Target’s (NYSE:TGT) stock is declining today after the retail chain warned its profits will fall in the coming months. The reason? Target stores collectively have too much inventory. Now, they will be forced to offer discounts and cancel orders to make room for the goods that consumers are still buying. This doesn’t bode well as Target shifts into summer, a heavy buying season.
This morning, TGT stock reacted poorly to the news, quickly dropping 8% as markets opened. While shares are rebounding, they are still in the red. As of this writing, TGT is down about 3% for the day.
These declines come on the heels of an even worse plunge. On May 17 and May 18 respectively, both Walmart (NYSE:WMT) and Target reported earnings misses for their first quarters, sending retail stocks down across the board.
Does this mean the current quarter will yield similar results for retailers like Target? Let’s take a closer look.
What’s Happening with TGT Stock?
Excess inventory may sound great after months of supply-chain woes. Upon further inspection, though, the negativity makes sense. For big box retailers of consumer staples, the pandemic meant a rush of business. Panic-buying became a defining market trend and, when Americans were issued stimulus checks in 2021, people had more money to spend.
A year later, things are changing in a way companies can’t afford to ignore. Inflation has sent prices rising across most retail categories, forcing consumers to rethink their spending habits. Stores like Target loaded up on inventory while they could to avoid supply-chain constraints, but now the people are opting to cut back on purchases as gas and energy costs take their toll. This has left Target with too many products Americans neither want nor need. The Wall Street Journal reports that the company’s inventory rose 43% in Q1 while sales fell.
Target is now being forced to offer discounts to offload inventory it can’t sell. While some consumers will be happy to hear this, it won’t be good news for TGT stock investors.
The Bottom Line on Target
Target’s grim profit forecast isn’t unexpected, but it will make for another disappointing earnings report. Other retail stocks like WMT and TJX Companies (NYSE:TJX) are also watching shares fall today as Target’s margin squeeze prediction spooks Wall Street. Clearly, bearish energy has already set in.
TGT stock can recover if management is smart about its current setback. But for shares to fully rebound, Wall Street will need to see proof the company can adapt to the shifting industry landscape.
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.