Walmart and Target struggle with high inventories

Both US retail giants Walmart and Target were among the biggest winners during the pandemic. They grew rapidly and were able to get in a lot of inventory as times were uncertain and supply chains overly stretched. This ability to ensure good inventories becaem a competitive advantage for big retailers.

The plateauing growth after the pandemic has turned that same inventory into a problem, especially for Target.

The high inventory levels received a lot of media coverage. However, one can see from the longer term trend that the inventory to sales ratio of the either company is not significantly above the longer term levels.

Target decided to take drastic action to reduce its inventories through big promotions. That led to a reduced profitability: a whopping 8,3%-point (or $2,1 billion) reduction in Operating income.

Contrary to Target, Walmart was able to keep on growing faster: (7% in US, 8,4% in total). Due to the higher growth and probably because of the different selling structure (more groceries), Walmart has not had to resort to similarly big promotions as Target. Thus, the hit on Operating margins has been smaller.

Additionally Walmart has been able to sustain the online growth a bit better than Target. Target has a higher share of online sales due to the more non-food based business. However, Walmart did grow it’s online sales by 12% compared to 8,8% growth for Target.