Shares of retailer Target (TGT 72.11, -3.04, -4.0%) are trading down 4% in pre-market action following the company's fourth quarter report and outlook. The rub is that neither was as robust as investors and analysts had been expecting.
To be fair, the fourth quarter results were every bit as good as Target said they would be on January 9 when it raised its fourth quarter guidance.
Comparable sales jumped 3.6%, versus guidance of around 3.4%, and the company's adjusted EPS of $1.37 was above the midpoint of the guidance range of $1.30 to $1.40, which had been raised from $1.05 to $1.25. Even so, analysts were expecting more of Target, which delivered an adjusted profit of $1.45 in the same period a year ago, which was a 13-week period compared to 14 weeks this year.
The stark reality is that the sales growth came at the expense of profit margins as Target battled on the promotional front with price and on the operating front with investments in its stores, employees, online business, and private-label brands. Target's gross margin rate slipped 40 basis points from the year-ago period to 26.2% and its EBIT margin rate fell 140 basis points to 5.1%.
The investments, however, have been paying off as Target has seen increased customer traffic and increased growth in its digital business. Comparable sales growth for the digital channel increased 29%, which contributed 1.8 percentage points to comparable growth. Traffic, meanwhile, grew 3.2% with the average transaction amount jumping 0.4%.
Target has plenty to feel good about looking back at its fourth quarter performance, which was commendable given the level of sales competition in the retail space during the holiday period. Target's changes are resonating with shoppers, evidenced by the growth in comparable sales and average transaction.
The retailer said it will continue to invest for profitable long-term growth and that it will accelerate its investment in 2018 in areas that set the company apart, namely its stores, exclusive brands, and rapidly-growing suite of fulfillment options.
Mindful of that investment plan, Target is expecting a low single-digit increase in first quarter comparable sales and adjusted EPS to be between $1.25 and $1.45. The midpoint of the EPS guidance range is below analysts' average expectation and is likely contributing to some of the early selling interest.
Shares of TGT have been doing extremely well in 2018, up 15.2% leading into the company's report. Accordingly, the conservative-sounding first quarter guidance has contributed to a sell-the-news response.
For the full-year 2018, Target expects a low single-digit increase in comparable sales and adjusted EPS of $5.15 to $5.45, which is in-line with the initial guidance it provided in January.