Why Target’s 3Q17 Margins Could Remain Muted
Target’s (TGT) fiscal 1H17 remained muted as higher business investments continued to hurt the company’s margins. Increased costs associated with rising e-commerce sales also dented the margins.
During the previous quarter, the company’s gross margin fell by 40 basis points. Meanwhile, the EBIT (earnings before interest and tax) margin fell by 90 basis points on a YoY (year-over-year) basis. Price investments and higher digital fulfillment charges had a negative impact on Target’s margins.
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In comparison, the company’s peers including Costco (COST), Walmart (WMT), and Kroger (KR) are also experiencing pressure on their margins due to increased price investments to fend off growing completion from Amazon.com (AMZN) and deep discounters like Aldi and Lidl.
During the last reported quarter, Costco’s gross margin fell by 15 basis points despite the leverage from stellar sales growth. Its increased investment in price more than offset the benefit.
Target’s margins are expected to fall in upcoming quarters. Continued price investments will likely remain a drag. Target announced price cuts on several products to drive store traffic, which is expected to hurt its margins. Rising e-commerce sales are projected to result in a higher digital fulfillment cost, which could impact the profitability. However, increased sales and closing underperforming stores are expected to help the company’s margins.
Target’s management expects its fiscal 3Q17 EBIT to fall by $230 million on a YoY basis, which reflects higher investments in growth initiatives and increased depreciation and amortization expenses.