Target’s Miss Hits Retailers Hard

Missing the target‘S

TGT -27.40%

earnings are sending an arrow through the heart of the retail sector.

The company on Wednesday said comparable sales rose 3.3% in the quarter ended April 30, better than the 0.24% that analysts polled by Visible Alpha had expected. But while total revenue increased, net profit more than halved. Over the past five years, Target has missed Wall Street’s net income expectations just three other times, and the biggest shortfall to date is 3.5%. Wednesday is 31%.

The retailer’s operating margin, last year looked more like a Macy’s department store than a Walmart‘S

, has come down to earth. Its operating margin was 5.3% last quarter – down sharply from the 9.8% it recorded in the same period a year earlier and its long-term target of 8%. Target’s profit miss sent its shares down Wednesday, which would be the worst percentage drop in a single day since the 1987 stock market crash. It comes a day after rival Walmart’s disappointing results also made it its heaviest loss since.

Rising fuel costs and supply chain bottlenecks have hit Target’s bottom line, and consumer demand has changed as well. Inventories rose 43% last quarter from a year earlier, leading to more declines in some categories. While Target typically takes less than 60 days on average to sell its inventory, it took more than 70 days last quarter.

Overall, the current environment remains a hazard for retailers. They face unpredictable changes in consumer demand at a time when they need to plan inventory earlier to make up for longer lead times. Target said demand was strongest for food and essentials, as well as for select outbound categories like beauty, where sales were up 45% year-over-year. Luggage sales increased more than 50% from a year earlier. Big-ticket items like home appliances and furniture are on sale, and so is clothing, although on-trend clothing is outselling essentials.

Target’s results are a worrisome sign for other retailers due to earnings reports in the coming weeks. First, it shows that the golden age of full-price sales is over when the two pillars that supported it – low overall inventory and fat wallets – are waning. Both Target and Walmart warn of many promotions and discounts. On the other hand, the days when shoppers continuously shopped for higher margins are over when they opted to spend on goods. And if retailers of this size can’t manage the shipping and cost pressures, that bodes poorly for smaller companies with weaker bargaining power.

It’s a bit surprising, then, that the retailer’s comment has sent other pandemic-era winners down, with no categories except for discount sellers like TJX Cos. Electronics Expert Best Buy‘S

shares fell 8%, while big-box retailers Costco and BJ’s Wholesale fell 11% and 16%, respectively. Kohl’s Department Store,

due to Thursday’s earnings report, fell 10%. The four major retailers — Walmart, Target, Costco and BJ’s — are on track to lose more than $120 billion in combined market value in two trading sessions.

The results for Walmart and Target are showing that the headwinds in favor of retailers are turning and impacting profits. While that will grab investors’ attention over the next few weeks, stores that can sustain sales and inspire customer loyalty – like Target – will eventually have can be profitable in the long run. Smaller competitors are another story.

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