Target Corporation (NYSE:TGT) Under Pressure Despite 28% Digital Sales Increase

Shares of Target fell by as much as 5%, despite the retailer reporting a 28% increase in online sales. The number of customers who visited the retailer’s outlets rose 3.7% in the three months ended May 5, the biggest surge in more than a decade. Overall sales, as a result, rose 3%.

Poor Weather Impact

Despite an increase in overall sales, the company reported disappointing earnings something that did not go well with investors, triggering a sell-off, of the stock. Earnings missed expectations both on the top and bottom lines, with the retailer blaming the underperformance on poor spring weather.

According to Target’s executives, everything went according to plan in the quarter other than the wet and cold weather recorded in April. Poor weather reportedly delayed sales of higher margin warm weather items as well as outdoor furniture and apparel.

“Strong sales growth in our home, essentials, and food & beverage categories offset the impact of delayed sales in temperature-sensitive categories, which accelerated rapidly in recent weeks as the weather improved across the country,” CEO Brian Cornell said in a statement.

Gross Margin Concerns

A sell-off of the stock came on growing concerns that the company is spending a lot to grow its digital sales. The retailer has had to spend a lot on this front, given that it is competing against heavyweights in the name of Amazon.com, Inc. (NASDAQ:AMZN) and Walmart Inc. (NYSE:WMT).

The retailer has had to spend billions of dollars to promote its products and remodel stores. It has also had to spend a lot in keeping its grocery prices low, in a bid to compete against Walmart and Kroger Co (NYSE:KR). The company has also cut its next-day delivery fee for household essentials to $2.99 from $4.99 as it seeks to remain competitive in the business.

Higher spending saw the company’s gross margin, a key measure of profitability, drop to 29.8% from 30% as of last year. The Q1 gross margin was an improvement from 26.2% registered in the fourth quarter, which was the lowest in 20 years. The company has already confirmed plans to spend $3 billion in capital expenditure this year on its supply chain, online delivery as it also moves to merge its online and in-store shopping.

It remains to be seen if the company’s gross margins will spike higher given that Target needs to continue spending more if it is to become a true online retailing powerhouse. The company is expected to spend more given that digital sales, despite the impressive growth, still account for a little more than 5% of the overall revenue.

Q1 Financial Results

Target reported first-quarter earnings of $1.32 a share below consensus estimates of $1.38 a share. Net income came in at $718 million an improvement from $678 million reported a year ago. Operating income dropped to $1.04 billion from $1.16 billion reported a year ago. Revenue in the quarter was up 3.4% to $16.78 billion, beating estimates of $16.53 billion.

The retailer has since reaffirmed its full-year outlook whereby it expects earnings per share to range between $5.15 and $5.45. Wall Street, on the other hand, is expecting earnings per share of $5.28.