Here's what Walmart and Target are saying about soaring food, gas, and labor costs, and what it could mean for prices

• Walmart and Target both delivered earnings this week that showed huge increases in costs.
• Target's transport costs exceed $1 billion, while Walmart said it was briefly "overstaffed."

Walmart and Target have both revealed how soaring costs are hitting across their operations, as consumers face 40-year high inflation and continued interest rate rises.

On an earnings call with analysts Wednesday, Target CEO Brian Cornell said the company was dealing with "unusually high costs" in the last quarter, while Walmart CEO Douglas McMillon said in his company's latest quarterly report the company was experiencing "double-digit inflation" in its food prices.

He said he was concerned these would continue to rise.

Transport and labor added to the grocers' costs

The companies have been dealing with exceptional circumstances that have put pressure on their supply chains, with both citing supply chain crunches and renewed global demand for energy which has pushed average gas prices to $4.59 a gallon.

Cornell said on the earnings call that Target was dealing with "much higher than expected freight and transportation costs" as a result, with the company facing $1 billion worth of shipping costs over the year, "hundreds of millions" above expectations.

"We did not anticipate the rapid shifts we've seen over the last 60 days," Cornell said, referring both to fuel prices and changing consumer habits as COVID-19 restrictions were lifted, with travel-hungry customers buying more luggage and fewer TVs.

McMillon said Walmart was likewise dealing with the rapidly climbing fuel prices, running $160 million higher than forecast, while both companies deal with materially high food costs instigated by global shortages.

Labor also continues to be stretched across the US, with job openings at a record high and wage rises exceeding 5%. For Walmart, this was made worse by a miscalculation on its staffing requirements as the Omicron variant swept the US at the end of 2021, McMillon said.

McMillon said on the earnings call the company had "weeks of overstaffing" after bringing in workers to cover for those it expected to be on sick leave, but almost all returned ahead of schedule in February, increasing labor costs alongside the knock-on from last year's wage rise.

"The extent of the impact of inflation on these giants of American retailing has woken investors up, once again, to the huge impact surging prices are having on every facet of the economy," Russ Mould, investment director at AJ Bell, said in a research note circulated to reporters.

What does it mean for prices?

McMillon said customers were already changing their spending habits, cutting back on premium brands.

He told analysts on the earnings call customers were "switching" from products in deli, lunch meat, dairy, and bacon to lower-cost items.

On the same call, Walmart's chief financial officer Brett Briggs said the company was likely to increase food prices, while offering reductions in its general merchandise like sporting goods and hardware, where margins were higher.

But McMillon said the company was working to bring down the burden for low-income families.

"Not all of them can afford to absorb this and they need our help," he said on the call. "And so we do stay focused on opening price-point food items, a loaf of bread, a gallon of milk, a can of tuna, mac & cheese, protein categories."

Cornell said Target was looking at where they could pass on costs "very carefully."

"You can expect us to surgically pass on costs where appropriate," Cornell said, but chief financial officer Michael Fiddelke said on the same call that price increases would continue to be "the last lever we pull."

Target and Walmart didn't immediately respond to Insider's request for comment.