Target sank in early trading after cutting its profit outlook for the second time in three weeks as it rushes to ease an inventory surge by marking down more merchandise and canceling orders.
Operating profit will amount to about 2% of sales in the current quarter, the retailer said in a statement Tuesday -- well below its May 18 prediction that the gauge would be in a wide range around 5.3%. Target sees operating margin rising to about 6% in the second half of the year. The retailer's shares sank 9.5% to $144.54 ahead of regular trading in New York.
In addition, the company will offload excess inventory and adjust some prices "to address the impact of unusually high transportation and fuel costs." Target is also seeking to get a handle on supply-chain disruptions by adding "incremental holding capacity near US ports," which will give it greater flexibility.
The measures show Target's struggle to adjust to rapid shifts in demand amid stubborn inflation that's forced consumer spending into less-profitable staple goods and away from discretionary categories such as electronics and home products. That's left Target and its big-box rivals with more merchandise that consumers don't want, complicating their effort to maintain their market-share gains of the pandemic while keeping investors happy.
"Excess inventory doesn't usually age well," Chief Financial Officer Michael Fiddelke said in an interview. "We want to make sure that we're being aggressive to right-size our inventory now." He said this would help improve shoppers' experience while boosting value for shareholders.
The retailer's shares had plunged the most since 1987 on May 18 after the release of its first-quarter results, which included the more pessimistic profit outlook and an increase in product inventories. The following week, the stock dropped to the lowest since September 2020.
In all, Target had fallen 31% this year through Monday.
Retailers have to account for many consumers' sudden price sensitivity, while balancing their own surging operating costs from fuel, labor and other expenses. Meanwhile, the lessons of the pandemic, when shoppers hoarded goods, are still fresh, and companies are wary of being caught without enough merchandise to sell.
But holding on to larger quantities of products is expensive, and if they fail to move, markdowns further hurt profitability while benefiting bargain-hunting shoppers. Inventories have soared at retailers from Gap to Costco. Last week, Walmart said it would need "another couple quarters" to work through its bloated inventory.
Given the industry overhang, Target decided since its earnings report to take "a decisive set of actions," Fiddelke said.
The Minneapolis-based company reiterated its earlier forecast for full-year revenue growth in the low- to mid-single digit percentage range. It expects "to maintain or gain market share in 2022" and said it still sees "resilient" demand from US consumers.
“Target’s business continues to generate healthy increases in traffic and sales, despite sustained volatility in the macro environment,” Chief Executive Officer Brian Cornell said in the statement. He added that Target’s moves will “pay off for our business and our shareholders over time, resulting in improved profitability in the second half of the year and beyond.”