After prospering in the pandemic, Target is now a symbol of inflation's impact

Target Corp., whose growth in the pandemic pushed its stock to record heights, on Wednesday became a symbol of inflation's toll on the American economy.

The Minneapolis-based retailer's latest quarterly profit was halved compared to a year ago as it contended with higher costs and changes in shopping habits, news that spooked investors fearing signs of recession.

The company's stock price plunged 25%, its biggest one-day drop since the 1987 market crash, and the news helped start a major sell-off in the broader market. The Dow Jones industrials shed more than 1,100 points, or 3.6%, their biggest one-day drop since June 2020.

Target executives scrambled to explain how things changed so radically in little more than 10 weeks since they were in New York selling investors on the idea that the company could maintain the momentum it built over the last two years.

"We did not anticipate the rapid shifts we've seen over the last 60 days," Target CEO Brian Cornell said on a call with analysts.

The company's sales grew 4% to $25.2 billion in its fiscal first quarter that ended April 30. But its cost of sales grew more than 10% and general expenses also grew sharply, with executives citing record fuel costs as one example.

As a result, Target's profit dropped to $1 billion from more than $2 billion a year ago. And executives said that rising costs would continue to erode profits for the next several quarters. They've raised prices on some items, but they said they won't pass on to consumers all the cost increases the company is facing.

"While we're not happy about the near-term pressure this causes on the profit line, we strongly believe these decisions will benefit our business over time," Cornell said.

Target shares closed at $161.61, down $53.67, a level last seen in November 2020. After initially falling like most stocks at the start of the pandemic, Target shares had raced upward in summer 2020 as the company adjusted to stay-at-home shoppers with delivery and pickup services. The stock peaked around $260 last November.

Shares of other retailers, including Costco and Best Buy, also took a nosedive Wednesday. Target's announcement came a day after Walmart reported a shortfall in its own profit, also citing inflation. Walmart's shares were down 17% over Tuesday and Wednesday.

"It's clear that the market is saying we are going to have a really significant slowdown in consumer spending," said Scott Mushkin, retail analyst and founder of R5 Capital. "I've done this 30 years and I've never experienced anything like we experienced today in retail."

Analysts had long anticipated Target's explosive growth during the pandemic would level off this year. Consumers are no longer being helped by government stimulus payments and are once again spending on services like dining out and travel.

But there were several additional factors working against Target this spring, executives said. They included: Higher freight and transportation costs (which Target said would cost $1 billion more than expected this year); increased compensation and hiring for its distribution centers; and greater discounting as it shed excess inventory, such as in furniture and televisions.

Despite the bleak news on its bottom line, Target continued to attract more customers in stores and online. Comparable sales increased by 3.3% as traffic to stores and online was up almost 4% compared to last year.

"We're still seeing healthy overall spending by our guests, even as their spending continues to evolve," Cornell said. "Notably, we continue to see meaningful spending surges around holidays, including Easter in April and Mother's Day a couple of weeks ago."

According to data analytics firm Placer.ai, Target has seen a more than 6% average monthly increase in visits to its stores in 2022 compared with the same time last year. When compared with pre-pandemic 2019 numbers, visits have been even more impressive, up 10.5% on average for the first four months of the year.

Sales growth in the latest quarter was led by repeat-purchase categories such as food and beverage, beauty and household essentials. Target also reported strong sales in categories such as toys with more children's birthday parties being hosted, luggage as people travel, and apparel as customers go out more.

"Many guests are sharing their uncertainty of the overall state of the economy, but are feeling more positive about their personal finances," said Christina Hennington, Target's chief growth officer.

Neil Saunders, managing director of the data analytics firm GlobalData, said he was impressed Target was still able to grow sales.

"I think what we are seeing is a normalization," Saunders said. "I think that the trend from here on in is going to be for lower growth and it's probably going to be for reduced profitability. But I think that the deterioration is particularly sharp this quarter because it's the first quarter where we've seen the correction."

Target executives said they would work to adjust inventory levels to better reflect demand and continue to improve logistics. Even so, they don't expect supply chain disruptions and associated pressures to meaningfully improve until next year.

"We're adjusting as we build our plans for the balance of the year. And we're committed to improving our operating performance over the second, third, and fourth quarter and getting ourselves back on track for a more normalized environment in 2023," Cornell said.