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Target takes a hit after heavy discounts to clear inventory

Executives are still "confident" about Target's decision to slash prices earlier this year to clear out unwanted inventory.

MINNEAPOLIS — Target reported solid sales for the fiscal second quarter but its profit plunged nearly 90% after it was forced to slash prices to clear unwanted inventories of clothing, home goods and electronics.

In early June, Target warned that it was canceling orders from suppliers and aggressively cutting prices because of a pronounced spending shift by Americans.

Shares fell almost 4% before the opening bell Wednesday.

Retailers were blindsided by the lightening-fast switch from spending on goods for the home, like TVs and small kitchen appliances, to dinners out, movies and travel. Adding to that shift is surging inflation. In the first quarter, Target's profits tumbled 52% compared to the year-ago period.

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Target reported second-quarter net income of $183 million, or 39 cents per share, for the three month period ended July 30. That's far short of the per-share profit if 79 cents that Wall Street had expected, according to a survey by FactSet.

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It was also down from the $1.82 billion the company earned last year in the same period.

Revenue rose 3.5% to $26.04 billion. Analysts were expecting $26.03 billion, according to FactSet.

Store comparable sales increased 1.3% on top of 8.7% growth last year. Online sales rose 9% following growth of 9.9% last year.

“While these inventory actions put significant pressure on our near-term profitability, we’re confident this was the right long-term decision in support of our guests, our team and our business," CEO Brian Cornell said.

Target executives told reporters during a media call that if Target weren't aggressive about marking down the inventory, it would have taken at least several quarters to get rid of the unwanted merchandise.

Cornell said the company is planning cautiously for the remainder of the year, including the critical holiday season. That will put a greater focus on stocking groceries and things like cosmetics.

The company is sticking to company's prior guidance for full year revenue growth in the low-to mid-single digit percentage range. It also expects operating margin rate in a range around 6% in the back half of the year, a big jump from 1.2% for latest quarter.

Walmart, the nation's largest retailer, reported Tuesday that its sales and profits for the second quarter rose. It said that higher-income shoppers were flocking to the discounter to save money on groceries, while low-income shoppers were feeling squeezed by higher inflation and were switching from deli meats to hot dogs and canned tuna.

Experts say there's still time to catch up, because companies like Target are coming off two successful years where their sales increased by double digits year over year.

Because of that, the company over-ordered product and is having a hard time selling it.

"From a consumer standpoint what that means to me is that customers are balking at the higher prices, and they can't just willy-nilly pass the price on," said George John, a marketing professor at the University of Minnesota. "So that's what we're seeing – we're seeing a little bit of a standoff. People are starting to cut back on purchasing."

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