Target Just Proved How Hard It Is to Please Both Customers & Investors Right Now

Target Corp. shares are taking a beating today after the company’s first-quarter earnings missed expectations as its ramped-up digital investments — perhaps a crowd-pleaser for shoppers — weighed on margins and disappointed investors.

As of 11:30 a.m. ET, the shares remained in the red more than 5 percent at $71.60.

The retailer — which has moved aggressively in recent months to expand a series of omnichannel initiatives such as its buy online, pick up in store program — said its earnings grew 6 percent year over year to $718 million, or $1.33 per diluted share. However, on an adjusted basis, diluted earnings per share were $1.32, missing forecasts that called for earnings to hit $1.38 per share.

Target’s gross margin rate for the period dipped to 29.8 percent, compared with 30 percent in the prior year — which the company said evidenced pressure from digital fulfillments costs, including store remodels and faster, two-day shipping. (The retailer last year also pledged to make significant investments in improving employee wages, which likely hurt margins.)

“Digital fulfillment sales have put pressure on gross margin as that continues to grow faster than the rest of the business,” EVP and COO John Mulligan told investors during a conference call today. “But on the other side of that, as we continue to ship more from our stores, that is the fastest way to ship for our guests; and second, it’s the most efficient from a cost perspective for us.”

Despite the pressure on profits, Target is reaping the rewards of seemingly satisfied shoppers, who are visiting its stores at a rate it hasn’t seen in 10 years, according to the company. Store traffic during the quarter grew by a record 3.7 percent — the highest rate in more than a decade — as comparable sales advanced 3 percent.

Overall, revenues gained 3.5 percent year over year to $16.6 billion, just above analysts’ bets of $16.5 billion. Digital sales also rose 28 percent, besting last year’s growth of 21 percent.

“In our digital channels, we continue to see strong trends even as we compare over rapid growth in past years,” chairman and CEO Brian Cornell said during the conference call. “While our operating income continues to reflect some near-term headwinds driven by last year’s investments to transform our business, we are benefiting from accelerated traffic and sales and federal tax reform legislation enacted late last year.”

Target reaffirmed its full-year guidance and continues to expect a low-single-digit increase in comparable sales, and both reported EPS from continuing operations and adjusted EPS of $5.15 to $5.45.

Facing competition from Amazon and other online players, traditional retailers such as Target, Walmart, Macy’s and JCPenney have accelerated their digital investments, focusing on optimizing stores for online fulfillment as well as improving shipping options for customers. So far — as retailers work through early hiccups — results remain mixed. Macy’s last week pulled off a better-than-expected quarter, while JCPenney’s results evidenced ongoing struggles.

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