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Target Stock Slides As Discounts Clip Margins, Sharply Trim Q2 Earnings

"While these inventory actions put significant pressure on our near-term profitability, we're confident this was the right long-term decision," said CEO Brian Cornell.

Updated at 9:50 am EST

Target Corp.  (TGT)  posted much weaker-than-expected second quarter earnings Wednesday as deep discounts put in place to shift excess inventory ate into the big box retailer's bottom line.

Target said adjusted earnings for the three months ending in July were pegged at 39 cents per share, down 89% from the same period last year and well shy of the Street consensus forecast of 72 cents per share.

Group revenues, Target said, rose 3.5% to $26 billion, essentially matching analysts' estimates of a $26.04 billion tally. Target said same-store sales rose 2.6%, again shy of the Refinitiv forecast of 3.2%, while operating margins fell to 1.2%, below the group's July guidance of a 2% level.  

Earlier this summer, Target cautioned that its bigger-than-expected 35% build-up in overall inventories over the first quarter would trigger price cuts, adding that deeper discounts would be needed to shift the excess goods onto a customer base that was already pulling back on discretionary spending.

"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 CEO Brian Cornell. "I want to thank our team for their tireless work to deliver on the inventory rightsizing goals we announced in June." 

"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," he added. "Looking ahead, the team is energized and ready to serve our guests in the back half of the year, with a safe, clean, uncluttered shopping experience, compelling value across every category, and a fresh assortment to serve our guests' wants and needs."  

Target shares were marked 2.4% lower in early Wednesday trading  following the earnings release to change hands at $175.83 each.

Walmart  (WMT) , Target's larger big box rival, said Tuesday that improving spending trends, as well as actions the group has taken to shift excess inventory, will ease some of the pressures it expects to face in terms of overall profits over the back half of the year.

Walmart said adjusted earnings for the three months ended in July came in at $1.77 per share, down one penny from the same period last year but well ahead of the Street consensus forecast of $1.62 per share.

Group revenues, the company said, were tabbed at $152.9 billion, an 8.4% increase from last year that topped analysts' estimates of $150.81 billion. U.S. same-store sales rose 6.5% from last year, the company said, firmly topping the Refinitiv forecast. 

Inventories, which were up 33% from last year at the end of the first quarter, narrowed to a 25% gain over the three months ending in July.