Fall merchandise won’t be flowing in as originally planned after Target slashed $1.5 billion in upcoming “discretionary” receipts to fix the inventory mess it made earlier this year. This comes after Walmart on Tuesday reported cutting billions of dollars in peak-season product to maneuver out of its own sticky stock situation.
In a Nutshell: Target’s inventory actions have already driven “meaningful short term impact on our financial results,” CEO Brian Cornell told Wall Street analysts on Wednesday’s conference call. “We strongly believe it was the best path forward.”
Clearing inventory over several quarters wouldn’t have been a wise move, he added.
Wednesday’s earnings report was the second quarter in a row that inventory problems made Target miss Wall Street‘s profit expectations.
“In today’s environment, that means our food and beverage category is front and center, having grown more than 50 percent, or $1.8 billion, since the second quarter of 2019,” Cornell said, using the pre-Covid period as a reference point for performance.
Target is seeing an “encouraging start to the back-to-school and back-to-college season,” and expects promotions to dominate the holiday selling period as usual.
Chief operating officer John Mulligan sees early signs that some supply chain costs and volatility may have peaked.
“Lead times and global shipping have begun to decline,” he said. “Spot rates to move shipping containers have fallen somewhat, and in light of the reduction in petroleum prices we’ve all seen recently, fuel surcharges have been easing somewhat compared with the peak rates we saw earlier in the second quarter.”
West Coast dockworkers negotiations and potential Covid lockdowns in China still pose risks in an “unfavorable” environment, he added, pointing to ongoing shipping delays. Target is moving up receipt dates to mitigate delays and cut down on costly air freight.
“We secured temporary capacity to store and stage shipping containers near the ports where we receive them when needed. This allows us to quickly clear the containers from the port area and hold them until the ideal time to begin moving inventory into our supply chain network,” he said. “We don’t expect to need this additional capacity over the long term. We believe it’s clearly the most efficient approach in today’s environment, given the volatility we continue to face.”
Target’s customers are still spending despite inflation, chief growth officer Christina Hennington said.
“Overall, the home category saw a low single digit decline compared to last year, despite affinity for our seasonal assortment and encouraging early results in back to school and back to college,” she said. “Apparel also saw a low single digit decline in the second quarter that saw meaningful growth in women’s fashion-forward categories, along with performance apparel.”
The retailer will introduce an “elevated fashion assortment, with several new collections and updated brands” in the next quarter, she said.
Net Sales: For the second quarter ended July 30, total revenue was up 3.5 percent to $26.04 billion from $25.16 billion, which included a net sales increase of 3.3 percent to $25.65 billion from $24.83 billion.
Comparable sales in the quarter rose 2.6 percent, on top of the 8.9 percent gain a year ago.
For the six months, total revenue was up 3.7 percent to $51.21 billion from $49.36 billion, which included a net sales gain of 3.7 percent to $50.48 billion from $48.71 billion.
Earnings: Net income dropped 89.2 percent to $183 million, or 39 cents a diluted share, from $1.82 billion, or $3.65, in the year-ago quarter.
Wall Street was expecting earnings per share of 71 cents on revenue of $26.04 billion.
For Fiscal 2022 guidance, the company is maintaining its prior guidance for full-year revenue growth in the low- to mid-single digit range.
Chief financial officer Michael Fiddelke cited a roughly $200 million impact from inventory shifts in the third quarter, but that should clear up by the fourth quarter.
“While we typically anticipate something closer to a balance of upside and downside potential when we make any forecasts, the macro and consumer risks in the back half of this year feel skewed to the downside. That’s why even in the face of consistent business trends in recent months, we’ve undertaken the significant cost and effort to remove risk from our inventory commitment,” he said of the $1.5 billion receipt cancellations.
For the six months, net income declined by 67.4 percent to $1.19 billion, or $2.55 a diluted share, from $3.91 billion, or $7.82, a year ago.
CEO’s Take: “The ability to play offense and focus on the long term makes us well positioned to emerge from the current downturn even stronger than before,” Cornell said.