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Why Target Stock Fell This Morning

By Evan Niu, CFA - Apr 23, 2020 at 1:42PM

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The retailer warned that profitability will take a hit in the first quarter due to the COVID-19 pandemic.

What happened

Shares of Target (TGT -0.54%) fell this morning, down by as much as 6%, after the retailer provided investors with a financial update regarding COVID-19. The stock has started to recover and was only down by 1% as of 12:40 p.m. EDT.

So what

The novel coronavirus pandemic is affecting Target's business in several ways. The retailer is extending a temporary wage increase of $2 per hour through the end of May to recognize the work its front-line employees are doing to help manage the crisis. Target is also extending other benefits -- like paid sick leave -- for certain workers. The pay bump is in addition to a $300 million program for worker pay and benefits that was announced last month.

Exterior of a Target store

Image source: Target.

"We have deep gratitude for the remarkable effort our team has put into supporting guests across the country," CEO Brian Cornell said in a statement. "We remain committed to prioritizing our efforts to provide for their well-being so they can take care of themselves and their families during this unprecedented time."

Now what

Target also said that comparable-store sales have increased 7% quarter to date, which includes a decline at physical stores but a more-than-doubling of online orders. As one might expect, consumers are shifting their shopping patterns, with comps for apparel declining by over 20% while comps for essential items (like food) increase more than 20%.

Profitability in the first quarter will be pressured as the company makes the appropriate investments in supporting workers, and the mix shifts toward lower-margin categories. Target will also write down some of its apparel inventory due to decreased demand. Operating margin in the first quarter will take a hit of over 5 percentage points as a result of these factors, the company said.

"While this crisis will certainly put near-term pressure on our profitability, that pressure is far outweighed by doing right by our team and our guests," Cornell said.

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