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Target Tops Earnings Estimates, But Shares Fall as Retailer Focuses on Keeping Customer Prices Low

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  • Target topped earnings for the fiscal third quarter, as seasonal moments like Halloween and back-to-school boosted sales.
  • The retailer raised its forecast, saying that comparable sales could rise at between a high single-digit and low double-digit pace in the holiday period. 
  • CEO Brian Cornell said the company is focused on value as prices of food, gas and more rise, and consumers face sticker shock.

Target shares fell Wednesday, as the big-box retailer opted to emphasize its focus on value as prices of groceries, fuel and other goods rise.

The stock closed down 4.73% to $253.80, despite beating earnings expectations for the fiscal third quarter.

Target CEO Brian Cornell said on an earnings call with reporters that the company is absorbing some of the higher costs it's seeing, rather than passing them on to customers. That strategy could squeeze margins.

"We are protecting prices," he said. "It's as important to our guests this year as safety has been throughout the pandemic." 

Target Chief Growth Officer Christina Hennington acknowledged on the call the pressure on the retailer's margins as the company tries to move inventory quickly, despite supply chain challenges. She described that as "an appropriate long-term investment in the relationship with our guests."

Sees higher holiday sales

Target topped analysts' predictions as sales jumped 13% after shoppers bought Halloween costumes, stocked up on back-to-school supplies and kicked off the search for holiday gifts early.

It also raised its fiscal fourth-quarter forecast, predicting comparable sales could rise at between a high single-digit and low double-digit pace in the holiday period. Previously, it estimated a high single-digit increase.

Here's what Target reported for the fiscal third quarter ended Oct. 30, compared with Refinitiv consensus estimates:

  • Earnings per share: $3.03 adjusted vs. $2.83, expected
  • Revenue: $25.65 billion vs. $24.78 billion

Net income jumped to $1.49 billion, or $3.04 per share, from $1.01 billion, or $2.01 per share, a year earlier. Excluding items, the retailer earned $3.03 per share, higher than the $2.83 per share expected by analysts surveyed by Refinitiv.

Total revenue rose 13% to $25.65 billion from the same period a year ago, slightly above analysts' expectations of $24.78 billion. 

Comparable sales in the third quarter grew 12.7%, as shoppers made more trips to Target's stores and visits to its website. That exceeded the 8.2% increase that analysts expected, according to a StreetAccount survey. 

Target's strongest month of the quarter was August, as parents and students bought pencils, notebooks and more to prepare for a return to in-person learning, Chief Financial Officer Michael Fiddelke said on the call. Its comparable sales dipped to about 10% in September and accelerated back into the low teens in October, he said.

Store comparable sales increased 9.7%, while digital comparable sales grew 29%. (These metrics were up 9.9% and 155%, respectively, in the year-ago quarter.)

Target said sales through its same-day services — which include curbside pickup service, Drive Up, in-store retrieval of orders called Order Pickup and home delivery service Shipt — grew nearly 60% in the quarter. That's on top of more than 200% growth in the year-ago period.

As it gears up for holiday shoppers, Chief Operating Officer John Mulligan said the company is making long-term investments to prepare for a spike in demand and adjust to the new ways that consumers shop.

Target uses its stores to fulfill almost all of its online orders, including ones retrieved in the parking lot and delivered to customers' homes. More than 95% of third-quarter sales were fulfilled in its stores.

Mulligan said on the earnings call that the retailer is adding storage capacity at more than 200 high-volume stores, adding temporary storage areas to support seasonal peaks and doubling the number of parking spots for curbside pickup compared with last year. It is also designating parking spots with numbers to help its employees more quickly get online orders to customers' cars.

'Key seasonal moments'

Cornell said sales have been strong throughout the year, but have been "punctuated during key seasonal moments." He said he expects that pattern to play out again during the holidays, as consumers buy toys, decorations and food.

Target is ready for the holidays, Cornell said. He explained that the retailer has gotten creative to make sure items arrive at stores and warehouses in time, despite clogged ports. It has contracted some of its own ships, unloaded about 60% of its containers at off-peak times and sent more of its goods to less-trafficked ports in Georgia, Virginia or the Pacific Northwest.

That's led to a nearly 20%, or $2 billion, increase in inventory year over year, he said.

Hennington said Target has new attractions that will draw shoppers. It has opened additional Disney and Apple shops inside of its stores. Plus, she said, it now is playing up beauty — a popular holiday category — with about 100 Ulta Beauty at Target shops inside of its stores and on its website. It will also launch a limited-time collection with Lego in early December with brightly colored hoodies, home goods and more.

Target began its first holiday deals in early October and has pledged price matches for early birds. He said the company is bulking up operations by hiring 100,000 seasonal employees, filling 30,000 new supply chain roles and giving about 5 million extra hours to current staff.

"The holiday season is off to a great start, but we've got many weeks in front of us and think we're going to continue to see that strength throughout the holiday season right up to Christmas Eve," Cornell said.

As of Tuesday's close, Target's shares are up about 51% this year. The stock closed at $266.39 on Tuesday, bringing the retailer's market value to $130.01 billion.

Read the company's press release here.

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