Target's latest warning is 'a bad development for the retail industry,' analyst explains

Target's latest warning on Tuesday is apt to send shivers down the backs of its retail competitors in home and apparel.

"While clearly a negative for Target, this is a bad development for the retail industry generally, particularly those that play in categories where Target is most over-inventoried, which are seemingly home and apparel," Citi retail analyst Paul Lejuez wrote in a note to clients. "While many believe Target had taken its medicine when it guided down three weeks ago, today’s announcement shows it is still struggling to adjust to recent trends."

The discount retailer said Tuesday that it's aiming to cut inventory by offering discounts, canceling orders, and taking a harder look at expenses. The actions are meant to "right-size its inventory for the balance of the year and create additional flexibility to focus on serving guests in a rapidly changing environment," the company said in a statement.

Target stock fell more than 2% in Tuesday's session, and the company's ticker page was the most active ticker on the Yahoo Finance platform by midday.

"We actually do see a continued strong sales environment, traffic and the top line continue to be strong," Target CFO Michael Fiddelke told Yahoo Finance recently. "But over the past several weeks what we have been able to continue to assess is the broader retail environment — and I think as has been reported pretty widely at this point — the level of inventory in retail is high. And we also expect inflation and higher costs to be persistent."

Fiddelke was hesitant to say the actions — which are far from the norm for Target in the past five years —were tantamount to the retailer preparing for a recession, stressing that the markdowns will be most acute in discretionary categories such as home goods as consumers curtail some spending.

A couple of shoppers leave a Target store on a rainy afternoon in Alhambra, California on December19, 2013. (FREDERIC J. BROWN/AFP via Getty Images)
A couple of shoppers leave a Target store on a rainy afternoon in Alhambra, California on December19, 2013. (FREDERIC J. BROWN/AFP via Getty Images)

And while it's clear that Target's increased sales in home furnishings this summer could place margin pressure on the likes of Wayfair, Williams-Sonoma, and TJX-owned HomeGoods, Citi's Lejuez sees Target's guidance rippling across the entire retail industry.

"With all the debate about the health of the consumer and questions about whether we might see a consumer recession over the next 24 months, we believe regardless of whether this comes to fruition at a macro level by technical definition, it is going to feel like a recession in apparel as we look out to the second half of 2022," Lejuez stated. "At a time when many are looking to pass through higher input costs to the consumer, weaker than expected demand and high inventory is going to drive markdowns, creating an extremely unfavorable margin equation."

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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