Target Inventory Warning Portends Retail Bloodbath

The company said in its latest earnings call on May 18 that it was holding too much merchandise that consumers no longer wanted—such as large appliances and furniture. Consumers are still spending on groceries and household essentials, while diverting discretionary dollars to things they need as they resume going to the office, traveling, attending concerts and so on—such as luggage, cosmetics and dressy clothes. Target’s inventory had swelled 43% last quarter compared with a year earlier, while comparable sales grew by just 3.3%.

While Target is known for strong merchandising, there are two reasons the inventory problem was especially bad for the retailer. One is that the largest retailers had the means to spend heavily to get more goods last year, when there were widespread concerns about shortages. Companies including

Walmart,

WMT -2.25%

Costco and Target all paid for their own chartered ships to stock shelves up ahead of last year’s holiday season.This could have made them more susceptible to accidental pileups of the wrong items.

In an interview with The Wall Street Journal, Target Chief Executive Officer

Brian Cornell

said the company was “chasing hard in 2021 to get more of the inventory that our guest was looking for.” But delayed shipments meant goods arrived late, when consumer preferences had already shifted. Another reason could be that Target’s sales mix is lighter on consumables (45%) like groceries, the one pandemic-winning category that still sees strong demand. Big-box retailers such as Walmart, Costco and Sam’s Club rely on consumables and groceries for more than half of their sales.

Target’s inventory warning indicates that other retailers could be undergoing the same kind of margin reckoning as they gauge the right sales mix. Other retailers with much higher inventory levels included Walmart, which saw a 33% increase in merchandise last quarter compared with a year earlier, and

Kohl’s,

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whose inventory rose 40%. It also portends a summer of heavy discounts, especially in categories that Target said it was carrying too much of, such as kitchen appliances, TVs and outdoor furniture. Margins could take a worse hit than expected at companies such as online furniture seller

Wayfair,

W -3.22%

electronics retailer

Best Buy

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and

Bed Bath & Beyond,

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which sells kitchen appliances.

It’s going to be a summer full of discounts for consumers and a stressful, sweaty season of planning for retailers.

Write to Jinjoo Lee at [email protected]