Schafer: Glory days of Target's youth may be history

There won't be any real news on the holiday retailing season for a while, but it seems safe to assume that Target's holiday sales are going as well as they usually do.

You know. Sort of disappointing.

The Wall Street crowd is expecting flat comparable-store sales for the fourth quarter, which includes the holiday season. That would match the flat same-store sales performance for December of last year.

Admittedly, sales growth is hard to come by in the industry these days, but the Target of 2013 looks quite a bit different from the Target we had come to know. It's starting to look like a company deep into its middle age. There may be good years still ahead, but the thrill is certainly gone.

Those paying attention to news out of Target this year would say, of course the thrill is gone: a big expansion into Canada went about as well as the rollout of Obamacare.

Forget Canada. Look at what's been happening at home.

Comparable-store sales — sales for stores that have been open at least a year — grew less than 1 percent at U.S. stores through the nine months ended Nov. 2. For the same period of last year, same-store sales were up 3.7 percent.

Target investors this year have heard the same explanation that Chief Financial Officer John Mulligan provided in a conversation last week. Target's customer, while more affluent than Wal-Mart Stores', still isn't exactly part of the top 1 percent. The median household income of the Target customer is $60,000, and she's been cautious.

On the other hand, Jefferies Group analyst Daniel Binder wrote in a research note following release of third-quarter earnings that 2013's sales stagnation "strikes us as more than that."

"Over time the store has become more commoditized and other cate­gories seem to be leaking share to Amazon and others," Binder wrote. "Meanwhile, the part of the story that remains unique — home and apparel — is [trending] down slightly."

The analysts suspect that the continued expansion of Costco stores and other warehouse concepts makes Target less of the place to go for the big American consumer stock-up run. Increasing square footage for dollar stores at the low end has taken some more of the very price-conscious consumer.

Want to run to a Target store for just a single item? Why would anyone do that, when Amazon.com and a host of other e-commerce sites work far better for that?

David Strasser, a senior analyst with the firm Janney Montgomery Scott, said that if he were put in charge of Target he might be more aggressive in trying to capture some additional sales growth with lower prices and more promotions, but it's far from an easy call. "It may not be the environment to take a lot of risk," he said.

Mulligan said he wouldn't use the term "middle-aged" to talk about his company, but he did agree that Target is further along its maturation than it was 10 years ago. He added, however, that growing profitably in retailing in 2013 is so much more challenging than it was in 2003 that apples-to-apples comparisons aren't really possible.

And what hasn't changed, he added, is the financial discipline that guides the company. The company will continue to invest in store remodels, new technology projects and new features in stores. It will take on projects it thinks will foster greater "engagement," meaning getting more of the customers' attention, when it can earn its expected return on invested capital.

So right now, Target just sees fewer of those good investment opportunities than it did in the past.

In the face of all this, it's not surprising that Target has dialed back its growth expectations. It didn't get much attention at the time, but Target this fall told investors that it had backed off its ambition to reach $100 billion in revenue in 2017.

Mulligan told investors that what's now realistic is that U.S. operations can grow an average of perhaps 3 to 4 percent through 2017, allowing the U.S. segment to reach the mid-$80 billion neighborhood.

"While the top line growth is not what it once was," he said last week, "we believe we have the outstanding opportunity, and the strategies in place, to drive significant shareholder value growth."

Target actually hopes to make just as much money per share as in its old $100 billion plan. What's different is how.

The company expects to spend at least $1 billion less on capital investment next year and beyond, compared with 2013, with fewer new stores. The company also expects to be working hard at maintaining margin. With the cash flow and the ability to maybe add some debt, the company thinks it can repurchase up to $4 billion of stock in 2014 and every year beyond. This would have the effect of boosting earnings per share by spreading earnings over fewer shares.

A lot has to go right for Target to achieve its goals, but even if it all comes together, the company will be spending less to reach its earnings-per-share goal rather than selling more.