2022 Q2 Profit Target (TGT): Earnings drop nearly 90%

A sign outside a Target department store on June 7, 2022 in Miami, Florida. Target announced that it expects a short-term drop in profits as it discounts unwanted items, cancels orders and takes aggressive steps to get rid of excess inventory.

Joe Radle | Getty Images

Target on Wednesday said its quarterly profit fell nearly 90% year-over-year as the retailer followed through on its warning that drastic discounts on junk items would hurt its bottom line.

The major retailer fell far short of Wall Street’s expectations, even after the company itself cut its forecast twice.

However, the company reiterated its guidance for the full year, saying it is now poised for a recovery. The company said it expects full-year revenue growth in the low-to-mid single digits. Target also said its operating margin will be in the range of around 6% in the second half of the year. This represents a jump from an operating margin of 1.2% in the second quarter.

Shares of Target fell about 2% in premarket trading.

CFO Michael Fiddelke defended Target’s aggressive inventory efforts. He said the retailer needs to act quickly so it can clean up the clutter, prepare for the holidays and navigate an inflation-clouded economic backdrop.

“Had we not dealt with excess inventory, we might have avoided some short-term profit problems, but it would hurt our long-term potential,” he said. “While our quarterly earnings are down significantly, our future path is brighter.”

Here are Target’s results for the three-month period ending July 30, compared to Refinitiv’s consensus estimates:

  • Earnings per share: 39 cents vs. 72 cents expected
  • Revenue: $26.04 billion vs. $26.04 billion expected

Over the past two quarters, Target’s fortunes have changed dramatically. Posting staggering sales figures quarter after quarter during the pandemic, he has seen clothes, coffee makers, lamps and more linger on the shelf and then tossed onto the clearance counter. Some of these surplus items are the same items that were sold out during earlier periods of the pandemic, when shoppers snapped up home furnishings and clothing.

The turnaround forced the major retailer to cut its profit forecasts twice, once in May and then again in June, and to commit to act quickly to raise its inventory levels to healthier levels.

However, inventories were still high, at $15.32 billion at the end of the second quarter, compared to $15.08 billion at the end of the first.

But CEO Brian Cornell said it’s a better mix, as Target relies on frequently used categories like groceries and essentials, along with popular categories like seasonal items. It canceled orders of more than $1.5 billion for discretionary categories with lower demand.

Fiddelke said the amount of inventory is higher due to cost inflation and getting inventory earlier to make sure Target is ready for the holidays.

In the second quarter, the company’s net income fell to $183 million, or 39 cents per share, from $1.82 billion, or $3.65 per share, a year earlier.

Total revenue rose to $26.04 billion from $25.16 billion a year ago, due in part to higher prices due to inflation.

Quarterly earnings have been cut in various ways. The sale of many items has become less profitable as they have been discounted. Freight, transportation and delivery costs have risen as fuel prices have risen. And the company had to increase headcount and cover more compensation at distribution centers as it handled an excess of extra materials.

cautious approach

Major rival Walmart said on Tuesday it has noticed a marked change in consumer behavior as even richer households sought discounts on groceries and necessities. The company told CNBC that about three-quarters of its growth in food market share comes from households with annual incomes of $100,000 or more.

Target, on the other hand, said it does not see such a significant change due to inflation. Unit sales rose in all five major product categories, especially in two categories: food and beverages, cosmetics and essentials.

Even when profits fell, like-for-like sales and traffic rose.

Like-for-like sales, a key metric that tracks sales online and in stores that have been open for at least 13 months, rose 2.6% in the second quarter, compared with 8.9% growth last year. That’s slightly out of line with estimates that suggested a 2.8% increase, according to StreetAccount. Target’s stores and website saw a 2.7% year-on-year increase in traffic.

Fiddelke, chief financial officer, said traffic growth proof that shoppers still have purchasing power and help Target realize its more rosy earnings forecast for the second half of the year.

“The persistence of this strong guest response puts us in an advantageous position, even if I can’t predict every curve that could happen to us in the fall season,” he said during a call with reporters.

Fiddelke said consumers differ by geography and income level, and they look for value in different ways. For example, some buy larger packs to save more per unit, or try one of Target’s cheaper private labels instead of the national brand.

Cornell said Target is keeping a close eye on consumer spending. He said he stocks up on popular items and orders fewer items that shoppers might miss out on.

“We’re going to take a very balanced approach,” he said, looking to plan “carefully” in discretionary categories where the company has noticed a change in behavior.

As of Tuesday’s close, Target shares are down about 22% this year. Shares closed Tuesday at $180.19, up nearly 5% on the same day after Walmart beat earnings expectations.

This story is evolving. Please stay tuned for updates.

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