Target of looming profit decline over inventory issues

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Target warns Tuesday that it had far too much inventory and would have to drop prices, cancel orders and cut its profit outlook to clear out the excess.

The retail giant’s plan to “right-size” its offerings comes as consumers are getting hammered by soaring food and fuel costs, leaving less room in their budgets for discretionary spending. It also highlights shoppers’ shifting preferences as they embark on the third summer of the pandemic. Even as the coronavirus is still infecting tens of thousands of people every day, many Americans are returning to their pre-covid lifestyles, spending more on experiences and services instead of electronics, housewares and other goods.

How retailers are faring in an environment of record inflation has taken on heightened significance. A drop-off in consumer spending could signal that higher costs are gnawing at the nation’s economic health. The Federal Reserve’s efforts to curb inflation through higher interest rates are also under scrutiny, as central bankers must find the delicate balance of cooling the economy without tipping the United States into a recession.

Consumers are shifting their spending from goods to services

Target set off alarms three weeks ago — its shares tumbled more than 25 percent — after reporting a 52 percent drop in first-quarter net profit. The Minneapolis-based company cited supply-chain pressures and rising expenses, factors that also hurt Walmart and helped spark a global market sell-off that erase more than 1,100 points from the Dow Jones industrial average.

Target now expects to sell fewer products in its home categories. It continues to see strong sales in high-frequency goods like groceries, household essentials and beauty products, significantly reflecting consumer trends away from the US shopping boom at the height of the pandemic. It also revised its second-quarter profit expectations from 5.3 percent to 2 percent, according to a Tuesday news release.

“While these decisions will result in additional costs in the second quarter, we’re confident this rapid response will pay off for our business and our shareholders over time, resulting in improved profitability in the second half of the year and beyond,” chief executive Brian Cornell said.

Other retailers, including Gap and Macy’s, are also trying to clear out merchandise that consumers have steered away from, or were left with orders that arrived too late or were placed too far in advance to capture dynamic fashion trends.

Lindsey Bell, Ally’s chief markets and money strategist, notes that while consumers are continuing to spend, they are shifting from goods to services. “This shift is happening at a much faster pace than some retailers anticipated.”

Unlike a typical recession, consumers tend to cut back stimulus, the low interest rates and federal of the coronavirus era fueled big-ticket purchases like computers and flat screens, home upgrades and appliances. But now hotels, airlines and restaurants are seeing a resurgence.

“Goods should become an increasing less important part of overall spending and consumption going forward,” said Kate Moore, head of thematic strategy for global allocation at BlackRock. “We are seeing consumers go back to their previous spending habits where services were much more important to their overall consumption basket.”

Target also said it is taking action to help offset unusually high transportation and fuel costs, and working with suppliers to shorten travel distances in its supply chain. It is also adding “incremental holding capacity” near US ports to make sure it can handle a future spike in inventory.

Durable goods prices have risen by 14 percent over the past year, while the cost of services has increased by 5.4 percent, according to the Bureau of Labor Statistics.

Target shares closed at $155.98, down 2.3 percent.

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