More woes for Target another shock for retailers

Even though the news was a shock, this time round there was no 29% plunge in the value of shares of giant US retailer Target as we saw in May with a weak first quarter report.

Target shares ended down a quarter on the day of the release of the report and its surprises about weak sales growth, too much stock and worries about its performance in the rest of the year.

Tuesday Target shares lost a more sedate 2.3% on the day after being down 4% in early trading.

It was the second time in three weeks that it had warned investors that it is overstocked – this time it said its profits would take a short-term hit as it cuts prices to get rid off unsold and over ordered stocks. Target said it had already cleared a lot of outdoor items in a massive sale over the Memorial Day long weekend at the end of May and similar events will follow.

Shares in Walmart, the biggest retailer, dipped 1.2%. They had been down around 3% early on but recovered slowly – it remains on suspicion after also revealed three weeks ago that it had too much stock and that sales growth had slowed, as had earnings.

But unlike those days in May, Target’s surprise warning didn’t rock the wider market with the Dow, S&P 500 and Nasdaq all ending just under 1% higher after opening in the red in the wake of the Target update.

Target said it had nearly $US15.1 billion of inventory as of April 30, the end of the fiscal first quarter. That’s about 43% higher than in April first quarter of 2021.

“We thought it was prudent for us to be decisive, act quickly, get out in front of this, address and optimise 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,” CEO Brian Cornell told CNBC in an interview.

Target anticipates its operating margin rate for the second quarter will be around 2%. That’s lower than the outlook it gave less than three weeks ago, when it anticipated its operating margin rate would be roughly around its first-quarter figure of 5.3%.

Target sees a better second half with profit margins around 6% – which it says will be better than its average performance for the fall season pre-e pandemic.

The company said it still expects revenue growth to be in the low to mid-single digits for the full year and to maintain or gain market share in 2022.

Target though is not alone – Walmart is in a similar position and has seen drop in its share price since it revealed weak quarterly figures three weeks ago – smaller gains like Gap, Abercrombie and Fitch and American Eagle Outfitters have revealed they are in similar situation with weak sales growth and high inventories.

But not all US retailers are struggling – old fashioned department store chains like Macy’s and Nordstrom have high stock levels, but are maintaining sales and earnings growth. So are cheap as chips chains like Dollar Tree and Dollar General.

Macy’s shares rose 1.2% on Tuesday while Nordstrom shares were up 2.48%, so the gloom about US retail isn’t universal.

But all it will take for the black cloud to settle across the entire sector is a warning from either of these two department store groups.