Retail giant Target (TGT 2.03%) reported third-quarter earnings on Wednesday, Nov. 20, that missed analyst consensus estimates on both top and bottom lines. Sales grew just 1.1% year over year for the quarter ending Nov. 2 while earnings per share (EPS) of $1.85 missed analysts' expectations of $2.30. The company attributed the shortfall to ongoing pressures in profitability, including higher costs in digital fulfillment and price cuts on thousands of products.
Overall, the quarter highlighted challenges for the discount retailer which were exacerbated by a cut in full-year guidance only three months after Target raised guidance in the previous quarter's report.
| Metric | Q3 2024 | Analyst Estimate | Q3 2023 | Change (YOY) |
|---|---|---|---|---|
| Adjusted EPS | $1.85 | $2.30 | $2.10 | (12%) |
| Revenue | $25.67 billion | $25.88 billion | $25.4 billion | 1.1% |
| Operating income | $1.17 billion | N/A | $1.32 billion | (11.2%) |
| Gross margin rate | 27.2% | N/A | 27.4% | (0.2%) |
Source: Target. Note: Analyst consensus estimates for the quarter provided by FactSet. YOY = Year over year.
An Overview of Target
Target is a major American retailer offering a wide selection of products including apparel, food, and electronics. The company operates through both physical stores and digital platforms, utilizing a multi-channel strategy that blends online and in-store shopping experiences. Key current focuses involve expanding its digital platform, enhancing product offerings, and fostering customer loyalty through programs like Target Circle and RedCard.
Target's merchandise strategy leverages both well-known brands and exclusive partnerships to stand out in the competitive retail sector. About one-third of its sales come from owned and exclusive brands, allowing for differentiated product lines and better margin controls. The company engages consumers with partnerships with popular brands like Levi's and Ulta Beauty, and it aims to capture market share through unique offerings and targeted in-store experiences.
Quarter Highlights
Target's focus on online sales yielded significant gains in Q3, with digital revenue climbing 10.8% year over year. This trend emphasizes the rising importance of Target's multi-channel retail strategy. Digital growth was bolstered by strong same-day services, including Drive Up and Order Pickup. Overall sales grew 1.1% from the previous year, driven by increased guest traffic by 2.4%, encompassing in-store visits and digital interactions. Comparable sales (sales of stores open at least 13 months) were up 0.3%, which missed expectations of a 1.5% increase.
However, profitability remains a concern as gross margin declined slightly from 27.4% to 27.2%, impacted by higher costs in digital fulfillment and the supply chain. Operating income fell 11.2%, demonstrating the tension between revenue generation and cost management. Operating expenses, labeled as selling, general, and administrative (SG&A), increased from 20.9% to 21.4%. This change reflects challenges in managing costs amid growth in specific sales channels.
The beauty segment was a standout, exhibiting over 6% growth, benefiting from strategic collaborations and high-demand cosmetics brands like e.l.f. Beauty. This growth aligns with Target's merchandise strategy that prioritizes appealing product assortments to attract a broad range of consumers.
Net earnings in Q3 decreased by 12.1%, from $971 million to $854 million. Meanwhile, inventory increased slightly, indicating a focus on ensuring product availability. Target declared a 1.8% rise in dividends, totaling $1.12 per share, emphasizing its commitment to returning capital to shareholders.
Looking Ahead
Target's guidance for the quarter now underway projects flat comparable sales and adjusted EPS within the range of $1.85 to $2.45. Management expects full-year adjusted EPS to range from $8.30 to $8.90. That’s lower than the $9 to $9.70 per share range it forecast in August.
Investors should keep an eye on consumer purchase tendencies and business strategies to mitigate costs. The company's success will depend on its ability to navigate an evolving retail environment and maintain its strategic initiatives in brand partnerships and digital enhancements. Companies need to address ongoing inflationary pressures and find efficiencies to support profitability in future quarters.
