Target shares dip after it misses profit expectations

Target Corp. reported strong third-quarter results on Tuesday, but investors wanted more.

Along with several other retailers — including Kohl's, Amazon and Walmart – the Minneapolis-based retailer saw shares dip through midday along with a broader market decline.

Target reported adjusted earnings per share of $1.09 on sales of $17.82 billion for the quarter that ended Nov. 3, the third of its fiscal year. Analysts had expected the company to hit $1.12 in per-share profit.

Minneapolis-based Target has spent heavily on store remodeling and on backroom operations to improve shipping times, delivery options and faster in-store pickup times. That spending contributed to a 3.3 percent decline in its operating profit.

"While this is unfortunate, we see this decline as necessary to support Target's growth ambitions," Neil Saunders of GlobalData Retail wrote in a report. "Some on Wall Street may lament the dip, but the truth is you cannot reinvent a retailer on the cheap. Target is not doing that and we applaud them for it."

The company's results overall amounted to the best third quarter for Target in a decade. Consumer confidence is high, and the company said it continues to gain market share entering the holiday season from Toys "R" Us and as competitors such as Sears close stores.

Same store sales grew 5.1 percent during the third quarter, with the company reporting gains in all major product categories. Digital orders — from people buying from the company's website or various mobile phone apps — contributed to more than a third of that growth.

Overall, online sales jumped 49 percent compared to last quarter. Some of the costs associated with such a leap, including increased shipping, cut into profit margins.

The company is into the final stage of a $7 billion, three-year plan to overhaul its stores and online operations where it has turned stores into order-fulfillment centers to speed up delivery and to reduce shipping costs.

During a conference call with investors, Target Chief Executive Brian Cornell sought to quell anxieties by stressing a two- to three-year horizon for the full benefits to accrue.

"If we were in a football game, we're still in the first quarter," Cornell said. "But I like the points we're putting on the board."

With consumers expecting instant gratification and convenience at a low price. Target began offering free, two-day delivery in November and will continue through the holiday shopping season.

It was a move that forced competitors Walmart and Amazon to follow, but will force the company to find savings elsewhere to keep prices competitive. Technology is improving productivity among its workers, who can be seen navigating store aisles with handheld devices picking up goods for customers.

Target expects fourth-quarter sales to rise 5 percent compared to last year, about in line with its third-quarter pace. It maintained annual earnings per share to range from $5.30 to $5.50.

Net income grew to $622 million, or $1.17 per share, compared with $478 million, or 87 cents per share, a year ago.

Despite the tightest labor market in a generation, Target said it had reached its hiring goal of adding 120,000 seasonal workers, the most of any other retail chain, and a 20 percent increase over last year.

Heading into the holidays, the company has completed 300 store remodels. It has quickly ramped up its drive-up service, which the company says has been a hit with consumers.

The service has gone from a 50-store pilot project around the Twin Cities last year to now being available in 1,000 stores. It will be available on Thanksgiving and Black Friday, as well.

Competition for toys continues to be a focus for the retailer, which said it saw third-quarter gains in the wake of the closing of Toys "R" Us stores.

Half of Target's annual toy sales come during the fourth quarter, and the retailer has beefed up its inventory, remodeled the toy areas in 100 stores and added more space in another 500 key locations.

Jackie Crosby • 612-673-7335 Twitter: @JackieCrosby