The news: Target struggled in Q1 as economic uncertainty and the backlash against its diversity, equity, and inclusion (DEI) rollback led shoppers to visit and spend less.

• Comparable store sales slumped 5.7% YoY in the quarter, which was only partially offset by a 4.7% jump in comparable digital sales. Overall, comparable sales fell 3.8%—a bigger decline than analysts expected.
• Profits were also considerably softer than anticipated, which Target blamed on higher markdowns and supply chain and fulfillment expenses. Adjusted earnings per share (EPS) came in at $1.30, well below estimates for $1.61.

The tough quarter led Target to cut its full-year forecast: It now expects a low-single-digit sales decline, a downgrade from its prior expectation for about 1% growth. Adjusted EPS in the $7 to $9 range is estimated, compared with $8.80 to $9.80 previously.

Tariffs take their toll: Tariffs are challenging Target’s performance on two fronts. On the demand side, uncertainty and concern over price hikes are sharply curbing discretionary spending—a problem for a retailer that relies on those purchases for two-thirds of its sales. On the supply side, half of Target’s merchandise comes from outside the US, with 30% of its private label products originating from China. That makes the retailer more exposed to tariffs than the likes of Walmart, which sources just one-third of its items from international markets and generates more revenues from essentials like groceries.

While the retailer was cagey about price hikes, it didn’t rule them out, calling them a “last resort” following other tariff mitigation strategies such as supplier negotiations, adjusting its assortment, and moving production to other countries. Political pressure is undoubtedly top of mind, but so too is the simple fact that higher prices are unlikely to strengthen Target’s appeal to cost-conscious shoppers.

The DEI conundrum: While the macroeconomic environment isn’t doing Target any favors, its own missteps—particularly on the DEI front—are making an already difficult situation worse. In a rare admission, CEO Brian Cornell noted that the economic boycotts following Target’s DEI rollback contributed to its weak Q1 performance, although that doesn’t appear to have shifted the company’s current stance on such policies.

The hit to Target’s brand reputation will complicate its efforts to win back shoppers and regain market share, which slid during the quarter.

• Target lost share in 20 of the 35 merchandising divisions it tracks over the last three months, COO Rick Gomez said on the company’s earnings call.
• The retailer is trying to regain momentum by adding more low-cost items and displaying them prominently in its stores—but even the prospect of a good deal may not be enough to sway consumers who see its DEI backtracking as a betrayal.

Our take: Target is mired in a mess that’s partly of its own making. While the retailer is trying to climb out of the hole by investing in stores, expanding private label partnerships with companies like Disney, Champion, and Kate Spade, and boosting its ecommerce capabilities, those efforts have yet to deliver the turnaround Target needs.

Target is clearly hoping that a cheap, trendy product assortment will get shoppers to overcome any personal misgivings around its corporate policies. But the more it tries to ignore consumers’ feelings, the harder it will be to win back their trust—and to offset the looming impact of tariffs on its business.