Target CEO Brian Cornell, warned that the retailer was sharply revising down its guidance on profits and sales and said it would be canceling orders as consumers reined in their discretionary spending. Target’s sales and earnings in the second quarter fell short of analyst estimates, and the retailer warned that it was rightsizing inventory in the face of flagging demand and refocusing around its best-selling categories. Target said its fall receipts on discretionary categories has been reduced by $1.5 billion.
In the earnings call, the Target chief painted a scenario where it will try to maintain its profit margins for the quarter by slowly clearing the inventory over time rather than quickly from discounts. “We worry that large discounts could damage Target’s brand image: 1) part of the apparel department looked like a Ross store; 2) the electronics department looked like Black Friday; and 3) outdoor goods looked like it was Winter,” Kirk said in the note. “We worry that even after inventory clears, some impact could remain.”
It all comes down to inventory and it is a whiplash-inducing shift from last year, when retailers were scrambling to keep their shelves stocked in the face of high demand and supply chain backups. Neil Saunders, managing director of GlobalData, said of Target’s inventory issues that the retailer “clearly badly misjudged demand and was too focused on getting product through the door at all costs while paying too little regard to the price paid.” Retailers, brands, wholesalers and other industry players are trying to match inventory with consumer demand — whatever that will be for the season.
“They’re guessing. They’re all guessing. And any one of them that tells you they’re not guessing, they’re lying, because they don’t know,” John McQuiston, managing director and global head of originations, receivables and trade finance with Wells Fargo, said about consumer behavior. “The demand levels are entirely unpredictable, so this will be a bit of a crystal ball Christmas.
Discussion Questions:
1. Explain the role of “sticky prices” in the aggregate expenditure model, and discuss some of the reasons why firms may prefer to adjust production rather than price short term.
2. Discuss the difference between planned and unplanned inventory investment in the aggregate expenditure model, and their connection to output or GDP gaps.
Sources| Retail Dive: https://www.retaildive.com/news/target-takes-hit-operating-profit-resets-inventory/629862/, https://www.retaildive.com/news/retail-inventory-holidays-2022-forecast/625896; Unsplash: Photo by Salonagility.com Daniel on Unsplash