More Markdowns Ahead: Target Looks to Cut Its Losses

Three weeks after announcing disappointing first-quarter earnings, Target said June 7 that it will move aggressively to reduce bloated inventory and order levels in discretionary categories such as home goods as consumers pull back their spending on non-essentials.

Specifically, the Minneapolis-based retailer said it will take additional markdowns, cancel some orders, and add product holding capacity at venues near U.S. ports to give the company more wiggle room in managing supply-chain stops and starts as it funnels products to Target's 51 supply-chain facilities across the United States.

In addition, Target said it will take (unspecified) pricing actions in light of rising transportation and fuel costs and that it is continuing to work with vendors to help reduce costs and lead times.

The moves will help Target "right-size its inventory for the balance of the year and create additional flexibility to focus on serving guests in a rapidly changing environment," the company stated in an investors news release. Target added that it's "planning for continued strength in frequency categories like food and beverage, household essentials and beauty, and is planning more conservatively in discretionary categories like home, where trends have changed rapidly since the beginning of the year."

Target's operating income was down 43% year over year to $1.35 billion in the first quarter of fiscal 2022, the company reported May 18. Target Chairman and CEO Brian Cornell said at the time that the company maintained confidence in its long-term financial algorithm, which predicts an operating margin rate of 8% over time. On Tuesday, Target updated and expanded upon its guidance, saying it now anticipates a second-quarter operating margin rate in the neighborhood of 2% and a fiscal second-half operating margin rate around 6%. The company added that it expects to maintain or gain market share in 2022.

"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," Cornell said June 7. "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."

Target (NYSE: TGT) closed the regular trading day down around 2.3% to $156.05. In the past month—mainly since the company's May 18 earnings release and the subsequent shareholder selloff—Target has seen its stock price fall around 30%.