Will Target’s Profitability Improve Due to Higher Sales Outlook?
What could impact Target’s margins?
Target’s (TGT) profitability is impacted by its dismal performance on the sales front. Higher fulfillment costs, due to increased online sales, put more pressure on Target’s margins. With upbeat comps guidance, will the company’s margins improve in fiscal 2Q17?
Target’s profitability will likely remain soft. Increased investment in price, higher promotional spend, a rise in costs associated with the fulfillment of online orders, and increased competition will continue to be a drag on Target’s margins.
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Target stated that it expects its adjusted EPS (earnings per share) to be at the higher end of its earlier projected range of $0.95–$1.15. However, the company’s bottom line is expected to benefit from the lower effective tax rate.
Retailers including Walmart (WMT) and Costco (COST) are investing in price to fend off the growing threat from Amazon (AMZN), which is hurting their gross margins. Walmart and Costco have managed to report higher sales, which provides leverage for their margins. Similar to its peers, Target is investing in price to remain competitive and drive store traffic, which is impacting its margins. Target lagged it peers on the sales front, which dragged its margins down.
Going forward, the company’s margins will likely remain low due to planned investments and higher costs. Target expects its fiscal 2Q17 EBIT fall by $200 million. The company’s bottom line is expected to fall on a year-over-year basis.