Target sees higher profit but its digital sales slow

Target Corp. managed to avoid the shopping blues that have recently dragged down the sales of other retailers including Macy’s and Nordstrom.

But investors weren’t feeling celebratory about the Minneapolis retailer’s 1.9 percent growth in same-store sales in the third quarter — or its profit that fell in line with expectations. The company’s stock fell 4 percent by the end of Wednesday to $69.78 after it reported its results for the August-to-October quarter.

One likely culprit is that Target’s online sales grew only 20 percent in the quarter, well below the ambitious 40 percent growth rate executives set as a goal for the next few years. It’s a slowdown from the 30 percent online growth Target posted in the second quarter and 38 percent in the first quarter.

For the fourth quarter, Target forecast online sales to continue that same 20 percent clip, even with a free shipping promotion on any size order through the holidays. That promotion helped drive a big boost in online sales last year.

“We believe Target is making the right investments and improving its online presence but the slowing digital sales growth is discouraging,” said Sean Naughton, an analyst with Piper Jaffray.

He noted that other retailers have seen a recent drop-off in online growth. On Tuesday, Walmart reported a 10 percent growth in online sales in the most recent quarter, down from the 21 percent growth in the same period a year ago.

The pace at which traditional retailers like Target can make digital sales, through the Web and mobile devices, a bigger part of their revenue mix is considered a sign of long-term competitiveness with online specialists like Amazon.com. Online sales account for about 3 percent of Target’s overall portfolio.

A recent report from Wells Fargo said that Amazon has been picking up market share in the last year, capturing about 36 percent of all retail growth so far this year in North America, not including fuel, vehicles and food.

On Wednesday, Target CEO Brian Cornell suggested that analysts take the online slowdown in context. The National Retail Federation expects online sales to grow between 6 and 8 percent this holiday season.

“We’re seeing an overall slowdown in digital growth across retail,” he said. “And we’re really pleased that we continue to outpace the industry.”

He added that 80 percent of Target shoppers start their shopping journey by looking up deals and products online before they step into a store, so its digital channel influences instore purchases in a way that may not show up in digital sales numbers. In the end, he said, it’s up to consumers how and where they want to shop.

“What we’re seeing right now is they are voting with their feet to spend more time in stores,” he said.

Target has been pouring millions of dollars into upgrading its online capabilities, such as ship-from-store services. This holiday season, it expects that 40 percent of online sales will be fulfilled by a store rather than a warehouse, shaving a day or two from delivery times. It also recently opened two fulfillment centers.

Matt Nemer, an analyst with Wells Fargo, said he doesn’t necessarily view Target’s deceleration in online sales as a bad thing.

“It’s not clear to me that higher growth is better because we know that e-commerce growth is less profitable,” he said. “I’d rather have (shoppers) swipe their credit cards in the store than online.”

In the third quarter, Target reported adjusted earnings of 86 cents per share, in line with analysts’ expectations and up from 79 cents a year ago. Net profit grew 56 percent to $549 million, chiefly reflecting the elimination of losses from its now-closed Canadian stores. Revenue grew 2.1 percent to $17.6 billion.

“From a sales perspective, its results were pretty good given everything else we’ve seen at retail,” said Naughton.

Last week, Macy’s and Nordstrom reported big drops in quarterly sales, spooking investors and sending retail stocks tumbling. Those retailers blamed in part a warmer fall that has depressed sales of colder-weather apparel, which Target felt in the quarter, too.