By Sabrina Escobar

Strong holiday demand for discretionary items helped Target barrel past fourth-quarter earnings expectations. But uncertainty over consumer demand and tariffs will weigh on the current quarter's performance, the company said.

Target reported fourth-quarter adjusted earnings of $2.41 a share, coming in well ahead of analyst consensus for $2.26, according to FactSet. Stronger-than-expected sales in margin-boosting discretionary items, including toys, electronics, and apparel, helped deliver the bottom-line beat, Target said.

Net sales fell 3.1% year over year to $30.9 billion, but were slightly better than Wall Street's projections for $30.8 billion. Same-store sales increased 1.5% year over year in the fourth quarter, in line with expectations.

Target, like many other retailers this earnings season, chose to strike a cautious tone for its full-year guidance. For the fiscal year ending January 2026, Target sees net sales growing at around 1% year over year. Analysts had penciled in 2.5% sales growth.

Earnings will range between $8.80 to $9.80 a share. The midpoint of that range, $9.30, is a tick higher than forecasts for $9.29 a share. First-quarter profit will come under pressure compared with the rest of the year thanks to ongoing consumer uncertainty, tariffs, the expected timing of certain costs, and a "small decline" in February sales, Target said.

"Our topline performance for the month was soft, as uncharacteristically cold weather across the U.S. affected apparel sales, and declining consumer confidence impacted our discretionary assortment overall," said Jim Lee, Target's chief financial officer. "Looking ahead, we expect to see a moderation in this trend as apparel sales respond to warmer weather around the country."

According to data from Placer.ai, Target's foot traffic fell consistently in the first three weeks of February, down 6.8% year over year, on average. Per R.J. Hottovy, head of analytical research at Placer.ai, foot traffic fell across much of the retail sector in February, but the slowdown at Target was more stark than at rival Walmart or Costco Wholesale. The company faced boycott calls last month in protest of Target's decision to roll back its diversity, equity, and inclusion policies.

Target stock is down 11% this year and closed 2.8% lower at $120.75 Monday. The benchmark S&P 500 is down 0.5% this year.

The shares' underperformance are an overhang from Target's dismal third-quarter results, reported in November. At the time, management said the earnings miss was tied to decisions to pull forward holiday orders in anticipation of the East Coast port strikes, as well as weak demand for discretionary products ahead of the holiday shopping spree.

The fourth-quarter's rebound in discretionary suggests Target was able to lure shoppers back in stores for the holidays. Product launches like Taylor Swift's Black Friday exclusives and a line of Thanksgiving staples priced below $20 helped drum up enthusiasm, the company said.

The company is banking that continuing investments in lower-priced goods and innovative merchandise will keep customers coming. For instance, Target recently announced partnerships with Champion and Warby Parker. As Evercore ISI analyst Greg Melich noted ahead of earnings, "Target does best when it offers its guests a differentiated assortment at a great value."

But the retailer has struggled to do that recently, particularly when it comes to its assortment of discretionary products. And indeed, the past few quarters have seen demand for discretionary products seesaw, improving one quarter and deteriorating the next. Investors have been waiting for discretionary demand to stabilize to grow more bullish on the stock, and will likely be listening to management commentary at the company's annual meeting, scheduled for 9 a.m. Eastern time Tuesday, for signs that the volatility may be drawing to an end.

Write to Sabrina Escobar at sabrina.escobar@barrons.com

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March 04, 2025 06:30 ET (11:30 GMT)

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