Target Profit Plummets After Month of Right-Sizing
When Target Corp. announced in June that it would take drastic measures to adjust inventory to meet shifting customer demand, the company warned investors of anticipated lower profit in its second quarter.
Those warnings have materialized. On Wednesday morning, the Minneapolis-based retailer reported a 90% drop in profit in its second quarter. The company’s net earnings dropped to $183 million during that time, down from $1.8 billion during the same quarter last year. Still, the company’s revenue grew to $26 billion, up 3.5% from last year.
Target shares fell more than 2% in premarket trading this morning.
Despite the profit drop, Target chairman and CEO Brian Cornell said he’s pleased with the company’s performance, citing growth in traffic and sales.
“While these inventory actions put significant pressure on our near-term profitability, we’re confident this was the right long-term decision in support of our guests, our team and our business,” Cornell said in a news release. “Looking ahead, the team is energized and ready to serve our guests in the back half of the year, with a safe, clean, uncluttered shopping experience, compelling value across every category, and a fresh assortment to serve our guests’ wants and needs.”
Target has maintained its projection of revenue growth in the low- to mid-single digit range by the end of the year. It also anticipates an operating margin rate around 6% in the second half of the fiscal year. The operating margin rate was 1.2% in the second quarter.
In a conference call with investors on Wednesday morning, Target executive VP and chief operating officer John Mulligan suggested that inflation will slow down in the months ahead. “While conditions remain far from what we would have considered normal in the years before the pandemic, there are early signs that both costs and volatility may have peaked,” Mulligan said. He pointed to a decline in lead times in global shipping and a reduction in petroleum prices.
“Fuel surcharges have been easing somewhat compared to peak rates we saw earlier in the second quarter,” he said.
That’s not to say the remainder of the year will be smooth sailing. Mulligan noted that the company still faces “far too many delays affecting overseas shipping,” which could affect transportation costs. Plus, there’s the lingering threat of slowdowns at West Coast ports, more Covid-related lockdowns in China, and “a reversal of the recent decline in energy costs.”
“We’re mindful of the continued risks in the months ahead,” Mulligan said.
In June, Target announced its plan to “right-size” its inventory through actions including markdowns on overstocked products, removal of items, and supplier order cancellations. This announcement came less than three weeks after the company reported a drop in its first-quarter earnings.
Target is not alone in having a high inventory of now low-demand products as customers shift spending habits. Additional retailers that have reported elevated inventories include Walmart and Costco.
Yet Walmart appears to have weathered the storm better than Target. On Tuesday, Walmart reported that its net income and revenue both increased in the second quarter, rising to $5.15 billion and $152.86 billion, respectively. With nearly five times as many stores as Target, Walmart is, of course, a significantly larger operation than the Minneapolis-based retailer.
In June, a supply chain expert told TCB that two factors play a major role in how retailers have been affected by excess inventory: how a company reacted at the beginning of the pandemic and how inflation affected its products.