A miss in the targetit is
profit sends an arrow to the heart of the retail sector.
The company said Wednesday that comparable sales rose 3.3% in the quarter ended April 30, better than the 0.24% expected by analysts polled by Visible Alpha. But while total revenue increased, net profit fell by more than half. In the past five years, Target has missed Wall Street’s net income expectations just three other times, and the biggest shortfall so far has been 3.5%. Wednesday’s was 31%.
Operating margins at the retailer, which last year looked more like a Macy’s department store than Walmartit is
, descended to earth. Its operating margin was 5.3% last quarter, down sharply from 9.8% in the same period a year earlier and its long-term target of 8%. Target’s profit loss sent its shares down a quarter on Wednesday in what would be its worst one-day percentage drop since the stock market crash of 1987. The selloff came a day after its rival’s own disappointing results Walmart also sent him to his biggest loss since then.
Soaring fuel prices and supply chain bottlenecks hurt Target’s margins, as did changing consumer demand. Inventory rose 43% in the last quarter compared to the previous year, leading to more markdowns in certain categories. While it typically takes Target less than 60 days to sell its inventory, it took more than 70 last quarter.
All in all, the current context remains perilous for traders. They face unpredictable shifts in consumer demand at a time when they need to plan inventory earlier to compensate for longer lead times. Target said demand was strongest in food and daily necessities, but also for selective outlet categories such as beauty, where sales were up 45% from the equivalent period in 2019. Baggage sales increased by more than 50% compared to the previous year. Larger items such as appliances and furniture fared poorly, as did clothing, although fashionable clothing sold much better than essential clothing.
Target’s results are a worrying sign for other retailers due to earnings reports in the coming weeks. On the one hand, it shows that the heyday of full-price selling is over, as the two pillars that sustain it – low overall inventory and large wallets – are weakening. Target and Walmart warned of more promotions and markdowns. On the other hand, the days of buyers continuing to stock up on higher margin discretionary purchases are over as they become selective about spending on goods. And if retailers of such scale cannot handle freight and cost pressures, it bodes ill for smaller companies with weaker bargaining power.
It’s no surprise, then, that the retailer’s remarks have derailed other pandemic-era retail winners, sparing no category except low-cost sellers such as TJX Cos. . The electronics specialist Best Buyit is
the stock fell 8%, while big-box retailers Costco and BJ’s Wholesale fell 11% and 16%, respectively. Kohl’s department store,
due to Thursday’s earnings report, fell 10%. Four big-box retailers — Walmart, Target, Costco and BJ’s — are on track to lose more than $120 billion in combined market value in two trading sessions.
Results from Walmart and Target show that the tides that have been blowing in favor of retailers are turning and hitting earnings hard. While this will grab the attention of investors over the next two weeks, stores that can hold on to sales and retain customers, like Target, can ultimately win in the long run. Small competitors are another story.
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