The shocking news out of Target earlier this week that it was overloaded with way too much inventory and was about to launch a massive dump-the-stuff program to get rid of it sent the entire retail world into a crazed frenzy.
But, a few days later, as things have settled in, perhaps Target wasn’t so crazy after all. Its stock, if not back to where it was a few weeks ago when the giant retailer issued its quarterly numbers and gave the first warnings of troubles, has recovered most of what it lost this week. (The announcement it was raising its dividend 20% didn’t hurt either.)
More importantly, in the light of the retail day, there appears to be a method to Target’s madness and when all the merchandising dust settles we may look back and say this was a pretty smart move in a very bad situation.
But let’s not forget what got them to this point in the first place: management blew it in when it came to figuring out how much inventory the company needed. They didn’t anticipate the big shifts in consumer spending, they didn’t take into account the wildly rising rate of inflation and they didn’t understand how year-over-year comparisons against stimuli last spring were going to impact disposable incomes now. Target, like many of its competitors, should have known better.
But given the hand they dealt themselves, one can say their doubling down strategy going forward could outsmart everyone else in the end:
• By telling Wall Street how bad things were, just two weeks after releasing miserable numbers, Target CEO Brian Cornell’s full disclosure meant there were no surprises coming down the road. He did the same thing when he took over the company in 2014 and told the Street things were going to be bad for a while as he worked to fix the company. It was a brilliant move that kept the stock damage to a minimum. Investors hate getting blindsided and he made sure that didn’t happen. It appears he has done it again this week.
• By getting out ahead of other competitors who are overloaded with excess goods, Target is the first to the markdown party, always a wise choice. The free advertising the company got by telling shoppers that the bargains were coming was priceless and it didn’t require the image-obsessed retailer to soil its usual marketing and promotional vehicles. How smart was that?
• And by clearing out the back room fast, Target is opening up space and money to set itself up for the back half of the year when it’s really important. Target’s holiday orders are already in process so it’s unlikely there will be any major adjustments made at this point but all of this does give the company a little extra flexibility to zig and zag accordingly as the economy plays out for the balance of the year.
This was a bad week for Target, coming on the heels of its worst stock sell-off in decades. Its sharees are off about a third from their 52-week high and the bad news in financial performance matrices is expected to continue for at least another quarter.
But, in hindsight even as the initial take was that Target had gone mad, we may look back at its actions this week and decide that indeed Brian Cornell and the rest of tea party were right. After the Mad Hatter asked her, “Have I gone mad?” Alice replied, “I’m afraid so. You’re entirely bonkers. But I’ll tell you a secret. All the best people are.”
WarrensReport 