Why Target’s Margins Could Suffer in the Near Term
Investments to hurt margins
Earlier in this series, we examined Target’s (TGT) growth initiatives and how these measures could drive its sales numbers. However, the company’s growth initiatives could come at the cost of its margins.
Target’s focus on its digital business results in higher fulfillment costs, which dents its margins. The company’s continued price investment to remain competitive is expected to further subdue its margins.
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Recently, Target announced price cuts on thousands of essentials to attract shoppers and fortify its market position against rivals such as Amazon (AMZN) and Walmart (WMT). Although Amazon announced price cuts soon after acquiring Whole Foods, Walmart continues to offer lower prices.
Although the move could help Target’s sales, it could eat into its margins in the near term.
Target’s margin trend
Target’s margins were muted during the first half of fiscal 2017. Increased investments and rising costs associated with the e-commerce business took a toll on its margin. During fiscal 2Q17, the company’s gross margin contracted 40 basis points, while its EBIT (earnings before interest and taxes) margin decreased 90 basis points on a year-over-year basis.
Target’s margins are expected to fall in the next few quarters as its planned investments in its digital business, supply chain reinvention, and pricing and promotions are projected to impact its profitability adversely.
In comparison, Walmart’s and Kroger’s (KR) margins are also expected to fall due to price investments and increased competition. Costco (COST), on the other hand, is estimated to report improved margins, thanks to its industry-leading sales growth.