Target’s bid to revamp the company and better compete with Amazon and a resurgent Walmart is taking a toll on profit.
The retailer posted fourth-quarter earnings that fell short of analysts’ estimates, sending the shares down as much as 4.7% in early trading. One key expense: Target is spending more to deliver online orders - part of its push to catch up in e-commerce.
The results threaten to renew the debate over whether a $7 billion turnaround plan by Chief Executive Officer Brian Cornell is coming at too high a price.
While new brands and store remodels have helped revive the retailer’s “Tar-zhay” cachet, the investments are squeezing earnings. And the company has been further constrained in recent months by a wage hike in October.
The shares fell as much as 4.7% to $71.60 in premarket trading after the earnings report was released. Target had been up 15% this year through Monday’s close.
A long and cutthroat holiday season also may have hurt profit because of the heavy discounting, said Moody’s analyst Charlie O’Shea.
Though Target’s various investments had the biggest impact on profitability, “the promotional environment, particularly during an elongated holiday season, had a bearing on margins as well,” he said in a note.
Target’s holiday-season gross margins fell to their lowest level in 20 years.
The good news is Target’s sales are improving, helped by stronger traffic in stores and online. On a comparable basis, they grew 3.6% last quarter - better than the 3.4% estimate. Profit came in at $1.37 a share during the period, excluding some items, a cent shy of Wall Street projections.
Target expects adjusted earnings of $5.15 to $5.45 a share this year, reiterating a forecast it delivered in January. The Minneapolis-based company plans to give more information at its annual investor presentation later on Tuesday.
Amazon poses a particular threat to Target. The overlap between Target’s core shoppers and membership in Amazon’s Prime loyalty program is higher than for many other retailers, according to Magid, a consulting firm.
But Target’s longtime foe Walmart isn’t standing still either. It recently made a bigger push into apparel and home decor, two of Target’s most important categories.
As part of its overhaul, Target is remodelling hundreds of stores and introducing new private brands in key categories like apparel and home decor. It also has acquired logistics specialists Shipt and Grand Junction to speed the rollout of same-day deliveries.
“While we have a lot left to accomplish, our progress in 2017 gives us confidence that we are making the right long-term investments,” Cornell said in a statement.