Target sacrifices earnings to sell unwanted inventory

Image source: The Verge

The US economy has seen some ups and downs, including the Target department store chain.

Reports

Target recently reported positive sales for its fiscal second quarter.

However, the chain’s profits plummeted nearly 90% as it was forced to slash prices on items like clothing, housewares and electronics to clear its inventory.

Two months ago, Target issued a warning saying it was canceling orders from suppliers while aggressively lowering prices.

Her decision came from shifting spending among Americans as the pandemic slowed. Meanwhile, Target shares fell nearly 4% on Wednesday.

The retailer missed Wall Street expectations by a significant margin, even after Target cut the lead twice.

Forecast

Despite reports, Target is sticking to the forecasts for the full year. The company is confident it is positioned for a rebound.

Target also expects full-year revenue growth in low to medium single digits. The company said its operating margin will be in the 6% range in the second half of 2022.

A 6% transaction would be a leap from an operating margin of 1.2% in the second fiscal quarter.

Spending shift

Retailers were caught off guard by the customer’s departure from shopping for TVs and small kitchen appliances, dining out, going to the movies, and traveling.

The shift also coincides with rising inflation.

In the first quarter, Target’s profits fell 52% compared to the same period a year ago.

Net income

Target reported second-quarter net income of $183 million for the three months ended July 30.

The numbers are lower than Wall Street’s expected earnings per share of 79 cents.

Net profit also fell short of the $1.82 billion target achieved in the same period last year.

Revenue rose 3.5% to $26.04 billion, while analysts had expected $26.03 billion.

Target store comparable sales also increased 1.3%, on top of last year’s 8.7% growth, and online sales increased 9% from 9.9% growth in 2021.

Executives

“While these inventory actions put significant pressure on our near-term profitability, we’re confident this was the right long-term decision in support of our guests, our team, and our business,” said Brian Cornell, Target CEO.

During a media call, Target executives shared with reports that Target would have needed more quarters to offload the unwanted goods had it not been for the company’s aggressive approach to reducing inventory.

According to Cornell, the company is planning cautiously for the rest of the year, including the critical holiday season.

The plans focus on stocking groceries and other items like cosmetics.

Target’s chief growth officer and executive vice president said the company listens carefully to customers’ wants, needs, hopes and concerns.

“They still have spending power, but they’re increasingly feeling the impact of inflation,” Hennington said during a conference call on Wednesday.

“While the recent reduction in prices at the gas pump have been encouraging, guest confidence in their personal finances continues to wane.”

Inflation effect

Due to inflation, customers seek out Target’s cheaper private label brands and wait for discounts and consolidate trips to save on gas bills.

The company will stick to its previous guidance for full-year revenue growth in the low to medium single-digit percentage range.

Target also predicts an operating margin rate in a range of more than 6% in the second half of the year, a significant jump from 1.2% in the last quarter.

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Target takes a hit after heavy discounts to clear inventory