Joe Raedle | Getty Images Target on Wednesday said its quarterly profit fell nearly 90% from a year ago, as the retailer followed through on its warning that sharp cuts to junk merchandise would weigh on results. The big-box retailer missed Wall Street expectations by a wide margin, even after the company itself cut guidance twice. However, the company reiterated its full-year forecast, saying it is now positioned for a recovery. It said it expects full-year revenue growth in the low to mid-single digits. Target also said its operating margin rate will hover around 6% in the second half of the year. That would represent a jump from the 1.2% operating margin rate in the second quarter. Shares of Target fell more than 3% in premarket trading. Chief Financial Officer Michael Fiddelke defended Target’s aggressive inventory efforts. He said the retailer needed to move quickly so it could clean up the mess, prepare for the holidays and navigate an economic landscape clouded by inflation. “If we hadn’t tackled our excess inventory head-on, we might have avoided some short-term pain on the bottom line, but it would have hindered our long-term potential,” he said. “While our quarterly earnings took a significant step down, our future path is brighter.” Here’s how Target did for the three months ended July 30, compared to Refinitiv’s consensus estimates:
Earnings per share: 39 cents vs. 72 cents expected Revenue: $26.04 billion vs. $26.04 billion expected
Target has had a sharp reversal of fortunes over the past two quarters. After posting impressive sales numbers quarter after quarter during the pandemic, it’s seen clothes, coffee makers, lamps and more get shelved — and then kicked off the shelf. Some of this excess merchandise is the same stuff that sold out during previous periods of the pandemic, when shoppers snapped up home decor and living rooms. The recovery forced the big retailer to cut its earnings outlook twice, once in May and then again in June, and pledge to move quickly to get its inventory level to a healthier place. The stock was still high, however: $15.32 billion at the end of the second quarter, compared with $15.08 billion at the end of the first quarter. But CEO Brian Cornell said it’s a more favorable mix, as Target leans into high-frequency categories like food and home essentials along with popular categories like seasonal merchandise. It canceled more than $1.5 billion of orders for discretionary categories with lower demand. Fiddelke said the inventory number is higher because of cost inflation and taking inventory earlier to make sure Target is ready for the holidays. In the second quarter, the company’s net income fell to $183 million, or 39 cents a share, from $1.82 billion, or $3.65 a share, a year earlier. Total revenue rose to $26.04 billion from $25.16 billion a year ago, partly due to higher prices driven by inflation. Quarterly earnings were compressed in several different ways. Sales of many commodities became less profitable as they declined. Freight, freight and shipping costs increased as fuel prices rose. And the company had to add headcount and cover more compensation at distribution centers as it faced a glut of extra materials.
A careful approach
Walmart said on Tuesday it had seen a marked shift in consumer behavior as even wealthier households looked for deals on groceries and essentials. The company told CNBC that about three-quarters of its market share gains in food came from households with annual incomes of $100,000 or more. Target, on the other hand, said it doesn’t see as many changes fueled by inflation. Unit sales increased in all five of its main merchandise categories, with particular strength in two categories: food & beverage and beauty & home. Even though profits were down, comparable sales and traffic were up. Comparable sales, a key metric that tracks sales online and at stores open at least 13 months, rose 2.6 percent in the second quarter, up from an 8.9 percent increase last year. That was well below estimates, which had expected a rise of 2.8 percent, according to StreetAccount. At Target’s stores and its website, traffic was up 2.7% year-over-year. Fiddelke, the CFO, said the increase in traffic is evidence that shoppers still have spending power and will help Target achieve its better earnings outlook for the second half of the year. “The resilience of this strong guest response positions us well, even if I can’t predict every curveball that might come our way in the fall season,” he said on a call with reporters. Fiddelke said consumers vary by geography and income level and look for value in different ways. For example, some buy larger packages to save more per unit, or try one of Target’s lower-priced private labels instead of a national brand. Cornell said Target is closely monitoring consumer spending. He said he stocks popular items and orders fewer goods that shoppers might skip. “We’re going to take a very balanced approach,” he said, making sure to “program carefully” in discrete categories where the company has seen changes in behavior. As of Tuesday’s close, Target shares are down about 22% so far this year. Shares closed Tuesday at $180.19, up nearly 5% on the day after Walmart beat earnings expectations. This story is developing. Check back for updates.
