Target plans discounts, inventory switch to match spending shifts as inflation soars

Deep discounts are coming to Target as the retail giant responds to a faster-than-expected change in consumer spending brought on by surging inflation.

Walmart and Target last month shocked investors after reporting lower-than-expected earnings amid a surprisingly quick shift in consumer spending and higher costs, including transportation and overstaffing.

It seems that shift hasn't slowed down, forcing Target to take more aggressive measures to pivot more quickly to match consumers' needs. It said it would further mark down inventory, cancel orders for inventory that no longer match what consumers want, and remove excess inventory from its system. The retailer also plans to raise prices on other merchandise.

Walmart's results foreshadowed "what could be a more challenging backdrop for others and we see most risk ahead at lower-end below $50,000 household income level," said Oliver Chen, a senior equity research analyst at Cowen, last month.

How did Target, Walmart end up with so much inventory?

Walmart said consumers, facing the highest inflation rate in 40 years, suddenly cut back on discretionary spending on things like clothes and patio furniture to afford everyday items like food and other consumables.

Target said its consumers shifted their spending from televisions, bikes, and kitchen appliances to items that enhance experiences.

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All that shifting, coupled with supply chain delays that resulted in some stock coming too late to sell, left the retailers with a glut of general merchandise inventory, they said.

“We didn't anticipate the magnitude of that shift,” said Brian Cornell, chairman and chief executive officer of Target, on the earnings conference call.

What's on sale at Target, Walmart?

Both retailers expect to have to work through that inventory through the next quarter, with Walmart saying it already started aggressively rolling back apparel prices in the first quarter. And now, Target is ratcheting up its discounts, too.

Most of the discounting will be seen in discretionary categories like home, where buying has soured since the beginning of the year as buyers turn more to everyday necessities in categories like food and beverage, household essentials, and beauty, Target said.

"Since we reported our first-quarter results, we have continued to monitor external conditions and have determined the necessary actions to remain nimble in the current environment," Cornell said in a statement on Tuesday.

The actions are expected to more than halve Target's operating margins to about 2% from its last forecast for around 5.3% in the second quarter.

Consumers love bargains, but will they have any spare change?

With forecasts for food, gas, and rent – a consumer’s largest expenses – forecast to continue rising, that may be unlikely any time soon.

“Gas hit a record high in early May, and the average price is well over the $4 mark,” said Beth Ann Bovino, chief U.S. economist at S&P Global Ratings. "That’s a psychological inflection point, where people start to get nervous. And with conditions from Ukraine and Russia expected to last longer, the worry that we have is that it is going to be a much slower descent for prices .”

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The war in Ukraine is not only pushing energy prices higher but also food, because wheat and sunflower oil are among Ukraine and Russia’s big exports. Prices are also increasing for metals like aluminum, platinum, and nickel that go into things like technology and auto parts because Russia is one of the world’s top producers of those commodities.

Meanwhile, April’s U.S. median rental price hit $1,827, a new high for the 14th month in a row, according to a Realtor.com survey. That’s increasingly cutting into households’ budgets for regular expenses and savings, and there are no signs this trend will fade any time soon.

Realtor.com found that 72% of more than 2,400 landlords surveyed, up from 65.1% in the January poll, expect to raise rent on at least one property in the next 12 months.

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Medora Lee is a money, markets, and personal finance reporter at USA Today TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.

This article originally appeared on USA TODAY: Target plans big discounts and sales as inflation soars. Here's why