Dive Brief:

• Target shares tumbled as much as 15% on Tuesday morning after reporting worse-than-expected fourth quarter same-store sales and forecasting further declines for the current fiscal year. Fiscal 2017 same-store sales growth will now fall in the low-single digit percentage range; they declined 0.5% in fiscal 2016. Consensus Metrix analysts cited by Reuters forecasted a 0.4% same-store sales boost this year. 

• Q4 same-store sales decreased 1.5%, the upper end of its previous guidance for a decline between 1.5% and 1.0%, missing Consensus Metrix analysts' forecast for a 1.3% decline. Same-store e-commerce sales in the quarter rose 34%, contributing 1.8 percentage points of comparable sales growth, according to a company press release.

• The retailer’s “signature categories,” which include baby and wellness, outpaced total comparable sales by nearly 3 percentage points, and same-store sales traffic rose 0.2% in the quarter. Q4 2016 sales decreased 4.3% to $20.7 billion, reflecting a 1.5% decline in comparable sales combined with the removal of pharmacy and clinic sales from this year’s results; Thomson Reuters I/B/E/S analyst expected $20.70 billion.

Dive Insight:

Target unsettled Wall Street on Tuesday morning, but Moody’s Investors Service lead retail analyst Charlie O’Shea took a longer view, acknowledging its "impressive" online sales growth.

“We also believe that Target’s decision to absorb some hits to profits in 2017 due to price investments, and the acceleration of investments in physical assets and new brands, as well as online, are sensible long-term strategic moves to enhance its competitive position, and recognize the changing landscape of retail,” O’Shea said in a statement emailed to Retail Dive. “Due to its historically balanced and disciplined financial policy, we believe Target has the wherewithal from a credit perspective to bite the short-term profitability bullet that will result from this strategy.”   

The retailer is feeling the heat from aggressive “everyday low price” moves from rival Wal-Mart, Matt Sargent, senior vice president of Retail at Frank N. Magid Associates, Inc., said in a statement emailed to Retail Dive. Sargent also warned that that the retailer’s grocery effort will “continue to be an overall drag on both profits and store traffic.” Target’s store remodeling effort could help address that, but will not likely be realized until later in 2017, he said. One of Target’s biggest problems is Amazon’s Prime membership program, which provides the e-commerce giant with a sticky customer base that overlaps with Target’s higher income, better educated core customer, he said.

Still, Target remains “well regarded” by those customers, says GlobalData Retail Managing Director Neil Saunders. That and its e-commerce results bode well, but the retailer must revamp its physical stores, he said “Target struggles to grow its store traffic and has difficulty in increasing conversion and average basket when it does get customers into its physical shops,” Saunders said in an email to Retail Dive. “In our view, the main reason for this is that Target is still operating a store format that was suited to the 1980s and 1990s, and not one that is conducive to engaging and inspiring customers in the modern era of retailing.”

Target could do a number of things to improve the shopping experience, Saunders adds. “These include improving displays, making areas like home less structured with lower level fixtures, and ensuring that products – especially in fashion and home – are cross merchandised to create room and outfit suggestions,” he said.

In a statement Tuesday morning CEO Brian Cornell said executives would be detailing moves for recovery, including new assertiveness in pricing as well as some emphasis on differentiated merchandise, typically a Target strong suit. That reference to pricing led to speculation about a price war.

“We will accelerate our investments in a smart network of physical and digital assets as well as our exclusive and differentiated assortment, including the launch of more than 12 new brands, representing more than $10 billion of our sales, over the next two years,” he said. “In addition, we will invest in lower gross margins to ensure we are clearly and competitively priced every day. While the transition to this new model will present headwinds to our sales and profit performance in the short term, we are confident that these changes will best-position Target for continued success over the long term.”

Saunders cautions against going to battle with Wal-Mart over prices — a lesson that Target painfully learned in the 1980s. After initiating but swiftly losing a price war back then, the retailer decided instead to focus on its merchandising, ushering in the “cheap chic” approach that has contributed to much of its success. Instead, Saunders advises that Target, a company with "many strong pieces and some slightly damaged parts" focus on fixing its weaknesses "to create a compelling proposition that cuts through in a much noisier and more competitive era of retailing."