Target reports profits are missing amid supply chain struggles

The conventional wisdom among Wall Street analysts was that shoppers would return to stores and drive rebound quarters for big-box retailers in Q1 2022. But amid ongoing supply chain challenges, only the first half of this assumption turned out to be true.

Target Corp. (NYSE:TGT) released its first-quarter 2022 earnings before the bell on Wednesday, which showed strong sales growth but declining profits. The retailer sharply missed its earnings per share, as did rival Walmart (NYSE: WMT), which reported earnings the day before. Target shares were down more than 20% in premarket trading on Wednesday.

Just looking at Target’s sales numbers paints a deceptively rosy picture. Same-store sales — those from stores open at least 13 months or online — rose 3.3% in the quarter, comfortably beating Wall Street’s estimate of 0.8%, per StreetAccount. Same-store and digital sales grew at a similar pace.

“Our first quarter results mark Target’s 20th consecutive quarter of sales growth, with mockup sales increasing more than 3% on top of a 23% increase a year ago,” the Target CEO said. , Brian Cornell, in a prepared statement. “Customers continue to depend on Target for our broad range of affordable products, as evidenced by the nearly 4% growth in customer traffic in the first quarter.”

Yet these strong sales figures resulted in a weak quarter. Target’s adjusted earnings per share of $2.19 were well below analysts’ expectations for $3.07, marking a 40.7% year-over-year decline. The operating profit margin rate of 5.3%, meanwhile, was well below what the big-box retailer itself had expected. First quarter net profit was more than halved (52%).

Target attributed the weaker-than-expected first quarter numbers to “inventory write-downs” and costs related to freight and supply chain disruptions. It also cited an increase in compensation and staffing at its fulfillment centers.

“We saw freight and transportation costs much higher than expected and a more drastic change in our sales mix than we had anticipated. This has resulted in excess inventory, much of it in bulky categories, which has put additional pressure on our already stressed supply chain,” Cornell added in Target’s first quarter 2022 earnings call.

Target also pointed to changing consumer habits as a possible culprit. He said sales in discretionary categories were below expectations, with large items like televisions and kitchen appliances seeing declines for the quarter.

“While we anticipated a post-stimulus slowdown in [apparel, home and hardlines] categories, and we expected consumers to continue to refocus their spending on goods and services, we did not anticipate the magnitude of this shift,” Cornell told investors on the earnings call. .

Read: Revised Target Planning Logistics for 2022

Read: Walmart’s fiscal first quarter results are very light

The first quarter of 2022 was a similar story for Target rival Walmart. The world’s largest retailer saw comparative sales rise 3%, but its adjusted earnings per share of $1.30 missed analysts’ estimates of $1.48, as well as its own projections.

In a statement, Doug McMillon, president and chief executive of Walmart, called the bottom line results “unexpected.” McMillon told analysts that cost increases in the second half of the quarter, triggered in part by Russia’s invasion of Ukraine in late February, happened “very quickly” and put Walmart in catch-up mode.

Shares of Walmart were trading at a 365-day low of $131.35 on Tuesday when the market closed.

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