Target’s profits fall nearly 90% after retailer slashed prices

Target reported on Wednesday that its profits plunged nearly 90 percent last quarter after it was forced to slash prices to clear unwanted inventories of clothing, home goods and electronics. 

In early June, Target warned that it was canceling orders from suppliers and aggressively cutting prices because of a pronounced spending shift by Americans as inflation cut into discretionary spending. 

US retailers have cut their profit forecasts in recent weeks as consumers squeezed by higher prices of essentials such as food and gas curtailed spending on items like apparel and electronics.

Target, which relies more on those discretionary categories, has been hit harder than other retailers like Walmart that stock a greater portion of their shelves with food and other everyday essentials.

On Tuesday, Walmart beat earnings estimates as it drew more shoppers to its stores for bargains on groceries and essential items.

But a day later, Target shares dropped 3 percent as the company reported second-quarter net income of $183 million for the quarter ended in July, down from the $1.82 billion the company earned last year and far short of expectations.

Sales were strong, with Target’s revenue rising 3.5 percent to $26.04 billion — but the glut of steep discounts ate into the retailer giant’s profit margins.

Like other retailers, Target loaded up on orders during last year’s widespread supply chain disruptions, but then wound up with a huge backlog of clothing, home goods and electronics as consumer spending shifted away from those categories. 

Target executives told reporters during a media call that if Target weren’t aggressive about marking down the inventory, it would have taken at least several quarters to get rid of the unwanted merchandise. 

‘While these inventory actions put significant pressure on our near-term profitability, we’re confident this was the right long-term decision in support of our guests, our team and our business,’ CEO Brian Cornell said.

Cornell said the company is planning cautiously for the remainder of the year, including the critical holiday season. That will put a greater focus on stocking groceries and things like cosmetics.

Even with the heavy discounting, inventory rose 1.6 percent to $15.3 billion at the end of the quarter from the prior period. Analysts had estimated a 21 percent fall.

The increase in inventory was due to the company expediting product shipments for the back-to-school and holiday shopping periods in a still ‘choppy’ supply chain environment, Cornell said.

Walmart, the nation’s largest retailer, reported Tuesday that its sales and profits for the second quarter rose. 

It said that higher-income shoppers were flocking to the discounter to save money on groceries, while low-income shoppers were feeling squeezed by higher inflation and were switching from deli meats to hot dogs and canned tuna.

Meanwhile, new government data on Wednesday morning showed the pace of US retail sales was unchanged last month as persistently high inflation and rising interest rates forced many households to spend more cautiously.

Retail purchases were flat in July after having risen 0.8 percent in June, the Commerce Department reported Wednesday. Economists had expected a slight increase in July retail sales.

‘Today’s retail sales number is a direct reflection of inflation’s impact on consumer spending,’ said Morning Consult’s retail and e-commerce analyst Claire Tassin. 

‘Americans have had to trade down or delay purchases as inflation continues to squeeze household budgets, and that’s apparent in today’s 0.0 percent month-over-month change in retail sales,’ she added.

However, lower gas prices likely allowed some shoppers to increase their purchases of other items. Gasoline sales plunged 1.8 percent, reflecting the drop in pump prices.

‘As gas prices fell, consumers had more money in their pockets for other items such as furniture and electronics,” said Jeffrey Roach, chief economist at LPL Financial.

Excluding autos and auto parts, retail sales rose 0.4 percent. And purchases of building supplies and garden equipment held up, as did sales at electronics and appliance stores. 

America’s consumers, whose spending accounts for nearly 70 percent of economic activity, have remained mostly resilient even with year-over-year inflation near a four-decade high, economic uncertainties rising and mortgage and other borrowing rates surging. 

Still, their overall spending has weakened, and it has shifted increasingly toward necessities like groceries and away from discretionary items like home goods, casual clothes and electronics.

The government’s monthly report on retail sales covers about a third of all consumer purchases and doesn´t include spending on most services ranging from plane fares and apartment rents to movie tickets and doctor visits. 

In recent months, Americans have been shifting their purchases away from physical goods and more toward services, like travel, hotel stays and plane fares.

Inflation continues to pose a severe hardship to families, with the consumer price index rising 8.5 percent in July from a year ago.

Though gasoline prices have fallen from their heights, food, rent, used cars and other necessities have become far more expensive, beyond whatever wage increases most workers have received.

Despite a still-robust job market, the U.S. economy shrank in the first half of 2022, raising fears of a potential recession. 

Growth has been weakening largely as a consequence of the Federal Reserve’s aggressive interest rate hikes, which are intended to cool the economy and tame high inflation.