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Target and Walmart Are Victims of Their Own Inventory Success

Almost overnight, retailers have gone from seeing their profits stuck on a ship in the Pacific to languishing on the shelf.

Walmart Inc. and Target Corp. are experiencing the downside of successfully navigating supply chain disruptions and keeping their stores well -stocked. So, on top of escalating costs for things such as labor and fuel, both retailers were caught off guard by a rapid retrenchment among consumers at a time when they were carrying a higher than usual level of inventories.

Target on Wednesday said these factors would mean a full-year operating margin of about 6%, compared with the 8% or more it forecast as recently as early March. The Minneapolis-based company’s shares fell about 25% in their worst one-day rout since 1987’s infamous Black Monday stock market crash. On Tuesday, Walmart’s shares plunged as much as 11.4%, also the most since October 1987.

The current problems have their roots in the supply-chain bottlenecks of late last year, which saw retailers scrambling to secure goods and stock up on inventories. The strategy made sense at the same time, as demand was bolstered by consumers flush with excess savings from pandemic-era fiscal stimulus programs. Walmart’s inventories at the end of its first quarter were about a third higher than a year ago at $61.2 billion. Target was carrying $15.1 billion of inventory as of April 30, about 43% more than a year earlier.

Although both companies anticipated some slowdown in demand, Walmart said food price inflation meant that customers were diverting more of their spending to essentials than it expected. Consequently, they had less left over for more discretionary, and higher margin, items such as clothing and home furnishings. So while Target’s same-store sales rose by a better-than-expected 3.3% in the quarter, it was caught out by a rapid shift in the types of products that its customers were buying.

In other words, after refreshing their homes for the past two years, shoppers moved away from bigger-ticket items such as furniture, kitchen appliances and televisions, and focused on smaller touches such as candles. They bought more toys as children returned to birthday parties in addition to travel-related products such as luggage. Consumers also have less of a need for bikes and casual clothing, turning instead to more fashionable attire as socializing becomes more popular again.

That pivot left Target with too much stock in categories that were often bulky to store. Rather than clutter its shops, it decided to cut prices on such items to make room for more in-demand but lower-margin products such as groceries and beauty. Chief Financial Officer Michael Fiddelke said additional markdowns are likely in the current quarter, Bloomberg News reports.

The quarter was a rare misstep for one the US’s best run retailers, which is doing many things right to attract and retain consumers, such as refurbishing its stores, developing a strong suite of private-label offerings and using its stores to fulfill online orders. But while Target and Walmart are feeling the pain, consumers may soon see the benefits.

Last year, as products were in short supply, retailers had no need cut prices. In fact, they raised them sharply, contributing to the highest rates of inflation since the early 1980s. Now, though, if the excess inventory levels are indicative of the retail sector more broadly and others follow Target’s lead by marking down prices, inflation in the retail part of the economy may begin to ease.

And if that proves true, it may relieve some of the pressure on the Federal Reserve to raise interest rates and tighten monetary policy as much as is priced in by markets, sprinkling a little “Tarjay” magic on the economy.   

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.

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