Northwest Arkansas Democrat-Gazette
Target, other retailers in a funk
Stores’ shipping, expanded gift offerings raising concern
Shoppers are turning out in droves for the Christmas season, but Target Corp. and the rest of the retail sector are in a funk.
Several of America’s big-name retailers reported same-store sales growth that might have heartened investors in the past, with Kohl’s Corp., TJX Cos. and Ross Stores Inc. beating forecasts and Target’s robust 5.1 percent growth coming in just shy of estimates. It wasn’t enough, with shares of all four slipping as Wall Street focused on the negative, wiping out about $9.5 billion in market value.
For Kohl’s, the bad news was weak full-year profit guidance. For Target and TJX, it was a margin squeeze, likely brought on by rising trucking fees and e-commerce investments. Best Buy Co., the industry’s shining star over the past year, was one of the few bright spots in the industry, boosting its earnings forecast for the year.
Target shares plunged 10 percent Tuesday, while Kohl’s fell 9 percent, TJX dropped 4.4 percent and Ross Stores lost 9.4 percent. Best Buy’s shares rose 2 percent.
The U.S.’ Christmas shopping season is expected to be among the best in recent memory, with sales projected to be up 5 percent or more. The sales growth would mark a slowdown from last year’s 5.3 percent, which was the largest gain since 2010. But the projection is still a healthy figure, and it’s the latest indication that the retail industry is far from an apocalypse that some feared only a year ago and a half ago.
But on Wall Street, there’s anxiety about whether this is shaping up to be a peak Christmas, with retailers spending too much to outdo one another on free shipping and expanded gift departments just as sales growth begins to subside.
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“Market expectations in this environment are high,” said Oliver Chen, an analyst at Cowen.
The slew of troubling reports illustrates how much investor expectations have risen for even the retailers performing at the top of their class, a group that also includes Macy’s Inc., Home Depot Inc. and Walmart Inc. Rising consumer confidence, low unemployment and tax cuts have provided strong tailwinds for merchants all year, but after several strong quarters, concerns are mounting that the momentum may have peaked.
Topping the list of concerns are new tariffs on Chinese goods, heavy investments to raise wages and grow online sales, and the fear of slowing economic growth. Amazon’s encroachment into key categories is another worry.
“Retail stocks have been on a roller coaster ride,” Scot Ciccarelli, an analyst at RBC Capital, said in a note. “The combination of tariffs, cost pressures and rising interest rates are causing angst for investors.”
Retailers that can navigate these choppier waters stand to win big this Christmas season. At stake is as much as $100 billion in sales that are up for grabs in the wake of Sears Holdings Corp.’s bankruptcy
and the demise of Toys R Us and other chains. Target and Walmart are picking up more than their fair share of those customers with expanded toy departments and early-bird discounts, but it’s all coming at a cost to their bottom lines.
A big culprit is online sales, which carry heavy fulfillment costs that can be compounded when retailers dangle enticements like free shipping. Recent moves by Amazon and Target to eliminate minimumpurchase amounts for free shipping could force others to match them, wreaking havoc on profitability. Web orders with the free service included have risen 13 percent so far this year through Nov. 16, according to analytics firm DynamicAction.
About one-fifth of holiday spending will happen online this year, according to researcher Forrester, and with Amazon gobbling up about half of all e-commerce spending, the remaining retailers must fight over the scraps.
The big bets Target and others are making on toys have also hurt profitability. Target’s inventory rose 18 percent in the quarter, due in part to its buildup of key toys like Fingerlings, Hatchimals and L.O.L. Surprise. Inventories have also risen earlier than usual as this year has more shopping days between Thanksgiving and Christmas than is typical. Target said it was “comfortable”
with its inventory levels.
Best Buy’s inventory was also way up in the quarter, by 23 percent. “We do suspect it reflects an early build ahead of tariff increases,” said RBC’s Ciccarelli.
Early last year, Target began a three-year plan to invest $7 billion in its stores and online operations. Kohl’s has been sprucing up its merchandise and is now allowing shoppers to return goods purchased through Amazon at 100 stores.
Best Buy has shown resilience in the face of increasing online competition by allowing shoppers to test new technology, and offering speedier delivery options. It’s also been expanding its tech support services, including a free service in a couple of hundred markets where salespeople visit customers at home to make recommendations on TVs, setup and more.
Meanwhile, TJX, which operates T.J. Maxx and HomeGoods, has been bolstering its fashion business, resulting in a hefty 7 percent increase in consolidated samestore sales in the quarter compared with a year ago. But higher freight costs took a bite out of profits.
Despite the snag, “TJX’s overall success underlines the fact that even in a strong economy where disposable incomes are rising, consumers still enjoy getting a bargain,”
wrote Neil Saunders, managing director of GlobalData Retail, a retail research firm.