Shares of the company fell 7.3% in early trading after Target also said its first-quarter performance was impacted by changes made to its diversity, equity and inclusion policies (DEI) in January.
Target’s latest quarter reflects another weak performance for the retailer, which has struggled with merchandise missteps, retail crime, and inventory management. Over the past year it has faced challenges in maintaining steady sales growth, dealt with boycotts and lawsuits related to its DEI practices and relied heavily on sourcing from countries where Donald Trump has placed broad-based tariffs.
“Expectations were very low for Target’s first quarter. Even against that, Target’s results came in light,” Michael Baker, a D.A. Davidson analyst, said. Target’s stock has performed poorly, down nearly 28% this year, in contrast to Walmart’s 9% gain and Home Depot’s 2.3% decline.
“Target’s (results) do nothing to restore confidence in the company. On the contrary, they are emblematic of a business that has made too many mistakes and has lost its way on several fronts,” GlobalData managing director Neil Saunders said, pointing to issues including a lack of exciting merchandise and poor inventory management.
The big-box retailer’s results also showcase the pressure American consumers are under. In May, consumer sentiment slumped further while one-year inflation expectations surged. That followed the first contraction in the U.S. economy in three years in the first quarter due to a flood of imports as businesses raced to avoid higher costs from tariffs. Target’s forecast contrasts with bigger rival Walmart, which maintained its annual forecasts last week but said it would need to pass on higher prices due to tariffs. That drew the ire of President Donald Trump, who said Walmart should “eat the tariffs” on imported goods instead of passing on costs. On a media call, Target executives declined to provide details on potential price increases due to tariffs. Most tariff-related increases could be offset, they said, but acknowledged that raising prices could be a “last resort.”
CEO Brian Cornell said pricing decisions will largely depend on ongoing efforts to source more products in the United States and reduce reliance on China.
“That is going to play a very important role,” he said.
Rick Gomez, the company’s chief commercial officer, said Target is working on negotiating with suppliers, expanding sourcing to other Asian countries beyond China, re-evaluating its product assortment, and adjusting the timing and quantity of orders.
“These efforts are expected to offset the vast majority of the incremental tariff exposure,” Gomez said.
CHINA EXPOSURE
Unlike Walmart, which generates the bulk of revenue selling grocery items like bananas, milk, toilet paper, and shampoo, a majority of what Target sells falls in the non-essential category – largely apparel, home furnishing and beauty products, which it sources from China.
Target has said it depends on China for 30% of its store-label goods and that it is on track to reduce that to less than 25% by the end of the year. This is down from 60% in 2017, but still makes the current 30% tariff on China imports hard to navigate, analysts have said.
But it is facing other issues as well.
In January, Target ended many of its DEI policies, drawing significant criticism, with some noting that its commitment to inclusiveness had helped attract younger, more diverse consumers. The decision generated more attention as it coincided with President Trump’s executive order to eliminate DEI policies in federal agencies and schools.
The backlash led to economic boycotts, notably from Reverend Jamal-Harrison Bryant, a Georgia pastor who organized a 40-day “fast” of Target stores earlier this year. He has since called for those efforts to continue
in recognition of the fifth anniversary of George Floyd’s murder in Minneapolis, Target’s headquarters.
CEO Cornell said the reversal of some DEI policies played a role in first-quarter performance, but that he couldn’t quantify the impact.
Target said Wednesday it now expects a low-single digit decline in annual sales, a surprise for Wall Street analysts, who expected a 0.27% rise, according to LSEG. Target previously forecast net sales growth of around 1%.
It expects annual adjusted earnings between $7.00 and $9.00 per share, compared to its prior forecast of $8.80 to $9.80. Analysts were expecting $8.40.
Target’s first-quarter comparable sales fell 3.8%, compared to analysts’ estimates of a 1.08% decline. On an adjusted basis, Target reported $1.30 per share. Analysts on average were expecting $1.61 per share.
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