Target drops 10% as it cuts its profit margin outlook on a plan to slash excess inventory while it leans into shifting customer demands
Mary Meisenzahl/Insider
- Target shares fell 10% Tuesday after lowering its operating profit margin forecast for the second time in three weeks.
- The retailer is planning to rid itself of excess inventory in response to developments since the first quarter.
- Customers have been buying more food, beauty items, and home essentials.
Target shares tumbled Tuesday after the retailer reduced its profit margin outlook for the second time in three weeks, outlining a plan to cut prices to move inventory that's been piling up and focus on categories that are seeing stronger consumer demand.
"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," Brian Cornell, Target's CEO, said in a statement.
Shares fell as much as 10% in premarket action to $143.75, the lowest price since September 2020. The stock later pared the loss to 7.6%.
Target said it will take several actions in the second quarter, including making additional markdowns, removing excess inventory, and canceling orders. It's also adding capacity near US ports to hold merchandise in response to supply chain volatility and is working on pricing to address unusually high transportation and fuel costs.
Target now projects its second-quarter operating margin rate will be in a range of around 2%. On May 18, it said it had expected an operating income margin rate in a wide range centered around 5.3%. Target shares plunged following the release of its first-quarter earnings last month that missed expectations, with results hurt by higher freight and transportation costs.
The company said it's planning for "continued strength" in categories like food & beverage, household essentials, and beauty. Meanwhile, it's been seeing a slowdown in sales in the home category since the beginning of the year. Retail customers in the US broadly ramped up purchases of home furnishings and decor during coronavirus lockdowns.
Target said for the back half of 2022, it now expects an operating margin rate in the range of around 6%, a rate that would exceed its average fall season performance in the years leading up to the COVID-19 pandemic. It still foresees full-year revenue growth in the low- to mid-single digit range, and expects to maintain or gain market share this year.
"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," said Cornell.
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