Shares of Target (NYSE: TGT) are trading lower this week again after the company told investors that its profits are likely to take a hit in the short run as the big-box department store chain takes measures to reduce extra inventory.
Why Target Cut its Guidance Again?
The company trimmed its profit margin outlook for the current quarter, sending its shares down roughly 7% in premarket trading.
“We thought it was prudent for us to be decisive, act quickly, get out in front of this, address and optimize our inventory in the second quarter — take those actions necessary to remove the excess inventory and set ourselves up to continue to be guest relevant with our assortment,” said Brian Cornell, CEO of Target.
Through several aggressive steps, Cornell hopes to prevent further losses and clear the inventory to make more space for highly demanded products such as groceries, household essentials, beauty items, and others.
The company said it is seeing strong traffic across both physical and online stores. Target also noted a highly “resilient customers,” but added that they are far less interested in products that were popular during the coronavirus pandemic.
“We want to make sure that we continue to lean into those categories that are relevant today,” he said.
Target expects its operating margin rate in Q2 to be around 2%, reduced from its previous outlook from less than three weeks ago when it said it expects its operating margin to be around 5.3%.
The company also provided an outlook for the second half of the year, saying it expects profit margins to be roughly 6%, marking an improvement relative to its average performance for the fall seasons during pre-pandemic years. Target anticipates full-year revenue growth to be in the low to mid-single digits, as well as to maintain or expand its market share in 2022.
The department store chain came up with its new inventory plan after seeing its rivals are facing similar challenges, said Cornell. He added that Target will attempt to get ahead of the key sales periods including back-to-school and the holiday season.
The company reported almost $15.1 billion of inventory as of the first quarter-end, up 43% from the same period last year.
Second Outlook Cut in Three Weeks
Last month, the retailer posted an unexpected earnings miss for Q1, citing growing fuel and freight costs, increased discounting levels, as well as a rotation away from products like television sets, bicycles, kitchen appliances, and more. Target also slashed its guidance citing slower demand.
The company’s shares plunged 25% on the Q1 earnings report to their worst level in 35 years, wiping nearly $25 billion off its market cap.
The company reported Q1 adjusted earnings per share (EPS) of $2.19, missing the consensus estimates of $3.07 per share. Net income was down at $1.01 billion from $2.1 billion in the year-ago period. Revenue came in at $25.17 billion, ahead of the analyst consensus of $24.49 billion.
On a more positive note, Target’s Q1 comparable sales grew 3.3% year-over-year, while analysts were looking for a comparable sales growth of 0.8%, according to StreetAccount.
“While we saw healthy top-line growth in the quarter, we were less profitable than we expected to be or intend to be over time,” Cornell told reporters at the time.
Quo Vadis Capital president John Zolidis said Target’s recent move and the profit warning indicate that “something went really wrong in the planning and allocation department.”
Zolidis said it is hard to believe how quickly the outlook changed from just three weeks ago when the company reported its earnings results.
Truist Securities analysts downgraded TGT to Hold from Buy last month and reduced the stock’s price target to $171 from $261. Investment research firm CFRA also downgraded Target’s stock to Hold from Buy, slashing the target price to $165 from $288.
Summary
Target shares are trading lower this week after the retailer cut its guidance for the second time in three weeks. The company is also taking action to tackle excess inventory as it is facing a bigger-than-expected slowdown. This means that Target stock will likely remain under pressure in the near-term.
