A sign outside the Target store on June 07, 2022 in Miami, Florida. Target has announced that it expects to generate profits in the short term, as it identifies unwanted items, cancels orders, and takes aggressive steps to eliminate additional inventory.
Joe Riddell | Getty Images
Target said Wednesday that its quarterly profit is down nearly 90% from a year ago, as the retailer went on to warn that sharp cuts on unwanted merchandise will hit its bottom line.
The major retailer missed Wall Street expectations by a wide margin, even after the same company cut guidance twice.
However, the company reiterated its full-year forecast, saying it is now in a position to rebound. She said she expects full-year revenue growth in the low to medium single digits. Target also said its operating margin rate will be in the around 6% range in the second half of the year. This is a jump from an average operating margin of 1.2% in the second quarter.
Shares of Target were down about 2% in pre-market trading.
CFO Michael Vedelk defended Target’s aggressive efforts. He said the retailer had to move quickly, so he could clear the clutter, get ready for the holidays, and navigate an economic backdrop clouded by inflation.
“If we hadn’t dealt with our surplus inventory head-on, we could have avoided some short-term pain in the profit line, but that would have hampered our long-term potential,” he said. “While our quarterly profit has taken a meaningful step, our path to the future is much brighter.”
Here’s how Target did for the three months ending July 30, compared to Refinitiv’s consensus estimates:
- Earnings per share: 39 cents vs. Expect 72 cents
- Revenue: $26.04 billion vs. $26.04 billion expected
Target has made a sharp reversal in its fortunes over the past two quarters. After posting quarter after quarter of staggering sales numbers during the pandemic, clothes, coffee makers, lamps, and more have seen waiting on the shelf — then kicked into the takedown shelf. Some of these excess merchandise are the same items that were sold during the earlier parts of the pandemic, when shoppers bought home décor and pajamas.
The shift forced the major retailer to cut its earnings forecast twice, once in May and then again in June, pledging to move quickly to get its inventory level to a healthier place.
The inventory was still high, though: $15.32 billion at the end of the second quarter, compared to $15.08 billion at the end of the first.
But CEO Brian Cornell said it’s a more appropriate combination, as Target tends to high-frequency categories like food and household necessities alongside popular categories like seasonal merchandise. It canceled more than $1.5 billion in orders for discretionary low-demand categories.
Fiddelke said the inventory number is larger due to cost inflation and receiving inventory early to ensure Target is ready for the holidays.
In the second quarter, the company’s net income fell to $183 million, or 39 cents a share, from $1.82 billion, or $3.65 a share, a year earlier.
Total revenue rose to $26.04 billion from $25.16 billion a year earlier, driven in part by higher prices due to inflation.
Quarterly earnings have been trimmed in several different ways. Sales of so many merchandise became less profitable as they were reduced. Freight, transportation, and freight costs have risen as fuel prices have risen. The company had to add headcount and cover more compensation in the distribution centers as it handled an abundance of extra stuff.
cautious approach
Walmart, the big-box rival, said Tuesday that it has seen a marked shift in consumer behavior, as wealthier families seek deals to buy groceries and necessities. The company told CNBC that about three-quarters of its food market share gains came from families with annual incomes of $100,000 or more.
On the other hand, Target said it does not see inflation-stimulated change. Sales by unit grew in all five major merchandise categories, with particular strength in two categories: food and beverage, and cosmetics and home essentials.
Even as profits fell, comparable sales and traffic rose.
Comparable sales, a key metric that tracks sales online and in stores that have been open for at least 13 months, grew 2.6% in the second quarter, on top of 8.9% growth last year. That was slightly below estimates, which had forecast a 2.8% increase, according to StreetAccount. In Target stores and on its website, traffic increased 2.7% year over year.
Fiddelke, Chief Financial Officer, said that the traffic growth Evidence that shoppers still have purchasing power and will help Target achieve better profit forecasts for the last half of the year.
“The resilience of this strong guest response makes us feel good, even if I can’t foresee every curve that might come to us in the fall season,” he said in a telephone interview with reporters.
Fedelke said consumers vary by geographic region and income level, and they seek value in different ways. For example, some buy larger packages to save more per unit or try one of Target’s lower-priced private labels rather than a national brand.
Cornell said Target is closely monitoring consumer spending. He said it’s stocking popular items and ordering smaller quantities of merchandise that shoppers might skip.
“We will take a very balanced approach,” he said, while making sure to “plan carefully” in discretionary categories as the company has seen shifts in behaviour.
As of Tuesday’s close, Target’s shares are down about 22% so far this year. Shares closed Tuesday at $180.19, up nearly 5% that day after Walmart beat earnings expectations.
This story is developing. . Please check back for updates