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Target Shares Crash After Full-Year Operating Income Slashed Due To "Unexpectedly High Costs"

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by Tyler Durden
Wednesday, May 18, 2022 - 11:44 AM

Update (0835ET): Record high diesel and jet fuel prices will do it. 

Both Target and Walmart are under pressure from their respective earnings. 

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Target shares plunged to a 14-month low in premarket trading after reporting first-quarter earnings that missed Wall Street's expectations. 

The discount retailer's first-quarter profit fell short of expectations, even as sales increased above forecasts, though the company was burdened with expensive freight costs, higher markdowns, and lower-than-expected sales of discretionary items (a similar story to Walmart's).

Market research firm Vital Knowledge said Target's margin shortfall is "more dramatic" than what Walmart reported Tuesday, due mainly to inflationary problems. 

The retailer lowered its full-year forecast on operating income margin to 6% of sales this year. Target had previously forecasted at least 8%. During the quarter, adjusted earnings tumbled to $2.19 a share. 

Here's what Target reported for Q1:

  • Adjusted EPS $2.19 vs. $3.69 y/y, estimate $3.06 (Bloomberg Consensus)
  • Sales $24.83 billion, +4% y/y, estimate $24.34 billion
  • Comparable sales +3.3%, estimate +1.17%
  • Operating margin 5.3%, estimate 8.13%

Commenting on the dismal results, Chief Executive Officer Brian Cornell said, "We were less profitable than we expected to be, or intend to be over time ... it's clear that many of these cost pressures will persist in the near term." 

Cornell said: "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."

The shares fell a staggering 21% on the news. 

On consumers, Target said strong demand for food staples, beauty products, and household essentials went along with "lower-than-expected sales in discretionary categories." Consumers are beginning to pull back on discretionary items as they struggle to buy essential items amid the worst inflation in four decades. Cornell said consumers are shifting towards more generic brands, a move to save money. He said consumers who bought large ticket items, such as television and home appliances last year, are buying lower ticket items. 

And it appears to be the same story between Target and Walmart, both missed profit expectations as inflation costs created pressure on margins.

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