Target on Wednesday reported better-than-expected quarterly sales but its stock fell sharply on a disappointing forecast for the crucial holiday season.
Target’s projection of flat to 2% growth in fourth-quarter same-store sales appeared to revive investors’ doubts over its turnaround plan. The retailer also expects earnings to be between $1.05 and $1.25 a share, compared to Wall Street’s expectations of a profit of $1.24 a share.
While Target’s heavy investment in e-commerce, aggressive product promotions and low grocery prices have paid off in sales growth, they have crimped its margins. Third-quarter gross margin slipped to 29.7% from 29.8%t, and CFO Cathy Smith said margin pressure should continue into the holiday quarter.
In trading Wednesday, Target shares were down 8.5% at $54.96, bringing the year-to-date decline to around 24%.
“It was always unrealistic that Target was going to have a great holiday season in terms of sales or profitability,” Neil Saunders, managing director of GlobalData Retail, told the New York Post.
“This is still a very competitive environment, and Target has no choice but to respond to that … The problem is that Wall Street doesn’t necessarily understand this,” he added.
The third-quarter results illustrated some of the benefits of the turnaround strategy. Target earned 91 cents a share, excluding items, as revenue rose 1.4% to $16.67 billion. Analysts had expected earning of 86 cents a share on revenue of $16.61 billion.
Same-store sales climbed 0.9%, beating estimates of an increase of 0.4%, and visits to stores — a key indicator of consumer interest heading into the peak of the holiday season — rose 1.4%, excluding newly opened or closed stores.
“We’re very pleased with Target’s third quarter performance, including traffic and sales growth that demonstrate we’re building on the progress we saw in the first half of the year,” Target CEO Brian Cornell said in a news release. “The investments we’re making in our business will help Target drive long-term success and ensure we’re well positioned to deliver for guests in the all-important holiday season.”