By Tonya Garcia
Target Corp. shares plunged more than 25% in Wednesday trading after the retailer reported a big earnings miss driven by a shift in spending away from key categories like apparel and home.
The stock had its worst day on Wednesday since Black Monday.
In earnings call comments, Target Chief Executive Brian Cornell said the company continued to make gains in areas like food and beverage and essentials. Beauty was also strong as Target /zigman2/quotes/207799045/composite TGT +0.08% continues its partnership with Ulta Beauty Inc. /zigman2/quotes/210513442/composite ULTA -2.66%
“In our other three core merchandise categories, apparel, home and hardlines, we saw a rapid slowdown in the year-over-year sales trends beginning in March when we began to see the impact of last year’s stimulus payments,” Cornell said, according to FactSet. Included among hardlines are furniture, appliances and electronics.
“While we anticipated a post-stimulus slowdown in these categories, and we expect the consumer to continue refocusing their spending away from goods and into services, we didn’t anticipate the magnitude of that shift.”
Target had too much inventory on ”bulky” items like TVs, kitchen appliances and outdoor furniture, which drove higher storage costs and markdowns.
High savings, higher wages, and the employment rate continue to help shoppers, though spending is moving towards travel and other activities that get people out of the house as the world begins to recover from the COVID-19 pandemic. Target’s Chief Growth Officer Christina Hennington notes that while consumers are concerned about inflation and gasoline prices, they might arrive at a store willing to splurge on home décor items, or looking for a new pair of shoes, or preparing for a barbecue or other festive activity. As a result of the changing consumer environment and inflation, which has reached a 40-year high, Target is focused on value.
“Many guests are sharing their uncertainty of the overall state of the economy but are feeling more positive about their personal finances,” she said.
The company also experienced freight and transportation costs in the first quarter that were higher-than-expected by hundreds of millions of dollars, and now anticipates freight costs will reach $1 billion for the year. While the retailer had hoped that volatility would moderate this year, “we don’t see conditions improving right away,” Cornell said.
Target reported first-quarter adjusted earnings per share of $2.19, missing the FactSet consensus of $3.07. Revenue of $25.17 billion beat the Street.
CFRA downgraded Target to hold from buy and slashed its price target to $165 from $288 after the earnings announcement.
“Overall, we were caught off guard by Target’s rapid change in outlook and worry that we could see more downward revisions to guidance, especially if overall consumer spending weakens and the U.S. economy moves closer to a recession,” wrote Arun Sundaram, an equity analyst at the research group.
Raymond James analysts note that Target hosted an investor event 78 days ago where the company expressed confidence in its ability to manage inflation.
“While the cost challenges are concerning and create further near-term uncertainty around estimates (and will take some time to gain investor confidence again), Target’s top-line momentum, traffic, customer loyalty remain strong (even against the toughest comparison of the year; tougher to fix in retail than cost) — supporting the long-term favorable thesis of market share gain opportunities,” wrote analysts led by Bobby Griffin.
Raymond James rates Target stock strong buy.