Target Warns of Weaker Profit as it Faces Overstuffed Stores, Inflation-Weary Shoppers

Less than three weeks after reporting a lower-than-expected quarterly profit, Target said Tuesday it has further tempered its profit outlook for the year. Inventory rose 43% in the April quarter as demand for outdoor furniture, small appliances and some electronics declined faster than expected and supply-chain snarls delayed the arrival of many goods past the ideal selling window, Target previously said. The company is moving faster to unload excess inventory in the current quarter.

“We’ve had some additional time after earnings to really evaluate the overall operating environment,” said Target Chief Executive

Brian Cornell

in an interview. That includes watching consumer behavior as they face high rates of inflation, he said, and seeing many other retailers talk about high inventory levels during their earnings presentations. “We have to be decisive and get out in front of this to make sure this doesn’t linger through the back half of the year.”

Mr. Cornell said he wanted to share the new profit estimates ahead of Target’s annual shareholder meeting Wednesday.

Target shares opened more than 7% lower on Tuesday, but those declines moderated through the trading day. The company’s stock price was down 31% for the year as of Monday, compared with a roughly 14% decline in the S&P 500. Shares of other big retailers including

Amazon.com Inc.

and

Walmart Inc.

WMT -1.84%

also were trading lower after the news.

“Coming so soon after its downbeat quarterly results, today’s update from Target comes across as somewhat careless,” said

Neil Saunders,

managing director of GlobalData. The update could signal that demand for some categories, such as home goods—an area where Target sells a variety of products—has deteriorated further, said Mr. Saunders, “All that said, the actions Target is taking are correct.”

Target’s warnings also underscore the growing challenge of forecasting demand as spending shifts to entertainment, inflation squeezes shoppers, and supply-chain snarls ease. Order books for many retailers are developed nearly a year in advance, meaning that they are projecting sales for goods and fashion trends well before consumers typically would be ready to buy them.

Many retailers said they have too much inventory on hand when they reported earnings in recent weeks, including Walmart,

Macy’s Inc.

M 1.06%

and

Gap Inc.

GPS -0.65%

Some are discounting goods, as well as holding on to some items to sell at the seasonally appropriate moment, retail executives have said.

They pointed to rapidly changing shopper preferences, as well as unpredictable import shipping schedules, as some of the reasons for an oversupply.

Target’s profit warning “is a bad development for the retail industry generally,” said

Citi

retail analyst Paul Lejuez. It could also mean stiffer negotiations between Target and other retailers with suppliers, eating into some supplier profits, he said.

Dealing with the excess inventory as quickly as possible could benefit Target if it is able to restock its shelves with more in-demand inventory later in the year while competitors are still working through excess items, a Target spokeswoman said.

Target said it aims to cancel orders with suppliers when possible or use promotions to remove all excess inventory during the current quarter. Canceling will result in additional fines, while discounting reduces the profitability of each sale. Mr. Cornell wants the inventory cleared out to fully stock stores with products in high demand such as food, beauty products and back-to-school items, he said.

Target now expects its second-quarter operating margin rate will be in a range around 2%, down from its late-May estimate of around 5.3%. For the full year, the company expects to be slightly below earlier forecasts because of the moves it is making in the second quarter, said Mr. Cornell.

In May Target said it expected full-year operating margin to fall in a range around 6%. The company continues to expect full-year revenue growth in the low- to mid-single digit percent range.

Target’s lower profit estimates are the latest sign that many retailers are struggling to navigate a rapidly changing environment. Sales are growing at many retailers, but profits have suffered as costs rise amid inflation and consumers spend more of their disposable income on experiences such as travel, entertainment and dining out.

Walmart posted lower-than-expected profit when it reported earnings last month, in part because of labor costs that were higher than it anticipated and spending shifts. Walmart, the country’s largest retailer by revenue, also reported inventory was up around 33% in the most recent quarter. The rise reflected buying behavior, the higher costs of goods because of inflation and a sudden uptick in goods moving through U.S. ports after Walmart earlier bought products aggressively to meet demand.

At Walmart’s annual shareholder meeting last week, executives said around 20% of the elevated inventory consists of items the company wishes it didn’t have, but much of the rest is to restock shelves or sell later this year.

“It’s going to take this quarter and probably part of next, maybe a couple of quarters would be the best way to describe it, to get back to where we want to be,” said

John Furner,

head of Walmart U.S.

Walmart has found that shipping times have accelerated after facing slowdowns in the handling of its goods at ports last year, he said.

The rise of inventory is likely to lead to more discounts, something retailers had avoided during the product scarcity of the pandemic. While higher promotional levels can hurt retailers’ bottom lines, it could be a boon for shoppers facing rising prices for food, fuel as well as other goods and services.

Macy’s net sales jumped 13.6% in the spring quarter compared with a year before. But the company said markdowns to clear the excess inventory would weigh on profit margins going forward and warned of higher promotional levels throughout the industry as other retailers do the same. Macy’s Chief Executive

Jeff Gennette

said in an interview in late May that the shift away from casual clothes to more dressy attire was significant and happened faster than the company had anticipated.

Target is also adjusting sales forecasts, promotion plans and cost expectations by category. The retailer is planning for more demand in food and beverage and beauty, and reducing expectations for categories such as home, the company said Tuesday.

“We were chasing hard in 2021 to get more of the inventory that our guest was looking for,” said Mr. Cornell. “Unfortunately we ran into delays. Inventory arrived late. Now that it is here the demand signal has changed.”

—Suzanne Kapner contributed to this article.

Write to Sarah Nassauer at [email protected]

Less than three weeks after reporting a lower-than-expected quarterly profit, Target said Tuesday it has further tempered its profit outlook for the year. Inventory rose 43% in the April quarter as demand for outdoor furniture, small appliances and some electronics declined faster than expected and supply-chain snarls delayed the arrival of many goods past the ideal selling window, Target previously said. The company is moving faster to unload excess inventory in the current quarter.

“We’ve had some additional time after earnings to really evaluate the overall operating environment,” said Target Chief Executive

Brian Cornell

in an interview. That includes watching consumer behavior as they face high rates of inflation, he said, and seeing many other retailers talk about high inventory levels during their earnings presentations. “We have to be decisive and get out in front of this to make sure this doesn’t linger through the back half of the year.”

Mr. Cornell said he wanted to share the new profit estimates ahead of Target’s annual shareholder meeting Wednesday.

Target shares opened more than 7% lower on Tuesday, but those declines moderated through the trading day. The company’s stock price was down 31% for the year as of Monday, compared with a roughly 14% decline in the S&P 500. Shares of other big retailers including

Amazon.com Inc.

and

Walmart Inc.

WMT -1.84%

also were trading lower after the news.

“Coming so soon after its downbeat quarterly results, today’s update from Target comes across as somewhat careless,” said

Neil Saunders,

managing director of GlobalData. The update could signal that demand for some categories, such as home goods—an area where Target sells a variety of products—has deteriorated further, said Mr. Saunders, “All that said, the actions Target is taking are correct.”

Target’s warnings also underscore the growing challenge of forecasting demand as spending shifts to entertainment, inflation squeezes shoppers, and supply-chain snarls ease. Order books for many retailers are developed nearly a year in advance, meaning that they are projecting sales for goods and fashion trends well before consumers typically would be ready to buy them.

Many retailers said they have too much inventory on hand when they reported earnings in recent weeks, including Walmart,

Macy’s Inc.

M 1.06%

and

Gap Inc.

GPS -0.65%

Some are discounting goods, as well as holding on to some items to sell at the seasonally appropriate moment, retail executives have said.

They pointed to rapidly changing shopper preferences, as well as unpredictable import shipping schedules, as some of the reasons for an oversupply.

Target’s profit warning “is a bad development for the retail industry generally,” said

Citi

retail analyst Paul Lejuez. It could also mean stiffer negotiations between Target and other retailers with suppliers, eating into some supplier profits, he said.

Dealing with the excess inventory as quickly as possible could benefit Target if it is able to restock its shelves with more in-demand inventory later in the year while competitors are still working through excess items, a Target spokeswoman said.

Target said it aims to cancel orders with suppliers when possible or use promotions to remove all excess inventory during the current quarter. Canceling will result in additional fines, while discounting reduces the profitability of each sale. Mr. Cornell wants the inventory cleared out to fully stock stores with products in high demand such as food, beauty products and back-to-school items, he said.

Target now expects its second-quarter operating margin rate will be in a range around 2%, down from its late-May estimate of around 5.3%. For the full year, the company expects to be slightly below earlier forecasts because of the moves it is making in the second quarter, said Mr. Cornell.

In May Target said it expected full-year operating margin to fall in a range around 6%. The company continues to expect full-year revenue growth in the low- to mid-single digit percent range.

Target’s lower profit estimates are the latest sign that many retailers are struggling to navigate a rapidly changing environment. Sales are growing at many retailers, but profits have suffered as costs rise amid inflation and consumers spend more of their disposable income on experiences such as travel, entertainment and dining out.

Walmart posted lower-than-expected profit when it reported earnings last month, in part because of labor costs that were higher than it anticipated and spending shifts. Walmart, the country’s largest retailer by revenue, also reported inventory was up around 33% in the most recent quarter. The rise reflected buying behavior, the higher costs of goods because of inflation and a sudden uptick in goods moving through U.S. ports after Walmart earlier bought products aggressively to meet demand.

At Walmart’s annual shareholder meeting last week, executives said around 20% of the elevated inventory consists of items the company wishes it didn’t have, but much of the rest is to restock shelves or sell later this year.

“It’s going to take this quarter and probably part of next, maybe a couple of quarters would be the best way to describe it, to get back to where we want to be,” said

John Furner,

head of Walmart U.S.

Walmart has found that shipping times have accelerated after facing slowdowns in the handling of its goods at ports last year, he said.

The rise of inventory is likely to lead to more discounts, something retailers had avoided during the product scarcity of the pandemic. While higher promotional levels can hurt retailers’ bottom lines, it could be a boon for shoppers facing rising prices for food, fuel as well as other goods and services.

Macy’s net sales jumped 13.6% in the spring quarter compared with a year before. But the company said markdowns to clear the excess inventory would weigh on profit margins going forward and warned of higher promotional levels throughout the industry as other retailers do the same. Macy’s Chief Executive

Jeff Gennette

said in an interview in late May that the shift away from casual clothes to more dressy attire was significant and happened faster than the company had anticipated.

Target is also adjusting sales forecasts, promotion plans and cost expectations by category. The retailer is planning for more demand in food and beverage and beauty, and reducing expectations for categories such as home, the company said Tuesday.

“We were chasing hard in 2021 to get more of the inventory that our guest was looking for,” said Mr. Cornell. “Unfortunately we ran into delays. Inventory arrived late. Now that it is here the demand signal has changed.”

—Suzanne Kapner contributed to this article.

Write to Sarah Nassauer at [email protected]