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Why Target’s Hot Deals Could Hurt Margins

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Why Target’s Hot Deals Could Hurt Margins PART 1 OF 4

Target Lowered Prices and the Stock Fell

Why investors are worried

Target Corporation’s (TGT) stock fell about 2% on Friday, September 8, soon after the company announced that it’s lowering prices on thousands of products, from cereals to razors. The move is in line with the company’s strategy to attract buyers and remain competitive against bigger rivals, including Walmart (WMT), Costco (COST), and Amazon (AMZN).

However, investors are wary of the fact that price cuts could hurt the company’s margins (as we’ll discuss in the next part of this series), which we saw with Kroger’s (KR) fiscal 2Q17 results. The grocer’s second-quarter profits took a hit as the company’s strategy to beat the competition through price cuts hurt profitability.

Target Lowered Prices and the Stock Fell

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Target’s executive vice president and chief merchandising officer, Mark Tritton, also stated that the company is cutting back on promotions by eliminating “two-thirds of its price and offer call-outs” to simplify marketing campaigns and make promotional deals more customer-friendly and easy to understand. However, Target is “not ditching promotions!” completely, Tritton says.

Grocery stocks fell on Friday

Target stock fell close to 2% on Friday while Kroger stock plunged about 8%, following sluggish Q2 results on price cuts. Costco, Walmart, and Amazon stocks fell 1%, 2%, and 1%, respectively, as investors believe increased competition among grocers will affect these companies’ financials in the near term.

On a YTD (year-to-date) basis, Target stock is down about 21% while Kroger stock fell 39%. Walmart and Costco performed better. They’re up 14% and 2%, respectively, on a year-to-date basis.

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