Best Buy, Target startle investors with plans to overhaul chains

Customers push a shopping cart towards the entrance of a Target store in Chicago on May 16, 2016. : Bloomberg photo by Christopher Dilts.

Brick-and-mortar retailers are increasingly acknowledging the need to make big changes if they want to keep shoppers in their aisles and away from But the cost of modernizing the chains has alarmed investors.

Best Buy Co. and Target Corp. saw their shares tumble in the past two days after announcing plans to overhaul their operations. Though Wall Street analysts agree that the changes are necessary, with traditional retailers facing a do-or-die moment, it’s not clear how much appetite shareholders have for the costly investments that lie ahead.

“The concern for me is, what if they make all these investments and it does not pay off?” said Brian Yarbrough, an analyst at Edward Jones & Co. “Investors are pretty cautious, and they will wait and see.”

The challenges facing the chains are legion. Traffic at many shopping centers has dwindled, price competition is heating up, and 65 million Americans are already Amazon Prime customers — locking them into a system where they can get one-hour free delivery on millions of items and access to exclusive movies, shows and video games. More than two-thirds of the U.S. population aged 14 and over will buy something online this year, according to researcher eMarketer.

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Against that backdrop, Best Buy vowed to expand its online operations, offer more higher-margin services and expand internationally. A shrinking U.S. consumer-electronics industry makes the new approach necessary, the company said, as demand for smartphones, tablets and video games levels off. But Best Buy acknowledged that the plan will weigh on profit this year, sending the shares down as much as 5.6 percent, the biggest intraday drop in more than three months.

At Target, the goal is to cut prices, refurbish stores and open more smaller locations in cities and near college campuses to better compete with Amazon and Wal-Mart Stores, which embarked on its own multibillion-dollar price reduction campaign in 2015.

“The retail industry is in the midst of a seismic shift,” Target Chief Executive Officer Brian Cornell said at an investor presentation Tuesday. “We can bemoan changes in the marketplace or embrace them.”

That embrace will be painful, though, as the Minneapolis-based retailer slashed this year’s earnings estimates by about 25 percent and said it doesn’t expect profit to grow again until 2019 at the earliest. Analysts including Mark Astrachan of Stifel Financial Corp. also questioned the wisdom of entering a price war against the likes of Wal-Mart. Target’s shares fell 12 percent Tuesday, the most in more than eight years.

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While it’s commendable that Target recognized the need to shake things up, “some of its initiatives will likely cause considerable pain in the short run,” UBS Group analyst Michael Lasser said in a note.

For some troubled chains, any signs of change are welcomed. Sears Holdings Corp.’s shares soared Feb. 10 after CEO Eddie Lampert vowed to lower its debt burden and cut annual expenses by at least $1 billion. But investors punished fellow department-store chain J.C. Penney Co. when it announced it was closing as many as 140 stores last week, citing the need for “aggressive action.”

Still, the growing roster of battered retailers provides a grim reminder to Cornell and Best Buy CEO Hubert Joly of what happens to companies that fail to move with the times. Best Buy once competed fiercely with rival Midwestern electronics retailer HHGregg Inc. But after years of steady growth, fueled by sales of big-screen TVs, the 61-year-old chain is now preparing to file for bankruptcy amid plunging revenue, people familiar with the matter said last week.

“If they don’t change,” Yarbrough said, “they are dying a slow death.”

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Bloomberg’s Molly Smith contributed.