By Richa Naidu and Sruthi Ramakrishnan
(Reuters) - Target Corp's (N:TGT) holiday-quarter profit forecast fell short of analyst expectations, sending its shares down 10 percent on Wednesday as hopes faded that the retailer would make a shopping season comeback.
Target has missed Wall Street's fourth-quarter profit expectations for the past two years. It is gearing up for the holidays by cutting prices and introducing delivery options to compete with Wal-Mart Stores Inc (N:WMT) and online sellers, moves that can lure customers but crimp margins.
"It was always unrealistic that Target was going to have a great holiday season in terms of sales or profitability," said Neil Saunders, managing director of GlobalData Retail, noting pressured margins were already expected based on company guidance.
"This is still a very competitive environment, and Target has no choice but to respond to that.. the problem is that Wall Street don't necessarily understand this," he added.
The big-box chain forecast adjusted earnings of $1.05 to $1.25 per share for the fourth quarter, a range largely below the average analyst estimate of $1.24. It expects same-store sales in the quarter in a range of flat to 2 percent higher.
The holiday season can represent 20 percent to 40 percent of annual sales for many retailers.
In October, Target said most of its holiday gifts would cost less than $15 and that it would offer customers free shipping beginning in November.
It also has hired 100,000 temporary holiday workers, up from 70,000 in each of the prior four years, and raised its minimum hourly wage this year by 10 percent.
Target shares have lost about 17 percent since the start of the year and were down 9.2 percent at $54.59 in midday trading.
Target's third-quarter gross margin slipped to 29.7 percent from 29.8 percent, and Chief Financial Officer Cathy Smith said margin pressure should continue into the holiday quarter.
Target will try to grab more of the lucrative holiday toy market, following the September bankruptcy and ongoing restructuring of Toys "R" Us, the biggest U.S. toy chain.
"We are playing to win in toys. We think there is opportunity to expand share," Chief Executive Brian Cornell said on a media call.
Third-quarter same-store sales topped estimates, rising 0.9 percent in the quarter as price cuts drove a 24 percent jump in comparable online sales. Analysts expected a 0.4 percent increase, according to Thomson Reuters I/B/E/S.
In a turnaround announced in February, Cornell vowed to double the number of small-format stores, invest heavily in e-commerce, aggressively promote products and keep grocery prices low to compete with Wal-Mart, Amazon.com Inc (O:AMZN) and supermarket chain Kroger Co (N:KR).
Target's Chief Merchandising Officer Mark Tritton said comparable grocery sales rose slightly, helped by demand for produce.
But pricing pressure on groceries is continuing to intensify. Amazon on Wednesday unveiled more discounts on several products at its Whole Foods Market (NASDAQ:WFM) with Thanksgiving around the corner, sending shares in U.S. grocers lower.
Excluding items, Target earned a profit of 91 cents per share in the quarter ended Oct. 28, beating the average estimate of 86 cents. Sales rose 1.4 percent to $16.67 billion, topping the average estimate of $16.61 billion.