Digital comparable sales rose 9.0%, down from the growth of 9.9% seen a year earlier.

Target Corp. said its net earnings plummeted in the second quarter as the costs associated with a massive plan to reduce excess inventory outweighed the effect of a rise in sales.

Second quarter earnings fell 89.9% from the comparable quarter last year to $183 million. 

Digital comparable sales rose 9.0%, down from the growth of 9.9% seen a year earlier. Comparable store sales grew 1.3%.

Target reported total revenue of $26.0 billion in the quarter, up 3.5% compared with last year. That reflected total sales growth of 3.3% and a 14.8% rise in other revenue.

Operating income fell a whopping 87.0% to $321 million from $2.5 billion a year earlier. Second quarter operating income margin rate dropped to 1.2% in 2022, compared with 9.8% in 2021. Target had forecast an operating margin of 2% for the quarter ending July 31, 2022.

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The earnings report stands in sharp contrast to Walmart Inc.’s more upbeat earnings report a day earlier.

Target ranks No. 5 in the 2022 Digital Commerce 360 Top 1000 database. Walmart is No. 2.

Target inventory sell off

Target announced in June that it would dramatically reduce inventory by slashing prices after supply-chain woes across the retail industry led to a surge in unsold goods.

“While this decision had a meaningful short-term impact on our financial results, we strongly believe it was the best path forward. Consider the alternative. We could have held on to excess inventory and attempted to deal with it slowly over multiple quarters or even years,” CEO Brian Cornell told analysts on the company’s earnings call. “(But) it would have cluttered our sales floor and hampered our ability to present new fresh items.”

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John Mulligan, Target’s chief financial officer, told analysts the company’s distribution centers reached more than 90% capacity by June, straining the system. By the end of Q2, Target had lowered capacity to 80%.

“Putting it another way, by the end of the second quarter, the physical space occupied by our distribution center inventory was more than 20% lower than the peak we reached in June,” Mulligan said.

With that done, Mulligan said the company aims to keep the distribution centers operating at or below 80% capacity.

Analysts were cautiously optimistic about the inventory reduction.

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“The inventory reset in Q2 pushed down the operating margin more than expected … but the move should position the retailer for a stronger second half,” Jennifer Bartashus, senior consumer staples analyst at Bloomberg Intelligence, said. “The worst of the inventory issues may be in the past.”

Online sales

Target executives told analysts the 9.0% rise in digital comparable sales in Q2 was driven by increased use of omnichannel services.

Same-day services (Order Pickup, Drive Up and Shipt) grew nearly 11% this year, led by Drive Up, which grew in the mid-teens on top of more than 80% last year.

In-store partnerships

Target said it planned to open 24 new stores this year, and would invest in “several hundred” locations to add Ulta Beauty at Target, co-branded Apple shopping spaces or Disney Store presentations to sales floors.

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Industry observers applauded that move.

“Target understands its customers and has been able to pivot to meet them where they are — lately in store. Target is starting to establish its presence as a mall to emulate a department store experience that customers are comfortable with,” said Gregory Ng, CEO of retail advisory firm Brooks Bell. “Why would a customer go to Ulta to pick up the latest lipstick when they can shop at Ulta as well as Starbucks, Apple and anything else they need all at one place?”

Pieter de Villiers, CEO and co-founder of Clickatell, which offers SMS and text services for retailers, said Target’s long-term outlook is good.

“While some big box retailers are faring better than initially expected, Target’s shortfall can be attributed to a number of challenges the company has faced in recent quarters, ranging from inventory concerns to inflation,” he said. “However, the company is still pursuing strategies that have proved to be successful, including its in-store initiatives like shop-in-shops. A consumer-focused approach in the coming quarters will help the company bounce back – especially throughout the holiday season.”

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Q2 2022 Target Earnings 

For the three months ending July 31, 2022, Target reported: 

  • Net earnings of $183 million, a drop of 89.9% from $1.82 billion a year earlier.
  • A 16.6% rise in the cost of sales to $20.14 billion from $17.28 billion in the comparable quarter of 2021.
  • Total sales of $25.65 billion, a rise of 3.3% from $24.83 billion a year earlier.

Percentage changes may not align exactly with dollar figures due to rounding.

Bloomberg News contributed to this report.

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