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Target Plans Short-Term Profit Margin Hit as it Right-Sizes Inventory for Future Growth

Target is taking multiple actions to right-size its inventory, including additional markdowns, removing excess inventory and cancelling orders, as it makes room for merchandise including groceries and back-to-school supplies. The retailer expects these efforts to temporarily reduce its margins to approximately 2% due to discounting but sees them as necessary to prepare the company for future growth.

Target also will add incremental holding capacity near U.S. ports to add flexibility and speed in the portions of the supply chain most affected by external volatility; take pricing action to address the impact of high transportation and fuel costs; and work with suppliers to shorten distances and lead times in the supply chain. The company also is planning to add five distribution centers over the next two years to support its supply chain.

“We thought it was prudent for us to be decisive, act quickly, get out in front of this, address and optimize our inventory in the second quarter — take those actions necessary to remove the excess inventory and set ourselves up to continue to be guest-relevant with our assortment,” said Brian Cornell, CEO of Target in an interview with CNBC.

Target also is revising its sales forecasts, future promotion plans and cost expectations by category. The company expects categories like food and beverage, household essentials and beauty to remain strong, while its outlook for discretionary categories like home is more conservative.

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The changes are expected to ramp up Target’s operating margin to 6% in the second half of 2022, which is higher than the average fall seasonal performance in the years leading up to the pandemic. Target also expects full-year revenue growth in the low- to mid-single-digit range and to maintain or gain market share through the remainder of 2022.

Target’s actions should position the retailer to succeed in the all-important holiday season by freeing up inventory space in advance. Dr. Thomas Goldsby, Professor and Chair in Logistics in the Supply Chain Management Department of the University of Tennessee, noted that supply will be available and the main challenge will be managing promotions.

“Retailers will be trying to maintain their topline volumes and prices, so [discounts and promotional activity] will come down to what a company’s competitors are doing and whether there will be an escalation of promotional activity,” said Goldsby in an interview with Retail TouchPoints. “But right now consumers are still assuming that shelves will always be stocked with products, and retailers will see how far they can ride that. Bottom line, they are recognizing that costs don’t seem to be retreating, so they will be cautious about promotions — but will go there if they’re forced to.”

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