S&P 500: Target’s Disappointing Forecast Raises Questions on US Consumer Health

Target Warns of Weak First-Quarter Profit as Consumer Spending Softens

Target (NYSE: TGT) issued a cautious outlook for the first quarter, citing weaker-than-expected February sales and consumer uncertainty. The retailer expects a “meaningful” decline in quarterly profit compared to last year, pointing to slowing discretionary spending, tariff concerns, and macroeconomic headwinds. This warning follows similar concerns from Walmart (NYSE: WMT) and E.l.f. Beauty (NYSE: ELF), raising broader questions about the strength of U.S. consumers.

Shares of Target fluctuated in premarket trading following the report but were last up about 1%. However, the broader implications of its cautious outlook could weigh on consumer discretionary stocks and impact the S&P 500’s performance today.

Is Consumer Weakness Hitting Target’s Sales?

Target’s softer outlook aligns with recent data showing a sharp pullback in consumer spending in January and the steepest decline in consumer confidence since 2021. While the first quarter is typically slow due to post-holiday spending fatigue, Target’s update suggests a more pronounced slowdown than usual. CFO Jim Lee highlighted declining consumer confidence and unseasonably cold weather as factors weighing on discretionary categories, particularly apparel.

Despite these challenges, Target expects some improvement as seasonal shopping picks up, especially with Easter approaching. However, the company remains cautious about broader spending patterns for the year.

How Did Target’s Q4 Earnings Perform?

Target managed to beat Wall Street expectations for both earnings and revenue in the fiscal fourth quarter. The company reported earnings per share (EPS) of $2.41, exceeding the $2.26 consensus estimate, while revenue came in at $30.92 billion, slightly ahead of expectations.

However, profits declined from the previous year, with net income falling to $1.10 billion from $1.38 billion. Comparable sales rose 1.5% during the holiday quarter, driven by strong performance in beauty, apparel, toys, and sporting goods. Meanwhile, home décor and furniture categories lagged, reflecting consumer spending shifts.

Why Are Margins Under Pressure?

Target’s profitability took a hit due to increased promotions and markdowns. The retailer’s gross margin declined by 0.4 percentage points, attributed to higher clearance activity and more competitive pricing strategies. Additionally, a rise in digital sales—up 8.7%—increased shipping costs, further pressuring margins.

The company also faces potential headwinds from tariffs on imported goods, which remain a lingering uncertainty. Target acknowledged that some consumers are already factoring tariff concerns into their spending habits, adding another layer of pressure to discretionary sales.

What’s the Outlook for 2024?

Target forecasts full-year EPS between $8.80 and $9.80, roughly in line with analysts’ estimates, but expects sales growth of just 1%, well below Wall Street’s 2.6% forecast. The retailer also anticipates flat comparable sales for the fiscal year, signaling continued consumer caution.

To counteract sluggish discretionary spending, Target is focusing on fresh merchandise and strategic partnerships. New collaborations with Champion and Warby Parker are expected to boost traffic and sales in the long term, though their impact won’t be felt until 2025.

What Should Traders Watch?

Target’s premarket stock movement suggests that investors are digesting the mixed signals from its earnings beat and cautious outlook. If Target’s warning on consumer spending sparks broader concerns, the consumer discretionary sector could see weakness today, potentially dragging on the S&P 500. Traders will also be watching for any market reaction to tariff developments and whether investors position defensively following Target’s warning.

More Information in our Economic Calendar.