Target is canceling orders from suppliers, particularly for home goods and clothing, and it’s slashing prices further to clear out amassed inventory ahead of the critical fall and holiday shopping seasons.
The actions, announced Tuesday, come after a pronounced spending shift by Americans, from investments in their homes to money spent on experiences like travel and nights out for dinner and other pre-pandemic routines. Shoppers are also focusing more on non-discretionary items like groceries as inflation makes them more selective. That’s a change that arrived much faster than major retailers had anticipated.
The speed at which Americans pivoted away from pandemic spending was laid bare in the most recent quarterly financial filings from a number of major retailers. Target reported last month its profit for the fiscal first quarter tumbled 52% compared with the same period last year. Sales of big TVs and small kitchen appliances that Americans loaded up on during the pandemic have faded, leaving Target with a bloated inventory that it said must be marked down to sell.
Other retailers including Macy’s, Kohl’s and Walmart cited rising inventories when they reported their quarterly earnings results last month. Walmart said at its annual shareholders’ meeting on Friday that 20% of its elevated inventory were items the company wishes it never had.
Target declined to give a dollar amount of merchandise orders that are being canceled and depths of the discounts.
In aggressively clearing out unwanted goods, Target wants to make room for what is now in demand, including groceries and makeup products. But Target is also facing sharply higher costs for everything from labor to transportation and shipping, and it will offset price cuts where it can with higher prices for goods now in demand.
“Retail inventories are elevated,” Michael Fiddelke, Target’s chief financial officer, told The Associated Press in a phone interview Monday. ”And they certainly are for us, in some of the categories that we misforecast. We determined that acting aggressively was the right way to continue to fuel the business.”
Target is working with suppliers to cover costs for their vendors whose orders are being cancelled. In some cases, some of the raw materials that were meant for some goods will instead be used for other products in higher demand, Fiddelke said. Many of the orders for products being canceled have a long production lead time of nine months, he said.
Target also announced that it will add five distribution centers over the next two fiscal years.
Target said the costs related to the moves will hurt the bottom line in the current quarter. Target now expects its second-quarter operating margin rate will be roughly 2%, down from around 5.3% it had expected last month. For the second half of the year, Target expects an operating margin rate in a range around 6%, a rate it said would exceed the company’s average fall season performance in the years leading up to the pandemic.
Last month, Target forecast its full-year operating income margin rate would be in the 6% range. Target didn’t give a new full range prediction. It also said it secured additional space near U.S. ports to hold merchandise to allow for more flexibility.
Target, however, continues to expect full-year revenue growth in the low- to mid-single digit range and expects to maintain or gain market share for the year.