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Target Disappoints, Outlines Aggressive Investment Strategy

Faced with plummeting profits, Target is taking the long view.

The retailer reported a sales decline of 4.3 percent to $20.69 million for the fourth quarter ended January 28, 2017, compared to the same period in 2016. It also experienced a 42.7 percent drop in net earnings, down to $817 million.

To address flagging sales and to position itself for future growth, the Minneapolis-based retail chain is looking at 2017 as an “investment year.” The company plans to spend $7 billion over the next three years revamping stores, pursuing an everyday low price model and launching private label brands.

These initiatives will take $1 billion out of Target’s annual operating margin, bringing EPS down to $3.80 to $4.20 from the expected $5.00-plus range, according to Thomson Reuters.

Target CEO Brian Cornell insists this is not a sign of trouble, but rather an opportunity for the retailer to gain market share.

“We’re investing to win share — not surrendering,” Cornell said, during the earnings call. “There will be winners and losers in this new era in retail. This plan is all about coming out on top.”

For 2017, the company will focus on boosting analytics, optimizing supply chain and opening more small-format stores, which allow it to open in more densely packed areas, which result in twice the sales.

Like many other retailers, Target’s online sales are its one bright spot. Comp digital sales increased by 34 percent and contributed 1.8 points of comp sales growth. Part of the company’s focus will be on facilitating more ecommerce, including pick up in store.

If the everyday low price strategy sounds familiar, it’s because it has long been the banner for competitor Walmart. Given its dominance in this space, going toe to toe with Walmart in this arena might be risky, analysts say.

“We would also caution that Target should not chase Wal-Mart on price, as it is a battle that cannot easily be won,” Neil Saunders, an analyst with GlobalData Retail, said to investors. “We also believe that many of Target’s issues are not solely price related.”

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To help address the 1.5 percent comp store sales drop in the fourth quarter, the company will be remodeling 100 stores in a bid to upgrade the customer experience and entice shoppers through better visual merchandising. By 2019, the retailer plans to have freshened up 600 locations.

The launch of 12 new house brands follows the success of the merchant’s Cat & Jack collection in kids. Target forecasts these new collections will represent $10 billion in sales in the next two years.

In light of the focus on long-term investment, the company’s Q1 guidance included a low single digit decline in comp sales.