Target warns of more margin squeeze as excess inventory weighs

By Aishwarya Venugopal and Uday Sampath Kumar

(Reuters) - Target Corp on Tuesday cut its quarterly profit margin forecast issued just weeks earlier, and said it would have to offer deeper discounts to clear inventory as decades-high inflation takes a toll on demand.

The surprise outlook revision sent shares of Target down nearly 7% in early trading and weighed on the retail sector and broader markets.

The retailer said it would mark down prices in the second quarter, cancel orders with suppliers, strengthen parts of its supply chain and prioritize categories such as food and household essentials.

Soaring inflation is forcing consumers to change their shopping habits, catching many retailers off guard and forcing them to offer more discounts.

Target, along with Walmart, had reported a much steeper-than-expected drop in quarterly profit in May, sending shockwaves through the retail industry.

At the time, Target said its inventory rose 43%, compared with a year earlier, as demand for high-margin discretionary items such as kitchen appliances and televisions waned.

"Target was a retailer that had done exceptionally well at managing inventory challenges, but now when consumers ... are pausing to see where they're spending, what was once an advantage may come back to bite," Jane Hali & Associates analyst Jessica Ramirez said.

Graphic: Target Corp performance slowdown - https://graphics.reuters.com/TARGET-OUTLOOK/zgvomexlovd/chart.png

Target's strategy to keep most of its products affordable compared with its rivals is proving to be costly, with the company now saying it would raise prices on some items to offset the unusually high transportation and fuel costs.

The company now expects second-quarter operating margin to be about 2%, compared with its prior estimate of 5.3%. It also expects margins to be around 6% for the second half of the year.

Still, Target maintained its sales goals for the year, prompting some Wall Street analysts to say the company's aggressive measures could help it come out on top later in the year.

"While this is a painful period for Target, taking their medicine (again) in Q1 and Q2 does set up for a better second half with cleaner inventories ... (and) set up for a better second half for the stock as well," D.A. Davidson analyst Michael Baker said.

(Reporting by Aishwarya Venugopal, Susan Mathew and Uday Sampath in Bengaluru; Editing by Anil D'Silva)