Target to return soon to strong profits after tackling inventory woes

© Reuters. A Target logo is What are the formal foreign exchange trading platforms in the United Statesseen on shopping carts at a Target store in Manhattan, New York City, U.S., November 22, 2021. REUTERS/Andrew Kelly/Files

(This June 7 story corrects last name of Placer.ai executive to Chernofsky from Chernofksy in final paragraph)

By Siddharth Cavale and Aishwarya Venugopal

(Reuters) - Target Corp (NYSE:TGT) is expected to shed by August the excess inventory that is hurting its profitability and be poised to show strong profits during the key back-to-school and holiday sales seasons, analysts said on Tuesday.

The retailer said it will work quickly to cull its unsold stock, which analysts believe is largely discretionary items like TVs and appliances that consumers have avoided as inflation spiked in recent months.

"Target is doing the right thing in acting aggressively to clear out excess inventory by taking the margin hit now. This will allow them to be better positioned ahead of the two most important retail selling seasons, back-to-school and holiday," said Ken Perkins, founder of research firm Retail Metrics.

"This should be a short-term problem."

The company on Tuesday cut its second-quarter operating profit margin forecast by more than half, to 2% from 5.3%, but expects to hit 6% in the second half of the year.

The inventory surge, up 43% in dollar value year over year at the end of the first quarter, hurt profitability.

But Target CEO Brian Cornell said the retailer was working to shed surplus stock by the end of the second quarter on July 31 and will cancel some orders, leading to "additional costs in the second quarter."

CFRA analyst Arun Sundaram said he believes the company will clear out its excess inventory in that time.

Going forward, the retailer will dedicate more shelf space to essentials like food and beauty items, where consumer spending is rising.

Target maintained its sales forecast for the year, and visits to Target stores have been rising since the start of the year, with the highest gains seen in April.

Even as inflation soared, traffic rose 10% that month compared to last year or 14.3% compared to pre-pandemic levels. In May, the trend slowed but traffic was still much higher than last year.

The strength in foot traffic helped Target shares pare losses on Tuesday, and they ended the day down 2.4%.

In the past month, full-year profit warnings from major U.S. retailers including Walmart (NYSE:WMT) and Target have stoked fears of recession.

Analysts, however, say the companies are well positioned, as their broad range of products - from eggs to kitchen appliances - and low prices attract shoppers.

"Target’s visit metrics have remained strong even amid significant economic headwinds, a testament to the company’s powerful draw, wide product offering and focus on value for its key audience," said Ethan Chernofsky, vice president of marketing at Placer.ai.

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