Target CEO explains how bloated inventory led to tough call

The day last month when Target Corp. reported lower-than-expected earnings and lost a quarter of its market value, its leader was already focused on its padded stores and warehouses, an issue most investors overlooked.

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

“We had to deal with this problem from the start instead of letting it hang around for three or four quarters,” Cornell said during 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 halt in the momentum the company has been building during the pandemic.

“We guided that day,” Cornell said, referring to the company’s May 18 earnings announcement and the resulting market drop. “But I also talked about the fact that stocks were up.”

The company said inventory in the February-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 afterwards.

“I’ve spent time in different parts of the country at our stores, at 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 presents many risks, including that the merchandise has to be sold at a loss.

Cornell attributed part of the backup to the delayed delivery of goods that Target is expected to sell in late 2021. More importantly, the spending habits of American consumers have changed over the winter and spring. As more people returned to offices and pre-pandemic habits and habits, they spent more on services like restaurants than on consumer goods.

As the company’s annual shareholder meeting looms in June, Cornell said he believes executives need to find an answer to the problem quickly.

“We could have started stacking pallets on the floor or doing things that aren’t right for our brand and that’s not right for our team,” Cornell said. “Or we could go out front and make a tough decision which I know will be appreciated by our guests and will suit our team.”

The decision to cut prices and halt orders for certain products, announced on June 7, forced Target executives to revise down their full-year earnings outlook.

“Long term, this will be the right thing for our shareholders, but these are tough decisions,” Cornell said.

Target’s stock price fell 2% that day and rallied over the following days, but fell with the broader market over the next two weeks. On Wednesday, Target stock closed at $140.81, down 47% from the all-time high reached last July.

Cornell said he was in Europe last week to speak with investors. He reminded them that Target had grown outrageously during the pandemic — revenue last year was $106 billion, up 35% from $78 billion in 2019 — and they could have grown. even more if they had had better access to goods.

“For most of the pandemic, we’ve been researching inventory,” Cornell said.

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

“We said, ‘Okay, we have to plan differently for the second half of the year,'” Cornell said. “It will be a strong season for food and beverage and household essentials. Our beauty sector is booming. But we will likely plan discretionary categories more conservatively.”