Target warns of margin hit as rising costs squeeze profits, shares fall 26%

  • First-quarter net profit drops 52% to $1.01 billion
  • Adj. earnings of $2.19/share miss estimates of $3.92
  • At $159, shares hit more than 18-month lows

May 18 (Reuters) – Target Corp’s (TGT.N) quarterly profit halved and it warned on Wednesday of a bigger margin this year due to rising fuel and freight costs, a sign clear that there would be no immediate relief for US retailers from runaway inflation.

Shares fell 26% following dismal results a day after arch-rival Walmart Inc (WMT.N) cut its full-year earnings outlook and its shares recorded their worst day since 1987, although both retailers reported better-than-expected quarterly sales. Read more

“We have a lot of work ahead of us to restore profitability to the level at which we plan to operate over time,” Target Chief Executive Brian Cornell said on a post-earnings conference call.

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The company said costs would rise by an additional $1 billion, more than it had expected for the year.

Costs remained high for businesses, notably due to pandemic disruptions to shipping channels and the crisis in Ukraine. Target executives said supply chain issues will persist until at least 2023.

The company now expects annual operating margins of around 6%, down from earlier guidance of 8% or more.

Signage is seen at a Target store in Manhattan, New York, U.S., November 22, 2021. REUTERS/Andrew Kelly

EVOLUTION OF CONSUMER EXPENDITURE

Target’s quarterly gross margin fell from 30% to 25.7% as high inflation over four decades drove consumers to spend more on groceries and household essentials instead of high-margin discretionary items like televisions and clothing.

“After Walmart’s (results) … we shouldn’t be surprised to see Target posting a bigger revenue shortfall given its wider range of discretionary products relative to Walmart,” said CFRA analyst Arun. Sundaram.

Target said it was selling bulky items such as kitchen appliances and TVs at discounted prices to make more shelf space for food and other essentials.

At an 18-month low of $159, the retailer’s shares were on course to shed about a quarter of its $100 billion market capitalization after its adjusted earnings per share of $2.19 missed estimates by 3 $.92 for the three months ended April 30.

“With macroeconomic volatility, commodity and freight headwinds, regaining investor confidence will likely require some input cost relief and solid cost reductions/productivity gains,” said analyst Greg Melich. ‘Evercore.

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Reporting by Aishwarya Venugopal and Uday Sampath in Bengaluru; Editing by Arun Koyyur

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