. Target is one of the few brick and mortar retailers that has translated its strong brand into ecommerce success.

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Target has also rewarded investors handsomely in recent months with a dividend yield of 2.8% and a return on equity of 24.61% in the fourth quarter. To add icing to the cake, Target is undervalued, with an enterprise value of $56.11 billion and a market cap of $48.43 billion.

My take is that Target is still overpriced; it was trading at $78.61 a share on Feb. 25, 2016. There are other cheaper retailers out there that are true values. They include Walmart, which was trading at $68.05 a share, and Kroger (NYSE: KR), which was trading at $39.46 a share.

Investors would be well advised to stay away from Target until we can see if the revenue reversal is permanent; if it is, we could see a big drop in share value at this market favor. Like many retailers these days, Target is in a very shaky position because of the retail apocalypse.

If a very well-run retailer like Target is having trouble maintaining its revenue, the economy is weaker than we thought. One has to wonder what weaker retailers, such as Dollar General (NYSE: DG) and Sears Holdings (NASDAQ: SHLD), will report. The havoc being wreaked in America’s retail segment could soon get far worse.

Disclosure for your edification: Your brilliant blogger owns shares of Kroger.