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Target CEO: Tariffs will lead to higher prices

Higher tariffs will lead to higher prices for consumers, Target Corp.'s Chairman and CEO Brian Cornell said on a May 22 call with analysts.

"As we think about tariffs, we reflect on the impact it could have and will have on American families that are going to be paying higher prices," Cornell said.

The U.S. raised tariffs on $200 billion worth of Chinese imports to 25% from 10% on May 10 and has threatened to impose 25% tariffs on an additional $300 billion of Chinese imports.

Responding to an analyst question about whether the impact of the raised tariffs was factored into the retailer's guidance for fiscal 2019, Target Executive Vice President and CFO Catherine Smith noted that "the anticipated 25% increase that will go in place in June is contemplated in our guidance."

Target reaffirmed its guidance for fiscal 2019 in its first quarter earnings release. The retailer continues to expect adjusted EPS between $5.75 and $6.05, low to mid-single-digit growth in comparable sales and mid-single digit growth in operating income.

To offset the impact of tariffs, Target is working with some of its vendors who have been in the process of diversifying their manufacturing base for years, Cornell added.

Looking forward, Target anticipates performance drivers that showed strength in its first quarter will continue on the same path in the second quarter.

"We're very confident that we're going to continue to see market share gains in a consistent rhythm of comp increases, operating income improvement and that's going to flow through the EPS," Cornell said.

Target said in the May 22 release that it expects adjusted EPS for the second quarter of fiscal 2019 to be between $1.52 and $1.72 and comparable sales growth in the low- to mid-single digit range. The general merchandise retailer also anticipates mid-single growth in operating income dollars.

To further improve its overall digital profitability, Target is banking on continued growth in the most profitable services within its digital business. According to Executive Vice President and COO John Mulligan, the Drive Up and Shipt delivery programs have been more profitable compared to other services in Target's digital business.

Target's e-commerce sales surged 42% in the first quarter, as online sales from in-store pick up grew more than 80% from the year-earlier quarter, and sales from both Drive Up and Shipt grew at a faster rate, according to Mulligan.

Target's executives also expressed interest in expanding initiatives such as Target Circle, a loyalty program that offers benefits such as 1% rebate on purchases and free next-day delivery on select items.