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Retail

Target Shares Drop On Plan To Adopt Wal-Mart's Discount Playbook

Target Corp. shares plunged as the struggling retailer announced plans to cut prices to get customers back into its stores, taking a page out of rival Wal-Mart Stores Inc.’s playbook.

The retailer projected that the shift to less expensive merchandise -- the details of which may be disclosed an an investor presentation Tuesday morning -- would weigh on sales and profit in the short term. That disappointing forecast came on the heels of a fourth-quarter performance at the low end of the retailer’s projections.

“We are stunned -- we thought they were going the other way, with higher-margin stuff,” said Brandon Fletcher, an analyst at Sanford C. Bernstein & Co. “We await further discussion at the investor meeting because we believe there is a better path, and we want to know why they stepped off into the wild.”

Target’s new strategy follows a gameplan employed over the past year by Wal-Mart. The world’s largest retailer is spending as much as $6 billion to lower prices across its aisles, according to Wolfe Research analyst Scott Mushkin. Wal-Mart Chief Executive Officer Doug McMillon said last week that “customers are responding” to the reductions, after the company reported its highest quarterly same-store sales increase in more than four years.

In contrast, Target’s gloomy outlook signals that CEO Brian Cornell has more work to do to reverse the weak traffic that marred its holiday season. Only 35% of US households shopped at Target in December, compared with 53% who did so in December 2007, according to data tracker Kantar Retail. Cornell also said the retailer will introduce more than 12 new brands to entice shoppers.

“What they are doing is not working,” said Amy Koo, an analyst at Kantar. “They need to fix their trip problem. They have to get more shoppers in the door, or get them to shop more often.”

Profit in the current fiscal year will be $3.80 to $4.20 a share, excluding some items, Minneapolis-based Target said Tuesday. Analysts estimated $5.34, on average.

The shares fell as much as 15% to $56.80 in early trading in New York. Target already had slid 7.4% this year through Monday’s close.

Target’s fourth-quarter results came in at the bottom end of forecasts the company provided last month, which represented cuts from its original earnings guidance. Profit was $1.45 a share, trailing analysts’ $1.51 average estimate. Same-store sales slid 1.5%, missing projections for a 1.3% decline.

The new brands could represent $10 billion in sales, Target said, and would follow the successful introduction of home decor label Pillowfort and kids’ apparel line Cat & Jack. Still, the new items were overshadowed by Target’s decision to reduce prices in the face of disappointing sales. Target said it expects a low to-mid-single digit decline in first-quarter comparable sales.

“While the transition to this new model will present headwinds to our sales and profit performance in the short term, we are confident that these changes will best-position Target for continued success over the long term,” Cornell said.

News by Bloomberg, edited by ESM. Click subscribe to sign up to ESM: The European Supermarket Magazine.

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