The retailer's December sales disappointed as clothing, housewares and electronics fared poorly. Analysts are questioning its strategy.
Target Corp. didn't get as much holiday cheer as it hoped for.
The Minneapolis-based retailer said Thursday that sales at stores open for at least a year in December, a key growth measure, increased just 1.6 percent vs. an expected 3.1 percent. This was the second consecutive month Target posted a comparable-store gain of less than 2 percent.
The dismal showing, during the crucial holiday shopping season, forced Target to cut its fourth-quarter profit forecast to $1.35 to $1.43 per share compared with its earlier prediction of $1.43 to $1.53 a share. As a result, Target shares dropped nearly 3 percent, or $1.49, to close at $48.51.
Target "disappointed themselves," said Judith Russell, editor of the Robin Report, a newsletter that tracks the retail industry. "They didn't do what they needed to do."
Target's weak performance stands in stark contrast to overall retail industry. The National Retail Federation and International Council of Shopping Centers now think holiday sales will grow closer to 4 percent, considerably higher than their forecasts last fall.
Macy's Inc. said same-store sales grew 6.2 percent, while Ross Stores Inc. reported a comparable-store sales jump of 9 percent.
Overall, Target said food and household essentials, including beauty products, mostly drove its business with same-store sales gains ranging from the mid single digits to low teens.
However, apparel and home furnishings, Target's traditional strengths, fared relatively poorly. Same-store sales for clothing and accessories were up in the low single digits, and housewares dropped in the low single digits.
Even more disappointing was Target's weak sales in electronics, music, books, and movies. The company had spent millions of dollars last year renovating those sections to drive more business.
"December sales were below our expectations," CEO Gregg Steinhafel said in a statement. "In 2012, we'll continue to pursue initiatives designed to deliver compelling value and a superior shopping experience against the backdrop of continued slow and volatile economic growth."
Analysts think Target fumbled with its PFresh grocery format. The retailer has been devoting about 50 percent to 200 percent more space in its stores to fresh produce, meats, and baked goods compared with earlier remodels. Target's strategy rests on the belief that the expanded food assortment would attract more consumers in stores, who, in turn, would buy other merchandise throughout the store.
But that clearly hasn't happened, especially during the holiday season when shoppers focused mainly on buying gifts, said Carol Spieckerman, president of Newmarketbuilders, a retail management strategy firm based in Bentonville, Ark. In fact, the expanded food sections means there was less space in stores for other higher-margin merchandise, she said.
Russell, of the Robin Report, also said Target faces increased competition in categories that it used to see good sales, like clothing, toys, and electronics. In toys, Target was especially aggressive in the holiday shopping season, using promotions to drive sales but which also eroded profits, said Dave Strasser, an analyst with Janney Capital Markets.
If Target stores continue to struggle in 2012, the company's website operations coupled with its expansion into Canada the following year will take on even more importance as the retailer seeks to surpass $100 billion in sales by 2017.
In the meantime, Target needs to better figure out its mix of products, Russell said.
"It's a question of strategy," she said. Target "needs to step back and say what business they want to be in. The company is going through an identity crisis on some level. The food thing is kind of confusing."
Thomas Lee • 612-673-4113