Target Corp. has been in the headlines a lot lately, and not for the right reasons.
Yes, there’s the hacking you’ve heard about. But that’s only the beginning.
Target TGT -0.69% first cut its fourth-quarter outlook , followed with news it would eliminate 1,175 positions at the top, and then an analyst slashed her price target and predicted an end to stock buybacks.
Some of this damage control is related to fallouts from security issues. But investors who chalk Target’s struggles up to hacking are missing the point.
Target is a company that has been on the ropes for some time, and this just happens to be the latest punch. Read more at MarketWatch’s Target topic page.
And investors in retail stocks need to remember this. Because there are plenty of other picks taking body blows right now, and will continue to do so in 2014.
Target by the numbers
Target stock is down 7% since the beginning of December, but the downtrend in shares has been serious for some time. Target is off a total 20% in the last six months vs. 9% gains for the S&P 500 SPX -.00% , and shares are flat since the start of 2012 while the S&P has soared 47% in the same period.
The reason for those long-term challenges? Stagnant revenue and razor-thin margins.
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Consider that while Target’s most recent guidance predicted a 2.5% sales decline for the fourth quarter vs. prior forecasts of a flat quarter, analysts were looking for a decline anyway. Furthermore, full-year revenue was predicted flat compared with last year before all this cybersecurity trouble.
Furthermore, earnings were also forecast to decline year-over-year before the data breach. And while the upcoming year is looking better, S&P Capital IQ forecasts that earnings across 2014 months will still be worse than calendar 2012.
In short, Target has been facing challenges long before the recent headlines.
Part of a trend
Moving beyond Target, the bigger story here is how almost every other major company in the retail sector is telling the same tale in their earnings.
Take discounter Wal-Mart WMT -0.48% . Even if you give the retail giant a pass on its abysmal streak of quarterly same-store sales declines, Wal-Mart saw same-store sales slip last spring at its namesake U.S. stores and admitted in its November earnings report that holiday sales and subsequently its next quarterly report would likely be dismal.
No wonder Wal-Mart is down 3% in the last six months vs. a 9% gain for the S&P 500. Back-to-back $15 billion buybacks can only get you so far in the face of declining sales.
Or take Best Buy Co. BBY -0.31% , which on the surface has been a “good” retail stock since it’s up roughly 130% since the beginning of 2013. But this run has happened in the face of sales declines in five of the last six quarters, and expectations for another rough quarter after an ugly holiday sales report.
My favorite statistic: Total revenue recorded in calendar 2013 is actually going to finish lower than calendar 2009. Think about that — Best Buy stock was making more in sales during the Great Recession than it is right now.
Or take Macy’s Inc. M -0.60% . The department store grew sales by less than 5% year-over-year in calendar 2012, will squeak out low single-digit growth in 2013 if it’s lucky, and is projected for the same in 2014.
But hey, the stock can still save $100 million annually through layoffs and efficiencies and just boosted its buyout plan last year… so maybe nobody will notice, right?
I could go on, but hopefully you get the idea, Target is not alone in its struggles.
It’s Amazon, of course
While most readers probably stopped reading this column after five seconds, the three of you who got this far (hi, Mom!) already know who’s to blame: Amazon.com Inc . AMZN -0.52%
When a $185 billion e-commerce giant leads a race to the bottom on price, sacrificing its own margins in the process, there are only two choices: stick with your higher pricing and watch customers leave, or join Jeff Bezos on the discount train to No Margin-ville.
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Either way, you lose.
It’s a gross oversimplification to say Amazon is killing traditional retailers — or as Josh Brown recently quipped, the “Bricks and Mortuary” crowd. But it happens to be true.
Sure, there are a few exceptions like Advance Auto Parts AAP -1.21% , which is up 60% in the last year and 270% since early 2009, thanks to some pretty unique factors related to the auto market. And Wal-Mart’s e-commerce chief said that he expects the company’s online service offerings would be in line with Amazon’s in two years.
And I’ll also admit some broad-based retail and consumer discretionary ETFs have found outperformance, so you can’t write off the whole sector … though in the same breath, I’d like add most funds intentionally include the very e-commerce stocks that are killing retail as we know it. Take the SPDR Retail ETF XRT -1.18% , which has done well in the last year but has positions in digital players including Expedia EXPE +0.61% , Overstock OSTK -1.74% , HomeAway AWAY -1.97% , and particularly Amazon itself.
But beyond these exceptions, by and large I see traditional retailers like Target, Wal-Mart, Macy’s and others as losers for the foreseeable future.
I found a recent article from the Washington Post about a retail trade show a particularly powerful reason to steer clear of these investments. In a nutshell, traditional retailers face two choices: retool operations to out-Amazon the folks at Amazon with e-commerce channels, or emphasize on the value of an in-person shopping experience with a focus on customer service and personalization.
For starters, on a bet between Jeff Bezos and the field, I’m taking the Amazon exec. And regarding customer service, that’s a fine presentation for a seminar but awfully difficult in reality. Motivating underpaid retail employees to be upbeat and helpful even as you’re laying them off, cutting benefits or trying to find other efficiencies to juice your profits is no easy task.
Remember this next time you think of buying a retail stock.
Target has taken a beating in the press lately, but its fellow brick-and-mortar retailers are in the same boat
only two choices: stick with your higher pricing and watch customers leave, or join Jeff Bezos on the discount train to No Margin-ville.
I hate to say this but Target is right in eliminating their upper management who are dinosaurs and unable to adapt to this changing shopping environment. I bet their unfamiliarity with credit card security also played a factor in the credit card number theft. There are certain things you need brick and mortar for and some things you can just buy online. Their marketing department should keep records of what is being sold in stores and what people are ordering online. For example, toys and games can be bought online so you don’t really need to stock them in the stores. Clothing need to be stocked because people have to try them on. Auto parts stores are also successful as brick and mortar because you can’t order your parts online especially if you are not a mechanic and don’t know which parts you need to fix your car. In other words, why buy Call of Duty by going to Wal-Mart when you can order it from Amazon without getting off your butt especially in this winter weather. Even if this entire planet is taken over by automation, mechanics will still be in demand and will still be top dog in brick and mortar businesses followed by restaurants and clothing stores.