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Target's Sales Are Rising, but Not Its Bottom Line

By Jennifer Saibil - Mar 25, 2020 at 10:05AM

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While the retailer is enjoying higher sales of essential items, the higher costs of disinfecting and lower sales of nonessentials are squeezing margins.

Target (TGT 2.65%) gave an update to investors on March 25 that although sales have increased over the current quarter, it's been mostly low-margin items, including necessities such as food, medicine, and cleaning supplies. Coupled with higher costs related to keeping stores clean in the midst of the coronavirus outbreak, the company said, earnings will decrease.

Exploding sales

The company's first quarter started Feb. 2, and February had a 3.8% increase in sales year over year. March to date has seen a 20% increase in sales, and essentials as well as food and beverage have seen a 50% increase over last year's numbers. Home office and entertainment saw a rise as well.

Target CEO Brian Cornell and workers.

Target CEO Brian Cornell talks with Target employees. Image source: Target.

However, beginning in mid-March, there were softer sales of higher-margin goods such as apparel and accessories, which are now down 20% compared to the same time last year.

Increasing costs

At the same time, Target is anticipating higher employee costs related to extra pay and benefits. The company has announced that it's increasing pay for hourly workers by $2 an hour and extending paid leave for workers over age 65 or those who are pregnant or immunocompromised.

Additionally, stores are incurring costs for extra hours devoted to cleaning instead of selling.

Unclear outlook

Due to the fluid nature of its current business, Target is withdrawing its previous guidance. It had set targets of low single-digit comps for the first quarter of 2020 and the full fiscal year and mid-single digit increases in operating income for both. It expected earnings per share of $1.55 to $1.75 for the first quarter and EPS of $6.70 to $7 for the full year. 

CFO Michael Fiddelke said, "With the best team in retail focused on serving our guests, and ample financial capacity to navigate a highly uncertain outlook, we are confident that Target will emerge from the current environment with an even stronger guest relationship and continue to operate from a position of financial strength."

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