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Why Target’s 1Q17 Sales Could Disappoint

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Sluggish sales trend

Target (TGT) has been witnessing sluggish sales. The company marked its fifth consecutive quarter of falling sales in 1Q17 as its store traffic fell, hurting its comps growth.

Meanwhile, tough comparables due to the absence of its pharmacy business also remained a drag in the quarter. Target sold its pharmacy business to CVS Health (CVS) for ~$1.9 billion in December 2015.

Target’s sales fell 0.6%, 5.4%, 7.2%, 6.7%, and 4.3% in 4Q15, 1Q16, 2Q16, 3Q16, and 4Q16, respectively. Its comps have fallen in the past three consecutive quarters, reflecting lower store sales.

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If we look at the company’s key metrics, its comps slumped 0.5% in 2016, compared to the 2.1% growth it registered in 2015, mainly on account of a 0.8% fall in traffic. In comparison, Walmart (WMT) and Costco (COST) have reported improved traffic. In fact, Walmart has reported its ninth consecutive quarter of traffic growth.

Outlook

Simply put, Target’s top line is expected to remain sluggish in 2017. The company made a soft start to the year as its management noted a choppy sales environment in February. Given its challenges, the company is expected to report a low to mid-single-digit comps fall in 1Q17.

Target is investing heavily in its business to drive store growth and generate strong digital sales. Notably, in its last quarter, the company’s comparable digital channel sales rose 34%, boosting its comps by 1.8%. Another area to watch is the company’s signature category, which includes style, baby, kids, and wellness. These areas continued to outperform overall comps growth, and they’re expected to remain stable in the current year. However, continued softness in the grocery category, which generates a major chunk of Target’s revenue, could offset the positives.

ETF investors looking for exposure to Target can invest in the VanEck Vectors Retail ETF (RTH), which has 4.5% of its total holdings in the company.

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