Is TGT's Operational Reset Laying the Foundation for Margin Recovery?

Target Corporation TGT made meaningful progress in stabilizing operations during the second quarter of fiscal 2025, as management completed planned inventory adjustments and restored key execution metrics. Ending inventory dollars were up just 2% year over year, while units declined in the low single digits, reflecting a healthier, fresher assortment across categories. Also, on-shelf metrics reached their strongest levels in years. This creates a cleaner base heading into the critical holiday seasons.

Shrink, which has weighed heavily on margins in recent years, is now a tailwind. Second-quarter operating margin benefited by roughly 130 basis points from shrink improvements and management expects about 80 basis points of benefit for the full year, following 40 basis points in fiscal 2024. This effectively returns shrink costs to pre-pandemic levels, marking a significant structural win in profitability.

At the same time, SG&A expenses were down 0.1% year over year, demonstrating cost discipline even while funding wage and technology investments. This balance of expense control with strategic reinvestment signals the emergence of a more efficient operating model.

With inventory cleanup behind it, shrink normalizing and expenses tightly managed, Target enters the second half of fiscal 2025 with a stronger profit base. These improvements lay the groundwork for sequential earnings recovery and a more durable margin profile into fiscal 2026.

Target’s Price Performance, Valuation & Estimates

Target stock has lost 32.7% year to date against the industry’s growth of 6.3%. The company has underperformed key peers such as Dollar General Corporation DG and Costco Wholesale Corporation COST. During the same period, Dollar General and Costco’s shares have risen 37.9% and 6.9%, respectively.

Target’s forward 12-month price-to-earnings ratio of 11.52 reflects a lower valuation compared with the industry’s average of 31. TGT carries a Value Score of A. Target is trading at a discount to Dollar General (with a forward 12-month P/E ratio of 16.57) and Costco (49.21). 

The Zacks Consensus Estimate for TGT’s fiscal 2025 earnings implies a year-over-year decline of 15.5%, while the same for fiscal 2026 indicates growth of 8.9%. Earnings estimates for fiscal 2025 have been southbound 6 cents per share and the same for fiscal 2026 has been unchanged in the past 30 days.

Target currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research