Target sinks after higher costs whack profitability

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Target Corporation (NYSE:TGT) dropped sharply after reporting Q1 EPS below consensus and guiding Q2 operating income short of expectations due to high costs.

The retailer reported comparable sales rose 3.3% during the quarter, reflecting comparable store sales growth of 3.4% and comparable digital sales growth of 3.2%.

Operating income plunged to $1.3B from $2.4B driven primarily by a decline in the gross margin rate during the quarter. Gross margin fell to 25.7% of sales from 30.0% a year ago due to higher markdown rates and costs related to freight, supply chain disruptions, and increased compensation and headcount in distribution centers.

For the trailing twelve months, after-tax return on invested capital was 25.3% vs. 30.7% a year ago. The decrease in ROIC was driven primarily by lower profitability in Q1.

"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," noted CEO Brian Cornell.

"Despite these near-term challenges, 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 percent or higher over time," he added.

Shares of Target (TGT) fell 21.59% to $168.80 in premarket action. Within the retail sector, Costco (COST) shed 3.35% and Dollar General (DG) peeled off 3.85% following the TGT print.