Target Corp. is off target again.
Just three weeks after a profit warning that saw its shares plunge the most since 1987, the big-box operator has cut its outlook again, as it seeks to address a glut of inventory amid a rapid shift away from pandemic purchasing patterns.
The company now expects a second-quarter operating margin of about 2%, compared with its previous guidance of a wide range around the first quarter’s 5.3%. Even if the margin recovers to 6% in the second half of the year, as the company expects, that puts the full-year guidance of an operating margin around 6% in peril.The shares fell as much as 7.8% on Tuesday morning before recovering slightly.
Too much stuff in stores and warehouses is an industry-wide problem, with retailers from Walmart Inc. to Gap Inc. and Macy’s Inc. suffering from a combination of late orders, changing consumer tastes and inflation, which increases the value of the stock on their balance sheets.
Target has taken the decision to aggressively clear excess inventory and preserve the appeal of its stores to consumers. Nobody wants to shop in cluttered, unattractive shops, particularly when there are so many alternatives, including online. Rather than mothball stock, as some rivals are doing, it is trying to quickly get rid of unwanted products.
The hope is that additional markdowns and canceling orders will lance the boil. That would put Target in better shape for the second half of the year, which includes important events such as the back-to-school shopping season, Halloween and the winter holidays.
That’s commendable, but risky.
Demand may not be sufficient to mop up the excess stock, given that consumers are being forced to spend more on essentials and so have less left over for the things they simply want. Target said it continued to expect full-year revenue growth in the low to mid-single-digit percentage range.
More worrying is that retailers are approaching the point when they must place orders for the holiday season. Target said it was working with suppliers to shorten lead times.
Even so, judging the shape of holiday demand will be particularly challenging this year, given the uncertainties around what types of products consumers will be buying, and whether spending power will be constricted by rising food and fuel prices, as well as savings being depleted by a summer of renewed travel.
Ordering too much could make the inventory glut worse, but being too conservative could mean missing out in the crucial shopping period.
Target is one of America’s best-run retailers, and over-buying for this spring summer season was quite a strategic misstep. The company would be wise to err on the side of caution.
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Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.
