Retailer Target (TGT 54.46, -5.63, -9.4%) did what it seemingly needed to do with its third quarter report. The company exceeded analysts' average expectations for sales, comparable sales, and adjusted earnings per diluted share, yet its stock is down 9% in the wake of the results.
The drop in the stock has been linked to Target's fourth quarter guidance and some underlying operating trends in the third quarter that have raised investors' concerns about Target's position in a competitive retail space.
First, the good news: third quarter sales increased 1.4% to $16.67 billion, comparable sales increased 0.9%, and adjusted diluted earnings per share of $0.91 comfortably exceeded analysts' average expectation. Comparable digital channel sales surged 24% and contributed 0.8 percentage points to comparable sales growth.
The bad news is that adjusted diluted earnings per share were down 13.1% from the year-ago period. Lower gross margins, which stemmed from promotional activity and higher digital fulfillment costs, and higher SG&A expenses, which were driven by higher compensation costs, pressured the company's bottom line.
Target is aiming to go toe-to-toe with the likes of Walmart (WMT 90.59, -0.50, -0.6%) and Amazon.com (AMZN 1127.33. -9.51, -0.8%) to win market share. It is doing so with an increased use of private-label brands, promotional pricing, increased investment in its digital channel, and higher wages for customer-facing employees at the company's 1,834 stores.
In some respects, Target is playing catch up to its competitors and investors are concerned that effort won't come easily, cheaply, and/or quickly, especially since Walmart and Amazon.com aren't going to sit idly by and just let Target steal away their market share.
Accordingly, investors were unimpressed with Target's fourth quarter guidance, which calls for comparable sales to be flat to up 2%, versus down 1.5% in the same period a year ago, and adjusted earnings per share to be between $1.05 and $1.25.
The midpoint of the EPS guidance range is comfortably below analysts' average expectation and down 21% from adjusted earnings per share of $1.45 reported for the fourth quarter of 2016.
The fourth quarter encompasses the all-important holiday selling season. Target plans to provide a post-holiday financial update on Tuesday, January 9.
The retailer said it expects this holiday selling season to be "highly competitive." Target is on point with that assumption, but judging by the response to its latest earnings results and outlook, investors have their doubts about the company hitting its target like it wants to knowing the likes of Walmart and Amazon.com will be shooting competitive arrows of their own.