Target stock plunges as earnings fall on changes in consumer spending and rising transportation costs

Shares of Target Corp. plunged 24.4% in Wednesday’s trading after the retailer reported a major loss in profit due to a shift in spending away from key categories like apparel and home.

In comments on the earnings call, Target chief executive Brian Cornell said the company continued to make gains in areas such as food and beverages and daily necessities. Beauty was also strong as Target TGT,
continues its partnership with Ulta Beauty Inc. ULTA,

“In our other three core merchandise categories, apparel, home and durable, we saw a rapid slowdown in year-over-year sales trends beginning in March, when we started to see the ‘impact of last year’s stimulus payments,’ Cornell said, according to FactSet. Furniture, appliances, and electronics are included among the hard-core commodities.

“While we anticipated a post-stimulus slowdown in these categories and expected the consumer to continue to refocus spending on goods and services, we did not anticipate the magnitude of this shift.”

Target had too much inventory of “bulky” items like TVs, kitchen appliances and outdoor furniture, which led to increased inventory costs and markdowns.

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Strong savings, higher wages and the employment rate continue to help shoppers, although spending is shifting towards travel and other activities that get people out of the house as the world begins to warm up. recovering from the COVID-19 pandemic. Target Chief Growth Officer Christina Hennington notes that even if consumers are concerned about inflation and gas prices, they may arrive at a store ready to splurge on home décor items, or looking for a new pair of shoes, or getting ready for a barbecue or other festive activity. . Due to the changing consumer environment and inflation, which is at a 40-year high, Target is focused on value.

“Many guests share their uncertainty about the overall state of the economy, but feel more positive about their personal finances,” she said.

The company also experienced freight and transportation costs in the first quarter that were hundreds of millions of dollars higher than expected, and now expects freight costs to reach $1 billion for the year. While the retailer had hoped volatility would moderate this year, “we don’t see conditions improving right away,” Cornell said.

Target reported first-quarter adjusted earnings per share of $2.19, missing the FactSet consensus of $3.07. Revenue of $25.17 billion beat the street.

The CFRA downgraded Target to hold the buy and reduced its price target to $165 from $288 after the earnings announcement.

“Overall, we were caught off guard by Target’s rapid change in outlook and are concerned that we could see more downgrades to guidance, particularly if overall consumer spending weakens and the U.S. economy is approaching a recession,” wrote stock market analyst Arun Sundaram. to the research group.

Raymond James analysts note that Target hosted an investor event 78 days ago where the company expressed confidence in its ability to manage inflation.

“While cost challenges are a concern and create additional near-term uncertainty around estimates (and it will take some time to regain investor confidence), revenue momentum, traffic and customer loyalty at Target remain strong (even relative to the toughest benchmark of the year; harder to fix in retail than cost) – supporting the favorable long-term thesis of revenue-earning opportunities. market share,” wrote the analysts led by Bobby Griffin.

Raymond James rates the target stocks strong buy.

“The company remains profitable – and made net gains in 2020 and 2019 – but margins are well below the long-term average, which is a cause for concern and a very notable stumble for a retailer that has long been lagging behind. ‘poster child for strong retail,’ wrote Neil Saunders, chief executive of GlobalData, noting that consumers are turning away from higher-margin products.

“Target’s value-for-money position and strong approach to product development and innovation should help it perform much better than other generalists and many market specialists, who will experience higher erosions. serious in the discretionary categories.”

Still, Saunders warns that Target needs to execute well and “make sure its grocery and household essentials offering is on point.”

Analysts also point to what RBC Capital Markets called “strangely similar” results from Target and Walmart Inc. WMT,
which released its first fiscal quarter results on Tuesday.

Walmart noted that some consumers are bargaining in certain grocery categories due to inflationary pressure on prices.

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“A major theme emerging from Walmart’s earnings is the bifurcation of the American consumer,” Cowen analysts led by Oliver Chen wrote in a Walmart note.

“Walmart noted that the impact of inflation on groceries has pushed sales away from other categories as low-to-middle-income shoppers cut back on non-essentials, resulting in overall flat transactions of a year to year.”

Cowen believes Walmart shares are outperforming with a price target of $180.

Truist Securities values ​​Walmart shares with a price target of $139, down from $150 previously.

“We believe rising food prices (double-digit inflation) will continue to have an outsized impact on the purchasing power of low/middle income customers (a baseline), which will increasingly make difficult for Walmart to sustain its sales/margin trajectory out of its massive $400 billion sales base,” the analysts wrote in a Walmart note.

Hennington of Target said Target increased food and beverage sales by $1.8 billion over the past three years, about a quarter of the company’s sales growth for the period.

The target stock has fallen 29.4% since the start of the year.