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Why Target Keeps Raising Its Employees’ Pay Even Though It’s Hurting Profits

Target Corp. shares have been in the red for much of the day, after the firm posted fourth-quarter profits that narrowly missed forecasts due, in part, to its ongoing workforce investments.

The retailer — which announced in September its plans to raise its minimum hourly wage for all team members to $11 starting the following month — said its Q4 profits gained 35 percent year over year to $1.1 billion, or $2.02 per diluted share. But on an adjusted basis, diluted earnings per share were $1.37, just below analysts’ bets of $1.38.

CFO and EVP Catherine Smith told investors during a call today that several profit headwinds contributed to the firm’s EPS during the period, “including accelerated depreciation resulting from our remodel program, continued cost pressure from the rapid rollout of our new fulfillment options [and] ongoing wage investments in the face of a tight labor market across the country.”

Despite the hit to its margins, Target — which also committed in September to increasing its minimum hourly wage to $15 by the end of 2020 — doubled down on its push to pay workers more, announcing another wage hike this spring, to $12.

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“Within days of [announcing the first wage hike in September], applications for seasonal positions spiked by more than 30 percent,” Target chairman and CEO Brian Cornell told investors. “But the benefits of that investment go much further than just the short-term seasonal boost. Our leadership positional wage establishes Target as an employer of choice and will drive preference for years to come.”

Target posted Q4 sales of $22.8 billion, representing growth of 10 percent over the prior year and just above analysts’ forecast of sales of $22.5 billion. Comparable sales grew 3.6 percent, helped by a strong holiday performance for the company, which threw significant investment behind optimizing its stores for the seasonal rush. Traffic grew 3.2 percent in the fourth quarter, and comparable digital channel sales increased 29 percent.

For the full year, sales were $72 billion, a gain of 3.4 percent over the prior year. Net income grew 7.2 percent to $3 billion, or $5.33 per diluted share.

In first quarter of 2018, Target expects a low-single-digit increase in comparable sales and EPS of $1.25 to $1.45. For full-year 2018, Target expects a low-single-digit increase in comparable sales and EPS of $5.15 to $5.45.

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