Target (TGT.US) May Face "Downgrade" in Consumer Spending as Holiday Sales Bonanza Won't Last

Target (TGT.US) will release its Q4 earnings on March 4. The market expects revenue of $30.85 billion, a 3% YoY decline; and expects EPS of $2.25, a significant decrease from $2.98 in the same period last year. Higher-than-expected sales The market's valuation has been climbing ahead of the Q4 earnings release. The retailer reported a 2.8% increase in holiday sales, reflecting a 2% increase in comparable sales, and record-breaking sales during Black Friday and Cyber Monday. Holiday sales exceeded expectations.

The sales during the holiday period benefited from a nearly 3% increase in traffic over two months, meaning both physical stores and digital channels saw growth. Digital channel sales increased by 9% YoY.

Notably, target achieved traffic growth YoY for the eighth consecutive month in December. The company saw a significant increase in sales of non-essential categories during the holiday period, especially apparel and toys, and sales in the beauty and frequency categories also remained strong.

Downgrade in discretionary spending morgan stanley believes that Target's latest guidance may be cautious due to the significant decline in discretionary demand across the board this year, recent pressure on sales, general and administrative expenses from general liability and healthcare costs, and significant policy uncertainty on tariffs and immigration.

A recent report from McKinsey showed that US consumer spending is generally optimistic, but consumers did not carry their holiday spending habits into the new year as they did in 2024. A notable trend is that consumers continue to maintain low-spending habits and reduce the purchase of semi-discretionary goods (cars, beauty products, toys). This may also affect Target, as it is usually considered a mid-priced retailer rather than the most value-oriented retailer.