Target announced plans to pull back on discretionary categories like home in an attempt to better right-size its inventory assortment after a first-quarter earnings shocker amid steep inflation and sagging demand for home furnishings. The company’s stock sank 6 percent in mid-afternoon trading.
In a statement Tuesday, Target outlined several actions for the second fiscal quarter, including markdowns, removing excess inventory, and cancelling orders. The company also plans to invest in strong categories such as food and beverage, household essentials, and beauty, while taking a more conservative approach to home goods.
The move comes as the once-red-hot home goods category seems to be slowing down from the unprecedented highs during the first two years of the Covid-19 pandemic. Furniture retail sales posted modest growth in April, increasing only 0.8 percent to an estimated $12.17 billion from $12.07 billion in April a year ago, according to the Department of Commerce report released in mid-May. Sales increased 0.7 percent from March numbers, which were revised down to $12.09 billion from the previously reported $12.86 billion. May numbers aren’t expected for a few more days.
Target’s action plan also includes the addition of incremental storage capacity near U.S. ports to add flexibility and speed in areas of the supply chain most affected by external volatility; along with pricing actions to address the impact of unusually high transportation and fuel costs; and working with suppliers to shorten distances and lead times in the supply chain.
Target declined to comment on whether it’s cancelling orders for goods already produced and/or in transit and which ports it’s prioritizing for capacity.
“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,” Target CEO Brian Cornell said. “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.”
Target now expects its second-quarter operating margin rate to be around 2 percent. For the back half of the year, Target now expects an operating margin rate in a range around 6 percent, a rate that would exceed the company’s average fall season performance in the years leading up to the pandemic. The company continues to expect full-year revenue growth in the low- to mid-single digit range, and expects to maintain or gain market share in 2022.
“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, resulting in improved profitability in the second half of the year and beyond,” Cornell said.
Target’s news raises questions for the rest of retail. Recent corporate earnings calls have speculated on the possibility of retailers resuming the discount-happy habits they largely paused during the height of supply chain turmoil that kept product scarce. Dick’s Sporting Goods, for one, suggested the second half of the year could bring a “higher propensity of promotions.” Genesco, the footwear company behind Journeys and Johnston & Murphy, is thinking about “reintroducing some promotional activity.”
A Goldman Sachs analyst last week warned that retailers run the risk of marking down product if they rush in too much inventory right now to work around supply chain disruption only for economic conditions to deteriorate and kill consumer demand.