What’s hurting Target stock?
Shares of Target Corporation (TGT) fell 2.9% on January 10 despite the company’s strong holiday sales numbers. Target has disappointed on the margin front over the past several quarters, primarily reflecting higher digital fulfillment costs and price investments. During the holiday season, Target’s comparable sales rose 5.7% driven primarily by the continued strength in its e-commerce platform.
Strong digital sales have indicated higher fulfillment costs for the company, which, in turn, are likely to affect its profit margins. During its last reported quarter, the company’s gross margin contracted 90 basis points owing to increased supply-chain costs. Moreover, its rate of contraction increased on a sequential basis. Weakness in its gross margin remains a drag on its operating margin.
Besides Target, other major retailers Walmart (WMT) and Costco (COST) have also reported weak profit margins as their continued investments in pricing to widen the value gap amid increased competition are weighing on their margins. Adverse mixes driven by higher digital sales also remain a drag.
We expect Target’s margins to remain weak in the fourth quarter, as higher digital fulfillment costs led by increased digital sales are likely to take a toll on its profitability. Target’s management expects its profit margins to remain subdued in the fourth quarter. However, their rate of contraction is expected to slow sequentially.