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Inflation crushes Target’s profit, shares plunge 25% in early trading

Inflation smacked Target Corp. over the past three months a surprise to both Target executives and Wall Street analysts — and investors followed this morning.

The Minneapolis-based retailer dealt both with higher costs from supply chain issues and reduced discretionary spending on certain items like furniture as customers faced higher living costs.

Target shares plunged 25% after it announced that its profit for February, March and April was well below analysts’ expectations. It’s the second-biggest single-day loss of value in the company’s history, surpassed only by a 33% drop on Oct. 19, 1987, when the broader stock market crashed in an event long known as Black Monday.

In the first hour of trading, Target shares were valued around $160, a level last seen in October 2020.

“We did not anticipate the rapid shifts we’ve seen over the last 60 days,” said Brian Cornell, in a Wednesday morning call with analysts. “We did not anticipate that transportation and freight costs would soar the way they have as fuel prices have risen to all-time highs. While we were certainly anticipating the impact of overlapping stimulus and a consumer and guest returning to more normal activities, we did not expect to see the dramatic shift in many categories.”

Target saw first-quarter revenue grow 4% to $25.2 billion. But net profit fell by half to a little more than $1 billion from $2.1 billion a year ago.

Adjusted earnings amounted to $2.19 a share, widely missing the consensus estimate by Wall Street analysts of $3.07. It was the first time Target missed analysts’ forecasts since fall 2018, Bloomberg reported.

Comparable sales still increased by 3.3% as traffic to stores and online was up almost 4% compared to last year.

On Wednesday, Cornell’s tone was much more reserved than just a few months ago in March when he proudly declared at an in-person investor event in New York City that Target had grown in such a short timeframe to be a company that could generate more than $100 billion in revenue in a year. Cornell said on Wednesday that Target is adjusting to prepare for a consumer that is transitioning to a new normal of buying patterns different than what retailers have experienced over the last two years.

“Things changed rapidly after we stood on stage in New York,” Cornell said. “We own that. It’s what we’re adjusting as we build our plans for the balance of the year and 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.”

Analysts had long anticipated that Target’s explosive growth during the pandemic would begin to level off this year.

Target reported strong sales in categories such as toys with more children’s birthday parties happening, luggage as more people travel and apparel as more people go out.

But with inflation at decades-high levels and consumers no longer bolstered by government stimulus checks, Target saw shoppers spend less on items like furniture and televisions, said Christina Hennington, Target’s chief growth officer. To help get rid of excess inventory, Target marked down prices of some of these excess items.

Sales growth this quarter was led by frequently-purchased areas like food and beverage, beauty and household essentials.

According to data analytics firm Placer.ai, Target has actually seen a more than 6% average monthly increase in visits to its stores in 2022 compared with the same time last year. When compared with pre-pandemic 2019 numbers, visits have been even more impressive, up 10.5% on average for the first four months of the year.

Target executives listed several factors working against it this spring. They included: higher freight and transportation costs, greater discounting, increased compensation and more hiring in its distribution centers.

Target executives lowered their outlook for the company’s full fiscal year operating income margin rate to around 6% from the 8% that they previously forecasted. They maintained their guidance for full-year revenue growth in the low- to mid-single digit percentage range.

On Tuesday, Walmart reported it was also grappling with inflation on food and fuel and higher supply chain costs.

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