Target Earnings: Margins Show Encouraging Improvement, but Sales Remain Weak

We were impressed by no-moat Target’s robust margin recovery during its fiscal 2023 fourth quarter, though we are concerned by continued softness in the retailer’s top-line results. The firm’s 5.8% operating margin (210 basis points ahead of last year) easily outpaced our 4.4% estimate, driven by a nearly 300-basis-point expansion in gross margin to 25.6% as normalized inventory levels reduced the need for inordinate promotional destocking that was pervasive across the retail landscape last year. Due to this margin strength, Target posted $2.98 in earnings per share, outpacing our $2.11 forecast. The market looked favorably on Target’s strong margin improvement and earnings beat with the stock trading more than 10% higher on March 5.