Target Corp. (TGT, Financial) released its fourth-quarter 2016 earnings recently, missing earnings estimates after recording three consecutive quarters of earnings beats. The retailer also failed to impress investors in terms of revenue, which came in short of estimates. In addition, Target gave a bleak outlook for 2017, which further disappointed investors.Ă‚ As a consequence, shares declined 13% in pre-market trading.
The numbers at a glance
Target registered earnings per share of $1.45 on revenue of $20.69 billion in the fourth quarter. As mentioned, both metrics came in below estimates, which were earnings of $1.51 on revenue of $20.71 billion. Even on a year-over-year basis, the results were a let-down. In the fourth quarter of 2015, Target generated EPS of $1.52 on revenue of $21.62 billion.
The company previously lowered its earnings guidance range from $1.55 to $1.75 per share to $1.45 to $1.55 per share. The numbers did not come as a surprise to analysts, though non-GAAP EPS were 60 cents short of expectations.
Revenue during the quarter was supported by strong performance in the e-commerce business. The online segment, however, accounts for only 6.8% of total revenues, which is a tiny proportion. As such, it did not bear an impact large enough to defend Target’s overall 4.3% decline in revenue during the period. Bleak sales in the pharmacy and clinic businesses, pricing pressure, rising competition and slow traffic affected the company’s top line.
Target’s gross margin for the quarter was 26.9%, which is a full percentage point lower from a year earlier. Even if the metric is compared to the prior quarter, Target’s gross margin improved 80 basis points year over year in third-quarter 2016. The drop in the gross margin is a reflection of the strong pricing pressures typically witnessed by retailers in the holiday season.
The Minneapolis-based company’s same-store sales declined 1.5% in the fourth quarter. The number of transactions grew 0.2%, but the average transaction value plunged 1.6%. Comparable sales in the digital channel inched up 34% and contributed 1.8 percentage points to same-store sales.
Target’s gross profit dropped 7.6% to $5,574 million and the gross margin narrowed 100 basis points to 26.9%. The retailer’s operating income dropped 13.5% to $1,344 million and the operating margin shrank 70 basis points to 6.5%. During the quarter, the company repurchased $565 million worth of shares and distributed $337 million in dividends. Target ended the fourth quarter with a cash balance of $2.5 billion and long-term debt and other borrowings to the tune of $11 billion.
The road ahead
For 2017, Target expects its comparable sales to see a low single-digit decline. The company has given GAAP EPS from continuing operations and adjusted EPS guidance of $3.80 to $4.20.
Target is working on increasing its omnichannel capacities. In addition, the company plans to widen its merchandise categories by investing in Style, Baby, Kids and Wellness. Target has also proposed to launch new brands and is working on placing its prices competitively.
The company said its new strategy of keeping prices low might press down on sales and profits in the near term. The transition into investments in smart network and competitively priced products will clearly bring headwinds in the short run. Regardless, it should help the company get a stronger hold on the market and gain favorable results in the long run.
Disclosure: I do not hold any position in the stock mentioned in this article.
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