Target's holiday forecast disappoints, sending shares lower

Key Points
  • Target has opted to invest more than $7 billion in capital in itself over the next three years.
  • The big-box retailer will use those funds to launch additional private-label brands, grow in grocery, open smaller-format stores and remodel existing locations.
Target shares under pressure after upbeat quarter. Here's why
Target shares under pressure after upbeat quarter. Here's why

Target on Wednesday reported a bigger-than-expected increase in quarterly same-store sales, a positive sign for the big-box retailer's turnaround plan.

Target also raised its earnings outlook for the full year, though its fourth-quarter forecast, which includes key holiday sales, is lower than analysts' expectations. That sent Target shares tumbling more than 8 percent shortly after market open.

"While we expect the fourth-quarter environment to be highly competitive, we are very confident in our holiday season plans," Chief Executive Brian Cornell said in a statement.

Here's what Target reported for the fiscal third quarter, compared with what Wall Street was expecting, based on a Thomson Reuters survey of analysts:

  • Earnings of 91 cents a share, excluding items, compared with a forecast profit of 86 cents per share.
  • Revenue was $16.67 billion, versus an estimate of $16.61 billion.
  • Same-store sales climbed 0.9 percent, compared with an anticipated increase of 0.4 percent.

The Minneapolis-based retailer is in the midst of a major overhaul to its business, as it fights to keep pace with retail rivals such as Wal-Mart and Amazon.

Target's $7 billion turnaround plan, announced in February, includes refurbishing existing locations, opening smaller stores and making heavy investments online. Target is also growing its private-label brands and expanding in grocery. Some of those brands that have already launched in the apparel and home goods categories include "Joy Lab," "A New Day" and "Hearth & Hand."

Meantime, the company is re-evaluating its pricing strategy, telling customers in September it will slash prices on thousands of items and focus on only the most "compelling" sales. But those investments could also eat into profit margins, analysts have warned.

"Q3 results for Target reflect the impact of its short-term investments for long-term benefit, with margins softening slightly as a result of Target's tactical price investments, as well as the persistent market share battles with Amazon and Walmart in multiple categories," Moody's lead retail analyst Charlie O'Shea wrote in a note to investors.

But, he added: "Margin erosion is being mitigated to an extent by private and exclusive brands, which are resonating with shoppers."

The number of customer transactions climbed during the third quarter, but shoppers' average transaction amounts fell. The company has said its goal is to lure people into its stores more frequently, picking up fewer items all at once.

Total sales climbed 1.4 percent, to $16.67 billion, during the quarter.

Net income fell to $480 million, or 88 cents a share, compared with $608 million, or $1.06 per share, a year earlier. Excluding one-time items, Target earned 91 cents a share.

Higher compensation costs including an increase in employee incentives and wage rates drove expenses higher. Just last month, Target bumped its minimum wage nationwide up to $11 per hour and has committed to paying $15 by the end of 2020.

Comparable sales were up 0.9 percent during the period, compared with a decline of 0.2 percent a year ago.

Target's digital sales increased 24 percent and contributed 0.8 percentage points to total comparable sales growth. Target's online sales now account for 4.3 percent of total company sales, compared with 3.5 percent a year ago.

Looking to the fiscal year 2017, Target now expects adjusted earnings per share to fall within a range of $4.40 to $4.60, compared with prior guidance of $4.34 to $4.54. Annual comparable sales are predicted to climb as much as 1 percent.

For the fourth quarter, Target projects adjusted earnings ranging from $1.05 to $1.25 per share and same-store sales rising up to 2 percent. Analysts on average had forecast earnings per share of $1.24.

Target ended its third quarter with more than double the amount of small-format stores. The big-box retailer has more than 1,800 locations, including 276 stores larger than 170,000 square feet and 44 stores smaller than 49,999 square feet.

Target said it completed 37 store remodels during the latest period and will have finished 110 renovations by the end of the year. Same-store sales of remodeled boxes should rise as much as 4 percent, according to CEO Cornell.

This holiday season, Target plans to hire 100,000 seasonal workers — a 40 percent increase from last year — with hopes of creating a better in-store experience for customers and fulfilling online orders faster and more efficiently.

Currently, more than 1,400 Target locations are able to fulfill online orders, compared with 140 stores just a few years ago.

With Wednesday's declines, Target shares have fallen more than 24 percent in 2017.