Target CEO Brian Cornell made a decision this week that matches a repeating pattern in his career: a sharp change in strategy that leaves some investors trying to figure out what and why. Cornell, who joined the U.S. retail giant as CEO in 2014, hopes his move will pay off in the long run. Similar steps have paid off in the past.
On Tuesday, Cornell surprised some investors by saying that the chain, one of the largest in the US, will report lower-than-expected earnings in the coming quarter as it rushes to get rid of excess inventory due to a change in buying patterns. The cost of managing a large inventory is now that the company will cancel orders quickly or sell products in the coming quarter at a big discount – which is expected to bite into its profits even more, Cornell said.
Other retail chains that have too much inventory in warehouses – inclusive WalmartMacy’s and Gap – announced that they will be giving discounts on some of the items and holding others to sell them at the right time in the season.
“We have to be decisive to get ahead of it and make sure it doesn’t last the entire second half of the year,” Cornell said in an interview earlier this week. Target shares fell 7% when the market opened on Tuesday, then restored some of its value during the day, eventually closing down 2.3%.
During the annual investor meeting on Wednesday, executives Trgt Asked why the company cut its profitability forecast so soon after already announcing low profits.
“While we have continued to see strong buyer traffic and sales growth since we reported first quarter results, we have seen many competitors who also reported high inventory levels,” said Michael Fidelka, Target’s chief financial officer. “In this regard, we announced this week that we are taking some steps to return inventory to the right proportions.” Target shares rose slightly on Wednesday to $ 156.70.
Closing branches in Canada and freezing expansion
Target’s announcement matches Cornell’s character. The 63-year-old manager joined the company after being a senior at PepsiCo and Sam’s Club. When Cornell took over at Target, the chain struggled for a long time with weak sales, in part due to a case of hacking into its information systems that damaged trust from many buyers.
Cornell decided pretty quickly that the company should close its branches in Canada and give up an international expansion program in which it had already invested $ 4 billion. This strategy was the opposite of that of some competitors, such as Walmart and Costco, which have already opened branches in countries outside the US. Also within the US, Cornell has made it clear that Target will reduce its focus and focus on categories such as baby products, fashion and e-commerce.
“This difficult decision in Canada allows us to focus all our energy on strengthening and executing our plans within the US,” he explained at a conference call at the time. Target shares closed that day up 1.8%.
Sales have improved in some places, though overall the chain is still lagging behind some of the competition. Among the problems that Cornell diagnosed – the prices are too high and some of the branches need renovation.
In February 2017, on the day Target released weak sales data for the holiday season, Cornell outlined a rehabilitation plan for the company at a meeting of analysts in New York. According to him, Target will invest billions of dollars in renovating the branches, turn branches into online trading centers, improve the brands it owns in its branches and lower prices. Target shares then fell 12%, the steepest drop since 2008.
The corona has brought a significant improvement in sales
“It was hard to get up the stairs and stand in front of the audience who looked at me with a wondering, why we made that decision,” Cornell said of the day, in a 2019 interview. The plan was largely successful, and then received a handsome backlash from the corona plague. Sales in comparable categories, both in branches and digital channels operating for at least 12 months, have risen every year since. After the onset of the plague, sales increased by 19.3% in the fiscal year ending January 2021, and the following year ending last January increased by 12.7%.
Buyers flocked to the new services Target began offering, made online purchases and collected the products in the parking lot or received them home delivery. Customers bought more furniture, outdoor equipment and food for cooking at home compared to the period before the plague. Target revenue grew more than $ 25 billion a year in the two years of the plague.
Now Cornell is once again facing the need to make big changes, as consumption trends change again.
“After we presented profits we had another stay to make a real assessment of the overall operating environment,” Cornell said in an interview earlier this week. This includes, he says, examining consumer behavior as they deal with high inflation rates, and observing how many other retailers talk about high inventory levels during their results reports.
Customers don’t buy a lot of products they used to buy at the time of the plague, Cornell said, like garden furniture and small kitchen appliances, and instead spend the money on food and entertainment. “Some items arrived late after delays in shipments, and now that they’re here, demand has changed.”
“Target’s long-term strategy remains the same,” a company spokesman said. “Yesterday’s announcement touched on dealing with short – term issues.”
After Tuesday’s profit warning, some investors expressed shock. “Cutting annual profit expectations so significantly and immediately is a pretty challenging move for a company that should be expected overall,” said John San Marco, portfolio manager at Neuberger Berman, which has a 0.14% stake in Target, according to FactSet data .
Target was very successful during the plague, he mentioned. “It is not clear why they are now facing problems when the consumer environment has just become challenging,” he added. Target’s core strategy – to offer customers in stores and digitally a carefully selected range of products – still makes sense in the long run, in his view.