Target (NYSE: TGT) shares are down more than 25% following the company's big miss in Q1 on the bottom line due to higher fuel and labor costs, supply chain issues, lower than expected demand in key categories, and excess inventory.
It's a major turnaround as the big-box retailers were some of the biggest winners of the past 2 years with strong physical and digital sales growth. These companies benefited as they were allowed to remain open during the lockdowns and were able to increase online sales. Another benefit was many services were unavailable so people increased spending on goods, especially with stimulus checks.
Now, people are increasing their purchases of services and traveling more while spending less on goods. This slowdown is happening as these retailers ramped up their spending and were stocking above-average inventories due to supply chain
issues and bottlenecks. A consequence of this is spending is shifting away from higher-margin items to lower-margin ones.
Inside the Numbers
In Q1, Target reported $2.19 in adjusted earnings per share which missed expectations of $3.07 per share in earnings. Last year, the company earned $4.17 per share.
Revenue topped expectations at $25.2 billion vs $24.5 billion. Comparable sales grew by 3.3% which was above expectations of 0.8% growth. This was despite facing some tough comps due to stimulus payments.
Target said the major reason for the earnings miss was higher costs and a shift in consumer spending. The results were similar to what is happening with other major retailers like Walmart (NYSE: WMT) which also made a 52-week low after being an outperformer.
Target continues to forecast revenue growth in the coming year but didn't provide any guidance for earnings. It also provided some interesting commentary on the consumer. They said spending remains strong but priorities have shifted to more experience-based products like luggage, toy sales, and decorations, an indication that birthday parties and other celebrations are returning. But, there was weakness in the sale of appliances, furniture, and electronics.
In terms of inflation, the company doesn't see pressures abating anytime soon, especially with the rising price of diesel. However, the company said that raising prices is a last resort.