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MINNEAPOLIS ─ Target Corp. reported its fiscal third quarter earnings for 2024, revealing a mixed financial performance marked by a slight rise in comparable sales but declining profitability. The company attributed the results to a cautious consumer spending environment, operational cost pressures and increased inventory management expenses as it navigates economic uncertainty and evolving consumer behavior.
Sales and Traffic: Mixed Signals
Comparable sales in the third quarter increased by 0.3%, driven primarily by a 2.4% rise in guest traffic and a robust 10.8% growth in digital sales. The beauty category stood out, posting over 6% growth, while the essentials and food and beverage categories grew modestly. However, discretionary categories like apparel and home goods continued to face declining consumer demand. Target's same-day delivery services, powered by innovations like Target Circle 360, showed nearly 20% growth, underscoring the importance of convenience for shoppers.
Despite these positives, Target's overall revenue of $25.7 billion missed Wall Street expectations of $25.9 billion. The results reflected flat consumer spending, as customers prioritized affordability over discretionary purchases. This cautious approach was echoed in chief executive officer Brian Cornell's remarks, emphasizing the importance of value in today's consumer mindset.
"I'm proud of our team's efforts to navigate through a volatile operating environment during the third quarter. We saw several strengths across the business, including a 2.4% increase in traffic, nearly 11% growth in the digital channel, and continued growth in beauty and frequency categories. At the same time, we encountered some unique challenges and cost pressures that impacted our bottom-line performance," said Cornell. "Looking ahead, our team is energized and ready to deliver the unique combination of newness and value that holiday shoppers can only find at Target, and we remain confident in the underlying strength and fundamentals of our business and our ability to deliver on our longer-term financial goals."
Profitability Under Pressure
Profitability was a crucial concern in the third quarter. Adjusted earnings per share fell to $1.85 from $2.10 a year earlier, well below analysts' expectations of $2.30. Gross margins dropped slightly to 27.2%, influenced by higher supply chain and digital fulfillment costs. Target's proactive decision to reroute shipments to avoid East Coast port strikes further strained the bottom line. Chief financial officer Michael Fiddelke acknowledged these measures came with a cost, contributing to inefficiencies in warehouse operations.
The operating income margin rate decreased to 4.6% from 5.2% last year. Analysts highlighted that while Target has focused on managing costs, higher team member wages, benefits and liability expenses have offset these efforts.
Challenges and Competitor Landscape
Target's challenges were stark compared to competitors like Walmart and Costco, which have shown more robust performance in discretionary and essential sales. Walmart's comparable sales increased by 5.3%, bolstered by non-grocery categories, while Target struggled to gain momentum in similar segments.
Analysts attribute part of the disparity to Target's pricing strategy. Despite efforts to position itself as a value-focused retailer, Target's prices remain 4% to 5% higher than Walmart's for comparable essential items, potentially driving price-sensitive shoppers to competitors.
Outlook and Strategic Adjustments
Target forecasts a flat sales performance for the fourth quarter and adjusted EPS between $1.85 and $2.45. The company revised its earnings guidance for the full fiscal year to $8.30 to $8.90 per share, down from an earlier range of $9.00 to $9.70. Management emphasized its commitment to offering value-driven promotions and introducing compelling holiday items to attract shoppers during the critical year-end season.
Despite the earnings miss, Cornell expressed optimism about the company's long-term fundamentals, citing substantial guest traffic and digital innovation as evidence of continued consumer loyalty.
Investors Respond
The market reacted sharply to the earnings report, with Target's stock plummeting over 20%, marking its steepest single-day drop in over two years. Analysts warned that the company faces ongoing challenges in aligning its value proposition with consumer expectations amid economic pressures.
As Target enters the holiday season, its ability to balance cost management with competitive pricing will be critical in regaining investor confidence and sustaining shopper loyalty in a complex retail environment.
