Analysis: Despite holiday softness, Target remains on the right trajectory

There is no doubt that Target’s holiday revenue has missed the mark. The 1.4% uplift in comparable sales represents some progress, but it is a long way below expectations and is a sharp deterioration on the third quarter when comparables grew by 4.5%.
 
While not a cause for celebration, neither are the results dire. The increase comes off the back of very strong 5.7% growth last year, which was always going to be a tough number to beat. Moreover, across most of Target’s assortment performance continues to be strong. Comparable sales in apparel rose by 5%, beauty by 7%, and food by 3%. In the first two categories, Target is taking market share; in food it is maintaining share.
 
Unfortunately, several key holiday categories did not play ball. Home sales fell by 1% in comparable terms, toy sales were flat, and electronics dropped by over 6%. Given the volume and significance of all these areas over the holidays, the lack of traction had a disproportionate impact on the overall number.
 
The results in electronics and home are particularly disappointing and, in our view, there are several factors at play here. Some of the softness relates to the later timing of Black Friday, which came much nearer Christmas and it is likely some consumers decided to preserve their budgets for holiday things rather than splash out on big-ticket bargains. Moreover, the technology line up in electronics was far from inspiring this season – something that is largely out of Target’s control – but which nonetheless affected sales.
 
The good news is that despite the value it generates, electronics is a very low margin category, so deterioration in this segment will not be particularly damaging to profits. This is one of the reasons Target has preserved its earnings guidance for the quarter.
 
Toys was a very competitive area over the holidays. And while Target did make some market share progress, extensive discounting, offers and generally lower prices all squeezed the sales line. The only crumb of comfort here is that Target was not alone in feeling this pressure.
 
Overall, Target remains a good retailer on the right trajectory. It may have stumbled and slowed over the holidays, but it is still one of the most attractive runners in the retail race.