May 23, 2018 / 10:47 AM / in a month

Target's profit miss overshadows sales growth, shares tumble

NEW YORK (Reuters) - Target Corp’s (TGT.N) first-quarter profit came in below analyst estimates as price cuts, higher wages and investments in its online business ate into margins, sending shares down 5 percent in afternoon trade on Wednesday.

FILE PHOTO: Shopping carts are seen at a Target store in Azusa, California U.S. November 16, 2017. REUTERS/Lucy Nicholson/File Photo

Comparable store sales rose more than analysts expected, boosted by the strongest growth in customer visits in a decade. But operating income continues to reflect near-term challenges, Chief Executive Brian Cornell said on an earnings conference call.

The retailer remained confident it could hit its earlier full-year earnings outlook, however, with payoff from investments aimed at warding off competition from Amazon.com Inc (AMZN.O) and brick-and-mortar rivals expected to pick up later this year.

“The key message from Target’s first-quarter results was the company’s ability to drive transaction growth, but not without investment spending and margin pressures,” Morningstar analysts wrote in a research note.

Target’s operating income margin weakened to 6.2 percent in the first quarter from 7.1 percent a year ago.

The retailer said margins should improve as seasonal merchandise sales rebound after a delayed spring, pricing investments made last year deliver results, customers react positively to new private-label brands and it focuses on cost-cutting.

Morningstar expects online sales, higher costs associated with delivery and price competition will continue to weigh, however, and did not anticipate a sizeable change to its 5.9 percent average operating margin projection over the next decade.

The retailer has poured billions of dollars into aggressively promoting its products, remodeling stores and keeping grocery prices low to compete with Walmart and supermarket chain Kroger Co (KR.N).

It cut its next-day delivery fee for household essentials to $2.99 from $4.99 last week and waived it for customers paying with a Target card.

The retailer said on Wednesday it is rolling out a new drive-up service where shoppers can pick up orders in an hour.

It is also expanding its delivery services through Shipt, a same-day delivery company it bought for $550 million last year, and partnering with courier services on same-day orders in metro areas.

Amazon’s purchase of Whole Foods rattled the grocery industry on worries the online seller would quickly ramp up delivery of fresh food.

Last week, Whole Foods debuted a loyalty program for Amazon Prime customers and Kroger said it would partner with British online grocer Ocado (OCDO.L) to build robot-operated warehouses to support U.S. home delivery.

Target has said it plans $3 billion of capital expenditure this year on its supply chain, online delivery, its own brands and merging online and in-store shopping.

    The retailer maintained its full-year forecast of a low to single digit increase in comparable sales and adjusted earnings of $5.15 to $5.45 per share.

    Target shares, which tumbled more than 8 percent in pre-market trade, were last down 5.4 percent at $71.37.

    MARGINS SLIP

    Gross margins remained under pressure at 29.8 percent compared to 30 percent last year. The measure had hit a 20-year low of 26.2 percent in the fourth quarter.

    First-quarter same-store sales were slightly higher than estimates, rising 3 percent. Analysts expected a 2.9 percent increase, according to Thomson Reuters I/B/E/S.

    In February last year, Target said it would reinvest more than $7 billion through 2020. Cornell said shoppers are reacting positively to remodeled stores, investments in merchandising and speedy delivery.

    Strong sales growth in home, essentials, food and beverages, offset weaker sales in weather-sensitive categories.

    Online sales rose 28 percent in the first quarter, up from a 21 percent rise a year ago but below the 29 percent rise in the fourth quarter.

    Excluding items, Minneapolis-based Target earned a profit of$1.32 per share in the quarter ended May 5, below the average analyst estimate of $1.39.

    The big-box chain forecast adjusted earnings of $1.30 to $1.50 per share for the second quarter, compared to the average analyst estimate of $1.35 per share.

    First-quarter selling, general and administrative expenses rose to 21.1 percent of sales from 20.7 percent a year ago.

    In October, the company said it would hike wages for hourly workers to $12 per hour this spring and $15 per hour by 2020.

    Revenue rose to $16.78 billion, topping the average estimate of $16.58 billion.

    Shares of the Minneapolis-based chain have risen 16 percent in 2018 and more than 35 percent in the past 12 months.

    Reporting by Nandita Bose in New York; Editing by Meredith Mazzilli

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