Like many a retailer before Target (TGT), the big-box department store chain announced a dismal sales performance for the most recent holiday period.On January 18, 2017, Target announced that its comparable sales fell 1.3% during the November-December holiday period. This number includes digital sales growth of greater than 30 percent. When we back out digital sales, comparable sales fell more than 3% during the period. Alongside these worse than expected results, the company has offered an update to its 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.

For full-year 2016, Target now expects GAAP EPS from continuing operations of $4.57 to $4.67, compared with prior guidance of $4.67 to $4.87. The Company expects full-year 2016 Adjusted EPS of $5.00 to $5.10, compared with prior guidance of $5.10 to $5.30.

Given the previous adjusted EPS guidance, the miss is pretty substantial. It should also be recognized that the substantial miss comes with the company having boosted its share repurchase program this year to $5bn. The brick and mortar sales declines combined with the sales lost from its pharmacy business (sale of business segment to CVS) are having a greater impact on all aspects of Target’s metric performance, but most importantly the share price performance. 

In truth, and as I’ve said many times before, nothing really works for Target in the way of becoming a better retail operator. The failures are numerous and ongoing and this recent holiday period is just another example of Target’s woes. After a 1.2% comp sales performance in Q1 of 2016, it’s been all down hill. In Q2 the company exhibited a 1.1% decline in comp sales followed by a .2% decline in Q3 2016. It should also be known that after a dismal Q2 period the company lowered its FY16 guidance significantly.

This lowered guidance was the only reason for the stocks surge after its rather poor performance in Q3 2016.In fact, the only reason Target achieved the beats for top and bottom line during the Q3 period was due to lowering the bar enough to jump over, even if ever so slightly. I offered this analysis after the Q3 beat as follows: 

The earnings outperformance came with $16.44B in revenues (-6.6% Y/Y) that beat estimates by $140mm. Such a significant beat on top and bottom-line signal that Target simply lowered the bar too much and jumped over that very low bar/guidance.

So what is next for the struggling retailer one might ask?Let’s discuss the stock price first and then dig a little deeper into the possibilities for the retail operator.Buckingham Research has taken a rather strong stance regarding the possibility that Target may continue to witness sales declines.  

“We are taking a much more conservative view on future results and now believe it’s reasonable to start with the assumption that TGT may never generate a positive annual comp again, or at least not before the e-commerce channel matures. In this admittedly dire scenario, we still see value in TGT shares, notably the company’s ownership of nearly all its real estate (we estimate this is worth more than the equity value) and robust FCF (averaging ~$5.50/share going forward) which the company returns to investors via dividends or share repurchase."

Goldman Sachs (GS) also weighed in negatively by cutting Target from Neutral to Sell. Target's price target was cut to $67 from $77. 

Analysts believe Target "has fared better than most in the face of" the shift to e-commerce, with margins falling less than other retailers. But the company is facing growing competition with Amazon in apparel and consumables. A proprietary Goldman Sachs survey found that Target customers are more likely than customers of other discounters to have a Prime membership, with penetration reaching more than 50% in the last six quarters. "Customers who indicated they prefer shopping at Target also marked that they often shop for apparel, books, health and wellness and cosmetics online - most of which are in Target's 'Signature Categories,'" the note said. "As Amazon's offerings in these categories continue to expand, we are concerned about Target's ability to maintain its growth rates and market share given high Prime penetration of the customer base."

The downgrade to sell seems a bit of an overreaction, but when compared to the results and the stock’s performance over the last 2 years, one can’t help but to recognize the losses on capital invested. Over the last 2-year period, shares of TGT have decayed by roughly 11.5% in value. When adjusted for a taxable dividend, investors would have still lost nearly 5% of their invested capital.Two years is a relatively long period for which to dedicate capital where that capital is exhibiting losses. More importantly, the capital losses are in-line with a poor performance by the Company. With few expected improvements anticipated from Target near to mid-term, the sell rating offered by Goldman Sachs may be warranted in favor of greater opportunity for capital appreciation elsewhere. 

Target is clearly struggling and exhibiting much of the same issues that are plaguing other brick and mortar retail operators like J.C. Penney (JCP), Macy’s (M) and Kohl’s (KSS) just to name a few. Despite double-digit e-commerce sales from these traditional retail operators, the sales growth is not enough to bridge the gap from declining core operations. As Target continues to improve its assortment and key category performance in stores, the retailer understands that even when competing online, its cost to do so is actually cost prohibitive.In a world whereby consumers are transacting online, Target is forced to forgo profits for the sake of sales.  This can be no more demonstrated than with Target’s decision to allocate free shipping during the holiday period. On October 25, 2016, Target announced that all digital sales would accompany free shipping through January 1, 2017. Can you imagine buying an item for less than $5 on-line and paying no shipping. Somebody has to pay for that item to be shipped and as such Target bore the brunt of that cost during the holidays, which likely served to impact its gross profits and earnings performance. All signs pointed to a rough holiday quarter for Target and with the latest sales and profit update, investors are reeling with dismay.

Target’s path forward will likely be much of the same as it has always been. The company will continue to refine its product assortment and mix between brick and mortar and e-commerce sales.Acquisitions will likely also occur going forward as its chief competitor in Wal-Mart (WMT) has recently acquired Jet.com in efforts to tackle e-commerce business more expeditiously. While I do indeed laud Target for many of the changes to its merchandising strategies in recent years, the implementation of mannequins and focus on women and children’s apparel, I can’t help but to recognize the black hole in every single Target store that is the Men’s department. The dead space that has proliferated in menswear for the retailer has been an issue for years, possibly decades. And if investors go back and read a decades worth of quarterly transcripts, the company almost never makes any mention of menswear or sales from men’s apparel. Some 1,000-2,000 sq. ft. of retail selling space that frankly doesn’t sell. Target can’t afford to alienate any consumer demographic. Maybe it’s about time to do something with this retail sales space rather than glance over it as Target has done in the past. 

Moreover, Target will likely also continue to refine its new store openings and the footprint of those stores between traditional Target formats and smaller store formats. As an investor, don’t be swayed with the consideration of smaller store formats opening in urban areas. While this initiative by Target has been ongoing for a couple of years, the initiative isn’t incremental and Target can’t scale this initiative quickly enough to offset its core business declines. While these smaller stores are seemingly driving strong sales per sq. foot presently, it should be better recognized these sales are being viewed through a small sample size in quantity and against a relatively low sample size of time quality. The true sales strength or weakness from smaller Target stores won’t be recognizable for many years, although management doesn’t want it to be viewed in this light.