MINNEAPOLIS _ Target executives are full of confidence heading into the holiday season, but investors showed more concern Wednesday about how the retailer's lowered prices, investments to boost employee wages and the higher costs to fulfill digital orders will continue to take a toll on its profits.
The company's shares were trading down 6 percent Wednesday morning after Target released a more conservative guidance for the fourth quarter than investors were expecting.
"Those investments are driving traffic and driving market share gains," CEO Brian Cornell told reporters on a conference call this morning.
The Minneapolis-based retailer forecast comparable sales during the holiday season to be flat to up 2 percent. Its profit guidance also disappointed investors as it showed that the investments Target is making would continue to heavily weigh on the bottom line.
As it has struggled with competition from Amazon and Walmart, Target has repositioned this year to be a rebuilding year for the company as it recovers from a yearlong sales slump that it finally pulled out of over the summer.
It's investing $7 billion over the next few years in various initiatives to revive its sputtering business and is taking a hit to margins this year as it has rolled back prices as part of its "priced right daily" campaign to better compete with Walmart on everyday prices.
This year, Target has remodeled about 110 stores, opened about 32 new small format stores in urban and dense suburban areas, launched eight new exclusive brands, and worked on upgrading its supply chain. It's planning to accelerating some of those initiatives next year.
While it may have come at a cost, Target reported its second consecutive quarter of growth Wednesday, with comparable sales in the August-to-October quarter rising 0.9 percent, driven by an increase in store traffic and a 24 percent jump in online sales.
Its overall revenue was better than analysts were expecting and rose 1.4 percent to $16.7 billion, up from $16.4 billion in the same quarter a year ago, as it benefited from the extra sales of new stores it has opened this year.
Its quarterly profit dropped 21 percent to $480 million, or 88 cents a share, compared with $608 million, or $1.07 a share in the same period a year ago.
When adjusted for one-time expenses, it earned 91 cents a share, which was better than the 86 cents analysts were expecting and at the high end of the company's own forecast.
In August and September, Target introduced four new brands _ A New Day in women's apparel; Goodfellow & Co. for men; Project 62 in modern home goods; and athletic leisure line JoyLab.
While Cornell said the company was pleased by the reception to the new brands, the company's apparel sales were slightly down in the quarter. He attributed the dip to the industrywide softness in the category and noted that Target gained market share.
"It was incredibly warm throughout the quarter," he told reporters. "We didn't see that cold weather boost we expected. ... But as the weather turned cold, the guest reacted well to our assortment."
A bright spot in the quarter was that Target finally saw sales growth in food and beverages, which had been a drag on its business. Executives said the stronger performance came in produce, where they have been working to improve availability and freshness, and in adult beverages such as beer and wine.
Target recently rolled out a new inexpensive wine label, California Roots, with bottles sold for $5.
And last week, Hearth & Hand, a new home decor line that is part of a new multiyear partnership with HGTV stars Chip and Joanna Gaines, hit shelves and the retailer's website with strong initial results.
Target is also boosting holiday hiring this year to 100,000 people, up from 70,000 last year, as it looks to improve customer service and put more manpower being initiatives such as in-store pickup during the holidays. It also has boosted its hourly minimum wage to $11 in October, which increased its expenses in the quarter.
