Barron's: Retail Inventory Build Reduces Pro

Companies Are Finally Rebuilding Their Inventories. What That Means for Profits.
By Jacob SonenshineFollow
May 29, 2022 7:00 am ET

Let’s break it down: Target’s sales for the most recent quarter of $25.2 billion beat analysts expectations of $24.5 billion, but the retailer needed a bigger beat for profits to surpass estimates. The profit of $2.19 a share was well below expectations for $3.07.

And that miss was because Target’s operating margin of 5.3% fell short of expectations for 8.1%, which brings us back to pricing: The company couldn’t fully offset rising costs with price increases.

Soaring inventory certainly didn’t help the profit margin. Target’s inventory rose 43.1%, while sales grew only 4%. Having so much inventory makes it hard to raise prices as much as management would like—and analysts at Cowen are now warning of markdowns on products in the coming quarters.

E.l.f Beauty ELF +5.48% (ticker: ELF), for instance, told investors early in the year that it was carrying more inventory to make sure supply matched demand. On Wednesday, the cosmetics maker posted numbers that showed the move didn’t drag down either sales and earnings. And the stock gained.

Dick’s Sporting Goods DKS +0.14% , on the other hand, is suffering from too much inventory. On Wednesday, the company lowered this year’s outlook for both sales growth and earnings—down 3 percentage points and 15% from previous midpoints, respectively. That isn’t surprising, given that inventory increased 40%.

Too much inventory hampers a company’s ability to raise prices as much as they want. In Dick’s case, pricing power may be eroding already. Still, the stock jumped, but that tends to be the exception rather than the rule.