Target Shares Crash After Inflation Crushes Earnings

A Target store is seen on August 19, 2020 in Miami, Florida. The company announced record-setting sales growth online and at established stores over the past three months causing Target shares to go up by more than 12%. (Photo by Joe Raedle/Getty Images)
Joe Raedle/Getty Images

Yesterday it was Walmart. Today is was Target’s turn to report quarterly results that showed sales soaring but profits crashing as the company was hit by higher costs for goods, shipping, and headcount.

Shares were down by 27.6 percent after the company said that fuel and freight costs will be $1 billion higher this year than it expected. Headcount, compensation, and product costs were up as well. The company said it sees no signs of the cost pressures easing in the second half of the year.

Target said it would try not to pass on the increased costs to customers, hoping that it can sacrifice some short-term profit to win market share from competitors. The results, and Target’s reaction, undermine the claim by the Biden administration and Capitol Hill Democrats such as Sens. Elizabeth Warren (D-MA) and Bernie Sanders (Ind-VT) that corporate profiteering and price gouging are fueling inflation.

The results also highlight the drag the ESG energy crisis is having on the U.S. economy. So-called ESG investing—an investment strategy focused on largely leftwing environmental, social, and governance priorities—has helped starve the energy sector of investment, pushing up the costs of fuel in the U.S. and around the globe. In addition, financial regulators, special interest pressure groups, and leftwing Democrat lawmakers have leaned on banks so that it is now extremely difficult to finance new fossil fuel projects.

Comparable store sales, which measure online sales and those in stores open for at least a year, rose 3.3 percent from a year ago. Digital sales climbed 3.2 percent, the slowest pace since the onset of the pandemic, as many Americans shifted some of their shopping back to in-store activity. Walmart reported a similar trend on Tuesday. Wall Street had forecast same-store sales to flatline or grow just 0.2 percent.

Total sales climbed 4 percent to $25.2 billion, as customers spent more on groceries, games, and home goods. Even luggage sales were up, signaling an increase in plans to travel.

Operating income, however, declined to $1.3 billion from $2.4 billion for the same quarter in 2021. Target reported earnings per share of $2.16, down a steep 48 percent from a year earlier. That missed Wall Street’s forecast for $3.06 per share.

Gross margins fell to 25.7 percent from 30 percent in the quarter a year ago. That largely reflected pressure from higher markdown rates to eliminate inventory overhangs and lower-than-expected sales in some discretionary categories as customers spent more on necessities.  The company was also hit by higher costs related to freight, supply-chain disruptions, and increased compensation and headcount in distribution centers.

Target lowered its full-year operating income margin rate expectation to a range “centered around six percent,” down from its previous expectation for eight percent or higher. It kept its guidance for sales over the year, highlighting again the pressure inflation is putting on corporate profitability.

Target chief executive Brian Cornell said customers were buying fewer items such as smaller kitchen appliances, bicycles, and TVs than they had been during the pandemic. Instead, they were spending more on groceries and gift cards, Cornell said, adding that this was part of a shift back toward “a more normalized life.”

Contrary to the Democrat narrative that corporate greed and price gouging are driving inflation, Target that widespread price increases would be the “last lever” it would pull to improve profitability. Some prices have gone up but the company said it is focused on providing customers with affordability, even at the cost of lower profits.

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

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