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Will Target’s Margins Take a Hit? Management Doesn’t Think So

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May. 17 2018, Published 7:18 a.m. ET

Investments in growth hurting margins

As we discussed previously, mass merchandisers’ margins remained subdued due to their investments in growth measures. Target (TGT), Walmart (WMT), and Costco (COST) saw their margins decline. Investments in price to drive shoppers and costs associated with digital fulfillment are taking a toll on companies’ profitability.

Since Amazon (AMZN) disrupted the grocery space with its Whole Foods acquisition and other deep discounters expanded their operations in the US, mass merchandisers have lowered their prices to match Amazon and drive value-driven shoppers to their stores. However, these growth measures are coming at the cost of margins.

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Target’s margins could improve in the first quarter

Retailers have been focusing on reducing costs and driving productivity to offset margin headwinds. However, lower costs and higher productivity weren’t enough. Target’s management remains upbeat and expects its gross margins to expand in the first quarter despite significant pressure from increased transportation, lower pricing, and new delivery mechanisms.

Target’s management is focusing on reinventing its supply chain to lower the per unit digital fulfillment costs, which should drive the margins higher. The anticipated increase in the sales of higher margin products is expected to support Target’s margins.

However, with expanded delivery options and value pricing, Target’s gross margin remains at risk. The company’s higher wages and investments in other growth measures remain a drag.

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