Target Corp (TGT.N) posted a larger-than-anticipated 90% drop in quarterly earnings on August 17 and did not reach estimates for comparable sales as it scrambled to draw inflation-weary customers with high discounts on apparel, home goods, and electronics.
A host of U.S. retailers have given profit warnings in recent weeks as consumers squeezed by rising prices for everything from gas to toothpaste cut spending on non-essential items.
As Target depends more on discretionary categories, it is at risk of taking a greater hit during tougher times than peers such as Walmart Inc (WMT.N), where packaged food items and groceries get more shelf space.
Walmart topped profit estimates as its key base of low-to-middle income shoppers streamed to its stores for bargains on groceries.
Minneapolis-based Target’s operating margin rate dropped to 1.2% in the second quarter compared with 9.8% a year ago, owing to costs related to clearing out excess merchandise. The big box retailer’s shares shed 3% in premarket trading.
Still, Target restated it would go back to an annual operating margin rate of around 6%. The finance Chief Michael Fiddelke said on a media call:
“The vast majority of the costs to get our inventory where we wanted it are behind us … we’re well positioned to see improved profit performance in the back half of the year.”
Target’s second-quarter comparable sales climbed 2.6%, missing analysts’ estimates of a 3.3% rise, IBES data from Refinitiv showed. The company announced quarterly earnings of $183 million, or 39 cents per share, below estimates of 72 cents.
Despite huge discounts, inventory increased 1.6% to $15.3 billion at the close of the quarter from the previous period. The climb in inventory was caused by the company accelerating product shipments for the holiday shopping and back-to-school periods in a still “choppy” supply chain environment, Chief Executive Brian Cornell said.
John Tomlinson, global director of research at M Science, stated:
“Target is now in a better position from a profitability standpoint but it is going to take some time to work through inventory. The magnitude of disconnect between inventory and sales growth is something I haven’t seen in a really long time, maybe ever.”