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Target warns of profit squeeze as it cuts prices to get rid of inventory


Shoppers walk past a Target store at the Lycoming Crossing mall in Muncy, Pennsylvania.

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Target warned investors on Tuesday that its profits will take a short-term hit as it flags junk items, cancels orders and takes aggressive action to dump extra inventory.

The retailer cut its profit margin expectations for the fiscal second quarter to account for a flurry of merchandise that will end up discounted or on the clearance rack. The shares fell more than 6% in premarket trading after the news.

“We thought it was prudent for us to be decisive, to act quickly, to get out of this situation, to approach and optimize our inventory in the second quarter – to take the necessary steps to eliminate the excess of stock and prepare to continue to be guest relevant with our assortment,” CEO Brian Cornell said in an interview with CNBC.

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

“We want to make sure we continue to look at categories that are relevant today,” he said.

Target expects its operating margin rate for the second quarter to be approximately 2%. That’s lower than the outlook it gave less than three weeks ago, when it forecast its operating margin rate to be roughly around its 5.3% operating margin rate in the first quarter.

In the second half of the year, Target expects profit margins to be in a range of 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 be in the low-to-mid numbers for the full year and to maintain or gain market share in 2022.

Walmart retailers in the Gap are facing a glut of inventory as inflation-hit shoppers ignore categories that were popular in the first two years of the pandemic. Gap, for example, said customers wanted party dresses and office wear instead of the company’s many fleece hoodies and activewear. Walmart said some families were making less discretionary purchases as gas and grocery prices rose. Abercrombie & Fitch and American Eagle Outfitters both reported sharp increases in inventory levels, up 46% and 45%, respectively, from a year ago, due to a mix of unsold items and easing supply chain delays.

The extreme shift in consumer spending habits comes as retailers begin to return to healthy inventory levels. That means some have an abundance of sweatpants, cushions and pajamas, just as consumers are looking for swimsuits and suitcases. Additionally, some shoppers are cutting back on spending due to inflation or spending more money on experiences such as dining out and travel.

Cornell said Target decided to roll out its new inventory plan after hearing that retail competitors were having similar issues. He said the company also wants to anticipate key selling seasons, such as back-to-school and holidays, when expired merchandise could crowd stores and scare away customers.

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

Target shocked Wall Street on May 18 with a large fiscal first-quarter revenue shortfall as it was hit by fuel and freight costs, higher discount levels and a turnover of items like televisions, small kitchen appliances and bicycles. Its shares fell nearly 25%, marking the company’s worst day on Wall Street in 35 years.

Walmart also missed earnings expectations. Its inventory levels are up about 33% from a year ago. Walmart U.S. CEO John Furner said at an investor event on Friday that about 20% of that merchandise is merchandise the retailer wishes it didn’t have. About a third is additional inventory to help the retailer restock key items. He said it will take “a few quarters to get back to where we want to be”.

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

For example, he said, Target held a big sale event over Memorial Day weekend to clear bulky outdoor items like patio furniture from its back rooms. He also got extra space near US ports to store goods, so he has a place to transport goods, some of which arrive too early or too late.

–CNBC Lawrence Thomas contributed to this report.


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