Target (TGT)

General merchandise retailer Target (NYSE:TGT) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 2.8% year on year to $23.85 billion. Its non-GAAP profit of $1.30 per share was 21.3% below 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).

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $105.9 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. To expand meaningfully, Target likely needs to tweak its prices or enter new markets.

As you can see below, Target grew its sales at a tepid 5.6% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it didn’t open many new stores.

This quarter, Target missed Wall Street’s estimates and reported a rather uninspiring 2.8% year-on-year revenue decline, generating $23.85 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 1.6% over the next 12 months, a deceleration versus the last six years. This projection is underwhelming and indicates its products will face some demand challenges.

Number of Stores

A retailer’s store count often determines how much revenue it can generate.

Target operated 1,981 locations in the latest quarter, and over the last two years, has kept its store count flat 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 is an industry measure of whether revenue is growing at those existing stores and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Target’s demand has been shrinking over the last two years as its same-store sales have averaged 2.3% 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 3.8% year on year. This decrease represents a further deceleration from its historical levels. We hope the business can get back on track.

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.

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 Q1, Target produced a 28.2% gross profit margin, in line with the same quarter last year and analysts’ estimates. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Target was profitable over the last two years but held back by its large cost base. Its average operating margin of 5.4% was weak for a consumer retail business. This result isn’t too surprising given its low gross margin as a starting point.

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 profit margin of 6.2%, 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 impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 3.8% over the last two years, better than the broader consumer retail sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Taking a step back, we can see that Target’s margin was unchanged over the last year, showing it recently had a stable free cash flow profile.

Target burned through $515 million of cash in Q1, equivalent to a negative 2.2% margin. The company’s cash flow turned negative after being positive in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’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? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Target hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked. Its five-year average ROIC was 19.8%, higher than most consumer retail businesses.

Target reported $2.89 billion of cash and $20.18 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 $8.47 billion of EBITDA over the last 12 months, we view Target’s 2.0× net-debt-to-EBITDA ratio as safe. We also see its $189 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.

We were impressed by how significantly Target blew past analysts’ EBITDA expectations this quarter. On the other hand, its full-year EPS guidance missed and its EPS fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock remained flat at $97.27 immediately after reporting.

Updated: July 10, 2025 at 10:35 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Target isn’t a terrible business, but it isn’t one of our picks. First off, its revenue growth was a little slower over the last six years, and analysts expect its demand to deteriorate over the next 12 months. And while its coveted brand awareness makes it a household name consumers consistently turn to, the downside is its shrinking same-store sales tell us it will need to change its strategy to succeed. On top of that, its gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses.

Target’s P/E ratio based on the next 12 months is 12.3x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $102.89 on the company (compared to the current share price of $105.20).