Bull's Eye

Target's Back-to-Basics Approach Works, for Now

It scored a win, but it may not be sustainable.
Photographer: Andrew Burton/Getty Images
At Closing, May 25th
71.21 USD
At Closing, May 25th
1610.15 USD

Getting back to retail basics seems to be working for Target Corp. -- for now.

The $29 billion big-box retailer on Thursday surprised investors by forecasting same-store sales growth in its second quarter, reversing an earlier call for a drop. This would represent Target's first quarter of increased sales at locations open at least a year after four periods of declines. The good news couldn't come at a better time for Target, whose shares have been battered by the general retail malaise and concerns about the implications of Amazon.com Inc.'s stampede into groceries with the $13.7 billion takeover of Whole Foods Market Inc.

Stuck in a Rut

Target's call for a modest increase in comparable sales in the second quarter would be a turning point after four straight quarters of decline

Source: Bloomberg

The irony is that what seems to be working for Target isn't a besting of Amazon at its own digital game, but rather a refocusing on retailing staples such as pricing, store remodeling and the launch of exclusive brands. In the press release announcing the boosted guidance, there isn't one mention of "digital," "online" or "e-commerce." Investors seem to be taking this turn of events as a sign that maybe things aren't quite so dire for big-box retailers: Target jumped about 4 percent in early trading, while Wal-Mart Stores Inc., Kroger Co. and Costco Wholesale Corp. also climbed.

Don't Call it a Comeback

No, actually don't. This latest news is just a short-term victory for Target.

Source: Bloomberg

Not so fast, though. Target has chalked up much of its recent struggles to a messaging problem: It talked too much about fashion and home decor, while perhaps not reminding consumers enough that it also was a destination for consumer staples at low prices. This shift in strategy is a re-calibration of CEO Brian Cornell's plans for the chain when he took over in 2014. Back then, he wanted to de-emphasize the "Pay Less" part of Target's "Expect More, Pay Less" slogan. This latest flip-flop does seem to be working, but there was a reason that Target backed away from it in the first place  -- and it's worth wondering how long the sales pop will last.

Target's chic and unique fashion, furnishings and kid gear gave the chain its distinctive "Tar-zhay" luster. This focus on low prices makes it increasingly look like just another retailer trying to duke it out in a very competitive industry. Amazon and Wal-Mart also sell goods on the cheap and have more developed e-commerce operations. Without something more to differentiate it, what reason do customers have to prioritize Target? Amazingly, Target earlier this year said it would build a store in New York City's Herald Square, even as it shut down parts of its Silicon Valley operations. That's not a winning bet in a world that is hurling fast toward a digital future. 

The Downside

Analysts are estimating Target's earnings will decline as its strategy emphasizing low prices takes hold

Source: Bloomberg

This low-price strategy works in the short term, but it puts the company at a disadvantage over the long haul, not least of all because of the impact on profit. Target also boosted its outlook for second-quarter earnings per share above the $1.15 high end of its previous guidance range. But it also seemed to indicate a decent chunk of that was due to tax benefits, as opposed to gains in core business profitability. The trend on Target's profitability is clearly moving in the wrong direction.

So enjoy the gains in Target's stock price today. Odds are it won't last.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the authors of this story:
    Brooke Sutherland in New York at bsutherland7@bloomberg.net
    Sarah Halzack in Washington at shalzack@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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