Target lowered its guidance as it seeks to offset the effects of tariffs.
The big red bullseye proved difficult to hit in the first quarter for mega retailer Target (NYSE:TGT) as the company missed both revenue and earnings projections by a significant margin.
And the outlook is not much better, causing the stock to plummet about 6% on Wednesday down to around $92 per share. Target stock is down a whopping 32% year-to-date.
Net sales for the quarter were $23.8 billion, down 2.8% from the same quarter a year ago. This fell short of estimates calling for $24.35 billion in revenue.
Net earnings were $1.04 billion, up 10% year-over-year, while earnings were $2.27 per share, up 11.7%. Adjusted earnings, which excludes gains from litigation settlements, was $1.30 per share, down 36% year-over-year. This missed estimates by a wide margin, as analysts had expected earnings of $1.65 per share.
“In the first quarter, our team and our business faced an exceptionally challenging environment that affected our performance with declines in both traffic and sales, most notably in our discretionary categories,” Target CEO Brian Cornell said. “For several years now, we’ve seen pressure in our discretionary businesses, as spending adjusted down from elevated levels during the pandemic and then moved further away in the face of historically high inflation in needs based categories.”
But there were other issues that impacted Target, as well.
Some bright spots
It was not all bad for Target, as the big box chain had some bright spots. One of them was the growth in its ecommerce channel. Digital comparable store sales jumped 4.7% in the quarter, led by 35% growth in same-day delivery via its Target Circle 360 program.
However, that was not enough to offset a 5.7% decrease in comparable store sales outside of digital. Overall, comparable store sales fell 3.8% in the quarter.
Another bright spot was expense discipline, as SG&A expenses dropped 10.8% in the quarter. But even when excluding one-time items related to litigation, it only grew 1%. Also, cost of sales dropped 2% in the quarter to $17.1 billion. Further, Target was able to shrink its inventory with markdowns on goods, which may have hurt profit in Q1 but should benefit the company in the second half of the year, said COO Michael Fidelke on the earnings call.
That said, Target faced major headwinds from five months of declining consumer confidence, uncertainty about tariffs, and boycotts related to its diversity, equity and inclusion (DEI) program.
Target lowers its guidance
The big question facing retailers, among others, is how will the tariffs impact their business? Based on Target lowering its revenue and earnings guidance for the fiscal year, it is clearly going to have an effect.
Target now expects low-single-digit net sales declines for the fiscal year, down from the previous guidance of 1% growth.
GAAP earnings are targeted to fall between $8 to $10 per share, while adjusted earnings are expected to be approximately $7 to $9 per share. The company had previously projected both GAAP and adjusted EPS to be between $8.80 to $9.80 per share.
“The merchandising team has been working tirelessly to mitigate the impact of tariffs,” Cornell said on the earnings call. “And the difficulty level has been incredibly high, given the magnitude of the rates we’re facing and a high degree of uncertainty on how these rates and impacted categories might evolve.”
Mitigating tariff exposure
Target is employing several strategies to mitigate the impact of tariffs, with raising prices being the last resort.
“Our strategy is to remain price competitive by leveraging the capabilities, long standing relationships, and the scale that set us apart for many of our retail peers,” the CEO said.
Those strategies include negotiating with its vendor, reevaluating assortment decisions, changing the country of production where possible, adjusting order timing, and where necessary, prices.
Rick Gomez, Target’s chief commercial officer, said these efforts will offset the “vast majority of the incremental tariff exposure.”
Target has a median price target of $111 per share, which suggests a 17% return, but Barclays just lowered its expectations to $102 per share. The stock is very cheap, trading at 11 times earnings, so it might be worth a look after this dip. But don’t look for much short-term growth, as it would be more of a long-term play.
