Target profits fall nearly 90% – WWD
Target Surplus inventory issues reduce quarterly profits.
The big-box retailer revealed earnings on Wednesday before the market opened, improving sales but falling short of bottom line profits by nearly 90% thanks to rapidly changing consumer shopping habits and a plethora unwanted products.
Ongoing inventory issues, along with rising markdowns and rising prices in the three months to July 30, caused the company’s profits to fall nearly 90% to $183 million. dollars, up from $1.8 billion a year ago. Second-quarter earnings per share fell more than 89% to 39 cents apiece from $3.65 a year ago.
Still, Brian Cornell, president and chief executive of Target Corp., said in a statement that he was pleased with the company’s performance over the past quarter.
“[Target] continues to grow traffic and sales while delivering large-scale unit share gains in a very challenging environment,” he said. “I would like to thank our team for their tireless work in meeting the inventory resizing targets we announced in June. While these inventory actions are putting significant pressure on our near-term profitability, we believe it was the right long-term decision to support our customers, our team and our business. Looking ahead, the team is energetic and ready to serve our customers in the second half of the year, with a shopping experience safe, clean and uncluttered, compelling value across all categories and a new assortment to meet the wants and needs of our customers.
The CEO added during Wednesday morning’s conference call with analysts that “the vast majority of the financial impact of these inventory actions is now behind us. This positions our business to deliver significant improvement in operating margin rates.” in autumn. “
The company canceled more than $1.5 billion in receipt orders for the fall season in discretionary categories to cut costs.
But investors didn’t seem convinced. Target shares closed down 2.6% at $175.50 apiece on Wednesday. Year-over-year, Target shares are down more than 29%.
The higher quarterly numbers were more supportive. Total revenue for the three-month period topped $26 billion, up from $25.1 billion a year ago. Total comparable sales increased 2.6% for the quarter, year-over-year, while comparable store sales increased 1.3%, with continued strength in the food and beverage categories , beauty and essential products. Same-day digital sales increased 9%, while same-day fulfillment services – including online purchase, in-store pickup, drive-up and shipping – increased nearly 11% . The biggest gains were in the drive-up, which rose in the middle bracket.
“We applaud [Target] for taking an aggressive stance on resizing its inventory levels instead of dealing with this issue for multiple quarters or potentially years,” Arun Sundaram, senior equity analyst at CFRA Research, wrote in a note. “We are waiting [Target] be in a much stronger inventory position in [fall] [fourth quarter]preparing the company for a stronger good [fiscal-year] 2024. That said, we are concerned about slowing model sales growth.
His company maintained a “hold” position on the stock, but set a new higher 12-month price target at $190 per share.
The retailer said it still expects full-year revenue growth in the low to mid-single digit range, compared to last year’s results, and expects a margin rate around 6% in the second half of the year, year-over-year. .
Target’s inventory balance, perhaps its biggest headwind for the quarter, remained around $15 billion between the first and second quarters. That’s about $6 billion above pre-pandemic levels. But Michael Fiddelke, executive vice president and chief financial officer, pointed out that about $3 billion of that amount is due to higher unit costs in the assortment.
Additionally, John Mulligan, executive vice president and chief operating officer, said the reduction in fall receipt orders was “huge for us, due to the uncertainty in these particular categories. This really reduces the risks for these categories in the future.
The company has also temporarily secured storage containers near ports and adopted earlier receipt dates for the season’s inventory in a bid to reduce reliance on air freight in the future.
“While the pressure of excess inventory presented our team’s biggest challenge this year, managing high costs and external supply chain volatility followed closely behind,” Mulligan said. “If necessary, [the containers] allow us to quickly clear containers from the port area and hold them until the perfect time to start moving inventory through our supply chain network.
“Although conditions remain far from what we would have considered normal in the years leading up to the pandemic, there are early signs that costs and volatility may have peaked,” he added. “Specifically, delivery times in global shipping have started to decrease; spot rates for moving shipping containers have come down somewhat. And in light of the reduction in oil prices that we’ve all seen recently, fuel surcharges have come down somewhat from the peak rates we experienced earlier in the second quarter. That said, conditions remain very unfavorable compared to the years before the pandemic and we are aware of the continuing risks in the months ahead, including potential slowdowns in West Coast ports, a reversal of the recent decline in shipping costs. energy and the possibility of additional COVID [-19] lockdowns in China.
The company expects an impact of approximately $200 million in the current quarter due to inventory reductions.
Meanwhile, changing consumer buying habits could actually be both a headwind and a tailwind, Christina Hennington, retailer executive vice president and chief growth officer, said on the call.
“What we see in our results and what our customers are telling us is that they still have purchasing power, but they are increasingly feeling the impact of inflation,” a- she explained. “In this context, we have seen our customers buy our own brands more and more frequently. We’ve also seen customer behavior change as they focus on optimizing their personal budgets through increased response to promotions, as well as greater travel consolidation. At the same time, customers continue to be the subject of difficult headlines, COVID [-19] surges and continued political volatility, leading them to seek more ways to celebrate, connect and find opportunities to bring joy to their families. This is one of the reasons we continue to see such strength in our seasonal categories, which we hope will continue into the second half of the year. »
Targeted shoppers continued to shop in the pet, healthcare, food and beauty categories over the past quarter. Hennington added that Target remains on track to open at least 250 in-store Ulta Beauty stores by the end of the year.
Headwinds included the Home and Hardline categories, driven by weakness in Electronics, but partially offset by strength in Entertainment and Toys. Overall apparel sales also declined in the quarter. But Hennington said specific categories — such as fashion-forward apparel and performance apparel — continued to grow.
The Minneapolis-based company released its latest quarterly results just one day after Walmartwhich also said it struggled with excess inventory in some categories – also in home, electronics and apparel – but still rose both up and down thanks to gains in the grocery category .
“We believe [Walmart’s] higher exposure to groceries and groceries inflation compared to [Target’s] assistance [Walmart]wrote Oliver Chen, managing director and senior equity analyst at Cowen, in a note. Still, he added, “we think the valuation remains compelling despite the misfire. [Target] is well positioned for a strong back-to-school with improved inventory positions compared to [last year]. Also, Target stands to benefit as consumers “celebrate the joy” given [Target’s] partnerships with Lego, Marvel and others, merchandising expertise and a history of executing well around events, holidays [and] occasions. »
His company noted Target’s stock was “outperforming.”
Target ended the quarter with more than $1.1 billion in cash and cash equivalents and $13.4 billion in long-term debt.