Target to take $1 billion margin hit to close gap with rivals, shares sink

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Target Corp's (TGT. N) full-year profit forecast fell far below market expectations as the retailer said it would take a $1 billion hit to margins in efforts to ramp up its online presence and cut prices to stay relevant amid fierce competition. The company's shares tumbled more than 13 percent on Tuesday, on track for their biggest one-day percentage drop in more than 18 years. The retailer also forecast a surprise decline in full-year sales at stores open for at least a year and reported weaker-than-expected same-store sales for the holiday quarter, blaming "unexpected softness" in it stores. Target's disappointing results come with the retail industry under pressure from lackluster economic growth, intense competition from (AMZN. O) and other online rivals, and concerns about the impact of President Donald Trump's planned border tax on the import of goods."We've not seen this number of distressed retailers since 2009 in the great recession. This contraction will create opportunities for Target to pick up market share over the long-term," Chief Executive Brian Cornell said during the company's investor day conference. Cornell said the retailer would undertake "aggressive promotional activities" that would erode its operating margins by $1 billion this year. Target also said it planned to invest $2 billion in 2017 on analytics, supply chain and opening 100 more small-format stores such as TargetExpress in urban neighborhoods and college markets. It also laid out plans to launch more than 12 new brands exclusive to the retailer. The changes to strategy echo moves by bigger rival Wal-Mart Stores Inc (WMT. N) two years ago when it aggressively cut prices and boosted its online presence.

Target, however, was unable to act at the time due to high costs related to a massive data breach and its decision to pull out of Canada."Basically, (Target is) doing what Wal-Mart did about two years ago," Edward Jones consumer analyst Brian Yarbrough said."I think they realized that they're going to have to invest to be more competitive. ... Most people thought they were going to take guidance lower, but this is definitely much worse than feared."Target forecast full-year earnings of $3.80-$4.20 per share from continuing operations, while analysts' on average were expecting its profit to top $5.00, according to Thomson Reuters I/B/E/S.

ONE BRIGHT SPOT Target's same-store sales fell 1.5 percent in the fourth quarter, which encompasses the important holiday shopping season. The decline was steeper than the 1.3 percent drop analysts had estimated, according to research firm Consensus Metrix. The company's net sales fell for the sixth straight quarter, declining to $20.69 billion, while its adjusted profit of $1.45 per share was also shy of the $1.51 analysts' were expecting.

One bright spot in the otherwise lackluster results was a 34 percent jump in Target's digital sales. Still, the results compare poorly against those of Wal-Mart, which last week reported higher-than-expected U.S. sales as its low-price strategy paid off and online activity accelerated. Target said it expects same-store sales to decline in the low-single digit percentage range in fiscal 2017, after reporting a fall of 0.5 percent in 2016. Analysts on average were expecting the company's same-store sales to increase 0.4 percent in 2017. Target's shares were down 13.5 percent at $57.90 in morning trading on Tuesday. They hit a session low of $57.36, their lowest since August 2014.

FILE PHOTO - A newly constructed Target store is shown in San Diego, California May 17, 2016.

REUTERS/Mike Blake/File Photo

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