Target beats estimates, but expects profit pressure from 'tariff uncertainty'

Key points

• Target stock was down about 3% Tuesday despite a Q4 earnings beat.

• The company expressed concern about softer expected sales in Q1 and tariffs.

• Is Target stock a buy?

Target stock was own about 3% on Tuesday

Target (NYSE:TGT) stock was heading lower on Tuesday despite a solid revenue and earnings beat by the big box retailer in Q4.

The stock was down about 3% on Tuesday to about $117 per share, most likely on concerns about the impact of tariffs and flagging consumer confidence.

Target generated net sales of $30.9 billion in the quarter ended February 1, down about 3.1% year over year. The sales results did, however, top analysts’ estimates of $30.76 billion in revenue. Store traffic was up 2.1% year over year,.

On the earnings side, Target made $1.1 billion in the quarter, which was down 20% from the same quarter a year ago. Earnings were $2.41 per share, which was better than the $2.25 per share that analysts projected.

The fourth quarter gross margin – net sales minus cost of sales — was 26.2%, down from 26.6% in the year ago quarter. This was due to higher digital fulfillment and supply chain costs and higher promotional and clearance markdown rates. 

Among the bright spots, Target’s fourth quarter comparable store sales grew 1.5%, led by strong increases in apparel and hardlines sales. Hardline items are bigger ticket goods, like appliances, and are often synonymous with consumer durables.

Also, digital comparable sales, or online purchases, spiked 8.7% in the fourth quarter. Within digital sales, same-day delivery through Target Circle 360 jumped more than 25% compared to the same quarter a year ago.

“Our team grew traffic and delivered better-than-expected sales and profitability in our biggest quarter of the year,” Brian Cornell, chair and CEO of Target, said. “Results were led by strong performance in Beauty, Apparel, Entertainment, Sporting Goods and Toys.”

On tariffs: “Prices will go up”

The decline in Target stock Tuesday came on a day when President Donald Trump imposed 25% tariffs on goods imported from Canada and Mexico, and a 20% tariff on imports from China. Both Canada and China responded with reciprocal tariffs and Mexico is expected to follow suit.

Target cited concerns about the impact of tariffs, and other forces, like consumer confidence, on its first quarter earnings.

“In light of ongoing consumer uncertainty and a small decline in February net sales, combined with tariff uncertainty and the expected timing of certain costs within the fiscal year, the company expects to see meaningful year-over-year profit pressure in its first quarter relative to the remainder of the year,” officials wrote in the earnings release.

In an interview with CNBC Tuesday, Cornell said that the tariffs will impact prices, as soon as next week for certain items, like fruits and vegetables from Mexico.

“Those are categories where we’ll try to protect pricing, but the consumer will likely see price increases over the next couple of days,” Cornell told CNBC. “If there’s a 25% tariff, those prices will go up.”

Is Target a buy?

The outlook is a bit better for the full year, as Target calls for net sales growth of around 1%, with comparable sales growth expected to be around flat. Further, it anticipates a modest increase in the operating margin compared to 2024, while earnings are expected to settle between $8.80 and $9.80 per share. That would be about a 5% increase at the midpoint, a 10% jump at the high end, and basically flat at the low end.

The company expects to invest meaningfully in new stores, its digital capabilities, and its supply chain.

Target has a median price target of $145 per share, which would be a 24% increase over its current share price. One analyst, Jefferies, lowered its price target for Target after earnings, dropping it by $15 to $150 per share. But Jefferies maintained its buy rating for the stock.

Target stock is really cheap right now, with a P/E ratio of just 12, which is the lowest it has been in more than a year. That’s due to a 21% drop in the stock price over the past year. The stock is down about 13% YTD.

But with the potential for rising prices amid this trade war, combined with the potential for a slowing economy and higher inflation, investors should be cautious.