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Target’s Shares Drop After Missing Earnings Estimates in Q3

Target Inc. reported its third quarter results before the markets opened Tuesday and lower-than-expected earnings, mixed with shrinking margins and an expanding inventory led to the retailer’s shares falling by up to 15 percent on the day, according to Reuters.

Shares closed Friday at $67.30 and opened at $68.47 in early trading on Monday.

In a Nutshell: After a solid second quarter in 2018, investor’s hopes were high for the retailer thanks to diminished competition and a retail environment that resulted in the highest reported same-store sales growth for Target in 13 years. The Q3 message from Target leadership was positive, providing support for their optimism by pointing to investments in fulfillment and guest experience that led to market share gains in all five of Target’s core merchandise categories, especially in toys, baby and beauty.

Traffic was up 5.3 percent across both digital and physical channels thanks to expanded fulfillment options, like Target’s free 2-day holiday shipping and the expansion of Drive Up—a curbside delivery option—to 1,000 stores in Q3.

However, the third quarter still failed to live up to the hype created by the previous quarter and the retailer missed Wall Street expectations for earnings-per-share. Target did not adjust its year-end EPS expectations of $5.30 to $5.50 but said it would make an additional earnings announcement on Jan. 10, following the holiday period.

Sales: Total revenue reached $17.8 billion for the quarter, up 5.6 percent from $16.9 billion in 2017. Sales growth of 5.7 percent was a contributing factor, along with revenue growth of 1.6 percent in other areas. Comparable sales were up 5.1 percent, although that number was also slightly below estimates.

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Comparable digital sales also increased by 49 percent in the quarter, the second straight quarter that saw an increase of more than 40 percent in that category.

Earnings: Earnings-per-share for Target’s third quarter were $1.09, up 20 percent from 2017, but below Wall Street’s expectation of $1.12, according to Reuters. Additionally, operating income margin rates fell to 4.6 percent in the quarter, compared to 5 percent in 2017, and gross margins fell from 29.6 percent in 2017 to 28.7 percent in Q3 of 2018, too. The retailer said the decline could be explained by higher supply chain costs driven by “growth in digital fulfillment costs” and the timing of “holiday-related inventory receipts” compared with 2017.

CEO’s Take: At the beginning of 2017, Target laid out a plan to begin a series of investments to bulk up its digital sales and fulfillment options. Those investments were at the forefront of Target CEO Brian Cornell’s mind.

“While digital channel sales continue to grow rapidly, we are benefiting from healthy traffic and sales growth in our stores as well,” Cornell said. “This growth reflects the capital we are investing in our remodel program, enhancements of the assortment and presentation in key categories and investments in our team, which will help them provide an elevated experience and higher level of service.”

Continuing, he said, “And to support these plans, we will deliver a compelling drumbeat of marketing and holiday promotions designed to keep Target top of mind with our guests throughout the holiday season. While continuing to focus on delivering consistent value by ensuring we are priced right daily.”