Target shares tumble 9% as earnings miss mark, weighed down by higher costs

  • Target reports third-quarter earnings that fall short of analysts' expectations.
  • Investments in its supply chain are seen weighing on profit margins.
  • The retailer reiterates its profit forecast for the full year.

Target delivered mixed earnings results for the third quarter on Tuesday, generating more revenue than expected but falling short on earnings as the company spent more on its same-day delivery service and raised wages.

Despite the earnings miss, Target maintained its forecast for the full year. It also said it's "better positioned for this holiday season than ever before" against a backdrop of strong consumer confidence in the U.S.

CEO Brian Cornell said there's absolutely "no sign" consumer spending is cooling off as retailers head into the holiday season.

"There is no indicator as we sit here today that the consumer environment is slowing as we enter the holiday season," Cornell told reporters on a conference call. He raved about the U.S. economy earlier this year, saying it was one of the best he'd ever seen in his career.

Investors still drove Target's shares down by more than 9 percent in morning trading, worried that inventories were building too much ahead of the holidays and that profit margins were weak.

Here's what Target reported for its fiscal third quarter compared with what Wall Street was expecting, based on a poll of analysts by Refinitiv:

  • Earnings per share: $1.09, adjusted, vs. $1.12 expected
  • Revenue: $17.82 billion vs. $17.80 billion expected
  • Same-store sales: up 5.1 percent vs. growth of 5.2 percent expected

Net income grew to $622 million, or $1.17 per share, compared with $478 million, or 87 cents per share, a year ago. Excluding one-time items, Target earned $1.09 per share, short of expectations for $1.12 per share, based on a survey by Refinitiv.

Total revenue climbed 5.6 percent from a year ago to $17.82 billion, slightly beating analysts' estimates.

Sales at Target stores open for at least 12 months were up 5.1 percent, slightly short of expectations for growth of 5.2 percent. The company said digital sales rose 49 percent during the third quarter and contributed 1.9 percentage points to same-store sales growth. It said the number of transactions at its stores jumped 5.3 percent, while the average shopper's ticket dropped 0.2 percent.

Target said its strongest sales gains during the quarter came from the toys, baby and beauty categories. Toy sales were up more than 20 percent from a year ago. The company has devoted more space in some stores to sell toys following the demise of Toys R Us.

But investors were still concerned about higher expenses eating into profits, despite the sales gains.

Target's third-quarter gross margin rate fell to 28.7 percent from 29.6 percent a year ago, with the company attributing the decline to higher supply chain costs as it fulfills more online orders ahead of the holiday season. It also said it ordered more holiday-related inventory ahead of the fourth quarter, earlier than when it did last year. Target ended the quarter with inventories up nearly 18 percent.

CFO Cathy Smith said during a call with analysts that margins will continue to be pressured during the fourth quarter, though not to the extent they were during the third quarter.

"While digital channel sales continue to grow rapidly, we are benefiting from the healthy traffic and sales growth in our stores as well," Cornell told analysts on a separate call Tuesday. "I will say that we are optimistic about our ability to deliver profitable growth next year and beyond."

But first, Target has to prove it can keep the momentum going through this holiday season. The retailer said it expects its adjusted earnings per share for the fiscal year to fall within a range of $5.30 to $5.50. For the holiday quarter, it's anticipating same-store sales will be up roughly 5 percent.

The retailer has been pouring money into store renovations, while opening up smaller-format locations in urban cities and college towns. It continues to add more in-house brands for apparel and home goods, which offer higher margins than national labels. And it's investing in logistics to be more competitive with Walmart and Amazon. This holiday season, for example, Target is dropping its minimum purchase threshold for free, two-day shipping, while Walmart still has a $35 threshold.

Target also said Tuesday it has met its hiring goals for the holidays to bring on 120,000 seasonal workers. There's been some concern, more broadly, that retailers won't be able to meet these lofty hiring goals with such a tight labor market in the U.S.

As of Monday's market close, Target shares have rallied more than 35 percent over the past 12 months, bringing its market cap to roughly $41.1 billion.

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