Target warns of reduced profits from aggressive inventory plan

Target warned investors Tuesday that its profits will take a short-term hit as it marks unwanted items, cancels orders and takes aggressive steps to get rid of extra inventory.

The retailer lowered its profit margin expectations for the fiscal second quarter to explain a wave of merchandise ending up at deep discounts or on the clearance shelf. Shares were down more than 9% in pre-market trading after the news.

“We thought it was prudent to be decisive, act quickly, get ahead of this, resolve and optimize our inventory in the second quarter – take the necessary actions to remove excess inventory and prepare to continue to be a relevant guest with our assortment,” said the CEO Brian Cornell in an interview with CNBC.

By taking quick action, Cornell said Target can avoid more pain and make room for merchandise customers want, like groceries, beauty items, household items and seasonal categories like back-to-school supplies. He said the company’s stores and website are seeing strong traffic and “a very resilient customer” but no longer buying popular Covid pandemic categories.

“We want to make sure that we continue to lean on the categories that are relevant today,” he said.

Target anticipates its operating margin rate for the second quarter will be around 2%. That’s lower than the outlook it gave less than three weeks ago, when it anticipated its operating margin rate would be roughly around its first-quarter operating margin rate of 5.3%.

In the second half of the year, Target predicts profit margins will be around 6% — better than its average performance for the fall season in the years before the pandemic began. The company said it still expects revenue growth to stay in the low to mid single digits for the full year and maintain or gain market share in 2022.

Retailers from Walmart to the Gap face overstocking as shoppers pressured by inflation skip categories that were popular during the first two years of the pandemic. Gap, for example, said customers want party dresses and office wear rather than the many fleece hoodies and activewear the company has. Walmart said some families are making less discretionary purchases as gas and groceries prices rise. Abercrombie & Fitch and American Eagle Outfitters reported a sharp jump in inventory levels, 46% and 45%, respectively, from a year ago, due to a mix of unsold items and supply chain delays.

The extreme shift in consumer spending habits comes as retailers start returning to healthy inventory levels. That means some have an abundance of sweatpants, pillows and pajamas, just as shoppers look for swimsuits and bags. In addition, some shoppers are cutting back due to inflation or investing more money in experiences like dining out and traveling.

Cornell said Target decided to roll out its new inventory plan after hearing that retail competitors had similar issues. He said the company also wanted to get ahead of key sales seasons, like back-to-school and holidays, when stale goods can fill stores and drive customers away.

Target said it had nearly $15.1 billion in inventory as of April 30, the end of the first fiscal quarter. This is about 43% higher than in the same period last year.

Target shocked Wall Street on May 18 with a big profit loss for the fiscal first quarter as it was hit by fuel and shipping costs, higher levels of discounts and a rotation of items like TVs, small kitchen appliances and bicycles. . Its shares are down nearly 25%, marking the company’s worst day on Wall Street in 35 years.

Walmart also missed earnings expectations. Its inventory levels have increased by about 33% compared to a year ago. Walmart US CEO John Furner said at an investor event on Friday that about 20% of that is merchandise the retailer wishes not to have. Approximately one-third is additional inventory to help the retailer restock key items. He said it will be “a couple of quarters to get back to where we want to be”.

The company’s shares also tumbled after Target’s announcement on Tuesday. Walmart shares are down about 4% in premarket trading.

Cornell said Target is looking at its inventory, deciding in some cases to package merchandise to sell at full price in the future, and in other cases to promote or find ways to sell now.

For example, he said, Target had a big sales event over Memorial Day weekend to get bulky outdoor items like patio furniture out of its racks. It has also gained additional space near US ports to store goods, so it has a place to move goods – some of which arrive very early or very late.

– CNBC Lauren Thomas contributed to this report.

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