Target’s profit plummeted 90% as it shed excess merchandise this summer

For much of the pandemic, Target Corp. turned insatiable demand into record growth. But Wednesday, the leaders of the Minneapolis company had to explain themselves to a significant drop in profits.

Target’s profit fell 90% in the May-July period as the company slashed prices and canceled orders to get rid of items that weren’t selling. He warned in June that stocks had gotten out of control.

“The vast majority of the financial impact of these inventory actions is now behind us,” Target CEO Brian Cornell said.

Target said it earned $183 million, or 39 cents per diluted share, for its fiscal second quarter. That was 33 cents below consensus analyst forecasts. Revenue rose 3.5% to $26 billion. Its shares fell 2.7% on the news.

Target cut $1.5 billion from discretionary product orders scheduled for the fall. Even so, its inventory at the end of the quarter was $15.3 billion, down from $15.1 billion three months earlier.

Overordering is at the heart of Target’s inventory issues. For the past two years, she and other retailers have been buying excess products to try to anticipate shipping delays. Target executives attributed part of the increase in inventory value to inflation.

“I think everyone had a bit of a glut in inventory…but Target seemed to be much more affected by that than almost any other retailer,” said Neil Saunders, chief executive of data analytics firm GlobalData. , in an interview.

By contrast, Walmart on Tuesday posted quarterly profit growth of more than 20% and said it had reduced its inventory value by more than 2% from the spring.

“I think it shows that Target has handled this really, really badly. … And I think it’s on them,” Saunders said.

Cornell said it made more sense to tackle the bloated inventory immediately rather than let goods clutter stores and warehouses.

Consumers who now face higher prices on everything from gas to groceries are turning to lower-margin necessities like food. At the same time, retailers are also suffering from rising freight and freight costs.

There were bright spots in Target’s numbers. Despite a period of strong growth last year, the company’s same-store sales increased by almost 3%, as well as traffic to its stores and website which also increased by almost 3%. Same-day delivery services, including drive-thru, continue to be popular, growing nearly 11% over last year.

Groceries, beauty and household essentials continued to be the best performers as customers facing high inflation focused more on basic necessities. Home and clothing sales declined.

Customers are turning to Target’s product brands more frequently and responding more to promotions, said Christina Hennington, Target’s chief growth officer.

“They still have purchasing power, but they are increasingly feeling the impact of inflation,” she said. “And while the recent reduction in prices at the gas pump has been encouraging, customer confidence in their personal finances continues to decline.”

Cornell said back-to-school, which is typically a successful shopping season for Target, saw strong sales this summer. The company predicted that Halloween would also bring strong consumer activity.

Target executives also reported growth in toy sales, which they said was an encouraging sign for the holiday season.