Target says costs are eating into sustained consumer demand

Target shoppers continued to do what they do best during the second quarter. But the retailer's costs — nearly everything from managing inventory and higher wages amid a competitive labor market, to higher shipping fees due to fuel prices — ate away at the company's margins.

Driving the news: Target saw more than 90 million additional customer visits to its stores than they did in 2019, an increase in traffic of more than 20%, CEO Brian Cornell said on an earnings call this morning.

• At the same time, its operating income fell by about 76% from the second quarter of 2019 to $321 million last quarter. Compared to last year, it was about an 87% drop.
• Operating profit margins fell to 1.2% from 7.2% in 2019 and 9.8% last year.
• Shares of the company fell by more than 3% in early trading as the results were lower than analysts and the company expected. Target had already revised expectations lower twice.
• But the company remains optimistic for the rest of the year due to consumer "resilience."

Why it matters: Target's performance in the second quarter shows just how hard it’s been for the average retailer to operate during the pandemic.

• The swift economic recovery from the pandemic gave companies little time and room to adjust first to logistics challenges and more recently to changing consumer preferences.

Details: Much of Target’s latest woes can be traced back to its inventory issues.

• The retailer pursued aggressive markdowns on discretionary or nice-to-have products like clothing, home decor and electronics — all of which have piled up as consumer spending on services ramped up.
• Inventory in the second quarter was $6 billion higher than it was three years ago due to higher costs and getting holiday inventories earlier in advance of the fall and holiday seasons, the company said on the earnings call.

What they're saying: "We could have avoided short term pain on the profit line, but that would have hampered our longer term potential," CFO Michael Fiddelke said on the call.

The big picture: Overstocking has been an industry-wide problem but retailers are still fearful of not having the right mix of goods to meet consumer demand.

What to watch: Target said the back-to-school and college season is currently looking "encouraging" ahead of the more important Halloween to holiday season in the latest part of the year.

Go deeper... Walmart earnings boosted by more higher income customers