Target (TGT -0.54%) continues to face inventory problems that have led it to engage in significant markdowns, which in turn have pressured margins and sent its stock tumbling 37% in 2022. The retailer is still struggling to keep its shelves stocked with items consumers are interested in buying.
Management maintains the worst is behind it and that it's actually in a better position than it was previously. But it's going to need to see that Christmas gave it a big boost in the fourth quarter if it wants to show improvement from recent earnings reports -- and it's looking like this may not materialize.
So it's a good time for investors to consider whether they should move in now or wait for even better opportunities.
Image source: Getty Images.
Performance is still under pressure
One of the main reasons Target is experiencing inventory issues was the explosive growth in online shopping during the onset of the pandemic. As more and more consumers turned to e-commerce for their shopping needs, Target saw a surge in online sales. While this was great news for the company's bottom line, it also put a strain on its supply chain and fulfillment operations.
Now inflation is running at 40-year highs and the Federal Reserve is pushing interest rates to 15-year highs. Consumers have become more budget-conscious and are looking for deals and discounts, leading to a shift in demand toward lower-priced items. Operating income was cut in half this past quarter to $1 billion for operating margins of 3.9%, compared to 7.9% a year ago.
Coupled with not correctly estimating demand for various product lines and styles, Target was left with a massive buildup of unwanted inventory. The company has reported lower-than-expected sales and earnings in recent quarters as well as increased costs associated with efforts to improve its supply chain and fulfillment operations.
Climbing a wall of worry
Management says it has gotten the problem under control by dealing with it in one swift but harsh stroke. It chose to severely mark down merchandise and clear out the old goods to make way for the new.
While it had $17.1 billion in inventory on its balance sheet at the end of the third quarter, up 50% from pre-pandemic levels, it says two-thirds of that increase is due to the sales growth it experienced during that time frame. The remaining third is because it got merchandise delivered earlier than it used to in the past.
In part that's because Target ordered earlier so as not to have a repeat of last year when goods were arriving late, but then the global supply chain woes that were affecting all of retail suddenly eased up and the retailer got its deliveries even earlier than expected.
Although Target won't have the empty shelf problem, it's not certain it's going to have the traffic it needs to move the products.
Image source: Target.
A lump of coal in the stocking
Data from geolocation data analytics firm Placer.ai indicates that store traffic is below what it was last year. Using the geolocation of mobile phones to gather data about consumer retail visits, it found that foot traffic at Target on Super Saturday -- the Saturday before Christmas, a potentially massive shopping day -- was down 1.5% from the year-ago figure, and off 8.5% from 2019.
While that was better than Walmart (down 14.2% from three years ago) and Costco Wholesale (off 11.7%), for a retailer struggling to regain its footing like Target is, it's not promising.
Target has implemented a number of strategies to address these issues, including expanding its partnerships with third-party fulfillment providers and increasing its investment in technology to improve its supply chain and e-commerce operations. The company has also focused on building up its private-label brands, which can offer higher margins and help to mitigate the impact of markdown pressure.
Overall, Target's recent inventory problems and markdown pressure are in good part a result of the unprecedented impact of the pandemic on consumer spending and the retail industry as a whole. It has also responded forcefully to correct the issues that were of its own making.
Better times ahead...some day
Despite these challenges, Target remains a strong and popular retailer with a loyal customer base. The company's strong financial position and commitment to innovation should help it to weather the current storm and emerge even stronger in the long run.
Yet retail may come under more pressure in the year ahead if the economy enters a recession, as many expect, suggesting investors might be better off biding their time before buying in.
