Target inventory plunge 25% in profits, high costs

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TGT -24.10%

Shares slipped after the retailer reported lower quarterly earnings and said it will absorb higher costs this year rather than raise its prices.

Sales at the Minneapolis retailer increased last quarter as shoppers spent more on food, groceries and even luggage as they prepared to travel again, but supply chain costs and inflationary pressures dampened profits. like walmart company ,

Target, its biggest competitor, reported quarterly earnings that missed Wall Street expectations.

Target stocks fell 25% to about $162 in trading Wednesday, putting the company on track for its largest one-day percentage drop since 1987, according to market data from Dow Jones.

Target management has said fuel and freight costs will be $1 billion higher this year than it had been expecting, with few indications of easing them throughout 2022. The company said it would try not to pass these cost increases on to consumers through higher prices for its goods, trading a short-term profit for what Hopes to have a long-term gain in market share.

Airlines, gas stations, and retailers use complex algorithms to adjust their prices in response to cost, demand, and competition. Charity Scott of WSJ explains what dynamic pricing is and why companies use it so often. Illustration: Adele Morgan

“During the quarter, we experienced unexpectedly high costs, driven by a number of factors, which resulted in profitability that came in well below our expectations, and well below where we expect to operate over time,” Target CEO Brian Cornell told reporters.

Target retailers and others have benefited from increased sales of higher-margin goods such as kitchenware, televisions and furniture during the pandemic, and profits have increased. The company said Wednesday that earnings for the April quarter were hit by higher discount rates, lower inventory values, and lower-than-expected sales in those discretionary categories.

Mr. Cornell said customers were buying fewer large items such as bikes, televisions and kitchenware than in the past two years. He said shoppers are “moving from buying small kitchen appliances and possibly exchanging them for gift cards to restaurants and entertainment as they return to a more normal lifestyle.”

The company said comparable sales, including sales from targeted stores or digital channels operating for at least 12 months, were 3.3% higher than a year earlier. Digital sales jumped 3.2% – the slowest growth since the start of the pandemic.

While total revenue increased 4% to $25.2 billion, operating income was $1.3 billion, down from $2.4 billion in the same quarter of 2021. Target earnings per share were $2.16, down 48% from the previous year, And lower than Wall Street expectations.

The retailer already reported increasing revenue and earnings per share at a slower rate than in 2021, when revenue crossed the $100 billion mark as shoppers returned to stores, but it acknowledged costs were surprisingly high in the last quarter.

Target said that while some prices have gone up, broader price increases will still be the last lever it will attract to improve profits because it has been aware that its customers are seeking affordability.

“While we don’t like the impact on our profitability in the short term, we know it is the right thing to do for our guests and our business in the long term,” said Michael Fidelk, Chief Financial Officer.

Target’s operating income margin averaged 5.3%, compared to 9.8% in 2021, as the retailer said it expects a similar level of profitability in the second quarter. For the full year, the company said it still expects an operating margin rate in a range centered around 6%.

Target said it had no plans to cut its planned annual capital expenditures from $4 billion to $5 billion. It has opened seven new stores so far in 2022 and plans to open 30 stores throughout the year.

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