Cornell explains how inventory bloat led to one of his toughest decisions at Target

On the day last month that Target Corp. announced a smaller-than-expected profit and lost one-fourth of its market value, its leader was already focused on its stuffed stores and warehouses, a problem that most investors were overlooking.

Brian Cornell told an audience in New York on Tuesday about the events that led Target earlier this month to announce it would slash inventory at the further expense of near-term profits. He called it one of the toughest decisions in his eight years as chief executive of the Minneapolis-based retailer.

"We had to address this problem up front as opposed to letting it linger for three or four quarters," Cornell said in an appearance at the Economic Club of New York.

The decision came just before Target's annual shareholder meeting and less than three weeks after it announced its spring quarterly results, which showed a sudden stop in the momentum the company built during the pandemic.

"We guided down that day," Cornell said, referring to the company's May 18 results announcement and resulting market plunge. "But I also talked about the fact that inventories were way up."

The company reported that inventory in the February-through-April quarter was 43% higher than a year ago. He said he was in New York for the results announcement but hit the road immediately afterward.

"I spent time in different parts of the country in our stores, in competitors' (stores), working with our teams, looking at a lot of syndicated data," Cornell said.

He said he noticed on CNBC every morning that other retailers were also reporting huge jumps in inventory. For all retailers, backed-up inventory poses many risks, including that merchandise may have to be sold at a loss.

Cornell attributed some of the backup to the delayed delivery of goods Target expected to sell in late 2021. But chiefly, the spending habits of American consumers shifted during the winter and spring. As more people returned to offices and pre-pandemic habits and patterns, they spent more on services such as dining out than on consumer goods.

With the company's annual shareholder meeting looming in June, Cornell said he felt executives had to find an answer to the problem quickly.

"We could have started stacking up pallets on the floor or doing things that are not right for our brand and that are not right for our team," Cornell said. "Or we could get out in front of it and make a tough decision that I know will be appreciated by our guests and be right for our team."

The decision to slash prices and halt orders for some goods, announced June 7, forced Target executives to lower their full-year profit outlook.

"Long term, it's going to be the right thing for our shareholders, but those are tough decisions," Cornell said.

Target's share price fell 2% that day and recovered during the next few days but has fallen with the broader market in the two weeks since. On Wednesday, Target shares closed at $140.81, down 47% from the all-time high reached last July.

Cornell said he was in Europe last week to talk with investors. He reminded them Target grew in an outsized way during the pandemic — revenue last year was $106 billion, up 35% from $78 billion in 2019 — and that it might have grown even more if it had better access to goods.

"For most of the pandemic, we've been chasing inventory," Cornell said.

By clearing out the oversupply Target found itself with, he said the retailer should have the proper space for goods that are in demand this fall as school resumes and the holidays arrive.

"We said 'All right, we've got to plan differently for the back half of the year,' " Cornell said. "It's going to be a strong food-and-beverage and household-essential season. Our beauty business is booming. But we'll probably plan discretionary categories more conservatively."