Target To Take Profit Blow As It Sheds Extra Inventory

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By Cristian Bustos. Originally published at ValueWalk.

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Target Corporation (NYSE:TGT) announced its near-term profit would take a dent as the retailer tries to cancel orders to aggressively offload unwanted items. This means Target has curved its second-quarter profit estimates while it manages to offer relevant product categories to customers.

Offloading Inventory

As reported by CNBC, shares of the giant retailer plunged by 7% in premarket trading after the news broke.


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CEO Brian Cornell told the news outlet, “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.”

Adam Crisafulli of Vital Knowledge said in a research note: “This announcement is going to spook investors —especially the fact that it comes less than a month after Target reported earnings— and it probably should make people a bit nervous about Walmart Inc (NYSE:WMT) and Kohl’s Corporation (NYSE:KSS), but it seems like the issue is more company-specific than anything else.”

The quick move means Target will shed unwanted products and focus on categories such as groceries, household products, beauty, and seasonal items such as back-to-school materials.

Outlook

By the end of the fiscal first quarter, Target had $15.1 billion of inventory, almost 43% more than in the year-ago period.

“We want to make sure that we continue to lean into those categories that are relevant today,” Cornell said.

Target anticipates that its operating margin for Q2 will be close to 2%, well below the three-week-ago estimate of anywhere near 5.3%, its first-quarter operating margin.

However, the company remains positive and has set sights on hitting a profit margin of 6% for the second half of the year, hence surpassing its fall season average in the pre-pandemic years.

Target’s fierce competitor Walmart is also going through inventory excess in certain items as inflation has prompted consumers to bypass those categories and favor more essential items.

These issues faced by other retailers, Cornell said, were what prompted Target to start offloading items —while gas and grocery price increases have kept buyers’ discretionary spending at a minimum.

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