Home sales at Target declined in Q2 despite encouraging early results in back-to-college.
MINNEAPOLIS – In addition to Target unloading inventory already owned during the second quarter, the company has also started reevaluating inventory distribution across categories for a dramatic reduction going forward.
“We took a hard look at sales trends and determined ideal inventory levels across every category for the remainder of the year,” said John Mulligan, executive vice president and chief operating officer. “As a result, we’ve meaningfully reduced our fall season receipt commitments in many discretionary categories.”
In the second quarter, Target reduced fall season receipts in discretionary categories by more than $1.5 billion.
This translated to an 85% or lower capacity at the company’s distribution centers through the remainder of the year, “even after the seasonal increase in holiday inventory is set to occur over the next two months,” Mulligan continued.
A new low
This represents the first time Target’s fall season inventory is projected to peak at a lower level than in spring, “providing another vivid illustration of the unique dynamics we’ve encountered so far this year, he said.
Chief Growth Officer and Executive Vice President Christina Hennington said Target teams spent much of the second quarter “aggressively working through excess inventory at every point along the product journey, from vendor to guest.”
This included rigorously reforecasting expectations for the balance of the year and beyond and determining where to reduce future receipts and orders.
“In some cases, it meant working with vendor partners to reduce our fall receipts in light of our updated expectations,” Hennington went on. “It also meant quickly building compelling promotional plans to drive unit velocity for products we already owned.”
As it relates to home, the category posted a low-single-digit decline in Q2 compared with last year, “despite affinity for our seasonal assortments and encouraging early results in back-to-school and back-to-college,” she said.
Consistent with the first quarter, mix accounted for approximately 10 basis points of pressure, added Michael Fiddelke, executive vice president and chief financial officer.
“The softness in higher-margin categories like apparel and home was largely offset by softness in lower-margin discretionary categories, most notably electronics,” he said.
Another shift for receipt intake calendar
While stress from excess inventory has presented the biggest challenge to Target’s team this year, dealing with high costs and volatility in the external supply chain has run a close second, Mulligan noted.
On the upside, lead times in global shipping have begun to decline and spot rates for shipping containers have fallen somewhat while petroleum prices and fuel surcharges have been easing, compared with the peak rates as recent as early in the second quarter.
“(But) conditions remain highly unfavorable when compared to the years before the pandemic,” Mulligan warned. “And we’re mindful of the continued risks in the months ahead, including potential slowdowns at the West Coast ports, a reversal of the recent decline in energy costs, and the possibility of additional COVID lockdowns in China.”
In addition, Target continues to encounter “far too many delays affecting overseas shipping,” which requires the company to pay spot rates to move containers – “rates that are well above our pre-negotiated shipping rates.”
In light of these ongoing macro impacts, the company is actively moving receipt dates earlier than it would have in the past, in hopes of mitigating the business risk from receiving shipments later than expected.
Investing in the store fleet
These headwinds have also turned much of Target’s attention toward capital expenditures this year on its store network, including expanding its footprint with up to 24 new locations and updating hundreds of existing units.
The first and largest investment within this endeavor is the store remodel program, “where we completely transform the space in the existing location, modernizing the shopping experience while enhancing the productivity of our team,” Mulligan said.
To date, more than 100 remodels are currently in flight across the country of the almost 200 targeted for this year.
Smaller investments to hundreds of other locations are also in the works. This includes the“hundreds of fulfillment remodels scheduled for completion this year to, among other things, increase capacity of drive-up, in-store pickup, and Shipt services.
Target is also making significant investments to its internal supply chain, including: building additional upstream capacity to its network; the addition late last year of two upstream distribution centers; and the opening of six new upstream facilities over the next several years, including two on track to open in 2023.