Ouch! No other word for it as Target – the omni-channel retail bellwether of choice – saw its Q2 profits collapse by nearly 90% year-on-year on the back of ongoing supply chain management issues.
But while profits were down to $183 million from $1.8 billion a year ago, revenues hit $26 billion, up from $25.1 billion a year ago. Digital sales were up nine percent year-on-year and same day fulfilment services saw an 11% increase.
Target CEO Brian Cornell was defiant on the post-earnings analyst call, insisting that the firm’s decision to make “a bold effort” to “rightsize” the retailer’s inventory issues had been a short term pain, but necessary to restore the balance:
Consider the alternative – we could have held on to excess inventory and attempted to deal with it slowly over multiple quarters or even years. While that might have reduced the near-term financial impact, it would have held back our business over time. Of course, this decision would have driven incremental costs to store and manage the excess inventory over a longer period. But much more importantly, it would have degraded the guest experience. It would have cluttered our sales force and hampered our ability to present new, fresh and fashionable items, the ones our guests expect from Target.
Just as importantly, the extra inventory would have presented an ongoing burden to our supply chain and sorties as they face the distraction of working around it day after day. Instead of taking that passive position on inventory we already owned and cutting back on receipts for the back half of the year. And today with those decisions behind us, we’re in a much better position as we head into the Fall season.
There are still successes to highlight, he said, pointing to digitally-enabled initiatives as a case in point, citing:
our industry-leading same-day services, which have transformed our business in a short time.
More specifically, three years ago in the second quarter of 2019, digital fulfillment accounted for just over seven percent of total sales. In contrast, by the second quarter of this year, the same day portion of our digital sales accounted for more than ten percent of our total sales. This drove our total digital penetration up to almost 18%, more than doubling in only three years…Whether a guest wants to make a conventional in-store shopping trip, place a drive-up order, arrange a Shipt delivery, or simply have a box delivered to their front door, stores can fulfill every one of those needs quickly and reliably, allowing our guests to choose what works best for them in that moment.
Not easy
But getting the supply chain house in order hasn’t been easy, added COO John Mulligan, a startling admission given Target’s recognized expertise on that front:
While this inventory rightsizing process hasn’t been easy and our teams have devoted an amazing amount of effort in a small amount of time this work has allowed our teams to strengthen ongoing communication mechanisms and build new processes.
Going forward these improvements will enable our merchandising and supply chain teams to maintain enhanced real-time communication, particularly with respect to categories where we faced the highest inventory risk, allowing us to respond to changes with more speed and agility. While pressure from excess inventory has presented the biggest challenge to our team this year, dealing with high costs and volatility in the external supply chain has run a close second.
And there are mixed signals moving forward, he cautioned:
And today while conditions remain far from what we would have considered normal in the years before the pandemic, there are early signs that both costs and volatility may have peaked. More specifically lead times in global shipping have begun to decline. Spot rates to move shipping containers have fallen somewhat. And in light of the reduction in petroleum prices, we’ve all seen recently, fuel surcharges have been easing somewhat compared with the peak rates we saw earlier in the second quarter.
That said conditions remain highly unfavorable when compared to the years before the pandemic 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.
My take
At a time when many others will be struggling just to survive, the ability to play offense and focus on the long-term makes us well-positioned to emerge from the current downturn even stronger than before.
That’s fighting talk from Cornell, although not enough to calm the nerves of the jittery on Wall Street. But Target has clearly taken the right call to address its supply chain and inventory issues quickly and surgically, even if the price has been that headline-grabbing profit drop.
Onwards!
