Target gets brutal reminder of turnaround’s challenges from weak holiday season

Struggling in toys and electronics sales, Target reported disappointing sales on Wednesday for the crucial holiday season

Even the head of the retail class proved to be fallible this holiday season.

Target, author of one of retail’s greatest turnarounds in recent years, reported disappointing sales on Wednesday for the crucial holiday season, hurt by a weak performance in key Christmas period staples such as toys and electronics.

The discount chain said comparable sales rose 1.4% in November and December. That was better than the declines at Kohl’s, Macy’s, J.C. Penney, and L Brands’ Victoria Secret, but still below both Target’s own forecasts and those of Wall Street analysts, not to mention anemic compared to the 5.7% jump in the 2018 holiday season.

Shares, which hit an all-time high in November, fell 7% in mid-day trading. The company will report full quarterly results in March.

Though Target says it remains on track to report an 11th straight quarter of sales growth, it was a humbling set of results. Target had been on a tear thanks to the launch of dozens of store brands, particularly in clothing, like Cat & Jack and Universal Thread, that have caught on quickly with shoppers and replaced stale ones.

The chain has also gotten a boost by remodeling stores to beautify them and equip them to also serve as e-commerce hubs and speed up delivery. Indeed, about three quarters of its digital sales growth during the holidays came from its ability to have shoppers drive up to a store, go into a store to pick up an order, or use its Shipt service for same-day delivery. But e-commerce rose a paltry 19% during the holidays, about half the clip as in Target’s third quarter.

Target chief executive Brian Cornell called the company’s holiday number a “tough miss” in a blog post, and said, “While we knew this season was going be challenging, it was even more challenging than we expected.”

As if to remind Target, and retail as a whole, that gains can be fleeting, toys sales were a big disappointment for a chain that placed a big bet on toys since the liquidation of Toys ‘R’ Us in 2018. Target’s toy sales were the same as the year before even though it opened mini-Disney stores inside a few dozen Target stores and set up a redirect to its own site for people browsing a relaunched Toys ‘R’ Us website.

Toys, not traditionally a major category for Target, are key to getting young parents—a demographic Target is banking on to keep renewing its clientele—to make in-store visits. Electronics were also a bust for Target, with sales falling 6%. (Target’s results brought down the stock of fellow Minneapolis-area retailer Best Buy, which will report its results next month.)

“The technology lineup in electronics was far from inspiring this season,” Neil Saunders, managing director at GlobalData Retail, said in a research note.

A big source of solace for Target though was how well its apparel and beauty businesses did. Clothing sales were up 5% as it continued to steal market share from its strip mall neighbor Kohl’s and the department stores, while beauty products rose 7%. Both categories are far more central to Target’s year-round strategy than areas that were a bust.

What’s more, the weak performers like toys and electronics, are disproportionately important to retailers during the holidays, meaning any lingering softness will have less impact on Target as things return to business as usual with the holidays now over. In addition, Target’s ability to use stores to fill online orders has boosted its profitability, allowing it to stick to its full year profit forecast despite the holiday season sales shortfall.

As Moody’s s senior retail analyst Charlie O’Shea, put it to CNBC: “When you start looking at where Target has strength, that is where they need to be strong. Apparel and food are the traffic drivers.”

Still, the results were a sober reminder of how even the most proactive, talented retailers can still stumble as they try to navigate Amazon’s ascent and changing customer behavior, something that will only get harder if the economy cools.

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