The conventional wisdom among Wall Street analysts was that shoppers would return to stores and drive bounce-back quarters for big box retailers in Q1 2022. But amid continuing supply chain struggles, only the first half of that assumption has held true.
Target Corp. (NYSE: TGT) reported Q1 2022 earnings before the bell Wednesday that revealed strong sales growth but dwindling profits. The retailer missed sharply on earnings per share, much like competitor Walmart (NYSE: WMT), which reported earnings the day before. Shares of Target stock were down more than 20% in premarket trading Wednesday.
Looking only at Target’s sales figures paints a deceptively rosy picture. Comparable sales — those that come from stores open at least 13 months or from online — grew 3.3% in the quarter, comfortably beating Wall Street’s estimate of 0.8%, per StreetAccount. Both in-store and digital comparable sales grew at a similar rate.
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“Our first-quarter results mark Target’s 20th consecutive quarter of sales growth, with comp sales growing more than 3% on top of a 23% increase one year ago,” said Target CEO Brian Cornell in a prepared statement. “Guests continue to depend on Target for our broad and affordable product assortment, as reflected in Q1 guest traffic growth of nearly 4%.”
Yet those strong sales numbers delivered a weak quarter. Target’s adjusted earnings per share of $2.19 fell far short of analyst expectations for $3.07, marking a 40.7% decline year-over-year. Operating income margin rate of 5.3%, meanwhile, was much lower than the big box retailer itself anticipated. Net profit for Q1 was slashed by more than half (52%).
Target attributed the weaker-than-expected Q1 numbers to “inventory impairments” and costs relating to freight and supply chain disruptions. It also cited increased compensation and headcount in its distribution centers.
“We saw much higher than expected freight and transportation costs and a more dramatic change in our sales mix than we anticipated. This resulted in excess inventory, much of it in bulky categories, which put additional strain on our already stressed supply chain,” Cornell added in Target’s Q1 2022 earnings call.
Target also pointed to shifting consumer habits as a possible culprit. It said sales in discretionary categories came in lower than expected, with large items like TVs and kitchen appliances seeing a decline for the quarter.
“While we anticipated a post-stimulus slowdown in [apparel, home and hardlines] categories, and we expected consumers to continue refocusing their spending away from goods and into services, we didn’t anticipate the magnitude of that shift,” Cornell told investors on the earnings call.
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Q1 2022 was a similar story for Target rival Walmart. The world’s largest retailer saw comparative sales grow 3%, but its adjusted earnings per share of $1.30 missed on analyst estimates of $1.48, as well as its own projections.
In a statement, Doug McMillon, Walmart’s president and CEO, called the bottom-line results “unexpected.” McMillon told analysts that cost surges in the second half of the quarter, triggered in part by Russia’s invasion of Ukraine in late February, happened “very quickly” and put Walmart in catch-up mode.
Shares of Walmart stock were trading at a 365-day low of $131.35 on Tuesday at market close.
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