Target (NYSE: TGT) this week announced results for the key holiday shopping period that provided more evidence that its rebound plan is working. Customer traffic growth accelerated in the fourth quarter to push sales past management's recently upgraded forecast.
Here's how the results stacked up against the prior-year period:
What happened this quarter?
Target managed a big spike in customer traffic that powered its best sales growth quarter of the year. It had to sacrifice profitability to win that market share, though.
Here are a few highlights from the quarter:
- Comparable-store sales rose 3.6% to edge past management's 3.4% forecast. That was enough to put the retailer ahead of rival Walmart (NYSE: WMT), which recently posted a 2.6% holiday comp result. Target beat the retailing giant in the digital sales channel, too, posting a 29% spike compared to Walmart's 23% increase.
- Growth, both in stores and online, didn't come cheap. Target's gross profit margin dipped to 26.2% of sales from 26.6% as price cuts and the expense of online fulfillment was just partially offset by reduced costs.
- Other expenses, mainly labor, jumped to 18.5% of sales from 17.5% a year ago to lower Target's adjusted profit margin to 5.1% from 6.5% in the prior-year period. For the full year, profitability declined to 6% from 7.1%.
- Operating income fell 15% to $1.5 billion, but the drop was more than offset by sharply lower tax liabilities, and so net income spiked 35%.
What management had to say
Executives were happy with the broad-based growth across Target's digital and physical selling channels and they credited their recent growth initiatives with powering those gains. "Our fourth quarter results demonstrate the power of the significant investments we've made in our team and our business throughout 2017," CEO Brian Cornell said in a press release.
"Our progress in 2017 gives us confidence that we are making the right long-term investments to best position Target for profitable growth in a rapidly changing consumer and retail environment," he continued.
Cornell and his team believe that 2018 will require more of the type of expensive investments that, while driving faster sales growth, pinched earnings last year. In a conference call with investors they explained that 2018 will be a "transition year" that includes ramped-up spending on priorities like store remodels and fulfillment upgrades that deliver free two-day shipping on many of its online products. Target also intends to keep investing in price cuts to protect its market share momentum while boosting wages and other spending on employees.
These spending programs will combine to create another year of reduced profitability, but operating earnings should drop at a far slower pace than the 8% rate investors witnessed in 2017. Meanwhile, Target is still predicting a low-single-digit comps increase that would mark its second straight year of growth following flat or modestly negative results in 2014 and 2016.
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