Target shares sink as promotions darken holiday outlook

By Richa Naidu and Sruthi Ramakrishnan

(Reuters) - Target Corp's profit forecast for the key holiday quarter fell short of analyst expectations, sending its shares down nearly 10 percent, as the retailer continues to cut prices and invest in its delivery options to attract more customers.

The Minneapolis-based retailer has slashed prices on thousands of items this year and shored up delivery and fulfillment systems to compete with rivals like Wal-Mart Stores Inc and online retailers such as Amazon.com Inc.

The outlook overshadowed better-than-expected third-quarter sales and profit. The holiday shopping season can represent 20 percent to 40 percent of annual sales for many retailers.

The big-box chain forecast adjusted earnings of $1.05 to $1.25 per share for the fourth quarter, considerably 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.

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.

Labor costs will be higher this quarter than in recent holiday seasons. Target 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.

"These things should not be seen as costs, but as investments in the future of the company. Without them, we believe Target's future would be bleak," said Neil Saunders, managing director of GlobalData Retail.

"Unfortunately, the pace at which the company is moving is slow."

Shares were last down 7.8 percent at $55.25 in morning trading.

Target is eyeing 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.

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.

Same-store sales topped estimates, rising 0.9 percent in the quarter as the 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.

"Twenty four percent online growth continues to place Target in the upper echelon of brick-and-mortar retailers from a percentage growth perspective," said Moody's lead retail analyst Charlie O'Shea.

"All-in-all, we believe Target is executing its strategic plan effectively."

In a turnaround announced in February, Chief Executive Brian Cornell vowed this year 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 and supermarket chain Kroger Co.

Target's Chief Merchandising Officer Mark Tritton said comparable grocery sales rose slightly, helped by demand for produce.

Excluding items, the company earned a profit of 91 cents per share in the quarter ended Oct. 28, beating the average analyst estimate of 86 cents. Sales rose 1.4 percent to $16.67 billion, topping the average estimate of $16.61 billion.

(Reporting by Sruthi Ramakrishnan in Bengaluru and Richa Naidu in Chicago; Editing by Bernadette Baum and Meredith Mazzilli)