Target cautiously looks ahead to holiday shopping season, while its stock drops 9%

Target Corp.’s cautious outlook on the crucial holiday season overshadowed progress the retailer made in bringing more customers to its stores, and its stock fell more than 9% on Wednesday morning. Other retailers’ stocks fell too, even though overall economic figures show people still spending.

Target reported higher customer traffic numbers and better sales at established stores as its investments in improving its stores and online capabilities appear to be paying off. But those changes, as well as its moves to cut prices and raise employee wages, are dragging down profits.

The discount chain reported a 21% drop in fiscal third-quarter profit.

Seeking to soothe investors, Chief Executive Brian Cornell said that although the fourth quarter is “always competitive,” the retailer is entering the holiday period with “lots of confidence.”

“While the bulk of the season is still ahead of us, we are very happy to see how these early efforts have set the tone for the season,” Cornell said.

Overall U.S. retail sales rose at a solid pace last month, as people spent more at electronics, grocery, clothing and sporting goods stores. Retail sales increased 0.2% in October, the Commerce Department said, after a 1.9% gain in September. The National Retail Federation trade group expects holiday sales to rise 3.6% to 4% this year and at least match the 3.6% growth of last year’s holiday season.

Target, like all traditional retailers, is in fierce competition with Amazon.com Inc. and needs to cater to the growing number of shoppers who transition seamlessly between store aisles and mobile phones when they shop.

But the company is in a stronger position than it was a year ago. Minneapolis-based Target said in February that it would spend more than $7 billion to revamp its stores and online businesses over the next few years. Cornell said those investments are either meeting or beating expectations.

Revenue at stores open at least a year rose 0.9%, better than analysts predicted. It also was the second consecutive quarter that metric rose. Online sales rose 24%, and customer traffic was up 1.4%.

As part of that, Target is offering new store brands, eight of which are available for the first time this holiday season. That includes Hearth & Hand with Magnolia, a lifestyle brand from Chip and Joanna Gaines of HGTV’s “Fixer Upper.” The retailer also has dedicated sales associates in areas such as beauty and electronics.

Target also is rolling out and testing new delivery options, though it’s playing catch-up there. It’s now shipping online orders from 1,400 of its 1,800 stores for faster delivery, and said it expects to ship more than 30 million items from its stores during the peak four weeks of the holiday season, up from 18 million last year. It’s testing same-day delivery (for a fee) at four New York City stores.

Target is also testing store-curb pickup for online grocery orders at 50 stores in the Minneapolis area. In comparison, Wal-Mart Stores Inc. has more than 1,000 stores that offer curbside pickup for online grocery shoppers and plans to double that figure next year.

“As much as Target is making progress, we believe it needs to be bolder and more creative,” Neil Saunders, managing director of GlobalData Retail, said in a report.

He noted that many legacy issues, such as a lack of stock control, which leaves frequent gaps on shelves, also need to be fixed.

Target reported a third-quarter profit of $480 million, or 88 cents per share, for the period that ended Oct. 28. That compares with $608 million, or $1.06 per share, in the year-earlier quarter.

Earnings, adjusted for one-time items, came to 91 cents per share, or a nickel better than Wall Street expected, according to a survey by Zacks Investment Research.

Revenue of $16.67 billion exceeded forecasts and was up from $16.4 billion in last year’s third quarter.

For the quarter that ends in January 2018, Target expects earnings per share of $1.05 to $1.25, shy of Wall Street projections for $1.27. The company expects full-year earnings of $4.40 to $4.60 per share. That compares with prior guidance of $4.34 to $4.54 per share.

Target stock was down 9.2% at $54.58 a share around 8:45 a.m. Pacific time Wednesday.