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Why Target’s Comps Are Likely to Stay Negative in 4Q16

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Feb. 24 2017, Published 6:53 p.m. ET

Evaluating Target’s top line performance

Target’s (TGT) top line contracted more than 6% YoY (year-over-year) in the first nine months of 2016. This contraction was primarily due to the removal of pharmacy and clinic revenues from its results and a fall in its same-store sales.

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Sale of Pharmacy and Clinics business

In December 2015, Target completed the sale of its Pharmacy and Clinics business to CVS Health (CVS) for $1.9 billion. Target’s sales were negatively impacted by the sale of this business in all the three reported quarters of 2016. However, its operating margins improved after the sale, which we’ll discuss in the next article.

Fall in sales comps

While Target’s comps improved 1.2% in 1Q16, they fell 1.1% in 2Q16 and another 0.2% in 3Q16. The falls were mainly due to falling traffic in the company’s stores.

However, digital sales remained strong in all three quarters. Comparable digital channel sales rose 26% in 3Q16 after rising 16% in 2Q16 and 21% in 1Q16.

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4Q16 expectations

Target’s management expects a further fall in its comps. It expects them to lie in the -1.5% to -1.0% range in 4Q16. The company’s 4Q16 sales are expected to fall 4.1% to $20.7 billion, but as we can see in the graph above, that would mark an improvement over the last two quarters.

Target’s total 2016 sales are expected to land at $69.5 billion, a fall of 5.7% YoY.

How have Target’s competitors done?

Target’s competitors have shown better top line growths recently. Walmart (WMT), the world’s largest retailer, released its 4Q16 and 2016 results on February 21, 2017. The company reported a 1% rise in its quarterly sales and a 0.8% rise in its annual sales. However, the company missed analysts’ estimates in the quarter.

Costco Wholesale (COST), which reported its quarterly results in December 2016, saw its sales rise 0.9% YoY. The company also missed analysts’ consensus estimates.

Target, Walmart, and Costco make up a combined 15.8% of the portfolio holdings of the VanEck Vectors Retail ETF (RTH). RTH invests in the 25 largest companies in the US retail sector.

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