Ris­ing sales give re­tail­ers hope ahead of hol­i­day sea­son

Tar­get, Best Buy cite strong de­mand though earn­ings are pinched by in­vest­ments

The Peterborough Examiner - - Business - KHADEEJA SAF­DAR AND SUZANNE KAPNER

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.

SCOTT OLSON GETTY IM­AGES

Tar­get has been spend­ing heav­ily to re­model stores and lower prices to com­pete for cus­tomers.

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