HomeBusinessTarget warns of further margin compression as excess inventory weighs

Target warns of further margin compression as excess inventory weighs

June 7 (Reuters) – Target Corp (TGT.N) on Tuesday cut its quarterly profit margin forecast published a few weeks earlier and said it would have to offer deeper discounts to eliminate inventories amid high inflation for decades has weighed on demand.

The surprise outlook revision sent Target shares down almost 7% in early trading and weighed on the retail sector and broader markets.

The retailer said it would cut prices in the second quarter, cancel orders with suppliers, strengthen parts of its supply chain and prioritize categories such as food and household essentials.

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Soaring inflation is forcing consumers to change their shopping habits, catching many retailers off guard and forcing them to offer more discounts.

Target, along with Walmart (WMT.N), had reported a much steeper than expected decline in quarterly earnings in May, sending shockwaves through the retail sector. Read more

At the time, Target said its inventory was up 43% from a year earlier as demand for high-margin discretionary items such as kitchen appliances and televisions waned.

A shopping cart is seen at a Target store in the Brooklyn borough of New York, U.S., November 14, 2017. REUTERS/Brendan McDermid

“The target was a retailer that had been exceptionally successful in managing inventory issues, but now when consumers…stop to see where they’re spending, what was once an advantage can come back to bite,” Jane Hali analyst & Associates Jessica says Ramirez.

Target’s strategy to keep most of its products affordable compared to competitors is proving costly, with the company now saying it will raise prices on some items to offset unusually high shipping and fuel costs. .

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The company now expects an operating margin of around 2% in the second quarter, down from a previous estimate of 5.3%. He also expects margins around 6% for the second half.

Still, Target stuck to its sales targets for the year, prompting some Wall Street analysts to say the company’s aggressive moves could help it gain a foothold later in the year.

“While this is a painful time for Target, taking (again) their drugs in the first and second quarters is setting itself up for a better second half with cleaner inventory… (and) also setting itself up for a better second half for the stock,” said DA Davidson analyst Michael Baker.

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Reporting by Aishwarya Venugopal, Susan Mathew and Uday Sampath in Bengaluru; Editing by Anil D’Silva

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