February 3, 2023

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Target warns of squeezed profits from aggressive inventory plan

2 min read

Target warned investors Tuesday that its profits will take a short-term hit, as it marks down unwanted items, cancels orders and takes aggressive steps to get rid of extra inventory.

The retailer slashed its profit margin expectations for the fiscal second quarter to account for a wave of goods winding up deeply discounted or on the clearance rack. Shares were down nearly 4% midday Tuesday.

“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 CNBC.

By taking swift action, Cornell said Target can fend off further pain and make room for merchandise that customers do want, such as groceries, beauty items, household essentials and seasonal categories like back-to-school supplies. He said the company’s stores and website are seeing strong traffic and “a very resilient customer,” but one who 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 anticipates its operating margin rate for the second quarter will be around 2%. That’s lower than the outlook it gave less than three weeks ago, when it anticipated its operating margin rate would be roughly around its first-quarter operating margin rate of 5.3%.

In the back half of the year, Target anticipates profit margins will be in a range 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 single digits for the full year and to maintain or gain market share in 2022.

Retailers from Walmart to Gap face a glut of inventory as inflation-pinched shoppers skip over categories that were popular during the first two years of the…

2022-06-07 11:48:06

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