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Target's Shrink Normalization Emerges as Key Margin Stabilizer
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Key Takeaways
TGT expects shrink to fully normalize in fiscal 2025, supporting gross margin stability.
Lower shrink added about 70 bps to the gross margin in 3Q25, offsetting higher markdown pressure.
TGT projects 80-90 bps of gross margin benefit from shrink improvements in FY25.
Target Corporation’s (TGT - Free Report) ongoing shrink normalization is shaping up as one of the most visible contributors to near-term margin stabilization, even as top-line trends remain pressured. After multiple years of elevated shrink, management expects the shrink levels to fully normalize to the pre-pandemic benchmarks in fiscal 2025, materially improving the gross margin performance.
Management has positioned shrink improvement as a deliberate, multi-year operational reset rather than a short-term benefit. Enhanced inventory controls, improved store execution and better supply-chain visibility have collectively reduced loss rates. Importantly, shrink normalization represents a margin lever that does not depend on pricing actions or incremental demand, making it a higher-quality source of profit improvement.
The financial impact is already evident in the third quarter of fiscal 2025 results. Lower shrink contributed approximately 70 basis points of gross-margin benefit, partially offsetting roughly 100 basis points of merchandising pressure tied to higher markdowns. As a result, the gross margin declined only modestly year over year to 28.2% despite ongoing softness in discretionary categories.
Looking to fiscal 2025, Target expects shrink improvements to deliver approximately 80-90 basis points of gross masrgin favorability. This level of benefit is sufficient to return shrink fully to the pre-pandemic levels, representing what management described as a “dramatic turnaround” versus peak post-pandemic losses.
From an earnings perspective, shrink normalization alone is unlikely to drive a full profit recovery. However, it meaningfully improves margin durability and earnings conversion. As sales trends stabilize, Target’s improved shrink profile positions the company to translate incremental revenues into disproportionately higher operating profit, making shrink control a foundational element of the longer-term profit rebound story.
How TGT’s Shrink Progress Compares to DG & ULTA
Dollar General Corporation (DG - Free Report) continues to demonstrate solid progress in reducing shrink, supporting margin recovery. In the third quarter of fiscal 2025, Dollar General achieved a 90-basis-point improvement in shrink, contributing to a 107-basis-point increase in the gross margin. Management noted that shrink is improving faster than anticipated, driven by operational and inventory initiatives. Despite ongoing cost pressures, shrink reduction remains a key margin lever for Dollar General.
Ulta Beauty, Inc. (ULTA - Free Report) delivered meaningful shrink benefits in third-quarter fiscal 2025, supporting margin expansion. Lower inventory shrink helped drive a 70-basis-point increase in the gross margin, reflecting disciplined execution. Ulta Beauty achieved this through enhanced associate training, process improvements and store-level action plans that reduced shrink across most categories and regions. Ulta Beauty expects modest shrink improvement in the fiscal fourth quarter compared with the prior-year period.
Target’s Price Performance, Valuation & Estimates
The TGT stock has gained 1.5% in the past six months compared with the industry’s growth of 0.4%.
Image Source: Zacks Investment Research
Target’s forward 12-month price-to-earnings ratio of 12.76 reflects a lower valuation than the industry’s average of 29.56. TGT has a Value Score of D.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for TGT’s fiscal 2025 earnings implies a year-over-year decline of 17.7%, while the same for fiscal 2026 indicates growth of 6%. Earnings estimates for fiscal 2025 and 2026 have been southbound by 7 cents and 25 cents per share, respectively, in the past 30 days.
Image: Bigstock
Target's Shrink Normalization Emerges as Key Margin Stabilizer
Key Takeaways
Target Corporation’s (TGT - Free Report) ongoing shrink normalization is shaping up as one of the most visible contributors to near-term margin stabilization, even as top-line trends remain pressured. After multiple years of elevated shrink, management expects the shrink levels to fully normalize to the pre-pandemic benchmarks in fiscal 2025, materially improving the gross margin performance.
Management has positioned shrink improvement as a deliberate, multi-year operational reset rather than a short-term benefit. Enhanced inventory controls, improved store execution and better supply-chain visibility have collectively reduced loss rates. Importantly, shrink normalization represents a margin lever that does not depend on pricing actions or incremental demand, making it a higher-quality source of profit improvement.
The financial impact is already evident in the third quarter of fiscal 2025 results. Lower shrink contributed approximately 70 basis points of gross-margin benefit, partially offsetting roughly 100 basis points of merchandising pressure tied to higher markdowns. As a result, the gross margin declined only modestly year over year to 28.2% despite ongoing softness in discretionary categories.
Looking to fiscal 2025, Target expects shrink improvements to deliver approximately 80-90 basis points of gross masrgin favorability. This level of benefit is sufficient to return shrink fully to the pre-pandemic levels, representing what management described as a “dramatic turnaround” versus peak post-pandemic losses.
From an earnings perspective, shrink normalization alone is unlikely to drive a full profit recovery. However, it meaningfully improves margin durability and earnings conversion. As sales trends stabilize, Target’s improved shrink profile positions the company to translate incremental revenues into disproportionately higher operating profit, making shrink control a foundational element of the longer-term profit rebound story.
How TGT’s Shrink Progress Compares to DG & ULTA
Dollar General Corporation (DG - Free Report) continues to demonstrate solid progress in reducing shrink, supporting margin recovery. In the third quarter of fiscal 2025, Dollar General achieved a 90-basis-point improvement in shrink, contributing to a 107-basis-point increase in the gross margin. Management noted that shrink is improving faster than anticipated, driven by operational and inventory initiatives. Despite ongoing cost pressures, shrink reduction remains a key margin lever for Dollar General.
Ulta Beauty, Inc. (ULTA - Free Report) delivered meaningful shrink benefits in third-quarter fiscal 2025, supporting margin expansion. Lower inventory shrink helped drive a 70-basis-point increase in the gross margin, reflecting disciplined execution. Ulta Beauty achieved this through enhanced associate training, process improvements and store-level action plans that reduced shrink across most categories and regions. Ulta Beauty expects modest shrink improvement in the fiscal fourth quarter compared with the prior-year period.
Target’s Price Performance, Valuation & Estimates
The TGT stock has gained 1.5% in the past six months compared with the industry’s growth of 0.4%.
Image Source: Zacks Investment Research
Target’s forward 12-month price-to-earnings ratio of 12.76 reflects a lower valuation than the industry’s average of 29.56. TGT has a Value Score of D.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for TGT’s fiscal 2025 earnings implies a year-over-year decline of 17.7%, while the same for fiscal 2026 indicates growth of 6%. Earnings estimates for fiscal 2025 and 2026 have been southbound by 7 cents and 25 cents per share, respectively, 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.