Target's shares tumble as retailer says first-quarter profits will be hurt by higher costs

Key Points
  • Target CEO Brian Cornell said the retailer has benefited from investments in online shopping options, but it will have lower profits this quarter.
  • The retailer is spending more on labor, selling fewer high-margin items and writing down apparel and other items that are not selling.
  • Target said it has seen a more than 7% increase in same-store sales for its fiscal first quarter, as store sales decline slightly and online sales double.
  • Same-day online services have especially gained popularity.
  • It's had single days when the volume of order pickup was twice as high as Cyber Monday.

In this article

Target CEO Brian Cornell on Q1 earnings, surge in digital sales and more
Target CEO Brian Cornell on Q1 earnings, surge in digital sales and more

Target CEO Brian Cornell said Thursday the retailer has benefited from a surge in online shopping, but warned it will have lower profits this quarter due to higher costs. 

The news sent Target shares tumbling nearly 7% in premarket trading Thursday, but the stock recouped some losses, and shares were down about 3% in trading later in the morning.

Cornell said the trend of shoppers avoiding trips to stores has worked in the discount retailer's favor, and it expects to emerge from the coronavirus pandemic in a strong position.

In an interview with CNBC's "Squawk Box," he said Target's investments in online shopping options and its workforce will lead to "market share gains that I think will benefit the brand for years to come."

Since its fiscal first quarter began Feb. 2, Target's same-store sales have risen more than 7%, the retailer said. The gain, which compares with an increase of 1.5% in the fiscal fourth quarter, is the result of a doubling of its online sales, partially offset by declines inside its nearly 1,900 brick-and-mortar stores. 

Cornell did not provide any specific estimates for its quarterly earnings. But he said higher labor costs, the sale of more low-margin items and write-downs of inventory in apparel and accessories because of a drop in sales will weigh on profits.

Target is spending more on worker pay and benefits. The company said it's already spent more than $300 million on coronavirus-related employee expenses, such as paid sick leave.

Those costs will continue to rise. On Thursday, the retailer announced plans to extend its $2 an hour temporary pay increase for store employees, additional child care benefits and paid leave policy for older or at-risk members of its workforce until May 30 — an acknowledgment that the retailer doesn't expect business to return to usual for many more weeks or months.

Moody's retail analyst Charlie O'Shea said in a statement Target's update gives a clearer picture of a complex retail environment where customers shop differently and skip over some items altogether.

He said its mix of items sold and the drop in apparel sales "indicates that consumers, once they decide to go to the store or hit the website, are focused on efficiency and 'needs vs wants'."

Michael Baker, a Nomura Instinet retail analyst, said the stock market's reaction is due to whiplash from volatile sales numbers and the company's margins getting squeezed. He said investors are trying to figure out customers' purchasing patterns, as Target's sales show a progression from "pantry loading a little bit, then taking a rest, then shopping again, but on the online side of it."

But he said he thinks the stock's downturn is "more of a blip." He said Target is set up well with its online business.

"Nothing we are seeing here is permanent, except maybe Target picking up new customers," he said.

A surge in online shopping

One factor that has helped Target is the investments it's made to offer customers different ways to shop. Customers can order online and either drive-up or walk inside the store to pick-up purchases. It also has Shipt, a personal shopping service that delivers to the home.

Cornell said the same-day services have gained popularity during the pandemic. In April, Target has had weeks when drive-up volume was up to seven times greater than normal, he said. It's had single days when the volume of order pickup was twice as high as Cyber Monday. And on the Friday before Easter, he said, it did more volume through Shipt than it typically does in a week.

So far in April, comparable digital sales have increased by more than 275% from a year ago.

Cornell told CNBC he expects some of customers' new habits to stick, as they discover the ease of driving up and having Target employees put purchases in their trunk or having a shopper from Shipt drop bags of groceries at their home.

He said he expects customers will continue consolidate their shopping into fewer trips. He said that trend would benefit the big-box store, too, since it sells many items from medicine and groceries to clothing.

"I certainly think that going forward, for the foreseeable future, consumers are going to take advantage of that one-stop shop."

Some of Target's categories have performed better than others. In the quarter so far, same-store sales grew more than 20% in its essentials and food and beverage categories and more than 16% in hardlines. They declined more than 20% in its apparel and accessories category and were up slightly in home.

Even as more customers shop online, Cornell said stores play a pivotal role: The large footprint of stores across the U.S. allows customers to do same-day pickup and workers to speed up fulfillment of online orders.

An evolving environment 

Even as an essential retailer that's remained open, Cornell said Target has had to adapt to evolving business dynamics. 

In late March, Target withdrew its guidance for the first quarter and fiscal year, postponed all new store remodels and delayed openings of many small-format stores. It said it would hold off on some strategic priorities, too, such as plans to add fresh food and alcohol to curbside pickup.

Target has watched customers shop and behave differently as the world around them changes. Initially, he said customers stocked up on household essentials, food, and medications. As they heard they would shelter at home, he said Target saw a spike in supplies needed to work and attend school remotely and games to help them stay entertained. In recent weeks, he said, customers have listened to government and public health officials, and are starting to shop while wearing face masks.

Cornell said it is difficult to know how to communicate with customers and whether to do seasonal or holiday promotions. He said Target wants to make sure its advertising and customer messages fit with the times, but also "sprinkle in a little bit of joy."

"We're contemplating 'What does Memorial Day look like in this environment?'" he said.

Target recognizes "there's going to be several more months where there's going to be significant concern as we work through this pandemic," Cornell said, adding it is doing surveys, talking to medical experts, and working government officials to try to plan for the future.

But, he said, "unfortunately, I don't have a crystal ball."