Why Target Got Beat Up After Its Earnings Report

In this segment of MarketFoolery, host Mac Greer is joined by David Kretzmann and Aaron Bush of Motley Fool Rule Breakers and Supernova to discuss Target (TGT -0.54%), which got no love from Wall Street despite what on the surface looked like a good third-quarter release.

Naturally, it's the outlook that had investors worried. The cheap-chic retailer is trying a host of experiments and initiatives to push its revenue back into growth mode in the face of the e-commerce tidal wave. The obvious question is how fast and how well those efforts are likely to work.

A full transcript follows the video.

This video was recorded on Nov. 15, 2017.

Mac Greer: Let's switch gears here and talk about a company that is nowhere close to $1 trillion, Target. A rough day for Target on Wednesday. David, at first glance, this looks like a good report. You have better-than-expected earnings, same-store sales, better than expected, and Target raising its outlook for the full year. So, that's all good, right? But investors are hung up on this fourth quarter forecast, the holiday forecast, which came in much lower than what was expected.

David Kretzmann: Yeah. Obviously, a tough environment for retailers here in the U.S. Target, I think they are doing everything they should be doing. They're testing a lot of different things, and the question is, can some of these new initiatives grab hold soon enough to really become a meaningful growth driver for the company, and stabilize some of these results? But you did see same-store sales and traffic tick up just slightly this quarter. So, at least it's not dropping. Their digital sales were up 24%. And like I said, they're testing a lot of different things, especially around digital, convenient different options for customers. They have ship from store in 1,400 locations, essentially where you can buy something online and they'll ship it from your local store. So, that should theoretically make it easier for them to roll out same-day or next-day delivery, make it more convenient for customers. They're remodeling hundreds of stores. Right now, they're planning to remodel another 325 or so next year. And when they do remodel the stores, they see sales accelerate about 2-4%. So, so far, that seems to be on track. But, again, how quickly can they do that, and can they ensure that those remodels do continue driving those returns? And some of the other initiatives they're testing drive-up, where you essentially drive up to the store, anything you ordered there is ready for you, you just pick it up, you've already paid online. So, I think, if you're not a destination retailer, if you don't have a very dynamic experience within the stores, you need to find ways to get closer to customers and make it so convenient for them, where they can continue to come back and make repeat purchases. So, I like the fact that they're testing a lot of different things here, but a lot of these tests are isolated in a few stores, in a few markets. And it'll be something to watch. But in the meantime, yeah, the quarter to quarter numbers for the company can still be mediocre.

Greer: Aaron?

Aaron Bush: Survival can be expensive sometimes. All those tests are good. They're really needed, in my opinion. But the costs of that can add up. You see, sales are relatively flat, up a little bit, but their profits were down about 20% this quarter. That's mainly the result of, we have to compete on lower prices against Wal-Mart and Amazon; we have to raise wages, because minimum wage is rising, and we have to compete with that, and that's a pinch. And then, anytime you're trying to compete online when you're not a native online business, you're duplicating a lot of your investments just to retain the same customer. So, that can get expensive. I do think that Target has done a pretty decent job adapting so far, but it's a really tough spot to be in. And when you see the results, they're holding steady, the business is holding steady on top, but they're paying for that to happen.