Target pivots to “Aggressive Cost Control” mode

Just three weeks after announcing an unexpected 40% drop in first-quarter earnings, Target unveiled a aggressive cost control plan Tuesday (June 7) to deal with what he calls a “rapidly changing environment” for consumers.

In issuing the update, the Minnesota-based operator of 2,000 outlets, e-commerce site and delivery service Shipt said its multi-pronged “inventory optimization strategy” was needed to counter a mix of issues including current industry performance, a challenging operating environment and deteriorating consumer trends.

As a result, Target said it would implement additional markdowns to eliminate excess inventory, while canceling some other orders altogether.

“Since we released our first quarter results, we have continued to monitor external conditions and have determined the actions needed to remain agile in the current environment,” said Target President and CEO Brian Cornell. , in the company’s press release, which also warned that second-quarter earnings margins would shrink to 2% due to expected cost increases and price reductions.

While the plan will involve near-term spending for the retailer, Cornell said it expects to see improved profitability and a return to normalized seasonal metrics in the second half.

Inversion of detail

The cautious comments didn’t sit well with investors and sparked a pre-market double-digit selloff in Target shares, extending a short-term slump that saw its stock drop 40% from a recent high of $250. April 20.

The cautious outlook and aggressive markdown plan also sparked broader, albeit more subdued, selling among many of the industry’s biggest players, including Walmart and Amazon, which had seen some recent momentum amid a growing chorus of optimism and reports of consumer resilience from many retail industry CEOs and CFOs.

In addition to executing more sales and order cancellations, Target said it’s also adding additional capacity near U.S. ports “to add flexibility and speed” to its biggest bottleneck. affected by the global supply chain crisis.

At the same time, Target pointed to the effect “unusually high transportation and fuel costs” were having on its business, as well as its customers’ household budgets, as the reason for the aggressive pricing action. The retailer also said it would work with suppliers to find ways to improve efficiency and shorten the distance goods need to be shipped, as well as the balloon supply lead time needed to ensure that orders have time to be executed and delivered.

Fuel price problem

Granted, Target isn’t operating in an economic vacuum, and its latest response comes the same day as the AAA set a new record the average price per gallon of gasoline and diesel fuel at $4.92 and $5.68 respectively – a level that marks an increase of 40% and 75% over the past 12 months.

While Target’s management team promised last month that action would be taken to reverse the surprise drop in earnings, the company’s first-quarter conference call was also peppered with pockets of optimism, such as the demand for food and other categories of basic consumer goods.

“We continue to see healthy overall spending from our customers,” Cornell told analysts while acknowledging changing habits and “significant increases in spending” around the holidays, including Easter in April and Christmas Day. mothers.

“Encouraging longer-term growth trends demonstrate the continued resilience of the American consumer,” Cornell said in mid-May, noting that while customers face multiple challenges, they remain focused on getting back to their habits. and behaviors before the pandemic. “Even as the composition of what they buy continues to shift, their ability to spend continues to benefit from high savings rates, high employment rates and healthy wage growth,” he said. he added.

It remains to be seen how long this consumer spending capacity can persist in the face of rising fuel prices and tightening household budgets. However, given Target’s latest action to resize its inventory, as well as similar inventory actions taken by other retailers, some relief could come in the form of discounts and sales.