Target Corp. (TGT, Financial) reported its fourth quarter 2017 results on Tuesday with strong sales, thanks to the holiday season. The big-box retailer’s plan to draw buyers into its stores is delivering results, even though it tussles to keep them away from buying through Amazon (AMZN, Financial). The company said it lured more customers during the holiday season by refurbishing few of its stores, expanding its online delivery service and providing a variety of exclusive brands and collections.
All this helped the company register comparable sales gain of 3.6% compared with the prior year's same period. The strength in sales continued beyond the holiday period and extended through January. Here’s a closer look at the quarter performance.
Dlving into the details
Target generated $22.8 billion in revenue during the quarter, up 10% from last year when the company reported revenue of $22.8 billion. The company benefited from an additional week in this quarter, which pulled up the top line.
Earnings before interest expense and income taxes (EBIT) came in at $1.15 billion for the quarter, down 14.3% from $1.34 billion in 2016. EBIT margin for the quarter stood at 5.1%, compared with 6.5% a year ago. Gross margin for the period was 26.2%. That compares with 26.6% in 2016. The fall in the gross margin is the result of the pressure from rising digital fulfillments costs.
The overall performance of the company seemed satisfactory, however, Wall Street appeared skeptical since earnings per share dropped and fell short of analysts’ estimates. Adjusted earnings declined to $1.37 a share relative to $1.45 last year, a penny shy of analysts’ expectation. But Target CEO Brian Cornell is quite encouraged with the company’s performance. He said:
"Our progress in 2017 gives us confidence that we are making the right long-term investments to best position Target for profitable growth in a rapidly changing consumer and retail environment.”
Growth in comp sales
Target's comparable sales growth for the quarter was its best in the last three years as the company witnessed 3.6% improvement in the metric. Considering the fact that the retailer enjoyed comparable sales gain across all its significant merchandise category, Target looks to be on a growth track. In addition, number of transactions increased a healthy 3.2% compared with a year earlier, signifying improvement in traffic in both stores and online platform.
Digital sales is on a growth trajectory
Digital sales is the highlight of the quarter for Target with solid performance compared with last year. The company reported online sales gain of 29% over the same period last year. In fact, digital sales channel contributed 1.8 percentage points towards comparable sales growth. Digital sales may be accounting for a small share of Target’s total revenue, however, that’s the number investors should watch out if the ongoing shopping trend is to be considered. The company’s e-commerce growth has been remarkable in the past several quarter. In the latest quarter, the company’s online sales growth surpassed Wal-Mart’s (WMT, Financial) 23%.
The online sales turf has been dominated by Amazon, followed by Wal-Mart. But if Target continues to sustain the growth momentum it is seeing in the past few quarters, it will soon enter into the league of Amazon and Wal-Mart. The company’s investment in e-commerce fulfillment had a bearing on the gross margin. These investments, though impacting the profitability currently, is essential to build market share in the long haul.
Disclosure: I do not hold any position in the stocks mentioned in this article.
