US retailer Target told investors on Tuesday that its profitability will suffer in the short term as it discounts undesired items, cancels orders, and takes aggressive measures to get rid of excess inventory.

The company reduced its profit margin forecast for the fiscal second quarter to account for a flood of merchandise that ended up heavily discounted or on the clearance rack. Following the news, shares tumbled roughly 7% in premarket trade.

“We thought it was prudent for us to be decisive, act quickly, get out in front of this, address and optimize our inventory in the second quarter — take those actions necessary to remove the excess inventory and set ourselves up to continue to be guest relevant with our assortment,” CEO Brian Cornell said in an interview with  a television news channel.

Cornell believes that by acting quickly, Target may avoid more damage and make room for things that shoppers actually want, such as groceries, beauty products, household staples, and seasonal categories such as back-to-school supplies. He stated that the company’s storefronts and website are witnessing high traffic and “a very robust client,” but that this customer no longer shops popular Covid pandemic categories.

“We want to make sure that we continue to lean into those categories that are relevant today,” he said.

Target expects their operating profit rate to be about 2% in the second quarter. This is lower than the projection it provided less than three weeks ago, when it predicted its operating margin rate would be approximately 5.3 percent in the first quarter.

Target expects profit margins in the second half of the year to be about 6%, which is better than its usual performance for the fall season prior to the pandemic. The company stated that it continues to forecast sales growth in the low to mid single digits for the full year, as well as to maintain or gain market share in 2022.

Retailers ranging from Walmart to Gap are facing a glut of inventory as inflation-conscious buyers avoid popular categories during the first two years of the pandemic. Gap, for example, stated that shoppers prefer party dresses and workplace attire to the company’s many fleece hoodies and active wear. According to Walmart, as gas and grocery prices climb, some families are making fewer discretionary purchases.

Abercrombie & Fitch and American Eagle Outfitters both reported a sharp increase in inventory levels, up 46 percent and 45 percent, respectively, from a year ago, due to a combination of items not selling and supply chain delays being resolved.

The dramatic shift in customer spending habits occurs as shops return to healthy in-stock inventories. This implies that some people have a surplus of sweatpants, toss pillows, and pyjamas while others are looking for swimsuits and bags. Furthermore, some buyers are reducing their spending due to inflation or directing more of their money toward experiences such as dining out and travelling.

Cornell stated that Target opted to use its new inventory strategy after learning that retail competitors were experiencing similar problems. He also stated that the corporation intended to get ahead of crucial sales seasons, such as back-to-school and the holidays, when stale products could overwhelm stores and drive people away.

As of April 30, the end of the fiscal first quarter, Target had nearly $15.1 billion in inventories. This is almost 43 per cent higher than the previous year.

Target stunned Wall Street on May 18 with a huge profits miss for the fiscal first quarter, blaming rising gasoline and freight costs, increased discounting, and a shift away from items such as televisions, small kitchen appliances, and bicycles. Its stock dropped over 25%, marking the company’s worst day on Wall Street in 35 years.

Walmart too fell short of earnings projections. Inventory levels were around 33 per cent higher than a year earlier. Walmart US CEO John Furner stated at an investor event on Friday that roughly 20 per cent of it is product that the retailer wishes it didn’t have. A third is extra inventory to assist the shop in restocking critical items. It will take “a couple of quarters to get back to where we want to be,” he said.

Following Target’s announcement on Tuesday, the stock of that firm plummeted as well. In premarket trade, Walmart’s stock was down roughly 3 per cent.

Cornell stated that Target is going through its inventory, deciding in some cases to pack up products to sell at full price in the future and in others to market or find ways to sell it immediately.

Target, for example, conducted a major sales event over Memorial Day weekend to move out heavy outside items like patio furniture from their backrooms, he added. It also received additional storage space near U.S. ports, allowing it to transfer items that are coming too early or too late.

(Adapted from FlipBoard.com)

Categories: Economy & Finance, Entrepreneurship, Regulations & Legal, Strategy, Sustainability