Analysis: Target is a company on the move—and it’s gaining momentum
After an extended period of performance fluctuating between poor and lackluster, Target has finally pulled a rabbit out of the proverbial hat and delivered an excellent set of numbers. Overall sales growth includes the benefit of an additional week of trading – but this does not detract from the strong underlying performance, as indicated by the healthy uptick in comparables.
Despite the sales increase, operating income fell by 15.8% thanks to higher digital fulfillment costs, upward wage pressure, and the various investments Target has been making. Fortunately, a lower provision for income tax saved the bottom line where net income increased by 34.7%.
While we understand the concern over increasing costs, we are critical of voices that see this as a weakness. We take the contrary view: if it is to grow, Target needs to invest — including in customer service, which affects wages. The alternative, which is to restrict or throttle investment, may deliver more profit in the short term, but it will be to the detriment of long-term performance. Wall Street’s myopic view on this matter — both about Target and other retailers — is problematic and demonstrates a lack of knowledge about the current dynamics of the retail market.
In the particular case of Target, we believe that the sales results more than justify the increased costs. Indeed, we are encouraged that the 3.6% uplift in comparables was driven by an evenly split contribution from stores and online. Not only does this indicate that Target’s omnichannel strategy is delivering, but it also shows that the store enhancements are working. In essence, it justifies Target’s view that stores remain a critical part of the proposition and are worth spending money on.
Refurbished stores were not the only factor driving Target’s numbers — which is hardly surprising given that the bulk of stores have yet to receive a makeover.
The compelling new own-label ranges in apparel and home provided a strong point of difference across the holiday period. That said, in many stores, poor merchandising and display minimized the impact. This reduced both conversion and sales and created many lost selling opportunities. Performance online, where these ranges are easier to shop, was much better. Despite this small stumble, Target is on the right trajectory regarding its product development.
Food performance was reasonable, and our data suggest that lower price points supported growth. Fortunately, the costs of reducing prices were largely offset by efficiency savings and gains elsewhere. Our one criticism on grocery is that seemingly little effort was made to push holiday food and drink, especially at the premium end of the offer. In our view, Target’s holiday food proposition was extremely lackluster compared to competitors.
Despite the good numbers, the sustainability of performance is open to question. After all, Target’s results were delivered over a period of robust trading for the retail sector. At this stage, we assess that current performance is sustainable. The January numbers and our consumer data from February both suggest Target remains on a steeper growth curve.
Moreover, we believe that the benefits of further store refurbishments, more investment in own-label products, and the driving of digital growth from the integration of Shipt, will all aid future performance. In short, Target is a company on the move, and it is gaining momentum.
Nordstrom board rejects takeover offer from founding family
The effort by the Nordstrom family to take the department store retailer private has hit another roadblock.
Speculation has been mounting for the past week that the family was close to securing a deal to take the retailer private. On Monday, a special committee advising Nordstrom’s board said it had received and rejected an offer from the family to take the company private, calling the proposed price “inadequate.”
The Nordstrom family group — consisting of company co-presidents Blake Nordstrom, Peter Nordstrom, and Erik Nordstrom, along with president of stores James Nordstrom, chairman emeritus Bruce Nordstrom, and Anne E. Gittinger — had informed the committee that it intended to submit a proposal to buy all outstanding shares of common stock of the company they don’t already own, and approximately 21% of the shares owned by the Nordstrom family members in the group, for $50 each, according to a company statement.
“The special committee has reviewed the group’s indicative acquisition proposal, in consultation with its financial adviser and legal counsel, and has determined that the price proposed is inadequate,” Nordstrom said in a statement. “The special committee has directed its advisors and management not to provide further due diligence information to the group.”
The offer was indicative, which means it may have been put together without financing in place, according to CNBC. The special committee of the board said unless the family group can substantial — and promptly — improve its offer price, it plans to end discussions.
The Nordstrom family, which owns 31.2% of the company’s shares, announced in June that it was considering taking the retailer private. It postponed the move in October, citing “the difficulty of obtaining debt financing in the current retail environment.” The family, which had been working with Leonard Green & Partners LP to provide equity financing on the deal, said it would resume efforts to take the company private after the holidays.
Report: Retail defaults could surpass those in 2017
Three months into 2018, there are already three defaults in the retail sector in the United States — and more are expected.
Burdened with high debt loads, the retail industry could see just as many defaults this year, if not more, according to MarketWatch, which cited a a study from S&P Global Ratings. There were 11 defaults recorded in 2017.
Approximately 60 days into the new year, three defaults have already been recorded for 2018, the report said. One of the latest is Tops Supermarket Holding LLC, which filed for bankruptcy protection on Feb. 21.
Retailers continue to be challenged by different factors. Some companies are carrying debt stemming from a leveraged-buyout boom throughout the last decade, while others have failed to build out their e-commerce capabilities fast enough to compete with online giant, Amazon, according to the study.
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