Target and Best Buy are looking for a merry buying season

While some big retailers have been floundering, Minnesota's two big-box heavyweights picked up momentum over the summer.

Investors will find out if that carried over into the fall when Minneapolis-based Target and Richfield-based Best Buy report their third-quarter earnings on Wednesday and Thursday, respectively, providing a glimpse into the health of their businesses as they head in to the heart of the holiday shopping season.

One question will be the effect of hurricanes that ravaged parts of Texas, Florida and Puerto Rico in recent months as both companies closed stores in those parts of the country during the storms. Macy's, Kohl's, and Nordstrom, which reported their results last week, cited the hurricanes as a factor in depressing store traffic and sales in August and September. But they saw a rebound in October.

Retailers are also facing other longer-term challenges — namely the growth in online shopping that has dragged down profits and led shoppers to buy more from other online retailers, most notably Amazon.com. Last week, Macy's reported its 11th straight quarter of comparable sales declines. Kohl's ­profits took a dip as its sales barely inched up in the third quarter. And Nordstrom reported a same-store sales drop of nearly 1 percent.

"I think Target and Best Buy are in a little bit different space," said Ken Perkins, president of Retail Metrics. "They are two of the better operators among retailers right now."

Target, which pulled out of a yearlong sales slump over the summer with comparable sales growing 1.3 percent in the May-to-July quarter, has been making headway on its strategic road map it unveiled in February aimed at reviving its sputtering business.

The plan calls for $7 billion in investments over the next few years in store remodels, replacing older in-house brands, opening new smaller-format stores in urban areas and upgrading its supply chain and digital capabilities. It is also taking a hit to margins in a major effort to lower prices to better compete with Walmart.

In August and September, Target introduced four new brands — A New Day in women's apparel; Goodfellow & Co. for men; Project 62 in modern home goods, and athletic leisure line JoyLab. It also has rolled out a new inexpensive wine, California Roots, with bottles sold for $5. And last week, Hearth & Hand, a new home decor line that is part of a new multiyear partnership with HGTV stars Chip and Joanna Gaines, hit shelves and the retailer's website.

The various investments are expected to drag down Target's profits in the third quarter by a double-digit percentage. The company has forecast earnings per share of between 75 to 95 cents, compared with $1.04 in the same quarter a year ago. Analysts are expecting 86 cents a share.

But Perkins said he is not concerned about the lower profits since these investments are important over the long haul for Target to retool its business for the digital age. Analysts are expecting Target's sales to rise a modest 0.6 percent in the quarter as it continues through a transitional year. Its shares are down about 15 percent over the last year.

Meanwhile, Best Buy surprised many over the summer with its blockbuster second quarter when it posted a giant 5.4 percent jump in comparable sales in the U.S., its biggest quarterly sales jump in seven years. CEO Hubert Joly tempered excitement a bit by noting this would not be a "new normal" for the electronics chain.

Still, investors have grown more confident that Best Buy can succeed alongside Amazon. Best Buy's shares have risen about 40 percent over the last year.

"It's a multitude of things that are all working in their favor right now," said Peter Keith, an analyst with Piper Jaffray. "For one, there are some compelling product cycles."

Where in the past, Best Buy's quarters might have been determined by the health of one or two dominant categories, he noted that the company listed five categories in its last quarter that were strong, the most it had mentioned in eight years. Wearables, driven by the Apple Watch, have helped. So have appliances and new smart home products. The Nintendo Switch released earlier this year also has been popular.

In addition, the liquidation earlier this year of regional competitor HHGregg helped boost its sales over the summer and will likely be a factor the rest of the year.

For the third quarter, Best Buy is expecting some more eye-popping numbers with U.S. same-store sales forecast to rise 4.5 to 5.5 percent, helped in part by a number of big new phone launches such as the Samsung Galaxy 8, the new Note and the iPhone 8.

While iPhone 8 sales seem to have been a little sluggish with consumers waiting to find out what features the iPhone X has, Keith said Best Buy does not factor it into its guidance since the last two iPhone launches have been disappointing for it. The iPhone X is expected to pick up more velocity into 2018 as supply catches up with demand.

Keith also noted that Best Buy will have some favorable comparisons this quarter and next because it was hurt last year by the recall of the Samsung Galaxy Note 7.

In September, Best Buy also rolled out its in-home adviser program it had been testing in five markets and expanded it to most major U.S. cities. This specially trained team of employees make free visits to customers' homes to give them ideas of how to better use technology in their homes.

That is one of the areas of increased investments that Best Buy has been making in the second half of the year. It has forecast third-quarter earnings per share in the range of 75 to 80 cents, compared to 60 cents a year ago. Analysts are expecting 78 cents a share.

As it heads into the holidays, analysts see opportunity for Best Buy to do better this year, especially since last year it felt the strain from a number of product shortages such as the Apple Watch 2, Amazon Echo, Google Pixel and the Nintendo NES Classic that dragged down its results.

But while Best Buy hasn't broken out its guidance for this year's fourth quarter, Keith said the implied guidance is about 1 percent growth, which would be a slowdown.

"There's a little bit of disappointment in that," he said, but added that executives are likely being cautious because the last two holidays have been tough for Best Buy. "It's a quirky time period because of all of the competition that comes in around the holiday."

The holidays are an extremely promotional time of year. In recent years, Best Buy has worked to be more disciplined to not lower its prices every time a competitor does in an effort to maintain margins.

But at the same time, it has taken a more aggressive stance in releasing more of its Black Friday deals earlier. Last week, it launched hundreds of deals from its Black Friday ad online and in stores for four days to help generate more early sales in the hopes of having a merrier holiday this year.

Target also had a disappointing holiday last year and is hoping for a better showing this year.

Kavita Kumar • 612-673-4113