Target revealed that price inflation is hitting its profit margins even as sales and earnings surge, sending the “cheap chic” discount retailer’s shares tumbling as much as 5 percent.
The Minneapolis-based chain beat Wall Street’s expectations for its third-quarter earnings on Wednesday, with net income surging 47 percent to $1.48 billion from $1.01 billion a year ago. Target’s revenue rose 13 percent to $25.6 billion in the quarter.
At the same time, however, investors were alarmed by a dip in Target’s gross margin rate to 28 percent in the quarter ended Oct. 31 compared with 30.6 percent in 2020.
Target Chief Executive Brian Cornell said the company has stopped short of raising prices — “protecting prices,” as he put it — across its 1,900 stores in the face of higher labor and shipping expenses.
The decline “reflected pressure from higher merchandise and freight costs, increased inventory shrink, and increased supply chain costs from increased compensation and headcount in the company’s distribution centers,” the company said on Wednesday.
Target shares were recently off 5 percent at $253.27 in early morning trades.
Like its larger rival, Walmart which reported brisk growth on Tuesday, Target is attracting more shoppers who are looking for low prices.
The retailer’s same-store sales — or sales at stores open at least a year — climbed 12.7 percent during the quarter. That’s on top of a 21-percent surge a year earlier, and “was driven entirely by traffic,” Cornell said.
He added that sales have been strong at stores as well as on the web across all major merchandise categories. Target is “poised to deliver continued, strong growth, through the holiday season and beyond,” he said.
“Target is outperforming its competition, bringing in huge numbers of new customers,” said analyst John Zoldis, president of Quo Vadis Capital in a research note. “Target did not drive traffic with discounts, traffic growth is organic and therefore should be sticky.”
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