Target announced on Tuesday that it is taking action to “right-size” inventory for the balance of the year as it looks to unload excess stock in its supply chain.
This news comes after the retailer reported last month that it saw disappointing earnings in the first quarter of 2022. Target said its weak results were a result of high fuel and transportation costs as well as excess inventory in its supply chain. Target saw an unexpected sales slowdown in categories such as home, electronics, sporting goods and apparel as consumers spent most actively across essential categories like food and beverage.
“We saw much higher-than-expected rate and transportation costs and a more dramatic change in our sales mix than we anticipated,” said Target chairman and CEO Brian Cornell during the company’s quarterly earnings call last month. “This resulted in excess inventory, much of it in bulky categories, which put additional strain on an already stretched supply chain.”
As a result, the company had to pursue temporary storage capacity options to manage excess inventory.
Now, Target is taking several steps in Q2 to move through the excess including additional markdowns, removing excess inventory, and canceling orders. The action plan also includes the addition of incremental holding capacity near U.S. ports to add flexibility and speed in the portions of the supply chain most affected by external volatility; pricing actions to address the impact of unusually high transportation and fuel costs; and working with suppliers to shorten distances and lead times in the supply chain, Target said.
The company also said on Tuesday that it is accelerating work to rapidly revise sales forecasts, promotional plans, and cost expectations by category. Specifically, the company said it is planning for continued strength in frequency categories like food & beverage, household essentials and beauty, and is planning more conservatively in discretionary categories like home, where trends have changed rapidly since the beginning of the year.
What’s more, Target said it is also pursuing aggressive options to control costs, including ongoing work with vendors to help offset inflationary pressures, driving continued operating efficiencies, and reducing costs while preserving a strong guest experience.
“Target’s business continues to generate healthy increases in traffic and sales, despite sustained volatility in the macro environment, including shifting consumer buying patterns and rapidly changing operating conditions,” Cornell said in a statement on Tuesday. “The additional steps we are announcing today will ensure that we deliver for our guests while driving further growth. While these decisions will result in additional costs in the second quarter, we’re confident this rapid response will pay off for our business and our shareholders over time, resulting in improved profitability in the second half of the year and beyond.”
Looking ahead, Target now expects its second-quarter operating margin rate will be in a range around 2%. For the back half of the year, Target now expects an operating margin rate in a range around 6%, a rate that would exceed the company’s average fall season performance in the years leading up to the pandemic.
The company added that it continues to expect full-year revenue growth in the low- to mid-single digit range and expects to maintain or gain market share in 2022.
The news has sparked Target’s stock to drop 5 points on Tuesday. Across retail, Walmart peeled off 2% and TJX Companies shed nearly 2% with investors worried that markdowns and heavy inventory positions will weigh on margins.
According to Neil Saunders, managing director of data analytics and consulting firm GlobalData, Target’s update comes across as “somewhat careless” as he said the corrective measures and their impact on profitability should have ideally been addressed during the quarterly announcement last month.
Saunders added that the additional guidance also “creates nervousness” that trading in certain categories, like home, has deteriorated further and faster since the first quarter results and leaves the company particularly “exposed.”
“All that said, the actions Target is taking are correct,” Saunders said in a statement. “There is a need to clear down inventory – even if that means discounting – to rebalance stock levels and make more room to focus on categories that are in demand such as food, household products and beauty. The price of such action will appear on the bottom line where an already light margin forecast will be thinned further.”