Target stocks collapse as profit margins are squeezed by price inflation

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If you’re wondering where American shoppers are heading as the prices rise for everything from groceries to gasoline, it’s official: the big box discounters are here.

“Chic cheap” discount retailer Target said on Tuesday its net income had climbed nearly 50% amid booming sales as cost-conscious customers flocked to its stores for deals on food, toys and clothes. The news came a day after its biggest rival Walmart raised its full-year profit outlook, citing heavy traffic.

At the same time, however, Target revealed that price inflation was reaching its profit margins even as sales and profits rose, pushing shares of the “cheap chic” discount retailer down by as much as 5%.

In particular, investors were alarmed by a drop in Target’s gross margin rate to 28% during the quarter ended October 31, from 30.6% in 2020. And this despite a net profit which jumped 47% to $ 1.48 billion compared to $ 1.01 billion a year ago. Target’s revenue increased 13% to $ 25.6 billion in the quarter.

Target chief executive Brian Cornell said the company has kept raising prices – “protecting the prices,” as he put it – at its 1,900 stores facing labor costs. work and shipping costs higher.

The decline “reflected pressure from rising freight and freight costs, increased inventory reduction, and increased supply chain costs resulting from increased pay and headcount in companies. the company’s distribution centers, “the company said Wednesday.

Target stocks recently lost 5% to $ 253.27 in early afternoon trades.

The discount chain is attracting more and more customers looking to save money amid high inflation.
Bloomberg via Getty Images

Like its biggest rival, Walmart, which announced rapid growth on Tuesday, Target is attracting more and more buyers looking for low prices.

The retailer’s comparable store sales – or sales at stores open for at least one year – climbed 12.7% in the quarter. This comes on top of a 21% increase from a year earlier and “was entirely due to traffic,” Cornell said.

He added that sales were strong in stores as well as on the web across all major merchandise categories. Target is “poised to deliver strong and continued growth through the holiday season and beyond,” he said.

“Target outperforms its competition, attracting a large number of new clients,” analyst John Zoldis, chairman of Quo Vadis Capital said in a research note. “The goal has not generated traffic with discounts, the traffic growth is organic and therefore should be constant. “

Nonetheless, sustaining earnings hasn’t been straightforward as Target and other major U.S. retail chains grapple with a global supply chain crisis. Retailers are redirecting cargo to less congested ports, even chartering their own ships. Target said it unloaded around 60% of its containers during off-peak hours.

The exterior of a Target store.
Target CEO Brian Cornell said the company is “protecting prices” to provide value to consumers.
Bloomberg via Getty Images

Target and Walmart are using their ladder to keep prices relatively low and perhaps more importantly, to keep their shelves full when supply is so scarce. Walmart said on Tuesday that its inventory levels were actually up 11.5% from the same period last year. It has thus boosted market share gains, especially in groceries, since it has attracted more and more Americans stung by rising prices everywhere.

“The sharp rise in inflation has been felt by many households, especially when it comes to shopping for groceries, and it has created a lot more churn where consumers are shopping,” said Neil Saunders, Director General of GlobalData Retail. “With its strong low-price credentials, Walmart is one of the retailers households are turning to to further stretch their food budgets. “

Walmart said its food sales grew nearly 10% in the quarter, reflecting strong market share gains and low to mid single-digit inflation. Company executives said they are seeing beneficial differences in the prices of groceries from their competitors and that these differences are larger now than before the start of the pandemic.

Walmart was not immune to the current inflationary pressures, however, and said on Tuesday that its consolidated gross margin had been affected primarily due to rising supply chain costs, among other issues.

Associated Press contributed reporting

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