Target Corporation (TGT) Earnings

Management highlights

### Strategic Refresh & Leadership Updates - Target has a refreshed long-term strategy focused on returning to sustainable growth, with core priorities: leading with merchandising authority, elevating the guest (customer) experience, accelerating technology, and strengthening the team and communities. - New leadership appointments were announced: Cara Sylvester as Chief Merchandising Officer, Lisa Roath as Chief Operating Officer, and Jeff England as Chief Global Supply Chain and Logistics Officer, bringing decades of combined retail and operational experience to execute the strategy. ### Merchandising Strategy & Early Progress - The merchandising team is focusing on clear category leadership, consistent execution, faster decision-making, and bolder assortment changes, with a core focus on serving busy families, Target's highest-value customer segment. - 8 prioritized growth categories that represent ~50% of current sales are expected to drive ~75% of future growth: leading beauty destination, expanded health and wellness, food forward, baby & kids, women's style, home, and culture-driven categories (toys, entertainment). - Early proof points of strategy traction: 5+ percentage point acceleration in baby comparable sales after assortment and in-store experience updates; double-digit sales growth in health and wellness after adding 1,500 new items; 50% higher sales from 3,000 new Q1 food and beverage items; multiple sold-out, record-setting limited-time cultural partnerships (Parke, Roller Rabbit, Pokemon, BTS) that drove store traffic and social engagement; all priority assortment items maintain accessible price points, with many popular toy offerings priced at $20 or less. - Upcoming major assortment changes in 2026: a decade-large center store grocery reset changing nearly half the dry grocery assortment in Q2; 75% of the decorative accessories home assortment will be replaced in Q2, with a multi-year home category reinvention continuing through 2027; launch of Target Beauty Studio in over 600 stores in fall 2026. ### Store Operations & Guest Experience Progress - Core operational priorities are improving inventory in-stock availability, rebalancing store workload and labor, simplifying workflows, and delivering consistent elevated guest experiences. - Q1 store experience metrics reached 3-year highs, with improved Net Promoter Scores and satisfaction for wait times, product availability, store cleanliness, and team interactions. Top item in-stock availability improved meaningfully year-over-year even amid stronger-than-expected sales. - Over 300,000 team members have completed new guest experience training, and stores with added labor are already seeing improved satisfaction scores. Tools like myDevice store handhelds and performance dashboards are being enhanced to simplify workflows. - 7 new stores opened in Q1 (including the 2,000th Target location), and the company remains on track to open over 30 new stores annually, with over 100 store remodels underway in 2026, prioritizing high-return food and high-frequency category updates. ### Supply Chain Improvements - Supply chain strategy focuses on improved reliability, speed, and cost efficiency, with investments in additional network capacity: two new facilities opened (receive center in Houston, food distribution center in Colorado), with the Houston facility expected to process 25 million cartons annually to expand upstream capacity. - The company maintains its store-as-hub fulfillment model, which supports fulfilling over 95% of sales from store inventory, so all store investments also double as supply chain investments.

Guidance

- Full-year net sales guidance was revised upward to a range centered around 4% growth, 2 percentage points higher than the prior guidance, but reflects moderation from Q1's 6.7% growth pace due to more challenging year-over-year comparisons for the remainder of the year. - Full-year EPS guidance is maintained at the prior range of $7.50 to $8.50, and management now expects full-year results to land near the high end of this range, reflecting Q1 profit upside. - Full-year capital expenditure guidance is maintained at $5 billion, consistent with prior plans to invest in strategic growth priorities. - Management expects cost headwinds in the first half of 2026 to moderate in the second half, driven by timing of depreciation for new stores/remodels and shrink accrual timing, with full-year shrink expected to be in line with 2025 levels. - The company expects to request Board approval for another small annual dividend increase later in 2026, continuing its 50+ year record of annual dividend increases, working toward a long-term target of a 40% payout ratio. - No share repurchases occurred in Q1, but management noted there may be capacity for repurchases later in the year if performance stays on track, with pace and magnitude limited by the goal of maintaining current mid-A credit ratings.

Segment performance

Target reported overall first quarter 2026 net sales of $25.4 billion, representing a 6.7% year-over-year increase and a 3.7% increase compared to Q1 2024. Comparable sales grew 5.6% driven primarily by a 4.4% increase in customer traffic. Store channel net sales grew nearly 6% year-over-year, accounting for ~$1 billion in additional sales, or roughly 2/3 of total net sales growth. Within the digital channel, first-party sales grew nearly 9%, led by 27% growth in same-day delivery, while third-party platform Target Plus grew gross merchandise value by nearly 60%. Across core merchandise categories, all 6 categories delivered net sales growth; priority growth categories including baby, health and wellness, food, toys, and beauty outperformed, with double-digit sales growth for wellness and toys. Gross margin rate was 29%, 80 basis points higher than last year, driven by supply chain productivity, growth in high-margin streams like Roundel and Target Plus, and lower markdowns. Adjusted SG&A expense rate was 21.9%, 20 basis points higher than last year's adjusted rate due to planned investments in store labor, training, marketing, and other strategic projects. GAAP and adjusted earnings per share (EPS) came in at $1.71, 32% higher than last year's adjusted EPS. Inventory turnover improved more than 10% year-over-year, indicating higher inventory productivity. Capital expenditures totaled $1 billion in the quarter, putting the company on track for the full year target of $5 billion.

Risks & headwinds

- The broader macroeconomic operating environment remains uncertain, with recent declines in consumer sentiment and ongoing consumer headwinds that could impact discretionary spending. - Q1 benefited from easier year-over-year comparisons and upside from higher 2026 tax refunds, both of which will not repeat for the remainder of the year; Q2 will face the toughest year-over-year comparison of 2026, including lapping the 2025 launch of the Nintendo Switch 2 which drove strong sales last year. - Product in-stock availability and product findability remain key friction points for guests, particularly in high-frequency categories like food during peak periods (evenings, weekends), and require ongoing investment and improvement. - Executing the large volume of 2026 assortment and operational changes requires significant team effort, and carries inherent execution risk as the company rolls out changes across thousands of items and hundreds of stores. - Freight and other input costs remain a monitored headwind, with current guidance reflecting current market scenarios, but ongoing volatility could impact margins. - While Q1 results were stronger than expected, management emphasizes the company is still early in its multi-year transformation, and the majority of work remains to deliver long-term sustainable growth.

Analyst Q&A

• Q: What sustainable organizational and strategic changes are driving Q1's better-than-expected results, and how do these support long-term profitable growth? /

  A: All changes are aligned to the core strategy of winning in Target's unique lane by combining style, design, and value for busy families. Key changes include focused assortment overhauls in high-priority categories: 1,500 new wellness items, 3,000 new food and beverage items, and a full refresh of the baby category with 2,000 new items (starting at $1) and tested premium services like baby concierge. Early consumer response to these changes has been positive, and strong top-line growth has translated to better bottom-line results, with more changes planned for Q2 and beyond.

• Q: How much of Q1's strength comes from Target's strategic changes versus exogenous factors like higher tax refunds, and are you seeing returning lapsed customers that would signal fading impacts of prior boycotts? /

  A: Both exogenous tailwinds like tax refunds and strategic changes contributed to Q1's performance. Strength was broad-based across categories and demographics, with traffic growth (more guests choosing Target more often) the core driver of comp sales, which is a healthy sign. The company controls its clear strategy and consistent execution regardless of macro conditions, and is encouraged by the strong consumer response to its updated assortments and experiences.

• Q: How much of Target's overall merchandise assortment will be overhauled by the end of 2026, with changes continuing into 2027? /

  A: The pace of change varies by category: more mature priority categories like Fund101 are farther along in reinvention, while larger categories like home require multi-year overhauls. 75% of the decorative accessories subcategory (a home segment) will be changed in Q2 2026, with additional home categories (kids home, bedding, kitchen, storage) updated through the end of 2026 and into 2027. The company expects 2026 will bring more assortment change than any year in the last decade, with ongoing newness investment to keep assortments fresh.

• Q: What gives Target confidence to guide full-year EPS to the high end of its prior range, and what is the long-term path for margin expansion? /

  A: Q1's performance confirms the early traction of the company's planned investments, with no surprises to the cost structure that was outlined prior to the start of the year. The Q1 SG&A increase is entirely driven by planned strategic investments to drive long-term growth, which were already communicated to investors. Sustainable top-line growth drives operating leverage and margin expansion over time, and management maintains a cautious outlook with three full quarters remaining in the year, updating guidance as results unfold.