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Target stocks are down 7% as you expect crushed benefits from the compulsory arrangement should get rid of junk stocks

Target stocks are down 7% as you expect crushed benefits from the compulsory arrangement should get rid of junk stocks

  • Target said it will make short-term profits as it cancels orders and detects unwanted merchandise.

  • CEO Brian Cornell said the major retailer wants to make room for merchandise including groceries and back-to-school supplies.

  • Target expects the operating margin for the second quarter to be around 2%. This is below expectations less than three weeks ago.

  • The company also reiterated its forecast for sales growth and said that margins will look better in the second half of the year.

Target warned investors Tuesday that its earnings will take a short-term hit, as it identifies unwanted items, cancels orders, and takes aggressive steps to get rid of extra inventory.

The retailer lowered its profit margin forecast for the second quarter of the fiscal year to account for a wave of merchandise ending up at a considerable discount or on the clearance shelf. Shares were down about 7% in pre-market trading after the news.

“We thought it was prudent for us to be decisive, to act quickly, to move forward with this, to approach and improve our inventory in the second quarter — take action to remove excess inventory and prepare ourselves to continue to be a guest,” CEO Brian Cornell said in an interview with Network CNN is bad.

By taking quick action, Cornell said the goal could stave off more pain and make room for merchandise customers want, such as groceries, toiletries, household essentials, and seasonal items like back-to-school supplies. He said the company's stores and website were seeing strong traffic and a "very resilient customer," but that he was no longer shopping in popular Covid pandemic categories.

"We want to make sure that we continue to rely on those categories that are relevant today," he said.

Target expects the operating margin for the second quarter to be around 2%. That's lower than my forecast less than three weeks ago when I forecast an average first-quarter operating margin rate of 5.3%.

In the second half of the year, Target expects profit margins to be around 6% -- better than its average performance for the fall season in the years leading up to the pandemic. The company said it still expects revenue growth to be low to average for the full year and to maintain or gain market share in 2022.

Retailers from Walmart to Gap are facing an inventory glut as bloated shoppers skip categories that were popular during the first two years of the pandemic. Gap said, for example, that customers want party dresses and office wear rather than the company's own sweaters and sportswear. Walmart said some families are making fewer discretionary purchases as gas and groceries prices rise. Abercrombie & Fitch and American Eagle Outfitters both posted a sharp jump in inventory levels, up 46% and 45%, respectively, from a year ago from a combination of unsold items and supply chain delays.

The extreme shift in consumers' spending habits comes as retailers begin to return to healthy inventory levels. This means that some have many of the track pants, pillows, and pajamas that consumers are looking for in swimwear and travel bags. Additionally, some shoppers are pulling back on spending due to inflation or allocating more of their dollars to experiences such as dining out and travel.

Cornell said Target decided to roll out its new inventory plan after learning that its retail competitors had similar problems. He said the company also wanted to precede key sales seasons, such as back to school and the holidays when vintage merchandise can spoil stores and drive customers away.

Target said it had about $15.1 billion in inventories as of April 30, the end of its first fiscal quarter. This is about 43% higher than the same period last year.

Target shocked Wall Street on May 18 with a significant profit loss for its fiscal first quarter, impacted by fuel and freight costs, higher levels of discounting, and rotations away from items such as televisions, kitchen appliances, and bicycles. Its shares fell about 25%, marking the company's worst day on Wall Street in 35 years.

Walmart missed the earnings forecast, too. Its inventory levels are up about 33% compared to last year. About 20% of this merchandise the retailer doesn't want to own, John Warner, CEO of Walmart US, said at an investor event on Friday. Roughly a third is an additional stock to help the retailer restock key items. He said it would be "a few quarters to get back to where we want to be".

The company's shares also fell after the target was announced on Tuesday. Walmart shares are down about 3% in pre-market trading.

Cornell said Target is sorting through its inventory, in some cases deciding to bundle merchandise to sell at full price in the future and in other cases to promote or come up with ways to sell it now.

For example, he said, Target had a major sales event over Memorial Day weekend to remove bulky outdoor items like patio furniture from his back rooms. It also has extra space near US ports to carry cargo, so it has room to carry cargo - some arriving too early or too late.

CNBC's Lauren Thomas contributed to this report.