Targets profit outlook sinks retail stocks

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Target Corp (TGT. N) shares plunged on Tuesday after executives issued a full-year profit forecast that fell well below analyst estimates and said the retailer would lower prices to compete with deep-discounting rivals. Target at its investor day conference vowed aggressive promotions and said new brands and investments in technology and small stores will allow it to eventually win back market share. Although its e-commerce operation is growing, Target reported its third straight quarter of lower sales from existing stores, citing "unexpected softness" and raising new questions about the health of large retailers in the United States. Target also forecast first-quarter profit short of Wall Street estimates. Shares sank 12.1 percent to $58.83, on track for their biggest one-day percentage drop in more than 18 years. The stock has lost a quarter of its value since the 2016 holiday season started in November, back at levels last seen in August 2014. The retail industry faces pressure from lackluster U.S. economic growth, intense competition from Amazon.com (AMZN. O) and other online rivals and concerns about President Donald Trump's planned border tax. With Tuesday's announcement, Target’s brand identity as a source for “cheap chic” fashion and other low-cost stylish goods is giving way to the push for lower prices, analysts said. That prompted declines across the retail sector. Wal-Mart Stores Inc (WMT. N) was down 1.4 percent, Kroger Co (KR. N) fell 1.7 percent and Macy's Inc (M. N) lost 1.6 percent. Dollar General Corp (DG. N) fell 4.4 percent. Shares of Amazon, whose market cap exceeds all those companies combined, were down slightly. But the drop in Target shares also reflects missteps by the company, said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh. “Target didn’t do its job of trying to engage its customers and the theory is they may have lost the ability to do it," she said. “That’s what the (stock) market is telling you.”

The retailer plans "aggressive promotional activities" that would erode its operating profit by $1 billion this year, Chief Executive Brian Cornell said at the investor day. Revamping older stores is also part of Cornell's plan. Target has "a large percentage of the portfolio where the buildings just don't match the brand. They are old. They're tired. And they have not been updated in years," he said on a conference call. Target said it planned to invest $2 billion in 2017 on analytics, supply chain and opening 100 more small-format stores in urban neighborhoods and college markets. It also plans to launch more than 12 exclusive brands. Target forecast full-year earnings of $3.80-$4.20 per share from continuing operations, while analysts on average were expecting profit above $5.00, according to Thomson Reuters I/B/E/S. TARGETING GROCERY SHOPPERS?

One of the first areas where prices will come down at Target is food, the company said. Food and pet supplies account for about a fifth of Target sales, according to its annual report. With Wal-Mart and Amazon already facing off on price, including in the grocery aisle, Target is in an uncomfortable middle ground. And where Wal-Mart has established itself as the nation’s largest grocer, Target’s foray into food has been less successful."Target is neither a full-line grocer nor a player with lots of niche specialty products; it is neither a high-end player, nor a price-focused discounter,” said Neil Saunders, managing director of GlobalData Retail. Target's grocery offerings are "confusing," he said. Bigger rival Wal-Mart aggressively cut prices across the board two years ago and boosted its online presence. Target could not act then due to costs related to a massive data breach and its decision to pull out of Canada.

"Target’s got bigger issues

FILE PHOTO - A newly constructed Target store is shown in San Diego, California May 17, 2016.

REUTERS/Mike Blake/File Photo

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