TJX TJX Companies Inc

Store sales reflect confident consumers, but online rivals pressure profits

By Khadeeja Safdar and Suzanne Kapner 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 21, 2018).

A parade of U.S. retail chains on Tuesday reported rising sales in the latest quarter, another sign of healthy consumer spending heading into the critical holiday shopping season.

Investors were unimpressed, dumping shares of Target Corp., Kohl's Corp. and others that released their quarterly results. The selloff, part of a broader market decline, included retailers such as Amazon.com Inc. and Walmart Inc. that didn't report on Tuesday.

A tight labor market and increasing wages have buoyed consumer confidence, prompting Americans to purchase more fashion apparel, flat-screen televisions and homewares. But retail profits have been under pressure from online competition as well as higher spending on workers' wages, shipping costs and recent tariffs on Chinese-made imports.

Target said more shoppers visited its stores and website, and bought products across all its merchandising categories, particularly toys, beauty products and baby items. The company reported a 5.1% increase in comparable sales in the third quarter from the same period a year earlier, including a 49% increase in digital sales.

"We continue to benefit from a very healthy consumer and macroeconomic backdrop," Target CEO Brian Cornell said on a conference call Tuesday, adding that the company has captured sales from retailers that are closing stores or liquidating.

However, profit margins declined in the latest quarter as Target spent more on its supply chain and wages. The company has made investments heading into the holidays, including several delivery and pickup options, new products and lower prices.

Target shares, which had rallied for most of the year, tumbled 10.5% to $69.03.

Mr. Cornell said Target wouldn't provide 2019 financial guidance, but said he was optimistic about the company's ability to boost profits next year. "We're poised to benefit from far greater scale across all of our initiatives," he said.

Some analysts said a decline in operating profit is necessary to support Target's growth. "Some on Wall Street may lament the dip, but the truth is you cannot reinvent a retailer on the cheap," Neil Saunders, managing director of GlobalData Retail, wrote in a note Tuesday.

Best Buy Co., which has been reporting strong demand for electronics in recent quarters, said comparable sales increased 4.3% in the third quarter for its domestic stores and website. It was the sixth straight quarter of comparable growth above 4%.

The company's profit margin, however, slipped on supply chain and other spending. CEO Hubert Joly said the sales growth reflects the company's efforts to add services as well as the favorable economic environment. "Because of the investments we've made, we are competitive in the marketplace," he said on a conference call.

Best Buy cited strong demand in the quarter for smartphones, videogames, home appliances and wearable gadgets. The gains were partly offset by declines in tablet computers, it said.

Meanwhile, Kohl's reported a 2.5% increase in comparable sales for the latest quarter, citing demand for apparel. The department-store chain's margins increased slightly from a year earlier, but sales growth was slower than recent quarters.

Kohl's CEO Michelle Gass told analysts on a conference call that she felt good about the health of consumers. "There's certainly no reason to believe that will change as we head into the holidays," she said.

Both Target and Best Buy reported higher quarterly profits than a year ago, but much of the gains came from lower tax rates following the U.S. federal overhaul. Operating profits declined in the latest quarter from a year ago. Without a lower tax rate, Kohl's profits would have missed analysts' expectations.

The results failed to reassure investors, who have been unloading shares of many retailers following the latest batch of earnings reports after driving up the stock prices earlier in the year.

Shares of Kohl's fell 9.2%, while Best Buy bucked the trend, gaining 2.1%. TJX Cos. fell 4.4% after the parent of TJMaxx and HomeGoods said earnings were hurt by a pension settlement charge.

TJX, which reported strong sales and profit growth in the latest quarter, was also hurt by higher freight costs, a problem facing many retailers. Kohl's warned that higher shipping costs in the holiday quarter would be a drag on margins.

Tuesday's results follow strong sales reports from the country's biggest retailer Walmart, department-store chain Macy's Inc. and the internet giant Amazon.com, which are all competing for American wallets. Shares of Walmart fell 2.7% and Macy's fell 3.4% Tuesday, while Amazon shed 1.1%.

Not all chains are riding the tide of rising consumer spending. Wedding gown retailer David's Bridal filed Monday for bankruptcy protection, cutting $400 million in debt while it restructures operations.

Mall-stalwart L Brands Inc., the parent of Victoria's Secret, said Monday it was halving its annual dividend after posting another quarter of falling sales at its flagship lingerie brand. Shares of L Brands dropped 17.7% Tuesday, the largest percentage drop since December 2008.

Comparable sales at the Gap brand fell 7% in the third quarter, compared with a 1% increase last year. That metric at its parent company, Gap Inc., was flat, helped by a 4% increase at Old Navy, its biggest division by sales. The company also lowered its profit guidance for the year.

On a conference call Tuesday, Gap Inc. CEO Art Peck said he might close hundreds of underperforming Gap stores. "These stores are a drag on the health and a drag on the performance of the brand," he said.

Some retailers are benefiting from the struggles of others. Following the collapse of Toys "R" Us and store closings at Sears Holdings Corp., retailers including Best Buy and Target have pursued their business and picked up market share.

Some chains are still struggling with strategic and operational challenges. Lowe's Cos. said Tuesday it plans to exit from its Mexico retail operations and shed two U.S. home-improvement businesses, after it reported slower same-store sales gains than rival Home Depot Inc. and a 27% decline in profit from a year ago.

Corrections & Amplifications TJX Cos. lowered its fiscal year GAAP earnings to reflect a pension settlement charge. Excluding the charge and other expenses, the retailer said it raised its adjusted profit goals on a split-adjusted basis. An earlier version incorrectly said TJX slashed its profit goals amid higher inventory and expenses. (Nov. 20, 2018)

Write to Khadeeja Safdar at khadeeja.safdar@wsj.com and Suzanne Kapner at Suzanne.Kapner@wsj.com

(END) Dow Jones Newswires

November 21, 2018 02:47 ET (07:47 GMT)

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