The third quarter earnings of Target, one of the largest department store retailers in the US, drew mixed results. Despite generating more revenue, the retailer missed its target on earnings estimate as the company focused their spending on raised wages and same-day delivery service.

Despite the dip in earnings, Target remains optimistic that it can achieve its forecast for 2018. Target puts its chances on the upcoming holiday season with confidence on significant consummation from shoppers. Target Chief Executive Officer Brian Cornell shares that consumer spending will not falter ahead of the holiday season.

However, Target’s three-quarter run saw their shares plummet down to 9% in trading. Investors worry that the profit margins are weak as the inventories keep piling up toward the holidays.

Target’s Fiscal vs. Wall Street’s Estimate

Based on a poll made by Refinitiv, here is the professional analysts’ comparison between Wall Street’s expectations and Target’s fiscal third-quarter report:

  • Earnings/share: $1.12 estimate vs. $1.09 adjusted
  • Revenue: $17.80 billion estimate vs. $17.82 reported
  • Same-store sales: 5.2 percent expected vs. 5.1 percent growth

Net income went from 87 cents per share ($478 million total) a year ago to $1.17 per share ($622 million total) today. Excluding limited items, Target garnered $1.09/share, which falls short for the expected $1.12/share.

Meanwhile, total revenue grew 5.6 percent from last year, which beats the professional analysts’ estimates with a $17.82 billion total compared to the expected $17.80 billion.

While sales at Target retail stores grew 5.1 percent, it still falls short of the expected 5.2 percent growth. The rise to 49 percent in the third quarter digital sales contributes to the same-store sales growth by about 1.9 percent. While the transactions in stores jumped up to about 5.3 percent, the regular shopper’s ticket went down by 0.2 percent.

Target reveals that its most robust sale gains for the third quarter are from the beauty, baby, and toys department. Toy sales rose up to 20 percent from the past year. To accommodate the increasing rise in toy sales, Target commits to selling toys in their stores to by dedicating more space following the downfall of one of the biggest toy retailers, Toys “R” Us.

Holiday Concerns

Investors remain concerned about Target’s higher expenses that can consume profits amid the rise in sales.

Target’s gross margin from the third quarter of 2018 dipped from 29.6 percent to 28.7 percent in a year, with Target fulfilling more online orders for the holiday season, causing the decline in higher supply chain costs. Target also ended the third quarter an 18 percent rise in inventories due to ordering more holiday-related products ahead of time.

Cathy Smith, Target’s Chief Financial Officer, shares that margins will feel pressure during the fourth quarter. CEO Cornell also reveals that Target benefits from the sales growth all over their stores. Cornell also shares that he is optimistic with the company’s ability to make profitable growth for 2019 onward.

That said, Target needs to keep its flow in profits going through the fourth quarter, especially during the holidays. The company expects the adjusted earnings/share to be within the range of $5.30 to $5.50 for the fiscal year. Target also anticipates an estimate of 5 percent in same-store sales growth.

Target shares reach 35 percent over the past year as of the market close last November 19, raising its market cap to an estimate of $41.1 billion.

Preparing for the Holiday Season

Target spends money on renovations in its stores while also opening up retail stores in urban cities or collegiate towns. The retailer remains assertive in adding in-house brands, which provides higher margins compared to national labels. Target also remains competitive with its business rivals by strengthening its logistics division.

Target hopes to compete with business giants Amazon and Walmart this holiday season. The retailer upgraded its supply chain by investing in bulking up on delivery options. The free two-day shipping, acquisition of a transportation company, curbside pickup, and same-day delivery service make it easier for customers to shop in Target stores or online.

The new convenient options make a huge difference when shoppers stock up on holiday treats and gifts. The current threat poises retail stores to receive another active holiday from U.S. shoppers. Last holiday season, Target revealed that their stores accomplished 70 percent of all digital orders. The company’s goal is to make the percentage higher.

This holiday season, Target applied a free threshold for two-day shipping, removing its minimum threshold while Walmart continues to hold a $35 limit. Target also sets a hiring goal of 120,000 seasonal workers for the holidays. However, there are concerns about the colossal hiring quota because of the thin labor market in the U.S.

By hiring more seasonal workers, Target can fulfill more online orders in stores and distribution this year and make huge strides in the final quarter, where the holidays will surely make an impact.