Target shares fall more than 20% after company says costs were high and inventory issues hurt profits

Target on Wednesday reported quarterly results well below Wall Street expectations, as the retailer faced high transportation costs, higher markdowns and weaker-than-expected sales of discretionary items, from televisions to bicycles.

The shares fell about 22% in premarket trading.

Here’s what Target reported for the fiscal first quarter ended April 30, compared to consensus estimates from Refinitiv:

  • Earnings per share: $2.19 adjusted vs. $3.07 expected
  • Revenue: $25.17 billion vs. $24.49 billion expected

The national retailer, known for its inexpensive chic brands of clothing, home decor and more, had a particularly strong period of sales. A year ago, shoppers had extra dollars in their pockets from stimulus checks and reflected a sense of optimism with their purchases as they received their first Covid-19 shots.

Sales increased compared to the same period a year ago. Comparable sales, a key metric that tracks sales at stores open at least 13 months and online, rose 3.3% in the first quarter. That comes on top of a 23% increase in comparable sales in the year-ago quarter and is above Wall Street projections of 0.8%, according to StreetAccount estimates. In Target stores and on its website, traffic increased by 3.9%.

Even so, CEO Brian Cornell said the company missed the mark because its gains were “accompanied by unusually high costs”.

“While we saw healthy revenue growth during the quarter, we were less profitable than we had anticipated or intend to be over time,” a- he said during a call with reporters.

Among the challenges, Target said earnings were hit by inventory arriving too early and too late, increased pay and headcount at distribution centers and a mix of merchandise sales that looked different than ‘previously.

Target’s results mirrored Walmart’s quarterly earnings performance. Walmart said Tuesday it also missed earnings, also citing higher inventory and widespread cost pressures. Shares of Walmart fell more than 11% on Tuesday and hit a 52-week low.

Target reiterated its revenue guidance, which calls for mid-single-digit growth this year and beyond. He did not provide an estimate of earnings per share.

Target’s net income in the quarter fell to $1.01 billion, or $2.16 per share, from $2.1 billion, or $4.17 per share, a year earlier. Excluding items, the retailer earned $2.19 per share, 88 cents below the $3.07 expected by analysts polled by Refinitiv.

Those adjusted earnings per share fell sharply – down nearly 41% from the prior year period.

Total revenue reached $25.17 billion from $24.20 billion a year ago, above analysts’ expectations of $24.49 billion.

Target vs. Walmart

While Target and Walmart both missed earnings expectations by wide margins, they diverged in descriptions of the American consumer.

Walmart chief financial officer Brett Biggs told CNBC the big-box retailer has seen some budget-strapped customers switch to the store’s brand for deli meats and buy a half-gallon of milk rather than a full one. . Others, he said, are looking for new game consoles and patio sets.

Meanwhile, Target CEO Brian Cornell said on a media call that the company sees a consumer who is healthy but lives — and spends — differently while resuming some pre-pandemic habits.

For example, Cornell said toy sales stood out in the first quarter and grew to high numbers as families resumed birthday parties for older children. Luggage sales were up more than 50%, he said.

On the other hand, sales of items like televisions, kitchen appliances and bicycles have plummeted as consumers shifted their spending towards experience-based purchases like booking travel and buying maps. -gifts for restaurants, he said.

Cornell, however, warned that cost pressures “will persist in the near term,” pointing out that some are beyond the company’s control. One such factor is the price of gasoline, which hit a national average of $4.523 per gallon on Tuesday, according to AAA.

Still, he said, he will continue to invest in the business, open new stores, and said Target’s bright, long-term trajectory remains the same.

As inflation hit its highest level in nearly four decades, Chief Financial Officer Michael Fiddelke said on a call with reporters that Target will focus on delivering value, even if that means absorbing some costs. He said the price increase “continues to be the last lever we pull.”

“We’ve gained so much confidence over the past few years from the investments we’ve made in the prizes and we’re not about to trade them in the current environment,” he said.

As of Tuesday’s close, Target shares were down about 7% so far this year. Shares closed at $215.28 on Tuesday, bringing the company’s market value to $99.82.

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