The major retailer anticipates that its operating margin rate for the second quarter of 2022 will be at 2 percent, a big drop from its more optimistic 5.3 percent estimate released in May.
The company had predicted that the numbers would be roughly close to the operating margin rate of 5.3 percent in the first quarter of the year.
Target said it had nearly $15.1 billion of inventory at the end of the fiscal first quarter, about 43 percent more than it had in the first quarter of 2021.
Target also lowered its profit margin expectations for the second quarter to account for a massive pile-up of retail items that eventually ended up being sold discounted or on the clearance rack.
The major retailer saw its worse results in 35 years on May 18, when it missed its first quarter targets after being swamped with fuel and freight costs, excessive discounting, and a drop in sales of items like TVs, small kitchen appliances, and bicycles; causing its shares to drop by nearly 25 percent.
“Target’s business continues to generate healthy increases in traffic and sales, despite sustained volatility in the macro environment, including shifting consumer buying patterns and rapidly changing operating conditions," said Brian Cornell, chairman and CEO of Target.
“Since we reported our first quarter results, we have continued to monitor external conditions and have determined the necessary actions to remain nimble in the current environment.”
The retailer is anticipating that profit margins for the latter half of 2022 will be around 6 percent and forecasts that revenue growth will continue to be steady in the low to mid single digits for the rest of the year, standing by its earlier prediction that sales growth and said margins will remain positive at year’s end.
Target plans to invest more in its logistical network by boosting its amount of holding capacity at U.S. ports to alleviate ongoing supply chain problems and to address the impact of rising transportation and fuel costs on operations.
It also said it will be working with suppliers to further shorten distances and lead times in the supply chain.
Many retailers like Target and Walmart are struggling to navigate the post-pandemic sales environment, as consumer tastes rapidly change.
The nation’s two largest retailers are dealing with an abundance of sweatpants, pillows, and pajamas, a shift from when many consumers were working from home during the pandemic.
Now there is a major demand for swimsuits and suitcases, as the number of Americans planning to go on vacation approaches pre-pandemic levels.
Shipping times have since accelerated after the slowdowns at American ports last year, which had earlier encouraged retailers to aggressively buy up products to meet demand in the latter months of 2021.
However, the alleviation of the backlogs in the first half of 2022 has led to the current glut in inventory, forcing Walmart and Target to sell off unwanted stocks at discounted rates, which hurt their bottom line.
This, combined with the rising cost of goods due to inflation and with consumers spending more on experiences such as travel, entertainment, and dining, caused profits to drop in the last quarter.
Meanwhile, Cornell explained that the decision to write off excess inventory and orders “will result in additional costs in the second quarter,” but that the company is confident “that this rapid response will pay off for our business and our shareholders over time, resulting in improved profitability in the second half of the year and beyond.”
The glut in inventory is likely to lead to further discounts, which retailers had avoided during the scarcity of the pandemic, but is a boon for shoppers facing rising prices for food, fuel, as well as other goods and services.
Cornell said Target plans to avoid the similar problems of its competitors by staying ahead of key sales seasons, such as back-to-school and holidays, while removing unwanted merchandise that would clutter stores and drive away customers.
Its Memorial Day weekend sales event, for example, was used to clear outdoor items like patio furniture out of its store rooms.
Target will roll out a new inventory plan to make room for more profitable categories like food & beverages, household essentials, and beauty items, with less emphasis on categories like home appliances, which have been declining in sales since the beginning of the year.
