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MINNEAPOLIS — Target Corp. is canceling orders from suppliers and reducing prices to help clear an inventory glut in response to consumers’ faster-than-expected shift toward non-discretionary spending on things like food, travel and entertainment.
Target said it also plans to add storage capacity near U.S. ports to lessen the impact of unusually high transportation and fuel costs. Target also announced that it will add five distribution centers over the next two fiscal years.
Brian Cornell, Target’s chairman and chief executive officer, said the retailer continues to generate “healthy increases” in traffic and sales despite the shifting consumer patterns and other factors that are affecting the business environment.
“Since we reported our first quarter results [on May 18], we have continued to monitor external conditions and have determined the necessary actions to remain nimble in the current environment. The additional steps we are announcing today [June 7] will ensure that we deliver for our guests while driving further growth. While these decisions will result in additional costs in the second quarter, we’re confident this rapid response will pay off for our business and our shareholders over time, resulting in improved profitability in the second half of the year and beyond.”
The latest quarterly results from Target and other major retailers illustrate the speed at which Americans pivoted away from pandemic spending. Target’s first quarter earnings fell 52% from the same period a year earlier, as consumers curtailed spending on things like home goods and apparel, leaving the company with a glut of unsold merchandise.
Walmart officials acknowledged at the company’s annual shareholder meeting last month that they were dealing with excess inventory ordered on what turned out to be outdated assumptions about consumer demand. Walmart, along with retailers including Macy’s and Gap Inc., were also cutting prices or storing merchandise until a more appropriate time.
Target said its forceful moves to clear out unwanted goods should make room for groceries, health and beauty aids, and other merchandise now in demand.
Despite the upheaval and the hit to earnings, Target reported continued top-line growth in its first quarter of fiscal 2022.
Comparable sales grew 3.3% in the period, with comps at stores up 3.4% and comparable digital sales increasing 3.2%.
Sales growth was led by frequently purchased categories, including food and beverage, beauty, and household essentials.
Total revenue of $25.2 billion represented an increase of 4% from the year earlier. Operating income was $1.3 billion, compared to $2.4 billion in 2021.
Business from Target’s same-day services (Order Pickup, Drive Up and Shipt) increased 8% in this year’s first quarter, when more than 95% of its sales were fulfilled by its stores.
The company paid dividends of $424 million in the first quarter, compared with $340 million in 2021. Additionally, the company repurchased $10 million worth of its shares in the first quarter.
“Our first quarter results mark Target’s 20th-consecutive quarter of sales growth, with comp sales growing more than 3% on top of a 23% increase one year ago,” Cornell said in releasing the results. “Guests continue to depend on Target for our broad and affordable product assortment, as reflected in Q1 guest traffic growth of nearly 4%. Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time. Despite these near-term challenges, our team remains passionately dedicated to our guests and serving their needs, giving us continued confidence in our long-term financial algorithm, which anticipates mid-single-digit revenue growth, and an operating margin rate of 8% or higher over time.”
In canceling orders from vendors and slashing prices on items already on hand, Target expects to have a more suitable merchandise mix heading into the critical fall and holiday shopping seasons.
Still, the company said costs associated with the inventory-clearing moves will hurt the bottom line in the current quarter. Target now expects second quarter operating margin of about 2%, down from around 5.3% it had forecast as of last month. For the second half of the year, Target expects an operating margin rate in a range around 6%, a rate it said would exceed the company’s average fall season performance in the years leading up to the pandemic.
Target continues to expect full-year revenue growth in the low- to mid-single-digit range, and expects to maintain or gain market share in 2022.
