Target’s (TGT) return to growth is proving to be a bit expensive for many investors, and shares fell sharply on Wednesday on the retailer’s underwhelming holiday quarter profit forecast.
The discount retailer reported good news on the sales front, with comparable sales rising 0.9% in the third quarter, beating the average analyst estimate of 0.4%, according to Consensus Metrix. And more crucially, as a leading indicator of consumer interest in the retailer heading into the peak of the holiday season, visits to stores (excluding newly opened or closed ones) rose 1.4%.
That suggests that Target’s efforts at better integration between stores and e-commerce, better product presentation and customer service, and new house brands like Cat & Jack are getting people to turn up at its physical stores. At the same time, online sales rose 24% during the quarter.
Target CEO Brian Cornell in a statement said that holiday season shoppers could expect an improved shopper experience thanks to “our investments in wages, training and additional hours.” Target is adding 100,000 seasonal workers this year, making it one of the few major retailers to ramp up holiday season hiring. Cornell also suggested Target would offer price cuts to match those of competitors, as well as its own deals.
The retailer has been trying to go to-toe-to with Walmart (WMT) and Amazon.com (AMZN), which are already proving to be aggressive in this year’s Christmas period price war.
But these investments cost money, and Target’s holiday quarter profit forecast came in well below what Wall Street was expecting, sending shares down 5% in premarket trading. The retailer expects adjusted earnings of $1.05 to $1.25 per share for the quarter ending January 2018, by far the most important of the year for Target, compared to the average analyst estimate of $1.24, according to Thomson Reuters.
While Target has shaken off a year-long sales slump, it has been playing catch up on some fronts compared to Walmart, and those investments in e-commerce, store remodels, and store worker raises are taking a toll. Earlier this year, the company announced a $7 billion reinvention plan that, among other things, would remodel hundreds of stores and continue the roll-out of its successful small format urban stores, including a recently opened location in the heart of Manhattan’s biggest shopping district, a new tack for a retailer historically focused on suburbs.
For the quarter ended Oct. 28, Target’s net income fell to $480 million, or 88 cents per share, from $608 million, or $1.06 per share, a year earlier. Total sales rose 1.4% to $16.67 billion.
