TGT Faces Earnings Pressure as Tariffs and Lower Spend Bite Margins

Target Corporation TGT reported mixed second-quarter fiscal 2025 results, highlighting challenges from cautious consumer spending and ongoing tariff-related costs. Adjusted earnings per share fell 20.2% year over year to $2.05, while revenues dipped 0.9% to $25.21 billion. Comparable sales declined 1.9%, reflecting improved store traffic and digital demand but a shrinking average basket, signaling shoppers’ restraint on discretionary purchases.

The gross margin contracted 100 basis points to 29%, caused by approximately 210 basis points of pressure in merchandising. This reflected inventory-adjustment costs related to the slowdown in first-quarter sales, combined with tariff-related pressures, including purchase-order cancellation costs. 

Operating margin declined 120 basis points to 5.2% from 6.4% in the prior-year period. While most one-time cancellation costs have been recognized, ongoing tariff-related expenses continue to weigh on profitability and lower per-visit spending is constraining operating leverage.

Target reaffirmed its full-year fiscal 2025 outlook, predicting a low-single-digit decline in sales and adjusted earnings of $7.00-$9.00 per share. Management emphasized that this guidance indicates cautious planning amid tariff and consumer uncertainties, supported by disciplined cost control.

To offset margin pressures, Target is investing in operational and merchandising initiatives, including more than 10,000 AI licenses to improve forecasting and inventory accuracy, alongside programs like the FUN 101 Hardlines refresh and new brand collaborations aimed at increasing basket size.

Target’s results will hinge on converting higher traffic into stronger per-trip spending while managing tariff impacts. Without a rebound in average ticket size, margin pressures could persist through year-end.

Target’s Price Performance, Valuation & Estimates

Target stock has lost 33.5% year to date against the industry’s growth of 3.8%. The company has underperformed key peers such as Dollar General Corporation DG and Costco Wholesale Corporation COST. During the same period, Dollar General and Costco’s shares have risen 37.7% and 5.6%, respectively.

Target’s forward 12-month price-to-earnings ratio of 11.39 reflects a lower valuation than the industry’s average of 30.14. TGT carries a Value Score of A. Target is trading at a discount to Dollar General (with a forward 12-month P/E ratio of 16.25) and Costco (48.59). 

The Zacks Consensus Estimate for TGT’s fiscal 2025 earnings implies a year-over-year decline of 15.5%, while the same for fiscal 2026 indicates growth of 8.9%. Earnings estimates for fiscal 2025 and 2026 have been upbound 3 cents and 10 cents per share in the past 30 days.

Target currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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