Target Corp. said its first-quarter net profit fell 51.9% as transportation costs rose amid the supply chain crisis.
“We had to deal with surprisingly high costs, driven by a number of factors, which resulted in profitability well below our expectations and well below what we expect to operate over time,” said CEO Brian Cornell said in a written statement.
Target does not expect rising freight costs and other inflationary pressures to subside soon.
“Looking forward, it’s clear that many of these cost pressures will persist in the near term,” Cornell said on a call with analysts.
Target Drive-Up Service
Comparable digital sales increased 3.2% in the quarter ended April 30, 2022. This is a massive decline from the 50.2% increase seen in the first quarter of 2021.
Same-day services (Order Pickup, Drive Up and Shipt) grew 8% this year. Drive Up grew more than 15% on top of that more than 120% growth from a year ago, Target said.
Total revenue increased 4.0% to $25.2 billion from a year earlier. This was largely due to an increase in sales of frequently purchased categories, including food and beverage, beauty and household essentials.
Target ranks 5th 2022 Digital Commerce 360 Top 1000 Database.
Target average profit margin
The retailer reported an operating margin of 5.3% in the quarter. That was well below analysts’ expectations and down considerably from the 9.8% reported in the first quarter of 2021.
The gross margin rate in the first quarter was 25.7%, against 30.0% a year earlier.
Target said the lower margins were “largely due to inventory write-downs and actions taken to address lower-than-expected sales in discretionary categories and freight-related costs, supply chain disruptions and increased compensation and headcount in our distribution centers”.
“Over the past two years, these guys have done nothing but exceed expectations,” Brian Yarbrough, retail analyst at Edward Jones, told Bloomberg News. “In one quarter, it’s all erased. Now it’s a “show me” story.
Target’s earnings come a day after rival Walmart Inc. reported similarly poor numbers as inflation eats away at margins in the retail world. Walmart ranks second in the Top 1000.
“The target margin shortfall is more dramatic than what Walmart released on Tuesday, and there are clearly industry-wide/macro issues occurring,” Vital Knowledge analyst Adam Crisafulli said in a report. “Food/gas inflation diverts dollars away from discretionary/general commodities, forcing aggressive discounts to eliminate product.”
Will Target succeed in the future?
Target reiterated its revenue forecast, saying it expects mid-single-digit growth this year and beyond.
It is less clear how the big-box retailer will deal with the expense side of the ledger.
On the call with analysts, Target executives said the company expects fuel and freight costs to be $1 billion higher this year than the retailer had forecast. Chief Financial Officer Michael Fiddelke said Target would try to avoid passing the cost of inflation on to consumers. Raising prices “continues to be the last lever we pull,” he said.
Despite weak first-quarter earnings, industry watchers tend to be optimistic about Target over the long term.
“Despite supply chain issues, Target’s digital loyalty program gives the company a strong competitive advantage by delivering the tailored discounts and rewards shoppers are looking for. Other struggling brick-and-mortar retailers should take note,” Sean Turner, CTO and co-founder of Swiftly, told Digital Commerce 360. Swiftly makes loyalty, delivery and other digital retail tools for retailers.
“Target sits where all retailers want to be – at the corner of offline and online shopping,” Productsup’s chief marketing officer, Lisette Huyskamp, told Digital Commerce 360. Productsup builds product data platforms to retailers. “Having started as a traditional brick-and-mortar, the company has a mature physical presence which it has leveraged with new e-commerce offerings. A pioneer in the curbside pickup space, Target is constantly adding value to consumers who want to make purchases online to pick them up later in-store.Target has also done a phenomenal job of making its physical locations a one-stop shop.It recently announced that customers can now make returns, as well as pick up a Starbucks order, at Target outlets.”
Q2 2022 profit target
For the three months ending April 30, 2022, Target reported:
- Net profit of $1.01 billion. That’s down 51.9% from $2.09 billion in the comparable quarter of 2021.
- Total revenue of $25.17 billion, up 4% from $24.19 billion the previous year.
- Operating profit of $1.34 billion, down 43.3% from $2.37 billion in Q1 2021.
Percentage changes may not add exactly to dollar figures due to rounding.
Bloomberg News contributed to this report.
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