Target Sees Strong Year-End Sales as Cost Pressures Mount

(Bloomberg) -- Target Corp. reported third-quarter sales that outpaced expectations and projected a brisk pace through the end of year while warning that cost pressures are creeping up. The shares slipped in early trading.

Comparable sales may post growth as high as the low-double digits during the fourth quarter, Target said in a statement Wednesday. The company previously forecast expansion in the high-single digits for the second half of the year. For the third-quarter, comparable sales rose 12.7%, exceeding the 8.3% average of analyst estimates compiled by Bloomberg.

The growth “reflects continued strength” in Target’s in-store sales and same-day fulfillment services, Chief Executive Officer Brian Cornell said in the statement, adding that the company posted double-digit increases in all five of its core merchandise categories.

The improved outlook shows that Target, which posted some of the biggest gains among major retailers during the coronavirus pandemic, continues to see high demand for groceries, home goods and more. But while sales growth is continuing, cost pressures are worsening -- and expenses related to supply-chain disruptions and higher wages are getting hard to overlook for investors. 

Target shares fell 2.3% as of 6:34 a.m. before the start of regular trading in New York. The stock climbed 51% this year through Tuesday, more than doubling the advance of an S&P retail index.

Gross margin, a measure of pricing power, fell to 28% in the third quarter -- down 2.6 percentage points from a year earlier. The company blamed the decline on rising merchandise and freight costs, as well as increased expenses tied to higher pay and headcount at its distribution centers. 

Target isn’t passing on all its cost increases to its customers, said Chief Financial Officer Michael Fiddelke, echoing comments by Walmart Inc. on Tuesday. 

“We’re definitely protecting price,” Fiddelke said in a briefing. “We’re seeing cost increases that are higher than our retail increases.”

Retailers sometimes opt to raise their prices at a slower pace in order to preserve market share and avoid brusque jumps that would risk sending customers elsewhere. 

The Minneapolis-based retailer reported adjusted earnings of $3.04 a share in the third quarter, surpassing the $2.84 expected by analysts. Revenue rose 13% to $25.7 billion, topping Wall Street’s prediction by more than $1 billion. 

Inventory climbed 18% during the third quarter. Target said it’s well positioned to satisfy holiday demand.

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