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Is TGT's Operational Reset Laying the Foundation for Margin Recovery?
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Key Takeaways
Target completed inventory adjustments, creating a fresher assortment for key seasons.
Operating margin rose 130 bps in Q2 as shrink costs normalized to pre-pandemic levels.
Expenses dipped 0.1% while supporting wage and tech investments for efficiency.
Target Corporation (TGT - Free Report) 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 - Free Report) and Costco Wholesale Corporation (COST - Free Report) . During the same period, Dollar General and Costco’s shares have risen 37.9% and 6.9%, respectively.
Image Source: Zacks Investment Research
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).
Image Source: Zacks Investment Research
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.
Image: Bigstock
Is TGT's Operational Reset Laying the Foundation for Margin Recovery?
Key Takeaways
Target Corporation (TGT - Free Report) 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 - Free Report) and Costco Wholesale Corporation (COST - Free Report) . During the same period, Dollar General and Costco’s shares have risen 37.9% and 6.9%, respectively.
Image Source: Zacks Investment Research
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).
Image Source: Zacks Investment Research
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.
Image Source: Zacks Investment Research
Target currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.