Target shares tumble as earnings miss the mark but retailer reiterates 2018 forecast
Target TGT on Tuesday reported a mixed quarter, with revenue slightly topping analysts estimates but earnings falling short, as investments in its supply chain weighed on profit margins.
Despite the earnings miss, Target maintained its forecast for the full year.
Its shares fell more than 10 percent in premarket trading on the news.
Here's what the company 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, short of expectations for $1.12, 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 were up 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 amount dropped 0.2 percent.
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 during the quarter, earlier than when it did last year.
Target continues to expect 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.
"We plan to leverage our current momentum into 2019," CEO Brian Cornell said in a statement.
But first, Target has to prove it can keep the momentum going through this holiday season, where some companies can make as much as 30 percent of their annual sales. Cornell recently said the consumer environment hasn't been this strong in his career. That was after the retailer during the second quarter reported "unprecedented" growth in foot traffic at its stores, along with the strongest same-store sales growth in 13 years.
Target 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 its supply chain 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.
"We think [Target's] unique mix of consumables and high-margin apparel/home decor leave it well-positioned to take share from at-risk retailers," KeyBanc analyst Edward Yruma said in a research note, predicting there is as much as $17 billion in "at risk" retail sales up for grabs.
Private brands like A New Day for women's apparel and Project 62 for home decor are a "key differentiator" for Target, Yruma wrote. "Private brands are an increasingly important way to combat Amazon and build overall customer loyalty."
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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