The retailer posted fourth-quarter earnings that fell short of analysts’ estimates, as Target is spending more to deliver online orders.

(Bloomberg)—Target Corp.’s bid to revamp the company and better compete with Amazon.com Inc. and a resurgent Walmart Inc. is taking a toll on profit.

The retailer posted fourth-quarter earnings that fell short of analysts’ estimates, sending the shares down. One key expense: Target is spending more to deliver online orders—part of its push to catch up in e-commerce.

The results threaten to renew the debate over whether a $7 billion turnaround plan by CEO Brian Cornell is coming at too high a price. While new brands and store remodels have helped revive the retailer’s “Tar-zhay” cachet, the investments are squeezing profits. And the company has been further constrained in recent months by a wage hike in October, with plans for another one by 2020.

“I think people have major concerns that the investments aren’t going away anytime soon and will continue to weigh on profitability,” said Brian Yarbrough, an analyst at Edward Jones.

The shares fell as much as 4.5% to $71.77. Target had been up 15% this year through Monday’s close.

advertisement

A long and cutthroat holiday season also may have hurt profit because of the heavy discounting, said Moody’s Corp. analyst Charlie O’Shea.

Though Target’s various investments had the biggest impact on profitability, “the promotional environment, particularly during an elongated holiday season, had a bearing on margins as well,” he said.

While Target said it was able to offset the impact of holiday deals with cost cuts, its fourth-quarter gross margins still fell to their lowest level in 20 years. Increased transportation costs for all retailers could crimp margins as well, according to UBS analyst Michael Lasser.

The good news is Target’s sales are improving, helped by stronger traffic in stores and online. On a comparable basis, they grew 3.6% last quarter—better than the 3.4% estimate. Profit came in at $1.37 a share during the period, excluding some items, a cent shy of Wall Street projections.

Investor presentation

advertisement

Target expects adjusted earnings of $5.15 to $5.45 a share this year, reiterating a forecast it delivered in January. The Minneapolis-based company plans to give more information at its annual investor presentation later on Tuesday.

Target is No. 20 in the Internet Retailer 2017 Top 500.

Amazon (No. 1) poses a particular threat to Target. The overlap between Target’s core shoppers and membership in Amazon’s Prime loyalty program is higher than for many other retailers, according to Magid, a consulting firm.

But Target’s longtime foe Walmart (No. 3) isn’t standing still either. It recently made a bigger push into apparel and home decor, two of Target’s most important categories.

As part of its overhaul, Target is remodeling hundreds of stores and introducing new private brands in key categories like apparel and home decor—the latest is Opalhouse, a collection of 1,300 items including bedding and bath items. It also has acquired logistics specialists Shipt and Grand Junction to speed the rollout of same-day deliveries.

advertisement

“I think the investments into technology are a never-ending cycle as all these retailers have to continue chasing Amazon,” Yarbrough said.

Favorite