What happened
Shares of retailer Target (TGT 0.60%) slumped on Tuesday following a third-quarter report that came up a bit short of expectations. While Target posted robust online-sales growth and solid comparable-sales growth, both the top and bottom lines missed analyst estimates. The stock was down about 9.9% at 12:30 p.m. EST.
So what
Target reported third-quarter revenue of $17.82 billion, up 5.6% year over year but $110 million below the average analyst estimate. Comparable sales grew by 5.1%, driven by a 5.3% increase in store traffic and a 49% increase in online sales. Target claimed to have gained market share across its five core merchandising categories during the quarter.
Image source: Target.
Non-GAAP earnings per share came in at $1.09, up from $0.90 in the prior-year period but $0.02 below analyst expectations. Earnings growth was driven by a reduction in interest expense and a lower tax rate. The company's gross margin was 28.7%, down from 29.6% in the prior-year period. Operating margin was 4.6%, down from 5% in the third quarter of 2017.
Investments in hours, training, and wages were one reason for the margin decline, but Target CEO Brian Cornell expects a payoff during the holiday season: "We've made significant investments in our team heading into the holidays and they are ready to serve our guests with a comprehensive suite of convenient delivery and pickup options, a wide range of new products and unique gift ideas and a strong emphasis on low prices and great value."
Now what
While Target missed analyst estimates, its results were just fine on an absolute basis. Comparable sales and traffic continue to grow, and the online business is accelerating. Target's 49% online growth was quite a bit faster than the 41% growth it reported in the second quarter. Free two-day shipping likely played a role in this acceleration.
Target's earnings growth will probably slow way down and possibly reverse once the company laps the benefits of a lower tax rate and lower interest expense. That could be one reason why the stock is selling off today. But with both in-store and online sales growing, Target is proving that it can go toe-to-toe with both Walmart and Amazon.
