UPDATE 3-Target profit misses estimates in holiday quarter, outlook disappoints

disappoints@ (Adds details on outlook, margins, background, updates shares)

NEW YORK, March 6 (Reuters) - Target Corp missed profit estimates for the holiday quarter on Tuesday as it invested to compete better online and in its stores and its financial outlook disappointed some investors, sending shares lower in premarket trading.

The retailer has missed analyst earnings expectations for the fourth quarter for the past two years, and its gross margins for the holiday season were the lowest in 20 years.

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.

The big box retailer 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 huge market-share gains made by Amazon.com Inc and other online retailers over the past decade.

The disappointing results came even as Target poured about $1 billion into boosting sales last year, mainly in its online business and to expand delivery options to take on Amazon, according to analysts. Profit margins were eroded also by a decision to hike employee wages in the fourth quarter.

Target plans to reinvest more than $7 billion back into the company through 2020, the company said in February last year.

The company has focused on doubling the number of small-format stores, aggressively promoting products and keeping grocery prices low to compete with rivals like Walmart Inc , Amazon and supermarket chain Kroger Co.

Excluding items like a boon from a recent cut in the corporate tax rate, Minneapolis-based Target earned a profit of $1.37 per share in the fourth quarter ended Feb.3, just short of the average analyst estimate of $1.38.

Gross margins during the fourth quarter stood at 26.2 percent, lower than 26.6 percent a year earlier.

Shares were down 1.5 percent in premarket trading, after earlier falling more than 4.5 percent.

The retailer's quarterly comparable sales growth of 3.6 percent beat 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.

"Target's fourth quarter and full-year revenue growth indicates that its various investments, including online, stores, and employees, are paying off, with the compression in margins largely due to these expenses," said Moody's retail analyst Charlie O'Shea.

"The promotional environment, particularly during an elongated holiday season, had a bearing on margins as well," he said.

Online sales during the quarter surged 29 percent and contributed 1.8 percentage points to overall comparable sales. The company enjoyed a fourth straight annual increase of more than 25 percent for online sales in the year through Feb. 3. (Editing by Bernadette Baum)