Target Hits 52-Week Low After Missing Badly on First Quarter Earnings

Edward Kim  |

Video source: YouTube, CNBC Television

Target ( TGT) reported first quarter earnings significantly below expectations Wednesday.

Despite posting its 20th consecutive quarter of sales growth, the big box retailer reported Q1 adjusted EPS of $2.19, down 41% from the same period last year. The street was looking for $3.07 per share.

Comparable sales grew 3.3% in the quarter, leading to revenues of $25.2 billion, up 4% over the first quarter of 2021.

Operating income came in at $1.3 billion, down 43% from the same period last year.

CEO Brian Cornell was subdued Wednesday morning, telling CNBC, "From a freight and transportation standpoint, things have changed significantly from even 13 weeks ago."

"We did not project the kind of significant increases we would see in freight and transportation costs, and you’ve been talking about it on CNBC almost every day. I think yet again this morning you talked about all-time record fuel and diesel costs."

"Right now we project that’s going to hit us [to the tune of] about a billion dollars of incremental costs in this fiscal year. So a significant increase that we didn’t anticipate."

Target reiterated revenue guidance of mid-single-digit growth for the year, but the company did not provide any bottom line guidance.

Investment thesis

  • Target stock fell 25% Wednesday to close at $161.61, the lowest closing value since Nov. 17, 2020.
  • The stock is under further pressure Thursday in pre-market trading, down 1.2% to $159.69 as of 6:45am.
  • We think continued caution is warranted, and we think any near-term upside may be capped by investors looking to sell into any bounce.
  • We note that Walmart ( WMT) also reported much lower-than-expected earnings this week, and the common denominator lies in the same unexpected high costs.
  • Investors shouldn't expect the high freight and transportation costs to ease anytime soon.
  • Diesel fuel costs are at an all-time high, hitting $5.58 per gallon this week. Diesel is used in most freight trains and long-haul trucks.
  • While Target is on the less expensive end of the retail spectrum, it's not the lowest. Further inflationary pressures, which seem likely in the near term, would impact the top line as consumers opt for Walmart and other less expensive sources for their staples.
  • CEO Cornell said that he's not seeing any consumer slowdown in May so far, but with regard to the cost side of the business, "We’re still going to have some of the same challenges in the second quarter" that the company had in Q1.

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Source: Equities News

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