Target on Tuesday warned that it expects a “meaningful” drop in first-quarter profit compared to the year-ago period as it contends with “ongoing consumer uncertainty,” soft sales in February and concerns around tariffs.
The first three months of the year tend to be slow for retailers because consumers typically pull back after the holiday shopping season. But Target’s tepid guidance comes after Walmart and E.l.f. Beauty raised concerns last month about a slower than usual start to the year.
Coupling those weak forecasts with a sharper-than-expected decline in consumer spending in January and the biggest drop in consumer confidence since 2021 in February, Target’s guidance is the latest warning sign about the health of the consumer and the U.S. economy.
Plenty of Target’s troubles have been self-inflicted in recent years, but as a big-box retailer that caters to large swaths of the population, its performance can offer insight into spending patterns ahead, especially when other companies have made similar comments.
In a statement, Target’s finance chief Jim Lee said February sales were “soft” and “declining consumer confidence” hurt discretionary sales. He also blamed “uncharacteristically cold weather,” saying it affected apparel sales.
“We expect to see a moderation in this trend as apparel sales respond to warmer weather around the country, and consumers turn to Target for upcoming seasonal moments such as the Easter holiday,” said Lee. “We will continue to monitor these trends and will remain appropriately cautious with our expectations for the year ahead.”
Beyond its outlook, Target reported fiscal fourth-quarter earnings and revenue that beat Wall Street’s expectations.
Here’s how Target did compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:
- Earnings per share: $2.41 vs. $2.26 expected
- Revenue: $30.92 billion vs. $30.82 billion expected
Target’s net income for the three-month period that ended Feb. 1 was $1.10 billion, or $2.41 per share, compared with $1.38 billion, or $2.98 per share, a year earlier.
Sales dropped to $30.92 billion, down about 3% from $31.92 billion a year earlier. In the year-ago period, Target benefited from an extra week, which has skewed year-over-year comparisons.
For its current fiscal year, Target is expecting earnings per share to be between $8.80 and $9.80, which at the midpoint is more or less in line with estimates of $9.31, according to LSEG. However, it’s expecting sales to grow just 1%, well behind estimates of 2.6%, according to LSEG.
Target’s first-quarter guidance will also likely surprise investors. While it declined to share specific figures, Target said it’s expecting “to see meaningful year-over-year profit pressure in its first quarter relative to the remainder of the year.” Meanwhile, analysts were expecting profits to grow 0.9%, according to LSEG.
In the leadup to Target’s earnings report, the retailer raised its comparable sales guidance for the fourth quarter in January after it saw steady traffic during the crucial holiday shopping months, but it stood by its profit guidance, indicating that it relied on deals and discounts to drive sales.
That strategy ultimately impacted profits. During the quarter, Target’s gross margin fell about 0.4 percentage points due in part to “higher promotional and clearance markdown rates,” it said in a press release.
Target, which has long enticed shoppers with its wide range of discretionary merchandise, has struggled to win consumers over with those nice-to-have items amid persistent inflation, high interest rates and steep competition from online discounters and rival Walmart. That shift in mix has hurt Target because discretionary merchandise tends to be more profitable to sell than household essentials like groceries and toothpaste.
The company has said that it’s been able to drive momentum when it offers new eye-catching merchandise – such as fresh workout gear, pet accessories or seasonal flavors of food.
For example, customers showed up and spent when Target started selling leggings from All In Motion, which came in bright colors and glittery patterns, for $25, Chief Commercial Officer Rick Gomez told CNBC in an interview last month. They also responded well when Target redesigned bras from its intimates and sleepwear line, Auden.
“When we have newness with style, on trend, at affordable prices, the consumer is willing to shop,” Gomez said.
During the fourth quarter, comparable sales trends in apparel grew by nearly 4 percentage points compared to the third quarter and Target is looking to sustain that momentum. At the end of February, Target said it was partnering with Champion and Warby Parker, which will see both brands show up in Target stores and online.
As part of its multiyear deal with Champion, Target will carry an exclusive line of sportswear that’s designed more for lounging and living, rather than proper gym clothes. With Warby Parker, Target will open five shop-in-shops and start offering the eyewear brand’s products online, with a larger rollout planned for next year.
The partnerships are designed to entice shoppers with fresh merchandise, bring new customers in and position Target to compete against its rivals, but it may take some time before these deals start bearing fruit.
Even though the agreements were announced at the beginning of the year, they won’t officially launch until the second half of 2025.
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