Shares of Target Corporation (NYSE: TGT) are down 5.0% on Tuesday after the retail giant said its profit will take a hit in the short-term as it resorts to aggressive measures to clear extra inventory.
Target’s inventory was 43% up at the end of Q1
The big box department store chain says it will sell unwanted items at deep discounts and focus on in-demand merchandise, such as groceries, household essentials, beauty items, and seasonal categories. In an interview with CNBC, CEO Brian Cornell said:
We thought it was prudent for us to be decisive, act quickly, get out in front of this, address and optimise our inventory in Q2; take those actions necessary to remove excess inventory and set ourselves to continue to be guest relevant.
Target had close to $15.1 billion of inventory at the end of its fiscal Q1; about 43% higher than the comparable period of last year.
Profit margins to recover in the second half of 2022
The move to “right size” its inventory level that will also see it cutting orders from suppliers will restrict its Q2 operating margin rate at around 2.0% versus 5.3% in the prior quarter, Target warned on Tuesday.
It, however, forecasts profit margins to pick up again to 6.0% range in the back half of 2022. The Minneapolis-based company continues to see a 5.0% or less increase in its sales this year but is confident it will retain or slightly expand its market share in 2022.
Target also secured additional space around U.S. ports and intends to store some of its merchandise that it will later sell at full price.