Target Corp.’s lackluster sales and its plans to spend $7 billion over the next few years on a reinvention of sorts has Wall Street preparing for an uphill financial battle.
Fitch Ratings affirmed its “A-” rating for the megaretailer, but revised its outlook to negative from positive given Target’s 42.7 percent decline in fourth-quarter net earnings and a 4.3 percent dip in sales.
The financial agency said the revision “acknowledges the accelerated impact of changes in consumer shopping preferences on Target’s near-term results” as well as the “significant investments” the retailer is looking to make with the aim of regaining market share Fitch said has been taken by “online and discount peers.”
“Fitch has reduced confidence in Target’s ability to maintain or grow market share over the long run, given online encroachment in many of its categories and Target’s pricing perception at the upper end of the discount sector,” the firm said.
Fitch added that a rating downgrade is possible if Target “does not exhibit signs of comp stabilization” by the latter half of 2018.
On the other hand, the agency said a rating upgrade was in the cards should the retailer “gain traction on its strategic initiatives,” namely in the form of sustained growth in comp sales of at least 2 percent and stability in its debt position.
Fitch also noted that Target has a strong liquidity position, with cash at the end of January totaling $2.5 billion and an unsecured credit facility for another $2.5 billion that expires in 2021.
After announcing fourth-quarter and full-year financial results that show earnings down 18.6 percent over 2016 to $2.74 billion on a 5.4 percent drop in sales to $20.6 billion, Target said it’s looking to make some big, expensive changes.
The retailer expects to spend $7 billion over the next three years on a capital investment program and sacrifice $1 billion in annual operating profits this year with the aim grow sales faster and capture market share against better-performing rivals like Wal-Mart Stores Inc. and TJ Maxx.
Within those expenditures are plans to renovate more than 600 stores, giving them more space for fashion storytelling and digital connection, Target’s chairman and chief executive officer Brian Cornell said. The company will also launch at least 12 brands over the next two years, mainly in home and fashion categories.
“The consumer told us that some of our brands have gotten a little tired and a little bit old,” Cornell said. “We’ll go from a series of labels to a collection of brands. We now have a portfolio with a lot of labels but very few brands.”
Cornell also told analysts during Tuesday’s annual meeting that Target was “making some headway” so far this year.
“We’re asking shareholders to make an investment to build a strong company for the future,” he said. “Our goal today is to demonstrate that the investments we’re making are the right decisions for the long term.”