Target warns of increased margin pressure as inventory weight increases

June 7 (Reuters) – Target Corp. (TGT.N) On Tuesday, it lowered its quarterly profit margin forecast released just weeks ago, and said it would have to offer deeper discounts to clear inventory as decades of high inflation weighs on demand.

The surprise revision of expectations sent Target shares down nearly 7% in early trade and weighed on the retail sector and broader markets.

The retailer said it will lower prices in the second quarter, cancel orders with suppliers, boost parts of the supply chain and prioritize categories such as food and household essentials.

Rising inflation is forcing consumers to change their shopping habits, surprising many retailers and forcing them to offer more discounts.

Target, together with Wal-Mart (WMT.N), had reported a sharper-than-expected drop in quarterly earnings in May, sending shock waves through the retail industry. Read more

At the time, Target said its inventory was up 43 percent, compared to the previous year, as demand for discretionary high-margin items like kitchen appliances and televisions waned.

Jessica, analyst Jane Haley & Associates, Jessica Ramirez said.

Target’s strategy of keeping most of its products affordable compared to its competitors has proven costly, with the company now saying it will raise prices on some items to offset unusually high transportation and fuel costs.

The company now expects operating margin for the second quarter to be around 2%, compared to its previous estimate of 5.3%. It also expects margins to be around 6% for the second half of the year.

However, Target has maintained its sales targets for the year, leading some Wall Street analysts to say the company’s tough measures may help it appear on top later in the year.

“While this is a sore period for Target, taking their medication (again) in Q1 and Q2 set up for a better second halve with cleaner stocks… (and) set up for a better second half for the stock as well,” said Michael Baker, analyst at D.A. Davidson.

Additional reporting by Aishwarya Venugopal, Susan Mathew and Uday Sampath in Bengaluru; Editing by Anil de Silva

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