Target predicts slow-growth year as consumer stress intensifies

Target closed the book Tuesday on a slow-growth year only to face pessimistic U.S. consumers skittish about high prices and tariffs.

Retailers, including Minneapolis-based Target, are a bellwether for consumer sentiment and most expect 2025 to be an uphill battle.

The new tariffs on Canadian and Mexican goods, plus a doubling of the tariff on goods from China, will add costs to Target’s supply chain. In the next few days, CEO Brian Cornell said he expects produce prices, namely strawberries and avocados that come from Mexico, to increase.

Cornell said the team is working on ways to mitigate the effects. That includes continued negotiations with vendors to try not to pass on all the costs to consumers, said Chief Commercial Officer Rick Gomez.

At Target’s annual investors day in New York City on Tuesday, Cornell outlined a plan to grow sales by $15 billion over five years.

The company plans to refresh brands, make its inventory and customer service more consistent across stores and find ways to cut costs and make delivery more efficient as digital sales continue to climb, he said.

“We stand behind the design, quality and value we offer. We’ll continue to lean into our owned brands and match it up with a great in store and digital experience that makes it really easy for the guests to find the value they’re looking for,” Cornell said in a chat with journalists following the meeting.

But he and other executives acknowledged Target has lost a bit of the “magic” that had customers calling it “Tar-zhay.”

“We come at this challenge from an enviable position,” said Michael Fiddelke, the company’s chief operating officer.

Executives said the fourth quarter was buoyed by sales of apparel, toys and sporting goods as people stretched their budgets for the holidays.

The new tariffs add cost pressure following a holiday quarter that met diminished expectations, but saw more profitable in-store sales decline. Overall sales, buoyed by a nearly 9% increase in digital revenue, rose 1.5%.

Target executives predict flat comparable sales next year. Profit margins for the current quarter are expected to decrease.

Analysts, though, said the profit guidance for the year was better than expected. Target’s stock sank 3% in trading Tuesday, along with the overall markets.

Profits for Target’s quarter ending Feb. 1 were down 20% to $1.1 billion. The year-ago quarter saw an extra week of profits, but margins for the quarter tightened slightly.

The retailer attributed the thinner profit margin to rising costs in digital fulfillment, supply-chain challenges and price discounting.

Overall February sales were soft, even as the retailer saw record sales surrounding Valentine’s Day, said Chief Financial Officer Jim Lee.

Economic uncertainty is up as shoppers navigate sticky inflation and concern over how the federal government cuts and the Trump administration’s new tariffs will affect household pocketbooks.

“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.

Walmart also was cautious on its guidance for the year. But Target doesn’t have any room to fail, said Neil Saunders, a managing partner at GlobalData Retail.

Walmart was coming off several strong quarters where it said it gained market share among middle- and professional-class shoppers.

Target has had several lackluster quarters in the past three years.

“Target has had a very torrid time of it the past couple of years,” Saunders said. For a while it looked like 2025 might be a chance for the retailer to get ahead. Now, it is unlikely to be a turning point.

To get past the stall in robust growth, Target announced several strategies on Tuesday.

The retailer is refreshing its product assortment with thousands of new items across key categories, including beauty, which will have 50 new brands entering stores, 90% of which will be priced under $20.

At the same time, Target is reassessing its brand strategy with a planned renovation across apparel, home goods and store design.

On the digital front, Target aims to increase third-party marketplace sales from $1 billion in 2024 to over $5 billion by 2030 through its Target+ platform. The executives said the marketplace will scale to complement existing products rather than competing directly with Walmart or Amazon. Cost-cutting initiatives are also expected to improve profit margins as digital sales grow.

The plan to add $15 billion in sales is doable, said Brian Yarbrough, senior analyst at Edward Jones, as it translates to 2.5% to 3% annual increases — growth levels the retailer consistently hit before the pandemic.

However, investors will need to see sustained gains over multiple quarters before confidence in Target’s trajectory strengthens, he added.

One area of concern is Target’s handling of inventory. During the investors meeting, executives sidestepped an analyst’s question about inventory levels being up 7% while sales were down.

“It only spooks people more if you’re not answering the question because they think there could be more there,” Yarbrough said.

Target attributed the higher-than-anticipated inventory to the addition of two food distribution centers, continued investments in new products and receipt-timing volatility.

Analysts, though, pointed to the fact that Walmart can invest more in capital spending, which could impact Target’s ability to compete in areas like digital sales and transaction size. While digital sales rose nearly 9% in the fourth quarter, in-store sales — historically more profitable — declined.

“At the end of the day, north of 70% of Target’s sales base comes through its stores, so it needs growth there,” Yarbrough said. “It’s going to be very difficult to drive growth with drive up and Shipt.”

The retailer announced it would add 20 new, mainly large format stores, in the coming year, as well as continued renovations for existing stores.

While Target remains optimistic about its omnichannel investments and cost-saving initiatives, analysts say the retailer faces headwinds as it balances promotions, inflationary pressures and competition.

For the full year, Target reported a modest 0.1% increase in comparable sales, with net sales down 0.8% to $106.6 billion. Adjusting for the extra week in 2023, Target executives said annual sales were slightly higher. Adjusted earnings were $8.86, compared with $8.94 in fiscal year 2023, leaving the Minneapolis-based retailer at the high end of analysts' predictions.