Target's turnaround is slow moving, but progress takes time

  • For Target, many signs point toward progress.
  • But analysts still call out slimmer gross margins, increased pricing pressure in certain categories, and competition from retail rivals Wal-Mart and Amazon.
  • Target is betting on its own strengths, one of those being its private-label brands.

For Target, its turnaround plan isn't yet hitting on all cylinders.

Though the big-box retailer's third-quarter earnings, revenue and same-store sales outpaced analysts' expectations on Wednesday, that news was clouded out as Target put out a very conservative forecast for the upcoming holiday season.

Investors were quick to react, sending Target shares down more than 9 percent by mid-afternoon trade.

All things considered, many signs point toward progress for the Minneapolis-based company. Target's online sales grew 24 percent during the latest period, and the retailer saw an uptick in the number of customer transactions in stores compared with a year ago.

But analysts are calling out Target's slimmer gross margins, increased pricing pressure in certain categories, and competition from retail rivals Wal-Mart and Amazon. And like everything else, progress takes time.

"No retailer of Target's scale and size can implement a quick turnaround in today's retail market," GlobalData Retail Managing Director Neil Saunders wrote in a note to clients.

"The process of reinvention takes time, effort and money — all of which have to be expended before any eventual rewards are reaped," added Saunders. "In Target's case, pressure on the bottom line has come from increased staffing costs, lower prices, and improvements to stores and products."

Target's strategy is vastly different than that of Wal-Mart, which has been on an acquisition run of late, buying up smaller retailers and partnering with outside brands including Hudson's Bay Lord & Taylor. Instead, Target is betting on its own strengths, one of those being its private-label business.

Eight new brands in the apparel and home goods categories have already launched this year, including "Joy Lab" for athletic clothing and "Project 62" for furnishings. Target management has said private-label sales are set to be "very beneficial both short-term and long-term for gross margin rate performance."

But Saunders notably pointed out: "It is taking time to persuade people who have never bought clothing at Target to look again at the offer."

Investments are also pouring into refurbishing Target's existing stores, opening up smaller locations in densely populated markets, and keeping prices appealing to shoppers and in-line with other retailers.

"For Target, we think these investments are intelligent and long overdue, but they will take time to resonate with its core shopper ... leading to some lag between 'investments' and 'results,'" said Gordon Haskett analyst Chuck Grom. "This will remain a headwind for most of 2018."

Chief Executive Brian Cornell explained Wednesday how Target is also expanding its online order pickup service, same-day delivery options, curbside car loading and Target Restock, a program similar to Amazon's Prime Pantry. Additionally, more than 1,400 Target locations today are able to fulfill online orders, compared with 140 stores just a few years ago.

Physical stores are still a vital component to retailers' businesses, Cornell told CNBC's "Squawk on the Street" Wednesday morning. Target ended the third quarter with more than 1,800 stores, in various sizes, nationwide.

"This quarter is another proof point along the journey," Chief Financial Officer Cathy Smith said on a call with members of the media. "I would see it as we're planning prudently," she added regarding the company's fourth-quarter earnings outlook, which falls on the low end of Street estimates.

Heading into the holidays, Target will try to find its footing in a crowded market. To begin, the retailer has hired 100,000 seasonal employees this year to create the optimal in-store experience for shoppers. And Target is betting on its beauty, home, toys and apparel categories to be top performers.

"We enter every holiday season knowing it will be highly competitive and promotional," Smith said on a call with analysts and investors. Target is calling for comparable sales to be flat or better in the fourth quarter, rising as much as 2 percent.

"The company is now in a much stronger position than it was at this time last year, which bodes well for the holiday quarter," said Saunders.

Target will provide a post-holiday financial update on Jan. 9.

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