Target (TGT) reported first-quarter earnings that came in well below Wall Street estimates, a day after archrival Walmart (WMT) also came in well shy of EPS targets. Target stock plunged early Wednesday. WMT stock, which tumbled Tuesday, fell further before the open.
Estimates: Analysts expected Target to earn $3.07 per share, a 20% drop, on revenue of $24.475 billion, up 1%. FactSet forecast a 0.9% same-store sales gain.
Results: Target earnings tumbled to $2.19 a share. Revenue rose 4% to $25.17 billion. Same-store sales climbed 3.3%, in-store comps up 3.4% and digital store comps up 3.2%.
Target blamed the profit shortfall on higher freight costs as well as bigger markdowns and weaker-than-expected sales of bigger-ticket discretionary items such as TVs. The markdowns and shift from discretionary items could be a consumer reaction to rising inflation, which is outpacing wages significantly.
The stock has an 83 Composite Rating. Its EPS Rating stood at 90.
Walmart Earnings, Walmart Stock
Walmart (WMT) earned $1.30 a share, below FactSet estimates for $1.48 per share. Revenue of $141.57 billion came in above expectations of $138.8 billion. Same store sales topped views, jumping 5.6% for the quarter.
A company statement said the “bottom-line results were unexpected, and reflect the unusual environment. U.S. inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected.”
Walmart, during its earnings call, said that that its profit during the quarter took a hit from expenses related to hiring, fuel and its supply-chain. As Omicron cases declined, workers who were out on Covid leave returned more quickly than expected. However, the company had also hired more people to cover for the employees sidelined by Covid, leading to “weeks of overstaffing.”
Management for the big-box chain also lowered profit expectations for the second quarter and full year.
For the full year, Walmart said it expected earnings per share growth to be flat. That was a more downbeat forecast than the one the chain gave in February for a 5% to 6% increase.
However, Walmart bumped its full-year net sales growth expectations to roughly 4.5% to 5%, up from an earlier outlook of around 4%. And it saw same-store sales growth at Walmart U.S., excluding fuel, of roughly 3.5%. That was better than its forecast in February for “slightly above 3%.”
Walmart offered a mixed portrait of the U.S. consumer overall, as investors try to gauge the impact of rising grocery prices on consumer spending. Prices for food and gas have been pushed higher by an ongoing supply-chain squeeze and Russia’s war in Ukraine.
“I think it’s important to recognize that there’s more than one consumer,” CEO Doug McMillon said on Walmart’s earnings call. “We serve the whole country.”
Management said customers buying things like deli meat, bacon and dairy were switching to Walmart’s private brands, which tend to be cheaper. But it said it also saw growth in more expensive items like game consoles, and strong demand for spring and summer-season items like patio furniture and grills.
The company also said that customers were making “more real-time choices.” And it said it would try to cut expenses where it could and pass on costs to consumers “where they appear to be less temporary in nature.”
‘No Retailer Is Immune’
For the second quarter, Walmart trimmed its earnings-per-share forecast to “flat to up slightly,” from expectations for a low to mid single-digit gain. It said it expected net sales to increase over 5%.
“Walmart’s softer than expected earnings for the first quarter demonstrate that no retailer is immune from the higher cost pressures reverberating throughout the retail sector,” Moody’s analyst Mickey Chadha said in an emailed statement.
He also noted that Walmart closed out the quarter with higher inventory, due to rising prices and “aggressive” purchases. Chadha said the extra stockpiles could lead Walmart to sell more at a discount if more customers turn away from higher prices.
More businesses have been fattening inventories to ensure they have product to sell, after pandemic disruptions snarled traffic at ports and warehouses and led to shipment delays. Still, he said Walmart was likely grabbing market-share in groceries, given its ability to keep prices lower than rivals.
Both Walmart and Target over the years have plowed more money into their e-commerce distribution infrastructure, which helped them tap into a pandemic-driven boom in online shopping. But the companies entered the year without the benefit of extra stimulus payments to consumers.
Ahead of earnings for both chains, Cowen analyst Oliver Chen said Walmart was a bit better positioned than Target, citing Walmart’s “grocery-centric diversification.” Walmart’s U.S. business drew more than half of its sales from groceries.
BMO analyst Kelly Bania, in a note, said Target, whose sales mix leans less on groceries than Walmart, could be more at risk in the event of a recession.
“That said, a recession likely weighs on discretionary peers more heavily, which could be a catalyst to ignite market share gains longer-term,” she said.
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