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Here's Why Target (TGT) Stock Plummeted After Earnings

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Shares of Target (TGT - Free Report) fell more than 11.5% in morning trading Tuesday after the discount retailer released its abysmal fourth-quarter earnings report. With the retail landscape already showing plenty of volatility, investors are fleeing from companies like Target that are struggling to compete.

Latest Earnings Results

Target posted adjusted earnings of $1.45 per share, missing our Zacks Consensus Estimate of $1.50 per share. The company also posted a revenue miss, with total sales of $20.69 billion falling short of our consensus estimate of $20.746 billion. Earnings per share were down 4.6% year-over-year, while revenues decreased 4.3% from the year-ago quarter.

Comparable store sales for the quarter decreased 1.5%, gross profit fell 7.6%, and operating income fell 13.5%. On a good note, Target said that e-commerce sales increased 34% year-over-year.

“Our fourth quarter results reflect the impact of rapidly changing consumer behavior, which drove very strong digital growth but unexpected softness in our stores,” said Target CEO Brian Cornell.

(Also Read: Target Q4 Earnings & Sales Miss Estimates)

For the first quarter of fiscal 2017, Target management now expects adjusted earnings in the range of 80 cents to $1.00 per share. This would be down from the $1.29 per share recorded last year, and it is well below the current Zacks Consensus Estimate of $1.31 per share.

What Went Wrong

It is clear that investors are in a selling frenzy thanks to Target’s earnings miss and horrible guidance, but it is important to consider what exactly is going wrong for Target right now. Sure, retailers across the board are struggling to compete with the likes of Amazon (AMZN - Free Report) , but something even worse is at play here.

Part of Target’s revenue decline is explained by its decision to sell its pharmacy business to CVS Health Corp. (CVS - Free Report) in late 2015, but sales were still down even after factoring in lack of pharmacy sales. The real problem reveals itself when we break down Target’s weak comparable store sales figures.

As mentioned above, Target saw comps decline 1.5% in the quarter. Its total number of transactions increased by a slight 0.2%, but average transaction amount declined 1.6%.

Compare this to Walmart (WMT - Free Report) , which saw comps increase 1.8% in its most recent quarter. This growth was aided by a 1.4% uptick in traffic and a 0.4% gain in average ticket.

We can blame the popularity of e-commerce all we want, but the fact remains that Target hasn’t fully lost its ability to get customers into its stores. The issue is that these customers are spending quite a bit less when they are shopping at Target.

Some Encouraging Signs

We don’t want to be too doom and gloom here, so let’s look at what went right for Target this quarter. Again, the company saw its e-commerce business gain an impressive 34% in the quarter. This outpaced both Amazon and Walmart’s holiday sales growth.

Furthermore, it’s clear that Target is trying to solve the aforementioned issues with shoppers in its stores. The company is revamping its in-store experience by investing in over a dozen brands, with a special focus on Style, Baby, Kids, and Wellness.

Bottom Line

Today was not a good day for Target investors, and you can add the bullseye brand to the list of retailers who have struggled recently. However, all hope is not lost, and there remains some positive signals for both Target and the industry as a whole.

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