Target Corp. on Wednesday said it grew sales and profits in the third quarter of 2015. While earnings met Wall Street’s expectations, a slowdown in digital growth irked investors, pushing the retailer’s stock down 5.1 percent to $69.19 on the New York Stock Exchange.
Minneapolis-based Target saw a 56 percent increase in profit for the quarter to $549 million, or 87 cents a share, from $352 million, or 55 cents a share, in the 2014 third quarter. Adjusted earnings per share in the third quarter of 2015 rose 8.6 percent to 86 cents, from 79 cents in the 2014 third quarter. Adjusted EPS came in above the midpoint of the retailer’s guidance of 79 cents to 89 cents a share. Target raised its full-year EPS guidance to between $4.65 and $4.75, from a previous $4.60 to $4.75. For the fourth quarter, Target forecast adjusted earnings in a range of $1.48 to $1.58 a share, compared with $1.49 in the 2014 period.
Sales for the third quarter ended Oct. 31 rose 2.1 percent to $17.6 billion from $17.3 billion in the year-ago period, reflecting a 1.9 percent increase in comparable-store sales and sales from new stores. In signature categories such as style, baby, kids’ and wellness, comps advanced more than 2.5 times the company average.
Digital sales rose 20 percent, contributing 0.4 percent to comp-store sales growth. While Target’s digital sales growth is outpacing the industry, the retailer was expecting a lift of 30 percent.
Earnings before interest expenses and income taxes were $962 million in the third quarter of 2015, an increase of 5 percent from $916 million in the 2014 third quarter.
Third-quarter margin rates for earnings before interest, taxes, depreciation and amortization and earnings before interest and taxes were 8.6 and 5.5 percent, respectively, compared with 8.4 and 5.3 percent in 2014. The gross margin rate was 29.4 percent in the current third quarter, compared with 29.5 in the 2014 period. Target experienced continued margin pressure from its investments in innovation and quality in its owned and exclusive apparel brands, and pressure from reimbursements in the pharmacy business.
The spending, general and administrative expense rate in the third quarter was 20.7 percent, compared with 21.1 percent in 2014.
“We’re pleased with our third-quarter financial results, as both sales and adjusted earnings per share were near the upper end of our expectations,” said Brian Cornell, chairman and chief executive officer of Target. “The third quarter marked the fourth consecutive quarter in which we have grown traffic, and Target’s sales growth continues to be led by our signature categories. Our momentum is encouraging, especially in the face of stiffer prior-year comparisons.”
Like Wal-Mart, Target was hit by softness in electronics, which posted a double-digit decline in the 2015 third quarter. Wearable devices, a standout, saw a 100 percent jump in comparable sales. Toys logged a 12 percent increase in the third quarter. Target posted solid back-to-school, back-to-college and Halloween sales and women’s ready-to-wear, kids’, wellness and food showed strong results.
The company is gearing up for the holiday by distributing 40 million copies of a 700-page gift catalogue. The retailer launched a kid gifting hub on target.com and is promoting one toy each day at half price on Cartwheel, its mobile app. “We’re one of the few retailers offering the Apple watch in stores this season,” Cornell said, adding, “More than 80 percent of our guests start their shopping activity online.”
The retailer is taking an aggressive stance on Black Friday, with 10 days of deals prior to the main event and pre-Black Friday deals that will be available on Nov. 25. Target stores will open on Thanksgiving Day at 6 p.m.
Target doesn’t want to leave any holiday sales on the table due to out-of-stocks. “If guests don’t believe they can rely on Target, they’ll begin to skip some trips,” said John Mulligan, executive vice president and chief operating officer. “Our in-stock metrics on our core products had deteriorated.” The retailer modernized its supply chain, adjusted planograms, reduced lead times in distribution centers and tightened delivery windows.
In addition to offering free delivery on holiday orders placed online, Target doubled the percentage of digital items delivered in a three-day window, expanded ship-from-store to 300 more units and opened in the third quarter two new direct-to-consumer fulfillment centers.
Target is trying to elevate the shopping experience both digitally and in stores. At 25 units that it’s remodeling in Los Angeles, dedicated ambassadors will be employed to help customers understand the retailer’s digital capabilities. Enhancing the in-store experience includes hiring 1,400 visual merchandisers to work with mannequins, fixtures and layouts in the women’s apparel department.
Target’s full-year 2015 guidance calls for a 1.5 to 2.5 percent increase in comp-store sales. “We delivered a 16.9 percent increase in adjusted EPS so far this year, and with our fourth-quarter guidance, we’re on track to deliver double-digit increases for the full year,” said Smith. “We feel confident entering the holiday season. Our third-quarter plans were based on the knowledge that we were facing tougher prior-year comparisons.”