Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Target’s Summer of Pain, the Revenue Collapse Continues

Target (NYSE: TGT) had a terrible summer in which revenue at the discounter continued to slide. One figure alone shows us just how bad Target’s summer was; its’ revenues declined by $1.26 billion during second quarter 2016.

Target started second quarter with $72.86 billion in revenues in April 2016, and ended it with $71.60 billion in revenues on July 31, 2016. That’s right Target’s revenues shrank by $1.26 billion in a three month period. To make matters worse this is the third straight quarter of revenue shrinkage and that decline seems to be accelerating.

Target reported $73.91 billion in revenues in October 2015; that number fell to $73.78 billion in January 2016, making for a decline of $110 million. Those revenues fell again to $72.86 billion in April 2016 a decline of $920 million. Finally the revenues fell by $1.26 billion during second quarter.

Not only is Target’s revenue falling, but the falls are growing. Call me a pessimist but this looks like the start of a death spiral. It isn’t as bad as the situation at Sears (NASDAQ: SHLD) but it obviously is not healthy.

Dollar Stores Boom at Target’s Expense

Particularly with the revenue growth seen at other retailers including Walmart (NYSE: WMT), Dollar General (NYSE: DG) and Dollar Tree (NASDAQ: DLTR). All of those stores and Amazon (NASDAQ: AMZN) reported growing revenues during second quarter 2016.

Dollar stores in particular had a great summer Dollar Tree reported that its revenues rose to $20.39 billion for the first more than double the $9.759 billion it reported in July 2016. Dollar General’s revenues cleared $21billion for the first time, rising from $20.72 billion in April 2016 to $21.01 billion in July. Dollar Tree’s revenues grew by $1.98 billion during the second quarter rising from $18.41 billion in April to $20.39 billion in July.


These figures indicate that Dollar Tree and Dollar General might be stealing some of Target’s customers. They show us that there is plenty of room for growth in the discount retail sector, but that growth is not going on at Target.

Are Customers Deserting Target?

One problem that Target faces can clearly be blamed squarely on Amazon. Foot traffic at its stores fell by 2.2% during the second quarter of 2016, CNBC reported. During the same period foot traffic at Walmart grew by 1.2%.

It sounds as if customers are abandoning Target for other stores in particular Walmart and dollar stores. Much of the growth at Walmart came from groceries and consumer basics such as laundry detergent; categories that Target has largely ignored in favor of fashion.

An even greater problem might be the sale of Target’s pharmacy business to CVS Health (NYSE: CVS) which effectively outsourced a lucrative revenue stream. A related problem may be that some Target pharmacy customers are so upset by that move they switched to other retailers; such as Walgreen (NASDAQ: WBA) or Kroger (NYSE: KR).

Target Feels the Amazon Effect

Despite that Target’s greatest problem is Amazon; which competes directly for its core customers Generation Xers and Millennials, but offers a far more convenient shopping experience.


Amazon’s revenues grew by $7.22 billion during second quarter 2016; rising from $113.42 billion in March to $120.64 billion in June. That causes me to wonder if Amazon is slowly sucking sales away from brick and mortar retailers like Target.

Target seems particularly vulnerable because Walmart was able to stem the tide, its revenue increased slightly by $620 million. Walmart reported $483.21 billion in revenues in April and $483.83 billion in June. Disturbingly much of Walmart’s growth came at high price with massive investments in online retail and salary increases.

Is Jet Hurting Target?

Another growing menace is, the growing online retailer launched last year which claimed to have hit $1 billion in general merchandise volume in April, according to Business Insider. Walmart acquired Jet for $3 billion in August 2016.

It might be a coincidence but Jet’s revenue claims seem to match the drop in revenues at Target. In February 70% of Jet sales were from first time buyers. Particularly to worrisome to Target should be the fact that 81% of shoppers were unaware of Jet’s existence. That means it has a lot of room to grow and Walmart is now behind it.

Another growing threat is Walmart’s online grocery business; particularly click and pull which lets customers order online and pick items up at the stores. This service is free and easy to use. A potentially greater threat is Walmart and Amazon’s experiments with same day delivery, Walmart is currently testing same-day delivery through Uber and Lyft a service that can be scaled up fast if it works out.

A major menace Target might soon face is Jet selling to customers through Walmart’s distribution network. Walmart’s logistics and supplier network coupled with Jet’s ability to discount and marketing expertise might simply swamp Target. The greatest threat will be to undercut Target’s prices while offering greater selection, free delivery and better customer service. A major problem is that both Walmart and Amazon seem well positioned to grab customers as they move online but Target is not.


Target has some Things Going for It

Target has a few advantages including a strong brand; and the possibility of losing some high-cost customers in the form of bargain hunters with no brand loyalty. If Target can keep a core base of loyal customers it might survive and make more money.

Financial numbers indicate Target has such customers because it made a lot of money during the second quarter. Numbers that indicate Target is making a lot of money include:

  • $3.287 billion in net income.


  • A profit margin of 4.21%


  • A free cash flow of $842 million.


  • Assets of $37.28 billion.


  • Cash and short term investments of $1.48 billion.


  • $4.469 billion in cash from operations.


  • A market capitalization of $39.67 billion on September 9, 2016.


  • An enterprise value of $50.9 billion on September 9, 2016.


Target is a Good Contrarian Investment

This gives Target some contrarian potential because it has a lot of cash and a strong brand. That means it is a strong candidate for a turnaround with new management or a change in direction.

One event that Target might be able to take advantage of is the slow collapse of Sears and its even sicker subsidiary Kmart. Target is well-positioned to capture some Sears and Kmart customers as those chains close stores. It is also in a good position to grab some Macy’s (NYSE: M) customers, Macy’s is planning to close 100 stores nationwide which gives Target another opening.


Target might be able to catch some of those customers in the way that JC Penney’s (NYSE: JCP) has. Penney’s uses data analysis to identify Sears and Macy’s customers and target them for direct marketing.

It might also be in a position to move into some new areas such as large appliances as Penney’s is doing. Target’s reputation for fashion might enable it to grab some Macy’s customers.

This means Target is a potential contrarian and value investors’ play and it is not that risky. Target had a dividend yield of 3.3% on September 9, 2016, and it was scheduled to pay a 60¢ dividend on September 10, 2016. That makes Target a nice income stock, as well as a contrarian play. It did reward investors with a 25.57% return on equity on July 30, 2016.

My advice would be to hold Target if you own it; because it will generate some income, but to hold off buying it. This stock price is likely to drop soon, which will make it a bargain. Even if the revenue drops continue, Target will be a good buy, because it keeps generating a lot of cash and paying off to investors.