Target (TGT) Q2 2022 earnings: Profits down nearly 90%

A sign outside a Target department store in Miami, Florida on June 07, 2022. Target announced that profits will take a short-term hit as it takes aggressive steps to mark unwanted items, cancel orders and clear excess inventory.

Joe Radle | Good pictures

target On Wednesday its quarterly profit fell almost 90% from a year ago, as the retailer did followed its warning Steep marks on unnecessary items will weigh down its bottom line.

The big-box retailer missed Wall Street’s expectations by a wide margin, even after the company itself cut guidance twice.

Nevertheless, the company reiterated its full-year forecast that it is now positioned for a rebound. It said it expects full-year revenue growth in the low to mid-single digits. Target also said its operating margin ratio will be in the range of around 6% in the second half of the year. This would represent an increase from its operating margin rate of 1.2% in the second quarter.

Shares of Target fell more than 3% in premarket trading.

Chief Financial Officer Michael Fidelke supported Target’s aggressive inventory efforts. The retailer needs to move quickly so it can clear the clutter, prepare for the holidays and navigate an economic backdrop dimmed by inflation, he said.

“Had we not reversed our excess inventory, we may have avoided some short-term pain in the profit line, but it would have hampered our long-term potential,” he said. “While our quarterly profitability took a meaningful step forward, our future path is bright.”

Here’s how Target performed for the three-month period ended July 30, compared to Refinitiv consensus estimates:

  • Earnings per share: 39 cents versus 72 cents expected
  • Revenue: $26.04 billion vs. $26.04 billion expected
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Target has had a sharp turnaround in fortunes over the past two quarters. After a quarter of eye-popping sales numbers during the pandemic, it’s seen clothes, coffee makers, lamps and more stretch out on the shelves — then kicked to the clearance rack. Some of that excess inventory is the same items sold in earlier parts of the pandemic, when shoppers picked up home decor and loungewear.

The change forced the big-box retailer to cut its profit outlook twice. Once in May And And then again in JuneAnd it must commit to moving quickly to bring its stock levels to a healthy place.

The balance was higher, however: $15.32 billion at the end of the second quarter, compared with $15.08 billion at the end of the first quarter.

But CEO Brian Cornell says it’s a more favorable mix because Target leans into high-frequency categories like food and home essentials and popular categories like seasonal produce. It canceled more than $1.5 billion in orders for preferred categories with lower demand.

Fidelke said inventory numbers are large because of price inflation and receiving inventory earlier to ensure the destination is ready for the holidays.

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

Total revenue rose to $26.04 billion from $25.16 billion a year ago, partly driven by higher prices due to inflation.

Quarterly profits were squeezed in various ways. Profits fell due to lower sales of many items. As fuel prices increased, freight, transportation and shipping costs increased. And as the company handled more products, it had to provide more compensation at the distribution centers.

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A cautious approach

Big-box rival Walmart said Tuesday it has seen a significant shift in consumer behavior Even wealthier families sought deals on groceries and essentials. The company told CNBC that three-quarters of its market share gains in food came from households with annual incomes of $100,000 or more.

Target, on the other hand, said it is not seeing inflation-driven changes. Sales by the unit grew across all five of its core business segments, with particular strength in two categories: food and beverages and beauty and home essentials.

Comparable sales and traffic rose, even as profits fell.

Comparable sales, a key measure that tracks sales online and in stores for at least 13 months, rose 2.6% in the second quarter, up from 8.9% growth last year. That fell short of estimates expecting a 2.8% increase, according to the Street Account. At Target’s stores and its website, traffic increased 2.7% year-over-year.

Fiddelke, CFO, said traffic growth Evidence that shoppers still have spending power will help Target deliver on its higher profit outlook later in the year.

“The backlash of that strong guest response positions us well, even if I can’t predict every curveball that might come our way in the fall,” he said on a call with reporters.

Fidelke 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 less expensive private labels instead of a national brand.

Cornell said Target is keeping a close eye on consumer spending. He said it keeps popular items stocked and shoppers order fewer items they might avoid.

“We’re going to take a more balanced approach,” he said, ensuring the company “carefully plans” in the preferred categories that have seen changes in behavior.

As of Tuesday’s close, Target’s shares had fallen about 22% so far this year. Shares closed Tuesday at $180.19, up nearly 5% on the day After Walmart beat earnings expectations.

This story is developing. Check back for updates.

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