Dive Brief:

• Target will take steps to pare down its inventory, including fresh markdowns, the removal of excess inventory and order cancellations, in a bid to rightsize its stock levels, the company announced this week.
• The moves are intended to "create additional flexibility to focus on serving guests in a rapidly changing environment" as well as "further build on the Company’s record of growth and market-share gains."
• Target also plans to add five distribution centers over the next two fiscal years as part of a strategy to ease supply chain delays.

Dive Insight:

The retailer is working to ease disruptions and rising costs in its supply chain in addition to dealing with consumer changes. Target's plans also call for adding holding capacity near domestic ports to add speed and flexibility, as well as adding the new distribution centers.

The company said it is also working with vendors to shorten distances and lead times as well as offset pressure from inflation and drive operational efficiencies.

The announcement comes just weeks after Target's Q1 results showed a major hit to the retailer's profits. Target is now scrambling to clear its stores and lower its inventory levels going forward.

At the time of the release of its earnings report in May, the retailer noted that it had taken markdowns in several discretionary areas where sales lagged expectations.

It was taken as a broad signal to the market that consumers were feeling the pain from inflation and the end of government stimulus, and adjusting their spending accordingly. Alongside Walmart's lower-than-expected profits, analysts have taken a more negative view of retail for 2022 since mid-May.

The retailer's note on market share gains suggests Target may be absorbing some profit declines to take advantage of an inflationary environment, winning over customers by keeping its own prices down where it can. Although Target also said it would take "pricing actions" to mitigate spiking fuel and transportation costs.

Overall, the retailer's top line appears healthy for now. It made no changes to its sales guidance. "Target’s business continues to generate healthy increases in traffic and sales, despite sustained volatility in the macro environment, including shifting consumer buying patterns and rapidly changing operating conditions," Chief Executive Officer Brian Cornell said in a statement.

John Zolidis, president of research advisory Quo Vadis Capital, said in emailed comments that Target's release "signals something went really wrong in the planning and allocation department."

"A second cut to guidance in three weeks certainly gives us pause, especially in the context of other retailer reports, some of which have been solid," Zolidis added."It suggests [Target]'s issues are internal rather than external."

For the back half of the year, Target expects its operating margin rate to rebound back to the 6% range, indicating it expects the current challenges to be a speed bump.