Photo: RetailWire
Is Target ready for what comes next?
Target is ready to get back to its more profitable ways.
That was the message yesterday from CEO Brian Cornell on the chain’s second-quarter earnings call with analysts.
Mr. Cornell recapped that Target found itself earlier this year overstocked with merchandise in discretionary categories at a time when inflation was forcing consumers to concentrate their dollars on buying everyday staples.
“We could have held on to excess inventory and attempted to deal with it slowly, over multiple quarters or even years. While that might have reduced the near-term financial impact, it would have held back our business over time,” he said.
Target’s decision to mark down overstocked categories may have cut into its second quarter profitability (down 90 percent year-over-year), but the move put it in a position to approach the second half of 2022 from a position of strength.
“We’ve meaningfully reduced our ownership and commitments in categories where we’ve seen softening demand,” said Mr. Cornell. “This has allowed us to strengthen our inventory position and in-stock position in the categories that are driving our growth, most notably in food and beverage, beauty and essentials.”
Target posted a 2.6 percent increase in sales for the quarter, marking 21 straight quarterly gains. The chain saw its customer traffic improve by 2.7 percent during the quarter, 20 percent higher than the same time in 2019.
“In raw numbers, that means in the second quarter alone, we’ve added more than 90 million guest visits over the last three years,” said Mr. Cornell. “These visits are a vivid demonstration of a deepening level of guest engagement resulting from multiple investments throughout our business. These investments include dozens of new stores and hundreds of remodels every year. They also include investments in our industry-leading same-day services, which have transformed our business in a short time.”
Mr. Cornell said that Target was “leaning into value” at a time of high inflation.
“We’re focused on providing great everyday pricing and strong opening price points across every category, including in our owned brands. At the same time, we hear from our guests that they’re focused on celebrating the seasonal moments they missed over the last two years. As a result, we’ll lean into those seasonal moments, helping our guests find ways to come together and celebrate with family and friends. So, we still have a lot of business ahead of us.”
Discussion Questions
DISCUSSION QUESTIONS: Was Target more effective at right-sizing its inventory during the first half of the year than the retail industry as a whole? What do you see as Target’s strengths and weaknesses as it moves into the back half of 2022?
Poll
Loading …BrainTrust
Neil Saunders
Managing Director, GlobalData
Richard J. George, Ph.D.
Professor of Food Marketing, Haub School of Business, Saint Joseph's University
Target is right to take the hit and clear down excess inventory. The strategy is working, although overall inventory is higher than last quarter and well above last year – so there is still some way to go. I am still optimistic about Target but they need to get back on the front foot – especially in non-food. Aside from the inventory missteps, there is a tiredness creeping into some of the own-brand ranges in home and apparel where products feel samey and lack the sparkle of a few years ago. Beauty is a far stronger area in terms of innovation which is why they are still punching out growth there. The next year or so is critical. Target will either get back on track and retain its status as the poster child of retailing, or it will fall back and lose its luster.
Target made a bet on ordering up, but then got caught with too much inventory. It was a calculated risk, and now leadership is adjusting based on the outcomes. I like Cornell’s approach to “ripping off the Band-Aid” when it comes to the excess inventory – clear it out and move on. Target has been brilliant at adjusting to market conditions by emphasizing value or selection as needed. Notwithstanding these current results, I believe Target is positioned among the best retailers to out-perform in the back half of 2022.
As I said when Target first warned about its inventory problem, “The first markdown is the best markdown.” It sounds like Target put most if not all of its overstock problems behind it, and can look forward to “less bad” earnings in the 3rd quarter and better results in the 4th.
It’s hard to fault Target’s overall performance for the past few years under Mr. Cornell’s leadership, and he was absolutely right about addressing its content issues with a great sense of urgency.
When the company I worked for bought a sizable chain, the same thing was said in different words to me. He said the first cut is the kindness.
The best retailers in the world are brilliant in releasing over-inventoried or under-desired categories to loosen cash for new and more in-demand product. Bad stock is not like wine, it never gets better with time. Bottom line, earlier inventory cuts supply the room for new and hopefully much more in-demand items on shelves.
Target will be ready for what comes next if they rethink their merchandising strategy and why they were overstocked in the first place.
Right sizing inventory means they didn’t buy into the right categories and overbought. This reality tells us that Target has not implemented predictive analytics or addressed archaic ways of building a line plan and going to market.
Retailers cannot go to market and plan buys the way they did pre-pandemic. Looking forward and reevaluating assortment planning processes is critical.
The past few years have created big challenges for retailers, but I have every faith in Mr. Cornell, whose instincts seem always to be correct.
While I still don’t understand the level of optimism that went into the over-buying, I think the bigger picture is Target’s proven track record over the last decade. They are clearly the leader in envisioning and implementing a forward looking and evolving retail model. They made the expensive, and sometimes unpopular, investments when it was called for. And now they’ve taken the expensive, and sometimes unpopular, markdowns necessary to get inventories back in line. They are not bashful about owning and then fixing their mistakes. And they are not bashful about investing in their opportunities. At a more micro level, they cannot let this current scenario draw them into a risk averse thought pattern. Their women’s active and apparel departments look like they continue to have abundant color and energy. Men’s looks downright drab and dreary. Hopefully the ongoing flow of new fall receipts will remedy that.
Target’s greatest strength over the last 30 years has been its ability and willingness to move fast. They have a long track record of driving change. They have been willing to adapt quickly when needed and to make course adjustments along the way when things haven’t gone as planned. Brian Cornell has driven the organization to take risks and move even faster. This served them well during the pandemic when they stood up curbside and home delivery in remarkable time for an organization of their size.
Going into the Holiday 2022, they now have the space and budget in their stores to make investment holiday items trending items. I think they will be better situated than some of their competitors in holiday shopping. Which really plays to their historical strengths.
On the downside, Target’s often talked about inventory in-stock issues continue to be a problem. They seem to be behind their competitors when it comes to the availability of key items. That’s my perception walking through their stores.
Another thing about Target that’s held up over the years — don’t bet against them. Their biggest strength is their store experience for their guests (in-stocks aside) and the power of the brand. I expect that in February, we’ll be talking about how well Target did during the holiday season.
Target was caught up in the excitement of the shopping surge but made the right decision to right size early. Staying lean while still testing new brands and concepts will keep its assortment fresh and fashion-forward which is their core value proposition.
Rightsizing now was the right move. If you have bad news, get it over with. Don’t let bad news dribble out. But be sure to convey all the emotion that is attached to bad news. Leaders must be able to stand the shock of war, and marketing leaders must be able to stand the shock of bad news. A leader to makes things happen. A leader can make winners of losers and can achieve progress in the face of retreat. Leadership is an activity, not a position. In my opinion, Brian Cornell’s leadership will continue to make Target a winner.
This strategic move will pay off for Target, right-sizing inventory will increase capacity to provide the right products for their customer. Their partnership with Ulta and continued investment in the beauty sector will drive traffic into the store. Affordable “nice to have” items like cosmetics are having a strong moment, and the trend will remain bullish.
Every retailer is in a tough position with supply chain issues and inflation. Target has a lot of strategic efforts that have to hit a sweet spot for consumers in order to steer the ship back on course.
My God … nothing like panic for no reason. Their business was up, but profit way down. Did they get caught in a vice because of supply/demand and inflationary pressures? Yes. Could they have possibly envisioned all of it having a 90% drop in profit YoY? No. By the way, percentages are misleading — if you have a huge profit quarter and then compare to following YoY no surprise the differences can be dramatic — thus the challenge for a store concept that sells close to everything. Target is a brilliant enterprise. They aren’t going anywhere and will continue to have outstanding performance for their stockholders as well as offer great price/value to their highly valued customers.
Sometimes short-term loss turns into long-term gain. Furthermore, one or two quarters does not predict the future. Target knew there would be losses as a result of this decision. As I was reading, I compared this to the high-ranking professional golfer who changes their swing to get even better. Short-term, they don’t score as well. Then a year later, the swing is working and they start winning — even more than before.
Target is spot on trying to right size inventory. The margin of the inventory on the shelf in the store is 0. The US has just been through a traumatic two years with the pandemic and buying habits are returning to more normal conditions. Target is also addressing the buying habit changes which occurred during the pandemic and is attempting to get ahead of the new trends.
Target’s major strength is its ability to know its store inventory, understand its customer trends and to adjust the inventory to meet the trends, like consumers going back to celebrating seasonal moments.
This topic seems more than a little ironic: looking back on these boards, hasn’t the Pavlovian response to the pairing of Target:inventory always been out-of-stock?
So while I’m fine with reducing clutter, I also hope they’ll — if you will — not overshoot the mark.
I agree. Rip the Band-Aid off and deal with the pain — now — and then move forward. I Also have faith in Mr. Cornell and the Target team!