Target’s stock fell more than 11 percent late Tuesday morning after it reported a so-so third-quarter-earnings report right as the holiday shopping season kicks off.
The company reported earnings per share of $1.09, below analyst predictions of $1.12. Revenue, however, was higher than expected, up 5.6 percent from last year at $17.82 billion.
The Minneapolis-based company has poured resources into becoming a holiday heavy hitter, introducing free two-day shipping (with no minimum purchase required) and same-day delivery to compete with heavyweights such as Walmart and Amazon.com. (Amazon founder and chief executive Jeffrey P. Bezos owns The Washington Post.) It’s bolstering its toy offerings and expanding customer service.
The new shipping services took a toll on profit margins, as Target blamed its gross margin rate — down from a year ago at 28.7 percent — on an unprecedented spike in digital traffic, which was up 49 percent this quarter.
“The biggest piece of the supply chain cost is related to the digital fulfillment,” chief financial executive Cathy Smith said in a conference call with investors. “The next biggest piece of that was the supply-chain cost to receive and process higher inventory ahead of the holidays.”
But Target assured investors it was ready to compete with other retail juggernauts in a hyper-competitive holiday season.
“We’ve made significant investments in our team heading into the holidays,” chief executive Brian Cornell said in a statement. “They are ready to serve our guests with a comprehensive suite of convenient delivery and pickup options, a wide range of new products and unique gift ideas and a strong emphasis on low prices and great value.”
Expectations were high after the company said sales growth was at a 13-year high, thanks to demand for toys and home goods. There’s a lot at stake this holiday season, which is supposed to see record spending because of the strong economy, low unemployment and higher wages.
To offset the flood of digital traffic and expedited shipping, Target is counting on customers to take advantage of its in-store pickup options and memberships in delivery service Shipt, which is now available in 200 markets, executives said in a conference call with investors. But banking on these fulfillment options to help margins might be foolish, said Bob Phibbs, chief executive of New York-based consultancy the Retail Doctor.
“As consumers, we rejoice in those programs, but I think they’re really the thing that’s going to erode margins for brick-and-mortar stores,” Phibbs said.
Target is also poised to capitalize on the collapse of storied retailers such as Toys R Us and Sears and a spate of closings for chains including J.C. Penney and Kmart. It’s tried to snag its competitors' shoppers by rolling out widespread renovations — remodeling its makeup departments with beauty-store lighting and vastly expanding its toy section — which should hit more than 1,000 stores by 2020. So far, stores remodeled in the past year have seen sales growth of 2 to 3 percent.
The ability to capture the market share of its former competitors might be what sets Target apart. While it might not be able to truly compete with Amazon and Walmart in areas such as grocery, Phibbs said, it can cement itself as the king of bricks-and-mortar convenience.
“They’re on-trend to make that push into being the place that America wants to go back to,” Phibbs said. “They’ve taken up Sears’s place, Kmart’s place, J.C. Penney’s place. They’re a middle-America brand and executing it extremely well.”