Sometimes really good isn’t quite good enough for Wall Street.
Target (TGT) on Wednesday reported strong online and in-store quarterly sales growth and, more importantly, a solid jump in store visits by shoppers, showing that its efforts to use its stores to ward off competition from Walmart (WMT) and Amazon.com (AMZN) are working. At the same time, these initiatives are costing a lot of money and unnerved Wall Street, with shares falling 5%.
The discount retailer reported comparable sales increased 3% in the quarter ended May 5, and that shopper visits, its top priority, were up 3.7%. At the same time, Target’s operating income margin slipped almost a full percentage point to 6.2%, as the chain spent money on store remodels, lower prices, and higher worker wages. And the company is not letting up, planning a previously announced $3 billion on capital expenditures this year. Target’s moves are ambitious, if pricey: they include the recent 40% cut to its next-day delivery fee (waived for holders of its store card), a new drive-up service where shoppers can pick up orders at a store in an hour, and broad expansion of its delivery in the wake of its $550 million purchase of Shipt last year, along with an ongoing expansion of its successful fleet of smaller urban stores.
In early 2017, Target scrapped some of its financial forecasts and announced a multi-year $7 billion program to spruce up its store and online businesses. So it’s clear Wall Street is looking for more of a payoff now, though Wednesday’s results show they’ll have to be patient. “Target will need to show that it can effectively balance sales and profits,” Credit Suisse wrote in a research note.
But the pressure is unlikely to ease anytime soon, particularly as other chains, particularly those with big grocery businesses like Walmart and Kroger (KR) ramp up their own efforts. Just in the last few days, Whole Foods launched a loyalty program for Amazon Prime members, while Kroger said it was working with British online grocer Ocado to beef up its U.S. home delivery capability. Walmart is also expanding grocery delivery.
Target’s first quarter profit rose 5.9% to $718 million, or $1.33 a share, compared with $678 million, or $1.22 a share a year earlier. Total sales jumped 3.5% to $16.56 billion, helped in part by a 28% increase in online sales, a faster clip than in the same quarter a year earlier.
While Target works to wring out more profit from its operations, it at least has a tailwind in the form of strong consumer spending. “The consumer is very healthy and they are spending more time shopping at Target,” Target CEO Brian Cornell said. And it has also helped itself: its new private apparel brands have largely been quick successes, helping it win market share in some key categories.
