After taking the long view and firmly addressing its inventory glut, Target is now in good position for the second half of the year, according to a Monday client note from Wells Fargo analysts.
The retailer does deserve “some criticism for its inventory missteps” and “took the earliest and biggest margin hit in retail” as it heavily marked down the excess, analysts led by Edward Kelly said.
But its swift and “decisive action should help protect pandemic share gains (the real prize at the end of the day)” and pave the way to a recovery, Wells Fargo said.
Retailers have seen much of their late-pandemic rebound undone by changing consumer priorities, as households grapple with rising prices of essential items. That is undermining apparel sales especially, leaving many retailers with a glut of merchandise that is necessitating markdowns and in turn squeezing margins.
Indeed, Wells Fargo analysts noted that Target is hardly alone, and called out Walmart’s warning last week that profits would take a hit as the retail giant cleared out unwanted clothing.
Target should get credit for its timely recognition of its problem and willingness to take the bitter medicine, they also said. The mass merchant first alerted analysts to a profit collapse this past spring, and in June said it was taking further action as supply chain and inventory troubles persisted.
“[Target] was first to respond to the sharp change in consumer spending patterns in April, as it took two upfront inventory charges in a matter of weeks,” Wells Fargo said. “This devastated the margin in the first half of 2022, but [the retailer] should now have one of the cleaner inventory set-ups in retail and see an earlier margin recovery than most. While we admit there is still some margin risk ahead given consumer uncertainty ... [Target] looks better positioned than most entering the second half.”
Telsey Advisory Group analysts actually see upsides to the promotions underway at Target as back-to-school shopping begins.
”[Target] should be able to leverage its members’ loyalty and merchandising expertise, such as fashion-oriented private brands in apparel and home/decor to boost sales,” Dana Telsey and Joseph Feldman said in emailed comments Monday. “Furthermore, elevated inventory levels and related promotional activities should help attract customers.”