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Goal (TGT) Q2 2022 earnings: Profit falls nearly 90%

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FILE PHOTO: Shoppers exit a Goal store during Black Friday sales in Brooklyn, Recent York, U.S., November 26, 2021. 

Brendan Mcdermid | Reuters

Goal on Wednesday said its quarterly profit fell nearly 90% from a yr ago, because the retailer followed through on its warning that steep markdowns on unwanted merchandise would weigh on its bottom line.

The large-box retailer missed Wall Street’s expectations by a large margin, even after the corporate itself lowered guidance twice.

Yet the corporate reiterated its full-year forecast, saying it’s now positioned for a rebound. It said it expects full-year revenue growth within the low to mid single digits. Goal also said its operating margin rate will probably be in a spread around 6% within the second half of the yr. That might represent a jump from its operating margin rate of 1.2% within the fiscal second quarter. 

Shares of Goal fell greater than 3% in early afternoon trading.

Chief Financial Officer Michael Fiddelke defended Goal’s aggressive inventory efforts. He said the retailer had to maneuver swiftly, so it could clear the clutter, gear up for the vacations and navigate an economic backdrop clouded by inflation.

“If we hadn’t handled our excess inventory head on, we could have avoided some short-term pain on the profit line, but that might have hampered our longer-term potential,” he said on a call with reporters. “While our quarterly profit took a meaningful step down, our future path is brighter.”

Here’s how Goal did for the three-month period ended July 30, compared with Refinitiv consensus estimates:

  • Earnings per share: 39 cents vs. 72 cents expected
  • Revenue: $26.04 billion vs. $26.04 billion expected

Goal has had a pointy reversal of fortunes over the past two quarters. After posting quarter after quarter of eye-popping sales numbers through the Covid pandemic, it has seen clothing, coffee makers, lamps and more linger on the shelf – after which get kicked to the clearance rack. A few of that excess merchandise is identical stuff that sold out during earlier parts of the pandemic, when shoppers snapped up home decor and loungewear.

The turnabout forced the big-box retailer to chop its profit outlook twice, once in May and nevertheless in June, and to pledge to maneuver quickly to get its inventory level to a healthier place.

Inventory was still high, though: $15.32 billion at the tip of the second quarter, compared with $15.08 billion at the tip of the primary. 

But CEO Brian Cornell said on the decision with reporters that it’s a more favorable mix, as Goal leans into high-frequency categories like food and household essentials together with popular categories like seasonal merchandise. It canceled greater than $1.5 billion in orders for discretionary categories with lower demand.

Fiddelke said the inventory number is larger due to cost inflation and receiving inventory earlier to make sure that Goal is prepared for the vacations.

Within the second quarter, the corporate’s net income fell to $183 million, or 39 cents per share, from $1.82 billion, or $3.65 per share, a yr earlier. 

Total revenue rose to $26.04 billion from $25.16 billion a yr ago, driven partially by higher prices attributable to inflation.

Quarterly profits got squeezed in many alternative ways. Sales of a number of merchandise became less profitable because it got marked down. Freight, transportation and shipping costs rose, as fuel prices increased. And the corporate had so as to add head count and canopy more compensation in  distribution centers because it handled a glut of additional stuff.

A cautious approach

Big-box rival Walmart said Tuesday that it had seen a marked shift in consumer behavior, as even wealthier households sought deals on groceries and essentials. The corporate told CNBC that about three-quarters of its market share gains in food got here from households with an annual income of $100,000 or more. 

Goal, then again, said it shouldn’t be seeing as much inflation-fueled change. Sales by unit grew in all five of its major merchandise categories, with particular strength in two categories: food and beverage, and sweetness and household essentials.

At the same time as profits fell, comparable sales and traffic rose. 

Comparable sales, a key metric that tracks sales online and at stores open a minimum of 13 months, grew 2.6% within the second quarter, on top of a rise of 8.9% last yr. That fell just wanting estimates, which anticipated a 2.8% rise, in accordance with StreetAccount. At Goal’s stores and on its website, traffic increased 2.7% yr over yr.

Fiddelke, the CFO, said the traffic growth is proof that shoppers still have spending power and can help Goal deliver on its rosier profit outlook for the back half of the yr.

“The resilience of that strong guest response positions us well, even when I am unable to predict every curveball which may come at us in the autumn season,” he said on the decision with reporters.

Food and beverage was Goal’s strongest category within the three-month period, with comparable sales growth within the low double digits, the corporate said. Beauty grew within the high single digits, as Goal adds Ulta Beauty shops inside more stores. And essentials grew within the mid single digits, fueled by pet supplies and health-care items.

Comparable sales in discretionary merchandise categories noticeably softened, but added up to just about $3.5 billion or greater than 35% higher than the identical period in 2019. Sales of hardlines, a category that include electronics, were down barely yr over yr. Home declined by low single digits. And apparel dropped by the low single digits, despite sales growth of girls’s fashion-forward clothing.

Fiddelke said consumers vary by geography and income level, and so they seek value in other ways. For instance, some are buying greater packs to avoid wasting more per unit or trying one in every of Goal’s lower-priced private labels as an alternative of a national brand.

Cornell said Goal is watching consumer spending closely. He said it’s stocking up on popular items and ordering fewer of products that shoppers may skip over.

“We’ll take a really balanced approach,” he said, ensuring to “plan cautiously” in discretionary categories where the corporate has seen shifts in behavior.

On a call with analysts on Wednesday, Goal’s chief growth officer, Christina Hennington, said the retailer has spoken with customers to get a greater sense of their mindset. As they feel inflation, they’re stretching the budget by benefiting from promotions and consolidating store trips, she said. It found that Goal shoppers still have spending power, but that “confidence of their personal funds continues to wane.”

As of Tuesday’s close, Goal’s shares are down about 22% to date this yr. The stock closed Tuesday at $180.19, rising nearly 5% that day after Walmart beat earnings expectations.

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