Rising sales give retailers hope ahead of holiday season
Target, Best Buy cite strong demand though earnings are pinched by investments
A parade of U.S. retail chains on Tuesday reported rising sales in the latest quarter, another sign of healthy consumer spending heading into the critical holiday shopping season.
But investors were unimpressed, dumping shares of Target Corp., Kohl’s Corp. and others that released their quarterly results. The selloff, part of a broader market decline, included retailers like Amazon.com Inc. and Walmart Inc. that didn’t report on Tuesday.
A tight labor market and increasing wages have buoyed consumer confidence, prompting Americans to purchase more fashion apparel, flat-screen televisions and homewares. But retail profits have been under pressure from online competition as well as higher spending on worker wages, shipping costs and recent tariffs on Chinesemade imports.
Target said more shoppers visited its stores and website, and bought products across all its merchandising categories, particularly toys, beauty products and baby items. The company reported a 5.1% increase in comparable sales in the third quarter from the same period a year earlier, including a 49% increase in digital sales.
“We continue to benefit from a very healthy consumer and macroeconomic backdrop,” Target CEO Brian Cornell said on a conference call Tuesday, adding that the company’s investments have helped it capture business from retailers that are closing stores or liquidating.
However, profit margins declined in the latest quarter as Target spent more on its supply chain and wages. The company has made investments heading into the holidays, including several delivery and pickup options, new products and lower prices.
Target shares, which had rallied for most of the year, tumbled 9% in Tuesday morning trading.
Mr. Cornell said Target wouldn’t provide 2019 financial guidance, but said he was optimistic about the company’s ability to boost profits next year. “We’re poised to benefit from far greater scale across all of our initiatives,” he said.
Some analysts said a decline in operating profit is necessary to support Target’s growth.
“Some on Wall Street may lament the dip, but the truth is you cannot reinvent a retailer on the cheap,” Neil Saunders, managing director of GlobalData Retail, wrote in a note Tuesday.
Best Buy Co., which has been reporting strong demand for electronics in recent quarters, said comparable sales increased 4.3% in the third quarter for its domestic stores and website. It was the sixth straight quarter of comparable growth above 4%.
The company’s profit margin, however, slipped on supply chain and other spending. CEO Hubert Joly said the sales growth reflects the company’s efforts to add services as well as the favorable economic environment. “Because of the investments we’ve made, we are competitive in the marketplace,” he said on a conference call.
Best Buy cited strong demand in the quarter for smartphones, videogames, home appliances and wearable gadgets. Those gains were partly offset by declines in tablet computers, it said.
Meanwhile, Kohl’s reported a 2.5% increase in comparable sales for the latest quarter, citing demand for apparel. The department store chain’s margins increased slightly from a year earlier, but sales growth was slower than recent quarters.
“I feel really good about where the customer is today,” Kohl’s CEO Michelle Gass said on a conference call. “There is no reason to believe that will change as we head into the holidays.”
Both Target and Best Buy reported higher quarterly profits than a year ago, but much of the gains came from lower tax rates following the U.S. federal overhaul. Operating profits declined in the latest quarter from a year ago. Without a lower tax rate, Kohl’s profits would have missed analysts’ expectations.
The results failed to reassure investors, who have been unloading shares of many retailers following the latest batch of earnings reports after driving up the stock prices earlier in the year.
Shares of Kohl’s fell 9% early Tuesday, while Best Buy bucked the trend, gaining 3%. Shares of TJX Cos. fell about 2% after the parent of TJMaxx and HomeGoods lowered its profit goals amid higher inventory and expenses.
TJX, which reported strong sales and profit growth in the recently completed quarter, was also hurt by higher freight costs, a problem facing many retailers. Kohl’s warned that higher shipping costs in the holiday quarter would be a drag on margins.
Tuesday’s results follow strong sales reports from the country’s biggest retailer Walmart, department store chain Macy’s Inc. and the internet giant Amazon.com, which are all competing for American wallets. Shares of Walmart and Macy’s were down about 3% Tuesday morning, while Amazon was flat.
Not all chains are riding the tide of rising consumer spending. Mall-stalwart L Brands Inc., the parent of Victoria’s Secret, said Monday it was halving its annual dividend after posting another quarter of falling sales at its flagship lingerie brand. Wedding gown retailer David’s Bridal filed Monday for bankruptcy protection, cutting $400 million (U.S.) in debt while it restructures operations.
Some retailers are benefiting from the struggles of others. Following the collapse of Toys “R” Us and store closings at Sears Holdings Corp., retailers including Best Buy and Target have pursued their business and picked up market share.
Retailers have been raising wages to attract talent in the tight labor market and building fulfillment centers for online orders.
At the same time, they are pushing discounts in a marketplace where smartphones make low prices and comparison shopping easier.
Some chains are still struggling with strategic and operational challenges.
Lowe’s Cos. said Tuesday it plans to exit its Mexico retail operations and shed two U.S. home-improvement businesses, after the home-improvement chain reported slower samestore sales gains than rival Home Depot Inc. and a 27% decline in profit from a year ago.