Target’s shift to digital is painful

Good news for Target: Online sales are booming. Bad news for Target: It’s spending so much to play catch up to Amazon that it’s hurting its profits.

Target’s online sales surged 28% from a year ago. But subpar earnings sent the stock down 5% in early trading Wednesday.

Target, like many other traditional retailers, is investing heavily in their digital operations. Amazon is the clear e-commerce leader. But Target, Walmart, Macy’s and other big chains are posting solid online sales growth too.

The problem for Target is that it costs money to generate those digital sales.

Target said that its gross margins, a key measure of profitability, were down slightly from a year ago. And that was due partly to increased digital fulfillments costs, the expenses tied to getting a product from a warehouse delivered to customers.

It’s essentially a classic case of short-term pain with the hopes of a longer-term gain. Target CEO Brian Cornell admitted as much in the company’s earnings release, saying that Target “made significant progress in support of our long-term strategic initiatives.”

The problem is that Wall Street often has a “what have you done for me lately?” sort of mentality. So the fact that Target’s sales missed analysts’ estimates is an issue.

Another concern: Target is going to have to keep spending in order to become a true online retailing powerhouse. Despite all its big investments, Target said that digital sales accounted for just a little more than 5% of overall revenue.