Target receives almost $1 billion in tariff refunds, plans to lower prices
Tariff refunds were a massive tailwind for Target last quarter that could help it continue to lower prices.
Target received $994 million in pre-tax tariff refunds during the second quarter, the company reported in its earnings release Wednesday morning. The tariff refunds boosted Target’s second-quarter operating income 9.6% year over year to about $2.6 billion. They improved the company’s full-year operating income margin rate by about 90 basis points to around 6%.
When asked how the company anticipates that value flowing through to customers or into the business, Target CFO Jim Lee told reporters Tuesday ahead of earnings that the company will invest in price reductions.
“We have, and we will continue to, invest in price to ensure our guests are getting tremendous value each and every time they visit us at Target,” Lee said. “You saw that reflected in strong traffic growth this year, highlighting how guests are appreciating the value we’re offering. This includes reducing prices on … more than 10,000 items over the last year alone, and there’s more to come, even as we’re facing cost headwinds overall.”
Target executives did not say anything during the call about directly refunding consumers. Walmart’s CFO John David Rainey similarly said in May that the company would invest any returns from tariff refunds into lowering prices. BJ’s Wholesale Club president and CEO Bob Eddy said in June that it used tariff refunds to reduce its retail prices by about half a percentage point. In July, Amazon CFO Brian Olsavsky said it will give customers a direct refund in some cases, CNN reported.
“We have identified a limited set of circumstances where we can trace that we passed specific import charges on to customers, and when we receive those refunds, we will proactively contact affected customers and automatically issue refunds to them,” Olsavsky said. “Otherwise, like other large retailers, we’ll utilize refunds to continue to invest in low prices for customers.”
CEO Michael Fiddelke pointed to the back-to-school season as one example of how the company is investing in value. The company previously said its entire selection of school supplies costs less than it did last year, more than 50% of its back-to-school assortment is new this year, and thousands of related items are exclusive to Target. In June, the retailer also announced a collaboration with women’s lifestyle brand LoveShackFancy with apparel, accessories, beauty products and school supplies largely priced under $25.
“Guests are responding to affordable school supplies — but really that style, design and value — [like] pastel notebooks that are at 35 cents, or our ability to actually get a lunchbox and a water bottle and backpack for just $10,” Cara Sylvester, chief merchandising officer, told reporters. “We are seeing that our guests respond when we have the right combination of style, design and value for these really important seasons.”
Target’s net sales grew 5.3% to $26.5 billion, a significant improvement from this time last year when the company reported a 0.9% decline in net sales. This comes as the company has been working to improve its assortment and operations under the leadership of CEO Michael Fiddelke, who began his position in February. The company spent $1.4 billion on capital expenditures — largely remodels and new stores — in the second quarter, up more than 27% from a year ago.
Net sales improved year over year in all six of Target’s core merchandising categories last quarter, with double-digit growth in Fun 101 (toys, electronics and books), and high single-digit growth in food and beverage as well as beauty.
“Q2 is an important step forward in the plan we laid out earlier this year to open a new chapter of growth for Target,” Fiddelke said Tuesday. “What you saw from us this quarter reflects the level of change we knew would be needed to put our strategy in motion.”