The holiday selling period is a critical one for Target (NYSE:TGT), and so investors are keenly interested in what the retailer might say about its operating momentum when it releases fourth-quarter results on Tuesday, March 6.
Target's growth pace has benefited from a mixture of two positive trends lately. Customer traffic, for one, inched higher by about 1% over the first three quarters of 2017. There are good reasons to expect a better result for the holiday season, too, since Walmart booked a 1.6% traffic increase in the period.
Target in early January also said that it enjoyed "strong traffic growth" over the peak shopping months, and we'll find out on Tuesday where that boost puts the company in its full-year traffic metric following the 0.8% decrease it booked in 2016.
Booming digital sales are the second big driver behind Target's modest recovery. In fact, the e-commerce sales channel contributed 0.9 percentage points toward overall comparable-store sales in the past nine months. That increase more than offset a slight sales drop at its stores to keep comps in modestly positive territory for the year.
Walmart's e-commerce growth slowed sharply during the period, posting a 23% increase compared to the prior quarter's 54% jump. Investors aren't expecting a similar situation to impact Target's business, though. Digital sales should rise by over 20% to mark the retailer's fourth consecutive year of 25%-plus growth.
A key challenge is generating sufficient profits from these e-commerce sales while competing with rivals fighting for market share by slashing prices and offering free, quick delivery. Again, Walmart's recent earnings report suggests investors shouldn't expect robust profitability from Target over the holiday season. The retailing titan's gross margin ticked down in the period as a result of cutting prices, as well as the sales mix shifting toward lower-margin e-commerce sales.
Target faced similar struggles in the third quarter and CEO Brian Cornell blamed "pressure from digital fulfilment costs" for reducing profitability. Executives might cite the same challenge as the reason behind lower gross margin over the holidays.
Outlook for 2018
The reduced profitability is paying important dividends, though. Target's comps for the full year are likely to reach just above 1% to mark a modest rebound over the prior year's 1% dip.
Yet investors will be even more interested in the retailer's outlook for 2018. Walmart's forecast calls for comps to rise by at least 2% in the core U.S. segment, or growth that's on par with the 2.1% increase it posted over the prior 12 months.
Target said in January that it was aiming for a "low single-digit" comps boost for the year, but we'll find out this week whether that projected rate implies another year of accelerating growth -- or a return to the essentially flat sales the retailer achieved in 2016 and 2014.