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Target warns of more margin squeeze as excess inventory weighs

June 7 (Reuters) – Target Corp (TGT.N) on Tuesday cut its quarterly profit margin issued just weeks earlier, saying it would have to offer deeper discounts to clear its inventory as decades of high inflation take a toll on demand.

The surprising revision of the outlook sent Target shares down nearly 7% in early trading, weighing on retail and wider markets.

The retailer said it would cut prices in the second quarter, cancel orders from suppliers, strengthen parts of the supply chain and prioritize categories such as food and household necessities.

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

Target, along with Walmart (WMT.N), had reported a much steeper-than-expected fall in quarterly results in May, sending shockwaves through retail. read more

At the time, Target said inventories increased by 43%, compared to a year earlier, as demand for high-margin discretionary goods such as kitchen appliances and televisions declined.

A shopping cart was seen in a Target store in the Brooklyn neighborhood of New York, USA, November 14, 2017. REUTERS / Brendan McDermid

“Target was a retailer that had done exceptionally well in dealing with inventory challenges, but now that consumers … stop to see where they are spending, what was once an advantage may come back to haunt them,” Jane Hali & Associates analyst Jessica and Ramirez.

Target’s strategy to keep most of its products affordable compared to its competitors is proving to be costly, and the company now says it will increase the prices of some goods to compensate for the unusually high transport and fuel costs.

Reuters graphics

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

Nevertheless, Target maintained its sales targets for the year, which led some Wall Street analysts to say that the company’s aggressive measures could help it reach its peak later in the year.

“Although this is a painful period for Target, it facilitates a better second half to take their medicine (again) in Q1 and Q2 with cleaner inventory … (and) added up to a better second half for the stock as well , “, said DA Davidson analyst Michael Baker.

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Reporting by Aishwarya Venugopal, Susan Mathew and Uday Sampath in Bengaluru; Editing Anil D’Silva

Our standards: Thomson Reuters Trust Principles.

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