Target (TGT)

General merchandise retailer Target (NYSE:TGT) met Wall Streets revenue expectations in Q3 CY2025, but sales fell by 1.6% year on year to $25.27 billion. Its non-GAAP profit of $1.78 per share was 3.6% above analysts’ consensus estimates.

Company Overview

With a higher focus on style and aesthetics compared to other large general merchandise retailers, Target (NYSE:TGT) serves the suburban consumer who is looking for a wide range of products under one roof.

Big-box retailers operate large stores that sell groceries and general merchandise at highly competitive prices. Because of their scale and resulting purchasing power, these big-box retailers–with annual sales in the tens to hundreds of billions of dollars–are able to get attractive volume discounts and sell at often the lowest prices. While e-commerce is a threat, these retailers have been able to weather the storm by either providing a unique in-store shopping experience or by reinvesting their hefty profits into omnichannel investments.

Scaled competitors that sell general merchandise and/or groceries to US consumers include Walmart (NYSE:WMT), Amazon.com (NASDAQ:AMZN)–which as a reminder owns Whole Foods market, and Costco (NYSE:COST).

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years.

With $105.2 billion in revenue over the past 12 months, Target is a behemoth in the consumer retail sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices. However, its scale is a double-edged sword because there are only a finite number of places to build new stores, making it harder to find incremental growth. For Target to boost its sales, it likely needs to adjust its prices or lean into foreign markets.

As you can see below, Target’s 5.2% annualized revenue growth over the last six years (we compare to 2019 to normalize for COVID-19 impacts) was tepid as it didn’t open many new stores.

This quarter, Target reported a rather uninspiring 1.6% year-on-year revenue decline to $25.27 billion of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 1.2% over the next 12 months, a deceleration versus the last six years. This projection is underwhelming and suggests its products will see some demand headwinds.

Number of Stores

Target listed 1,995 locations in the latest quarter and has kept its store count flat over the last two years while other consumer retail businesses have opted for growth.

When a retailer keeps its store footprint steady, it usually means demand is stable and it’s focusing on operational efficiency to increase profitability.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at brick-and-mortar shops for at least a year.

Target’s demand has been shrinking over the last two years as its same-store sales have averaged 1.6% annual declines. This performance isn’t ideal, and we’d be concerned if Target starts opening new stores to artificially boost revenue growth.

In the latest quarter, Target’s same-store sales fell by 2.7% year on year. This decrease represents a further deceleration from its historical levels. We hope the business can get back on track.

Target has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 28% gross margin over the last two years.

When compared to other non-discretionary retailers, however, it’s actually pretty solid. That’s because non-discretionary retailers have structurally lower gross margins; they compete on the lowest price, sell products easily found elsewhere, and have high transportation costs to move goods. We believe the best metrics to assess these companies are free cash flow margin, operating leverage, and profit volatility, which account for their scale advantages and non-cyclical demand.

In Q3, Target produced a 28.2% gross profit margin, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Target’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same, averaging 5.2% over the last two years. This profitability was paltry for a consumer retail business and caused by its suboptimal cost structureand low gross margin.

Analyzing the trend in its profitability, Target’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Target generated an operating margin profit margin of 3.8%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Target has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 3.5% over the last two years, slightly better than the broader consumer retail sector.

Taking a step back, we can see that Target’s margin dropped by 1.4 percentage points over the last year. This decrease warrants extra caution because Target failed to grow its same-store sales. Its cash profitability could decay further if it tries to reignite growth by opening new stores.

Target broke even from a free cash flow perspective in Q3. This cash profitability was in line with the comparable period last year but below its two-year average. In a silo, this isn’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Target’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 18%, slightly better than typical consumer retail business.

Target reported $3.82 billion of cash and $20.04 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $7.34 billion of EBITDA over the last 12 months, we view Target’s 2.2× net-debt-to-EBITDA ratio as safe. We also see its $207 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was great to see Target’s EPS outperform Wall Street’s estimates. On the other hand, the company lowered full-year EPS guidance as the retailer saw uneven spending and shoppers looking for more value. Overall, this was a mixed quarter. The stock traded down 1.4% to $87.32 immediately following the results.

Updated: December 4, 2025 at 9:39 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Target.

Target falls short of our quality standards. First off, its revenue has declined over the last three years. And while its coveted brand awareness makes it a household name consumers consistently turn to, the downside is its gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses. On top of that, its shrinking same-store sales tell us it will need to change its strategy to succeed.

Target’s P/E ratio based on the next 12 months is 11.9x. This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $96.67 on the company (compared to the current share price of $91.54).