Target Corp. said its net earnings in the first quarter fell a whopping 51.9% as transportation costs rose amid the supply chain crisis. 

“We faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time,” CEO Brian Cornell said in a written statement.  

Target doesn’t expect rising freight costs and other inflation-driven pressures to ease soon.  

“Looking ahead, it’s clear that many of these cost pressures will persist in the near term,” Cornell said in a call with analysts. 

Target’s Drive Up service 

Digital comparable sales grew 3.2% in the quarter ended April 30, 2022. This was a massive decline from the 50.2% rise seen in the first quarter of 2021.  

Same-day services (Order Pickup, Drive Up and Shipt) grew 8% this year. Drive Up grew more than 15% on top of more than that 120% growth from last year, Target said. 

Total revenue grew 4.0% to $25.2 billion compared with a year earlier. That’s largely because of a rise in sales of frequently purchased categories, including Food & Beverage, Beauty, and Household Essentials. 

Target ranks No. 5 in the 2022 Digital Commerce 360 Top 1000 database. 

Target’s average profit margin 

The retailer reported an operating margin of 5.3% in the quarter. That was well below analysts’ expectations and down considerably from the 9.8% reported in Q1 2021. 

The gross margin rate in the first quarter was 25.7%, compared with 30.0% a year earlier. 

Target said the shrinking margins were “driven largely by inventory impairments and actions taken to address lower-than-expected sales in discretionary categories and costs related to freight, supply chain disruptions, and increased compensation and headcount in our distribution centers.” 

“For the last two years, these guys have done nothing but blow out expectations,” Brian Yarbrough, a retail analyst at Edward Jones, told Bloomberg News. “In one quarter, that’s all wiped away. Now it’s a ‘show-me’ story.” 

Target’s earnings come a day after rival Walmart Inc. reported similarly poor numbers as inflation eats into margins across the retail world. Walmart ranks No. 2 on the Top 1000. 

“The Target margin shortfall is more dramatic than what Walmart posted on Tuesday, and clearly there are some industry-wide/macro problems occurring,” Adam Crisafulli, an analyst at Vital Knowledge, said in a report. “Food/gas inflation are drawing dollars away from discretionary/general merchandise, forcing aggressive discounting to clear out product.” 

Will Target be successful in the future? 

Target reiterated its revenue forecast, saying it expects mid-single-digit growth this year and beyond. 

Less clear is how the big-box retailer will address the expense side of the ledger.  

During the analyst call, Target executives said the company expects fuel and freight costs to be $1 billion higher this year than the retailer had expected. Chief Financial Officer Michael Fiddelke said Target will try to avoid passing on the cost of inflation to consumers. Raising prices “continues to be the last lever we pull,” he said. 

Despite the poor earnings in Q1, industry watchers tend to be optimistic about Target in the long term. 

“Despite supply chain issues, Target’s digital loyalty program gives the company a strong competitive edge by delivering the tailored discounts and rewards shoppers are looking for. Other brick-and-mortar retailers that are struggling should take note,” Sean Turner, chief technology officer and co-founder of Swiftly, told Digital Commerce 360. Swiftly makes loyalty, delivery and other digital retail tools for retailers. 

“Target is sitting where all retailers want to be — at the corner of offline and online shopping,” Lisette Huyskamp, chief marketing officer of Productsup, told Digital Commerce 360. Productsup builds product data platforms for retailers. “Having started as a traditional brick-and-mortar, the company has a mature physical presence that it has leveraged with newer ecommerce offerings. A frontrunner in the curbside pickup space, Target is constantly adding value for consumers wanting to make purchases online to pick up in-store later. Target has also done a phenomenal job of making its physical locations a one-stop shop. It recently announced that customers can now make returns, as well as pick up a Starbucks order, at Target’s curbside locations.” 

Q1 2022 Target Earnings 

For the three months ending April 30, 2022, Target reported: 

• Net earnings of $1.01 billion. That’s down 51.9% from $2.09 billion in the comparable quarter of 2021. 

• Total revenue of $25.17 billion, up 4% from $24.19 billion a year earlier. 
• Operating income of $1.34 billion, down 43.3% from $2.37 billion in Q1 2021. 

Percentage changes may not align exactly with dollar figures due to rounding.

Bloomberg News contributed to this report.

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