Target warns of looming profit decline over inventory issues

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Target warned Tuesday that it had far too much inventory and would have to drop prices, cancel orders and cut its profit outlook to clear out the excess.

The retail giant’s plan to “right-size” its offerings comes as consumers are getting hammered by soaring food and fuel costs, leaving less room in household budgets for discretionary spending. It also highlights the shifting preferences of consumers now entering the third summer of the pandemic. Even as the virus is still infecting tens of thousands of people every day, many Americans are returning to their pre-covid lifestyles, spending more on experiences and services instead of electronics, housewares and other goods.

How retailers are fairing in an environment of record inflation has taken on heightened significance. A drop-off in consumer spending could signal that higher costs are gnawing away at the economic health of the country. The Federal Reserve’s efforts to curb inflation through higher interest rates also are under scrutiny, as central bankers must find the delicate balance of cooling the economy without tipping the US into a recession.

Consumers are shifting their spending from goods to services

Target’s announcement comes as economists and political leaders scramble for real-time economic bellwethers.

Three weeks ago, the retailer’s shares slumped more than 25 percent after reporting that net profit shrank 52 percent in the first quarter. The Minneapolis-based chain cited supply chain pressures and rising expenses, factors that also hurt Walmart and helped spark a broader market sell-off that erased more than 1,100 points off the Dow Jones industrial average.

“While these decisions will result in additional costs in the second quarter, we’re confident this rapid response will pay off for our business and our shareholders over time,” chief executive Brian Cornell said, “resulting in improved profitability in the second half of the year and beyond.”

Target said Tuesday it is taking action to help offset unusually high transportation and fuel costs, and working with suppliers to shorten travel distances in its supply chain. It also is adding “incremental holding capacity” near US ports to make sure it can handle a future spike in inventory.

While Target expects to sell fewer products in its home categories, it continues to see strong sales in high-frequency goods like groceries, household essentials and beauty products, largely reflecting consumer trends away from the shopping boom that gripped the country at the height of the pandemic.

Lindsey Bell, Ally’s chief markets and money strategist said that consumer spending remains healthy despite lowered confidence. “They continue to spend, but they are shifting their spend from goods to services,” she said. “This shift is happening at a much faster pace than some retailers anticipated.”

At the outset of the pandemic, Americans forced to stay at home focused on buying goods to occupy themselves and better spend their time inside. While in a typical recession consumers tend to cut back, the low interest rates and federal stimulus of the covid-era fueled big-ticket purchases like computers and flat screens, home upgrades and appliances. But now hotels, airlines and restaurants are seeing a resurgence.

“Goods should become an increasingly less important part of overall spending and consumption going forward,” said Kate Moore, head of thematic strategy for global allocation at BlackRock. “We are seeing consumers go back to their previous spending habits where services were much more important to their overall consumption basket,” she said, adding that evidence from companies and households still points to robust spending.

The shift back to purchases on services could ease some of the inflationary pressure that the Fed is working to temper, as easing demand for some backlogged goods allows crunched supply chains to catch up.

The prices of durable goods have risen by 14 percent over the past year, while the cost of services has increased 5.4 percent, according to the Bureau of Labor Statistics.

Shares of Target were down almost 4 percent in afternoon trading.

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