Target shares sank on Wednesday, as surging costs resulted in a big miss in quarterly earnings and a reduced outlook.
The stock fell as much as 26% to $159 by midday, the lowest price since November 2020. Target’s first-quarter earnings announcement caught the attention of the broader equity market, with US stock futures swinging lower following the release.
Consumer staples stocks were the worst-performing during the regular session, with their collective 5% drop fronting the S&P 500’s nearly 2% decline.
“We have a lot of work ahead of us to restore profitability to the level where we expect to operate over time,” Target Chief Executive Brian Cornell said on a post-earnings call.
The company said costs will rise by an additional $1 billion, more than it had anticipated for the year.
Costs have remained elevated for companies also due to pandemic disruptions to shipping channels and the crisis in Ukraine. Target executives said the supply-chain woes would remain until at least 2023.
The company now expects annual operating margins to be around 6% compared to a prior outlook of 8% or higher.
Earning Highlights
Target reported Wednesday that its profit tumbled 52% compared with the same period last year in an environment of rising costs for things like fuel, and also a lightening quick return by consumers to more normalized spending.
Purchases of big TVs and appliances that Americans loaded up on during the pandemic have faded, leaving Target with a bloated inventory that must be marked down to sell.
The company’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, Target 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.
Sales at Target stores open at least a year increased 3.4% during the latest quarter. It posted an 18% increase in the same quarter last year. Online sales increased 3.2%, following growth of 50.2%.
Consumer effect
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 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 toward experience-based purchases like booking trips and buying gift cards for restaurants, he said.
Target’s quarterly financial report comes a day after shares of rival Walmart tumbled about 17% for similar reasons after it posted quarterly results. Both companies missed profit expectations by a wide margin. Shares of Walmart fell another 8% Wednesday.
