Target’s profit slump came from deep discounts it had to offer on much of its general merchandise, such as apparel, electronics and homewares. The impact on profits of such a large discount was unavoidable. But company executives insist it was the right choice.
“Consider the alternative: we could have kept the excess inventory and tried to manage it slowly, over several quarters or even years. time,” CEO Brian Cornell told investors. “The vast majority of the financial impact of these inventory actions is now behind us.” He predicts a significant improvement in operating margin rates in the fall.
Many analysts agree that Target did the right thing in taking the hit. Many say the sudden change in consumer buying habits was not the fault of miscalculation on the part of management.
“All of last year the supply chain was very, very tight. Stores were out of stock of many items. They were ordering for a very reasonable level of demand,” said Bobby Griffin, sales analyst at the retail at Raymond James. “Then there was a very rapid change in consumer behavior.”
Discretionary purchases made by consumers have shifted from goods to things like travel, Griffin said.
Other experts say Target management wasn’t entirely blameless for being caught with too much bad inventory.
“My feeling is that this [problem at Target] 70% was consumer behavior and 30% inventory-related miscalculations,” said Eric Schiffer, chief investment officer of Los Angeles-based private equity firm The Patriarch Organization.
There is some hope for all retailers that they could take advantage of the significant and steady decline in gasoline prices over the past two months.
Target was always going to have more trouble with a sudden change in consumer spending than Walmart. Walmart gets more than half of its sales from grocery stores while Target is closer to 20%, said Owen Chen, retail analyst at Cowen. Walmart also had to offer sales on its non-essential general merchandise in the quarter.
And Walmart has always been more competitive on low prices, an advantage at a time when even middle- and upper-income shoppers are worried about higher prices. Walmart executives said they saw more business from these higher-income households in the past quarter, a statement that encouraged its investors.
But Chen said the numbers indicate they haven’t gotten those higher-income shoppers from traditional Target customers.
“I think Target is [store] the traffic numbers show it has done a good job of retaining customers,” he said. The number of customers shopping at Target increased 2.7% from a year ago in the quarter just ended. And that’s an increase of more than 20% since the same period of 2019, before the pandemic.
Target stocks have underperformed some of its rivals, falling 28% so far this year, compared to a drop of just 5% at Walmart. Schiffer said he wouldn’t be surprised to see Target shares continue to fall, as he believes they are up to 30% overvalued. But he doesn’t think that means Target is badly positioned for the future.
“I would stay the course,” he said. “The pace of growth during the pandemic was never going to be sustainable. They will continue to grow, but not as fast.”