Target Earnings: Financial Marks Under Pressure Amid Precarious Economic Climate, Tough Competition

Key Morningstar Metrics for Target

• Fair Value Estimate: $135.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

What We Thought of Target’s Earnings

Target’s TGT revenue declined 3.0% in the first quarter, underpinned by a 3.8% drop in comparable sales. Transaction count and average ticket declined by 2.4% and 1.4%, respectively. Profits were pressured as adjusted operating margin fell 160 basis points to 3.7% and adjusted EPS dropped 36.0% to $1.30.

Why it matters: Target continues to grapple with intense competition and deteriorating consumer confidence. Management also cited a negative reaction to its rollback of diversity, equity, and inclusion initiatives, but we think the former factors were more significant drivers behind its recent performance.

• Target’s merchandise sales declined 3%, primarily due to soft demand in discretionary categories. Indeed, sales of apparel, accessories, hardlines, and home furnishings collectively fell by 5%. Food, beverage, beauty, and household essentials held up better, collectively declining by just 1%.
• The retail landscape remains competitive as firms compete for foot traffic and digital sales. Management tracks market share performance across 35 broad product divisions, of which Target lost share in 20 categories. We expect stringent competition to pressure sales throughout 2025.

The bottom line: We plan to lower our $135 fair value estimate on no-moat Target by a high-single-digit percentage, as the firm’s financial marks and guidance proved underwhelming. Still, investors’ sentiment seems overly pessimistic, and we view shares as undervalued.

• Management cut its adjusted EPS guidance for fiscal 2025 to $7.00-$9.00 from $8.80-$9.80. We plan to bring our $9.01 preprint 2025 EPS forecast to the lower end of management’s guidance range and lower our forecast for 2026 EPS to around $8.50 from $9.77.
• Half of Target’s sales come from items that are sourced internationally, leaving the firm exposed to tariffs. While the impact that higher prices have on demand remains to be seen, management noted that its wide guidance range reflects the added uncertainty that tariffs offer.