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Target stock falls as the retailer announces plan to reduce inventory

Yahoo Finance Live anchors discuss Target’s plan to slash prices in an effort to move more of its inventory.

Video Transcript

BRIAN SOZZI: Now here are three things you need to know right now. Speaking of things going down, excess inventory is a major problem at retailers right now as consumers curtail their spending with inflation staying high. And that is forcing Target to take some very drastic actions.

Target CFO, Michael Fiddelke tells Yahoo Finance they plan to cancel orders, markdown inventory, and take a harder look at expenses as they prepare for a new consumer reality. All this will come at a price to Target second quarter profits the company disclosed this morning.

And, wow. I saw this release, guys. And my first thought was this is Target preparing for a recession. Now, Fiddelke, when I talked to him, he pushed back on that notion, really emphasizing that they're seeing more of a consumer shift from consumers, perhaps, spending more on food and daily essentials in this inflationary environment and less on home goods.

But still, Target just reported at the end of March. And so, this is, I would say, an unprecedented release from Target, at least for the close to 13 years I've been covering the company. I know they did not make this decision very lightly.

JULIE HYMAN: Yeah. I mean, what's interesting to me too is how, to the point of not taking this decision lightly, that they're taking really decisive action here. They're talking about the margins being smaller here, although then expanding closer to operating margins. Expanding closer to 6% for the full year.

But it seems like it's interesting to me how negative the reaction is in the market. Because here is Target coming out and saying, here's the situation on the ground, here's the action that we're taking to deal with it and to right size our inventory and the market rather than saying, OK, you're trying to stop the problem here, stop the bleeding, for lack of a better word. They're not saying that.

- Well, it's this deep discounting on inventory, of course. And we had kind of heard this during the last earnings call as well where they very much talked about the fact that they had seen consumers in their core merchandise categories, apparel, home, and hard lines. They saw rapid slowdown in year-over-year sales trends beginning in March, and that's when they started to annualize last year's impact, especially up against the stimulus payments.

But they didn't expect that type of downturn, that type of slippage to the extent that it was seen. And so, we could really be heading towards, within retail for Target and Walmart it seems right now too, some of this heavy discounting, a Christmas in July type sales event, if you will. And it's a bigger question of how much this is going to compress some of those margins as well.

BRIAN SOZZI: Well, if you need fake plants, now's the time to do it.

JULIE HYMAN: Well, that's what I was going to ask.

BRIAN SOZZI: Yes. Because this is going to cause ripple effects throughout the retail sector. No retailer I have seen is out that have done this yet. But if you're a Walmart, if you're a Wayfair-- and I talk more about this on a piece on Yahoo Finance this morning, you are concerned because now you're going to probably walk into a Target store, see 50% to 60% off home furnishings, and now you are forced to mark down your own items. Then you see Wall Street bringing down estimates and you can see the stocks continue to sell off.

JULIE HYMAN: OK. So there's the stock's perspective and then there's the shoppers perspective, Brian Sozzi. And so, I want to know as a shopper, where am I going to get some deals? At long last, am I going to be able to get deals on home furnishings at Target?

BRIAN SOZZI: Towels, fake plants, furniture, all that stuff will be on sale because they over-ordered inventory, they concede that. But still, do you need those deals? In an environment where you're seeing your food bill going up through the roof, even at the likes of Target. And this is something that got lost when in the press release from Target this morning, they are increasing prices. Not, I would say, across the board, but I think Target is going to become more expensive, Walmart is going to become more expensive. And, as a result, perhaps you don't want to go buy off that fake plant.

- Well, here are the categories here because they were particularly bulky in categories. In their inventory, they mentioned kitchen appliances, TVs, outdoor furniture. Look for discounts, deals in those particular departments. I'd already seen ads popping up here for one of their competitors in Walmart slashing the prices of some of those consumer electronics as well.

BRIAN SOZZI: I'll leave on this, I don't want to sit here and just totally dump on Target. Let's keep in mind this is one of the best run retailers over the past six or seven years under CEO, Brian Cornell. This is the factor of shifts happening in the economy in real time because of the pandemic. And retailers now have to adjust.

Now as an investor, now they have looking to clean out this inventory. This is a company, this is stock you, perhaps, put back on your shopping list ahead of the holiday shopping season, provided we are not in some form recession or sharp slowdown.

JULIE HYMAN: Right. Well, that's kind of the point I was making, that they're taking this decisive action now as they're seeing these events on the ground. By the way, if appliances are turning, that's really a big deal, right? Because we have seen not just appliance numbers go up, prices go up, but they've been hard to get. So if we see that loosening of the supply chain for appliances as well, that represents a big, big change from what we've seen over the past two years.

- Yeah. Absolutely.