Gross margins declined
Target’s (TGT) fiscal 2Q17 margins fell, despite its healthy growth in sales. As expected, higher costs took a toll on the company’s margins, with its gross margin contracting 40 basis points and higher sales and cost savings being offset by higher digital fulfillment charges.
Target’s efforts to improve pricing and cut back on promotions also dented the 2Q17 margins, though improved product mix and growth in the headlines category positively impacted margins.
By comparison, Wal-Mart Stores (WMT) is also expected to report soft margins as the company’s increased price investments to drive store traffic are projected to offset benefits from increased sales.
Costco Wholesale (COST) is expected to report healthy margin growth, driven by strong sales and higher savings from shift to the new Citi Visa co-brand card program and a membership fee hike.
What affected TGT’s EBIT margin?
Target’s EBIT (earnings before interest and taxes) margins fell 90 basis points to 6.8% in fiscal 2Q17, as lower gross margins and higher SG&A (selling, general, and administrative) expenses as a percentage of sales negatively impacted profitability. SG&A expenses rose 50 basis points, reflecting higher compensation costs, but were partially offset by cost-saving initiatives.
Target’s margins are expected to fall as it continues to invest in strengthening its digital capabilities, supply chain, and pricing and promotions. TGT’s management expects its fiscal 3Q17 EBIT to fall $230 million YoY (year-over-year), reflecting higher depreciation and amortization costs and increased investments in growth initiatives.