Target Stock Drops After It Says It’s Overstocked – Should You Sell Your Stock?

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Inflation is also hitting big-box retailers like Target. The company says it is overstocked and lowered its financial guidance. In turn, the stock is down 7.68% in pre-market trading on June 7 and is down 31.6% year-to-date.

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To address the overstocking issue, Target announced it is planning several actions in the second quarter, “including additional markdowns, removing excess inventory and canceling orders,” according to a press release.

Target added that it is revising sales forecasts, promotional plans and cost expectations by category. “Specifically, the company is planning for continued strength in frequency categories like Food & Beverage, Household Essentials and Beauty, and is planning more conservatively in discretionary categories like Home, where trends have changed rapidly since the beginning of the year.”

Based on the company’s current expectations for the economy and consumer environment, Target said it now expects its second-quarter operating margin rate will be in a range around 2%, according to the release. That’s a staggering decrease from the outlook the company issued three weeks ago when it expected its operating margin rate to be around 5.3%, according to the guidance on its May 18 earnings report.

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Target released its first-quarter earnings in May, which were below analysts’ expectations. The company said that its “operating margin rate of 5.3% was well below expectations, driven primarily by gross margin pressure reflecting actions to reduce excess inventory as well as higher freight and transportation costs.”

“We’ve had some additional time after earnings to really evaluate the overall operating environment,” Target CEO Brian Cornell said in an interview on June 7, according to The Wall Street Journal.

He said this includes watching consumer behavior as they face high rates of inflation and seeing many other retailers talk about high inventory levels during their earnings presentations. “We have to be decisive and get out in front of this to make sure this doesn’t linger through the back half of the year.”

Following Target’s announcement, CFRA Research said it maintained its Hold opinion on the stock and lowered its 12-month target by $5 to $160, according to a note sent to GOBankingRates.

“Today TGT announced a new plan to right-size inventory and prepare for changing operating conditions, presumably because the issues it noted in its FQ1 earnings call, which was less than three weeks ago, have persisted or since intensified,” Arun Sundaram, senior CFRA equity research analyst, wrote in the note.

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Sundaram added that Target is likely struggling more than other big-box retailers such as Walmart and Costco, as its sales mix is more discretionary in nature, compounded by its lack of fuel stations, “a disadvantage when consumers are consolidating shopping trips,” and relatively smaller stores, which makes it difficult to store excess inventory without compromising the guest experience.

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.

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