After quick stock action, Target is poised for a comeback, analysts say:

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Dive briefing:

  • After taking a long-term view and firmly tackling its excess inventory, Target is now in a good position for the second half of the year, according to a customer note from Wells Fargo analysts on Monday.

  • The shopkeeper earns “some criticism of its inventory missteps” and “has accumulated the first and largest margin in retail” as it severely narrowed the surplus, analysts led by Edward Kelly said.

  • But his swift and “decisive action should help protect pandemic stock gains (the real price at the end of the day)” and paving the way for recoverysaid Wells Fargo.

Dive Insight:

Retailers have seen much of their recovery from the late pandemic reversed by shifting consumer priorities as households grapple with rising prices of essential items. This especially undermines clothing sales, leaving many retailers with an abundance of merchandise necessitating price cuts and in turn putting pressure on margins.

Indeed, Wells Fargo analysts noted that Target is hardly alone, exclaiming: Walmart’s warning last week that profits would take a hit if the retail giant cleared out unwanted clothing.

Target should take credit for his timely acknowledgment of his problem and willingness to take the bitter drug, they also said. The mass trader first warned analysts of a drop in earnings last spring and said in June it was taking further action as supply chain and inventory problems persisted.

“[Target] was the first to respond to the sharp change in consumer spending in April, as two inventory charges had to be prepaid within weeks,” said Wells Fargo. “This destroyed the margin in the first half of 2022, but [the retailer] should now have one of the cleaner inventory setups in the retail industry and see an earlier margin recovery than most. While we admit there is still some margin risk ahead given consumer uncertainty… [Target] looks better than most going into the second half.”

Analysts at the Telsey Advisory Group are actually seeing benefits in ongoing promotions at Target as pre-school shopping begins.

”[Target] should be able to leverage its members’ loyalty and merchandising expertise, such as fashion-focused private labels in apparel and home/decor to drive sales,” said Dana Telsey and Joseph Feldman in email responses Monday. “In addition, increased inventory levels and related promotional activities should help attract customers.”

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