Why Target’s Fiscal 2Q17 Margins Are Expected to Underperform
Increased business investments pressure margins
Target (TGT) is projected to report muted margins in fiscal 2Q17. Higher business investments to enhance its digital arm and increased price investments are likely to take a toll on its fiscal 2Q17 margins despite modest sales improvement.
Meanwhile, higher costs related to digital fulfillment could remain a drag. Target’s investments that allow it to offer low prices and drive store traffic is hurting its margin growth. In comparison, Walmart (WMT) has implemented a similar strategy, which could affect its margin growth.
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Costco’s (COST) margins are projected to gain from increased sales. Costco should also realize savings from its membership fee hike and lower costs from the Citi Visa co-brand card program. These measures help the company support its growth program without pressuring its margins.
Revisiting the last quarter
During fiscal 1Q17, Target’s (TGT) gross margins contracted 40 basis points. This contraction reflected sales deleverage, increased price investments, and higher digital fulfillment expenses.
Outlook for fiscal 2Q17
Target’s fiscal 2Q17 margins are expected to remain low despite a slight improvement in comps. During its fiscal 1Q17 conference call, the company’s management projected a $200 million year-over-year decline in EBIT. Soft sales and increased SG&A costs are expected to lower its profitability. The company’s planned investments and lower pricing are expected to subdue the company’s results.