Target misses earnings as rising costs cut into profits, stock plunges premarket

Yahoo Finance Live anchors discuss first-quarter earnings for Target.

Video Transcript

BRIAN SOZZI: Target shares are getting walloped pre-market on an eye-popping earnings miss and a full year profit warning. Now the vibe off Target's quarter isn't too different from Walmart's on Tuesday, which drove its stock down 11%. Guys, I just want to get right into this, because this is a shocking report from Target. Now, Julie, I know you don't like the word shocking, but it very much applies here. Big earnings miss from Target, a big profit warning from the company. They are warning that inflation in transportation and the supply chain more broadly will hit their results by a billion dollars this year.

Now, over the past 24 hours, I have talked to executives at Walmart and Target, and just being on the phone with these folks, I think the-- I think they really are really, really shocked that inflation has not come down to any large extent. That's first. And then secondarily, that consumers have started to retrench relative to how they were spending back just three months ago. So you are seeing a complete reset of valuations across the retail sector, in large part because of Walmart and Target. And I have to say, it's all very deserved.

JULIE HYMAN: Yeah, OK, shocking is deserved here, Sozz. I'll give it to you here this morning. We'll start on a positive note, a little agreement here this morning. I want to run through some of the numbers here that were so shocking to me. Operating margin is really the number that stands out, I think. When the company talked about costs really pressuring it, there you see the trend of the operating margins going lower. In the first quarter, operating margin just 5.3%.

Let's put that in context. That number for 2021 was 9.8%. The company's longer term operating margin goal, which it says it is still holding to over the longer term, is 8%, but this year, it is going to be in a, quote, "range centered around 6%." So, Brad, this really encapsulates the pressure, the squeeze, that is coming, that is happening for Target, for Walmart, for a lot of these other retailers.

BRAD SMITH: And some of the discretionary doldrums that continue right now, especially as we look across the areas that actually did well for Target, sales growth, it was led by frequently purchased categories-- food and beverage, beauty, household essentials. And particularly here, as it comes back to discretionary, the actions that they had to take to address lower than expected sales in discretionary categories is what they had to call out.

They also had costs, as you were mentioning, Sozz, related to freight, supply chain disruptions, and then also-- get this-- the increased compensation and headcount for the distribution centers particularly. And so all of that combined really pressuring on margins, which is going to be a theme that even as we get into Lowe's earnings, that continues even more so throughout this broader retail landscape right now.

BRIAN SOZZI: Yeah, no, I caught up with Brian Cornell, the CEO of Target, and I have some of his comments in a story right now on the Yahoo Finance home page. And he really went-- just his tone, when that conversation was happening, was surprise. You know, he flat out said, we just did not expect the cost increases that we saw in our business. Now, if there's any positive here, Julie-- and maybe I'll get another little agreement with you on this-- Target did not cut its longer term outlook that it provided at its investor day just three months ago.

So despite these high levels of inflation, if you're looking for a positive here in this Target route, those guidance ranges that they put forth three months ago are still intact. But still, this is a very worrying report. Now, a lot of these retailers this week, guys, they don't want to come out and say that consumer spending is slowing down. What they are blaming is weather. Well, it was wet, and it was cold in the latter part of April, and maybe someone didn't want a new grill.

Bottom line is, consumers are balking at the price increases they are seeing in the stores. Their wallets are getting hit over the head here. This is a very worrying trend here for retail ahead of, one, the summer buying season, two, the back to school selling season, and then, three, ultimately, the holiday season, because all these guys are starting to place orders for the holidays. So lots of worry, lots of concern out there.

BRAD SMITH: Well, and just to add on to that, very briefly here, because inventory is something that we've continued to track over the course of this earnings season, especially in retail. Inventory, they have $15 billion worth of inventory on the balance sheet right now. That is, what, rough math, about 33% higher than it was last year at about $10 billion, just a little bit north of that. And so particularly-- and actually, there, you're looking at the inventory value year over year, 43% higher.

So, looking through the inventory, how they're actually going to be able to move that through, that does suggest that we could see more markdowns on some of the backup inventory that they do have, because, clearly, they did more purchasing similar to Walmart in order to get ahead of exactly where they would need to move some of that inventory out the door or where they were trying to anticipate for supply chain disruptions, getting some of that inventory, stockpiling as much as they needed to, and then hoping that it would sell. But that not being the case, leading to some of those markdowns that we saw.

JULIE HYMAN: Yeah, and having to sort of move-- they said they weren't able to sort of manage the inventory like they wanted to. Couple other quick notes here, silver linings, if you will, comparable sales were up 3.3% in the quarter, and that wasn't just from price, right? Traffic was up 3.9%, which I thought was interesting as well. So that kind of stood out to me. The other thing is whether you're talking about Walmart or Target, both of them are talking about raising prices maybe in certain areas, but also really holding price.

The CFO, Michael Fiddelke, talked about, we don't like the impact to our profitability in the short-term from keeping prices low, but that's what our customers want. So that was an interesting comment as well. And then finally, you have to look at the ripple effect, right? Walmart yesterday, you mentioned that drop in the shares, Sozz. That drop was the biggest going back to 1987 for those Walmart shares in a single session. And they're selling off again this morning.

And not only do we see Walmart and Target selling off, it's really across the complex. Across the retail complex, we are seeing pressure today. We're seeing Costco down, Kroger down, in pre-market trading. So now that you have this one-two punch of Target and Walmart now, this is really putting the fear into investors in some of these other retailers about what their numbers are going to show.