The pendulum swings in retail: Target, other big chains now have too much stuff on hand

Empty shelves plagued retailers during the height of the pandemic. Now, they face the opposite problem — too much inventory.

As customers gravitate toward spending more on services and necessities, stores like Target have grown desperate to shed the expensive and bulky backlogs of furniture and home electronics.

Minneapolis-based Target Corp. said Tuesday it will slash prices, cancel vendor orders and take other steps to cut its bloated inventory, moves that will lower its profit more than executives thought just three weeks ago.

The aggressive actions are a signal of just how difficult it has been for retailers to adjust to swings in consumer behavior.

"Over the past several weeks, we've continued to assess the broader retail environment and I think it's no secret right now based on what's been reported, the level of inventory across all retail is pretty high," said Michael Fiddelke, Target's chief financial officer.

The strategy adjustments could provide relief to customers looking for deals on items like TVs, furniture and kitchen appliances as Target tries to push them out the door to make way for better-selling merchandise. But other prices across the store could gradually tick up as Target and other retailers compensate for higher costs.

The Minneapolis-based retailer revealed when it announced its latest quarterly results on May 18 that its inventory soared 43% in the February-through-April period.

At the time, executives said they expected the company's operating margin rate for the second quarter to be around the same 5.3% it saw in the first quarter of the year. With the more aggressive actions needed to reduce inventory, they now think the operating margin rate will be around 2%.

Target shares closed down more than 2% Tuesday. The company lost a quarter of its market value on May 18 after surprising investors with profit cut in half by inflation costs and the change in shoppers' behavior.

Target isn't the only retailer to face profit challenges and inventory issues. Richfield-based Best Buy two weeks ago reported higher costs as it has been more expensive to get containers and fuel.

Walmart said higher labor and fuel costs, combined with a 33% jump in inventory, dragged down its profit this spring. Macy's executives said they also predict higher fuel costs and markdowns needed to correct overstock levels this quarter.

To confront shipping delays and sporadic shortages of products the last couple of years, many retail companies increased their inventory, said Kyle Goldschmidt, an assistant professor at the University of St. Thomas' Department of Operations and Supply Chain Management. Target, like other companies, ordered some merchandise several months in advance.

"This has resulted in historically high logistics costs throughout the supply chain, from ocean, rail and trucking carriers, to warehousing, and now fuel costs," Goldschmidt said. "Concurrently, consumer spending is gradually shifting from goods back towards services ... which could leave retailers with too much inventory, and more importantly, the wrong type of inventory."

Demand softened for home products, like furniture, that were popular during the height of the pandemic as people were forced to spend more time at home. Spending has now shifted from these high-margin items to lower-margin items like groceries, Goldschmidt said.

Target's current best-selling products are in its food, household essentials and beauty sections.

A lot of the excess items are bulky and take up considerable space in stores and warehouses, leaving less room for faster-moving products.

Fiddelke said the cost of getting them sold is worth it to provide more flexibility as Target gets closer to its busiest selling periods — back-to-school and the year-end holidays.

"We got more of that product than we want to have, and we think dealing with that head-on by being aggressive now positions us with the right flexibility for the back half of the year," he said.

While its excess inventory will be marked down, Target, like other retailers, has had to raise some prices to offset higher costs. It can be a tricky tightrope to walk especially as customers become more price-conscious in this high-inflation era.

"Price is the last lever that we pull. … But price increases are unavoidable given the inflationary pressures that we've seen in many categories," Fiddelke said.

Target executives are more optimistic about the second half of the year when it can capitalize on seasonal purchases for back-to-school and the holidays.

In the fall, Target expects an operating margin rate around 6%, which would exceed the company's average fall performance before the pandemic. Factoring in the first half of the year, Fiddelke estimates that the rate would be around 5% for the full fiscal year.