Dive Brief:
- Target expects consumer and tariff uncertainties to pressure profits in Q1, the retailer said in its earnings announcement Tuesday.
- For the fourth quarter, the retailer reported net sales declined 3% year over year to $30.9 billion, while comparable sales rose 1.5%. Operating income fell 21% from the prior year to $1.5 billion and net income fell about 20% to $1.1 billion.
- Net sales for the full year fell nearly 1% to $106.6 billion from last year, while comps were essentially flat. Operating income for the year fell 2.5% to about $5.6 billion. The gross margin rate for the year was 28.2%, up from 27.5%, which the company attributed in part to product cost improvements and growth in advertising and marketplace revenues.
Dive Insight:
Although Target’s Q4 performance met or beat analyst expectations, its full-year outlook reflects continued concerns driven by the reality of trade wars and softness in consumer spending.
“Ultimately, we see Target in a difficult spot given competitive pressure, continued margin pressures on low sales growth, discounting, and e-com mix, and significant risk from tariffs and cyclical downside if the consumer slows further on federal cuts or rising inflation on the back of tariffs,” Chris Bottiglieri, equity research analyst at BNP Paribas Exane, said in a Tuesday note.
Executives on the Tuesday earnings call acknowledged that while several key metrics are trending positive, the company still has room for improvement, including with out-of-stocks and store experience elements like checkout speed.
“In a world where consumer expectations continue to rise, we have to deliver even higher levels on things like ease, speed and reliable in stocks,” Chief Operating Officer Michael Fiddelke said. “We know there's no ‘Tarzhay’ magic if you can't find the item you were looking for because we were out of stock or we didn't delight you.”
Fiddelke said the company has “made considerable progress” on inventory reliability, with out-of-stocks lower in every quarter of last year than the prior year and the year before that.
The inconsistent execution — which includes issues like out-of-stocks, crowded aisles and locked-up products — and lack of newness continue to pose issues for Target, according to Global Data Managing Director Neil Saunders. Target in recent weeks has worked to address some of these challenges through partnerships with Warby Parker and Champion.
“The challenge and opportunity for management is to reset the business with a much bolder vision backed by proper investments, even if they come at the short-term cost of weaker profit,” Saunders said. “The alternative is to permit further customer defection which, over time, will also weaken margins.”
Looking ahead, the retailer saw “a small decline” in net sales for February. The month saw unusually cold weather across the U.S., which affected apparel sales, as did soft consumer spending and declining consumer confidence affected the retailer’s overall discretionary assortment.
However, Chief Financial Officer Jim Lee said the outlook for the rest of the year is stronger. For the full year, guidance is for net sales growth around 1%, reflecting nearly flat comp growth. Target said it’s on track to continue its store growth plans. The company opened 23 stores last year and plans to open another 20 this year.
“Looking ahead, 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,” Lee said. “We will continue to monitor these trends and will remain appropriately cautious with our expectations for the year ahead.”
