NEW YORK (Reuters) – Target Corp posted lower-than-expected quarterly profit on Tuesday as spending on its online business and delivery options helped sales but ate into margins, sending shares down 6 percent in pre-market trade.
The retailer’s price cuts and heavy investments to ward off competition from Amazon.com Inc and brick-and-mortar rivals continued to hurt profitability even as comparable sales beat analyst estimates and online sales accelerated from a year earlier.
The company’s first-quarter 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 came in slightly higher than estimates, rising 3 percent. Analysts expected a 2.9 percent increase, according to Thomson Reuters I/B/E/S.
The retailer said it expects same-store sales growth during the second quarter to be in the low to mid-single digit range.
Target has poured billions of dollars into investments aimed at boosting online sales. It has also been aggressively promoting its products and keeping grocery prices low to compete with rivals like Wal-Mart Stores Inc and supermarket chain Kroger Co.
It cut its next-day delivery fee for household essentials to $2.99 from $4.99 last week and waived it altogether for customers paying with a Target credit card.
The pressure has intensified since Amazon’s purchase of Whole Foods, which has rattled the grocery industry on worries the online seller will 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 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.
In February last year, Target said it would reinvest more than $7 billion through 2020.
Online sales rose 28 percent in the first quarter, up from a 21 percent rise during the same period a year ago but short of the 29 percent rise during the fourth quarter.
The company has also focused on doubling the number of so-called small-format stores with a narrower selection of products aimed at urban buyers.
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 its hourly employees.
In October, the company said it would raise wages for hourly workers to $12 per hour this spring and to $15 by 2020.
Target’s revenue rose to $16.78 billion, topping the average estimate of $16.58 billion.
Shares of the Minneapolis-based chain have risen 16 percent since the start of the year and more than 35 percent in the past 12 months.
Reporting by Nandita Bose in New York; Editing by Meredith Mazzilli