Target’s Shares Drop on Worries Over Holiday

The retailer reported a sharp decline in profits for the third quarter, but expressed confidence over its holiday strategy.

Target Corp. shares on Wednesday plummeted more than 9 percent, following the retailer’s release of its third-quarter financial results, which included a lackluster outlook for the year’s final period, while acknowledging the challenges of what promises to be a brutally competitive holiday season.

While Target Corp. grew traffic and sales in the third quarter ended Oct. 28, the Minneapolis-based retailer’s net income declined 21 percent to $480 million, from $608 million in the 2016 third quarter. Earnings per share of 87 cents were near the high end of the retailer’s guidance range of of 75 to 95 cents per share, beating Wall Street’s consensus estimate of 86 cents.

Sales increased 1.4 percent to $16.7 billion from $16.4 billion in last year’s period, reflecting a 0.9 percent comparable sales increase and sales in non-mature stores. Comps in last year’s third quarter fell 0.2 percent. Target said its digital channel is growing at twice the industry’s pace, with comp sales advancing 24 percent, which contributed 0.8 percentage points to comparable-sales growth, indicating comps at the retailer’s physical stores were basically flat. Segment earnings before interest expense and income taxes, Target’s measure of segment profit, were $869 million in the third quarter, a decrease of 17.8 percent from $1.1 billion in the 2016 third quarter.

The third-quarter margin rate of earnings before interest expense and income taxes was 5.2 percent, compared with 6.4 percent in 2016’s period. Target’s third-quarter gross margin rate was 29.7 percent, versus 29.8 percent in 2016, reflecting pressure from digital fulfillment costs and the retailer’s pricing and promotional strategies, which was partially mitigated by cost savings. The third-quarter SG&A expense rate was 21.1 percent in the 2017 period, compared with 20.3 percent in 2016, driven by higher wages, also partially offset cost-savings efforts.

“We’re very pleased with Target’s third-quarter performance, including traffic and sales growth that demonstrate we’re building on the progress we saw in the first half of the year. The investments we’re making in our business will help Target drive long-term success and ensure we’re well positioned to deliver for guests in the all-important holiday season,” said chairman and chief executive officer Brian Cornell, referring to a $7 billion capital investment plan and $1 billion in annual operating profits, starting this year and earmarked to grow sales faster and gain market share.

Cornell contended the retailer’s investment in elevating sales associate’s expertise in several categories, along with being priced right daily and impressive deals, will result in success during the holiday season. The retailer last month raised associate wages to $11 an hour, with plans to reach $15 by 2010. Target’s eight new exclusive brands, include Hearth and Hand with Magnolia, a home partnership with Chip and Joanna Gaines, is highly promising, with consumers standing on line for its launch, he said.

Mark Tritton, evp and chief merchandising officer, said Target in the third quarter registered “a multibillion increase in regular price sales, which more than offset declines in discount sales.” Supported by Target’s “Run and Done” marketing campaign, the retailer saw an increase in quick fill-in trips as well as strong performance in discretionary categories.

Electronics and hardlines led the store in the third quarter with double-digit and single-digit comp increases, respectively. Apparel and accessories had “strong market share gains in a space where spending is declining,” Tritton said, adding that Target’s three new apparel labels, A New Day, Joy Lab and Goodfellow & Co. “generated strong sales and traffic results. Beauty continued to gain market share with our differentiated assortment, first-to-market launches and service model with in-store beauty experts.”

Investors weren’t impressed by the retailer’s fourth-quarter guidance, despite assurances from Cornell that “we don’t expect to see any deterioration in the progress we’ve been making throughout the year. The stores are performing incredibly well.”

Comparable fourth-quarter sales were seen as being flat to 2 percent ahead of last year’s period. For the full-year, comparable sales were projected as flat to up one percent. Fourth quarter EPS was projected to be in the range of $1.05 to $1.25, and $4.38 to $4.58 for the full year.

Gordon Haskett analyst Charles Grom said Target’s operating margins need to come down. While Target didn’t explicitly discuss 2018 EBIT margins on its call, it was clear the retailer believes future market share gains will come at a cost, Grom said, adding, “investments in stores and lower prices and ramping up of digital capabilities are intelligent and long overdue investments, but they may take time to resonate with core shoppers.”

Target, which unveiled 12 new stores during one week in October, has also been retooling its supply chain to offer new fulfillment options such as ship-from-store, with basket sizes six to nine times larger than average. Cornell attributed Target’s 1.9 percent increase in comp store traffic to “existing guests shopping more often, but also new guests coming to our stores and visiting our sites.

“With three-fourth of the year behind us, we’re on track or ahead of delivering all of our goals,” Cornell said. “While we expect the fourth-quarter environment to be highly competitive, we’re very confident in our holiday season plans.”