Target warns on margins as excess inventory weighs

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The surprise forecast revision sent shares of the retailer down nearly 10% in premarket trading and weighed on the retail sector and broader markets.

The retailer said it would mark down prices in the second quarter, cancel orders with suppliers, speed up parts of its supply chain and prioritize categories such as food and household essentials.

Soaring inflation and higher gas prices are forcing consumers to change their shopping habits, catching many retailers off guard and forcing them to offer more discounts.

Target (NYSE:TGT), along with Walmart (NYSE:WMT), had reported a much steeper-than-expected drop in quarterly profit in May, sending shockwaves through the retail industry.

At the time, Target said its inventory rose 43%, compared with a year earlier, as demand for high-margin discretionary items such as TVs and apparel waned.

“Now we get more indications that it’s a continued pressure, not just a one-off quarter thing,” said Andrea Cicione, head of strategy at TS Lombard.

Target’s strategy to keep a big portion of its products affordable compared with its rivals is also proving to be costly, with the company now saying it would raise prices on some items to offset the unusually high transportation and fuel costs.

“While these decisions will result in additional costs in the second quarter … (it will result) in improved profitability in the second half of the year and beyond,” Target Chief Executive Officer Brian Cornell said.

The company now expects second-quarter operating margin to be about 2%, compared with its prior estimate of 5.3%. It also expects margins to be around 6% for the second half of the year, while maintaining its sales goals for the year.