Target warns on profits and outlines plan to shed excess inventories

Target cut its profit outlook for the second time in less than a month as the US retailer said it planned to cancel orders and further mark down prices to clear excess inventories in response to shifting consumer behaviour.

The Minneapolis-based group on Tuesday warned that it would offer deeper discounts after high inflation ate into consumer spending. That will cut the company’s second-quarter operating margin to about 2 per cent, it said, three weeks after telling Wall Street that margins would be “in a wide range” around the first-quarter level of 5.3 per cent.

In a statement, Target said it would embark on a programme of “additional markdowns, removing excess inventory and cancelling orders” from suppliers.

Target shares, which were already down 30 per cent this year, were down by another 7 per cent in early trading. The news shaved 2.8 percentage points off the European retail stocks index and also weighed on other US stocks, with Walmart down 2.5 per cent and the S&P 500 down 0.8 per cent.

“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,” said Brian Cornell, Target’s chair and chief executive.

The US retailer’s shares in May suffered their biggest one-day decline since 1987’s Black Monday stock market crash, losing one-quarter of their value in a single trading session after the company warned that rising costs would dent its annual profits.

Like its larger rival Walmart, Target has struggled to pass on higher prices to consumers and has been affected by higher freight, fuel and labour costs, as well as supply chain problems.

On Tuesday it announced fresh plans to address those challenges, saying it would add more holding capacity near US ports, change prices to offset the impact of high transport and fuel costs, and work with suppliers to shorten distances and lead times in its supply chain.

Census Bureau data show that retailers’ inventories plunged between March and June of 2020 as Covid-19 forced consumers to stay at home, but inventories have since shot up beyond pre-pandemic levels.

They have climbed steeply this year as China’s Covid lockdowns dragged on imports from Asia and as US retailers tried to bring stock in before any disruptions at west coast ports, which are in negotiations to renew a contract with unionised longshoremen which expires on July 1.

Retailers are also struggling to keep pace with changes in consumers’ behaviour as shoppers emerge from the constraints of the first two years of the pandemic and adjust to the impact of the highest inflation rates for 40 years.

On Tuesday, Target said it expected demand to stay strong for food, household essentials and beauty products but it was now taking a more conservative view of demand in discretionary spending categories like goods for the home where, it noted, “trends have changed rapidly since the beginning of the year”.