U.S big retailer, Target has felt the bit of inflation as its stock has plummeted by 20%.
The retailer saw its quarterly gross margin dip to 25.7% from 30%.
This is coming after Target reported first-quarter adjusted earnings of $2.19 a share, well below analysts’ forecasts.
Target’s first quarter profits plummeted to half, making the retailer to warn of a bigger margin hit on Wednesday.
The drop in stock is due to rising fuel and freight costs.
A day before, rival retailer, Walmart Inc reported a mixed first-quarter result.
Although it delivered better-than-expected revenue, Walmart earnings missed expectations and it lowered its full-year forecast.
Walmart’s stock on Tuesday logged its worst day since 1987, closing down 11.4%.
Conversely, analysts expected Target to earn $3.07 a share, on revenue of $24.48 billion.
This is because, last year it earned $3.69 a share on sales of $24.2 billion.
However, Target’s shares fell 12% to $190.27 in premarket trading.
“We were less profitable than we expected to be or intend to be over time,” Target Chief Executive Brian Cornell said.
“These (costs) continue to grow almost on a daily basis and there is no sign right now…that it is going to abate over time.”
Target said rising fuel and freight expenses will add nearly $1 billion more than originally expected in annual cost.
Its quarterly gross margin dipped to 25.7% from 30%.
Many companies have dealt with inflation by raising product prices.
However, the Minneapolis-based retailer has so far looked to undercut peers by doing that only for some products.
“(Pricing) continues to be the last lever we pull,” finance chief Michael Fiddelke said.
“While we don’t like the impact to our profitability in the short term, we know it is the right thing to do.”
Why this matters:
Target has kept a considerable section of its products affordable, with exceptions to very few ones.
The affordability of products at Target made the retailer record growth in sales at 3.3% in the three months ended April 30.
According to Refinitiv data, the growth was above expectations of an about 0.5% increase.
However, the drop in stock has cast doubt on the continuity of this trend.
Meanwhile, Target maintained its full-year sales forecast.
It, however, predicted that operating margin will grow at a slower pace of around 6% compared to a prior forecast of 8% or higher.
With a total revenue rising by 4% to $25.17 billion in the quarter, the retailer earned $2.19 per share.
However, Target’s Net profit fell about 52% to $1.01 billion.
“Target depends less on low-margin grocery than Walmart, and it tends to attract wealthier customers.
“Therefore, if it too saw its shoppers trading down to cheaper options and pulling back in its first quarter, that could mean that inflation is having a bigger impact even higher up the income scale, despite Americans’ relatively high savings rates and lower debt ratios.”
A report by Barrons said, “Target depends less on low-margin grocery than Walmart, and it tends to attract wealthier customers.
“Therefore, if it too saw its shoppers trading down to cheaper options and pulling back in its first quarter;
“that could mean that inflation is having a bigger impact even higher up the income scale.
This is “despite Americans’ relatively high savings rates and lower debt ratios.”
“Investors will be especially keen to know from Target management if the company’s discretionary categories still performed decently.
“Customers are most likely to pull back on nonessentials first if they can’t cover groceries” it said.
It added saying, “many already bought plenty of clothes and gadgets during the pandemic.”
“Other areas of interest will likely be Target’s ongoing curbside and in-store pickup growth.”
“These allow it to fulfill more online orders from stores—a cheaper option than shipping.”