Wall Street laid into Target on Wednesday after the company failed to deliver on quarterly profits.
The Minneapolis-based big-box retailer revealed earnings, increasing top-line revenues but falling short on profits due to continued pandemic-related headwinds. The news caused shares of Target to plunge more than 27 percent Wednesday, ultimately closing down 24.87 percent to $161.73 apiece.
“Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations and well below where we expect to operate over time,” Brian Cornell, chairman and chief executive officer of Target Corp., said in a statement. “Despite these near-term challenges, our team remains passionately dedicated to our guests and serving their needs, giving us continued confidence in our long-term financial algorithm, which anticipates mid-single-digit revenue growth and an operating margin rate of 8 percent or higher over time.”
Total revenues for the three-month period ending April 30, were $25.1 billion, up from $24.1 billion a year ago. Comparable sales grew 3.3 percent during the quarter, year-over-year, on top of 22.9 percent growth last year, while guest traffic rose 3.9 percent during the quarter, thanks to strength in food and beverage, beauty and household essentials. Same-day services — which include buy online, pick up in stores, drive-up and Target’s delivery service Shipt — accounted for more than half of digital sales growth.
Still, excess inventory and higher freight and transportation costs lead to reduced earnings per share. Target’s first-quarter GAAP earnings per share fell 48.2 percent to $2.16, down from $4.17 the same time last year. The company logged just over $1 billion in profits, as a result, down from $2.09 billion during 2021’s first quarter.
Target’s results mimicked the trends big-box rival Walmart revealed Tuesday during its quarterly earnings. Like Target, Walmart executives said the company was hit by higher-than-expected freight costs, excess inventory and reduced spending on high-margin categories, like apparel, all of which hurt bottom-line profits.
“While we anticipated a post-stimulus slowdown in [apparel, home and hardline] categories and we expected the consumer to continue refocusing their spending away from goods and into services, we didn’t anticipate the magnitude of that shift,” Cornell told analysts during Wednesday morning’s conference call. “This led us to carry too much inventory, particularly in bulky categories, including kitchen appliances, TVs and outdoor furniture. And with very little slack capacity after two years of unprecedented growth, we faced elevated costs to store and rightsize our inventory position. And we certainly didn’t anticipate the impact that would have on our supply chain costs. That certainly impacted our business in the first quarter and we expect that to continue in the second quarter. So things changed rapidly. We own that.”
For the full year, Target is now anticipating about a billion dollars in incremental freight costs. In addition, increased promotional activity and storage fees for added inventory cut into profits.
“Rather than jamming store sales floors with excess product — which would have made them more difficult to shop — our team secured temporary storage capacity instead,” John Mulligan, executive vice president and chief operating officer at Target, said on the call. “While these were difficult decisions in the moment, we have no doubt they are the right long-term choices. However, they involve higher costs, resulting directly from the actions we chose to take and indirectly, in terms of team member hours required to manage the extra volume.”
Cornell also remains bullish on Target’s future. “Guests continue to depend on Target for our broad and affordable product assortment,” he said. “Our first-quarter results mark Target’s 20th consecutive quarter of sales growth.
“We’re committed to improving our operating performance over the second, third and fourth quarter and getting ourselves back on track for a more normalized environment in 2023,” Cornell added.
And unlike Walmart shoppers, who invested in things like outdoor furniture, gardening supplies and game consoles, Target shoppers shied away from these categories, in addition to a noticeable decline in apparel basics, home and sporting goods.
Instead, as consumers increasingly headed back out into the world, they stopped at Target for fashion-forward, or going-out, pieces; beauty products; food and beverage; prepaid cards; toys, and travel needs.
“We frequently get questions about how our guests are feeling given the current economic environment, how their shopping habits are evolving and what’s top of mind for them,” Christina Hennington, executive vice president and chief growth officer, said on the call. “Our guest base encompasses every slice of the American population, given that we serve nearly 20 million guests on average each and every week. And the breadth of their individual decisions as they navigate a rapidly changing macro environment is just as broad, making the answers to those questions that much more complex.”
For now, beauty remains Target’s fastest-growing category, with comp growth in the low-double digits, compared to last year, driven by strength in sunscreens, color cosmetics and fragrances. Essentials increased high-single digits, while food and beverage rose in the low-double digits. Other tailwinds included luggage (up 50 percent in the quarter), and Target’s own-brand portfolio, which grew faster than total sales. Hennington added that “trend-based apparel accelerated meaningfully” thanks to the return of in-person events and travel plans.
But Target has stocked its shelves (both physically and digitally) with a number of popular private-label fashion brands over the years, including Levi’s Red Tab, Stoney Clover Lane, lingerie label Journelle, period-panties brand Thinx, Priyanka Chopra’s hair care brand Anomaly and home goods brand Opalhouse. The retailer is also home to Ulta Beauty, Disney and Apple shops-in-shop in select locations, in addition to its own brands, 10 of which have revenues that top a billion dollars.
Cornell told analysts that Target would consider price increases to balance inflation “where appropriate.”
“But we’re also laser-focused on protecting our value position in this environment and making sure we provide great affordability to the guests in a time of need,” he said. “So we’ll take a very balanced perspective on that.”
Target affirmed its full fiscal year 2022 outlook of revenue growth in the low- to mid-single-digit range.
But that wasn’t enough to tame investor fears. CFRA Research slashed its 12-month price target for the firm to $165, down from $288 a share, and updated its rating on the stock from “buy” to “hold.”
“Similar to Walmart, Target is seeing a rapid shift in consumer spending habits as inflation rises and COVID-19 restrictions ease, leading to lower-than-expected sales in certain discretionary categories and stronger results in most consumable categories,” Arun Sundaram, equity analyst at CFRA, wrote in a note. “Rightsizing inventory and product assortment will take time — in our view — likely leading to more markdowns and inventory impairment, along with higher freight and labor costs. Overall, we were caught off guard by Target’s rapid change in outlook and worry that we could see more downward revisions to guidance, especially if overall consumer spending weakens and the U.S. economy moves closer to a recession.”
Target ended the quarter with 1,933 stores, in addition to its e-commerce business, $1.1 billion in cash and cash equivalents and roughly $13.3 billion in long-term debt.
Shares of Target are down more than 26 percent, year-over-year.