Target is one of America’s largest retailers — and while the brand is a name consumers know and love, investors have a different perspective lately. The big-box retailer is facing significant inventory issues. These are so troublesome that Target altered its guidance weeks after issuing it.
As an investor, here’s what you need to know about Target now and moving forward.
Target Is Sitting on More Inventory Than Usual
Operating margin compression was the first sign that Target (NASDAQ:TGT) had problems. Looking under the hood the problems include:
- Additional markdowns
- The removal of excess inventory
- Canceled orders
- Excess merchandise held at shipping ports
Companies like Target generally showcase an inventory spike before Christmas — not in the spring. That has investors justifiably concerned. The retail giant is sitting on more than $15 billion in unsold products, and as inventory turnover dramatically slows, it will need to adjust its prices. For consumers, that means great deals, but for Target it translates to worsening margins.
In short, Target is sitting on too much in-store inventory heading into a perfect economic storm. The retailer may have purchased products too aggressively, and if inflation remains high, there may not be enough demand to push discounted merchandise. If it moves marked-down products, the company can expect worsening sales and profits. Either way, the near-term outlook isn’t great for investors.
Buying Behavior Has Changed
At the beginning of 2022, the economy appeared to be in reasonably good shape. Consumption was still high but soon demand fell. As the possibility of a recession became more apparent and inflation rates hit record highs, consumers started to feel the pinch. Savings dropped, credit card balances rose and personal loans at companies like SoFi soared. The situation for retailers went from good to bad in a hurry.
Having forecast and planned for higher demand, companies like Target, Walmart, and Best Buy are now experiencing inventory bloat issues, hurting their profit margins — but for how long?
When inventory levels and sales are misaligned, which is the case with Target, it can have a lasting ripple effect. Because Target is moving into the second half of fiscal 2022 at a significant disadvantage, the company may experience problems into 2023. How the company handles rising concerns in the coming months will be crucial for investors.
Target Is Anticipating Lower Than Expected Profit Margins
In its most recent quarter, Target reported an anticipated profit margin of 5.3%, which fell short of investor expectations. From that point, the company saw its shares plummet the most since 1987. Target followed up less than a month later, anticipating a profit margin closer to 2%. Share prices were chopped by over a third in just 1 month.
Although Target still has some major shopping events ahead, including back-to-school shopping, Black Friday, and the Christmas season, spending habits will likely be materially affected this year. More money will be spent on essentials as the prices of food and fuel increase, leaving less money for discretionary purchases.
Speaking of the holidays, retailers like Target are fast approaching the deadline for ordering their holiday season inventory. It’s a challenging balancing act for management with many unknown variables. If they order too much, their inventory issues will be worse, but if they order too little, they will miss out on a critical period of high demand to increase revenue.
What Does This Mean Long-Term?
For long-term investors, Target shares are not off-limits. However, now is not the time to buy shares.
At the beginning of the pandemic, Target faced supply chain issues; but the challenges that Target faces today are very different. Now demand, not supply is the primary concern. Undoubtedly, the retailer’s inventory issues will weigh on the company’s near-term results and finances.
Even though shares of Target have plunged recently, the stock could well face even more pressure this year. Target’s next quarter results likely won’t be strong. When combined with inflation and reduced consumer spending, inventory pressures may not be alleviated for some time, sparking even lower prices on the horizon.
So, Should You Buy Shares of TGT?
If you’ve been watching Target, you may be tempted to buy in at the current price, but prudence would suggest it is best to wait out the storm for at least the first glimmers of sunlight on the horizon.
The odds are there will be an even lower entry point opportunity later on in the year. That is the time to reassess whether Target is worth the investment.