A Target store in New York, on Nov. 14, 2017.Brendan McDermid/Reuters
Target TGT-N warned on Tuesday that uncertainty around tariffs would weigh on the retailer’s profit in the first quarter and doubled down on sourcing more of its products from countries including Guatemala.
The company was moving away from giving quarterly forecast figures for sales and profit because it expected more volatility in its business, Chief financial officer Jim Lee said during a post-earnings call.
“Consumer spending trends are not yet back to normal today,” Mr. Lee added.
The company joined bellwether Walmart WMT-N, as well as electronics retailer Best Buy BBY-N in warning about expectations for the year. Sticky inflation and tariffs on imports proposed and implemented by President Donald Trump is expected to temper demand for non-essential categories such as home furnishings and electronics that make up more than two-thirds of Target’s sales.
Target shares fell 6 per cent as it set out plans to reduce its exposure to imports from China, and said new 25-per-cent tariffs on imports from Mexico and Canada – that took effect on Tuesday – could increase prices “over the next couple of days” for seasonal produce such as avocados.
“Those are really short supply chains. We depend on Mexico during the winter,” Target’s chief executive officer Brian Cornell told CNBC in an interview. “We’re going to try to make sure we can do everything we can to protect pricing. But if there’s a 25-per-cent tariff, those prices will go up … certainly over the next week.”
Target also faces competition from big retailers such as Walmart, Amazon and Costco offering cheaper products.
While the company has tried to claw back some demand by cutting prices, ramping up promotions, and partnering with brands to offer exclusive deals on products, analysts warn it may not have been enough to recapture market share.
“Walmart has been known to have a business that is growing margins and market share, something that Target has not been able to exemplify over the last few years, so the guidance is another point of frustration for investors,” said David Wagner, head of equities at Aptus Capital Advisors.
Target said it would invest about US$5-billion in stores and technology this year, and targets comparable sales to be about flat in the year through January, 2026, compared with analysts’ average estimate of 1.86-per-cent growth, according to data compiled by LSEG.
Its annual earnings forecast of US$8.80 to US$9.80 a share was largely in line with estimates.
While the annual forecast does not consider any impact from tariffs, consumers continue to be stressed and at least some of the noise surrounding the levies hit sales in February, a Target spokesperson said.
That could pressure profit in the first quarter, which typically ends around April, the company said, adding that demand was weak for apparel and other non-essential categories that make up more than two-thirds of Target’s sales.
“We will continue to monitor these trends and will remain appropriately cautious with our expectations for the year ahead,” Mr. Lee said in a statement.
“This is another disappointment from Target, which has persistently come up short over the last couple of years. While tariffs are undoubtedly a legitimate new headwind, management had known about it for quite some time, particularly since the November elections,” said Sheraz Mian, director of research at Zacks Investment Research.
The disappointing outlook may reflect the mood of shoppers who in January pulled back spending far more than expected and showed that they are much more worried about the impact of tariffs on their wallets.
“In the near term, the consumer is hibernating for a variety of reasons,” said Gordon Haskett analyst Chuck Grom.
Still, Target’s holiday quarter comparable sales rose 1.5 per cent and beat estimates as heavy discounts and promotions helped drive sales. Earnings fell 19.3 per cent to US$2.41 a share, but beat estimates of US$2.27.
Beauty, apparel, toys and sporting goods were top performers during the holiday quarter, while home decor and furnishing sales were negative, a spokesperson said.
Consumers also did more of their shopping online, with digital comparable sales up 8.7 per cent, which led to an increase in costs of box shipping, or those made within one or two days, he noted.
Target was aggressive with its marketing and merchandising strategies as consumers spent selectively on popular products during the holidays. The company partnered exclusively with pop star Taylor Swift and attracted Black Friday sales for Swift’s Eras Tour book and vinyl albums.