What happened
Shares of Target (NYSE: TGT) were down 3.9% to session lows as of 1:53 p.m. ET Tuesday. The drop comes as the stock has struggled to recover from a sharp 30% drop in just a week earlier this year. That decline in May represents almost all of the retailer's 31% stock price slide year to date.
So what
Tuesday's slump came in the wake of a Wall Street Journal article reporting that apparel retailer Gap is eliminating 500 corporate jobs. That comes just months after Target management said that supply chain issues had contributed to an inventory bloat that the company would have to unwind by reducing prices. Gap and Target aren't in the same position, but with Gap taking action to reduce its expenses, Target investors are wondering if that retailer might be facing challenges on the cost side as well.
Now what
Target is already operating with razor-thin margins as it works to clear up its inventory situation. When the company reported its second-quarter earnings a month ago, it said product promotions caused its operating margin rate to drop to just 1.2%. That compares to an already-disappointing 5.3% in the prior quarter and 9.8% in the year-ago period.
Gap's cost-cutting move comes as it endures dropping sales and profits. In its last quarterly report, Gap said comparable-store sales declined 10% year over year. Management also withdrew its full-year guidance, citing an "uncertain macro-environment." Target's second-quarter sales grew by 2.6% compared to the prior year period, but investors are wondering if the company might follow its fellow retailer and deliver worse news on the cost front.
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Howard Smith has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.
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