Target movements to reduce inventory, take markdowns and cancel orders


Diving Brief:

  • Target will take steps to reduce inventory, including further markdowns, removal of excess inventory and order cancellations, in an effort to resize inventory levels, the company said this week.
  • These measures are intended to “create additional flexibility to focus on serving customers in a rapidly changing environment” as well as to “further build on the company’s track record of growth and market share gains”.
  • Target also plans to add five fulfillment centers over the next two fiscal years as part of a strategy to reduce supply chain delays.

Overview of the dive:

The retailer is working to mitigate disruptions and rising costs in its supply chain in addition to dealing with consumer shifts. Target’s plans also include adding storage capacity near domestic ports to increase speed and flexibility, as well as adding new fulfillment centers.

The company said it was also working with suppliers to shorten distances and lead times, as well as offset inflation pressure and increase operational efficiency.

The announcement comes just weeks after Target’s first quarter results showed a major impact on the retailer’s earnings. Target is now scrambling to empty its stores and reduce inventory levels in the future.

At the time of its earnings report in May, the retailer noted that it had taken markdowns in several discretionary areas where sales were below expectations.

This was seen as a general signal to the market that consumers were feeling the pain of inflation and the end of government stimulus, and adjusting their spending accordingly. Along with Walmart’s below-expected earnings, analysts have taken a more negative view of retail for 2022 since mid-May.

The retailer’s memo on market share gains suggests Target could absorb some profit declines to take advantage of an inflationary environment, winning customers by keeping its own prices low where it can. Although Target also said it would take “pricing action” to mitigate soaring fuel and transportation costs.

Overall, the retailer’s revenue looks healthy so far. He made no changes to his sales forecast. “Target’s business continues to generate healthy increases in traffic and sales, despite continued volatility in the macro environment, including changing consumer buying habits and rapidly changing operating conditions. “General Manager Brian Cornell said in a statement.

John Zolidis, chairman of research consultancy Quo Vadis Capital, said in emailed comments that Target’s post “signals that something has gone seriously wrong in the planning and allocation department.”

“A second forecast cut in three weeks certainly gives us pause, especially against the backdrop of other retailer reports, some of which have been strong,” Zolidis added. “It suggests [Target]The problems are internal rather than external.”

For the second half of the year, Target expects its operating margin rate to rebound in the 6% range, indicating that it expects the current challenges to be a speed bump.

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