Target Stock Drops 20% After Earnings Miss by a Mile. What Went Wrong.

“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,” said Chief Executive Brian Cornell in a statement.

Analysts expected Target (ticker: TGT) to earn $3.07 a share, on revenue of $24.48 billion. Last year it earned $3.69 a share on sales of $24.2 billion.

In general, supply chain and transportation pressures have weighed on profits across industries recently, even as higher inflation has led to higher sales, as consumers are forced to spend more to buy the same goods.  

Target’s report came one day after

Walmart

(WMT) delivered mixed first-quarter results. While the world’s largest retailer delivered better-than-expected revenue, its earnings missed expectations and it lowered its full-year forecast. The company noted that many of its consumers were changing their behaviors in the face of inflation, which remains at multidecade highs.

Walmart typically serves a lower-income shopper than Target. In addition, Walmart’s management said on its conference call that not all consumers had noticeably altered their behavior, and it had seen some growth in higher-ticket items like gaming consoles, of late. That could bode well for Target, as its slightly more well-heeled shoppers may therefore still be more willing to spend.

The last government stimulus checks went out more than a year ago, and they have been most sorely missed by lower-income Americans, who are now also contending with higher prices for essentials. There was some hope that this cohort could shrug off at least some higher prices, given that as a group, they are also most helped by rising wages. However, those wages haven’t risen as quickly as inflation, a fact that was on display in Walmart’s report.

Target depends less on low-margin grocery than Walmart, and it tends to attract wealthier customers. Therefore, if it too saw its shoppers trading down to cheaper options and pulling back in its first quarter, that could mean that inflation is having a bigger impact even higher up the income scale, despite Americans’ relatively high savings rates and lower debt ratios.

Investors will be especially keen to know from Target management if the company’s discretionary categories still performed decently. Not only are customers most likely to pull back on nonessentials first if they can’t cover groceries, but many already bought plenty of clothes and gadgets during the pandemic.

Other areas of interest will likely be Target’s ongoing curbside and in-store pickup growth, as these allow it to fulfill more online orders from stores—a cheaper option than shipping—and any commentary on supply chains, which remain in focus amid ongoing global disruptions.

Write to Teresa Rivas at teresa.rivas@barrons.com