Target Q1 earnings plunge amid ‘unusually high costs’
Target Corp. racked up its 20th consecutive quarter of sales growth but its bottom line took a big hit as freight and transportation costs came in much higher than expected.
“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," said CEO Brian Cornell.
Target’s cost of sales increased 10.4% to $18.46 billion, with gross margin contracting to 26.7% from 30.9%, as a result of actions to reduce excess inventory and higher freight and transportation costs.
On a media call, Cornell said the chain saw healthy top-line growth in the quarter, but that the gains were “accompanied by unusually high costs.”
“We were less profitable than we expected to be or intend to be over time,” he said.
Target reported its first-quarter earnings the day after rival Walmart also reported a big miss in its first-quarter earnings. Similar to Target, the retail giant’s sales increased but higher costs weighed heavily on its earnings.
Target’s net income for fell to $1.01 billion, or $2.16 a share, for the quarter ended April 30, from $2.10 billion, or $4.17 a share, in the year-ago period. Adjusted earnings per share of $2.19 were below analysts’ estimates of $3.07.
Total revenue rose 4.0% to $25.17 billion, above estimates of $24.48 billion. Same-store sales increased 3.3%, also more than expected. Sales growth was led by frequently-purchased categories, including food & beverage, beauty and household essentials.
Digital comparable sales grew 3.2%, following a growth of 50.2% last year.
Same-day services (order pickup, drive up and Shipt) rose 8%, led by drive up, which grew in the mid-teens on top of more than 120% last year. More than 95% of Target’s first-quarter sales were fulfilled by its stores.
In addition to higher costs, Target faced other challenges during the quarter, including inventory that arrived too early or too late and rising compensation at distribution centers. The company has also seen a shift to some pre-pandemic buying behavior, such as experience-based purchases. Luggage sales, for instance, rose more than 50% during the quarter. Toys were another standout as children’s birthday parties rebounded.
On the media call, Cornell warned that cost pressures “will persist in the near term,” with some of those costs, such as fuel costs, beyond the retailer’s control.
Despite “near-term challenges,” Cornell said, “our team remains passionately dedicated to our guests and serving their needs, giving us continued confidence in our long-term financial algorithm, which anticipates mid-single-digit revenue growth, and an operating margin rate of 8 percent or higher over time.”
For fiscal 2022, the company affirmed its revenue growth outlook in the low- to mid-single-digit percentage range.