Target growing slowly despite inventory wipeout

Target was one of the biggest winners during the pandemic. The company was also one of the hardest hit by the inventory glut of last year. The inventories started to accumulate rapidly during the first half of 2022. In May of 2022, Target CEO Brian Cornell woved to take drastic actions to cut down on inventory problems to secure high-quality inventories for the holiday season. Wall Street did not like this approach, and Target's share price plummeted by -26%.

For the holiday season (Q4/2022), Target reported sluggish sales growth of 1,2%. The company had reduced inventories, which declined by -2,9% from Q4/2021. The inventory wipeout led to a dramatic reduction in the inventory/sales metric. The smaller inventory gives Target flexibility to move forward but also comes at a cost.

The inventory reduction led to a 4,2%-point decline in the Gross margin.

Also, the Operating margin declined to 3,7%. It has been at a historically low level throughout the whole year 2022. Usually, Target has had operating margins ranging between 5% and 7% of revenues.

The inventory reduction was significantly more dramatic compared to the most critical benchmark for Target, Walmart. Walmart decided to take a more nuanced approach to remove inventory. Walmart's inventory stayed flat in Q4 Year On Year. It is interesting to follow which approach was better, the more dramatic approach of Target or the gradual approach of Walmart.