Target helped invent the concept of "cheap chic" -- putting a high-class sheen on low-cost goods. Now it's taking a similar approach to its financial results.
Target Corp. shares jumped by as much as 9 percent on Wednesday, the biggest intraday jump since December 2008, after the company's third-quarter earnings and sales weren't as bad as expected. Sales fell just 0.2 percent from the year before, compared with expectations for a 1.1 percent drop.
Investors pretty much ignored how Target managed to overshoot third-quarter targets and raise its full-year 2017 outlook: It had already lowered those bars during the previous quarter.
Back in August, Target posted its first quarterly comparable sales decline since 2014. It slashed its 2017 earnings outlook and said the best-case scenario in the third and fourth quarters would be that comparable sales stayed flat from the year before. Worst case, it would go down by 2 percent from the year before.
Unsurprisingly, analysts lowered their own estimates in response. And voila! Target turned in slightly better results than those downbeat expectations, and its stock shot up. It's a tried-and-true recipe for managing a company quarter to quarter.
However, doing better than awful doesn't mean the Minneapolis-based retailer has turned some sort of corner -- or that investors should expect trends to improve all that much.
The company has become a revolving door lately, seeing its chief marketing officer defect to Uber and its top online executive leave after only four months after being promoted to chief digital officer. Its head of stores, head merchant, grocery chief and other top executives have also left the company in recent months.
So it's no surprise that Target's online sales growth -- into which the company has been sinking money -- has been choppy. While it picked up some in the most recent quarter, thanks to some big online promotions, it's still lagging behind peers.
And while Wal-Mart Stores Inc., The Kroger Co., and other mass merchants are cutting prices to get more customers in the door, Target has actually been raising prices. Meanwhile, the number of items per customer transaction at Target has declined for five straight quarters.
Plus, Target's pullback from grocery and the sale of its pharmacies to CVS last year have made it more reliant on categories such as clothing, furniture, and electronics, which have fallen out of favor with shoppers and are suffering from ever-declining prices. Its push into building more stores at a time when other retailers are cutting back is also worrisome.
Target is right to focus on growing categories such as fitness and kids and events such as back-to-school sales. Its efforts to trim $2 billion in costs will also help prepare the company for the future, as long as it uses that money to improve its supply chain and e-commerce operations, rather than just continuing to reduce its share count by buying back stock.
But Target needs to engage in some deep reflection as to why so many of its top executives are leaving the company. It should ask why its online sales growth is lagging competitors and whether cost-cutting should really be its main focus right now. Boosting its bottom line is good, but not at the expense of top-line sales. Traffic across the retail industry is down and retailers are fighting for market share; now is not the time for Target to hold back sales in favor of profits.
Under-promising and over-delivering might work fine for Wall Street. But with the all-important holiday period ahead, Target will have to do more to win over its customers, too.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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