Target's investments in the future hits margins

MINNEAPOLIS (AP) - Target's ramped up investments online and in stores are bringing in shoppers, but they're bruising the bottom line right now.

Company shares tumbled 10 percent before the opening bell Tuesday after Target missed profit expectations for the third quarter, the last look at the retailer's performance as it heads into the holiday shopping season.

At the same time, revenue at stores opened at least a year rose 5.3 percent, its sixth consecutive quarter in that direction. And online sales soared 49 percent. In the previous quarter, Target racked up the strongest same-store sales growth in 13 years.

The battle for customers has become rooted in convenience and to that end, Target leapt in front of rival Walmart with free, two-day delivery for any delivery. Amazon followed by dropping its $25 minimum for free delivery.

Early last year, Target began an aggressive three-year plan to invest $7 billion in its stores and online operations. The company has been remodeling its stores and building brands from scratch like trendy electronics under the Heyday brand and men's clothing brand called Goodfellow. But with increasing pressure from online behemoth Amazon and shoppers' demanding more convenience, a large part of those investments are going toward transforming its stores into shipping hubs to cut shipping costs and speed deliveries. It's expanded a variety of services that allow people to pick up goods curbside or get next-day delivery for some purchases.

Behind the scenes, it's been remaking the backroom operations of 1,400 of the 1,800 stores that ship online orders to customers. Target says that overhaul was been key in its ability to offer two-day free shipping this holiday.

Target exclusively told The AP that it's redesigned the pack stations, while workers' tasks are now divided into clear roles: pickers, those who prep orders, packers and sorters. Target workers have also received new tools like new carts that have compartments to make it easier to organize the orders. They're also armed with new apps on their phones that help them navigate the store to find the online orders more quickly or tell them exactly how much tape to put across that box of Tide so it doesn't open during shipping.

Roughly about 130 stores have undergone a major backroom overhauls, complete with conveyor belts and LED lighting similar to the store's selling floor. The changes shave seconds off each task, adding up to minutes saved that will bring shipping costs down.

The new measures underscore how Target is doubling down on becoming more efficient. Two-thirds of Target's online volume is now going through the stores with more than half of the orders being shipped to homes. The remainder is from order pickup or curbside pickup services. When Target ships an online order from a store, it ships two days faster on average compared to shipping from a fulfillment center. In fact, 90 percent of Target's two-day online deliveries are being handled at stores. Revamped backrooms are doing three times more volume than the rest of the chain. That's helped Target become 25 percent more efficient in shipping online orders than just last year, according to the company.

"We're trying to get speed for the guests and the faster we can get in the backroom, the faster we can make that promise," said John Mulligan, chief operating officer, during a phone interview with The Associated Press. He says the ultimate goal: a 24 hour turnaround between when an item is sold and then replaced on the shelf.

Target says all the new enhancements in its online operations will enable the company to fulfill twice as many orders for the holiday shopping season as it did last year.

Mulligan said that it deployed engineers and analytics to analyze each step of the process figuring out where the bottlenecks were and how to eliminate them.

During a tour of the backroom at Target's Edison, N.J. store, workers assume specific tasks in assembly line operations in a space that's the size of about 12 parking lots.

Workers now use new carts that have 19 compartments that can keep everyone's order separate. Previously, workers put everyone's order in two baskets in cart.

All this is designed to make the job "simple and repeatable as possible," Mulligan said.

Still, the latest results show that Target has more work to do to keep costs down.

The company reported income of $622 million, or $1.17 per share. Per-share earnings without one-time benefits and pretax gains were $1.09, 2 cents short of expectations, according to a survey by Zacks Investment Research.

Revenue for the Minneapolis retailer was $17.82 billion, just edging out Wall Street expectations.

Target expects full-year earnings in the range of $5.30 to $5.50 per share

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Portions of this story were generated by Automated Insights (http://automatedinsights.com/ap) using data from Zacks Investment Research. Access a Zacks stock report on TGT at https://www.zacks.com/ap/TGT