Well, at least it’s trying…
The good news for Target: Online sales are booming.
The bad news for Target: It’s spending way too much on trying to play catch-up with Amazon, and that’s hurting its profits.
Online sales for Target (NYSE: TGT) have surged by 28% from a year ago.
But subpar earnings sent the stock down by 5% in early trading last Wednesday.
Target, like many other traditional brick-and-mortar retailers, is heavily investing in its digital operations in hopes of catching up to Amazon.
Target has said its gross margins, a key measure of profitability, are down slightly from a year ago.
And this was partly because of increased digital fulfillment costs. Digital fulfillment costs are the expenses tied to the delivery of a product from a warehouse to a customer.
It’s a classic case of short-term pain with the hopes of a longer-term gain.
Target CEO Brian Cornell admitted as much in the company’s earnings release. He said Target has “made significant progress in support of our long-term strategic initiatives.”
The problem is, Wall Street often has a “what have you done for me lately?” attitude.
So, Target’s sales missing analysts’ estimates has been made into a major issue. But it’s not for a lack of trying on Target’s part…
Target among fellow retailers, like JCPenney, Lowe’s, and Home Depot, have pointed to the poor spring weather as the reason behind their poor quarterly results.
The retailers have said the slow start to spring has delayed purchases of items like patio furniture, grills, and gardening gear.
Target also told analysts that sales drastically improved when the weather improved.
In a recent statement, Cornell said:
Strong sales growth in our home, essentials, and food & beverage categories offset the impact of delayed sales in temperature-sensitive categories, which accelerated rapidly in recent weeks as weather improved across the country.
Still, the performance will likely rattle investors who have been closely watching Target’s efforts in reinventing its business.
Target is focusing on new, smaller-format stores, a push into private-label brands, and boosting its delivery capabilities.
But the retailer’s investments weighed on its earnings in the last period.
According to Neil Saunders, managing director of GlobalData Retail:
We applaud Target for putting long-term success over short-term gains. However, it does underline that continued effort is needed to drive top-line growth — especially as the company starts to lap tougher prior year comparatives.
Another major concern is that Target will have to keep spending to become a true online retail powerhouse.
Despite all its big investments, Target said its digital sales accounted for a mere 5% of its revenue.
But some analysts still think Target is making the smart, albeit painful, decisions in the short term. And this will help it to become a leader in the digital commerce space down the road.
The retailer has also been focusing on fulfillment and boosting its delivery service, too.
As part of these efforts, it recently acquired delivery service Shipt for $550 million.
In the race to beat Amazon in getting packages to customers as fast as possible, Target has expanded its same-day delivery service to 55 stores in Boston, New York, Chicago, Washington, and San Francisco.
Target will still have to cut its prices to beat rivals Walmart and Amazon. And that could continue to erode its profits.
And even though Target’s stock took a major hit last Wednesday, it’s still doing much better than other retailers like JCPenney and Sears, which have failed to embrace digital commerce and are losing relevance with today’s shoppers.
That’s all for now.
Until next time,
John Peterson
Pro Trader Today