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Why Target Remains Unattractive to Shoppers and Investors

PART:
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Part 3
Why Target Remains Unattractive to Shoppers and Investors PART 3 OF 5

Why Target’s Profitability Will Likely Remain Low

Lower sales to hurt margins

Similar to its top line, Target’s (TGT) profitability is projected to remain low in coming quarters, and that shouldn’t surprise investors. Sales deleverage, increased price investments, and higher costs associated with fulfillment of online orders are likely to remain a drag on its profitability. Though the company is focusing on productivity measures to boost margins, increased competition is forcing the company to offer low prices to drive sales, which is negatively affecting its bottom-line performance.

Why Target’s Profitability Will Likely Remain Low

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During the last reported quarter, Target’s gross margin contracted by 40 basis points to 30.5% as higher promotional spending to support its “everyday low prices” and increased fulfillment costs related to the rise in digital channel sales dragged the results down. In comparison, rivals including Walmart (WMT) and Costco (COST) are also witnessing similar trends. Retailers are investing in prices to drive store traffic, which is affecting their profitability. However, Costco remains somewhat well positioned on this front. The company’s higher savings from its new Citi Visa (V) co-branded card program and membership fee hike offset higher investments.

On the operating margins front, Target’s EBIT contracted 80 basis points during the last quarter as lower gross margins and higher SG&A expenses took a toll on the margins.

Outlook

Management expects profitability to remain low in coming quarters as higher planned expenses and the rise in fulfillment costs will likely continue to affect margins and in turn the company’s bottom line. As for fiscal 2Q17, Target projects its EBIT to register a decline of $200 million on a YoY (year-over-year) basis, reflecting lower sales, increased price investments, and higher costs.

Moreover, the company’s EPS (earnings per share) is also projected to decline in the range of 7.0%–23.0% for fiscal 2Q17. As for the full year, Target’s bottom line is expected to be in the range of $3.80–$4.20, a decrease of 16.0%–24.0% YoY.

Continue to the next part where we’ll analyze Target’s recent dividend growth rate.

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