Take a look at these four plummeting stock charts.
New Business Models Are Never Good News – Especially for This Stock
Several of the four charts I showed you above are companies we're shorting in Zenith Trading Circle, so I can't give you all the details. But over the past year, all of them have made drastic organizational changes phrased as "restructuring plans," "new business models," "new strategies," and other euphemisms in their earnings reports. Quite often these plans involve consolidating various branches of the company, closing stores, and laying off workers – all under the guise of improving efficiency and the bottom line.
Needless to say, when you hear a company is trying out a "new business model," that should be a clue to look at their financials, because if their old one was working, they wouldn't need a new one. What "restructuring" really means is "circling the drain."
Nowhere is that more true than for Target Corp. (NYSE: TGT).
TGT reported 4Q16 adjusted earnings per share (EPS) of $1.45, down from $1.52 a year ago and below consensus expectations of $1.51. Same-store-sales dropped 1.5%, and overall sales were down 1.0%. Traffic was up a mere 0.2%, and digital sales were up +34% year over year. Discounting pressured gross margins, which dropped by 95 basis points. The average ticket declined by 1.6%. Earnings before interest and taxes (EBIT) fell by 6%.
As disappointing at the fourth quarter was, the company's guidance for 2017 was much worse. TGT forecast 2017 EPS of $3.80-$4.20, sharply lower than consensus expectations of $5.34. The company is launching a "new business model," corporate-speak for an attempt to reverse poor sales trends that are disrupting the entire retail industry.
The new business plan involves making itself more price competitive (without necessarily making itself the low-cost competitor in every market), launching at least a dozen new private label brands in the next two years designed to generate $10 billion of sales, shifting its supply chain to reduce the amount of inventory in-store, "re-imagining" stores (a fancy name for remodeling its stores to increase their appeal to consumers), and increasing the number of its new small-format stores in urban and college areas.
On its analyst day, where it unveiled its new business model, TGT announced a series of changes to its merchandising, supply chain, and stores that are going to significantly hit margins in 2017 with an expected $1 billion hit to EBIT in 2017 versus 2016 (leaving its EBIT margin at an expected 5.7% this year). It also cuts its sales growth guidance to negative to low-single-digit same-store-sales growth, well below Wall Street's previous expectations. It said that gross margins are expected to decline by 60 basis points on pricing and the impact of shifting more sales to e-commerce. It also plans to spend more on SG&A. The company plans to spend $2 billion on …
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.