By Nandita Bose
NEW YORK (Reuters) - Target Corp (N:TGT) shares pared losses to trade down 5 percent on Wednesday as investors weighed a lower-than-expected quarterly profit against the retailer's unchanged full-year outlook.
Price cuts, wage increases and ongoing investments to ward off competition from Amazon.com Inc (O:AMZN) and brick-and-mortar rivals hurt profitability in the first quarter even as comparable sales beat analyst estimates, boosted by the strongest growth in customer visits in a decade.
Operating income continues to reflect near-term challenges driven by last year's investments to transform the business, Chief Executive Brian Cornell said on an earnings conference call.
Target expects margins to improve as seasonal merchandise sales rebound after a delayed spring, pricing investments made last year deliver results, customers react positively to new private-label brands and it focuses on cost-cutting initiatives.
Target has poured billions of dollars into aggressively promoting its products and keeping grocery prices low to compete with rivals like Walmart Inc (N:WMT) and supermarket chain Kroger Co (N:KR).
It cut its next-day delivery fee for household essentials to $2.99 from $4.99 last week and waived it for customers paying with a Target credit card.
The retailer said on Wednesday it is rolling out a new drive-up service where shoppers can pick up orders in an hour.
It is also expanding its delivery services through Shipt, a same-day delivery company it bought for $550 million last year, and said it is partnering with courier services on same-day orders in dense metro areas.
The pressure to deliver items faster has intensified since Amazon's purchase of Whole Foods, which rattled the grocery industry on worries the online seller would be able to quickly ramp up delivery of fresh food.
Last week, Whole Foods debuted a loyalty program for Amazon Prime customers and Kroger said it would partner with British online grocer Ocado (L:OCDO) to build robot-operated warehouses to support U.S. home delivery.
Target has said it plans $3 billion of capital expenditure this year on investments in its supply chain, online delivery, its own brands and merging online and in-store shopping.
The retailer held on to its full-year forecast of a low to single digit increase in comparable sales and adjusted earnings of $5.15 to $5.45 per share.
MARGINS SLIP
The company's operating income margin weakened to 6.2 percent from 7.1 percent the same period a year ago.
Gross margins remained under pressure at 29.8 percent compared to 30 percent last year. The measure had hit a 20-year low of 26.2 percent in the fourth quarter.
First-quarter same-store sales were slightly higher than estimates, rising 3 percent. Analysts expected a 2.9 percent increase, according to Thomson Reuters I/B/E/S.
In February last year, Target said it would reinvest more than $7 billion through 2020. Cornell said shoppers are reacting positively to remodeled stores, investments in merchandising and speedy delivery.
Strong sales growth in home, essentials, food and beverages, offset weaker sales in weather-sensitive categories.
Online sales rose 28 percent in the first quarter, up from a 21 percent rise a year ago but short of the 29 percent rise in the fourth quarter.
Excluding items, Minneapolis-based Target earned a profit of$1.32 per share in the quarter ended May 5, below the average analyst estimate of $1.39.
The big-box chain forecast adjusted earnings of $1.30 to $1.50 per share for the second quarter, compared to the average analyst estimate of $1.35 per share.
Its first-quarter selling, general and administrative expense rate rose to 21.1 percent of sales compared to 20.7 percent a year ago, driven by higher compensation costs and wage hikes for hourly employees.
In October, the company said it would raise wages for hourly workers to $12 per hour this spring and $15 per hour by 2020.
Revenue rose to $16.78 billion, topping the average estimate of $16.58 billion.
Shares of the Minneapolis-based chain have risen 16 percent in 2018 and more than 35 percent in the past 12 months.