Last week, Target Corp. (TGT) offered a rather gruesome outlook for 2017 that came on the heels of a very weak Q4 2016 performance. Much of the Q4 results were offered in a preliminary warning to investors on January 18^th in a press release. At that time, the company had experienced an underwhelming and below guidance holiday period with comparable sales in Target stores declining more than 3 percent, partially offset by digital sales growth of more than 30 percent. But at less than 5% of total sales for the retailer, digital sales simply couldn’t offset where greater than 95% of sales are transacted, in stores. Target was forced to lower their Q4 2016 guidance as follows:

• Target now expects fourth quarter comparable sales in the range of (1.5) percent to (1.0) percent, compared with prior guidance of (1.0) percent to 1.0 percent.
• In fourth quarter 2016, Target expects both GAAP EPS from continuing operations and Adjusted EPS of $1.45 to $1.55, compared with prior guidance of $1.55 to $1.75.

When Target finally reported the consolidated results for the Q4 period, the lower end of the ranges for both revenues and EPS were achieved as offered in the previously revised guidance. Additionally, the reported total net sales of $20.69bn for the quarter missed analysts’ estimates by roughly $50mm and resulted in a YOY sales decline of roughly 4.3 percent. But the Q4 results were not the worst aspect of the reporting period for Target and its shareholders, as I will further outline. So buckle yourselves in, because this is going to be a long body of work. 

Target’s guidance for 2017 was abysmal!It was the worst guidance from the company since it fell into the calamity surrounding the 2008-2009 Financial Crisis. At the crux of Target’s 2017 guidance, the company has forecasted EPS to fall all the way back to levels expressed in 2014.In 2014, Target earned an adjusted EPS of $4.22. It grew to $5.01 in 2016. That growth was highly artificial in nature and somewhat financially and operationally engineered with share repurchases, selling of assets and closing of certain operations. Finding the Target Canada venture to come at a high cost to profits in 2013 and 2014, CEO Brian Cornell with the Board’s approval, decided to forgo the Target Canada venture and closed down all Target Canada operations.I reported on this discontinuation of Target Canada operations in an article titled Target Did Not Have A Snowball's Chance In Canada. 

Post this capital-depleting venture, all that previously disposed of profit that went into Target Canada, now flowed through to the bottom line and artificially grew earnings into 2015. One would naturally believe that without the Target Canada overhead and overhanging issues plaguing the retailer in 2015 and 2016 management would have been more focused on the core Target business, but obviously, that belief fell short on profit and sales performance. With respect to the offered 2017 earnings guidance, Target expects GAAP and adjusted EPS of $3.80 to $4.20. As it pertains to sales/revenues, Target is planning for a low single-digit decline in comp sales this year. While the average analyst estimate for sales presently only anticipates revenues to decline by ½ percent in 2017, I would be of the opinion that this average estimate will be modified over the coming weeks and months.

In the last three years, Target has more than doubled its digital sales from $1.4 billion in 2013 to more than $3.4 billion last year. While Target’s digital sales are growing at one of the fastest clips amongst its peers, it won’t be enough to stem the downfall from its storefront sales. Furthermore, Target is investing roughly $1bn in operating margins in 2017 to position itself to invest for the future while taking market share, as the retailer assumes. This all but ensures that earnings will decline significantly in 2017.These investments are aimed at returning to growth possibly in 2019 and assuming all goes according to plan.So for those investors who are of the opinion that the initiatives and investments taking form will bring with them a turnaround soon enough, you may be better served by adjusting that expectation with a long-term focus.

The situation for which Target finds itself was well forecasted and destined to occur.I’ve been chronicling Target’s operations for several years. In 2012, I warned long-term investors about the dangers that surround Target as a supposed darling of the retail industry.Below are my two initial analytical works on Target that began in 2012:

• Target And The Big Retail Bust 
• Target Store Operations: Impact On Earnings Growth Potential, Part 2 Of 3 

Within these linked publications lay the root of the issues that plague the retailer on a continuous basis. They have been in place for decades and if you believe that the company has changed its tune or methodologies, a simple reading of the most recent transcript speaks to the contrary. Target is and will be just as it has been for many decades, a smaller and less trafficked Wal-Mart operation, with it’s own unique flare mixed into the business for differentiation. You don’t have to be a Wal-Mart fan or a Target antagonist to recognize this point of fact as the two retail operators have clearly demonstrated it for decades. Target is a great business nonetheless and will carry forward over the next several decades as it has throughout its history, exhibiting peak and trough periods for which it aims to return profits to shareholders.

In speaking about Target’s transcripts/conference calls, nothing has changed despite the tone of “change and adjustment” to the seismic shift in the retail industry that has been proposed by Target. In other words, don’t believe management’s hype. I warned investors about Target’s management team in the past, and how the team employs their so-called initiatives aimed at addressing its need to change and adjust to business challenges. For the most part, the executive team preys on unwitting investors and analysts’ lack of knowledge on how the general retail operation works. In my article Target Augments Merchandising And In-Stocks After Q1 2016 Shortcomings I take aim at Target’s management team quite directly and with concern for its so-called in-stocks performance initiatives. Again, this is one of those analytical pieces that has not only proven to be most accurate, it is also most informative and like nothing else found in freely published works. The main warning I offer in this publication is the misrepresenting of how incremental its in-stocks improvements can be to in-stocks and the bottom line performance. My many warnings about the company’s operation that would lead to many shortcomings and investor outcry have unfortunately come to pass. From here, Target hopes to return to its so-called glory days. Having said that the reality is that Target is, at the very least, better positioned to improve upon its past performance than most if not all of its peers. A bit late to the “improvement party” comes Target, but better late than never. So let’s take a look at a direct message from Target’s executive team to investors noted below and found in its Q4 2016 transcript:

Now in all candor, 2016 was not our best year, and we’re facing some headwinds as we begin 2017. But we’re asking shareholders to make a meaningful investment, to build a stronger growing company for the future. But in addition to making the capital investments, we’re also investing $1 billion in operating margins this year. We’re investing to win share, not surrender it.

This is definitely a commitment, but not unlike commitments from any previous trough periods that the company has made.  In 2017 and over the next few years the company will refine/remodel several hundred stores…not enough. In 2017 and over the next few years the company will further invest in its omni-channel capabilities to drive sales and profitability… not enough. In 2017 and over the next few years the company will resurrect more small store formats in urban areas around the country… not enough.In 2017 and over the next few years the company will add new brands aimed at duplicating the success of Cat & Jack… not enough. I think you get the picture, right? These are all the right things to do; they are to the advantage of Target to do them and may help to stabilize the business going forward. But in no way shape or form, even in collection, do they have the incremental power to return the company to growth. NO, what will return the company to growth will be the ability of the company to stabilize the business and gain market share as its peers succumb to the seismic shift in retail from a lesser position.

Target’s core problem is the existing business that its management team believes they just need to “speed up” in terms of rolling out all of their initiatives that have been in place for the last couple of years. These initiatives have not proven to offset its core business issues that align with the shift to digital sales. Moreover, for all the company has done in recent years to better understand its core customer and demographics, they’ve not been found in any better position for these studies.Remember the identification of the core Target customer as being the “demanding enthusiast” back in 2015 and at that FY’s Financial Community Meeting. Well if you don’t you’re more than welcome to walk down memory lane as I participated and chronicled the meeting in an article titled Target Executives Outline The Retailer's Path To Future Growth.  

The growth that was supposed to come and be somewhat sustainable from all the initiatives outlined in the 2015 conference, along with its understanding of its core customer demographics was found fleeting. Again, no, no, no, no, no! Target can only be found to stabilize its core business from all these initiatives that come and go with each passing year. If Target truly desires to grow and find that growth sustainable it needs a complete restructuring of its business model.While such a restructuring is highly unnecessary given its position in the retail industry that is what it would take. But no, Target will carry through with all these initiatives, find its peers faltering as they currently are doing so, take modest market share and increase its customer demographics, hopefully. The more consumers Target can appeal to the better, but to date Target hasn’t really addressed that need in a meaningful, impactful manner. If Target implements all these plans/projects and operations to find it hasn’t increased its customer base, it’s all a lot of money spent for the purpose of stabilization and nothing more. And they will do so with investor’s funding the way of course.

Certainly, I carry through these analytics with a subdued and/or negative tone. But let’s face facts, they are and have been warranted as Target has been found greatly wanting and underperforming shy of some financial engineering shenanigans. What financial engineering you might ask? When we look at the retail landscape, retail operators can’t sell assets quickly enough. “But Seth, Target hasn’t done that like Macy’s (M) or J.C. Penney (JCP ) has, you’re off base”. Upon further examination, however, we come to find that Target has done quite a good deal of asset sales over the years.

• Sold credit card portfolio
• Sold pharmacy operation
• Sold Target Canada

I know what you’re thinking, Target Canada wasn’t sold to anybody, but rather liquidated and with significant write-downs. All true as I acquiesce to those notions. But within the liquidation was a lift to the YOY bottom line, akin to what is offered from a direct asset sale and not with respect to core business operations of being a retailer of consumer goods and services. And of course, none of these financial engineering actions come close to the share repurchases made over the last decade that essentially curtailed the float by several million shares. Financial engineering is all well and good until investors get hurt and are forced to realize the true strength or weakness of the core business.

As I’ve outlined in the past several operations that occur in the day-to-day business of a Target store, I could easily outline why every single initiative put forth by Target most recently won’t amount to much.I could tell you why the initiatives surrounding refining store footprints and backroom space is a farce akin to the in-stocks improvements. I could offer as to why the L.A. 25 concept wouldn’t be incremental or why expanding its small store format is of a lesser impact to the bottom line. I could example as to why the acquisition of Chefs Catalogue and Cooking.com was utterly ridiculous and in roughly 2 years Target closed down these businesses. Fortunately, I don’t need to do any of that.In fact, Target’s executives do a bang-up job of outlining how enamored they are with the way things are, shy of some modest improvements and carrying forward these initiatives in a more expeditious manner.

As we all know, we could make changes to maintain our margins through this transition. We could cut store service and cleanliness standards. We could pull back on marketing. We could stop investing in brands and cut back on their quality, and we could stop investing in our stores. Those changes would help our P&L in the short term, but they are absolutely the wrong long-term decisions. So today, as we take our new store experience to a higher level, our team is ready and excited to do more.

Ever heard anybody tout the fantastic service offered at Wal-Mart (WMT)… me either. Ever heard anybody suggest Wal-Mart to be a clean shopping experience…me either. Ever heard anybody suggest Wal-Mart has the highest of quality and best of brands… me either. And yet, Wal-Mart just achieved its largest same-store-sales comparison in years. But I digress, or do I? What is painfully obvious here and with regards to Target’s management team is that they are happy with Target not appealing to the demographic of shoppers along the low-middle income bracket in a more profound way. See, that’s what Wal-Mart has done, is doing and will continue to do and without a focus on wide-open and clean aisles. 

Clean, brands, marketing, services... cry me a river Brian Cornell, cry me a Target red river! But let’s also be truthful with the public and investors; you have cut brands and quality and you’ve lost many vendors over your tenure. You’ve even made packaging cuts to your private label foods. That’s right, go buy a box of Target’s private label cookies, fruit snacks etc. Target reached out to all of its co-packers in 2015. The goal was to cut material packaging expenses by 1/3 across the board.Target was successful in getting its co-packers to go along with this objective as they met the desired outcome.And with that, these product-packaging initiatives find many consumers with packages that are thinly put together and nearly impossible to re-close post the opening of the package.It has prompted many a consumer to return goods to the retailer and posting images and comments of concern to Target’s Facebook page.Of course, this is just one of many subject matters of concern posted on Target’s Facebook page, but now I digress.

Target does no more or less than it feels it has to do and unfortunately it finds itself in a “have to” position today. Brian Cornell was no more qualified to lead Target into the future than he was at his brief stent with Sam’s Club, Safeway and/or Michael’s. In fact, Mr. Cornell has made it a habit of leaving his role within 3 years at previous employers. I raised this very concern with shareholders back in 2014 when he was named the successor to Gregg Steinhaffel. 

Cornell most recently served as the chief executive officer of PepsiCo Americas Foods (NYSE:PEP). Before joining PepsiCo in 2012, Cornell served as president and CEO of Sam’s Club. Cornell also held the position of CEO at Michaels Stores, Inc. (Nasdaq:MIK), and prior to that, executive vice president and chief marketing officer for Safeway (NYSE:SWY). While the list of name brand consumer packaged goods and retail operators do certainly jump off the page for many, performance is key. If we recognize the performance of Sam's Club, Safeway and Michaels Stores over the last decade, we come to conclude that success has not been readily visible from these retailers over this time period. But what is of greatest concern is while Mr. Cornell has held executive titles in the aforementioned companies; he did not do so for any extensive periods of time. In fact, his longest tenure at any company previously named was 3 years. This is hardly enough time to extrapolate any successes or loyalty on the part of a proposed CEO positioned individual.

Regarding Brian Cornell, what is even more disturbing is that his extensive experience in the food and beverage categories have not proven to be of any benefit to Target thus far.Lastly, nobody, including Mr. Cornell himself desires for me to explain his departure from Pepsi. While not too many of the Pepsi executives had admiration or appreciation for Indra Nooyi in those days, Mr. Cornell had a deeper issue with the CEO of Pepsi for which his departure took place. More to the point and in short, Target investors were sold a bill of goods when Mr. Cornell took the helm of Target, one that has proven more expensive than initially considered.

Moreover, I lied. I am going to offer investors and those who simply desire to know more about one initiative offered by Target recently and regarding expanding inventory and meeting the customer’s needs and demands from anywhere in the store. Below is what Target has offered as a new initiative and directly from the Q4 2016 transcript:

 This summer, we’re implementing a program where when a guest wants a different size or color our team members will take care of everything. They will be able to search our network’s inventory, take payment from a mobile point-of-sale system, and arrange home delivery right from the sales floor. We expect to offer this level of service in all stores by holiday.

Now that sounds pretty awesome, right? Target may not have the inventory in store when the customer is shopping and wanting that item so a sales floor associate can check it’s inventory that will be linked to the vendor’s inventory.First, all the best with marketing this service to the consumer; what’s that look like? Second, good luck having the shopper wait around for a floor associate to enable this service. Third, the learning curve is far too great to be incremental going forward if ever. Lastly, but certainly not least, Bed Bath & Beyond (BBBY) has been lending such an extension of customer service for decades. Want a leopard print bedspread you don’t see in-store, they will find it, even if it takes weeks. Want a fringed, burgundy surfer motif bathroom towel collection, they will find it. The first search exists in the Beyond.com store and the secondary search would be by directly contacting the various towel vendors whom supply Bed Bath & Beyond. Most importantly, even with such a unique service in the past and to this day being offered by Bed Bath & Beyond, the retailer finds itself no better than its retail peers. So thank you for the initiative Target and the extended customer service, but it’s not likely going to prove incremental to the totality of your business. But don’t take it from me; take it from one of your retail peers. 

Focus on cleanliness and wide-open aisles all you desire to do Target and while Wal-Mart makes the greatest usage of its sales floor footprint with pallet stacks and fixture islands. And by all means, can Target please not discuss the Menswear department so much in each of its conference calls. Surely that was sarcasm! Target dedicates nearly 4,000 sq. ft. of retail selling space to menswear in its 1,800 stores and it is by far the worst apparel business segment for the retailer. This has gone on for decades. It’s the black hole of every Target store.

The picture above is of a Target Menswear department during the holiday shopping season. It depicts the choices Target’s retail buyers make in assortment. That’s a green suede blazer offered at $79.99. Of course, this was a terrible buyer’s decision for which the product landed in the clearance rack post the holiday period.

4,000 sq. ft. X 1,8000 stores; that’s a lot of wasted space for which the company makes almost no mention of year after year after year.Investors hear a great deal about women’s, children’s and even plus size apparel. Do your own case study and visit your local Target, spend an hour back there in Menswear and see what the findings are. Then do the math.Funny how Target is suggesting it recognizes it needs to changes its retail footprint, assortment, services etc. but some things simply never change as I’ve mentioned in the past 

In juxtaposition, J.C. Penney recognizes its apparel business is flagging downward with every single apparel category expressing declining sales in the most recent quarters. They’ve decided they will utilize former apparel selling space in favor of appliances. Don’t get me wrong, I’m not of the opinion appliances is the right use for this space at J.C. Penney long-term, but at least they are recognizing the need to address a trending problem in consumption habits. Target’s Menswear problems are decades old. Not years, but decades. The last time they reconfigured Menswear was in 2008. But those are just details, details, and details!

“Ok Seth, so Target has turned out to be the nightmare you’ve chronicled… good, fine, great! What now?” Target just told investors that this is an extremely important investment period for which the investments won’t likely exhibit an ROI for a few years.The stock is trading at a reasonable valuation, but that valuation is highly dependent on the company’s ability to show execution. Not an execution of beating estimates, but an execution of not further faltering. It’s nice to have a 4%+ dividend while one waits on Target to get its act right, but in doing so investors must force themselves to recognize they will likely underperform versus a variety of other investment opportunities. The fact is that TGT shares were trading in the current range 10 years ago and have essentially proven to be an extremely poor investment if held for this period of time when compared to the S&P 500. Not all dividend plays are created equally. 

I like shopping at Target; I like the clean atmosphere, wide-open aisles and product assortment. But I could say that about several other retailers. What I can also say is that as a man I only shop at Target for my daughter’s needs as well as odds and ends. I’ve never purchased clothing from Target for myself. I’m a large demographic of the U.S. population that Target is not capturing and likely won’t capture based on current objectives. Nonetheless, Target has an opportunity with modifying its operation through the usage of its exceptional balance sheet, retail footprint and commitment to investing for its future. So is Target a good investment from this point forward? No, it likely isn’t a long-term investment, but rather a great trading vehicle as has been proven over the last decade or so. With $4.7bn currently outstanding on its share repurchase program also, understand the retailer will be slowing this operation down dramatically over the course of 2017. Don’t marry shares of TGT, rent to the benefit of your return on capital invested.