Shares of Target (NYSE: TGT) dropped more than 9% on Wednesday morning after the retailer reported its third-quarter earnings. That drop was somewhat surprising, since it beat analysts' estimates on both the top and bottom lines.

Target's revenue rose 1.4% annually to $16.67 billion, topping the consensus forecast by $70 million. Its adjusted earnings declined 13.1% to $0.91 per share, but still exceeded expectations by $0.05.

The key facts

On the surface, Target's numbers looked decent. Its comparable-store sales rose 0.9%, beating the 0.4% growth that analysts had predicted. Its comparable digital channel sales grew 24% annually, though that was a slowdown from the 32% growth of the second quarter.

The chains number of recorded transactions during the quarter rose 1.4%, but that gain was slightly offset by a 0.5% drop in the amount of the average transaction. Its gross margin of 29.7% beat expectations of 29.3%, but declined from 29.8% in the prior year quarter. Sales, general, and administrative expenses also rose 80 basis points annually and used up 21.1% of its revenues.

The guidance

Target said it expects adjusted fourth-quarter earnings of $1.05 to $1.25, a range that covers the consensus estimate of $1.24. However, it seems that investors were hoping for a stronger holiday-quarter forecast. For the full year, Target expects earnings of $4.40 to $4.60 per share, which is also in line with Wall Street's consensus estimate of $4.52.

Looking ahead, Target expects to invest over $7 billion into itself over the next three years, to launch new private label brands, expand its grocery business, open smaller-format stores, and renovate existing locations.

However, Target still faces uphill battles against Wal-Mart and Amazon, whose purchase of Whole Foods could wreak havoc on its grocery business. Investors still seem to favor those two rivals over Target, which saw its shares drop nearly 25% this year.

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The author(s) may have a position in any stocks mentioned.

 

Leo Sun has no position in any of the stocks mentioned. 

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