Target Corp. shares tumbled more than 10 percent to $69 in midday trading Tuesday after the retailer reported third-quarter earnings per share of $1.09. The result fell short of Wall Street’s expectations of $1.12 per share, even though it represented a 20.2 percent increase over the 90 cents posted a year earlier.
Revenue advanced 5.6 percent to $17.8 billion in the period ended Nov. 3, from $16.9 billion, and net income shot up 30.2 percent to $622 million from $478 million.
Same-store sales advanced 5.1 percent compared, slightly less than the 5.2 percent expected. Gross margin rate declined to 28.7 percent compared with 29.6 percent a year earlier.
Prior to the start of the important holiday season, Target’s digital sales rose 49 percent in the third quarter, “far outpacing the industry and the vast majority of our peers,” said chairman and chief executive officer Brian Cornell, noting that digital sales contributed 1.9 percentage points to Target’s same-store sales growth. Transactions at stores saw a 5.3 percent increase, but shoppers’ average ticket fell 0.2 percent.
As other retailers continue to close stores or even liquidate, Target is ready to capture sales and market share this holiday season, Cornell said. “We’re poised to benefit from far greater scale across all initiatives. Growth is being driven by small format locations opening in dense urban locations and on college campuses. These stores have high productivity, allowing them to deliver strong financial returns, while allowing Target to serve a guest we wouldn’t have served in the past.
“We’re working to ensure we’re priced right daily, while delivering the appropriate number of clear, compelling drumbeat promotions,” Cornell said. Target is investing in hours, wages and training for sales associates to differentiate the shopping experience in stores, and capabilities such as delivery of target.com orders from stores and new digital innovations to make shopping faster and easier.
“We continue to benefit from a very healthy consumer and economic backdrop,” Cornell said. “We have the balance sheet to invest in our future.”
The retailer expects fourth-quarter comparable-store sales of 5 percent, noting that operating income will see a small decline reflecting continued pressure on the gross margin line. For the full year, Target reiterated its earlier forecast for adjusted EPS of $5.30 to $5.50.
During a conference call, retail analysts were concerned about erosion of the gross margin rate, which Target attributed to higher supply chain costs driven by growth in digital fulfillment costs and other expenses tied to holiday-related inventory receipts compared with last year, partially offset by the benefit of merchant initiatives.
“Target’s third-quarter results reflect the continued favorable impact of the retailer’s multiyear investment strategy with impressive sales growth both in stores and online,” said Charlie O’Shea, Moody’s lead retail analyst. “With market share gains across all five core merchandise categories, offerings are clearly resonating with consumers, with the myriad private and exclusive brand rollouts leading the charge. Promotional cadence and pricing discipline will be key for the holiday season as Target continues to battle Walmart, Amazon and Best Buy for [market share] in key product categories such as toys and consumer electronics.”
In a research note, Jefferies said, “Despite healthy comps and traffic gains as new fulfillment options are received well by customers and solid merchandise execution continues, the third quarter widely missed consensus. Results reflect some element of transitory transportation costs to build holiday inventory, but the continued shift in the online mix and investment spending required to remain competitive in today’s market is likely to dog margins.”
Cornell said: “We’re optimistic about our ability to deliver profitability next year and beyond. We plan to leverage our current momentum into 2019, when we’ll achieve greater scale across the full slate of our initiatives, creating efficiencies and cost-savings, and further strengthening our guest experience and positioning Target for profitable growth in the years ahead.”
For the fourth quarter, Target expects comparable-store sales growth of 5 percent, consistent with its year-to-date performance.
Third-quarter operating income margin rate was 4.6 percent, compared with 5 percent in 2017. Third quarter SG&A expense rate was 22.1 percent in 2018, essentially flat to last year. Third-quarter SG&A results reflected continued investments in associates, including hours, training and wages, which were offset by continued cost discipline across the enterprise.