In the Q4 2015 earnings conference call, Target Corporation (NYSE:TGT) management referred to 2014 as a "year of transition" after dealing with the ongoing financial effects of the 2013 customer data breach and approaching the decision to close down all of its Canadian stores to staunch any further operating losses.
Also in the call the company's new store format designed to drive urban area sales and customer brand loyalty was showcased. Though just the beginning, it could be a successful strategy combining changing consumer trends with the company's quickly growing digital commerce.
Target's 3.8% in Q4 comparable sales growth, more than double Wal-Mart's (WMT) 1.5%, shows the company's increased competition toward other major retailers. These two topics can help carry on the transition.
How did the closure plans of Canadian stores affect the quarter and full year?
As expected, the decision to close all the Target stores in Canada hit the quarterly and annual results hard. A pre-tax impairment loss and other charges totaling $5.1 billion was recorded in the fourth quarter. The $4.09 billion charge for discontinued operations against the twelve-month operating earnings brought the annual reported net earnings to a loss of $1.64 billion.
Diluted earnings per share came out to minus $2.56 after subtracting $6.38 a share.
Quarterly diluted earnings plummeted to minus $4.10 per share, well down from the $0.81 a share in Q4 a year ago.
The company noted that certain assets and liabilities of the Canadian operations are based on estimates, so there could be material adjustments to these amounts in future periods.
Previously when the closure plans were announced in January, Target estimated the Canadian operations would not have turned profitable until 2021. Already the stores in total lost around $2 billion since it took over about 124 store locations from Canadian retailer Zeller in 2011.
Just as Target's US stores were beginning to show improvement against retailing peers Wal-Mart and Costco Wholesale Corporation (COST), CEO Brian Cornell made the tough decision to shutter the loss-making Canadian business and take the financial hit quickly at one time.
The decision was lauded by some of the market. The stock suffered no major plunge, and since the January 15 announcement, it's up 3%.
In the Q4 conference call, CEO Cornell talked about effect on company credit and share repurchases for the quarter, "As expected, we didn't repurchase any shares in the fourth quarter. However, as we discussed in our January update, the exit from the Canadian market will meaningfully improve our credit metrics going forward. And provided the wind down of our Canadian operations continues to push as planned, we will be in a position to revisit the possibility of share repurchase later in 2015."
Target Express
Putting the Canadian store issue to one side, Target management turned to sales initiatives taken in the fourth quarter and to be put into action in fiscal 2015. Following a recent trend among major retailers, Target is experimenting with a smaller-scale version of its stores in Minneapolis. This test store is called Target Express and soon will be expanded to about nine stores in 2015.
Nestled in specific urban areas, the new store format is as small as 12,000 sq.ft, far less than the average 80,000 sq.ft of a typical Target store. Target Express is to cater to city residents who may like shopping at Target, yet don't want to travel to larger stores located further out in suburban areas.
Not all of Target's total range of products can be in the Express stores. However, stores could be tailored to the shopping preferences and habits of local customers apart from the standard items expected to sell well in any of the stores. City dwellers are looking for convenience, and if it can translate into higher sales per sq.ft, then it could be worth it.
Another benefit of the Express stores could be to also act as pick up points for online purchases. Online sales were translating into more store visits, which in turn improved store sales as customers did extra shopping once in the store.
Target's Q4 earnings media release reported digital channel growth added almost 1% to comparable sales growth in the fourth quarter. Coupling the growing digital trend with improving customer experience is a high priority. In the conference call, CEO Cornell listed five priorities management will be focusing on.
First is driving digital sales growth. Number three is have stores align product offerings to local consumers. "Our third priority is to become much more localized in the assortment and experience we provide in our stores, and more personalized in our digital interaction with our guest. We are in the very early stage of these efforts, and we see huge opportunity ahead of us. So we're investing these capabilities we'll need to make progress on this priority over the next few years."
As consumers are shifting away from big box stores visits and mobile shopping is made easier with both convenient shipping and in-store "click and collect" pick-ups, Target has an opportunity to pivot from the failure of the Canadian expansion to taking the lead in the growing local-centric retail trend.
Currently trading at around 17 times 2016 forecast earnings, Target's stock is up about 26% in the past year. Early investors picked up that gain, but as the company attempts to turn 2014's "year of transition" into 2015's "year of transformation", I suspect the share the share price to go sideways. If the stock slips back to $65 - $70, it could be a good price range to start a position and watch the stock story to improve.
