Target isn’t wasting any time in cutting the glut from its inventory
Target is serious about getting its inventory in order. The retailer today said it would markdown merchandise and cancel orders in an effort to right size its inventory, even though it will take a big hit to profit margins.
The chain’s first quarter operating income margin rate was 5.3 percent, down from 9.8 percent in 2021. Target ended the quarter with inventory about 43 percent higher than the same period last year.
The company lowered its forecast for the second quarter while at the same time emphasizing this short term response as a means to sustainable growth. The chain expects an operating margin of around two percent in the second quarter, rising to six percent in the second half of the year. It projects sales growth in the mid- to single-digit range.
The chain’s revised outlook forecasts continued growth in the beauty, food and beverage, and household essentials categories. The company expects that discretionary categories, including home, will be challenged.
The retailer said it was “pursuing aggressive options” to reign in expenses. These include working with vendors to address rising costs, building on operational efficiencies and finding other savings while seeking to maintain the customer experience in stores and online. Target said it was also moving ahead with plans to add supply capacity by building five new distribution centers over the next two years.
“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 additional steps we are announcing today will ensure that we deliver for our guests while driving further growth,” Brian Cornell, Target chairman and CEO, said in a statement. “While these decisions will result in additional costs in the second quarter, we’re confident this rapid response will pay off for our business and our shareholders over time.”
The chain, mindful of supply chain disruptions that have affected retail since the start of the pandemic also said it plans to add “incremental holding capacity” near key ports to help “add flexibility” and speed the movement of goods at points in the supply chain most likely to be affected by external sources.
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DISCUSSION QUESTIONS: Do you agree with Target’s approach to dealing with its inventory and cost challenges at this point in time? What are the potential downsides, if any, and how likely are Target’s chief competitors to engage in similar actions?