MINNEAPOLIS — Target Corp. will cut prices, cancel orders and take other steps to cut its bloated inventory, moves that will lower its profit in the current quarter more than executives thought just three weeks ago.
"Over the past several weeks, we've continued to assess the broader retail environment and I think it's no secret right now based on what's been reported, the level of inventory across all retail is pretty high," said Michael Fiddelke, Target's chief financial officer, in an interview with the Star Tribune.
Customers might see prices drop on TVs, outdoor furniture, and kitchen appliances as Target tries to push them out the door to make way for better-selling merchandise.
The Minneapolis-based retailer revealed when it announced its latest quarterly results on May 18 that its inventory soared 43% in the February-through-April period.
At the time, executives said they expected the company's operating margin rate for the current second quarter to be around the same 5.3% it saw in the first quarter of the year. With the more aggressive actions needed to reduce inventory, they now think the operating margin rate will be around 2%.
Target shares fell 7% in early trading this morning. Target lost a quarter of its market value the day it announced first-quarter results, which showed its profit was cut in half due to inflation-related costs and a change in shoppers' behavior.
Demand softened for home products, like furniture, that were popular during the height of the pandemic. In addition to presenting a financial cost, a lot of those items are bulky and take up considerable space in stores and warehouses.
But discounting such items and canceling orders come at a cost to the retailer. Fiddelke said that cost is worth it to provide more flexibility and maintain a pleasing retail experience for Target's customers.
"We got more of that product than we want to have, and we think dealing with that head-on by being aggressive now positions us with the right flexibility for the back half of the year," he said.
Target's current best-selling products are in its food, household essentials and beauty sections.
While its excess inventory will be marked down, Target may see its overall price level rise this summer as it grapples with transportation and other costs that are being affected by inflation.
"Price is the last lever that we pull. … But price increases are unavoidable given the inflationary pressures that we've seen in many categories," Fiddelke said.
Other major retailers also saw inventory levels rise sharply this spring. All are seeing consumer spending habits shift as people return to work and spend more on services, such as dining out and going to public events. Such spending was curtailed in the pandemic.
Richfield-based Best Buy two weeks ago reported higher costs as it has been more expensive to get containers and fuel. Walmart said higher labor and fuel costs, combined with a 33% jump in inventory, dragged down its profit this spring.
Fiddelke said Target also plans to address supply chain woes by adding more holding capacity near busy U.S. ports and working with suppliers to shorten distances and lead times for products. Target will add five distribution centers to its network over the next two fiscal years.
Logistical issues are expected to be present throughout the year, especially as the Russia-Ukraine conflict continues to impact fuel costs, Fiddelke said.
Target executives are more optimistic about the second half of the year when it can capitalize on seasonal purchases for back-to-school and the holidays.
In the fall, Target expects an operating margin rate in a range around 6%, a rate that would exceed the company's average fall performance before the pandemic. Factoring in the first half of the year, Fiddelke estimates that the rate would be around 5% for the fiscal year.
