Target Earnings: Walmart's Playbook Won't Work

(Bloomberg Gadfly) -- What does a CEO do when he's stumped on how to fix his ailing business? Sometimes he rips a plan from his rivals.  

Target Corp. chief executive Brian Cornell on Tuesday outlined a three-year plan to jump-start sales at the retailer, which has fallen out of favor with consumers looking for lower prices and a better in-store and online shopping experience. 

The only problem is, the plan was plucked directly from the playbook of Wal-Mart Stores Inc. -- whose Sam's Club unit Cornell previously led. That doesn't bode well for investors hoping Target can figure out a way to shield itself from the retail bloodbath currently underway. 

Target said it was heading into "a year of investment" and didn't foresee growth until at least 2019. It plans to build more small-format stores, plunge more money into e-commerce, and offer customers the everyday low prices Walmart helped popularize decades ago, which set it apart from retailers that focused on one-time discounts. 

Target also released a dismal earnings report on Tuesday, marking three straight quarters of sales declines, and offered 2017 guidance that fell short of analyst forecasts.

Target shares tanked as much as 14 percent on Tuesday, the retailer's largest one-day drop since 2008.

That's pretty much what happened to Walmart shares back in October 2015, when it, too, announced it was shifting to "investment mode" and didn't expect an earnings rebound until 2019.

In less than 20 minutes that day, Walmart lost the equivalent of the entire market value of Macy's Inc. But it bought something more valuable -- time. 

By resetting investor and analyst expectations, Walmart was able to re-frame subsequent earnings shortfalls as old news. And every quarter it outperformed awful expectations boosted its stock price. Meanwhile, Walmart was free to spend gobs of money on acquisitions, employee wages, and price reductions. 

But this approach has its dangers. It took Walmart's stock a year to start coming back from that October 2015 drop, and the stock still hasn't fully recovered to its $90 high. 

As for where it stands with customers, Walmart continues to lose share to the much scarier and more aggressive player in the fight for shoppers' dollars -- Amazon.com Inc. And while Walmart has managed to stoke same-store sales growth in the U.S., profits continue to suffer. 

Target's running this play with even more disadvantages than Walmart had. As Walmart lowers prices, Target has raised them on some items. As grocery sales across the industry rise, Target has pulled back on its food offerings. And as more shoppers go online for clothes, Target's online growth in that category hasn't been fast enough to match Amazon's rise. 

And Target is getting a later start than its rival. This isn't always a problem in retail; rivals with differentiated or lower-priced offerings can come late to the game and take market share.

But Target has a lot of work to do just to get back to where it was 10 years ago. A little more than a third of U.S. households shopped at Target last December -- in the all-important holiday season -- compared with more than 50 percent of U.S. households in December 2007, according to data firm Kantar Retail.

And at $70 billion in annual revenue -- and $3.4 billion in online sales -- Target is a tiny force compared to Walmart's $308 billion in U.S. sales and Amazon's $98 billion in online retail sales. 

Last November, I urged Target to stop trying to play in Walmart's sandbox. It would only win back its once fiercely loyal customer base if it figured out how to set itself apart. 

Instead, it looks like Target took advice from Walmart founder Sam Walton, who famously said, "Most everything I've done I've copied from someone else." That might have worked for him, but so far it hasn't worked for Target. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

To contact the author of this story: Shelly Banjo in New York at sbanjo@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.