Target warned investors on Tuesday that its profits would be affected in the short term as it marked unwanted items, canceled orders and took aggressive steps to get rid of extra stocks.
The retailer lowered its profit margin expectations for the second fiscal quarter to report a wave of goods at a deep discount or on the release rack. Shares fell about 9% in pre-market trading after the news.
“We thought it wise to be decisive, to act quickly, to get out of this, to turn to and optimize our inventory in the second quarter – to take these actions necessary to remove redundant inventory and set out to continue to be a guest appropriate for our range, “CEO Brian Cornell said in an interview with CNBC.
Taking swift action, Cornell said Target could alleviate further pain and make room for goods that customers really want, such as groceries, beauty items, household goods and seasonal categories such as back-to-school supplies. He said the company’s stores and website saw heavy traffic and a “very resilient customer,” but one who no longer bought popular categories from the Covid pandemic.
“We want to make sure that we continue to focus on those categories that are relevant today,” he said.
Target expects its operating margin for the second quarter to be around 2%. This is lower than the forecasts he gave less than three weeks ago, when he expected his operating margin to be approximately around his operating margin for the first quarter of 5.3%.
In the last half of the year, Target expects profit margins to be around 6% – better than its average performance for the autumn season in the years before the pandemic. The company said it still expects revenue growth to be low to medium single digits for the full year and to maintain or gain market share in 2022.
Retailers from Walmart to Gap are facing inventory oversupply as inflation-stricken shoppers miss categories that were popular during the first two years of the pandemic. Gap, for example, said customers want party dresses and office clothes instead of the many polar hoodies and active clothes the company has. Walmart said some families are making less discretionary purchases with rising gas and food prices. Abercrombie & Fitch and American Eagle Outfitters reported a sharp jump in inventory levels of 46% and 45%, respectively, compared to a year earlier with a combination of items not sold and a slowdown in the supply chain.
The extreme change in consumer spending habits comes as retailers begin to return to healthy levels of availability. This means that some have plenty of sweatpants, pillows and pajamas, just as consumers look for swimsuits and suitcases. In addition, some buyers cut costs due to inflation or invest more of their dollars in experiences such as dinner out and travel.
Cornell said Target decided to launch its new inventory plan after hearing that retail competitors had similar problems. He said the company also wants to anticipate key sales seasons, such as going back to school and the holidays, when stale goods can overwhelm stores and drive customers away.
Target said it had nearly $ 15.1 billion in inventories as of April 30, the end of the first fiscal quarter. This is about 43% more than in the previous period.
Target shocked Wall Street on May 18 with a big loss of profit for the first fiscal quarter, as it was affected by fuel and freight costs, higher discounts and rotation away from items such as TVs, small kitchen appliances and bicycles. Its shares fell nearly 25%, marking the worst day for the Wall Street company in 35 years.
Walmart also missed expectations for profits. Its stock levels have increased by about 33% compared to a year ago. Walmart CEO John Fernner told an investor’s event on Friday that about 20 percent of it was merchandise. Approximately one third is additional inventory to help the retailer recover the main items. He said it would take “several quarters to get back to where we want to be.”
Its shares also fell on Tuesday after the announcement of Target. Walmart shares fell about 4% in pre-market trading.
Cornell said Target was sorting out its inventory, in some cases deciding to pack goods to sell at full price in the future, and in other cases promoting or inventing ways to sell through it now.
For example, he said, Target had a big shopping event over Remembrance Day weekend to clear bulky outdoor items such as patio furniture from their back rooms. It has also been given extra space near US ports to store goods, so there is room to move goods – some of which arrive too early or too late.
– Lauren Thomas of CNBC contributed to this report.
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