UPDATE 1-Target profit plunges 90% on discounting

Target profit slumped as discounts fail to spur spending by inflation-weary consumers Reuters- Target Corp reported a 90% fall in quarterly earnings and missed comparable sales estimates on Wednesday as its inflation-hit customers reined in spending on discretionary goods despite higher discounts.

On Tuesday, larger rival Walmart Inc beat estimates as its core base of low- to middle income shoppers flocked to its stores for bargains on groceries and other essential items.

Target's comparable sales increased by 2.6% in the second quarter, less than analysts' average estimate of 3.3%, according to IBES data from Refinitiv.

Its operating margin fell to 1.2% in the quarter, below 2% forecast last month and 9.8% a year ago, due to costs related to clearing out excess merchandise on store shelves, including through heavy discounting.

U.S. retailers including Target and Best Buy Co Inc have cut their profitability forecasts in recent weeks due to the squeezed prices of everything from toothpaste to gas, which curtailed spending on items like apparel and electronics.

Target, which relies more on discretionary categories, has been hit harder, compared to retailers like Walmart that stock a greater portion of their shelves with food and other everyday essentials.

The company's shares fell marginally in choppy premarket trading. They lost 22% of their value this year.

Minneapolis-based Target said it would return to an around 6% annual operating margin, but said it was still cautious about demand for discretionary items.

The vast majority of the costs to get our inventory where we wanted it are behind us. Michael Fiddelke, Chief Financial Officer, said on a media call that we are well positioned to see improved profit performance in the back half of the year.

The company reported quarterly earnings of $183 million, or 39 cents per share.

With the heavy discounting, the inventory was up 1.6% at the end of the quarter from the previous quarter, with total merchandise at $15.3 billion.

The increase in inventory was due to the company expediting product shipments for the back-to school and holiday shopping periods in a still choppy supply chain environment, Chief Executive Brian Cornell said.