Target's sales shine, but the cost of reinvention is steep
NEW YORK - Target's reinvention plan is driving more people to its stores and its website, where they're spending more for everything from fashion to towels. But the cost of such a massive overhaul is extensive, and it took some of the shine off a strong quarter of sales.
Minneapolis-based Target (TGT) reported better-than-expected sales in the fourth quarter, which includes the critical holiday period. But those healthy sales were overshadowed by muted earnings and a conservative profit outlook.
In the race to modernize, Target's profit margins are under significant pressure.
Shares slid 3.7 percent in early premarket trading on Tuesday, but recovered somewhat to a loss of 1.7 percent, or $1.31, at $73.83.
Target is overhauling its business as customers move online. Amazon (AMZN) has created fierce loyalty among shoppers who spend $99 a year for a Prime membership that comes with free shipping, as well as streaming movies and music. Amazon's acquisition of Whole Foods Market last year is also raising the stakes in the grocery business.
Target pledged last year to invest more than $7 billion to modernize its business over the next three years. That includes remodeling old stores, opening small ones in cities and college towns, and offering faster delivery for online orders. Late last year, the company said it was accelerating plans to remodel more than half of its 1,800 stores by 2020.
It recently acquired the startup Shipt, which will mean same-day delivery from about half of its stores early this year. It's also testing store-curb pickup for its online grocery customers, and Target expects to expand next-day delivery of essentials like detergent nationwide by the end of this year.
Target is also offering more clothing and furniture brands and has said its children's line Cat & Jack brought in more than $2 billion in sales in the first year of its launch.
There are consistent signs that Target's reinvention is resonating with its customers.
But among the notable costs for Target is its decision to raise its minimum hourly wage for its workers to $11 late last year. That jumps to $15 by the end of 2020. It's part of the company's ambition of making the experience better for shoppers.
Target plans to hold its annual meeting at its headquarters Tuesday to update investors on its reinvention plan.
"Our fourth quarter results demonstrate the power of the significant investments we've made in our team and our business throughout 2017," said CEO Brian Cornell in a company release.
Target had a profit of $1.1 billion, or $2.02 per share. That compares with $817 million, or $1.45 per share, in the year-ago period.
Earnings, adjusted for one-time gains and costs, were $1.37 per share, which is 2 cents short of analyst projections, according to Zacks Investment Research.
Revenue rose 10 percent to $22.77 billion, edging out expectations for $22.46 billion.
Target reported a 3.6 percent increase in the key retail metric of revenue at stores opened at least a year. That beat estimates of a 3.1 percent gain, according to FactSet.
Customer traffic rose 3.2 percent, and online sales jumped 29 percent, compared with a 23 percent increase in online sales at Walmart (WMT) during the last quarter of 2017.
Target said it enjoyed healthy sales growth in all five of its merchandising areas, including fashion and home furnishings. And it expects its per-share earnings this quarter to range from $1.25 to $1.45. Analysts expect $1.40.
The company expects full-year earnings in the range of $5.15 to $5.45 per share, versus Wall Street expectations for $5.21.
