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08/17/2022

Target Q2 Revenue Up, But Profitability Takes A Hit

Increasing markdown activity along with higher operating costs offset continued growth in sales and customer traffic.
Greg Sleter
Associate Publisher/Executive Editor
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Target store

Second quarter sales at Target were up 3.5% but operating income was down significantly reflecting a decline in the company’s gross margin rate.

For the three months ended July 30, total revenue was $26.03 billion, compared with revenue of $24.82 billion in the comparable quarter the previous year. Operating income was $321 million, down 87% from the second quarter of 2021. Net earnings were $183 million, down 90% year-over-year.

According to Target officials, several factors impacted the decrease in earnings. They included higher markdown rates to address lower-than-expected sales in discretionary categories, higher merchandise inventory shrink and higher freight costs. 

“I’m really pleased with the underlying performance of our business, which continues to grow traffic and sales while delivering broad-based unit-share gains in a very challenging environment,” said Brian Cornell, chairman and chief executive officer of Target Corporation. 

He noted that while the inventory rightsizing goals announced in June put “significant pressure” on near-term profitability, Cornell is confident the decision was right for the long-term. 

As a result of Target’s inventory actions in the second quarter, the company reduced its inventory exposure in discretionary categories while investing in rapidly-growing frequency categories. Additionally, fall season receipts in discretionary categories were reduced by more than $1.5 billion.

Comparable store sales for the quarter were up 2.6%, with store comps up 1.3% and digital comps up 9%. Target saw continued growth in traffic and strength in several categories including food and beverage, beauty and household essentials. 

Same-day services (order pickup, drive up and Shipt) grew nearly 11% this year, led by drive up, which grew in the mid-teens on top of more than 80% last year. More than 95% of Target’s second quarter sales were fulfilled by its stores.

While the company is planning cautiously for the remainder of the year, current trends support the company’s prior guidance for full-year revenue growth in the low- to mid-single digit range, and an operating margin rate in a range around 6% in the back half of the year