Target stock plummets, profits clobbered as inflation comes for retail

Target Corporation released earnings today for the first quarter of 2022, and they amounted to a stunning miss.

The retail giant reported a 52% drop in profit, missing Wall Street’s forecasts by a mile. The company blamed the shortfall on rising costs caused by ongoing supply-chain disruptions, and added consumers aren’t necessarily helping because rampant inflation is causing them to hold off on purchasing nonessential items.

“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,” CEO Brian Cornell wrote in today’s earnings press release.

Target said store traffic was up about 4% in Q1, and sales actually increased. Shoppers spent more on not just home goods and groceries, but even items like luggage as they start traveling again. However, high supply-chain costs and other inflationary pressures cut into profits, sometimes in dramatic fashion: Target predicted fuel and freight costs will be $1 billion higher this year than it had expected. Shares fell Wednesday by nearly 25% on the news, to about $163 in premarket trading, potentially setting the stock up for its worst day since 1987.

The early pandemic days were pretty good for retailers like Target. Profits climbed as they sold lots of furniture, big-screen TVs, kitchen appliances, washer-dryer sets, and other high-margin goods for the home—where consumers suddenly found themselves trapped and restless. On Wednesday, Target said in addition to increased shipping costs, earnings were also hurt by underperforming sales and inventory writedowns in those discretionary categories. Cornell hypothesized that shoppers are “moving from buying small kitchen appliances, and maybe replacing that with gift cards to restaurants and entertainment as they return to a more normalized lifestyle.”

Until now, retail has largely fended off inflation’s bite. That’s partly because many of its goods are daily essentials, meaning compared to other sectors, it has benefited from prices being at a nearly four-decade high. But after routing the tech industry this month, inflation is now walloping retail, too. Target’s bleak earnings come one day after Walmart’s shares tumbled 11%, their worst day in 35 years. Famous for carefully managing costs, Walmart also posted poor earnings that it blamed on higher fuel costs, supply-chain problems, and inventory backlogs (alongside a couple other factors, such as increased labor costs). CEO Doug McMillon said the bottom-line results “were unexpected and reflect the unusual environment,” and added Walmart is working to find the correct balance between keeping prices as low as possible and not letting profits continue to slide.

Target said major price hikes aren’t in the cards just yet over there, because it understands customers’ finances are hurting right now, too. “While we don’t like the impact to our profitability in the short term,” CFO Michael Fiddelke told investors during today’s earnings call, “we know it is the right thing to do for our guests and our business over the long term.”