profits fell by almost 90%

A sign outside a Target department store in Miami, Florida on June 7, 2022. Target announced that its near-term profits will take a hit as it marks unwanted items, cancels orders and takes aggressive steps to clear out excess inventory .

Joe Radle | good images

Target On Wednesday, quarterly profit fell nearly 90% from a year ago as the retailer followed through on its warning. Steep markups on unnecessary items will weigh on the bottom line.

The big-box retailer largely missed Wall Street expectations, even after the company itself cut guidance twice.

Nevertheless, the company reiterated its full-year forecast that it is now ready for recovery. It said it expects full-year revenue growth in the low to mid-single digits. Target also said the operating margin ratio will be around 6% in the second half. This would represent an increase from the operating margin of 1.2% in the second quarter.

Target’s shares fell more than 3% in premarket trading.

Chief Financial Officer Michael Fidelke supported Target’s aggressive inventory efforts. He said the retailer needs to act quickly so it can declutter, prepare for the holiday season and navigate an economic backdrop dampened by inflation.

“Had we not rolled back our excess inventory, we might have avoided some short-term pain in the profit line, but it would have hampered our long-term potential,” he said. “While our quarterly profitability has taken a significant step forward, our future path is bright.”

Here’s how Target fared for the three-month period ended July 30, compared to Refinitiv’s consensus estimate:

  • Earnings per share: 39 cents against expected 72 cents
  • Revenue: $26.04 billion vs. $26.04 billion expected

Target has experienced a sharp turnaround in fortunes over the past two quarters. After a quarter of the dazzling sales figures during the pandemic, clothes, coffee machines, lamps and more have crept onto the shelves – then kicked to the clearance rack. Some of that surplus is the same stuff that sold in earlier parts of the pandemic, when shoppers picked up home accessories and loungewear.

The turnaround forced the big-box retailer to cut its earnings outlook twice. Once in May and then again in June, and it must commit to acting quickly to bring its inventories to a healthy place.

However, the balance was higher at $15.32 billion at the end of the second quarter, compared to $15.08 billion at the end of the first quarter.

But CEO Brian Cornell says it’s a more favorable mix because Target leans on high-frequency categories like food and home essentials and popular categories like seasonal products. It canceled more than $1.5 billion in orders for preferred categories with lower demand.

Fidelke said inventory numbers are high due to price inflation and receiving inventory early to ensure the destination is ready for the holiday season.

In the second quarter, the company’s net income fell to $183 million, or 39 cents per share, from $1.82 billion, or $3.65 per share, a year earlier.

Total revenue rose to $26.04 billion from $25.16 billion a year ago, driven in part by higher prices due to inflation.

The quarterly earnings were pressured in several ways. Profit fell due to lower sales of many items. As fuel prices rose, so did freight, transportation and shipping costs. And as the company processed more products, it had to pay more compensation in the distribution centers.

Big-box rival Walmart said Tuesday it has seen a significant shift in consumer behavior. Even wealthy families sought deals on groceries and necessities. The company told CNBC that three-quarters of its market share gains in food came from households with annual incomes of $100,000 or more.

Target, on the other hand, said it sees no inflation-driven changes. Unit sales grew in all five of the company’s core segments, particularly in two categories: food and beverage and beauty and home.

Comparable store sales and traffic increased, even as profits fell.

Comparable store sales, a key metric that tracks online and store sales for at least 13 months, grew 2.6% in the second quarter, compared with 8.9% last year. That was slightly below estimates that expected a 2.8% increase, according to Street Account. Target’s stores and website traffic grew 2.7% year over year.

Fiddelke, CFO, said traffic growth Evidence that customers still have spending power will help Target meet its higher earnings outlook later this year.

“The reaction from the strong guest response positions us well, although I can’t predict all the curveballs that may come our way this fall,” he said during a phone call with reporters.

Fidelke said consumers differ by geography and income level, and they search for value in different ways. For example, some buy larger packages to save more per unit or try one of Target’s cheaper house brands instead of a national brand.

Cornell said Target closely monitors consumer spending. He said it keeps popular items in stock and customers order fewer items they might avoid.

“We are going for a more balanced approach,” he said, assuring that the company “would plan carefully” in preferred categories that have seen behavioral changes.

Shares of Target are down about 22% so far this year as of Tuesday’s close. Shares closed at $180.19 on Tuesday, up nearly 5% the day after Walmart beat earnings estimates.

This story is in development. Check back for updates.

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