Target (TGT) reported mixed fiscal 4Q17 (the period ended February 3, 2018) results on Tuesday, March 6. The company’s top line saw strong growth and surpassed analysts’ expectations thanks to its sales-driving initiatives including value pricing, exclusive product launches, and store remodeling. Besides, its digital business continues to generate strong sales growth on the back of consumer-friendly offerings. Despite reporting stellar sales growth, Target stock fell about 4.5% on Tuesday, March 6, 2018, reflecting increased pressure on its margins.
Notably, Target’s impressive sales growth is coming at the cost of margins, which didn’t sit well with investors. Target’s investment in price, costs associated with digital fulfillment, and investments in higher wages are taking a toll on its profit margins.
The company’s investments in growth measures are expected to hurt its margins in coming quarters as well. Target plans to ramp up its delivery mechanism in 2018, which is likely to dent its margins owing to the rollout of new delivery options. Besides, the company will raise its minimum wage to $12 per hour, which is expected to increase the SG&A rate and in turn, hurt its operating margins. However, leverage from improved sales and increased sales in high-margin categories are expected to cushion its margins.
YTD stock performance
Target stock is up about 10.0% on a YTD (year-to-date) basis as of March 6, 2018, and has outperformed its peers and the benchmark index. During the same period, Costco (COST) stock has grown 2.9%, while Walmart (WMT) stock fell 9.8%, owing to the slowdown in its e-commerce business. Meanwhile, the S&P 500 Index is up about 2.0%.