By Sarah Foster
Target Corp. reported healthy increases in sales figures for the fourth quarter ended Feb. 3, but when it came to profits, the company barely hit its bullseye, and shares fell.
In accordance with GAAP, new U.S. tax legislation helped boost profits up 34.7 percent to $1.10 billion, or $2.02 per diluted share, in the fourth quarter, compared with $817 million, or $1.46 a share, in the year-earlier period. The company reported Tuesday a benefit of 64 cents per share related to the new tax law.
But adjusted earnings, which exclude tax-related savings, fell short of analyst expectations, causing shares to plummet nearly 5 percent. Adjusted diluted earnings per share reached $1.37 compared with expectations of $1.38.
Sales climbed 10 percent to $22.77 billion from $20.69 billion a year earlier, slightly beating expectations of $22.52 billion, thanks to robust consumer spending both in stores and online and an additional week in the quarter.
These gains, however, were offset by various company-wide investment efforts that ate into its fourth-quarter profit. The company aims to invest more dollars into its online shopping experience and increase wages to $15 by 2020, CEO Brian Cornell said at an annual gathering of Target analysts in Minneapolis.
“These are the choices we’re making to ensure Target continues to stand out from the pack and further distinguish our brand in the minds of the guest,” Cornell said. “Our progress in 2017 gives us confidence that we are making the right long-term investments to best position Target for profitable growth in a rapidly changing consumer and retail environment.”
Same-store sales rose by 3.6 percent and were up more than 4 percent in January, the company said. Online sales increased by 29 percent.
But gross margins slipped to 26.2 percent, compared with 26.6 percent in 2016, a drop that the company attributed to digital fulfillment costs.
“Gross margins were lower than expected, general administrative expenses were higher than initially anticipated,” said Brian Yarbrough, securities analyst at Edward Jones, in a phone interview. “Those things combined with upping their investment in spending, the Street is a little bit worried about whether they can grow profits and sales at the same time.”
Profits for the year ended Feb. 3 rose 7.2 percent to $2.93 billion, or $5.33 per diluted share, compared with $2.74 billion, or $4.70 per share, a year ago. Revenues rose by 3.4 percent to $71.88 billion from $69.50 billion.
Commenting on its outlook for 2018 and the first quarter, the company expects a low-single digit increase in same-store sales. The retailer predicts that earnings per share will reach between $5.15 and $5.45, reflecting a decline in the year-over-year pressure related to depreciation and amortization.
Cornell said he hopes to spend the year helping the company accelerate in the areas that set Target apart from other chains: “Our stores, exclusive brands and rapidly-growing suite of fulfillment options.”
Seth Sigman, analyst at Credit Suisse, said in a note to investors the company will need to refocus its efforts on offsetting “cost pressures and investments through operating efficiencies and alternative distribution models, while allowing for less of a margin decline in 2018.”
Target’s shares fell $3.35, or 4.46 percent, to $71.79.