September 28, 2022

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Target shares lost 25 per cent of their value on Wednesday after the retailer said its profits had halved in the first quarter, owing to freight costs and supply chain disruptions.

“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.

The Minneapolis-based retailer reported net income fell 50 per cent year on year to $1bn, missing analyst expectations of $1.5bn, as high costs impacted profit margins. The company earned $2.16 a share, missing analyst expectations of $3.08. 

Target shares lost almost one-quarter of their value on Wednesday to trade at $161.50.

Line chart of $ per share showing Target shares fall after profit warning

The retailer’s first-quarter gross margin rate slid to 25.7 per cent, down from 30.9 per cent in the same period a year earlier, because of inventory impairments, lower than expected sales in discretionary categories, higher freight costs, increased pay and headcount and supply chain disruptions.

Moreover, the company expects its full-year operating income margin rate to be around 6 per cent, down from its previous forecast of about 8 per cent.

“[Target’s] bullish operating margin view . . . was not expected to be challenged so soon, which may create some degree of market consternation,” said Stephanie Wissink, analyst at Jefferies.

The retailer on Wednesday said it continued to expect an “operating margin rate of 8 per cent or higher over time”.

US retailers are struggling to navigate supply chain snarls and inflation, which is at its highest level in 40 years. Walmart, the world’s largest retailer, this week cut its profit outlook having been wrongfooted by growing price pressures, triggering the biggest one-day decline in the company’s stock since 1987.

Walmart said it had observed customers switching towards cheaper, private-label items from branded goods, particularly in its grocery business where food price inflation is running at a double-digit pace.

Still, sales at retailers have climbed as Americans continue to loosen their purse strings despite rising inflation. Target on Wednesday said its revenue jumped 4 per cent to $25.17bn in the first quarter, ahead of analyst expectations for $24.5bn.