Target’s planned markdowns lead to 90% drop in profits but longer-term growth.
Target announced on Wednesday that quarterly profits had declined 90% from last year.
The company marked down slow-moving inventory to make room for holiday merchandise, including kitchen appliances, bicycles, outdoor furniture, and more. It is also looking to prioritize products with a higher turnover rate, such as food and household items, according to The Daily Wire.
Store sales still increased 2.6% in the past quarter even with revenue of $183 million, a significant decrease from this time last year at $1.8 billion.
Why it’s important
The news is significant because it reveals that what seems like bad news for a company can actually be good news. Target warned investors in June that profits would take a short-term hit as it cleared unwanted items. It fully expects to rebound in the next quarter, with its operating margin increasing from 1.2% to 6% for the second half of 2022.
“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,” CEO Brian Cornell told CNBC.
“If we hadn’t dealt with our excess inventory head-on, we could have avoided some short-term pain on the profit line, but that would have hampered our longer-term potentia,” says Target CFO Michael Fiddelke.
Backing up a bit
The drop in sales also reflects mixed earnings from the majority of retail stores, which are still struggling with inflation and supply-chain issues, according to The Daily Wire.
Some retail chains have performed better than Target, which focuses on home goods and clothing. The Home Depot reported a 6.5% profit increase from the second quarter of last year. Walmart fared better than Target thanks to food sales, with even wealthier families seeking out Walmart for discount food prices according to CNBC. Only 20% of Target’s sales are food, although the company reported that food and beverage was its strongest category in the past quarter.