Target shares drop on profit miss, wage hikes offset sales gains

Key Points
  • Target's earnings per share fall one penny short of estimates, as the company reports more expenses from wage increases and other investments in employees.
  • But revenue and same-store sales for the fourth quarter top Street expectations.
  • Same-store sales climbed 3.6 percent during the holiday period, and Target calls for a low-single-digit increase in same-store sales for fiscal 2018.
Target's revamp sparks concern over costs
Target's revamp sparks concern over costs

Target's refurbished stores with more open layouts and the launch of several exclusive home furnishing and apparel brands are helping lure more people to shop there.

However, a decision to hike employee wages weighed on profit margins during the fourth quarter. The discount retailer fell short of earnings estimates, sending shares down 4.5 percent by market close Tuesday on the news.

Here's what the company reported for the quarter ended Feb. 3, compared with what analysts were expecting based on a Thomson Reuters survey:

* Adjusted earnings per share: $1.37 vs. $1.38 expected.
* Revenue: $22.8 billion vs. $22.5 billion.
* Same-store sales: 3.6 percent growth vs. an increase of 3.1 percent.

Target's holiday quarter was robust in comparison to some of its peers, with same-store sales rising 3.6 percent and ahead of analysts' expectations. The momentum continued into January, with the company saying same-store sales climbed 4 percent during that month alone.

For the entire fourth quarter, the number of customer transactions and the average amount shoppers spent per trip at Target jumped. Traffic was up more than 3 percent.

Those gains were still overshadowed on Tuesday by the fact that Target's expenses have been climbing, as big investments come with even bigger price tags.

"I think you have a situation where Target is doing a lot of investing in the business," Telsey Advisory Group's Joe Feldman told CNBC's "Squawk Box." But, "I think there is some concern that there is a lot of expense related to this. [Target] may hit the top line, like you saw this quarter, but will we see that flow through to the bottom line?"

Net income for the fourth quarter, which included an extra week than in 2016, totaled $1.1 billion, or $2.02 a share, compared with $817 million, or $1.45 per share, a year earlier. The company reported a benefit of 64 cents a share due to new tax legislation.

Excluding one-time items, Target earned $1.37 a share, one penny short of analysts' estimates. The company said investments in employees increased expenses and thereby hampered profit margins. Analysts said a promotional environment for certain categories — particularly toys — during the holidays likely squeezed earnings further.

Revenue climbed 10 percent to $22.8 billion, slightly topping analysts' forecast of $22.5 billion.

"Our progress in 2017 gives us confidence that we are making the right long-term investments," CEO Brian Cornell said in a statement.

Looking to fiscal 2018, Target is calling for a low-single digit increase in same-store sales. Earnings per share are forecast by the company to fall between a wide range of $5.15 to $5.45, while analysts had forecast earnings of $5.27 a share, which is higher than the bottom of Target's range.

CEO Cornell said he aims to make "2018 a year of acceleration in the areas that set Target apart — our stores, exclusive brands, and rapidly-growing suite of fulfillment options."

The Minneapolis-based retailer has lived in the shadows of Walmart and Amazon but is forging ahead with a plan to reinvest more than $7 billion back into the company through 2020. The money is largely being spent on opening smaller-format stores, redesigning existing locations, rolling out more private-label brands and upgrading Target's mobile app, Cartwheel.

On Monday, Target said it will complete roughly 325 additional store remodels across the U.S. in 2018, following 110 last year. The company ended 2017 with 1,822 stores, more than double its number of smaller-format locations, which are typically found in dense, urban markets and near college campuses.

Among other upgrades, Target's remodeled stores are beginning to feature more fresh food, produce and prepared options for shoppers in a hurry. Target also has applied for liquor licenses in some areas so that it can add dedicated wine and beer shops, which analysts have highlighted as a potential revenue driver.

In launching new brands and making these investments in stores, the company has seen its performance improve. Last holiday season, for example, Target reported a 1.5 percent drop in same-store sales.

The company also continues to make gains online. 2017 marked the fourth-consecutive year Target saw digital sales growth of more than 25 percent. Digital sales accounted for 8.2 percent of the company's revenue mix in the fourth quarter, compared with 6.8 percent a year ago.

Online sales climbed 29 percent during the holiday period, contributing 1.8 percentage points to Target's same-store sales growth. The company has been expanding the option for shoppers to order online and pickup items in stores (in some cases curbside), leveraging both its digital and physical assets.

Late last year, Target acquired delivery service Shipt for $550 million, showing it was serious about bolstering its supply chain and finding ways to get online orders to shoppers as quickly as possible. The news followed Target's acquisition of transportation company Grand Junction in August.

As of Tuesday's market close, Target shares have climbed a little more than 10 percent so far this year.