Despite Sales Growth, Target's Margins 'Well Below Expectations' in Q1

Target, like Walmart a day before, reported higher-than-expected comp sales growth in the company's first fiscal quarter of the year—3.3%, well ahead of analyst estimates of less than 1%. 

But, also as with Walmart, inflation-boosted sales weren't enough to offset strong cost pressures, which ranged from higher freight and transportation costs to "actions to reduce excess inventory," the Minneapolis-based retailer said May 18. 

See also: Target and Walmart Braced for Bad. The Reality Was Worse.

"Throughout the quarter, 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," Target Chairman and CEO Brian Cornell said in a statement. 

Target's first-quarter operating income rate came in at 5.3%, down markedly from 9.8% in 2021. Gross margin rate was 25.7% vs. 30% a year ago. The company took bigger markdowns to help move inventory in discretionary categories, where consumers have pulled back spending in the face of high inflation. Supply-chain disruptions and higher compensation and head count in distribution facilities also weighed on margins, the company said. 

Net sales for the first quarter ending April 30 topped $24.8 billion. Operating income was $1.35 billion, 43% off the year-ago period. Basic earnings per share were $2.17, vs. $4.20 a year ago. 

On a brighter note for the company, traffic increased 3.9%, after rising 8.1% in the fourth quarter of fiscal 2021, and digital comp sales were up 3.2% year over year. By comparison, Walmart reported May 17 that its e-commerce sales grew 1% over the year-ago period. 

Despite "near-term challenges," Cornell said, "our team remains passionately dedicated to our guests and serving their needs, giving us continued confidence in our long-term financial algorithm, which anticipates mid-single digit revenue growth, and an operating margin rate of 8% or higher over time."