Tar­get’s re­make is ac­cel­er­at­ing, at a cost

South Florida Times - - BUSINESS - By

ANNE D’IN­NO­CEN­ZIO

NEW YORK (AP) — Tar­get is in­creas­ing the min­i­mum hourly pay to $12 start­ing this spring, the sec­ond in­crease in a mat­ter of months, while ac­cel­er­at­ing its rein­ven­tion plan to make the dis­counter more com­pet­i­tive in the age of Ama­zon.

The dis­counter’s moves, an­nounced at its an­nual in­vestor meet­ing in Min­neapo­lis, where the com­pany is based, come as its am­bi­tious plan to make it­self over is driv­ing more peo­ple to its stores and its web­site. But the cost of such a mas­sive over­haul, along with its pay in­creases, squeezed its fourth-quar­ter prof­its, and it took some shine off over­all strong quar­terly sales. The com­pany also of­fered a muted profit out­look.

In fact, shares were trad­ing lower Tues­day on the news of muted prof­its be­fore the an­nounce­ment of the pay hike. And in­vestors pun­ished the stock fur­ther, send­ing shares down nearly 5 per­cent.

Last fall, Tar­get in­creased its hourly wage to $11 from $10. Brian Cor­nell, CEO of Tar­get, told an­a­lysts Tues­day the com­pany saw a bet­ter ap­pli­cant pool and a 60 per­cent spike in the num­ber of ap­pli­cants in the days af­ter the an­nounce­ment. Cor­nell re­it­er­ated Tues­day its promise to in­crease the min­i­mum pay to $15 by the end of 2020.

Tar­get also an­nounced other ini­tia­tives to help it speed up de­liv­er­ies and make shop­ping in its stores eas­ier. The com­pany is rolling out free, two-day ship­ping for hun­dreds of thou­sands of items on Tar­get.com. Ex­cept for hold­ers of its branded credit card, shop­pers pre­vi­ously needed to spend at least $35 to get free ship­ping. And its same-day de­liv­ery ser­vice, which was tested New York City, is be­ing rolled out to key cities in the U.S. such as Bos­ton and Chicago. Tar­get, which was test­ing curb­side pickup at 50 stores, said it also plans to ex­pand to 1,000 lo­ca­tions na­tion­wide.

“2017 was a year of sig­nif­i­cant progress,” Cor­nell said. “2018 is all about ac­cel­er­a­tion.”

As it races to mod­ern­ize, Tar­get’s profit mar­gins are un­der sig­nif­i­cant pres­sure. The bot­tom lines of tra­di­tional re­tail­ers are get­ting bruised try­ing to hold Ama­zon.com at bay. Late last month, Wal­mart re­ported weak fourth-quar­ter prof­its as it stum­bled with e-com­merce sales dur­ing the cru­cial hol­i­day sea­son.

Where in­vestors pun­ished Wal­mart by sell­ing off shares, the re­ac­tion on Tues­day to Tar­get was more sub­dued, sug­gest­ing that the tra­di­tion­ally iras­ci­ble Wall Street may be giv­ing the re­tailer what it needs most: more time to win over con­sumers.

Some in­dus­try an­a­lysts seemed ex­as­per­ated with the fick­le­ness of Wall Street in what they be­lieve is a turn­around story.

“While we un­der­stand the con­cern over in­creas­ing costs, we are crit­i­cal of voices that see this as a weak­ness,” wrote Neil Saun­ders, man­ag­ing di­rec­tor of Glob­alData. “We take the con­trary view: if it is to grow, Tar­get needs to in­vest — in­clud­ing in cus­tomer ser­vice, which af­fects wages. The al­ter­na­tive, which is to re­strict or throt­tle in­vest­ment, may de­liver more profit in the short term, but it will be to the detri­ment of long-term per­for­mance.”

But tra­di­tional re­tail­ers face a mov­ing tar­get in Ama­zon.com.

Ama­zon has cre­ated fierce loy­alty among shop­pers who spend $99 for a mem­ber­ship that comes with free ship­ping, as well as stream­ing movies and mu­sic. Its ac­qui­si­tion of Whole Foods Mar­ket last year has raised the stakes for Tar­get and Wal­mart, which also sell gro­ceries. Ama­zon just in­tro­duced twohour Whole Foods de­liv­ery for Prime mem­bers.

Tar­get pledged last year to in­vest more than $7 bil­lion in mod­ern­iza­tion ef­forts over the next three years. That in­cludes re­mod­el­ing old stores, open­ing small lo­ca­tions in cities and col­lege towns and faster on­line de­liv­ery. Late last year, the com­pany said it was ac­cel­er­at­ing plans to re­model more than half of its 1,800 stores by 2020.

Tar­get earned $1.1 bil­lion, or $2.02 per share, in the fourth quar­ter, com­pared with $817 mil­lion, or $1.45 per share, a year ear­lier. Earn­ings, ad­justed for one-time gains and costs, were $1.37 per share, which is 2 cents short of an­a­lyst pro­jec­tions, ac­cord­ing to Zacks In­vest­ment Re­search.

Rev­enue rose 10 per­cent to $22.77 bil­lion, edg­ing out ex­pec­ta­tions for $22.46 bil­lion.

Tar­get re­ported a 3.6 per­cent in­crease in rev­enue at stores opened at least a year. That beat es­ti­mates of a 3.1 per­cent gain, ac­cord­ing to Fac­tSet. Same-store sales, a cru­cial barom­e­ter in the in­dus­try, rose more than 4 per­cent in Jan­uary, sug­gest­ing that Tar­get’s trans­for­ma­tion is sus­tain­able.

Cus­tomer traf­fic rose 3.2 per­cent and on­line sales jumped 29 per­cent in the fourth quar­ter. The com­pany logged healthy sales growth in all five of its mer­chan­dis­ing ar­eas, in­clud­ing fash­ion and home fur­nish­ings.

Tar­get ex­pects its per-share earn­ings this quar­ter to range from $1.25 to $1.45. An­a­lysts ex­pect $1.40. Full-year earn­ings are pro­jected in the range of $5.15 to $5.45 per share, ver­sus Wall Street ex­pec­ta­tions for $5.21.

Shares of Tar­get Corp. fell 4.7 per­cent, or $3.58 in early af­ter­noon trad­ing, to $71.56.

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