Target Stock Plunge Wipes $25 Billion As Inflation Squeezes Customers And Sends Costs Soaring—Spurring ‘Dramatic’ Earnings Shortfall

Topline

Shares of Target collapsed Wednesday after the brick-and-mortar retailer posted disappointing first-quarter earnings spurred by unexpectedly high costs that offset rising sales—spelling more trouble for the broader retail industry just one day after competitor Walmart posted its own stock-market plunge.

Key Facts

Target stock plunged as much as 26% to less than $160 on Wednesday—hitting its lowest point since late 2020 and erasing more than $25 billion in market value—as investors digested the retail giant’s morning earnings report, which revealed profit margins that were “well below” expectations due in part to higher freight and transportation costs.

Though the firm posted its twentieth consecutive quarter of sales growth and $25.2 billion in total revenue, Chairman and CEO Brian Cornell said the “unexpectedly high costs” pushed first-quarter earnings down 48.2% from one year prior.

In a morning email, Adam Crisafulli called Target’s shortfall more “dramatic” than Walmart’s worse-than-expected earnings, which pushed the stock down 11% on Tuesday, adding there are “clearly” industry-wide problems as food and gas inflation draw spending away from discretionary merchandise and force “aggressive” discounting to clear out products.

Like Target, the world’s largest brick-and-mortar retailer attributed its widely disappointing results to rising fuel costs and higher levels of inventory, with CEO Doug McMillon saying the firm ramped up the number of rollbacks, or price markdowns, to help spur sales.

In a morning note, market analyst Tom Essaye of the Sevens Report pointed out retail customers are buying less high-margin merchandise (like apparel and electronics) to instead spend more on lower-margin food (like bread and eggs), and also shifting spending away from brand names to cheaper private labels—signs that “consumers are starting to get squeezed by inflation.”

The SPDR S&P Retail ETF, which counts Walmart and Target as holdings, plunged 7% Wednesday and has tumbled 31% this year—far more than the broader S&P 500’s decline of 17%.

Crucial Quote

“Middle and lower-end consumers are starting to get squeezed by inflation, and they are beginning to cut back on nonessential items,” Essaye said Wednesday, adding that investors “need to be cautious on the lower end of the consumer spectrum” because “inflation always hits the lower-income cohorts hardest and first, and these results imply that’s starting to happen now.”

What To Watch For

Essaye cautions the Walmart and Target results could be a sign of more negative earnings to come from retailers like Kohl’s Corp. and Bed Bath & Beyond—and a potential threat to higher-end consumer goods companies and consumer staple stocks like Procter & Gamble.

Key Background

Despite the worst inflation rate in 40 years, retail sales have been largely resilient during the pandemic—reaching a record level in 2021 and still going strong this year. On Tuesday, the U.S. Census Bureau reported retail sales climbed 8.2% on a yearly basis in April to $677.7 billion. “April retail sales demonstrate consumer strength and willingness to spend despite persistent inflation, supply chain constraints, market volatility and global unrest,” NRF President and CEO Matthew Shay said in a statement. “While consumers are facing higher prices, they are preserving their budgets by shopping smart.” Despite resilient sales, rising costs are starting to hit retail profits, and Comerica Bank economist Bill Adams cautions retail sales growth will moderate as higher energy and food prices cut deeper into discretionary spending power.

Further Reading

Dow Falls 800 Points, Stock Market Selloff Continues As Major Retailers Warn Of Rising Cost Pressures (Forbes)

The World’s Largest Retailers 2022: Pandemic Helps Amazon Cement Its Lead (Forbes)

Companies Rush To Raise Prices While They Still Can (Forbes)