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Target Shares Dive 26% as Inflation and Inventory Issues Hit Company

Ticker Symbol: TGT

Target, the large U.S. discount retailer, plummeted 26% at market open after producing one of the worst earnings reports of the first quarter earnings season. Much like Walmart yesterday, if the intraday move holds, it would be the largest single-day decline in the company’s stock price since October 1987. The company missed its first quarter earnings expectations, reduced its guidance for the year, and management also pointed to inventory management issues during the earnings call.

Chief Executive Officer Brian Cornell also noted during the call that a swell in costs during the first quarter shows little sign of diminishing. Much like Walmart, sales did grow compared with the first quarter of 2021, up 4% to $25.2 billion. Comparable sales, a key metric that tracks sales at stores open at least 13 months and online, grew 3.3% in the first quarter. That is on top of a 23% increase in comparable sales in the year-ago quarter and it is higher than Wall Street’s projections for 0.8%.

However, the company said operating profit would be about 6% of sales this year, below the previous forecast of 8%. Furthermore, Cornell also said that most of the cost pressures the company dealt with in the first quarter could become sticky and persist at least in the near to medium term.

Among other challenges, Target said profits declined due to inventory that arrived either too early or too late in the quarter, a mix of merchandise sales that looked different than before and compensation and headcount that rose at distribution centers. The value of Target’s inventory was up 8.5% from the previous quarter and 43% from a year earlier. Retailers generally try to avoid piling up inventory because it can incur costs.

In terms of the merchandise mix, consumers sharply cut spending on apparel and home-goods and forced the company to mark down inventory in those segments. Adjusted earnings per share plunged to $2.19 a share during first quarter, for the Minneapolis-based company, versus the average analyst estimate of $3.08. The company reported an adjusted EPS of $4.17 in the year ago quarter.  

The company noted that strong demand for staples such as food and drinks, luggage, toys, beauty products and household essentials were accompanied with “lower-than-expected sales in discretionary categories.” Big-ticket items such as kitchen appliances, televisions and bicycles saw a sharp drop in sales in a sign that shoppers are reducing spending on luxury or “nice to have” items as they struggle to buy basic goods.

More consumers were also looking for bargains during the quarter, relative to the year ago period when stimulus checks were buoying consumers balance sheets. Target’s store brands also saw an increase in demand as customers looked for discounted items.

Despite the poor results, management said it would continue to invest in its existing operation, open new stores and continue to fight for market share. With inflation at a nearly four-decade high, Chief Financial Officer Michael Fiddelke reiterated his confidence in the company’s long-term future but said that Target will focus on offering value, even if that would mean absorbing some costs. He said lifting prices at stores would be “the last lever we pull.”

Given the results of both Target and Walmart, we believe Walmart’s larger revenue base would allow it drive better pricing from its suppliers due to economies of scale. Furthermore, Walmart has traditionally displayed better inventory and supply chain management expertise in our opinion, two factors that are going to be key to the near-term success of either company.

Walmart’s management also indicated that it would be more flexible in managing its profit margins relative to Target’s. Moreover, Walmart reduced its forward guidance less than Target did today. Based on the above factors, investors could be well served to rotate out of Target’s stock and into Walmart’s in the U.S. discount retailer space.

This content is provided for general information purposes only and is not to be taken as investment advice nor as a recommendation for any security, investment strategy or investment account.