Target profit sinks as the retailer offloads unwanted inventory

Like many other retailers, Target did not anticipate the sharp reversal in buying behavior that has occurred in recent months as shoppers, squeezed by inflation, shift more spending to travel and cut back on patio furniture, small electronics and other items that were in high demand from the pandemic. COVID-19. Target has taken a more aggressive approach than some of its competitors, cutting prices and canceling orders to remove the glut as quickly as possible.

On Wednesday, executives spent a lot of extended calls with analysts to answer questions about Target’s shrinking margins and Strategy for dealing with inventory problems.

Target CEO Brian Cornell said on a separate call with reporters that he didn’t want to deal with years of excess inventory, which could impair the experience for customers and workers.

“Today, the vast majority of the financial impact of these inventory actions is now behind us,” he said. Chief Financial Officer Michael Vedelk said on a conference call on Wednesday that the company expects in the current quarter an impact of close to $200 million from its inventory reduction efforts. The company expects operating margin to rise to 6% in the second half of the year.

Target stocks fell 2.7% on Wednesday to close at $175.34.

Parent TJ Maxx

TJX

TJX 2.84%

Cos said. On Wednesday, inventory rose 39% last quarter, while sales fell 1.9%. The company said it was comfortable with its inventory levels and that lower gasoline prices could boost consumer spending on its goods.

Large retail chains including Walmart and

Home Depot a company

Increased sales for the last quarter were driven by Consumers desire to absorb higher prices. Findings so far suggest that Americans continue to spend even as they shift purchases away from non-food items to offset the effects of inflation.

Total retail salesThe Commerce Department said – a measure of spending in stores, online and in restaurants – was flat in July as gasoline prices fell, compared to an increase of 0.8% in June. After excluding gasoline and auto sales, retail sales rose 0.7% in July.

Walmart, like Target, has discount merchandise to reduce excess inventory. Those efforts impacted fourth-quarter earnings and will continue into the current quarter, executives said on Tuesday.

Target executives said the traffic gains and overall spending power among core shoppers are evidence that the retailer can put inventory issues behind. Executives said the retailer believed it was gaining market share through unit sales in all major categories. Cornell said target shoppers are buying fewer discretionary items as prices go up, but “we have a guest who’s still out shopping.”

Company executives said on a call with analysts Wednesday that the challenge of Target’s inventory has spread through its business over the past quarter. Chief Operating Officer John Mulligan said that in June, inventory in Target’s warehouse network peaked at more than 90% capacity, before dropping below 80% by the end of the period. He said the company aims to keep its capacity at 85% or less to reduce cost and operational difficulties.

To eliminate excess inventory, Target offered discounts, order cancellations and modified how products were ordered for the second half of the year, favoring items such as food that shoppers now buy more, executives said on the call. Target the store space typically used for seasonal merchandise to highlight bargains, stop selling outdoor products earlier than usual and bring back-to-school items ahead of time. Executives said the company canceled $1.5 billion in discretionary product orders in the fall.

Mulligan said the company continues to import merchandise earlier than it did before the pandemic to make sure seasonal merchandise arrives on time, but believes the supply chain is peaking. He said Target’s inventory rose nearly 10% in the second quarter to $15.3 billion as the retailer prepared for fall and holiday shopping.

Target’s net income was $183 million, compared to $1.8 billion during the same period last year.

The company’s revenue increased, buoyed by strong sales of food and beverages, beauty and household items as well as more shopper visits. Comparative sales, those from stores and digital channels operating for at least 12 months, were up 2.6% in the quarter compared to the same period last year. Shopper traffic increased 2.7% in the quarter. Shoppers spent a bit more for fewer items per transaction during the quarter.

Home Depot said Tuesday that Sales increased in part due to higher prices, while traffic decreased in the last quarter. Walmart said its sales were up, also supported by higher prices, and traffic increased 1% in the quarter.

Target revenue increased 3.5% during the quarter to $26 billion. It maintained previous full-year estimates of revenue growth in the low to medium single-digit percentage range.

write to Sarah Nassauer at [email protected]