Target sees margins stabilizing in year ahead as profit disappoints

Target Corp said on Tuesday it expects profit margins to stabilize in the year ahead even as they are pressured by investments in store and online operations, sending its shares down more 4 percent in afternoon trading.

To spur growth, Target is revamping its supply chain, strengthening online delivery services, investing in its own brands and employees, and connecting its online and store shopping experiences for customers, Chief Executive Officer Brian Cornell said at an investor meeting at Target’s headquarters in Minneapolis.

Earlier in the day, the retailer reported fourth-quarter profit that missed estimates, gross margins that were at their lowest in 20 years, and gave a disappointing forecast for first-quarter comparable sales. Shares were down 4 percent at $72.10 after earlier sinking more than 5 percent.

“2017 was all about putting down a plan, getting the wheels turning in the right direction,” Cornell said. “2018 is about acceleration, leveraging our greatest assets and leaning in to our competitive strength.”

The retailer plans $3 billion of capital expenditure this year to support those investments, remodel stores and strengthen online operations to stay competitive. In February last year, Target said it would reinvest more than $7 billion through 2020.

The company said it would introduce free two-day shipping without a membership requirement, following larger rival Walmart Inc, which introduced the feature last year on orders of $35 or more. Target did not say if the free shipping was conditional upon a minimum order of a certain value.

Target said more than half its online order volume was shipped or picked up from stores, a key factor driving online sales growth of 29 percent during the fourth quarter. That made it a fourth straight annual jump in online sales of more than 25 percent in the year through Feb. 3.

MISSING EXPECTATIONS

Earlier in the day, Target missed fourth-quarter earnings expectations for a third consecutive year.

Looking forward, the company expects only modest comparable sales growth in the low single digits for the first quarter, with analysts expecting 2.36 percent. It expects adjusted earnings of $1.25 to $1.45 per share, against analyst estimates for $1.40 per share.

For the full year, Target reiterated its forecast from January, expecting adjusted earnings of $5.15 to $5.45 a share, compared to analyst estimates for $5.27 per share.

The earnings miss bucked strong fourth-quarter results from rival brick-and-mortar retailers like Macy’s Inc, Kohl’s Corp and Best Buy Co Inc, who have suffered the most from the market-share gains made by Amazon.com Inc over the past decade.

Profit margins were further eroded by a hike in employee wages in the fourth quarter. In October, the company said it would raise wages for hourly workers to $15 by 2020 and as part of that plan, will raise them to $12 per hour this spring.

In a bid to fend off rivals, Target has focused on doubling the number of its small-format stores, aggressive product promotions and keeping grocery prices low. On Tuesday, it said it will remodel 1,000 stores by 2020. Excluding items, Target earned $1.37 per share in the fourth quarter ended Feb.3, just shy of average analyst estimates for $1.38.

Gross margins stood at 26.2 percent, lower than 26.6 percent a year earlier.

Quarterly comparable sales grew 3.6 percent, beating expectations and was its strongest performance since the first quarter of 2012, thanks to higher customer traffic at both stores and online. Analysts expected a 3.1 percent increase, according to Thomson Reuters I/B/E/S.

Sales grew 10 percent to $22.77 billion, topping the average estimate of $22.53 billion, helped by an additional week in the fourth quarter.