Target shares fall after US retailer warns of rising costs

Target shares tumbled on Wednesday after the U.S. retailer said rising costs would hit its full-year profits, echoing a warning from rival Walmart and triggering a broader stock market sell-off on fears companies would struggle to pass on higher prices to consumers.

Target shares fell 25% as it revealed first-quarter profits halved to $1 billion, putting its stock on course for the biggest drop since 1987. The retailer also blamed a combination of higher transportation, fuel and labor costs. than the supply chain disruptions that began with the pandemic.

Shares of Walmart, the world’s largest brick-and-mortar retailer, fell another 6% on Wednesday after falling 11% the day before when it cut its profit forecast.

“While it wasn’t clear after Walmart fell yesterday, it’s clear that discretionary spending is slowing, inflationary pressures have increased and, for the first time since pre-Covid, investment risk is down and price increases,” JPMorgan said in a note to clients.

Like Walmart, Target has been caught off guard by the extent of inflationary pressures in the US economy. Chief executive Brian Cornell admitted the group was facing “high unexpected costs”.

Signs that cost pressures are more acute than expected by two of the country’s biggest retailers prompted investors to dump shares of companies in the sector.

Discount group Dollar General fell 12%, Dollar Tree fell 17% and Costco fell 11%.

The benchmark S&P 500 stock was down 2.8% at lunchtime in New York, while the tech-heavy Nasdaq Composite fell 3.3%, with Amazon down 3.3%. 5%.

“We don’t expect a significant reduction in pressures on the global supply chain until 2023 at the earliest,” said Mike Fiddelke, chief financial officer of Target. “So the high costs we have been facing will continue to affect our profitability for the rest of the year.”

As a result, the Minneapolis-based retailer expects its operating margin to be around 6% this year, down from a previous forecast of 8%.

“[Target’s] bullish view of operating margin . . . was not expected to be challenged so soon, which could create some consternation in the market,” said Jefferies analyst Stephanie Wissink.

The S&P had climbed 2% on Tuesday, in a short-lived rebound from the worst streak of weekly losses for global stocks since 2008. Analysts warned it was a bearish rally, where downtrends Stock market declines are punctuated by short bursts of relief, as investors remained jittery as rising interest rates deepen the global economic slowdown.

Although rising costs are eroding Target’s margins, the retailer’s revenue growth has proven more resilient. Revenue jumped 4% to $25.17 billion in the quarter, beating analysts’ expectations of $24.5 billion.

Beauty and luggage saw strong sales, climbing more than 45% and 50% respectively, as more consumers returned to their pre-pandemic shopping habits.

“We’re still seeing our customers’ overall spend, even as their spend continues to shift,” Cornell told analysts.

However, Target reported that beginning in early March, sales of apparel and home goods suffered a rapid slowdown.

Walmart said on Tuesday that customers were turning to less expensive private label items and moving away from branded goods, especially in its grocery business where inflation was moving at a double-digit pace.

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