Boots, beer boost Target sales, but earnings take hit
Sales of beer, boots and groceries are boosting sales at Target, but investors weren’t impressed.
The number of shoppers who visited Target stores rose 3.7% in the three months ended May 5 — the most in more than a decade — and those crowds led to sales at stores open at least a year increasing 3%. But profits fell short of what retail watchers predicted, and share prices took a dip Wednesday.
Some analysts were sympathetic, saying Target is in a phase in which it needs to reinvest earnings as it transitions to compete against Web-based businesses such as Amazon.
“Wall Street needs to understand that Target has to erode profit to remain relevant by investing in the business,” says Neil Saunders, managing director of retail consultancy GlobalData. “Wall Street too often plays a short-term game. Target is playing the long game, and it is right to do so.”
Target has been reaching out to a younger, urban customer by opening smaller, tailored locations in cities and near college campuses. But it also revamped 56 stores in the first quarter, tweaks CEO Brian Cornell says led to a 2% to 4% lift in sales.
Target also continued to build on its reputation as a low-cost fashion destination, unveiling three of a dozen new, exclusive brands in the first quarter, and partnered with popular boot maker Hunter for a limited collection. It also said it profited from better sales of food and beverages during the quarter.
In the race to beat Amazon by getting packages to customers as fast as possible, Target expanded same-day delivery in cities where many shoppers may not have a car and depend on public transportation. The service is available at 55 stores in Boston, New York, Chicago, Washington D.C., and San Francisco.
Target also reported that its digital sales soared 28%. But its adjusted earnings of $1.32 per share missed the prediction of analysts with S&P Global Intelligence by seven cents. Target said it earned $718 million in its first fiscal quarter, up 5.6% from $678 million a year ago.
Target’s inability to meet analysts’ expectations appeared to confirm concerns by some investors that the chain will have to continue cutting prices to beat rival Walmart, as well as Amazon and other e-commerce sellers, eroding its potential profits. Target shares closed at $71.14, down 5.7% for the day.
“First, the company faces competition from Internet retailers that typically offer lower prices,” Brian Yarbrough, an analyst for Edward Jones, said in a note. “Second, we have concerns about Walmart getting more aggressive on pricing, which will most likely cause Target to lower prices as well.” As a result, “we believe these issues will pressure profit margins and thus limit future earnings growth.”