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What Went Wrong at Target?

No retailer has been hit harder by recent trends than Target (NYSE: TGT). The iconic discounter’s cult-like following; was not able to save it from a dramatic drop in revenues.

On April 30, 2016, Target reported a revenue figure that was $920 million lower than the number for January 2016. Target reported TTM revenues of $73.78 billion at the end of fourth quarter 2015 that fell to $72.86 billion at the end of first quarter 2016.

It looks as if all the revenue growth Target enjoyed in 2015 has reversed, and this time nobody can blame Canada. Between October 2014 and October 2015; Target’s TTM revenue grew by $2.84 billion rising from $71.07 billion to $73.91 billion. That all but made up for the losses north of the border, but now it seems to have dramatically reversed.

The latest earnings figures show us that Target has suffered two straight quarters of revenue losses; fourth 2015 and first 2016. During that’s period its revenue has declined by $1.05 billion. The decline is not only large it is accelerating.


Discount is doing Great, Target is not

What is even troubling is that it is coming at a time when other discounters; as diverse as Walmart (NYSE: WMT), Dollar General (NYSE: DG) and Costco Wholesale (NADAQ: COST) are reporting revenue growth.

During the May 26, 2016, earnings conference call Dollar General CEO Todd Vasos; said that his company’s first quarter sales increased by 7%, and its same-stores sales increased by 2.2%.  Over at Walmart; the TTM revenue grew by $1.08 billion during first quarter 2016, rising from $482.13 billion in January to $483.21 billion in April. Costco’s TTM revenue rose by $720 million between November 2015 and February 2016.

It looks as if the discount segment is doing well but Target is not. What is going on here, what is Target doing wrong that other retailers are getting right?

What is Target doing wrong?

There are a number of possible explanations for the revenue decline at Target including:

  • Over reliance on higher-end merchandise like electronics, home furnishings and fashion apparel. This makes Target more vulnerable to competition from Amazon (NASDAQ: AMZN); which can undercut its prices in those areas.


  • A shrinking middle class; Target’s core customer base, especially in urban areas. The Pew Research Center found that the percentage of adults living in middle-class households fell in 203 of the 229 US urban areas it surveyed. Pew also discovered that the middle class is no longer a majority in several large cities including New York, Boston, Los Angeles, San Francisco and Houston.


  • Americans of all classes have less disposable income. Pew found that the average middle class family’s household income fell by $4,979, between 1999 and 2014. In 1999 the average middle class family had an income of $77,898 a year, by 2014 that figure had dropped to $72,919 annually. To make matters worse; the average upper class household income fell by $13,217 in the same period, dropping from $186,424 in 1999 to $173,207 in 2014. This means Americans simply have less cash to spend on Target’s urban chic.


  • Not doing enough to attract Millennial shoppers. Millennials; those aged 18 to 34, are now the largest age group in the United States – with 75.4 million members according to the US Census Bureau. Vasos reported that Millennials made up 12% of Dollar General’s foot traffic and 24% of its sales, according to Seeking Alpha. Seeking Alpha Editor Clark Schultz credited millennials for surging sales at discounters like Big Lots (NYSE: BIG) during the first quarter.


  • Target’s prices might simply be too high. The biggest growth in retail is coming at the lower end of the price spectrum, at Walmart, dollar stores and Amazon; which is also a bulk discounter. Target might not have adjusted its prices to keep up with economic realities; such as falling incomes, or its competitors’ prices.


  • Too much emphasis on fashion. A number of fashion-oriented stores have been doing badly lately. Aeropostale announced it was closing 100 stores and filing for bankruptcy on May 2. Macy’s (NYSE: M) TTM revenue fell by $1.44 billion between April 2015 and April 2016, dropping from $28.06 billion to $26.62 billion. The Gap (NYSE: GPS) announced it was closing 75 Old Navy and Banana Republic stores overseas. It looks as if fashion is no longer the money maker it once was. One problem here is that many consumers might view Target as a higher-priced fashion store; not a good strategy when marketing to thrifty Millennial shoppers.


  • The decision to sell all of Target’s pharmacies to CVS Health (NYSE: CVS) last year. Perhaps outsourcing a revenue stream in a contracting retail market was not a good idea.


  • Vulnerability to Amazon. Target seems to be far more vulnerable to Amazon than most discounters. It relies heavily on sales of products the Everything Store emphasizes; including electronics, toys, clothing, shoes and household goods. Target’s key clientele is middle-class urban and suburban Millennials and Generation X (35 to 50 year olds); the people most likely to shop online.


  • Changes in the grocery business. Particularly the growth of Kroger (NYSE: KR); which has an impressive ability to deep discount and undercut competitors’ prices. Another is the spread of discount grocers like Aldi and Trader Joe’s; which offer much lower prices.


  • Changing shopping habits. Many people no longer buy some items; such as clothing, office supplies and electronics, at brick and mortar stores. Instead they order those items online and only buy groceries; or household supplies, from physical stores. This favors grocers like Kroger and dollar store operators; like Dollar General, because their stores are conveniently located in the neighborhood. Target is often located out in shopping centers on the edge of town.


The billion dollar question here is can Target change course and prevail against these trends? Perhaps, Target did survive the Canadian debacle, and decades of intense competition from Walmart. Yet the task facing this retailer faces is daunting, particularly with Amazon completely disrupting some segments of retail.

The only way Target will be able to survive is to completely reinvent itself; perhaps as a more streamlined discounter emphasizing low prices, or as an online brand. The company has a strong brand and lots of resources.

One thing is clear here though; Target seems to lack the ability to change with the times as Walmart is. If this discounter cannot learn that, it will follow Sears Holdings (NASDAQ: SHLD) into the death spiral.