Target Facing Prolonged Difficult Conditions... "Time Needed for Normalization"

Korea Investment & Securities Report

[Asia Economy Reporter Myunghwan Lee] Target, a major U.S. retailer, reported second-quarter results this year that fell short of market expectations, and securities analysts predict that it will take time for the company to return to normal performance.

According to Korea Investment & Securities on the 21st, Target's sales for the second quarter of fiscal year 2022 (May to July) increased by 3.5% year-on-year to $26 billion (approximately 33.4 trillion KRW), and earnings per share (EPS) stood at $0.39. These figures were below market expectations. Target, which also recorded an earnings shock in the first quarter, lowered its second-quarter earnings guidance in June, but still failed to meet the revised forecast, Korea Investment & Securities noted.

The poor performance was caused by inventory issues, similar to the first quarter. The costs related to discounts implemented to reduce excess inventory, along with increased management expenses due to inventory growth, led to the weak results. Earlier, Target experienced an earnings shock in the first quarter due to a decline in sales of high-margin apparel and household goods. In the second quarter, gross profit (GP) margin fell by 8.9 percentage points year-on-year due to a worsening sales mix caused by weak sales of high-margin products.

Korea Investment & Securities analyzed that additional time will be needed for Target to normalize its performance. Target's inventory increased by 43% year-on-year in the first quarter and by 36% in the second quarter. Considering that the average quarterly inventory growth rate in fiscal year 2021 was 24.4%, the growth rate remains high, but the slowdown in the increase is viewed positively by Korea Investment & Securities.

Korea Investment & Securities expects Target to continue efforts to normalize inventory in the third quarter, with related costs estimated at around $200 million. Due to the decline in high-margin products, third-quarter results are also expected to be weak, and achieving the annual guidance of a 6% operating profit margin is considered difficult, according to Korea Investment & Securities.

However, the steady increase in 'Shop in Shop' brands, which is Target's growth strategy, is seen as a positive sign. Unlike Walmart, where food sales account for about 50%, Target's food sales proportion is low at 20%, with higher sales proportions in household goods and apparel.

Myungjoo Kim, a researcher at Korea Investment & Securities, advised, "Even if the excess inventory issue is resolved, Target is likely to suffer a greater impact on consumer purchasing power compared to competitors during periods of rising consumer prices," adding, "Given the expected continuation of a difficult environment, a conservative approach is recommended."

This content was produced with the assistance of AI translation services.