Target’s Surprisingly Sluggish Holiday, And What It Portends

Retailers having a less than festive holiday season saleswise has become an increasingly repetitive storyline in early 2020, as the earnings results are rolling in and the revenue figures have been disappointing. Macy’s, Kohl’s, JCPenney, Five Below, L Brands and Bed, Bath & Beyond all made weaker-than-expected holiday sales in the final quarter of 2019 – and their stock prices have been hit hard for the failure.

But in the above cases, the weak results were not a surprise. Department stores have long struggled, as have mall-based brands, and their performance has been declining consistently over the last several quarters. The holiday quarter numbers are consistent with recent results.

Target turning in a sluggish performance during the final quarter of 2019, on the other hand, came as a surprise, as the company had been one of physical retail’s standout turnaround stories of 2019. Target, buttressed by evolving digital upgrades and a competitive push into the grocery business, saw stronger-than-expected growth in earnings, same-store sales, eCommerce and basket size. By the end of Q3, Target had seen its share price increase by 67 percent. By the end of the year, that had climbed to 82 percent.

Based on that year of solid growth, Target had predicted big things for its holiday season, forecasting same-store sales to be up 3 percent to 4 percent. Holiday 2019 was Target’s “most successful holiday in more than a decade,” CEO Brian Cornell told investors at the outset of the annual shopping season during an earnings call – before noting that the retailer intends to “top it this year.” The news certainly cheered investors, and Target’s share price shot up 12 percent in late November as the earnings report confirmed both solid growth and a sunny outlook.

The problem with setting great expectations, however, is the need to live up to them, which Target mostly did not in terms of holiday sales. Cornell noted as much in a blog post concurrent with the Q4 earnings release.

“After three strong quarters this year and a record-breaking holiday season in 2018, we had some really ambitious plans heading into the season,” he wrote. “While we knew this season was going be challenging, it was even more challenging than we expected.”

By the numbers, those challenges saw same-store sales growth of 1.4 percent, far from the more than 5 percent reported last year and the 3 percent to 4 percent Target was forecasting pre-season.

The top two trouble categories for Target seemed to be electronics and toys. The retailer bet big on the toy category preseason, hoping to capitalize on the hole left in the market by the Toys R Us exit a year ago. Target now powers the Toys R Us website that has operated post-bankruptcy, cleared additional floor space to expand its toy offering and announced a partnership with Disney to create mini-stores that would carry Disney-branded toys (among other items).

The investment, however, doesn’t seem to have paid off – Target’s toy sales were about flat with 2018 in 2019. Though some tracking data by The NPD Group indicates Target did pick up market share in the toy category, overall demand in that area seems to be declining.

Electronics weren’t merely flat – Target actually reported a 6 percent drop in sales, while home items were down around 1 percent. Overall for the 2019 holiday season, electronics and home goods were up 4.6 percent and 1.3 percent respectively, according to the most recent edition of the Mastercard Spending Pulse.

Target did see some growth in other, higher-margin categories like apparel (5 percent growth), beauty (7 percent) and food (3 percent) – pickups that kept same-store sales growth in the positive territory, if not as strongly as initially forecast.

Digital sales were also a highlight of Target’s earnings release – up 19 percent, primarily driven by its expansion of same-day services, particularly curbside pickup and home delivery. Target reported use of same-day services was up by more than 50 percent during the last two months of 2019, and that they drove around three-quarters of digital sales during the holiday season.

In the blog post, Cornell remained upbeat about what 2020 will look like, holiday 2019 stumble aside.

“We’re on track to deliver on each of our key metrics for the full year – sales, operating income and earnings per share – and that’s something to celebrate, considering how high we set the bar for 2019,” he noted.

But investors were not so easily cheered, and Target’s long streak of post-earnings surges ended abruptly as its stock price tumbled 7 percent on the announcement of the softer-than-expected results. Target raised so many concerns, in fact, that it brought down adjacent stock prices – Walmart’s share price tumbled 1.8 percent in the wake of Target’s miss (although Walmart will not report its earnings results until mid-September).

And while the market looks ahead to that release – to see just how bad things got for physical retail during holiday 2019 – Target, according to Cornell, is moving on to what’s next in 2020. Though he offered few specifics, he did say to be on the lookout for “new brands, new stores and new partnerships” as Target once again sets out on the turnaround trail.