Target (TGT 0.76%) reported first-quarter fiscal 2022 earnings before the markets opened on Wednesday, May 18. The results disappointed investors, and the stock was down as much as 27% on the day of the release. Target has been one of the prime beneficiaries of the pandemic.
It has gained the trust of millions of customers by operating effectively during difficult times, and revenue and profits have surged. That momentum came to a halt on Wednesday, though, when it reported lower-than-expected profits and lowered guidance for the rest of the year. Let's look closer at Target's Q1 figures.
Target hit unexpectedly high costs
Sales for the quarter that ended on April 30 were impressive at $25.2 billion. That was a 4% increase from the same quarter last year during a period of less competition for consumer spending and when folks received stimulus checks from the government.
Fulfilling those sales was the problem. Target's cost of sales rose to $18.5 billion, up from $16.7 billion in the same quarter the prior year. The retailer had to pay more for inventory, transportation of goods, and storage, and those increases reduced its gross profit margin to 25.7% in Q1 this year vs. 30% a year ago.
In the press release on May 18, Target's CEO Brian Cornell reflected on the quarter just completed:
"Guests continue to depend on Target for our broad and affordable product assortment, as reflected in Q1 guest traffic growth of nearly 4 percent. 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."
The company had been on a record streak of boosting profitability. Indeed, in its fiscal year that ended in January, it earned an operating profit margin of 8.4%, its highest in the past decade. Target's investment in its omnichannel shopping experience has been favorably received by consumers. Same-day fulfillment options -- like buying online and picking up in a Target parking lot, where an associate will bring it to your car -- are highly popular with consumers and highly profitable for Target as they remove the expensive delivery to consumer homes.
Target management reiterated that this quarter's decrease in profit margins is not a long-term issue. Admittedly, expenses will stubbornly remain high for the rest of 2022, and Target lowered its operating profit margin goal from over 8% to 6%. However, Target feels it can consistently earn operating profit margins of over 8% annually in the longer run.
Should you buy Target stock now?
Unsurprising and justifiably, its stock has been down 28% since announcing these figures. The underperformance was a sudden turnaround from a retailer executing almost flawlessly, consistently boosting sales and profits since the pandemic's onset. Trading now at a price-to-earnings multiple of 11 and a price-to-free-cash-flow ratio of 15, the stock is not expensive.
Investors would be prudent to wait to purchase Target stock following this news, either to allow its stock price to fall further or to observe one or two quarters of operating results to determine whether the decrease in profit margins will improve or deteriorate.