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Target takes a hit after heavy discounts to clear inventory

Target reported solid sales for the fiscal second quarter but its profit plunged nearly 90 per cent after it was forced to slash prices to clear unwanted inventories of clothing, home goods and electronics.

In early June, Target warned that it was cancelling orders from suppliers and aggressively cutting prices because of a pronounced spending shift by Americans as the pandemic eased.

Retailers were blindsided by the lightning-fast switch from spending on goods for the home, like TVs and small kitchen appliances, to dinners out, movies and travel. Adding to that shift is surging inflation. In the first quarter, Target’s profits tumbled 52 per cent compared to the year-ago period.

Target reported second-quarter net income of US$183 million, or 39 cents per share, for the three-month period ended July 30. That’s far short of the per-share profit of 79 cents that Wall Street had expected, according to a survey by FactSet.

It was also down from the US$1.82 billion the company earned last year in the same period.

Revenue rose 3.5 per cent to US$26.04 billion. Analysts were expecting US$26.03 billion, according to FactSet.

Store comparable sales increased 1.3 per cent on top of 8.7 per cent growth last year. Online sales rose nine per cent following growth of 9.9 per cent last year.

“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,” CEO Brian Cornell said.

Target executives told reporters during a media call that if Target weren’t aggressive about marking down the inventory, it would have taken at least several quarters to get rid of the unwanted merchandise.

The company is planning cautiously for the remainder of the year, Cornell said, including the critical holiday season. That will put a greater focus on stocking groceries and things like cosmetics.

Target said it’s carefully “listening to the wants, needs, hopes and concerns”, of customers, said Christina Hennington, Target’s chief growth officer and executive vice president.

“They still have spending power, but they’re increasingly feeling the impact of inflation, and while the recent reduction in prices at the gas pump have been encouraging, guest confidence in their personal finances continues to wane,” Hennington said on a company conference call Wednesday.

As a result of inflation, customers are looking more at Target’s private label brands, which are less expensive, waiting for discounts and consolidating trips to save on gas, the company said.

Target is sticking to its prior guidance for full year revenue growth in the low-to-mid-single digit percentage range. It also expects operating margin rate in a range around six per cent in the back half of the year, a big jump from 1.2 per cent for latest quarter.

Walmart, the nation’s largest retailer, reported Tuesday that its sales and profits for the second quarter rose. It said that higher-income shoppers were flocking to the discounter to save money on groceries, while low-income shoppers were feeling squeezed by higher inflation and were switching from deli meats to hot dogs and canned tuna.


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