Target adapts to a more cautious shopper, increasing discounts and reducing guidance

Target is closing the gaps for its business as customers become more cautious in their consumption due to rising inflation for food, gas and shelter.

The discount retailer – a few weeks away from seeing its stock fall 25% in the midst of a surprising loss of earnings due to a slowdown in consumer spending – said on Tuesday that it aims to cut inventory by offering discounts, canceling orders and looking closer on expenses. Target entered the second quarter with an inventory of 43%, which the company admitted several weeks ago when it reported that the profit in the first quarter was too high in relation to consumer demand.

Target’s actions are intended to “direct its inventory to the right size for the rest of the year and create additional flexibility to focus on serving guests in a rapidly changing environment,” the company said.

“We also expect inflation and higher costs to be sustained”

The company will also look at pushing up price increases in certain categories to help offset stubborn inflation in transport and logistics.

“We actually see a continued strong sales environment, the traffic and the top line continue to be strong,” Target CFO Michael Fiddelke told Yahoo Finance. “But over the last many weeks, what we have been able to continue to assess is the broader retail environment – and I think, as has been reported quite widely at this time – the stock level in retail is high. “And we also expect inflation and higher costs to be sustainable.”

Fiddelke was reluctant to say that the actions – which are far from the norm for Target in the last five years – meant that the retailer was preparing for a recession and emphasized that the cuts would be most acute in discretionary categories such as housing, which consumers limit. some expenses.

“It really is a shift in what is at the top of the shopping list for the consumer compared to what I would characterize as a slowdown,” Fiddelke added. “And so in some categories, it’s definitely a slowdown compared to what we expected, but overall traffic and the top line continue to be strong.”

Signs point to merchandise during the Black Friday sales event on Thanksgiving Day at Target in Chicago, Illinois, USA on November 23, 2017. REUTERS / Kamil Krzaczynski

In light of the actions, Target reduced its expectations for the operating margin for the second quarter. The company said it is now aiming for operating margins in the second quarter in a “range around” 2%. Previously, Target was looking for margins “in a broad area centered around the first quarter operating margin of 5.3%.

Target maintained expectations for full-year revenue growth at a low to mid-digit percentage.

Given the current economic background, Target’s drastic actions in stock could have far-reaching consequences for retail and investors in the sector.

Walmart may be forced to follow suit and liquidate its inventory more aggressively in the second quarter at the expense of margins. Walmart left the first quarter with its stock up 30% from the year before, which it acknowledged was too high when it reported earnings a few weeks ago.

The Target warning could also lead to further cuts in retailer earnings estimates as industry rebates rise, inflation remains high and consumers fall back. The entire sector has been under pressure since a disappointing retail reporting season in mid-May, and the news from Target suggests that we are at the beginning of a sharp decline in consumer spending that retailers did not expect.

Brian Sozzi is editor-in-chief and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.