If you were wondering where US shoppers are headed as prices surge on everything from groceries to gas, it’s official: Big-box discounters are in.
“Cheap-chic” discount retailer Target on Tuesday said its net income soared nearly 50 percent amid booming sales as cost-conscious customers flocked to its stores for deals on food, toys and clothing. The news came a day after its bigger rival Walmart raised its full-year profit outlook, citing strong traffic.
At the same time, however, Target revealed that price inflation is hitting its profit margins even as sales and earnings surge, sending the “cheap chic” discount retailer’s shares tumbling as much as 5 percent.
In particular, investors were alarmed by a dip in Target’s gross margin rate to 28 percent in the quarter ended Oct. 31 compared with 30.6 percent in 2020. That’s despite net income that surged 47 percent to $1.48 billion from $1.01 billion a year ago. Target’s revenue rose 13 percent to $25.6 billion in the quarter.
Target Chief Executive Brian Cornell said the company has stopped short of raising prices — “protecting prices,” as he put it — across its 1,900 stores in the face of higher labor and shipping expenses.
The decline “reflected pressure from higher merchandise and freight costs, increased inventory shrink, and increased supply chain costs from increased compensation and headcount in the company’s distribution centers,” the company said on Wednesday.
Target shares were recently off 5 percent at $253.27 in early afternoon trades.
Like its larger rival, Walmart which reported brisk growth on Tuesday, Target is attracting more shoppers who are looking for low prices.
The retailer’s same-store sales — or sales at stores open at least a year — climbed 12.7 percent during the quarter. That’s on top of a 21-percent surge a year earlier, and “was driven entirely by traffic,” Cornell said.
He added that sales have been strong at stores as well as on the web across all major merchandise categories. Target is “poised to deliver continued, strong growth, through the holiday season and beyond,” he said.
“Target is outperforming its competition, bringing in huge numbers of new customers,” said analyst John Zoldis, president of Quo Vadis Capital in a research note. “Target did not drive traffic with discounts, traffic growth is organic and therefore should be sticky.”
Nevertheless, propping up profits has been no simple matter as Target and other big US retail chains grapple with a global supply chain crisis. The retailers are rerouting goods to less congested ports, even chartering their own vessels. Target said it unloaded about 60 percent of its containers at off-peak times.
Target and Walmart are using their scale to keep prices comparatively low and perhaps most importantly, keeping its shelves full when so much is in short supply. Walmart said Tuesday that its inventory levels actually rose 11.5 perent from the same period last year. It boosted market share gains as a result, particularly with groceries, as it drew in more Americans stung by prices that are rising everywhere.
“The sharp increase in inflation has been felt by many households, especially when it comes to grocery shopping, and this has created far more churn in where consumers buy,” said Neil Saunders, managing director at GlobalData Retail. “Thanks to its solid low-price credentials, Walmart is one of the retailers households turn to make their food budget stretch further.”
Walmart said its food sales rose nearly 10 percent during the quarter, reflecting strong market share gains and low to mid-single digit inflation. Company executives said they’re seeing beneficial gaps in pricing for groceries compared with rivals and that those gaps are wider now than before the pandemic began.
Walmart was not immune from the current inflationary pressures, however, and said Tuesday that its consolidated gross profit rate took a hit primarily due to increased supply chain costs, among other issues.
Associated Press contributed reporting