Target Earnings: Gross Margin Gains Offset Lingering Traffic Headwinds

Key Morningstar Metrics for Target

• Fair Value Estimate

  : $118.00

• Morningstar Rating

  : ★★★

• Morningstar Economic Moat Rating

  : None

• Morningstar Uncertainty Rating

  : High

What We Thought of Target’s Earnings

Target’s TGT fourth-quarter results included a 2.5% decline in comp sales and adjusted EPS of $2.44, up 1.5%. Gross margin expanded 40 basis points to 26.6%, reflecting lower shrinkage and fulfillment costs and growth in advertising sales, while being partly offset by higher product and import costs.

Why it matters: This quarter reinforced our view that Target’s return to recovery remains execution-dependent. Management guided toward profitable growth in fiscal 2026 with a 20% increase in capital spending to fund new stores, remodels, and customer experience designed to reignite traffic.

• Target’s traffic fell 2.9% in the quarter, marking the fourth consecutive period of declines. We believe this stems from its reliance on discretionary demand, as the only category that delivered growth was low-margin grocery (up 1.3%).
• While near-term macroeconomic headwinds continue, we believe Target’s focus on broad assortment changes and elevating the shopping experience can support a return to low-single-digit sales growth in the longer term.

The bottom line: We plan to raise our $118 fair value estimate for no-moat Target by a low-single-digit percentage due to the time value of money, and we view shares as fairly valued. We surmise that investors have newfound confidence that Target can regain its merchandising relevance over the long term.

• Target’s shares are up 20.0% in the year to date, outperforming our US consumer defensive index (up 14.5%). Up another 7% on the print, we believe the market is signaling optimism that meaningful improvement will emerge without a prolonged period of elevated reinvestment.
• We continue to believe that Target’s midmarket positioning leaves it vulnerable on both price and assortment, limiting its ability to defend its competitive standing.

Coming up: Target’s CEO outlined a 2026 plan to reset their store operating model, backed by a wave of merchandising overhauls across home, hardlines, and beauty to recapture traffic.