What happened
Shares of Target (TGT 1.03%) plunged on Wednesday after the department store chain warned investors that surging costs were eating into its profits. As of 2:25 p.m. ET, Target's stock price was down 28%.
So what
The retail giant's revenue rose 4% year over year to $24.8 billion in its fiscal first quarter, which ended on April 30. Target's comparable sales increased by 3.3%, driven by traffic growth of 3.9%.
"Our first-quarter results mark Target's 20th-consecutive quarter of sales growth, with comp sales growing more than 3% on top of a 23% increase one year ago," CEO Brian Cornell said in a press release. "Guests continue to depend on Target for our broad and affordable product assortment."
Image source: Getty Images.
Unfortunately, Target's costs rose faster than its sales. Customers spent less on discretionary items, which forced the retailer to offer more discounts to clear excess inventory. Higher freight, fuel, and labor costs also took a heavy toll on the company's profitability. Target's gross and operating margins, in turn, fell to 25.7% and 5.3%, respectively, down from 30% and 9.8% in the year-ago quarter.
All told, Target's operating income plummeted 43.3% to $1.3 billion, while its adjusted earnings per share dropped 40.7%, to $2.19. That was far less than the $3.07 in per-share profits Wall Street projected and significantly weaker than Target's own forecast.
"Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time," Cornell said.
Now what
Like many retailers, Target's results are being damaged by inflation. Gasoline prices are at record highs above $4.50 per gallon in the U.S. Food and housing costs are also rising. That's forcing many consumers to cut back on their discretionary spending. Higher gas prices are also increasing the cost of shipping goods to customers when they do make purchases.
Still, Target believes these macroeconomic issues will eventually subside. "Despite these near-term challenges, our team remains passionately dedicated to our guests and serving their needs, giving us continued confidence in our long-term financial algorithm, which anticipates mid-single-digit revenue growth, and an operating margin rate of 8% or higher over time," Cornell said.
