Target and Walmart are victims of the success of their own inventory

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Almost overnight, retailers went from having their profits stuck on a ship in the Pacific to languishing on the shelves.

Walmart Inc. and Target Corp. know the downside of successfully managing supply chain disruptions and keeping their stores well stocked. So, in addition to escalating costs for items such as labor and fuel, both retailers were caught off guard by a rapid downturn in consumers at a time when they were holding a higher level of inventory. higher than usual.

Target said Wednesday those factors would translate to an operating margin of about 6% for the full year, down from the 8% or more it expected as recently as early March. Shares of the Minneapolis-based company fell about 25% in their worst one-day rout since the infamous Black Monday stock market crash of 1987. On Tuesday, Walmart shares plunged as much as 11.4% , also the most since October 1987.

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

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

In other words, after sprucing up their homes over the past two years, buyers have moved away from the more expensive items like furniture, kitchen appliances and TVs, 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 clothes, turning instead to more fashionable clothes as socializing becomes more popular again.

This pivot left Target with too much stock in categories that were often large to stock. Rather than clutter its stores, it decided to reduce the prices of these items to make room for more in-demand but low-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 of America’s best-run retailers, which is doing many things to attract and retain consumers, such as revamping its stores, developing a strong line of private label offerings and the use of its stores to fulfill online orders. But as Target and Walmart feel the pain, consumers may soon see the benefits.

Last year, as products were scarce, retailers did not need to lower prices. In fact, they have increased them sharply, contributing to the highest inflation rates since the early 1980s. Now, however, if excess inventory levels more broadly point to the retail sector and other follow Target’s lead in cutting prices, inflation in the retail sector of the economy may begin to ease.

And if true, it could relieve some of the pressure on the Federal Reserve to raise interest rates and tighten monetary policy as much as markets expected, sprinkling some “Tarjay” magic on the table. ‘economy.

This column does not necessarily reflect the opinion of the Editorial Board or of 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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