Target earnings beat estimates but margins hit by supply chain woes, higher wages

Target (TGT) followed Walmart on Wednesday by posting better than expected third quarter earnings despite inflationary pressure hitting shoppers and its own income statement.

The discount retailer's 12.7% comparable sales increase was fueled by increased traffic to its stores and online. But similar to Walmart, the supply chain challenges caused by bottlenecks at the ports and higher hourly wages clipped Target's gross and operating profit margins. Both key metrics fell compared to the prior year.

Here is how Target performed compared to Wall Street projections, according to Bloomberg consensus estimates:

  • Net Sales: $25.7 billion vs. $24.20 billion

  • Comparable Sales: +12.7% vs. +8.3%

  • Gross Margin: 28% vs. 29.80%

  • Operating Margin: 7.8% vs. 7.68%

  • Diluted EPS: $3.03 vs. $2.84

"With a strong inventory position heading into the peak of the holiday season, our team and our business are ready to serve our guests and poised to deliver continued, strong growth, through the holiday season and beyond," said Target Chairman and CEO Brian Cornell in a statement.

In part, Target's above consensus earnings were driven by share repurchase activity (similar to Walmart) that reduced the number of shares outstanding. The company said it repurchased $2.2 billion in stock in the third quarter, helping to reduce its diluted share count by about 3.2% year-over-year.

For the holiday quarter, Target said it sees a comparable sales increase of a high single-digit percentage to a low double-digit percentage. Previously, the company expected a high single-digit percentage increase.

Target shares touched a record high of $266.57 on Tuesday ahead of the company's latest earnings report.

"We expect Target to be a share beneficiary in a supply constrained environment and see further benefits from the company's leading omni-channel offering. We recommend continuing to Hold as a core position in broadlines retail," said Jefferies analyst Stephanie Wissink prior to Target's earnings results.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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