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Retail

Target Profit Halves As Rising Costs Hit Margins

Target Corp's quarterly profit halved and it warned of a bigger margin hit due to rising fuel and freight costs, in a clear sign there would be no immediate relief for U.S. retailers from surging inflation.

Shares tumbled 24% following the bleak results that came a day after larger rival Walmart Inc cut its annual profit view and its shares logged their worst day since 1987, though both retailers clocked better-than-expected quarterly sales.

Profit Impact

"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."

Rising fuel and freight expenses will add nearly $1 billion more than originally expected in annual expenses, Target said, as pandemic disruptions to shipping channels and the crisis in Ukraine keep costs for companies elevated.

Target's quarterly gross margin dipped to 25.7% from 30%, also due to excess inventory resulting in higher discounts. Demand for costlier items such as televisions and kitchen appliances was also waning, the company said.

Margin Impact

"Target's print looks remarkably similar to Walmart's ... But this is accompanied by much worse margins due to the now all too common refrain of higher supply-chain costs, which are not yet being fully passed through to consumers," D.A. Davidson analyst Michael Baker said.

"This dynamic, which is likely to persist, makes it painful to own (shares of) retailers in the current environment."

The company predicted annual operating margins to be around 6% compared to a prior forecast of 8% or higher. Its first-quarter net profit fell to $1.01 billion. Its adjusted profit of $2.19 per share missed expectations of $3.92.

Still, revenue rose 4% to $25.17 billion, helped by its strategy to undercut peers by keeping a large section of its products affordable even at the cost of some short-term profitability.

Read More: U.S. Retail Sales Increase Strongly In April

News by Reuters, edited by ESM – your source for the latest retail news. Click subscribe to sign up to ESM: European Supermarket Magazine.

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