Target's ambitious plan to remake itself is driving more people to its stores and its website, where they are spending more for everything from fashion to towels. But the cost of such a massive overhaul is extensive, and it took some of the shine off a strong quarter of sales.
In the race to modernize, Target's profit margins are under significant pressure. The bottom lines of traditional retailers are getting bruised trying to hold Amazon.com at bay. Late last month, Walmart reported weak fourth-quarter profits as it stumbled with e-commerce sales during the crucial holiday season.
Where investors punished Walmart by selling off shares, the reaction to Target was more subdued Tuesday, suggesting that the traditionally irascible Wall Street may be giving the retailer what it needs most: more time to win over consumers.
Still, shares slipped close to 4 percent in early trading and a number of industry analysts seemed exasperated with the fickleness of Wall Street in what they believe is a turnaround story.
"While we understand the concern over increasing costs, we are critical of voices that see this as a weakness," wrote Neil Saunders, managing director of GlobalData. "We take the contrary view: if it is to grow, Target needs to invest -- including in customer service, which affects wages. The alternative, which is to restrict or throttle investment, may deliver more profit in the short term, but it will be to the detriment of long-term performance. "
But traditional retailers face a moving target in Amazon.com.
Amazon has created fierce loyalty among shoppers who spend $99 for a membership that comes with free shipping, as well as streaming movies and music. Its acquisition of Whole Foods Market last year has raised the stakes for Target and Walmart, which also sell groceries. Amazon just introduced two-hour Whole Foods delivery for Prime members.
Target pledged last year to invest more than $7 billion in modernization efforts over the next three years. That includes remodeling old stores, opening small locations in cities and college towns and faster online delivery. Late last year, the company said it was accelerating plans to remodel more than half of its 1,800 stores by 2020.
It recently acquired the startup Shipt, which will mean same-day delivery from about half of its stores early this year. It's also testing store-curb pickup for online grocery shopping, and Target is expanding next-day delivery for some products nationwide by the end of this year.
Among the notable costs for Target is its decision to raise its minimum hourly wage for its workers to $11 late last year. That jumps to $15 by the end of 2020. It's part of the company's ambition to elevate the experience of customers.
Investors are eager to hear more Tuesday during the company's annual meeting at its headquarters.
"Our fourth quarter results demonstrate the power of the significant investments we've made in our team and our business throughout 2017," said CEO Brian Cornell in a company release.
Target had a profit of $1.1 billion, or $2.02 per share. That compares with $817 million, or $1.45 per share, in the year-ago period.
Earnings, adjusted for one-time gains and costs, were $1.37 per share, which is 2 cents short of analyst projections, according to Zacks Investment Research.
Revenue rose 10 percent to $22.77 billion, edging out expectations for $22.46 billion.
Target reported a 3.6 percent increase in revenue at stores opened at least a year. That beat estimates of a 3.1 percent gain, according to FactSet.
Same-store sales, a crucial barometer in the industry, rose more than 4 percent in January, suggesting that Target's transformation is sustainable.
Customer traffic rose 3.2 percent and online sales jumped 29 percent.
The company logged healthy sales growth in all five of its merchandising areas, including fashion and home furnishings.
Target expects its per-share earnings this quarter to range from $1.25 to $1.45. Analysts expect $1.40.
Full-year earnings are projected in the range of $5.15 to $5.45 per share, versus Wall Street expectations for $5.21.
Shares of Target Corp., which had fallen close to 5 percent before the opening bell, were down more than 3 percent in late morning trading, to $72.84.
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