Inventory markdowns weighed on Target in Q2 2022 as its net earnings dropped to $183 million, down almost 90% from its Q2 2021 performance. Walmart reported operating income of $6.8 billion for Q2 2023, down 6.8% from Q2 2022. However, comparable sales growth was positive (if modest) at both retailers, with Target growing 2.6% and Walmart up 6.5%.
Target expects to make a rebound in the second half of 2022 despite the recent challenges it’s faced. Reduced performance was expected as the retailer worked to right-size its inventory, including through markdowns, removing excess inventory and cancelling orders. Target expects its operating margin rate to reach approximately 6% in the second half of the year, compared to the operating margin rate of 1.2% in Q2 — significantly lower than the expected 2%.
“We are not happy with our current profit performance,” said Michael Fiddelke, EVP and CFO at Target on an earnings call. “And our team is laser-focused on helping to quickly restore our business performance to where it should be operating over time. That said, nothing that is happening today has changed our long-run expectations regarding the ability of our business to grow, nor has it changed our view of the long run potential of our business to deliver an operating margin rate of 8% or higher over time.”
Target further right-sized its “inventory exposure in discretionary categories” by canceling more than $1.5 billion in orders during Q2. Inventory levels remained slightly elevated, at $15.3 billion in Q2 compared with $15.1 billion at the end of Q1, but Fiddelke noted that this number was impacted by inflation and that Target was receiving inventory to prepare for the holiday season.
Despite the reduced earnings, sales remained strong. Total revenue rose to $26 billion from $25.2 billion a year ago, driven partially by higher prices due to inflation. Food and beverage was the strongest category with low-single-digit comparable sales growth, though beauty recorded stronger mid-single-digit sales growth due to the continued rollout of Ulta Beauty store-in-stores.
Grocery Sales Surge at Walmart
Walmart’s Q2 performance beat expectations with overall revenue of $152.9 billion, up 8.4% year-over-year. Walmart CEO Doug McMillon noted that the company made “good progress” in managing its supply chain costs “and that work is ongoing” during an earnings call.
“We’re pleased to see more customers choosing Walmart during this inflationary period, and we’re working hard to support them as they prioritize their spendings,” said McMillon in a statement. “The actions we’ve taken to improve inventory levels in the U.S., along with a heavier mix of sales in grocery, put pressure on profit margin for Q2 and our outlook for the year.”
Grocery market share continued to rise during the quarter, led by mid-teens percentage growth in food, strong private brand sales and higher average ticket sizes. This growth was expected — Walmart previously warned that more sales would come from low-margin grocery items as shoppers cut back on discretionary spending.
Sam’s Club also saw a solid quarter, with net sales of $21.9 billion, up 17.5% year-over-year. Comparable sales increased 17.5% overall, though that fell to 9.5% without fuel. Ecommerce sales jumped 25% during the quarter on the back of strong curbside pickup and delivery performance. The number of transactions was up 9.8%, which offset a 0.2% average ticket decline.