The doubling of Target's (TGT -2.57%) stock price in 2019 reflected surging optimism on the part of investors who have been betting on the chain's retail rebound. The company provided plenty of data to support that bullish reading, with sales gains accelerating from the second to third quarter. Rising customer traffic rates, improving profitability, and market share gains all seemed to set the retailer up for a banner finish to the year.
Yet the retailing business is inherently hard to predict, especially around the competitive holiday shopping season. Target's sales update report, issued on Wednesday, demonstrated that difficulty, as management had to walk back its fourth-quarter outlook after a soft holiday performance.
Sales gains, but not as high as predicted
Investors had been looking for fourth-quarter sales growth of between 3% and 4%, which would have marked a slight deceleration compared to last quarter's 4.5% spike. CEO Brian Cornell and his team issued that aggressive forecast following a blockbuster third-quarter report that showed plenty of shopper enthusiasm for its offerings both in stores and online. Target's Q3 digital sales jumped 31% and overall customer traffic spiked 3.1%.
The momentum didn't carry over completely into the holiday period. Instead, Target noted that comparable-store sales gains slowed to 1.4%. Traffic softened online, where growth fell to 19%, and in stores, where shoppers became more deliberate about where they did their purchasing.
The company performed well in consumer staples categories like clothing and beauty products. However, it fell short in the discretionary niches of consumer electronics and home goods. These categories tend to dominate sales around the holiday season, so a slight underperformance here had a major impact on the business. "We faced challenges throughout November and December in key seasonal merchandise categories," Cornell said in a press release, "and our holiday sales did not meet our expectations."
Still growing efficiently
Management stressed several positive takeaways from the holiday performance, including continued success in the chain's multi-channel selling approach. Customers continued to opt for ultra-fast fulfillment options like in-store pickup and same-day delivery, which lifted profitability. Target also benefited from a sleek inventory position heading into Q4, along with a more efficient supply chain. As a result, the company affirmed its full-year earnings prediction despite the weaker sales trends.
Zooming out to the wider year demonstrates that the business is on the mend, too. "We remain on track to deliver historically strong full-year results," Cornell said, "including comp sales growth of more than 3% and record-high EPS reflecting mid-teens growth compared with last year."
Looking out to the coming year
That positive earnings picture makes it likely Target will still notch its first annual increase in operating profit margin since it started its transformation strategy over two years ago. Investors can also celebrate the chain's continued progress at winning market share in key categories like beauty products, toys, and apparel, while taking advantage of its network of stores to capitalize on the demand for fast fulfillment offerings. Those wins point to another record year for the business in 2020. The chain's recent growth challenges, on the other hand, suggest there are limits to Target's ability to drive demand in the most competitive product niches.