Target and Best Buy are entering the holiday season with plenty of reason for enthusiasm, each posting strong third-quarter sales Tuesday amid hopeful signs that consumers are ready to spend.
“We are energized by our continued momentum,” said Best Buy Co. Inc. Chief Executive Hubert Joly.
But reports of increased quarterly profits at Minnesota’s two top retail chains fell on a topsy-turvy day on Wall Street where a spate of retailers — including Amazon, Walmart and Kohl’s — were hammered by investors over growing concerns that free shipping and other perks to woo in consumers may erode profit margins.
“The market is worried about retailer fundamentals deteriorating as we get into the new year,” said Piper Jaffray retail analyst Peter Keith. “While overall same-store sales results are pretty healthy, there are signs of a bit of a slowdown. Investors are looking out to 2019, and starting to lap tax cuts and potentially facing price increases from tariffs.”
Target’s stock took a beating after it reported earnings per share of $1.09, which fell shy of analysts’ expectations.
The miss came amid Target’s continued efforts to modernize its operations online and in stores and to reward customers with speedy delivery. The additional spending contributed to a 3.3 percent decline in Target’s operating profit.
Target shares were down more than 10 percent, to $69.03, at the end of trading.
At Richfield-based Best Buy, same-store sales were up 4.3 percent for the third quarter, higher than what analysts had forecast. Strong sales of mobile phones, gaming equipment and appliances helped drive a quarter in which profits soared 16 percent.
Best Buy eased investor jitters when it boosted its full-year guidance as it heads into the heart of the holiday shopping season. Shares ended the day up about 2.1 percent, at $63.53.
The holiday shopping season officially kicks off for both retailers on Thanksgiving evening with a blitz of doorbusters and exclusive sales both online and in stores. Though both companies have trotted out sales early in hopes of getting consumers primed, the upcoming Christmas holiday shopping sprint is forecast to be among the busiest in recent memory. Sales are forecast to rise 4.3 to 4.8 percent over last year, according to the National Retail Federation.
With Sears closing stores and Toys ‘R’ Us customers up for grabs, Target and Best Buy have both seen market-share gains and have stocked up on inventory to fortify positions.
Best Buy is the lone survivor as a major purveyor of consumer electronics, which is one of the strongest categories of holiday sales. It faces competition from Amazon, Walmart, Target and other retailers who stock headphones, TVs and games.
While televisions and personal computers have traditionally been among the company’s top sales drivers, hot items now include headphones, wearable devices and products for the smart home. The company’s improved customer service and buying experience bodes well for the holidays, Piper’s Keith said.
“Best Buy used to be in a business where there were one or two key products driving sales,” he said. “Right now, you’re seeing a lot of meaty product cycles or broader innovation across consumer electronics products that’s helping their results.”
Analysts predict consumers won’t shy away from making big-ticket purchases, which Best Buy sees as playing to its strengths. The company has seen increasing growth in services, including its free in-home consultation to assess consumers’ increasingly wired world and its $199 package that provides unlimited tech help from the company’s Geek Squad staff for a year.
The November-December holiday season has accounted for a third of Best Buy’s yearly sales in the past. It stands to gain sales in high-margin appliances as Sears closes stores, and it is stocking more traditional toys — including Barbies and stuffed animals — hoping to carve a portion of the market since Toys ‘R’ Us liquidated.
It also has gained sales as Staples and other office products retailers have lost ground.
“We’ve been a beneficiary over the last several years now over this shakeout and we fully intend to compete,” Joly said in a media briefing. “The strategy is not targeted at these dying competitors, it’s targeted at the customers.”
For the year, Best Buy said it now expects comparable sales to increase 4 to 5 percent, leading to revenue between $42.5 billion and $42.9 billion. Profits are forecast to rise 15 to 17 percent.
For Target, despite Wall Street’s retreat that erased much of the stock-price gains of the year, third-quarter sales results were among its best in a decade. Same store sales grew 5.1 percent compared with a year ago, with the company reporting gains in all major product categories. Digital orders — from people buying from the company’s website or various mobile phone apps — contributed to more than a third of that growth. Overall, online sales jumped 49 percent compared with last quarter.
The company is in the final stage of a $7 billion, three-year plan to overhaul its stores and online operations where it has turned stores into order-fulfillment centers to speed up delivery and reduce shipping costs.
During a conference call with investors, Target Corp CEO Brian Cornell sought to quell anxieties by stressing a two- to three-year horizon for the full benefits to accrue.
“If we were in a football game, we’re still in the first quarter,” Cornell said. “But I like the points we’re putting on the board.”
With consumers expecting instant gratification and convenience at a low price, Target began offering free, two-day delivery in November and will continue through the holiday shopping season.
It was a move that forced competitors Walmart and Amazon to follow, but it will force the company to find savings elsewhere to keep prices competitive. Technology is improving productivity among its workers, who can be seen navigating store aisles with handheld devices picking up goods for customers.
Neil Saunders of GlobalData Retail wrote in a report that the pinch to Target’s profit margin is a necessary trade-off to support the company’s growth ambitions.
“Some on Wall Street may lament the dip, but the truth is you cannot reinvent a retailer on the cheap,” Saunders said. “Target is not doing that and we applaud them for it.”
Target expects fourth-quarter sales to rise 5 percent compared with last year, about in line with its third-quarter pace. It maintained annual earnings per share to range from $5.30 to $5.50.