Dive Brief:
- Target’s operating profit rose 273% YoY in Q2 to $1.2 billion after the retailer recovered from last year’s painful scramble to reduce inventory levels through discounts and canceling orders.
- Gross margin rate was 27% in Q2, up more than six percentage points YoY. The company attributed the change to lower markdowns and other inventory-related costs, improved freight and other supply chain costs and price increases.
- “Importantly, last year's inventory actions laid the groundwork for the recovery and profitability we've achieved so far this year,” CEO Brian Cornell told analysts on the company’s earnings call.
Dive Insight:
The sharp rise in Target’s profits, despite a hefty comparable sales decline, surprised analysts and helped vindicate the company’s efforts to reign in inventory and keep its position lean in 2023.
“As you'll recall, in the first half of 2022, we were faced with excess inventory, driven by a rapid change in consumer spending patterns,” Cornell said on the call. “In the face of that challenge, the team took important steps a year ago, allowing us to quickly adjust our inventory down to the proper level. Those critical decisions have allowed our team to operate efficiently while focusing on serving our guests.”
Inventory levels at the end of Q2 were down 17% YoY, while discretionary categories were down even further at 25%. The goal for the retailer has been to keep its store floors and warehouses as clean as possible so it can chase profitable inventory and move it efficiently through the system, executives have said.
So while keeping levels as a whole lean, Target has pursued product in categories where consumers have shown increased interest. Chief Growth Officer Christina Hennington pointed to vendor partnerships around Barbie and The Little Mermaid merchandise as well as seasonal and celebration-related inventory.
COO John Mulligan noted that in-stocks have improved from a year ago even as the retailer has pared down its inventory as a whole. He attributed this partly to “strong partnership with our vendors” that have led to “improvement on multiple performance metrics including fill rates and on-time arrivals.”
Target executives trumpeted their lean inventory position multiple times on the call and seem poised to continue the approach as the holiday shopping season approaches.
“I think our inventory position allows us the ability to chase into demand and we'll be ready when we see demand changing as we enter the holiday season,” Cornell said.
Clarification: This story has been updated to reflect the 273% percentage spike in Q2 was a year-over-year figure.
