Target shares sink more than 20% after company says high costs, inventory woes hit profits

Target on Wednesday reported quarterly earnings that fell far short of Wall Street’s expectations, as the retailer coped with pricey freight costs, higher markdowns and lower-than-expected sales of discretionary items from TVs to bicycles.

Shares fell about 24% in premarket trading.

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

• 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 cheap chic brands of apparel, home decor and more, lapped an especially elevated sales period. A year ago, shoppers had extra dollars in their pockets from stimulus checks and reflected a sense of optimism with their purchases as they got their first Covid-19 vaccines. 

Sales did grow compared with that year-ago period. Comparable sales, a key metric that tracks sales at stores open at least 13 months and online, grew 3.3% in the first quarter. That is on top of a 23% increase in comparable sales in the year-ago quarter and it is higher than Wall Street’s projections for 0.8%, according to StreetAccount estimates. At Target’s stores and its website, traffic rose 3.9%.

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

“While we saw healthy top line growth in the quarter, we were less profitable than we expected to be or intend to be over time,” he said on a call with reporters.

Among the challenges, Target said profits got hit by inventory that arrived too early and too late, compensation and headcount that rose at distribution centers, and a mix of merchandise sales that looked different than before.

Target’s results mirrored Walmart’s quarterly earnings performance. Walmart reported Tuesday that it also missed on earnings, also citing higher inventory and numerous cost pressures. Walmart’s shares fell more than 11% on Tuesday and touched a 52-week low.

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

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 short of the $3.07 expected by analysts surveyed by Refinitiv.

Those adjusted earnings per share dropped sharply – down nearly 41% from the year-ago period.

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

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

Walmart Chief Financial Officer Brett Biggs told CNBC that the big-box retailer has seen some budget-strapped customers trade down to the store brand for deli meats and buy a half-gallon of milk rather than a full one. Some others, he said, are seeking out new gaming consoles and patio sets. 

Target CEO Brian Cornell, meanwhile, said on a media call that the company is seeing a healthy consumer, but one who is living – and spending – differently while resuming some pre-pandemic habits.

For instance, Cornell said toy sales were a standout in the first quarter and grew by the high single digits as families resumed bigger children’s birthday parties. Luggage sales were up more than 50%, he said.  

On the other hand, sales of items like TVs, kitchen appliances and bicycles dropped off as consumers shifted their spending towards experience-based purchases like booking trips and buying gift cards for restaurants, he said.

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

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

With inflation at a nearly four-decade high, Chief Financial Officer Michael Fiddelke said on a call with reporters that Target will focus on offering value, even if that means absorbing some costs. He said raising prices “continues to be the last lever we pull.”

“We’ve earned so much trust over the last several years with investments we’ve made in price and we aren’t about to trade that out in the current environment,” he said. 

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