Target on Tuesday said it is canceling orders from suppliers, particularly for home goods and clothing, and it’s slashing prices further to clear out amassed inventory ahead of the critical fall and holiday shopping seasons.
The actions come after a pronounced spending shift by Americans from investments in their homes to money spent on travel, nights out for dinner and dressier clothes — a change that arrived much faster than major retailers anticipated.
The speed at which Americans pivoted away from pandemic spending was laid bare in the most recent quarterly financial filings from a number of major retailers. Target reported last month its profit for the fiscal first quarter tumbled 52% compared with the same period last year.
Sales of big TVs and small kitchen appliances that Americans loaded up on during the pandemic have faded, leaving Target with a bloated inventory that it said must be marked down to sell.
“This announcement is going to spook investors — especially the fact that it comes less than a month after Target reported earnings — and it probably should make people a bit nervous about Walmart and Kohl’s, but it seems like the issue is more company-specific than anything else,” Adam Crisafulli of Vital Knowledge said in a research note.
Target shares tumbled more than 7% in pre-market trading. The shares of other retailers retreated with it, with Walmart, Nordstrom and Macy’s falling between 2% and 4%.
Target declined to give a dollar amount of merchandise orders that are being canceled and depths of the discounts.
“The additional guidance also creates nervousness that trading in certain categories, like home, has deteriorated further and faster since the first quarter results,” said Neil Saunders, managing director of GlobalData, in an email. “This is not unique to Target but, given the company’s over-inventory, it leaves it particularly exposed.”
In demand: Groceries and makeup
In aggressively clearing out unwanted goods, Target wants to make room for what is now in demand, including groceries and makeup products. But Target is also facing sharply higher costs for everything from labor to transportation and shipping, and it will offset price cuts where it can with higher prices for goods now in demand.
“Retail inventories are elevated,” Michael Fiddelke, Target’s chief financial officer, told The Associated Press in a phone interview Monday. “And they certainly are for us, in some of the categories that we misforecast. We determined that acting aggressively was the right way to continue to fuel the business.”
Target is working with suppliers to cover costs for their vendors whose orders are being canceled. In some cases, some of the raw materials that were meant for some goods will instead be used for other products in higher demand, Fiddelke said. Many of the orders for products being canceled have a long production lead time of nine months, he said.
Target also announced that it will add five distribution centers over the next two fiscal years.
Target said the costs related to the moves will hurt the bottom line in the current quarter. Target now expects its second-quarter operating margin rate will be roughly 2%, down from the roughly 5.3% it had expected last month. For the second half of the year, Target expects an operating margin rate in the range of around 6%, a rate it said would exceed the company’s average fall season performance in the years leading up to the pandemic.
Last month, Target forecast its full-year operating income margin rate would be in the 6% range. Target didn’t give a new full range prediction. It also said it secured additional space near U.S. ports to hold merchandise to allow for more flexibility.
Target, however, continues to expect full-year revenue growth in the low- to mid-single digit range and expects to maintain or gain market share for the year.